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PROASSURANCE CORP – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS.

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The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes to those statements which accompany
this report. Throughout the discussion we use certain terms and abbreviations,
which can be found in the Glossary of Terms and Acronyms at the beginning of
this report. In addition, a glossary of insurance terms and phrases is available
on the investor section of our website. Throughout the discussion, references to
"ProAssurance," "PRA," "Company," "we," "us" and "our" refer to ProAssurance
Corporation and its consolidated subsidiaries. The discussion contains certain
forward-looking information that involves significant risks, assumptions and
uncertainties. As discussed under the heading "Caution Regarding Forward-Looking
Statements," our actual financial condition and results of operations could
differ significantly from these forward-looking statements.
ProAssurance Overview
ProAssurance Corporation is a holding company for property and casualty
insurance companies. Our wholly owned insurance subsidiaries provide
professional liability insurance, liability insurance for medical technology and
life sciences risks and workers' compensation insurance. We also provide capital
to Syndicate 1729 and Syndicate 6131 at Lloyd's of London.
We operate in five segments which are based on our internal management reporting
structure for which financial results are regularly evaluated by our CODM to
determine resource allocation and assess operating performance. Descriptions of
ProAssurance's five operating and reportable segments are as follows:
•Specialty P&C - This segment includes our professional liability business and
medical technology liability business. Our professional liability insurance is
primarily comprised of medical professional liability products offered to
healthcare providers and institutions. Our professional liability insurance also
includes the business acquired through the NORCAL transaction that closed on May
5, 2021. In addition, we offer, to a lesser extent, professional liability
insurance to attorneys and their firms. Medical technology liability insurance
is offered to medical technology and life sciences companies that manufacture or
distribute products including entities conducting human clinical trials. We also
offer custom alternative risk solutions including loss portfolio transfers,
assumed reinsurance and captive cell programs for healthcare professional
liability insureds. For our alternative market captive cell programs, we cede
either all or a portion of the premium to certain SPCs in our Segregated
Portfolio Cell Reinsurance segment.
•Workers' Compensation Insurance - This segment includes our workers'
compensation insurance business which is provided primarily to employers with
1,000 or fewer employees. Our workers' compensation products include guaranteed
cost policies, policyholder dividend policies, retrospectively-rated policies,
deductible policies and alternative market solutions. Alternative market program
premiums are 100% ceded to either SPCs in our Segregated Portfolio Cell
Reinsurance segment or, to a limited extent, an unaffiliated captive insurer.
•Segregated Portfolio Cell Reinsurance - This segment includes the results
(underwriting profit or loss, plus investment results, net of U.S. federal
income taxes) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC
operations. Each SPC is owned, fully or in part, by an agency, group or
association, and the results of the SPCs are attributable to the participants of
that cell. We participate to a varying degree in the results of selected SPCs
and, for the SPCs in which we participate, our participation interest ranges
from a low of 20% to a high of 85%. SPC results attributable to external cell
participants are reflected as an SPC dividend expense (income) in our Segregated
Portfolio Cell Reinsurance segment. The SPCs assume workers' compensation
insurance, healthcare professional liability insurance or a combination of the
two from our Workers' Compensation Insurance and Specialty P&C segments.
•Lloyd's Syndicates - This segment includes the results from our participation
in Lloyd's of London Syndicate 1729 and Syndicate 6131. The results of this
segment are normally reported on a quarter lag, except when information is
available that is material to the current period. Syndicate 1729 underwrites
risks over a wide range of property and casualty insurance and reinsurance lines
in both the U.S. and international markets while Syndicate 6131 focuses on
contingency and specialty property business, also within the U.S. and
international markets. To support and grow our core insurance operations, we
decreased our participation in the results of Syndicate 1729 for the 2021
underwriting year to 5% from 29%. Syndicate 6131 is an SPA that underwrites on a
quota share basis with Syndicate 1729. Effective July 1, 2020, Syndicate 6131
entered into a six-month quota share reinsurance agreement with an unaffiliated
insurer. Under this agreement, Syndicate 6131 ceded essentially half of the
premium assumed from Syndicate 1729 to the unaffiliated insurer; the agreement
was non-renewed on January 1, 2021 and we decreased our participation in the
results of Syndicate 6131 to 50% from 100% for the 2021 underwriting year. Due
to the quarter lag, the change in our participation in the results of Syndicates
1729 and 6131 was not reflected in our results until the second quarter of 2021.
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•Corporate - This segment includes our investment operations, including the
investment operations of NORCAL since the date of acquisition and excludes those
reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates
segments, interest expense and U.S. income taxes. This segment also includes
non-premium revenues generated outside of our insurance entities and corporate
expenses.
Additional information regarding our segments is included in Note 15 of the
Notes to Condensed Consolidated Financial Statements and in the Segment Results
sections that follow.
Critical Accounting Estimates
Our Condensed Consolidated Financial Statements are prepared in conformity with
GAAP. Preparation of these financial statements requires us to make estimates
and assumptions that affect the amounts we report on those statements. We
evaluate these estimates and assumptions on an ongoing basis based on current
and historical developments, market conditions, industry trends and other
information that we believe to be reasonable under the circumstances, including
the potential impacts of the COVID-19 pandemic (see "Item 1A, Risk Factors" and
"Critical Accounting Estimates" in our December 31, 2020 report on Form 10-K for
additional information). We can make no assurance that actual results will
conform to our estimates and assumptions; reported results of operations may be
materially affected by changes in these estimates and assumptions.
For further information on the significant accounting policies we follow in
making estimates that materially affect financial reporting please refer to the
Notes to Consolidated Financial Statements in our December 31, 2020 report on
Form 10-K. Management considers the following accounting estimates to be
critical because they involve significant judgment by management and those
judgments could result in a material effect on our financial statements.
Reserve for Losses and Loss Adjustment Expenses
The largest component of our liabilities is our reserve for losses and loss
adjustment expenses ("reserve for losses" or "reserve"), and the largest
component of expense for our operations is incurred losses and loss adjustment
expenses (also referred to as "losses and loss adjustment expenses," "incurred
losses," "losses incurred" and "losses"). Incurred losses reported in any period
reflect our estimate of losses incurred related to the premiums earned in that
period as well as any changes to our previous estimate of the reserve required
for prior periods.
As of September 30, 2021, our reserve is comprised almost entirely of long-tail
exposures. The estimation of long-tailed losses is inherently difficult and is
subject to significant judgment on the part of management. Due to the nature of
our claims, our loss costs, even for claims with similar characteristics, can
vary significantly depending upon many factors, including but not limited to the
specific characteristics of the claim and the manner in which the claim is
resolved. Long-tailed insurance is characterized by the extended period of time
typically required both to assess the viability of a claim and potential
damages, if any, and to reach a resolution of the claim. The claims resolution
process may extend to more than five years. The combination of continually
changing conditions and the extended time required for claim resolution results
in a loss cost estimation process that requires actuarial skill and the
application of significant judgment, and such estimates require periodic
modification.
Our reserve is established by management after taking into consideration a
variety of factors including premium rates, historical paid and incurred loss
development trends and our evaluation of the current loss environment including
frequency, severity, expected effect of inflation, general economic and social
trends, and the legal and political environment. We also take into consideration
the conclusions reached by our internal and consulting actuaries. We update and
review the data underlying the estimation of our reserve for losses each
reporting period and make adjustments to loss estimation assumptions that we
believe best reflect emerging data. Both our internal and consulting actuaries
perform an in-depth review of our reserve for losses on at least a semi-annual
basis using the loss and exposure data of our insurance subsidiaries.
Our reserving process can be broadly grouped into three areas: the establishment
of the reserve for the current accident year (the initial reserve), the
re-estimation of the reserve for prior accident years (development of prior
accident years) and the establishment of the initial reserve for risks assumed
in business combinations, applicable only in periods in which acquisitions occur
(the acquired reserve).
Current Accident Year - Initial Reserve
Considerable judgment is required in establishing our initial reserve for any
current accident year period, as there is limited data available upon which to
base our estimate (see further discussion that follows under heading "Use of
Judgment"). Our process for setting an initial reserve considers the unique
characteristics of each product, but in general we rely heavily on the loss
assumptions that were used to price business, as our pricing reflects our
analysis of loss costs that we expect to incur relative to the insurance product
being priced.
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Specialty P&C Segment. Loss costs within this segment are impacted by many
factors including but not limited to the nature of the claim, including whether
or not the claim is an individual or a mass tort claim, the personal situation
of the claimant or the claimant's family, the outcome of jury trials, the
legislative and judicial climate where any potential litigation may occur,
general economic and social trends and, for claims involving bodily injury, the
trend of healthcare costs. Within our Specialty P&C segment, for our
professional liability business (80% of our consolidated gross reserve for
losses and loss adjustment expenses as of December 31, 2020; predominantly
comprised of our HCPL products), we set an initial reserve based upon our
evaluation of the current loss environment including frequency, severity,
economic inflation, social inflation and legal trends.
We observed a reduction in claims frequency in 2020 that has continued into
2021, some of which is likely associated with the COVID-19 pandemic. Given the
consistent and prolonged nature of these favorable trends we began to recognize
some of these favorable frequency trends in our HCPL current accident year
reserve during the third quarter of 2021. We continue to remain cautious in
recognizing these favorable trends due to the long-tailed nature of our HCPL
claims as well as the uncertainty surrounding the length and severity of the
pandemic. See further discussion in our Segment Results - Specialty Property &
Casualty section that follows under the heading "Losses and Loss Adjustment
Expenses."
The risks insured in our Medical Technology Liability business (3% of our
consolidated gross reserve for losses and loss adjustment expenses as of
December 31, 2020) are more varied, and policies are individually priced based
on the risk characteristics of the policy and the account. The insured risks
range from startup operations to large multinational entities, and the larger
entities often have significant deductibles or self-insured retentions. Reserves
are established using our most recently developed actuarial estimates of losses
expected to be incurred based on factors which include results from prior
analysis of similar business, industry indications, observed trends and
judgment. Claims in this line of business primarily involve bodily injury to
individuals and are affected by factors similar to those of our HCPL line of
business. For the Medical Technology Liability business, we also establish an
initial reserve using a loss ratio approach, including a provision in
consideration of historical loss volatility that this line of business has
exhibited.
Workers' Compensation Insurance Segment. Many factors affect the ultimate losses
incurred for our workers' compensation coverages (8% of our consolidated gross
reserve for losses and loss adjustment expenses as of December 31, 2020)
including but not limited to the type and severity of the injury, the age,
health and occupation of the injured worker, the estimated length of disability,
medical treatment and related costs, and the jurisdiction and workers'
compensation laws of the state of the injury occurrence.
We use various actuarial methodologies in developing our workers' compensation
reserve, combined with a review of the payroll exposure base. For the current
accident year, given the lack of seasoned information, the different actuarial
methodologies produce results with significant variability; therefore, more
emphasis is placed on supplementing results from the actuarial methodologies
with trends in exposure base, medical expense inflation, general inflation,
severity, and claim counts, among other things, to select an expected loss
ratio.
As in our Specialty P&C segment, we observed a reduction in claims frequency in
2020. Claims frequency in 2021 continues to be below pre-pandemic levels in our
Workers' Compensation Insurance segment, some of which is likely associated with
the COVID-19 pandemic. While claims frequency is down, we have experienced an
increase in 2021 accident year reported losses through September 30, 2021,
including increased severity-related claim activity, which we primarily
attribute to the current pandemic conditions and the impact of workers returning
to full employment with the easing of pandemic-related restrictions in our
operating territories, including the impact of labor shortages on the existing
workforce. As a result of the increase in reported losses, we adjusted our
current accident year loss ratio for the nine months ended September 30, 2021,
during the third quarter of 2021. Our COVID-19 claim activity has trended
downward through the first three quarters of 2021; however, the impact of
legislative and regulatory bodies in certain states changing or attempting to
broaden compensability requirements for COVID-19 claims could, if successful,
have an adverse impact on the frequency and severity related to COVID-19 claims.
See further discussion in the "Insurance Regulatory Matters" section in Part 1,
Item 1 of our December 31, 2020 report on Form 10-K. Furthermore, as it relates
to both our Workers' Compensation Insurance and Segregated Portfolio Cell
Reinsurance segments, the current economic conditions resulting from the
COVID-19 pandemic have introduced significant risk of a prolonged recession,
which could have an adverse impact on our return to wellness efforts and the
ability of injured workers to return to work, resulting in a potential reduction
in favorable claim trends in future periods.
Segregated Portfolio Cell Reinsurance Segment. The factors that affect the
ultimate losses incurred for the workers' compensation and HCPL coverages
assumed by the SPCs at Inova Re and Eastern Re (4% of our consolidated gross
reserve for losses and loss adjustment expenses as of December 31, 2020) are
consistent with that of our Workers' Compensation Insurance and Specialty P&C
segments, respectively.
Lloyd's Syndicates Segment. Initial reserves for Syndicate 1729 and Syndicate
6131 are primarily recorded using the loss assumptions by risk category
incorporated into each Syndicate's business plan submitted to Lloyd's with
consideration given to loss experience incurred to date (5% of our consolidated
gross reserve for losses and loss adjustment expenses as of December 31, 2020).
The assumptions used in each business plan are consistent with loss results
reflected in Lloyd's historical
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data for similar risks. The loss ratios may also fluctuate due to the mix of
earned premium from different open underwriting years which we participate in to
varying degrees, as well as the timing of earned premium adjustments. Such
adjustments may be the result of premiums for certain policies and assumed
reinsurance contracts being reported subsequent to the coverage period and may
be subject to adjustment based on loss experience. Premium and exposure for some
of Syndicate 1729's insurance policies and reinsurance contracts are initially
estimated and subsequently recorded over an extended period of time as reports
are received under delegated underwriting authority programs. When reports are
received, the premium, exposure and corresponding loss estimates are revised
accordingly. Changes in loss estimates due to premium or exposure fluctuations
are incurred in the accident year in which the premium is earned.
For significant property catastrophe exposures, Syndicate 1729 uses third-party
catastrophe models to accumulate a listing of potentially affected policies.
Each identified policy is given an estimate of loss severity based upon a
combination of factors including the probable maximum loss of each policy,
market share analytics, underwriting judgment, client/broker estimates and
historical loss trends for similar events. These models are inherently
uncertain, reliant upon key assumptions and management judgment and are not
always a representation of actual events and ensuing potential loss exposure.
Determination of actual losses may take an extended period of time until claims
are reported and resolved, including coverage litigation.
Development of Prior Accident Years
In addition to setting the initial reserve for the current accident year, we
reassess the amount of reserve required for prior accident years each period.
Our reserve re-estimation process is based upon the most recently completed
actuarial analysis supplemented by any new analysis, information or trends that
have emerged since the date of that study. We also take into account currently
available industry trend information. Changes to previously established reserve
estimates are recognized in the current period if management's best estimate of
ultimate losses differs from the estimate previously established. While
management considers a variety of variables in determining its best estimate, in
general, as claims age, our methodologies give more weight to actual loss costs
which, for the majority of our reserves, continue to indicate that ultimate loss
costs will be lower than our previous estimates. The discussion in our Critical
Accounting Estimates section in Item 7 of our December 31, 2020 report on Form
10-K includes additional information regarding the methodologies used to
evaluate our reserve.
Any change in our estimate of net ultimate losses for prior accident years is
reflected in net income (loss) in the period in which such changes are made. In
recent years such changes have reduced our estimate of consolidated net ultimate
losses, resulting in a reduction of reported losses for the period and a
corresponding increase in pre-tax income.
Due to the size of our consolidated reserve for losses and the large number of
claims outstanding at any point in time, even a small percentage adjustment to
our total reserve estimate could have a material effect on our results of
operations for the period in which the adjustment is made. Please refer to the
Executive Summary of Operations and Segment Results sections that follow for a
discussion on consolidated and segment prior accident year loss development
recognized in the current period.
Use of Judgment
The process of estimating reserves involves a high degree of judgment and is
subject to a number of variables. These variables can be affected by both views
of internal and external events, such as changes in views of economic inflation,
legal trends and legislative changes, as well as differentiating views of
individuals involved in the reserve estimation process, among others. We
continually refine our estimates in a regular, ongoing process as historical
loss experience develops and additional claims are reported and settled. Our
objective is to consider all significant facts and circumstances known at the
time.
Changes in economic conditions and steps taken by the federal government and the
Federal Reserve in response to COVID-19 could lead to inflation trends that are
different from those we anticipated when establishing our reserves, which could
in turn lead to an increase or decrease in our loss costs and the need to
strengthen or reduce reserves.
We use various actuarial methods in the process of setting reserves. Each
actuarial method generally returns a different value, and for the more recent
accident years the variations among the various methodologies can be
significant. In order to project ultimate losses, we partition our reserves for
analysis such as by line of business, geography, coverage layer or accident
year. For each partition of our reserves, we evaluate the results of the various
methods, along with the supplementary statistical data regarding such factors as
closed with and without indemnity ratios, claim severity trends, the expected
duration of such trends, changes in the legal and legislative environment and
the current economic environment to develop a point estimate based upon
management's judgment and past experience. The series of selected point
estimates is then combined to produce an overall point estimate for ultimate
losses.
HCPL. Over the past several years the most influential factor affecting the
analysis of our HCPL reserves and the related development recognized has been an
observed increase in claim severity for the broader medical professional
liability industry as well as higher initial loss expectations on incurred
claims. The severity trend is an explicit component of our pricing models
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and directly impacts the reserving process. Our estimate of this trend and our
expectations about changes in this trend impact a variety of factors, from the
selection of expected loss ratios to the ultimate point estimates established by
management.
Because of the implicit and wide-ranging nature of severity trend assumptions on
the loss reserving process, it is not practical to specifically isolate the
impact of changing severity trends. However, because severity is an explicit
component of our HCPL pricing process we can better isolate the impact that
changing severity can have on our loss costs and loss ratios in regards to our
pricing models for this business component. Our current HCPL pricing models
assume severity trends in the range of 2% to 5% depending on state, territory
and specialty. In some portions of our HCPL business we have observed and
reflected higher severity trends in our estimates of losses and loss adjustment
expenses.
Due to the long-tailed nature of our claims and the previously discussed
historical volatility of loss costs, selection of a severity trend assumption is
a subjective process that is inherently likely to prove inaccurate over time.
Given the long tail and volatility, we are generally cautious in making changes
to the severity assumptions within our pricing models. All open claims and
accident years are generally impacted by a change in the severity trend, which
compounds the effect of such a change.
Although the future degree and impact of the ultimate severity trend remains
uncertain due to the long-tailed nature of our business, we have given
consideration to observed loss costs in setting our rates. For our HCPL
business, this practice had generally resulted in rate reductions as claim
frequency declined and remained at historically low levels. However, from early
2017 to the current period, the average pricing on renewed business has steadily
increased reflective of the rising loss cost environment, and we anticipate
further renewal pricing increases due to increasing loss severity.
More recently, another factor affecting our analysis of our HCPL reserves and
the related development recognized is the reduction in claims frequency in 2020,
some of which is likely associated with the COVID-19 pandemic, as previously
discussed. In 2020, we established a $10 million IBNR reserve related to
COVID-19. While we continue to remain cautious in recognizing these favorable
frequency trends in our prior accident year reserve due to the long-tailed
nature of our HCPL claims as well as the uncertainty surrounding the length and
severity of the pandemic, we recognized net favorable prior accident year
reserve development of $1 million associated with our COVID-19 IBNR reserve
during the third quarter of 2021. At September 30, 2021, we maintain a $9
million IBNR reserve related to COVID-19 which represents our best estimate of
future COVID-19 related losses not already captured by our claims process based
on currently available information and reported incidents.
Workers' Compensation. The projection of changes in claim severity trend has not
historically been an influential factor affecting our analysis of workers'
compensation reserves, as claims are typically resolved more quickly than the
industry norm. As previously mentioned, the determination and calculation of
loss development factors, in particular, the selection of tail factors which are
used to extend the projection of losses beyond historical data, requires
considerable judgment.
Acquired Reserve
The acquisition of NORCAL increased our gross reserves by $1.2 billion which was
the fair value of NORCAL's loss reserve at the time of acquisition. The fair
value estimate of NORCAL's reserve for losses and loss adjustment expenses was
based on three components: an actuarial estimate of the expected future net cash
flows, a reduction to those cash flows for the time value of money determined
utilizing the U.S. Treasury Yield Curve and a risk margin adjustment to reflect
the net present value of profit that an investor would demand in return for the
assumption of the development risk associated with the reserve. The fair value
of NORCAL's gross reserve, including the risk margin adjustment, exceeded the
actuarial estimate of NORCAL's undiscounted loss reserve by approximately
$42.2 million as of May 5, 2021. This fair value adjustment was recorded to the
reserve for losses and loss adjustment expenses and will be amortized over a
period utilizing loss payment patterns as a reduction to prior accident year net
losses and loss adjustment expenses. See Note 2 of the Notes to Condensed
Consolidated Financial Statements for more information.
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Investment Valuations
We record the majority of our investments at fair value as shown in the table
below. At September 30, 2021, the distribution of our investments based on GAAP
fair value hierarchies (levels) was as follows:
                                                     Distribution by GAAP Fair Value Hierarchy
                                                                                                                                                      Total
                                         Level 1                     Level 2                      Level 3              Not Categorized             Investments
Investments recorded at:
Fair value                                 7%                          84%                          1%                       5%                        97%
Other valuations                                                                                                                                        3%
Total Investments                                                                                                                                      100%


Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. All of our fixed maturity and equity
investments are carried at fair value. The fair value of our short-term
securities approximates the cost of the securities due to their short-term
nature.
Because of the number of securities we own and the complexity of developing
accurate fair values, we utilize multiple independent pricing services to assist
us in establishing the fair value of individual securities. The pricing services
provide fair values based on exchange-traded prices, if available. If an
exchange-traded price is not available, the pricing services, if possible,
provide a fair value that is based on multiple broker/dealer quotes or that has
been developed using pricing models. Pricing models vary by asset class and
utilize currently available market data for securities comparable to ours to
estimate a fair value for our securities. The pricing services scrutinize market
data for consistency with other relevant market information before including the
data in the pricing models. The pricing services disclose the types of pricing
models used and the inputs used for each asset class. Determining fair values
using these pricing models requires the use of judgment to identify appropriate
comparable securities and to choose a valuation methodology that is appropriate
for the asset class and available data.
The pricing services provide a single value per instrument quoted. We review the
values provided for reasonableness each quarter by comparing market yields
generated by the supplied value versus market yields observed in the
marketplace. We also compare yields indicated by the provided values to
appropriate benchmark yields and review for values that are unchanged or that
reflect an unanticipated variation as compared to prior period values. We
utilize a primary pricing service for each security type and compare provided
information for consistency with alternate pricing services, known market data
and information from our own trades, considering both values and valuation
trends. We also review weekly trades versus the prices supplied by the services.
If a supplied value appears unreasonable, we discuss the valuation in question
with the pricing service and make adjustments if deemed necessary. Historically
our review has not resulted in any material changes to the values supplied by
the pricing services. The pricing services do not provide a fair value unless an
exchange-traded price or multiple observable inputs are available. As a result,
the pricing services may provide a fair value for a security in some periods but
not others, depending upon the level of recent market activity for the security
or comparable securities.
Level 1 Investments
Fair values for a majority of our equity securities and portions of our
short-term and convertible securities are determined using exchange-traded
prices. There is little judgment involved when fair value is determined using an
exchange-traded price. In accordance with GAAP, we classify securities valued
using an exchange-traded price as Level 1 securities.
Level 2 Investments
Most fixed income securities do not trade daily; thus, exchange-traded prices
are generally not available for these securities. However, market information
(often referred to as observable inputs or market data, including but not
limited to, last reported trade, non-binding broker quotes, bids, benchmark
yield curves, issuer spreads, two-sided markets, benchmark securities, offers
and recent data regarding assumed prepayment speeds, cash flow and loan
performance data) is available for most of our fixed income securities. We
determine fair value for a large portion of our fixed income securities using
available market information. In accordance with GAAP, we classify securities
valued based on multiple market observable inputs as Level 2 securities.
Level 3 Investments
When a pricing service does not provide a value for one of our fixed maturity
securities, management estimates fair value using either a single non-binding
broker quote or pricing models that utilize market based assumptions which have
limited observable inputs. The process involves significant judgment in
selecting the appropriate data and modeling techniques to use in the valuation
process. In accordance with GAAP, we classify securities valued using limited
observable inputs as Level 3 securities.
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Fair Values Not Categorized
We hold interests in certain investment funds, primarily LPs/LLCs, which measure
fund assets at fair value on a recurring basis and provide us with a NAV for our
interest. As a practical expedient, we consider the NAV provided to approximate
the fair value of the interest. In accordance with GAAP, we do not categorize
these investments within the fair value hierarchy.
Nonrecurring Fair Value Measurements
We measure the fair value of certain assets on a nonrecurring basis when events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. These assets include investments carried principally at
cost, investments in tax credit partnerships, fixed assets, goodwill and other
intangible assets. These assets would also include any equity method investments
that do not provide a NAV. During the third quarter of 2020, we recognized a
nonrecurring fair value measurement related to the goodwill in our Specialty P&C
reporting unit with a carrying value of $161.1 million prior to the fair value
measurement. This nonrecurring fair value measurement resulted in the goodwill
being written down to its implied fair value of zero resulting in an impairment
of the goodwill of $161.1 million (see following discussion under the heading
"Goodwill / Intangibles" and Note 7 of the Notes to Condensed Consolidated
Financial Statements). The inputs used in the fair value measurement were
non-observable and, as such, were categorized as a Level 3 valuation. We did not
have any other assets or liabilities that were measured at fair value on a
nonrecurring basis at September 30, 2021 or December 31, 2020.
Investments - Other Valuation Methodologies
Certain of our investments, in accordance with GAAP for the type of investment,
are measured using methodologies other than fair value. At September 30, 2021,
these investments represented approximately 3% of total investments, and are
detailed in the following table. Additional information about these investments
is provided in Note 3 and Note 4 of the Notes to Condensed Consolidated
Financial Statements.
                     (In millions)                        Carrying Value               GAAP Measurement Method

Other investments:

Other, principally FHLB capital stock                    $          3.2                   Principally Cost

Investment in unconsolidated subsidiaries:
Investments in tax credit partnerships                             16.0                        Equity
Equity method investments, primarily LPs/LLCs                      50.2                        Equity
                                                                   66.2
BOLI                                                               80.8                 Cash surrender value

