ProAssurance : 2020 Annual Report - With Full Financial Data

®

2020 Annual Report

Financial Highlights

				FISCAL YEARS ENDED DECEMBER 31
		2020		2019		2018		2017		2016
Income Statement Highlights					(in thousands)
Gross premiums written	$	854,422	$	967,490	$	957,311	$	874,876	$	835,014
Net premiums earned	$	792,715	$	847,532	$	818,853	$	738,531	$	733,281
Total revenues	$	874,940	$	999,834	$	886,030	$	866,149	$	870,214
Net losses and loss adjustment expenses	$	661,447	$	753,915	$	593,210	$	469,158	$	443,229
Net income (loss) (1)	$	(175,727)	$	1,004	$	47,057	$	107,264	$	151,081
Non-GAAP operating income (loss) (2)	$	(27,741)	$	(43,779)	$	79,527	$	108,538	$	129,844
Balance Sheet Highlights
Total investments	$	3,389,345	$	3,390,409	$3,349,382	$	3,686,528	$3,925,696
Total assets	$	4,654,803	$	4,805,599	$4,600,726	$	4,929,197	$5,065,181
Reserve for losses and loss	$	2,417,179
adjustment expenses	$	2,346,526	$2,119,847	$	2,048,381	$1,993,428
Debt less unamortized debt issuance costs	$	284,713	$	285,821	$	287,757	$	411,811	$	448,202
Total liabilities	$	3,305,593	$	3,293,686	$3,077,724	$	3,334,402	$3,266,479

1. The 2020 net loss includes a pre-tax net underwriting loss of approximately $45.7 million associated with a tail policy issued to a large national healthcare account and a pre-tax $10 million pandemic-related IBNR reserve, both of which were recorded in the second quarter of 2020, and a pre-tax $161.1 million goodwill impairment charge recorded in the third quarter of 2020.
2. A reconciliation of net income (loss) to Non-GAAP operating income (loss) is provided in Appendix A to the ProAssurance Form 10-K included with this mailing

to shareholders.

®

To My Fellow Shareholders

Much has been written about the unprecedented nature of 2020, and I will not endeavor to add to it here. Rather, I will focus on the significant accomplishments made by the employees of ProAssurance during this extraordinary time. I am grateful for all that our Executive Leadership Team and the employees they support have done to steer us toward future success. Through their efforts, we have improved our competitive position in one of the most challenging years in the history of our Company. ProAssurance is a people business, and we have a culture that feeds off the energy that each of us brings to work each day. The sudden shift to a new work environment that forced distance between each of us was challenging, and ProAssurance rose to the occasion. The safety of our employees, customers, and business partners continues to be our highest priority. In spite of our physical separation, we spent the year continuing to execute a comprehensive business strategy to streamline our organizational structure and improve our profitability, while further enhancing our culture.

In our Specialty Property & Casualty segment, we continued our efforts to build a strong foundation for the future and improve our competitive position. We consolidated operations, restructured our field organization, re-underwrote the Specialty Healthcare business, strengthened rate adequacy, reduced expenses, and incrementally improved the current accident year net loss ratio. We are proud of all that was achieved to address profitability and deliver operational excellence. Meanwhile, signs of a firming market continue to emerge in our Specialty Healthcare business in the form of rate gains and improved terms, conditions, and coverage structures. Although our top line contracted in 2020 as a result of our re-underwriting and rate strengthening efforts, and the macro conditions in the property & casualty industry remain challenging, we have positioned the segment to grow in the future.

In our Workers' Compensation Insurance seg- ment, we made organizational changes in 2020,

repositioning from five operating regions to three for more effective and efficient management of the underwriting, risk management, and claims processes. We expect this change will improve the consistent application of our business model while maintaining our local service teams. We integrated small business and underwriting support functions into single units, each with dedicated leadership, which has resulted in better turnaround times on policy submissions while continuing our individual account underwriting philosophy, which has been a resounding part of our success in workers' compensation. Lastly, we realigned our previously stand-alone captive team into the existing regional structure to improve accountability and streamlined our marketing operations to extend more agency management responsibilities to the decision makers in the underwriting process. We continue to operate profitably in this line of business despite intense market competition, and execute our rural underwriting strategy and short-tailed claim model to great effect.

Trends in our Segregated Portfolio Cell Reinsurance segment were consistent with those of the Workers' Compensation Insurance and Specialty Property & Casualty segments - the lines of business which cede premium to the captive cell programs. The captive cells play an increasingly important role for customers seeking to manage controllable expenses, particularly in these uncertain economic conditions.

Finally, we reduced our participation in Lloyd's Syndicate 1729 from 61% to 29% for the 2020 underwriting year, and again from 29% to 5% for the 2021 underwriting year as we support and grow our core insurance operations, and seek to reduce volatility in our underlying performance. We've also reduced our participation for Syndicate 6131 from 100% to 50% for the 2021 underwriting year.

Meanwhile, our consolidation of systems and leveraging of new technology continues to promote organizational efficiency in all aspects of our business.

