ProAssurance(PRA) - 2022 Q3 - Quarterly Report

Preliminary Information Glossary of Terms and Acronyms This section defines key financial, insurance, and regulatory terms and acronyms for clarity throughout the report - The report includes a comprehensive glossary defining key terms such as HCPL (Healthcare professional liability), IBNR (Incurred but not reported), and FAL (Funds at Lloyd's), which are essential for understanding the company's business[8][9][10] Caution Regarding Forward-Looking Statements This section warns that forward-looking statements are based on current estimates and actual results may differ due to various risks and uncertainties - Forward-looking statements cover aspects like liquidity, capital requirements, investment performance, premiums, and loss reserves[13] - Key risk factors that could cause actual results to differ include changes in economic conditions, regulatory actions, tort reforms, interest and tax rate changes, market performance, and uncertainties in loss reserve estimates[14] - Specific risks related to the company's participation in the Lloyd's market are also highlighted, such as levies by the Council of Lloyd's, rating agency downgrades of Lloyd's, and dependence on a specialized management team[16] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents ProAssurance Corporation's unaudited condensed consolidated financial statements for Q3 2022, including balance sheets, income statements, and cash flows, with explanatory notes Condensed Consolidated Balance Sheets Total assets decreased from $6.19 billion to $5.78 billion, primarily due to reduced fixed maturity investments, while shareholders' equity declined significantly Condensed Consolidated Balance Sheet Data (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Investments | $4,385,507 | $4,828,323 | | Total Assets | $5,783,319 | $6,191,477 | | Total Liabilities | $4,717,323 | $4,763,090 | | Total Shareholders' Equity | $1,065,996 | $1,428,387 | Condensed Consolidated Statements of Income and Comprehensive Income The company reported a net loss of $14.3 million for the nine months ended September 30, 2022, a reversal from prior-year net income, primarily due to net investment losses Income Statement Highlights (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Premiums Earned | $771,337 | $698,598 | | Total Revenues | $811,980 | $811,344 | | Total Expenses | $832,947 | $776,900 | | Gain on Bargain Purchase | $0 | $74,408 | | Net Income (Loss) | ($14,344) | $111,984 | | Comprehensive Income (Loss) | ($354,869) | $78,264 | | Diluted EPS | ($0.27) | $2.07 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly decreased to $6.7 million, while overall cash and cash equivalents declined by $102.2 million for the nine months ended September 30, 2022 Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $6,673 | $69,363 | | Net Cash from Investing Activities | ($91,749) | ($25,531) | | Net Cash from Financing Activities | ($17,154) | ($56,661) | | Decrease in Cash & Cash Equivalents | ($102,230) | ($12,829) | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of accounting policies and financial data, covering fair value measurements, investments, loss reserves, and segment information - Beginning in 2022, the company revised its process for estimating Unallocated Loss Adjustment Expenses (ULAE) due to the integration of NORCAL, prospectively increasing operating expenses by $21.8 million and decreasing net losses by the same amount, with no impact on total expenses or net income[37] - The company holds passive interests in various Variable Interest Entities (VIEs), primarily LPs/LLCs, totaling $276.2 million at Sep 30, 2022, and has consolidated PPM RRG, acquired with NORCAL, as its primary beneficiary[148][149] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and operations, covering critical accounting estimates, liquidity, and detailed results across five business segments Overview ProAssurance operates across five segments, with critical accounting estimates including loss reserves and investment valuation, and a key 2022 change in ULAE estimation - The company operates in five segments: Specialty P&C, Workers' Compensation Insurance, Segregated Portfolio Reinsurance, Lloyd's Syndicates, and Corporate[174] - A change in the estimation of ULAE was implemented in 2022, reclassifying costs from 'net losses and loss adjustment expenses' to 'underwriting, policy acquisition and operating expenses' with no impact on total expenses or net income[179] Liquidity and Capital Resources ProAssurance's liquidity, primarily from investment revenues, included $86 million in cash and liquid investments, while operating cash flow significantly decreased due to higher paid losses and expenses - The holding company held approximately $86 million in cash and liquid investments outside of its insurance subsidiaries as of September 30, 2022[181] - Operating cash flow for the nine months ended Sep 30, 2022, decreased by $62.7 million compared to the prior year, mainly due to a $204.6 million increase in paid losses and a $96.9 million increase in cash paid for operating expenses, largely related to the NORCAL acquisition[195] - The company has $250 million available under its Revolving Credit Agreement, with a potential $50 million accordion feature, and no borrowings were outstanding as of November 2, 2022[181] Results of Operations The company reported a net loss of $14.3 million for the nine months ended September 30, 2022, with a combined ratio of 105.7%, influenced by the NORCAL acquisition and investment valuations Consolidated Financial Highlights (in thousands) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Premiums Written | $803,055 | $677,527 | | Net Premiums Earned | $771,337 | $698,598 | | Net Losses and LAE | $585,166 | $555,030 | | Net Income (Loss) | ($14,344) | $111,984 | | Combined Ratio | 105.7% | 108.1% | - Non-GAAP operating income for the nine months ended Sep 30, 2022 was $21.0 million, down from $42.5 million in the prior year, excluding net investment gains/losses and other non-recurring items like the 2021 gain on bargain purchase[242] - Book value per share decreased to $19.75 at Sep 30, 2022 from $26.46 at year-end 2021, primarily due to a $6.00 per share negative impact from Accumulated Other Comprehensive Income (AOCI) driven by unrealized investment losses[247] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and credit risk, with a 100 bps interest rate increase projected to decrease fixed maturities fair value from $3.43 billion to $3.31 billion - The company's primary market risks are identified as interest rate risk and credit risk[359] Interest Rate Sensitivity of Available-for-Sale Fixed Maturities (in millions) | Interest Rate Shift | Fair Value at Sep 30, 2022 | | :--- | :--- | | -100 bps | $3,558 | | Current | $3,431 | | +100 bps | $3,309 | | +200 bps | $3,193 | - As of September 30, 2022, 92% of the company's fixed maturity securities were rated investment grade, which helps mitigate credit risk[369] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no significant changes in internal controls during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[372] - No significant changes were made to internal controls over financial reporting during the third quarter of 2022[373] PART II. OTHER INFORMATION Legal Proceedings This section refers to Note 6 for details on legal proceedings, noting that no material reserves were established for corporate legal actions - For information on legal proceedings, the report directs readers to Note 6 of the financial statements[374] Risk Factors This section states no material changes to risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the company's 2021 Form 10-K[375] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 138,980 shares in July 2022 at $23.38 per share, with $106.4 million remaining authorized for future repurchases Share Repurchase Activity (Q3 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2022 | 138,980 | $23.38 | | August 2022 | — | N/A | | September 2022 | — | N/A | | Total | 138,980 | $23.38 | - As of September 30, 2022, approximately $106.4 million remained authorized for share or debt repurchases under the company's plan, which has no expiration date[376] Exhibits This section lists exhibits filed with the Form 10-Q, including officer certifications and XBRL Interactive Data Files - Filed exhibits include officer certifications pursuant to SEC Rules 13a-14(a) and 13a-14(b), and XBRL data files[378]