Total investments – Other valuation methodologies $ 150.2

Impairments

We evaluate our available-for-sale investment securities, which at September 30,
2021 and December 31, 2020 consisted entirely of fixed maturity securities, on
at least a quarterly basis for the purpose of determining whether declines in
fair value below recorded cost basis represent an impairment loss. We consider a
credit-related impairment loss to have occurred:
•if there is intent to sell the security;
•if it is more likely than not that the security will be required to be sold
before full recovery of its amortized cost basis; or
•if the entire amortized basis of the security is not expected to be recovered.
The assessment of whether the amortized cost basis of a security is expected to
be recovered requires management to make assumptions regarding various matters
affecting future cash flows. The choice of assumptions is subjective and
requires the use of judgment. Actual credit losses experienced in future periods
may differ from management's estimates of those credit losses. Methodologies
used to estimate the present value of expected cash flows are:
The estimate of expected cash flows is determined by projecting a recovery value
and a recovery time frame and assessing whether further principal and interest
will be received. We consider various factors in projecting recovery values and
recovery time frames, including the following:
•third-party research and credit rating reports;
•the current credit standing of the issuer, including credit rating downgrades,
whether before or after the balance sheet date;
•the extent to which the decline in fair value is attributable to credit risk
specifically associated with the security or its issuer;
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•internal assessments and the assessments of external portfolio managers
regarding specific circumstances surrounding an investment, which indicate the
investment is more or less likely to recover its amortized cost than other
investments with a similar structure;
•for asset-backed securities, the origination date of the underlying loans, the
remaining average life, the probability that credit performance of the
underlying loans will deteriorate in the future and our assessment of the
quality of the collateral underlying the loan;
•failure of the issuer of the security to make scheduled interest or principal
payments;
•any changes to the rating of the security by a rating agency;
•recoveries or additional declines in fair value subsequent to the balance sheet
date;
•adverse legal or regulatory events;
•significant deterioration in the market environment that may affect the value
of collateral (e.g., decline in real estate prices);
•significant deterioration in economic conditions; and
•disruption in the business model resulting from changes in technology or new
entrants to the industry.
If deemed appropriate and necessary, a discounted cash flow analysis is
performed to confirm whether a credit loss exists and, if so, the amount of the
credit loss. We use the single best estimate approach for available-for-sale
debt securities and consider all reasonably available data points, including
industry analyses, credit ratings, expected defaults and the remaining payment
terms of the debt security. For fixed rate available-for-sale debt securities,
cash flows are discounted at the security's effective interest rate implicit in
the security at the date of acquisition. If the available-for-sale debt
security's contractual interest rate varies based on subsequent changes in an
independent factor, such as an index or rate, for example, the prime rate, the
LIBOR, or the U.S. Treasury bill weekly average, that security's effective
interest rate is calculated based on the factor as it changes over the life of
the security. If we intend to sell a debt security or believe we will more
likely than not be required to sell a debt security before the amortized cost
basis is recovered, any existing allowance will be written off against the
security's amortized cost basis, with any remaining difference between the debt
security's amortized cost basis and fair value recognized as an impairment loss
in earnings.
Exclusive of securities where there is an intent to sell or where it is not more
likely than not that the security will be required to be sold before recovery of
its amortized cost basis, impairment for debt securities is separated into a
credit component and a non-credit component. The credit component of an
impairment is the difference between the security's amortized cost basis and the
present value of its expected future cash flows, while the non-credit component
is the remaining difference between the security's fair value and the present
value of expected future cash flows. An allowance for expected credit losses
will be recorded for the expected credit losses through income and the
non-credit component is recognized in OCI. The amount of impairment recognized
is limited to the excess of the amortized cost over the fair value of the
available-for-sale debt security.
Pension
As a result of our NORCAL acquisition, we sponsor a frozen defined benefit
pension plan which covers substantially all NORCAL employees (except those that
were previous employees of Medicus Insurance Company and FD Insurance Company,
employees of PPM RRG as well as new hires after December 31, 2013). Accounting
for pension benefits requires the use of assumptions for the valuation of the
PBO and the expected performance of the plan assets.
We use December 31 as the measurement date for calculating our obligation
related to this defined benefit pension plan. The PBO for pension benefits
represents the present value of all future benefits earned as of the measurement
date for vested and non-vested employees. At each measurement date, we review
the various assumptions impacting the amounts recorded for the pension plan
including the discount rates, which impacts the recorded value of the PBO and
interest costs, and the expected return on plan assets.
To estimate the discount rate at the measurement date, we use a bond yield curve
model, developed based on pricing and yield information for high quality
corporate bonds. The assumption for the expected return on plan assets is based
on the anticipated returns that will be earned by the portfolio over the long
term. The expected return is influenced, but not determined, by historical
portfolio performance.
Accounting standards provide for the delayed recognition of differences between
actual results and expected or estimated results. This delayed recognition of
the differences is amortized into earnings over time. The differences between
actual results and expected or estimated results are recognized in full in AOCI.
Amounts recognized in AOCI are reclassified to earnings in a systematic manner
over the average future service period of participants. Due to the acquisition
of NORCAL and the application of GAAP purchase accounting, there were no amounts
recorded in AOCI as of September 30, 2021 as the plan assets and benefit
obligation are not remeasured on a quarterly basis.
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Deferred Policy Acquisition Costs
Policy acquisition costs (primarily commissions, premium taxes and underwriting
salaries) which are directly related to the successful acquisition of new and
renewal premiums are capitalized as DPAC and charged to expense, net of ceding
commissions earned, as the related premium revenue is recognized. We evaluate
the recoverability of our DPAC typically at the segment level each reporting
period or in a manner that is consistent with the way we manage our business.
Any amounts estimated to be unrecoverable are charged to expense in the current
period.
As part of our evaluation of the recoverability of DPAC, we also evaluate our
unearned premiums for premium deficiencies. A premium deficiency is recognized
if the sum of anticipated losses and loss adjustment expenses, unamortized DPAC
and maintenance costs, net of anticipated investment income, exceeds the related
unearned premium. If a premium deficiency is identified, the associated DPAC is
written off, and a PDR is recorded for the excess deficiency as a component of
net losses and loss adjustment expenses in our Condensed Consolidated Statements
of Income and Comprehensive Income and as a component of the reserve for losses
and loss adjustment expenses on our Condensed Consolidated Balance Sheets.
During the three and nine months ended September 30, 2021 and 2020, we did not
determine any DPAC to be unrecoverable.
Estimation of Taxes / Tax Credits
For interim periods, we generally utilize the estimated annual effective tax
rate method under which we determine our provision (benefit) for income taxes
based on the current estimate of our annual effective tax rate. For the nine
months ended September 30, 2021, we utilized the discrete effective tax rate
method for recording income taxes after the estimated annual effective tax rate
method produced an unreliable estimated annual effective tax rate. The discrete
method is applied when the application of the estimated annual effective tax
rate method is impractical and does not provide a reliable estimate of the
annual effective tax rate. We believe the use of the discrete effective tax rate
method is more appropriate than the annual effective tax rate method for the
nine months ended September 30, 2021 as minor changes in our estimated ordinary
income would have a significant effect on the estimated annual effective tax
rate and would result in sizable variations in the customary relationship
between income tax expense (benefit) and pre-tax accounting income (loss). For
the nine months ended September 30, 2020, we utilized the estimated annual
effective tax rate method. Under the estimated annual effective tax rate method,
items which are unusual, infrequent, or that cannot be reliably estimated are
considered in the effective tax rate in the period in which the item is included
in income, and are referred to as discrete items. In calculating our
year-to-date income tax expense (benefit), we include the estimated benefit of
tax credits for the year-to-date period based on the most recently available
information provided by the tax credit partnerships; the actual amounts of
credits provided by the tax credit partnerships may prove to be different than
our estimates. The effect of such a difference is recognized in the period
identified.
Deferred Taxes
Deferred federal income taxes arise from the recognition of temporary
differences between the basis of assets and liabilities determined for financial
reporting purposes and the basis determined for income tax purposes. Our
temporary differences principally relate to our loss reserves, unearned and
advanced premiums, DPAC, NOL and tax credit carryforwards, compensation related
items, unrealized investment gains (losses) and basis differences on fixed
assets, intangible assets and operating leases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to be in effect
when such benefits are realized. We review our deferred tax assets quarterly for
impairment. If we determine that it is more likely than not that some or all of
a deferred tax asset will not be realized, a valuation allowance is recorded to
reduce the carrying value of the asset. In assessing the need for a valuation
allowance, management is required to make certain judgments and assumptions
about our future operations based on historical experience and information as of
the measurement period regarding reversal of existing temporary differences,
carryback capacity, future taxable income of the appropriate character
(including its capital and operating characteristics) and tax planning
strategies.
A valuation allowance was established in a prior year against the deferred tax
asset related to the NOL carryforwards for the U.K. operations. In addition, a
valuation allowance was established in 2020 against a portion of the deferred
tax asset related to the U.S. state NOL carryforwards. Management concluded that
it was more likely than not that these deferred tax assets will not be realized.
We also established a valuation allowance in a prior year against the deferred
tax assets of certain SPCs at our wholly owned Cayman Islands reinsurance
subsidiary, Inova Re. Due to the limited operations of these SPCs, management
concluded that a valuation allowance was required. As of September 30, 2021,
management concluded that a valuation allowance was still required against the
deferred tax assets related to the NOL carryforwards for the U.K. operations,
against the deferred tax assets related to the U.S. state NOL carryforwards and
against the deferred tax assets of certain SPCs at Inova Re. See further
discussion in Note 5 of the Notes to Consolidated Financial Statements in our
December 31, 2020 report on Form 10-K.
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U.S. Tax Legislation
Coronavirus Aid, Relief and Economic Security Act
In response to COVID-19, the CARES Act was signed into law on March 27, 2020 and
contains several provisions for corporations and eases certain deduction
limitations originally imposed by the TCJA. See further discussion in Note 5 of
the Notes to Consolidated Financial Statements in our December 31, 2020 report
on Form 10-K. We anticipate the temporary changes regarding NOL carryback
provisions included in the CARES Act will have a favorable impact on our
liquidity (see discussion that follows in the Liquidity and Capital Resources
and Financial Condition section under the heading "Taxes").
American Rescue Plan Act of 2021
In response to economic concerns associated with COVID-19, the American Rescue
Plan Act of 2021 was signed into law on March 11, 2021 and includes an expansion
of the number of employees covered by the limitation on the deductibility of
compensation in excess of $1 million. This provision is effective for tax years
beginning after December 31, 2026. We have evaluated this provision as well as
the other provisions of the American Rescue Plan Act of 2021 and concluded that
they will not have a material impact on our financial position or results of
operations as of September 30, 2021. See further discussion in Note 6 of the
Notes to Condensed Consolidated Financial Statements.
Unrecognized Tax Benefits
We evaluate tax positions taken on tax returns and recognize positions in our
financial statements when it is more likely than not that we will sustain the
position upon resolution with a taxing authority. If recognized, the benefit is
measured as the largest amount of benefit that has a greater than 50%
probability of being realized. We review uncertain tax positions each quarter,
considering changes in facts and circumstances, such as changes in tax law,
interactions with taxing authorities and developments in case law, and make
adjustments as we consider necessary. Adjustments to our unrecognized tax
benefits may affect our income tax expense, and settlement of uncertain tax
positions may require the use of cash. Other than differences related to timing,
no significant adjustments were considered necessary during the three and nine
months ended September 30, 2021 or 2020. At September 30, 2021, our liability
for unrecognized tax benefits approximated $5.2 million.
Goodwill / Intangibles
Goodwill and intangible assets are tested for impairment annually or more
frequently if circumstances indicate an impairment may have occurred. The date
of our annual impairment testing is October 1. Impairment of goodwill is tested
at the reporting unit level, which is consistent with our reportable segments
identified in Note 15 of the Notes to Condensed Consolidated Financial
Statements.
Interim Impairment Assessments
During the third quarter of 2020, we performed interim impairment assessments of
the goodwill and definite and indefinite lived intangible assets in our
Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell
Reinsurance reporting units due to the significant market volatility impacting
our actual and projected results along with a decline in our stock price. The
goodwill analysis indicated an impairment of the goodwill associated with our
Specialty P&C reporting unit and accordingly we recorded a $161.1 million charge
to goodwill (see further discussion in Note 7 of the Notes to Condensed
Consolidated Financial Statements). The analysis of our definite and indefinite
lived intangible assets indicated no impairment at September 30, 2020.
There were no triggering events as of September 30, 2021 that would suggest an
updated impairment test would be needed for our goodwill and intangible assets.
Annual Impairment Assessments
Of the five reporting units, two have net goodwill - Workers' Compensation
Insurance and Segregated Portfolio Cell Reinsurance. For our last annual
impairment test at October 1, 2020, we performed qualitative assessments for our
Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance
reporting units (see Note 7 of the Notes to Condensed Consolidated Financial
Statements). Management concluded that it was not more likely than not that the
fair value of each of our two reporting units that have net goodwill was less
than the carrying value of each reporting unit as of the testing date; therefore
no further impairment testing was required.
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Acquired Intangibles
The acquisition of NORCAL added $14 million to identifiable intangible assets as
of the acquisition date. Intangible assets acquired in the NORCAL acquisition
included the following:
   (In thousands)    Estimated Fair Value on Acquisition Date      Estimated Useful Life
  Trade name        $                                  1,000                 3
  Licenses                                            13,000            Indefinite
  Total             $                                 14,000


See further information on the intangible assets acquired in the NORCAL
acquisition in Note 2 of the Notes to Condensed Consolidated Financial
Statements and additional information regarding our goodwill and intangible
assets is included in Note 1 and Note 6 of the Notes to Consolidated Financial
Statements included in our December 31, 2020 report on Form 10-K.
Business Combinations
We accounted for our acquisition of NORCAL in accordance with GAAP relating to
business combinations which required us to make certain estimates and
assumptions including determining the fair value of the non-cash components of
the acquisition consideration and the acquisition date fair values of the
acquired tangible and identifiable intangible assets and assumed liabilities of
NORCAL. Subsequent to the preliminary valuation of the non-cash components of
the purchase consideration and net assets acquired, any adjustment identified
associated with the purchase price allocation will be evaluated to determine
whether the adjustment represents a measurement period adjustment in accordance
with GAAP. If the adjustment is deemed to be a measurement period adjustment and
is identified within one year of the acquisition, then the measurement period
adjustment will be recorded in the current reporting period with a corresponding
adjustment to the gain on bargain purchase.
Contingent Consideration
Contingent consideration in a business combination is recorded at fair value on
the date of the acquisition and remeasured each subsequent reporting period with
changes in fair value recognized in earnings. The purchase consideration in the
NORCAL acquisition included contingent consideration with an acquisition date
fair value of approximately $24 million. NORCAL policyholders who tendered
NORCAL stock to ProAssurance are eligible for a share of contingent
consideration in an amount of up to approximately $84 million depending upon the
after-tax development of NORCAL's ultimate net losses between December 31, 2020
and December 31, 2023. The estimated fair value of this contingent consideration
was $24 million as of September 30, 2021, which did not change from June 30,
2021, and was derived utilizing a stochastic model. This estimate does not
guarantee that contingent consideration will ultimately be paid. Depending on
NORCAL's actual ultimate net loss development between December 31, 2020 and
December 31, 2023, the actual amount due to eligible policyholders may be
greater than or less than the $24 million current fair value estimate. See
further discussion around the contingent consideration in Note 2 and Note 9 of
the Notes to Condensed Consolidated Financial Statements.
VOBA
VOBA is an intangible asset (or liability) that reflects the estimated fair
value of in-force contracts acquired in an acquisition and represents the
portion of the purchase price that is allocated to the value of the right to
receive future cash flows from the business in-force at the acquisition date.
VOBA is based on actuarially determined projections, and in instances where the
in-force business is expected to generate an underwriting loss, the value of
VOBA may be negative. Negative VOBA is reported in the reserve for losses and
loss adjustment expenses on the Condensed Consolidated Balance Sheets.
We recognized negative VOBA of $11.7 million in connection with our acquisition
of NORCAL, representing the value of future losses expected to be recognized
over the lifetime of the contracts acquired determined using a discount rate and
other relevant assumptions. The negative VOBA will be amortized over a period in
proportion to the earn-out of the premium as a reduction to current accident
year net losses and loss adjustment expenses on the Condensed Consolidated
Statements of Income and Comprehensive Income. See Note 2 of the Notes to
Condensed Consolidated Financial Statements for more information.
Gain on Bargain Purchase
As a result of the NORCAL acquisition, we recognized a gain on bargain purchase
of $74.4 million during the second quarter of 2021 representing the excess of
the fair value of the identifiable assets acquired and liabilities assumed over
the purchase consideration. A gain on bargain purchase is recognized in earnings
and is considered unusual, infrequent and non-recurring in nature. We exclude
gains on bargain purchases from Non-GAAP operating income (loss) as they do not
reflect normal operating results. See further discussion around the gain on
bargain purchase recognized in the second quarter of 2021 from the NORCAL
acquisition in Note 2 of the Notes to Condensed Consolidated Financial
Statements.
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Accounting Changes
We did not have any change in accounting estimates or policy that had a material
effect on our results of operations or financial position during the nine months
ended September 30, 2021. We are not aware of any accounting changes not yet
adopted as of September 30, 2021 that could have a material impact on our
results of operations, financial position or cash flows.
Liquidity and Capital Resources and Financial Condition
Overview
ProAssurance Corporation is a holding company and is a legal entity separate and
distinct from its subsidiaries. As a holding company, our principal source of
external revenue is our investment revenues. In addition, dividends from our
operating subsidiaries represent another source of funds for our obligations,
including debt service and shareholder dividends. We also charge our operating
subsidiaries within our Specialty P&C (excluding the acquired operating
subsidiaries of NORCAL) and Workers' Compensation Insurance segments a
management fee based on the extent to which services are provided to the
subsidiary and the amount of gross premium written by the subsidiary. At
September 30, 2021, we held cash and liquid investments of approximately $57
million outside our insurance subsidiaries that were available for use without
regulatory approval or other restriction. We also have $250 million in permitted
borrowings available under our Revolving Credit Agreement as well as the
possibility of a $50 million accordion feature, if successfully subscribed. As
of November 3, 2021, no borrowings were outstanding under our Revolving Credit
Agreement.
To date, during 2021, our operating subsidiaries have paid dividends to us of
approximately $51 million. In the aggregate, our insurance subsidiaries,
excluding NORCAL, are permitted to pay dividends of approximately $56 million
over the remainder of 2021 without prior approval of state insurance regulators.
However, the payment of any dividend requires prior notice to the insurance
regulator in the state of domicile, and the regulator may reduce or prevent the
dividend if, in its judgment, payment of the dividend would have an adverse
effect on the surplus of the insurance subsidiary. We make the decision to pay
dividends from an insurance subsidiary based on the capital needs of that
subsidiary and may pay less than the permitted dividend or may also request
permission to pay an additional amount (an extraordinary dividend).
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Operating Activities and Related Cash Flows
Reinsurance
Within our Specialty P&C segment, we use insurance and reinsurance
(collectively, "reinsurance") to provide capacity to write larger limits of
liability, to provide reimbursement for losses incurred under the higher limit
coverages we offer and to provide protection against losses in excess of policy
limits. Within our Workers' Compensation Insurance segment, we use reinsurance
to reduce our net liability on individual risks, to mitigate the effect of
significant loss occurrences (including catastrophic events), to stabilize
underwriting results and to increase underwriting capacity by decreasing
leverage. In both our Specialty P&C and Workers' Compensation Insurance
segments, we use reinsurance in risk sharing arrangements to align our
objectives with those of our strategic business partners and to provide custom
insurance solutions for large customer groups. Within our Lloyd's Syndicates
segment, Syndicate 1729 utilizes reinsurance to provide capacity to write larger
limits of liability on individual risks, to provide protection against
catastrophic loss and to provide protection against losses in excess of policy
limits. The discussion in our Liquidity section under the same heading in Item 7
of our December 31, 2020 report on Form 10-K includes additional information
regarding our reinsurance agreements.
Excess of Loss Reinsurance Agreements
We generally reinsure risks under treaties (our excess of loss reinsurance
agreements) pursuant to which the reinsurers agree to assume all or a portion of
all risks that we insure above our individual risk retention levels, up to the
maximum individual limits offered. Generally, these agreements are negotiated
and renewed annually. Our HCPL and Medical Technology Liability treaties renew
annually on October 1. As of October 1, 2021, our HCPL treaty renewed with a
reduction to the gross rate paid under the renewed treaty and also incorporates
NORCAL policies. For the NORCAL excess of loss reinsurance arrangement in effect
prior to October 1, 2021, NORCAL policies were reinsured under separate
reinsurance agreements, primarily excess of loss, which have historically
renewed annually on January 1. For the NORCAL excess of loss reinsurance
arrangement that renewed on January 1, 2021, retention is generally the first $2
million in risk and coverages in excess of this amount are ceded up to $24
million. There were no significant changes in the cost or structure of our
Medical Technology Liability treaty upon the latest renewal on October 1, 2021.
Our Workers' Compensation treaty renews annually on May 1. Our traditional
workers' compensation treaty renewed May 1, 2021 at a higher rate than the
previous agreement, with an increase in the AAD to 3.50% from 3.16% of ceded
earned premium, in excess of the $0.5 million retention per loss occurrence; all
other material treaty terms were consistent with the expiring agreement. The
significant coverages provided by our current excess of loss reinsurance
agreements are detailed in the following table.
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                     Excess of Loss Reinsurance Agreements
                     [[Image Removed: pra-20210930_g1.jpg]]
    Healthcare Professional         Medical Technology & Life           Workers' Compensation -
           Liability                    Sciences Products                     Traditional