As a result of our strategic restructuring initiatives in 2020, which includes an overall reduction in our

1

workforce of approximately 13%, we anticipate $17 million in annual expense savings. This is on top of initiatives taken in 2019 that reduced annual costs by $5 million, bringing us to estimated cumulative annual cost reductions of approximately $22 million since this leadership team was put in place almost two years ago.

These changes, though often difficult, have positioned us to achieve our long-term profitability goals while enhancing the best-in-class products and services we provide to our customers. Our operational profitability in the third and fourth quarters is evidence that we are on the right track.

While it was an important year of transformation, our performance did not meet our standards. The operating loss for the year was attributable to

a pre-tax net underwriting loss of $45.7 million associated with a tail policy issued to a large national healthcare account, and a pre-tax $10 million pandemic-related IBNR reserve, both of which were recorded in the second quarter. Our full-year net loss was attributable to a pre- tax $161.1 million goodwill impairment charge recorded in the third quarter in recognition of market volatility and the depression our stock price experienced through the first nine months of the year. We must, and will, continue to improve as we strive always to reward the trust given us by our customers and shareholders.

Over a year ago, as the COVID-19 virus began to wreak havoc on our national economy and healthcare system, I noted that in the midst of these extraordinary times, we are blessed to insure and employ extraordinary people.

That statement has proven truer with each passing day, and I have every confidence that ProAssurance, our customers, distribution part- ners, employees, and shareholders will emerge stronger on the other side of the pandemic.

The pursuit of operational excellence is a never- ending journey, as we can always make ourselves better, and we are a more focused organization

than we were a year ago. We are applying that focus to our pending acquisition of the NORCAL Group. As I write this letter, NORCAL Mutual Insurance Company is soliciting its eligible policyholders to vote on the plan to convert from a mutual company to a stock company. Policy- holders will have the option to take their ownership share of the company in the form of NORCAL stock, which ProAssurance will offer to buy through our Tender Offer. There are several steps remaining in the process, and we anticipate being able to close the deal in the second quarter of 2021, bringing another valued member into the ProAssurance family of companies.

Being part of the ProAssurance family means being committed to providing a safe and healthy working environment where all employees are treated with dignity and respect, allowing them to do their best work every day. The ideals of Diversity, Equity and Inclusion (DE&I) have always been important at ProAssurance, and I am proud of the emphasis placed on them in 2020. We will foster and support DE&I efforts in 2021 with even greater intentionality. Important in those efforts is the formation of a DE&I Council, which held its first official meeting in January of 2021. I eagerly anticipate the opportunities for positive change that the Council's work will present to us. The Executive Leadership Team and I are committed to ensuring that ProAssurance is a place where everyone feels welcome and safe, and that we are providing equal opportunities to contribute, grow, and prosper.

The pandemic is not over, and the challenges present in healthcare professional liability and workers' compensation insurance industries remain formidable, but we are better positioned to meet and overcome these challenges as a result of our accomplishments in 2020.

Thank you,

Ned Rand

President & Chief Executive Officer

2

							COMMITTEES
									Nominating
Board of Directors			Independence	Audit	Compensation	Executive	& Corporate
		Governance
W. Stancil Starnes, Esq.			N				C
Executive Chairman
ProAssurance
Kedrick D. Adkins, Jr.			I		M
Retired Chief Financial Officer
Mayo Clinic
Bruce D. Angiolillo			I		M	C
Retired Partner
Simpson Thacher & Bartlett LLP
Samuel A. Di Piazza, Jr.			I		C,E
Chairman, Mayo Clinic Board of Trustees,
Retired CEO of PricewaterhouseCoopers
Robert E. Flowers, M.D.			I			M
Retired Physician
Maye Head Frei			I			M
Chairman
Ram Tool Construction Supply Company
M. James Gorrie			I					M
President and Chief Executive Officer
Brasfield & Gorrie
Ziad R. Haydar, M.D.			I					M
Independent Healthcare Consultant,
Retired Chief Clinical Officer, Ascension Health
Edward L. Rand, Jr.			N				M
President and Chief Executive Officer
ProAssurance
Frank A. Spinosa, D.P.M.			I		M
Practicing Podiatrist
Past President of the American Podiatric Medical Association
Katisha T. Vance, M.D.			I					M
Practicing Physician
Thomas A. S. Wilson, Jr., M.D.			I			M	M	C
Retired Physician
Management, Non-Independent = N	Independent = I	Member = M	Chairman = C	Financial Expert = E
Executive Officers
Michael L. Boguski		Jeffrey P. Lisenby			Edward L. Rand, Jr.
President, Specialty P&C segment		Executive Vice President			President and Chief Executive Officer
Dana S. Hendricks		General Counsel and Corporate Secretary	ProAssurance Corporation
	ProAssurance Corporation			Kevin M. Shook
Executive Vice President, Chief Financial
Noreen L. Dishart
Officer, and Corporate Treasurer				President, Workers' Compensation
ProAssurance Corporation		Executive Vice President, Chief Human	Insurance and Segregated Portfolio
			Resources Officer			Cell Reinsurance segments
			ProAssurance Corporation

3