(1) Effective October 1, 2020, one prepaid limit reinstatement of $21M and a
second limit reinstatement of up to $21M for the second layer, subject to
reinstatement premium, which attaches after the first reinstatement has been
completely exhausted. All limit reinstatements thereafter require no additional
premium. Effective October 1, 2021, limits can be reinstated a maximum of four
times.
(2) Prior to October 1, 2020, retention was $1M.
(3) Historically, retention has ranged from 2.5% to 32.5%.
(4) Historically, retention has ranged from $1M to $2M.
(5) Includes an AAD where retention is 3.5% of subject earned premium in annual
losses otherwise recoverable in excess of the $500K retention per loss
occurrence.
Large HCPL risks that are above the limits of our basic reinsurance treaties are
reinsured on a facultative basis, whereby the reinsurer agrees to insure a
particular risk up to a designated limit. We also have in place a number of risk
sharing arrangements that apply to the first $1 million of losses for certain
large healthcare systems and other insurance entities, as well as with certain
insurance agencies that produce business for us.
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Other Reinsurance Arrangements
For the workers' compensation business ceded to Inova Re and Eastern Re, each
SPC has in place its own reinsurance arrangements; which are illustrated in the
following table.
                     Segregated Portfolio Cell Reinsurance
                     [[Image Removed: pra-20210930_g2.jpg]]
                    Per Occurrence Coverage       Aggregate Coverage


(1) The attachment point is based on a percentage of written premium within
individual cells, ranges from 85% to 94%, and varies by cell.
Each SPC has participants and the profit or loss of each cell accrues fully to
these cell participants. As previously discussed, we participate in certain SPCs
to a varying degree. Each SPC maintains a loss fund initially equal to the
difference between premium assumed by the cell and the ceding commission. The
external participants of each cell provide collateral to us, typically in the
form of a letter of credit that is initially equal to the difference between the
loss fund of the SPC (amount of funds available to pay losses after deduction of
ceding commission) and the aggregate attachment point of the reinsurance. Over
time, an SPC's retained profits are considered in the determination of the
collateral amount required to be provided by the cell's external participants.
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Cash Flows
Cash flows between periods compare as follows:
                                                                 Nine 

Ended months September 30

                  (In thousands)                          2021                  2020               Change
Net cash provided (used) by:
Operating activities                               $     69,363             $   73,173          $   (3,810)
Investing activities                                    (25,531)                21,999             (47,530)
Financing activities                                    (56,661)               (38,593)            (18,068)
Increase (decrease) in cash and cash equivalents   $    (12,829)            

$ 56,579 $ (69,408)

                                                                Nine Months 

Ended September 30

                  (In thousands)                         2020                  2019               Change
Net cash provided (used) by:
Operating activities                               $    73,173             $  128,803          $  (55,630)
Investing activities                                    21,999                (25,717)             47,716
Financing activities                                   (38,593)               (81,346)             42,753
Increase (decrease) in cash and cash equivalents   $    56,579             

$ 21,740 $ 34,839

The principal components of our operating cash flows are the excess of premiums
collected and net investment income over losses paid and operating costs,
including income taxes. Timing delays exist between the collection of premiums
and the payment of losses associated with the premiums. Premiums are generally
collected within the twelve-month period after the policy is written, while our
claim payments are generally paid over a more extended period of time. Likewise,
timing delays exist between the payment of claims and the collection of any
associated reinsurance recoveries.
The decrease in operating cash flows of $3.8 million for the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020 was
partially offset by additional net cash receipt from NORCAL of approximately
$2.7 million primarily associated with net premium receipts, partially offset by
transaction-related expenses. Excluding NORCAL, operating cash flows decreased
by $6.5 million for the nine months ended September 30, 2021 as compared to the
nine months ended September 30, 2020 primarily due to a decrease in net premium
receipts of $52.8 million driven by our Lloyd's Syndicates and Specialty P&C
segments. The decrease in premium receipts in our Lloyd's Syndicates segment
reflected our decreased participation in the results of Syndicate 1729 and
Syndicate 6131 for the 2021 underwriting year. The decrease in premium receipts
in our Specialty P&C segment was due to our re-underwriting efforts and the
dissolution of our arrangement with CAPAssurance and the effect of $14.3 million
of tail premium received from a large national healthcare account during the
second quarter of 2020 (see further discussion in our Segment Operating Results
- Specialty Property & Casualty section that follows). Additionally, the
decrease in operating cash flows was due to a decrease in cash received from
investment income of $15.4 million driven by a decrease in distributed earnings
and redemptions from our portfolio of investments in LPs/LLCs. The decrease in
operating cash flows was partially offset by a decrease in paid losses of $50.5
million driven by our Specialty P&C and Segregated Portfolio Cell Reinsurance
segments. The decrease in paid losses in our Specialty P&C segment was primarily
due to a smaller number of claims resolved with large indemnity payments as
compared to the prior year period, some of which is likely associated with the
COVID-19 pandemic including the disruption of the court systems. The decrease in
paid losses in our Segregated Portfolio Cell Reinsurance segment reflected the
effect of the payment of a $10 million claim during the first quarter of 2020 by
an SPC at Eastern Re in which we do not participate. This claim payment related
to a reserve established by the SPC in 2019 related to an errors and omissions
liability policy. Additionally, the decrease in operating cash flows reflected a
decrease in cash paid for operating expenses of $9.2 million driven by the
effect of one-time expenses of $3.2 million primarily related to employee
severance and early retirement benefits paid to certain employees during the
third quarter of 2020. Furthermore, the decrease in cash paid for operating
expenses reflected a decrease in various operational expenses in our Specialty
P&C, Workers' Compensation Insurance and Corporate segments resulting from
improvements over the past year including organizational structure enhancements
and improved operating efficiencies. In addition, the decrease in cash paid for
operating expenses was due to our decreased participation in the results of
Syndicate 1729 and Syndicate 6131 for the 2021 underwriting year. The remaining
variance in operating cash flows for the nine months ended September 30, 2021 as
compared to the nine months ended September 30, 2020 was comprised of
individually insignificant components.
The decrease in operating cash flows for the nine months ended September 30,
2020 as compared to the nine months ended September 30, 2019 of $55.6 million
was primarily due to an increase in paid losses of $85.8 million driven by our
Specialty P&C and Segregated Portfolio Cell Reinsurance segments. The increase
in paid losses in our Specialty P&C segment was primarily due to higher average
claim payments. The increase in paid losses in our Segregated Portfolio Cell
Reinsurance
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segment reflected the payment of a $10 million claim during the first quarter of
2020, as previously discussed. Additionally, the decrease in operating cash
flows reflected a decrease in net cash received of $7.4 million associated with
the cash settlement of the 2017 calendar year quota share reinsurance
arrangement between our Specialty P&C segment and Syndicate 1729 due to the
reduction in premiums ceded to Syndicate 1729. Furthermore, the decrease in
operating cash flows also reflected the aforementioned one-time expenses of $3.2
million. The decrease in operating cash flows was somewhat offset by an increase
in net premium receipts of $34.6 million, a decrease in 2020 net tax payments as
compared to 2019 of $7.8 million and an increase in cash received from
investment income of $3.8 million. The increase in net premium receipts was
driven by our Specialty P&C segment due to $14.3 million of tail premium, as
previously discussed. The decrease in net tax payments was primarily due to
refunds received during the nine months ended September 30, 2020. The increase
in cash received from investment income was primarily due to an increase in
distributed earnings and redemptions from our portfolio of investments in
LPs/LLCs. The remaining variance in operating cash flows for the nine months
ended September 30, 2020 as compared to the nine months ended September 30, 2019
was comprised of individually insignificant components.
We manage our investing cash flows to ensure that we will have sufficient
liquidity to meet our obligations, taking into consideration the timing of cash
flows from our investments, including interest payments, dividends and principal
payments, as well as the expected cash flows to be generated by our operations
as discussed in this section under the heading "Investing Activities and Related
Cash Flows."
Our financing cash flows are primarily comprised of dividend payments and
borrowings and repayments under our Revolving Credit Agreement. See further
discussion of our financing activities in this section under the heading
"Financing Activities and Related Cash Flows."
Taxes
We are subject to the tax laws and regulations of the U.S., Cayman Islands and
U.K. We file a consolidated U.S. federal income tax return that includes the
parent company and its U.S. subsidiaries. Our filing obligations include a
requirement to make quarterly payments of estimated taxes to the IRS using the
corporate tax rate effective for the tax year. We did not make any quarterly
estimated tax payments during the three and nine months ended September 30, 2021
or 2020.
As a result of the CARES Act that was signed into law on March 27, 2020, as
previously discussed, we are now permitted to carryback NOLs generated in tax
years 2019 and 2020 for up to five years. See further discussion in Note 5 of
the Notes to Consolidated Financial Statements included in our December 31, 2020
report on Form 10-K. We have an NOL of approximately $33.3 million from the 2020
tax year that will be carried back to the 2015 tax year and is expected to
generate a tax refund of approximately $11.7 million. Additionally, we had an
NOL of approximately $25.6 million from the 2019 tax year which was carried back
to the 2014 tax year and generated a tax refund of approximately $9.0 million
which we received in February 2021. Furthermore, we received a tax refund of
$1.3 million during the second quarter of 2021 due to the repeal of a previous
election we made under the TCJA related to discounted loss reserves.
As a result of our acquisition of NORCAL, we recorded $46.8 million of net
deferred tax assets reflecting the remeasurement of NORCAL's historical net
deferred tax assets, as such deferred taxes were subject to recalculation
following application of all purchase accounting adjustments and our assessment
of the realizability of NORCAL's deferred tax assets. Also as a result of the
NORCAL acquisition, we have U.S. federal NOL carryforwards of approximately
$68.0 million that will begin to expire in 2035. We currently expect to utilize
at portion of these NOL carryforwards in 2021.
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Investing Activities and Related Cash Flows
Our investments at September 30, 2021 and December 31, 2020 are comprised as
follows:
                                                                      September 30, 2021                               December 31, 2020
                                                                 Carrying            % of Total                  Carrying            % of Total
                     ($ in thousands)                             Value              Investment                   Value              Investment
Fixed maturities, available-for-sale
U.S. Treasury obligations                                  $         242,705                    5  %       $         107,059                    3  %
U.S. Government-sponsored enterprise obligations                      20,468                    1  %                  12,261                    1 

%

State and municipal bonds                                            522,707                   10  %                 332,920                   10  %
Corporate debt                                                     1,963,113                   41  %               1,329,342                   39  %
Residential mortgage-backed securities                               477,909                   10  %                 276,541                    8  %
Commercial mortgage-backed securities                                233,966                    5  %                 126,402                    4  %
Other asset-backed securities                                        443,268                    9  %                 273,006                    8  %
Total fixed maturities, available-for-sale                         3,904,136                   81  %               2,457,531                   73  %
Fixed maturities, trading                                             45,049                    1  %                  48,456                    1  %
Total fixed maturities                                             3,949,185                   82  %               2,505,987                   74  %
Equity investments                                                   214,530                    4  %                 120,101                    4  %
Short-term investments                                               151,708                    3  %                 337,813                   10  %
BOLI                                                                  80,821                    2  %                  67,847                    2  %
Investment in unconsolidated subsidiaries                            317,869                    7  %                 310,529                    9  %
Other investments                                                    110,012                    2  %                  47,068                    1  %
Total investments                                          $       4,824,125                  100  %       $       3,389,345                  100  %


At September 30, 2021, 99% of our investments in available-for-sale fixed
maturity securities were rated and the average rating was A+. The distribution
of our investments in available-for-sale fixed maturity securities by rating
were as follows:
                                                          September 30, 2021                             December 31, 2020
                                                     Carrying          % of Total                  Carrying            % of Total
                ($ in thousands)                      Value            Investment                   Value              Investment
Rating*
AAA                                              $   1,165,022                   30  %       $         717,187                   29  %
AA+                                                    127,707                    3  %                 103,996                    4  %
AA                                                     242,772                    6  %                 168,452                    7  %
AA-                                                    214,032                    6  %                 122,733                    5  %
A+                                                     246,534                    6  %                 197,274                    8  %
A                                                      526,078                   14  %                 323,044                   13  %
A-                                                     365,689                    9  %                 245,464                   10  %
BBB+                                                   277,641                    7  %                 189,971                    8  %
BBB                                                    310,325                    8  %                 190,385                    8  %
BBB-                                                   129,235                    3  %                  59,847                    2  %
Below investment grade                                 293,004                    7  %                 133,607                    5  %
Not rated                                                6,097                    1  %                   5,571                    1  %
Total                                            $   3,904,136                  100  %       $       2,457,531                  100  %

* Average of three NRSRO sources, presented as an S&P equivalent. Source: S&P, Copyright © 2021, S&P Global Market Intelligence

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Our acquisition of NORCAL added the following to our investment holdings as of
May 5, 2021, the date of acquisition:
                            (In thousands)
             Fixed maturities, available for sale         $ 1,100,058
             Equity investments                               374,484
             Short-term investments                            61,289
             BOLI                                              12,581
             Investment in unconsolidated subsidiaries         26,948
             Other investments                                 32,461
             Total investments                            $ 1,607,821


A detailed listing of our investment holdings as of September 30, 2021 is
located under the Financial Information heading on the Investor Relations page
of our website which can be reached directly at
www.proassurance.com/investmentholdings or through links from the Investor
Relations section of our website, investor.proassurance.com.
We manage our investments to ensure that we will have sufficient liquidity to
meet our obligations, taking into consideration the timing of cash flows from
our investments, including interest payments, dividends and principal payments,
as well as the expected cash flows to be generated by our operations.
Furthermore, we managed our investments as part of our capital planning in
anticipation of closing our acquisition of NORCAL. In addition to the interest
and dividends we will receive from our investments, we anticipate that between
$80 million and $100 million of our portfolio will mature (or be paid down) each
quarter over the next twelve months and become available, if needed, to meet our
cash flow requirements. The primary outflow of cash at our insurance
subsidiaries is related to paid losses and operating costs, including income
taxes. The payment of individual claims cannot be predicted with certainty;
therefore, we rely upon the history of paid claims in estimating the timing of
future claims payments with consideration to current and anticipated industry
trends and macroeconomic conditions. To the extent that we may have an
unanticipated shortfall in cash, we may either liquidate securities or borrow
funds under existing borrowing arrangements through our Revolving Credit
Agreement and the FHLB system. Permitted borrowings under our Revolving Credit
Agreement are $250 million with the possibility of an additional $50 million
accordion feature, if successfully subscribed. Given the duration of our
investments, we do not foresee a shortfall that would require us to meet
operating cash needs through additional borrowings. Additional information
regarding our Revolving Credit Agreement is detailed in Note 11 of the Notes to
Condensed Consolidated Financial Statements.
At September 30, 2021, our FAL was comprised of fixed maturity securities with a
fair value of $64.3 million and cash and cash equivalents of $8.2 million
deposited with Lloyd's. See further discussion in Note 4 of the Notes to
Condensed Consolidated Financial Statements. We received a return of
approximately $24.5 million of FAL during the second quarter of 2021, and we
expect to receive a return of approximately $8.0 million of FAL during the
fourth quarter of 2021 given the reduction in our participation in the results
of Syndicate 1729 for the 2021 underwriting year.
Our investment portfolio continues to be primarily composed of high quality
fixed income securities with approximately 92% of our fixed maturities being
investment grade securities as determined by national rating agencies. The
weighted average effective duration of our fixed maturity securities at
September 30, 2021 was 3.63 years; the weighted average effective duration of
our fixed maturity securities combined with our short-term securities was 3.50
years.
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The carrying value and unfunded commitments for certain of our investments were
as follows:
                                                       Carrying Value                          September 30, 2021

(in thousands of dollars, except planned funding September 30, the 31st of December,

             Unfunded      Expected funding
                   period)                          2021             2020                Commitment      period in years
Qualified affordable housing project tax
credit partnerships (1)                       $       15,980    $     27,719          $         597                      6

All other investments, primarily investment
fund LPs/LLCs                                        301,889         282,810                145,993                      4
Total                                         $      317,869    $    310,529          $     146,590
(1) The carrying value reflects our total commitments (both funded and unfunded) to the partnerships, less any
amortization, since our initial investment. We fund these investments based on funding schedules maintained by the
partnerships.


Investment fund LPs/LLCs are by nature less liquid and may involve more risk
than other investments. We manage our risk through diversification of asset
class and geographic location. At September 30, 2021, we had investments in 33
separate investment funds with a total carrying value of $301.9 million which
represented approximately 6% of our total investments. Our investment fund
LPs/LLCs generate earnings from trading portfolios, secured debt, debt
securities, multi-strategy funds and private equity investments, and the
performance of these LPs/LLCs is affected by the volatility of equity and credit
markets. For our investments in LPs/LLCs, we record our allocable portion of the
partnership operating income or loss as the results of the LPs/LLCs become
available, typically following the end of a reporting period.
Acquisitions
On May 5, 2021, we completed the acquisition of NORCAL by purchasing 98.8% of
the converted company stock in exchange for total consideration transferred of
$449 million. On September 16, 2021, we acquired the remaining 1.2% interest in
NORCAL for $3.1 million of cash. On May 5, 2021, ProAssurance funded the
transaction with $248 million of cash on hand and NORCAL paid $2 million to
policyholders who elected to receive the discounted cash option for their
allocated share of the converted company's equity. Additional consideration with
a principal amount of $191 million and a fair value of $175 million, is in the
form of Contribution Certificates issued to certain NORCAL policyholders in the
conversion, and those instruments are an obligation of NORCAL Insurance Company,
the successor of NORCAL Mutual Insurance Company (see Note 11 of the Notes to
Condensed Consolidated Financial Statements for further discussion of the terms
of the Contribution Certificates). Policyholders who tendered NORCAL stock to
ProAssurance are also eligible for a share of contingent consideration in an
amount of up to approximately $84 million depending upon the after-tax
development of NORCAL's ultimate net losses between December 31, 2020 and
December 31, 2023. The estimated fair value of this contingent consideration was
$24 million as of May 5, 2021 and September 30, 2021. The Agreement and Plan of
Acquisition was previously filed as Exhibit 10.19 to our December 31, 2020
report on Form 10-K. Additional information regarding our acquisition of NORCAL
is included in Note 2 of the Notes to Condensed Consolidated Financial
Statements.
Financing Activities and Related Cash Flows
Treasury Shares
During the nine months ended September 30, 2021 and 2020, we did not repurchase
any common shares and, as of November 3, 2021, our remaining Board authorization
was approximately $110 million.
ProAssurance Shareholder Dividends
Our Board declared quarterly cash dividends of $0.05 per share during each of
the first three quarters of 2021, $0.31 per share during the first quarter of
2020 and $0.05 per share during each of the second and third quarters of 2020.
Dividends are paid the month following the quarter in which they are declared.
Any decision to pay future cash dividends is subject to the Board's final
determination after a comprehensive review of financial performance, future
expectations and other factors deemed relevant by the Board.
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Debt
At September 30, 2021 our debt included $250 million of outstanding unsecured
senior notes. The notes bear interest at 5.3% annually and are due in 2023
although they may be redeemed in whole or part prior to maturity. There are no
financial covenants associated with these notes.
NORCAL Insurance Company, successor to NORCAL Mutual Insurance Company, issued
Contribution Certificates, which bear interest at 3.0% annually and are due in
2031, to certain NORCAL policyholders in the conversion. The Contribution
Certificates have a principal amount of $191 million and were recorded at their
fair value of $175 million at the date of acquisition. The difference of $16
million between the recorded acquisition date fair value and the principal
balance of the Contribution Certificates will be accreted utilizing the
effective interest method over the term of the certificates of ten years as an
increase to interest expense. Furthermore, interest payments, which begin in
April 2022, are subject to deferral if we do not receive permission from the
California Department of Insurance prior to payment. See Note 2 and Note 11 of
the Notes to Condensed Consolidated Financial Statements for additional
information on the Contribution Certificates issued in the NORCAL acquisition.
There are no financial covenants associated with these certificates.
We have a Revolving Credit Agreement, which expires in November 2024, that may
be used for general corporate purposes, including, but not limited to,
short-term working capital, share repurchases as authorized by the Board and
support for other activities. Our Revolving Credit Agreement permits borrowings
of up to $250 million as well as the possibility of a $50 million accordion
feature, if successfully subscribed. In August 2021, we repaid the balance
outstanding on the Revolving Credit Agreement of $15.0 million and, as of
September 30, 2021, there were no outstanding borrowings; we are in compliance
with the financial covenants of the Revolving Credit Agreement.
Two of our subsidiaries, ProAssurance Indemnity Company, Inc. and ProAssurance
Insurance Company of America, had Mortgage Loans with one lender in connection
with the recapitalization of two office buildings, with scheduled maturities in
December 2027. The Mortgage Loans accrued interest at three-month LIBOR plus
1.325% with principal and interest payable on a quarterly basis. In June 2021,
we repaid the balance outstanding on the ProAssurance Indemnity Company, Inc.
Mortgage Loan of $15.6 million and, in July 2021, we repaid the balance
outstanding on the ProAssurance Insurance Company of America Mortgage Loan of
$19.7 million. Interest expense on the Mortgage Loans during the three and nine
months ended September 30, 2021 included the write-off of the unamortized debt
issuance costs which were nominal in amount.
Additional information regarding our debt is provided in Note 11 of the Notes to
Condensed Consolidated Financial Statements.
Three of our insurance subsidiaries are members of an FHLB. Through membership,
those subsidiaries have access to secured cash advances which can be used for
liquidity purposes or other operational needs. In order for us to use FHLB
proceeds, regulatory approvals may be required depending on the nature of the
transaction. To date, those subsidiaries have not materially utilized their
membership for borrowing purposes.
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Results of Operations - Three and Nine Months Ended September 30, 2021 Compared
to Three and Nine Months Ended September 30, 2020
Selected consolidated financial data for each period is summarized in the table
below.
                                         Three Months Ended September 30                     Nine Months Ended September 30

($ in thousands, except per share

              data)                   2021           2020           Change                2021           2020           Change
Revenues:
Net premiums written              $ 287,043     $  213,260     $  73,783              $ 677,527     $  605,222     $  72,305

Net premiums earned               $ 272,248     $  194,559     $  77,689              $ 698,598     $  605,708     $  92,890

Net investment result                34,522         21,777        12,745                 85,672         33,812        51,860
Net realized investment gains
(losses)                                530          8,838        (8,308)                20,212            150        20,062
Other income                          2,400          1,723           677                  6,862          5,668         1,194
Total revenues                      309,700        226,897        82,803                811,344        645,338       166,006

Expenses:

Net losses and loss adjustment
expenses                            223,393        145,581        77,812                555,030        521,412        33,618
Underwriting, policy acquisition
and operating expenses               66,812         59,433         7,379                200,450        180,178        20,272
SPC U.S. federal income tax
expense                                 431            871          (440)                 1,291          1,573          (282)

SPC dividend expense (income) 1,320 3,854 (2,534)

              5,926          7,988        (2,062)
Interest expense                      5,814          3,881         1,933                 14,203         11,725         2,478
Goodwill impairment                       -        161,115      (161,115)                     -        161,115      (161,115)
Total expenses                      297,770        374,735       (76,965)               776,900        883,991      (107,091)
Gain on bargain purchase                  -              -             -                 74,408              -        74,408

Profit (loss) before tax 11,930 (147,838) 159,768

             108,852       (238,653)      347,505
Income tax expense (benefit)           (270)         2,141        (2,411)                (3,132)       (48,621)       45,489
Net income (loss)                 $  12,200     $ (149,979)    $ 162,179              $ 111,984     $ (190,032)    $ 302,016
Non-GAAP operating income (loss)  $  13,766     $    2,559     $  11,207              $  42,452     $  (31,029)    $  73,481
Earnings (loss) per share:
Basic                             $    0.23     $    (2.78)    $    3.01              $    2.08     $    (3.53)    $    5.61
Diluted                           $    0.23     $    (2.78)    $    3.01              $    2.07     $    (3.53)    $    5.60
Non-GAAP operating income (loss)
per share:
Basic                             $    0.25     $     0.05     $    0.20              $    0.79     $    (0.58)    $    1.37
Diluted                           $    0.25     $     0.05     $    0.20              $    0.79     $    (0.58)    $    1.37
Net loss ratio                         82.1  %        74.8  %        7.3   pts             79.4  %        86.1  %       (6.7   pts)
Underwriting expense ratio             24.5  %        30.5  %       (6.0   pts)            28.7  %        29.7  %       (1.0   pts)
Combined ratio                        106.6  %       105.3  %        1.3   pts            108.1  %       115.8  %       (7.7   pts)
Operating ratio                        99.5  %        96.6  %        2.9   pts            100.7  %       106.6  %       (5.9   pts)
Effective tax rate                     (2.3  %)       (1.4  %)      (0.9   pts)            (2.9  %)       20.4  %      (23.3   pts)
Return on equity*                       4.0  %        (8.8  %)      12.8   pts              4.2  %       (14.1  %)      18.3   pts

* Annualized. See a more in-depth discussion of this calculation in the Executive Summary of Operations section under the heading “ROE”.
In all the tables which follow, the abbreviation “nm” indicates that the information or the percentage of variation is not significant.

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Executive Summary of Operations
The following sections provide an overview of our consolidated and segment
results of operations for the three and nine months ended September 30, 2021 as
compared to the three and nine months ended September 30, 2020. Our results for
the three and nine months ended September 30, 2021 include NORCAL's results
since the date of acquisition. See the Segment Results sections that follow for
additional information regarding each segment's results.
Revenues
The following table shows our consolidated and segment net premiums earned:
                                            Three Months Ended September 30                                                Nine Months Ended September 30
   ($ in thousands)           2021                 2020                       Change                       2021                2020                       Change
Net premiums earned
Specialty P&C           $   203,716            $ 117,849          $ 85,867              72.9  %        $  487,963          $ 365,305          $ 122,658              33.6  %
Workers' Compensation
Insurance                    42,235               42,516              (281)             (0.7  %)          122,872            129,437             (6,565)             (5.1  %)
Segregated Portfolio
Cell Reinsurance             15,344               16,052              (708)             (4.4  %)           47,500             49,780             (2,280)             (4.6  %)
Lloyd's Syndicates           10,953               18,142            (7,189)            (39.6  %)           40,263             61,186            (20,923)            (34.2  %)
Consolidated total      $   272,248            $ 194,559          $ 77,689              39.9  %        $  698,598          $ 605,708          $  92,890              15.3  %


For the three and nine months ended September 30, 2021, consolidated net
premiums earned included additional earned premiums of approximately $82.9
million and $131.4 million, respectively, in our Specialty P&C segment from our
acquisition of NORCAL. Excluding NORCAL, consolidated net premiums earned
decreased $5.2 million and $38.5 million during the 2021 three- and nine-month
periods, respectively, as compared to the same respective periods of 2020 driven
by a decrease in net premiums in our Lloyd's Syndicates and Workers'
Compensation Insurance segments and, for the 2021 nine-month period, our
Specialty P&C segment. The decrease in our Lloyd's Syndicates segment was due to
our decreased participation in the results of Syndicate 1729 and Syndicate 6131
for the 2021 underwriting year. For both our Workers' Compensation Insurance and
Segregated Portfolio Cell Reinsurance segments, the decrease in net premiums
earned reflected the competitive workers' compensation market conditions and,
for our Workers' Compensation Insurance segment, a decrease in audit premium for
the 2021 nine-month period. Net premiums earned in our Specialty P&C segment,
excluding NORCAL, increased during the 2021 three-month period due to a decrease
in ceded premiums earned driven by the pro rata effect of a decrease in premium
ceded under our shared risk and excess of loss arrangements during the preceding
twelve months. For the 2021 nine-month period, the decrease in net premiums
earned in our Specialty P&C segment, excluding NORCAL, was driven by the prior
year effect of a tail policy associated with a large national healthcare account
which resulted in $14.3 million of one-time premium written and fully earned
during the second quarter of 2020, partially offset by $7.8 million of tail
premium written and fully earned during the second quarter of 2021 associated
with a Custom Physician policy. In addition, net premiums earned in our
Specialty P&C segment for the 2021 three- and nine-month periods reflected
premium adjustments related to loss sensitive policies which decreased earned
premium by $0.9 million and $0.1 million, respectively, as compared to an
increase in earned premium of $2.3 million and $2.6 million for the same
respective periods of 2020.
The following table shows our consolidated net investment result:
                                             Three Months Ended September 30                                               Nine Months Ended September 30
    ($ in thousands)           2021                2020                      Change                         2021                 2020                       Change
Net investment income     $     19,278          $ 16,924          $  2,354              13.9  %       $    51,713             $ 55,877          $ (4,164)             (7.5  %)
Equity in earnings (loss)
of unconsolidated
subsidiaries*                   15,244             4,853            10,391             214.1  %            33,959              (22,065)           56,024             253.9  %

Net financial result $ 34,522 $ 21,777 $ 12,745

            58.5  %       $    85,672             $ 33,812          $ 51,860             153.4  %

* Equity in earnings (loss) of unconsolidated subsidiaries includes our share of operating results of the interests we hold in certain limited partnerships / LLCs as well as operating losses
associated with our tax credit partnership investments, which are designed to generate returns in the form of tax credits and tax deductible project operating losses.

Our consolidated net investment result for the three and nine months ended
September 30, 2021 included additional net investment income of approximately
$5.1 million and $7.8 million, respectively, from NORCAL. Excluding NORCAL,
consolidated net investment income decreased $2.8 million and $12.0 million
during the 2021 three- and nine-month periods, respectively, as compared to the
same respective periods of 2020 driven by lower yields on our corporate debt
securities and short-term investments given the continued low interest rate
environment and, to a lesser extent, lower income from our equity portfolio due
to the reallocation in our mix of securities within this asset category.
Furthermore, the decline in net investment
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income during the 2021 nine-month period reflected the impact of capital
planning in anticipation of closing the NORCAL acquisition. In addition, our
consolidated net investment result for the three and nine months ended
September 30, 2021, included additional earnings from our acquired interests in
four LPs from NORCAL of approximately $0.4 million; given the results of our
investments in LPs/LLCs are often reported to us on a one-quarter lag, the
impact of these acquired investments were not captured in our results until the
current period. The increase in our investment results from our portfolio of
investments in LPs/LLCs for the 2021 three- and nine-month periods as compared
to the same respective periods of 2020 was due to higher earnings from several
of our LPs/LLCs and, for the 2021 nine-month period, the prior year effect of
the volatility in the global financial markets related to COVID-19.
Expenses
The following table shows our consolidated and segment net loss ratios and net
prior accident year reserve development.
                                              Three Months Ended September 30                          Nine Months Ended September 30
          ($ in millions)               2021              2020              Change              2021               2020              Change
Current accident year net loss ratio
Consolidated ratio                       85.2  %           80.7  %          4.5   pts            83.3  %            91.8  %         (8.5   pts)
Specialty P&C                            90.0  %           89.8  %          0.2   pts            89.7  %           107.9  %        (18.2   pts)
Workers' Compensation Insurance          77.8  %           66.9  %         10.9   pts            74.0  %            69.2  %          4.8   pts
Segregated Portfolio Cell
Reinsurance                              67.2  %           67.3  %         (0.1   pts)           66.3  %            63.3  %          3.0   pts
Lloyd's Syndicates                       50.4  %           65.9  %        (15.5   pts)           54.5  %            66.5  %        (12.0   pts)

Calendar year net loss ratio
Consolidated ratio                       82.1  %           74.8  %          7.3   pts            79.4  %            86.1  %         (6.7   pts)
Specialty P&C                            86.6  %           87.4  %         (0.8   pts)           85.6  %           102.2  %        (16.6   pts)
Workers' Compensation Insurance          74.3  %           62.2  %         12.1   pts            69.4  %            65.4  %          4.0   pts
Segregated Portfolio Cell
Reinsurance                              56.7  %           42.7  %         14.0   pts            55.9  %            48.0  %          7.9   pts
Lloyd's Syndicates                       62.5  %           51.4  %         11.1   pts            62.7  %            64.4  %         (1.7   pts)

Favorable (unfavorable) reserve
development, prior accident years
Consolidated                         $       8.6       $      11.5       $ (2.9)             $      27.2       $       34.6       $ (7.4)
Specialty P&C                        $       6.8       $       2.9       $  3.9              $      20.0       $       20.7       $ (0.7)
Workers' Compensation Insurance      $       1.5       $       2.0       $ (0.5)             $       5.6       $        5.0       $  0.6
Segregated Portfolio Cell
Reinsurance                          $       1.6       $       4.0       $ (2.4)             $       4.9       $        7.6       $ (2.7)
Lloyd's Syndicates                   $     (1.3)       $       2.6       $ (3.9)             $     (3.3)       $        1.3       $ (4.6)


The primary drivers of the change in our consolidated current accident year net
loss ratio for the three and nine months ended September 30, 2021 as compared to
the same periods of 2020 were as follows:
                                                                               Increase (Decrease)
                                                                                 2021 versus 2020
                                                                  Comparative                       Comparative
                                                                  three-month                       nine-month
                   (In percentage points)                           periods                           periods

Estimated increase (decrease) in ratio due to:
NORCAL operations

                                                   5.5 pts                           3.4 pts
NORCAL Acquisition - Purchase Accounting Adjustment                (1.3 pts)                         (0.8 pts)
Premium adjustments on loss sensitive policies                      1.3 pts                           0.5 pts
Large National Healthcare Account                                    - pts                           (7.8 pts)
COVID-19 IBNR Reserve                                                - pts                           (1.7 pts)

All other, net                                                     (1.0 pts)                         (2.1 pts)
Increase (decrease) in the consolidated current accident
year net loss ratio                                                 4.5 pts                          (8.5 pts)


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Excluding the impact of the items specifically identified in the table above,
our consolidated current accident year net loss ratios for the three and nine
months ended September 30, 2021 decreased 1.0 and 2.1 percentage points,
respectively, driven by our Specialty P&C and Lloyd's Syndicates segments,
somewhat offset by a higher ratio in our Workers' Compensation segment. The
improvement in the current accident year net loss ratio in our Specialty P&C
segment was driven by decreases to certain loss ratios during the first quarter
of 2021 in our Standard Physician and Specialty lines of business as we continue
to recognize the beneficial impacts of our re-underwriting efforts and focus on
rate adequacy. In addition, the lower current accident year net loss ratio in
our Specialty P&C segment reflected an additional reduction in certain loss
ratios in our Standard Physician line of business during the third quarter of
2021 related to favorable frequency trends. For our Lloyd's Syndicates segment,
the lower current accident year net loss ratio reflected decreases in certain
loss ratios during the current period and, for the 2021 nine-month period,
higher reinsurance recoveries as a proportion of gross losses as compared to the
prior year periods. In our Workers' Compensation Insurance segment, we have
experienced an increase in 2021 accident year reported losses through
September 30, 2021, including increased severity-related claim activity. We
believe the increase in reported losses is primarily attributable to the current
pandemic conditions and the impact of workers returning to full employment with
the easing of pandemic-related restrictions in our operating territories,
including the impact of labor shortages on the existing workforce and, as a
result, we increased our current accident year loss ratio during the third
quarter of 2021.
As shown in the previous table, current accident year net loss ratios associated
with the business we acquired in the NORCAL transaction were higher than the
average for the other books of business in our Specialty P&C segment, which
increased our consolidated current accident year net loss ratios for the three
and nine months ended September 30, 2021 by 5.5 and 3.4 percentage points,
respectively. Also as a result of our acquisition of NORCAL, our current
accident year loss ratios for the three and nine months ended September 30, 2021
were impacted by amortization of the negative VOBA associated with NORCAL's
assumed unearned premium which is recorded as a reduction to current accident
year net losses and accounted for a 1.3 and 0.8 percentage point decrease,
respectively, in our consolidated current period ratios. See Note 2 of the Notes
to Condensed Consolidated Financial Statements for additional information on the
NORCAL acquisition and the related purchase accounting adjustments. In addition,
our consolidated current accident year net loss ratios for the three and nine
months ended September 30, 2021 were impacted by changes in premium adjustments
related to loss sensitive policies in our Specialty P&C segment which increased
the current period ratios as compared to the same periods of 2020 by 1.3 and 0.5
percentage points, respectively (see previous discussion under the heading
"Revenues"). For the nine months ended September 30, 2020, our consolidated
current accident year loss ratio was higher due to the effect of a large
national healthcare account, net of the impact of related PDR amortization,
which accounted for 7.8 percentage points of the decrease in the current period
ratio as compared to the prior year period. In addition, our consolidated
current accident year loss ratio for the nine months ended September 30, 2020
was impacted by a $10 million IBNR reserve we recorded during the second quarter
of 2020 for COVID-19 which accounted for 1.7 percentage points of the decrease
in the ratio as compared to the prior year period.
In both the 2021 and 2020 three- and nine-month periods, our consolidated
calendar year net loss ratio was lower than our consolidated current accident
year net loss ratio due to the recognition of net favorable prior year reserve
development, as shown in the previous table. Consolidated favorable development
recognized during the three and nine months ended September 30, 2021 included
$2.9 million and $5.0 million, respectively, related to the amortization of the
purchase accounting fair value adjustment on NORCAL's assumed net reserve and
amortization of the negative VOBA associated with NORCAL's DDR reserve which is
recorded as a reduction to prior accident year net losses and loss adjustment
expenses. We have not recognized any development related to NORCAL's prior
accident year reserves since the date of acquisition during the three and nine
months ended September 30, 2021. See Note 2 of the Notes to Condensed
Consolidated Financial Statements for additional information on the NORCAL
acquisition and the related purchase accounting adjustments. In addition,
consolidated favorable development recognized for the three and nine months
ended September 30, 2021 included a $1.0 million reduction in our IBNR reserve
for COVID-19. Consolidated net favorable prior year reserve development
recognized in the 2021 three- and nine-month periods was lower as compared to
the same periods of 2020 primarily due to unfavorable development recognized in
our Lloyd's Syndicates segment primarily driven by catastrophe related losses.
In both our Specialty P&C and Workers' Compensation Insurance segments, we
observed a reduction in claims frequency in 2020 that has continued into 2021,
some of which is likely associated with the COVID-19 pandemic including the
disruption of the court systems. However, in our Workers' Compensation Insurance
segment, we have experienced an increase in 2021 accident year reported losses
through September 30, 2021 which we primarily attribute the current pandemic
conditions and the impact of workers returning to full employment with the
easing of pandemic-related restrictions, as previously discussed. For our
Specialty P&C segment, given the consistent and prolonged nature of these
favorable trends we began to recognize some of these favorable frequency trends
in our HCPL current accident year reserve during the third quarter of 2021.
We continue to remain cautious in our evaluation of our reserves in both our
Specialty P&C and Workers' Compensation Insurance segments due to the
uncertainty surrounding the length and severity of the pandemic. As it relates
to our Workers' Compensation Insurance segment, legislative and regulatory
bodies in certain states have changed or are considering changing compensability
requirements and presumptions for certain types of workers related to COVID-19
claims. Such changes could have an adverse impact on the frequency and severity
related to COVID-19 claims in that segment.
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Our consolidated and segment underwriting expense ratios were as follows:
                                                  Three Months Ended September 30                                 Nine Months Ended September 30
                                         2021                2020                 Change                 2021                2020                 Change
Underwriting Expense Ratio
Consolidated (1)                           24.5  %             30.5  %             (6.0   pts)             28.7  %             29.7  %             (1.0   pts)
Specialty P&C                              17.7  %             23.8  %             (6.1   pts)             18.7  %             22.7  %             (4.0   pts)
Workers' Compensation Insurance            32.0  %             35.2  %             (3.2   pts)             31.3  %             32.9  %             (1.6   pts)
Segregated Portfolio Cell
Reinsurance                                31.0  %             31.4  %             (0.4   pts)             31.7  %             31.1  %              0.6   pts
Lloyd's Syndicates                         35.7  %             38.2  %             (2.5   pts)             37.8  %             38.2  %             (0.4   pts)
Corporate (2)                               2.5  %              2.6  %             (0.1   pts)              2.7  %              2.9  %             (0.2   pts)
(1) Includes transaction-related costs associated with our acquisition of NORCAL that are not included in a segment as we do not consider these costs in
assessing the financial performance of any of our operating or reportable segments. See Note 15 of the Notes to Condensed Consolidated Financial Statements
for a reconciliation of our segment results to our consolidated results.
(2) There are no net premiums earned associated with the Corporate segment. Ratios shown are the contribution of the Corporate segment to the consolidated
ratio (Corporate operating expenses divided by consolidated net premium earned).


The change in our consolidated underwriting expense ratio for the 2021 three-
and nine-month periods as compared to the same respective periods of 2020 was
primarily attributable to the following:
                                                                               Increase (Decrease)
                                                                                 2021 versus 2020
                                                                   Comparative               Comparative nine-month
                   (In percentage points)                       three-month period                   period

Estimated increase (decrease) in ratio due to:
Decrease in net earned premiums and DPAC amortization (1)

            (0.2 pts)                      (0.9 pts)
NORCAL Operations                                                   (6.3 pts)                      (4.7 pts)
Transaction-related Costs                                            1.2 pts                        4.2 pts
Large National Healthcare Account Tail Premium(2)                     - pts                         0.8 pts
Custom Physician Tail Premium(2)                                      - pts                        (0.5 pts)

All other, net                                                      (0.7 pts)                       0.1 pts
Increase (decrease) in the underwriting expense ratio               (6.0 pts)                      (1.0 pts)
(1) Excludes earned premium and DPAC amortization contributed by NORCAL since the date of acquisition as well as
$7.8 million of earned premium in the 2021 nine-month period associated with a Custom Physician tail policy and
$14.3 million of earned premium in the 2020 nine-month period associated with a large national healthcare account
tail policy. See further discussion in Segment Results - Specialty Property & Casualty section that follows.
(2) See previous discussion under the heading "Revenues"


The decrease in our consolidated underwriting expense ratios for the 2021 three-
and nine-month periods were impacted by our acquisition of NORCAL. For the 2021
three- and nine-month periods, the additional expenses of NORCAL of $8.5 million
and $11.0 million, respectively, had a nominal effect on the ratios as they were
more than offset by the effect on the ratios of NORCAL net premiums earned of
$82.9 million and $131.4 million, respectively, as previously discussed. The
impact of NORCAL decreased our consolidated underwriting expense ratios for the
2021 three- and nine-month periods by 6.3 and 4.7 percentage points,
respectively. Included in NORCAL's expenses for the 2021 three- and nine-month
periods was approximately $3.2 million and $4.1 million, respectively, of DPAC
amortization associated with NORCAL policies written subsequent to our
acquisition; however, this level of DPAC amortization is approximately $5.5
million and $11.8 million, respectively, lower than would be considered normal
for the period of time post-acquisition due to the application of GAAP purchase
accounting rules whereby the capitalized policy acquisition costs for policies
written prior to the acquisition date were written off rather than being
expensed pro rata over the remaining term of the associated policies.
Normalizing this amortization would have increased our consolidated expense
ratios for the 2021 three- and nine-month periods by an estimated 2.1 and 1.7
percentage points, respectively. Please see Note 2 of the Notes to Condensed
Consolidated Financial Statements for additional information on the NORCAL
acquisition. For the 2021 three- and nine-month periods, our consolidated
underwriting expense ratios were also impacted by transaction-related costs of
$2.3 million and $23.5 million, respectively, associated with our acquisition of
NORCAL which accounted for an increase of 1.2 and 4.2 percentage points,
respectively, in our current period ratios. We do not consider
transaction-related costs in assessing the financial performance of our
segments, and thus these costs are only included in our consolidated operating
expenses. Please see Note 15 of the Notes to Condensed Consolidated Financial
Statements for a reconciliation of our segment results to our consolidated
results.
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Excluding the impact of NORCAL and the other items specifically identified in
the table above, our consolidated underwriting expense ratios decreased by 0.7
percentage points for the 2021 three-month period and was relatively unchanged
for the 2021 nine-month period. The remaining decrease in the ratio during the
2021 three-month period was primarily due to the effect of one-time expenses of
$3.2 million during the prior year period, mainly comprised of early retirement
benefits granted to certain employees during the third quarter of 2020 and
expenses associated with the restructuring of our HCPL field office
organization. Furthermore, our consolidated underwriting expense ratios for the
2021 three-month period reflected a decrease in operating expenses resulting
from the operational and structural changes implemented over the past year and a
half, partially offset by higher amounts accrued for performance-related
incentive plans due to our improved performance metrics in our Specialty P&C and
Corporate segments.
For the three and nine months ended September 30, 2021, the underwriting expense
ratios in our Specialty P&C and Corporate segments also reflected the impact of
a reduction to the management fee charged to the operating subsidiaries of our
Specialty P&C segment (excluding the acquired operating subsidiaries of NORCAL)
by our Corporate segment effective January 1, 2021 (see further discussion in
our Segment Results - Specialty Property & Casualty and Segment Results -
Corporate sections that follow). This change had no impact to our consolidated
underwriting expense ratio.
Gain on Bargain Purchase
As a result of the NORCAL acquisition, we recognized a preliminary gain on
bargain purchase of $74.4 million during the second quarter of 2021 representing
the excess of the fair value of the identifiable assets acquired and liabilities
assumed over the purchase consideration. We do not consider this gain in
assessing the financial performance of any of our operating or reportable
segments and therefore, we have excluded it from the Segment Results sections
that follow. See further discussion around the gain on bargain purchase
recognized from the NORCAL acquisition in Note 2 of the Notes to Condensed
Consolidated Financial Statements.
Taxes
Our provision for income taxes and effective tax rates for the nine months ended
September 30, 2021 and 2020 were as follows:
                                                      Nine Months Ended 

September 30

              ($ in thousands)               2021            2020           

Switch

Profit (loss) before taxes $ 108,852 $ (238,653) $ 347,505 145.6%

Less: Income tax expense (profit) (3,132) (48,621)

 45,489        93.6  %
    Net income (loss)                    $  111,984      $ (190,032)     $  302,016       158.9  %
    Effective tax rate                      (2.9%)          20.4%         (23.3 pts)


We recognized an income tax benefit of $3.1 million and $48.6 million during the
nine months ended September 30, 2021 and 2020, respectively; however, the
comparability of our effective tax rates is impacted by the consolidated pre-tax
income recognized during the 2021 nine-month period as compared to the
consolidated pre-tax loss recognized in the 2020 nine-month period. Furthermore,
the comparability of our effective tax rates is impacted by our use of the
discrete effective tax rate method for the nine months ended September 30, 2021
versus our use of the estimated annual effective tax rate method for the nine
months ended September 30, 2020 (see further discussion on these methods in the
Critical Accounting Estimates section under the heading "Estimation of Taxes/Tax
Credits").
Our effective tax rate for the 2021 nine-month period was different from the
statutory federal income tax rate of 21% primarily due to the non-taxable $74.4
million gain on bargain purchase related to the NORCAL acquisition, as
previously discussed. Additionally, our effective tax rates for both the 2021
and 2020 nine-month periods include the benefit recognized from the tax credits
transferred to us from our tax credit partnership investments. Our effective tax
rate for the 2020 nine-month period was also impacted by the non-deductible
portion of the goodwill impairment related to the Specialty P&C reporting unit
recognized during the third quarter of 2020. See further discussion of the
goodwill impairment in Note 7 of the Notes to Consolidated Financial Statements
and further information on other notable items impacting our effective tax rate
in the Segment Operating Results - Corporate section that follows under the
heading "Taxes."
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Operating Ratio
Our operating ratio is our combined ratio, less our investment income ratio.
This ratio provides the combined effect of underwriting profitability and
investment income. Our operating ratio for the three and nine months ended
September 30, 2021 and 2020 was as follows:
                                                    Three Months Ended September 30                           Nine Months Ended September 30
                                                2021            2020             Change                  2021            2020             Change
Combined ratio                                    106.6  %        105.3  %         1.3   pts               108.1  %        115.8  %         (7.7   pts)
Less: investment income ratio                       7.1  %          8.7  %        (1.6   pts)                7.4  %          9.2  %         (1.8   pts)
Operating ratio                                    99.5  %         96.6  %         2.9   pts               100.7  %        106.6  %         (5.9   pts)

Combined ratio, excluding
transaction-related costs*                        105.8  %        105.3  %         0.5   pts               104.8  %        115.8  %        (11.0   pts)

* Our consolidated combined ratio for the three and nine month periods 2021 includes $ 2.3 million and $ 23.5 million, respectively, of
transaction costs included in consolidated operating expenses associated with our acquisition of NORCAL. Since these costs do not reflect
normal operating expenses, we have excluded their impact from our calculation of the consolidated combined ratio. See the previous discussion under
“Expenses” section.

The main drivers of the change in our operating ratio are as follows:

                                                                                        Increase (Decrease)
                                                                                          2021 versus 2020
                                                                       Comparative                                Comparative
                                                                       three-month                                 nine-month
                    (In percentage points)                               periods                                    periods

Estimated increase (decrease) in ratio due to:
NORCAL subscription results

                                              3.7 pts                                    1.3 pts
NORCAL Acquisition - Purchase Accounting Adjustments                    (2.0 pts)                                  (1.4 pts)
NORCAL Investment Results                                               (1.9 pts)                                  (1.2 pts)
Transaction-related Costs                                                0.8 pts                                    3.3 pts
Large National Healthcare Account (1)                                     - pts                                    (7.3 pts)
COVID IBNR Reserve (1)                                                  (0.4 pts)                                  (1.8 pts)
Investment Results (2)                                                   3.5 pts                                    2.9 pts
All other, net                                                          (0.8 pts)                                  (1.7 pts)
Increase (decrease) in the operating ratio                               2.9 pts                                   (5.9 pts)

(1) See the previous discussion under the headings “Income” and “Expenses”.
(2) Excluding net financial income contributed by NORCAL since the acquisition date. See the previous discussion under the title
“Income”.

Excluding the impact of the items specifically identified in the table above,
our operating ratios for the 2021 three- and nine-month periods decreased by 0.8
and 1.7 percentage points, respectively, as compared to the same respective
periods of 2020 primarily due to a lower net loss ratio in our Specialty P&C
segment, partially offset by a higher net loss ratio in our Workers'
Compensation Insurance and Segregated Portfolio Cell Reinsurance segments. See
previous discussion in this section under the heading "Expenses" and further
discussion in our Segment Operating Results sections that follow.
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ROE
ROE is calculated as annualized net income (loss) for the period divided by the
average of beginning and ending shareholders' equity. This ratio measures our
overall after-tax profitability and shows how efficiently capital is being used.
Transaction-related costs associated with our acquisition of NORCAL were not
annualized in our calculation of ROE for the three and nine months ended
September 30, 2021 as these costs are considered non-recurring in nature.
Further, the $161.1 million goodwill impairment recognized during the third
quarter of 2020 was not annualized in our calculation of ROE for the three and
nine months ended September 30, 2020 as it is a non-recurring charge (see
further discussion of the goodwill impairment in Note 7 of the Notes to
Condensed Consolidated Financial Statements). In addition, the $74.4 million
gain on bargain purchase recognized during the second quarter of 2021 was
excluded in our calculation of ROE for the nine months ended September 30, 2021
consistent with our treatment of gains on bargain purchases from previous
acquisitions. ROE for the three and nine months ended September 30, 2021 and
2020 were as follows:
                               Three Months Ended September 30                                Nine Months Ended September 30
                        2021             2020               Change                    2021              2020               Change
ROE                         4.0  %          (8.8  %)            12.8   pts                4.2  %          (14.1  %)            18.3   pts


Our ROE for the current year periods was impacted by our acquisition of NORCAL.
NORCAL operations since the date of acquisition, excluding purchase accounting
adjustments, decreased our ROE for the 2021 three- and nine-month periods by 2.8
and 1.5 percentage points, respectively, largely due to operating expenses,
partially offset by a lower than normal amount of DPAC amortization due to the
application of GAAP purchase accounting rules (see previous discussion under the
heading "Expenses"). Furthermore, the purchase accounting adjustments associated
with the acquisition increased our ROE by 1.6 and 0.9 percentage points,
respectively. See Note 2 of the Notes to Condensed Consolidated Financial
Statements for additional information on the NORCAL acquisition and the related
purchase accounting adjustments. Excluding the NORCAL acquisition, ROE for the
2021 three- and nine-month periods increased 14.0 and 18.9 percentage points,
respectively, driven by the prior year effect of a $161.1 million pre-tax
goodwill impairment recognized related to the Specialty P&C reporting unit
during the third quarter of 2020. Additionally, the increase in our ROE for the
2021 three- and nine-month periods as compared to the same periods of 2020,
excluding NORCAL, reflected higher earnings from certain LPs/LLCs, the sale of
certain available-for-sale fixed maturity securities and equity investments as
well as improved underwriting results.
Book Value per Share
Book value per share is calculated as total shareholders' equity at the balance
sheet date divided by the total number of common shares outstanding. This ratio
measures the net worth of the Company to shareholders on a per share basis. Our
book value per share at September 30, 2021 as compared to December 31, 2020 is
shown in the following table.
                                                                         Book Value Per Share
Book Value Per Share at December 31, 2020                              $               25.04
Increase (decrease) to book value per share during the nine months
ended September 30, 2021 attributable to:
Dividends declared                                                                     (0.15)

Net income (loss) (1)                                                                   2.08
OCI (2)                                                                                (0.62)
Other                                                                                   0.01
Book Value Per Share at September 30, 2021                             $               26.36


(1) Includes the $74.4 million gain on bargain purchase as a result of our
acquisition of NORCAL, which accounted for $1.38 of the increase in book value
per share. See further discussion in Note 2 of the Notes to Condensed
Consolidated Financial Statements.
(2) Primarily the impact of unrealized investment gains (losses) on our
available-for-sale fixed maturity investments. See Note 12 of the Notes to
Condensed Consolidated Financial Statements for additional information.


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Non-GAAP Financial Measures
Non-GAAP operating income (loss) is a financial measure that is widely used to
evaluate performance within the insurance sector. In calculating Non-GAAP
operating income (loss), we have excluded the effects of the items listed in the
following table that do not reflect normal results. We believe Non-GAAP
operating income (loss) presents a useful view of the performance of our
insurance operations, however it should be considered in conjunction with net
income (loss) computed in accordance with GAAP.
The following table is a reconciliation of net income (loss) to Non-GAAP
operating income (loss):
                                                             Three Months Ended                     Nine Months Ended
                                                                September 30                           September 30
        (In thousands, except per share data)             2021               2020                2021               2020
Net income (loss)                                      $ 12,200          $ (149,979)         $ 111,984          $ (190,032)
Items excluded in the calculation of Non-GAAP
operating income (loss):
Net realized investment (gains) losses                     (530)             (8,838)           (20,212)               (150)

Net realized gains (losses) attributable to SPCs that
no profit / loss is withheld (1)

                              143               1,155              2,208                 732
Transaction-related costs (2)                             2,327                   -             23,535                   -
Goodwill impairment                                           -             161,115                  -             161,115
Guaranty fund assessments (recoupments)                      53                  88                186                 114

Gain on bargain purchase (3)                                  -                   -            (74,408)                  -
Pre-tax effect of exclusions                              1,993             153,520            (68,691)            161,811

Tax effect, at 21% (4)                                     (427)               (982)              (841)             (2,808)
After-tax effect of exclusions                            1,566             152,538            (69,532)            159,003
Non-GAAP operating income (loss)                       $ 13,766          $    2,559          $  42,452          $  (31,029)

Per diluted common share:
Net income (loss)                                      $   0.23          $    (2.78)         $    2.07          $    (3.53)
Effect of exclusions                                       0.02                2.83              (1.28)               2.95

Non-GAAP operating income (loss) per diluted common share
to share

                                                  $   0.25          $     0.05          $    0.79          $    (0.58)
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell
Reinsurance segment. SPC results, including any realized gain or loss, that are attributable to external cell participants
are reflected in the SPC dividend expense (income). To be consistent with our exclusion of net realized investment gains
(losses) recognized in earnings, we are excluding the portion of net realized investment gains (losses) that is included in
the SPC dividend expense (income) which is attributable to the external cell participants.
(2) Transaction-related costs associated with our acquisition of NORCAL. We are excluding these costs as they do not reflect
normal operating results and are unique and non-recurring in nature.
(3) Gain on bargain purchase associated with our acquisition of NORCAL which is considered unusual, infrequent and
non-recurring in nature. As such, we have excluded the gain on bargain purchase from Non-GAAP operating income (loss) as it
does not reflect normal operating results.
(4) The 21% rate is the annual expected statutory tax rate associated with the taxable or tax deductible items listed above.
We utilized the discrete effective tax rate method for the three and nine months ended September 30, 2021 while we utilized
the estimated annual effective tax rate method for the three and nine months ended September 30, 2020. For the 2021 periods,
our statutory tax rate was applied to these items in calculating net income (loss), excluding the 2021 gain on bargain
purchase. For the 2020 periods, our effective tax rate for the respective periods was applied to these items in calculating
net income (loss), excluding the 2020 goodwill impairment loss and net realized investment gains (losses) and related
adjustments. See further discussion on these methods in the Critical Accounting Estimates section under the heading
"Estimation of Taxes/Tax Credits". Net realized investment gains (losses) in our Corporate segment are discrete items and are
tax effected at the annual expected statutory tax rate (21%) in the period they are included in our consolidated tax
provision and net income (loss). See previous discussion in this section under the heading "Taxes." The taxes associated with
the net realized investment gains (losses) related to SPCs in our Segregated Portfolio Cell Reinsurance segment are paid by
the individual SPCs and are not included in our consolidated tax provision or net income (loss); therefore, both the net
realized investment gains (losses) from our Segregated Portfolio Cell Reinsurance segment and the adjustment to exclude the
portion of net realized investment gains (losses) included in the SPC dividend expense (income) in the table above are not
tax effected. The 2021 gain on bargain purchase is non-taxable and therefore had no associated income tax impact. The 2020
goodwill impairment loss was treated as a discrete item and the portion that is tax deductible was tax effected at the
statutory tax rate (21%). The remaining portion of the 2020 goodwill impairment loss is not tax deductible and therefore had
no associated income tax benefit.



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Segment Results - Specialty Property & Casualty
Our Specialty P&C segment focuses on professional liability insurance and
medical technology liability insurance as discussed in Note 15 of the Notes to
Condensed Consolidated Financial Statements. On May 5, 2021, we completed our
acquisition of NORCAL, an underwriter of healthcare professional liability
insurance (Note 2 of the Notes to Condensed Consolidated Financial Statements
provides additional information regarding this acquisition). Segment results
reflected pre-tax underwriting profit or loss from these insurance lines,
including the pre-tax underwriting results of NORCAL since the date of
acquisition as well as certain purchase accounting adjustments. Segment results
for the three and nine months ended September 30, 2021 exclude
transaction-related costs and, for the nine months ended September 30, 2021, a
$74.4 million gain on bargain purchase related to the NORCAL acquisition as we
do not consider these items in assessing the financial performance of the
segment. Segment results included the following:
                                               Three Months Ended September 30                                      Nine Months Ended September 30
       ($ in thousands)               2021              2020                 Change                       2021              2020                  Change
Net premiums written            $         218,636 $         135,399 $  83,237         61.5  %       $         467,383 $         359,337 $  108,046         30.1  %
Net premiums earned             $         203,716 $         117,849 $  85,867         72.9  %       $         487,963 $         365,305 $  122,658         33.6  %
Other income                                  860               726       134         18.5  %                   2,800             3,515       (715)       (20.3  %)
Net losses and loss adjustment
expenses                                (176,490)         (102,951)   (73,539)        71.4  %               (417,890)         (373,442)    (44,448)        11.9  %
Underwriting, policy
acquisition and operating
expenses                                 (36,147)          (28,074)    (8,073)        28.8  %                (91,369)          (82,894)     (8,475)        10.2  %
Segment results                 $         (8,061) $        (12,450) $   4,389         35.3  %       $        (18,496) $        (87,516) $   69,020         78.9  %

Net loss ratio                        86.6%             87.4%        (0.8 pts)                            85.6%            102.2%        (16.6 pts)
Underwriting expense ratio            17.7%             23.8%        (6.1 pts)                            18.7%             22.7%         (4.0 pts)


Premiums Written
Changes in our premium volume within our Specialty P&C segment are generally
driven by four primary factors: (1) the amount of new business written, (2) our
retention of existing business, (3) the premium charged for business that is
renewed, which is affected by rates charged and by the amount and type of
coverage an insured chooses to purchase and (4) the timing of premium written
through multi-period policies. In addition, premium volume may periodically be
affected by shifts in the timing of renewals between periods. For the three and
nine months ended September 30, 2021, our premium volume was primarily affected
by our acquisition of NORCAL (see Note 2 of the Notes to Condensed Consolidated
Financial Statements).
The professional liability market, which accounts for a majority of the revenues
in this segment, remains challenging as physicians continue joining hospitals or
larger group practices and are thus no longer purchasing individual or group
policies in the standard market. In addition, some competitors have chosen to
compete primarily on price; both factors may impact our ability to write new
business and retain existing business. Furthermore, the insurance and
reinsurance markets have historically been cyclical, characterized by extended
periods of intense price competition and other periods of reduced competition.
The professional liability area has been particularly affected by these cycles.
Underwriting cycles are generally driven by an excess of capacity available and
actively pursuing business that is deemed profitable. Changes in the frequency
and severity of losses may affect the cycles of the insurance and reinsurance
markets significantly. During "soft markets" where price competition is high and
underwriting profits are poor, growth and retention of business become
challenging which may result in reduced premium volumes.
Gross, ceded and net premiums written were as follows:
                                               Three Months Ended September 30                                              Nine Months Ended September 30
     ($ in thousands)            2021                 2020                      Change                       2021                2020                       Change
Gross premiums written     $   235,091            $ 158,257          $ 76,834             48.6  %        $  515,414          $ 420,702          $  94,712             22.5  %
Less: Ceded premiums
written                         16,455               22,858            (6,403)           (28.0  %)           48,031             61,365            (13,334)           (21.7  %)
Net premiums written       $   218,636            $ 135,399          $ 83,237             61.5  %        $  467,383          $ 359,337          $ 108,046             30.1  %


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Gross Premiums Written
Gross premiums written by component were as follows:
                                                      Three Months Ended September 30                                                Nine Months Ended September 30
        ($ in thousands)                2021                 2020                       Change                        2021                2020                       Change
Professional Liability
HCPL
Standard Physician(1)(14)
Twelve month term                 $    65,531            $  72,641          $ (7,110)             (9.8  %)       $   167,882          $ 168,950          $ (1,068)             (0.6  %)
Twenty-four month term                      -                    -                 -                    nm                 -              8,314            (8,314)                   nm
NORCAL Standard Physician(2)           55,235                    -            55,235                    nm            71,575                  -            71,575                    nm
Total Standard Physician              120,766               72,641            48,125              66.3  %            239,457            177,264            62,193              35.1  %

Speciality

Custom Physician(3)(14)                13,222               11,600             1,622              14.0  %             35,814             48,042           (12,228)            (25.5  %)
NORCAL Custom Physician(4)              6,700                    -             6,700                    nm             7,905                  -             7,905                    nm
Hospitals and Facilities(5)(14)        12,802               14,610            (1,808)            (12.4  %)            39,553             40,543              (990)             (2.4  %)
NORCAL Hospitals and
Facilities(6)                           3,999                    -             3,999                    nm             6,386                  -             6,386                    nm
Senior Care(7)(14)                        573                1,485              (912)            (61.4  %)             6,333              5,589               744              13.3  %
Reinsurance (assumed)(8)               14,612                3,736            10,876             291.1  %             29,139             11,002            18,137             164.9  %

Total Specialty                        51,908               31,431            20,477              65.1  %            125,130            105,176            19,954              19.0  %
Total HCPL                            172,674              104,072            68,602              65.9  %            364,587            282,440            82,147              29.1  %
Small Business Unit(9)                 38,718               38,203               515               1.3  %             84,662             81,608             3,054               3.7  %
Tail Coverages(10)(14)                  5,210                6,045              (835)            (13.8  %)            26,666             30,052            (3,386)            (11.3  %)
NORCAL Tail Coverages(11)               6,544                    -             6,544                    nm             8,994                  -             8,994                    nm
Total Professional Liability          223,146              148,320            74,826              50.4  %            484,909            394,100            90,809              23.0  %
Medical Technology Liability(12)       11,709                9,822             1,887              19.2  %             29,887             25,926             3,961              15.3  %
Other(13)                                 236                  115               121             105.2  %                618                676               (58)             (8.6  %)
Total                             $   235,091            $ 158,257          $ 76,834              48.6  %        $   515,414          $ 420,702          $ 94,712              22.5  %


(1) Standard Physician premium was our greatest source of premium revenues in
both 2021 and 2020 and is predominantly comprised of twelve month term policies.
The decrease in twelve month term policies during the 2021 three- and nine-month
periods was driven by retention losses, partially offset by an increase in
renewal pricing, new business written and, for the 2021 nine-month period, the
conversion of twenty-four month term policies. In addition, twelve month term
policies in the 2020 nine-month period included the impact of premium credits
granted as a result of the COVID-19 pandemic. Retention losses during the 2021
three- and nine-month periods were largely attributable to the loss of two large
policies totaling $5.9 million due to the insureds' decision to enter into
captive arrangements and, for the 2021 nine-month period, the loss of two
policies totaling $1.4 million due to price competition during the first quarter
of 2021. Retention losses during the 2021 three- and nine-month periods also
reflected our targeted state strategy to reassess our underwriting appetite in
certain unprofitable states. We will continue to perform a detailed evaluation
of venues, specialties and other areas to improve our underwriting results. We
also continue to focus on underwriting discipline as we emphasize careful risk
selection, rate adequacy, improved contract terms and a willingness to walk away
from business that does not fit our goal of achieving a long-term underwriting
profit. While retention during the 2021 three- and nine-month periods has
recovered somewhat from the impact of our re-underwriting efforts over the past
two years, it remains lower than our historical average for this line of
business as we continue to reevaluate certain states and set our rates to
reflect our observations of higher severity trends. Renewal pricing increases
during the 2021 three- and nine-month periods reflect the rising loss cost
environment and new business written reflects general market conditions.
Standard Physician premium in the 2020 nine-month period also included
twenty-four month term policies that were offered to physician insureds in one
selected jurisdiction. We ceased offering twenty-four month term policies
beginning in the second quarter of 2020, and the majority of the policies that
were up for renewal in the 2021 nine-month period
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were renewed to twelve month term policies; however, a portion of the premium
from the 2020 nine-month period related to policies that will be subject to
renewal and conversion in 2022.
(2) NORCAL Standard Physician premium represents premium contributed by NORCAL
since the date of acquisition and is comprised of three and twelve month term
policies. NORCAL Standard Physician premium during the 2021 three- and
nine-month periods was impacted by an increase in renewal pricing and, to a
lesser extent, new business written, partially offset by retention losses,
including the loss of one large policy during the second quarter of 2021.
(3) Custom Physician premium includes large complex physician groups,
multi-state physician groups and non-standard physicians and is written
primarily on an excess and surplus lines basis. The increase in Custom Physician
premium during the 2021 three-month period was driven by new business written,
including the addition of a $2.0 million policy, and, to a lesser extent, an
increase in renewal pricing, partially offset by retention losses. In addition,
the change in Custom Physician premium for the 2021 three- and nine-month
periods included the impact of the dissolution of our arrangement with
CAPAssurance as a result of our acquisition of NORCAL, which also resulted in
the loss of a large program and two large policies in California totaling $10.2
million during the first quarter of 2021. The decrease in Custom Physician
premium during the 2021 nine-month period also reflected retention losses due to
our focus on underwriting discipline which resulted in the non-renewal of two
large policies totaling $7.3 million and net timing differences of $1.1 million,
primarily related to the prior year renewal of one policy. The decrease in
Custom Physician premium during the 2021 nine-month period was partially offset
by new business written, including the addition of a $1.7 million policy during
the second quarter of 2021, and, to a lesser extent, an increase in renewal
pricing. Renewal pricing increases for the 2021 three- and nine-month periods
reflect the rising loss cost environment and new business written reflects
general market conditions. The retention rate in our Custom Physician book for
the 2021 three-month period improved, and we anticipate retention rates to
continue to normalize going forward as we substantially completed our
re-underwriting efforts as of the end of 2020. The retention rate in our Custom
Physician book for the 2021 nine-month period was lower than the prior year
period which also reflects the impact of the aforementioned dissolution of our
arrangement with CAPAssurance, which resulted in a decrease to our Specialty
retention rate of 10.2 percentage points.
(4) NORCAL Custom Physician premium represents premium contributed by NORCAL
since the date of acquisition and includes large complex physician groups,
multi-state physician groups and non-standard physicians and is written
primarily on an excess and surplus lines basis. NORCAL Custom Physician premium
during the 2021 three- and nine-month periods was impacted by retention losses,
including the loss of one large policy due to price competition during the
second quarter of 2021, partially offset by an increase in renewal pricing and,
to a lesser extent, new business written.
(5) Hospitals and Facilities premium (which includes hospitals, surgery centers
and miscellaneous medical facilities) decreased during the 2021 three- and
nine-month periods as compared to the same respective periods of 2020 driven by
retention losses, partially offset by an increase in renewal pricing and, to a
lesser extent, new business written. Furthermore, the decrease in premium for
the 2021 three-month period was partially offset by net timing differences of
$1.7 million primarily related to the prior year renewal of one policy. Renewal
pricing increases for the 2021 three- and nine-month periods reflect rate
increases and contract modifications that we believe are appropriate given the
current loss environment and new business written reflects general market
conditions. Retention losses in the 2021 three- and nine-month periods were
driven by the loss of a $2.0 million policy due to an insured's decision to
enter into a captive arrangement and, for the 2021 nine-month period, the
non-renewal of a $2.3 million policy during the second quarter due to price
competition as well as our decision not to renew certain products. As we
substantially completed our re-underwriting efforts on this book of business as
of the end of the third quarter of 2020, retention rates have started to
normalize.
(6) NORCAL Hospitals and Facilities premium represents premium contributed by
NORCAL since the date of acquisition and includes hospitals, surgery centers and
miscellaneous medical facilities. NORCAL Hospitals and Facilities premium during
the 2021 three- and nine-month periods was impacted by an increase in renewal
pricing and, to a lesser extent, new business written, partially offset by
retention losses.
(7) Senior Care premium includes facilities specializing in long term
residential care primarily for the elderly ranging from independent living
through skilled nursing. Our Senior Care premium decreased for the 2021
three-month period as compared to the same period of 2020 driven by retention
losses, partially offset by renewal pricing increases and, to a lesser extent,
new business written. The increase in Senior Care premium during the 2021
nine-month period as compared to the same period of 2020 was driven by renewal
pricing increases and, to a lesser extent, new business written, partially
offset by retention losses. The increase in renewal pricing during the 2021
three- and nine-month periods was primarily the result of an increase in the
rate charged for certain renewed policies in select states. Retention losses in
the 2021 three- and nine-month periods were driven by our decision not to renew
certain classes of Senior Care business based on our expectations of poor loss
performance. As we completed our re-underwriting efforts on this book of
business during the third quarter of 2020, retention rates have started to
normalize.
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(8) We offer custom alternative risk solutions including assumed reinsurance.
The increase in premium during the 2021 three- and nine-month periods primarily
reflected an increase premiums assumed on a quota share basis through a
strategic partnership since 2016 with an international medical professional
liability insurer. For 2021, we increased our participation in the original
program and entered into another program with this insurer in a new
international territory. We anticipate the volume of premium assumed through
this partnership will continue to grow going forward. Our custom alternative
risk solutions during the 2021 nine-month period also include an assumed
reinsurance arrangement with a regional hospital group entered into during the
first quarter of 2021, which resulted in $4.5 million of premium written,
comprised of $2.3 million of retroactive premium written and fully earned and
$2.2 million of prospective premium written. Furthermore, the increase in
premium during the 2021 three- and nine-month periods reflected the annual
renewal of this arrangement. See Note 5 of the Notes to Condensed Consolidated
Financial Statements for further information on this transaction.
(9) Our Small Business Unit is primarily comprised of premium associated with
podiatrists, legal professionals, dentists and chiropractors. Our Small Business
Unit premium was relatively unchanged for the 2021 three-month period and
increased for the 2021 nine-month period as compared to the same respective
periods of 2020. The increase in premium for the 2021 nine-month period was
driven by an increase in renewal pricing and new business written, partially
offset by retention losses. The increase in renewal pricing during the 2021
three- and nine-month periods was primarily the result of an increase in the
rate charged for certain renewed policies in select states.
(10) We offer extended reporting endorsement or "tail" coverage to insureds who
discontinue their claims-made coverage with us, and we also periodically offer
tail coverage through stand-alone policies. Tail coverage premiums are generally
100% earned in the period written because the policies insure only incidents
that occurred in prior periods and are not cancellable. The amount of tail
coverage premium written can vary significantly from period to period. The
decrease during the 2021 nine-month period as compared to the same period of
2020 was primarily due to the prior year effect of a large national healthcare
account that exercised its contractual option to purchase tail coverage which
resulted in $14.3 million of one-time premiums written and fully earned in the
second quarter of 2020. This impact was largely offset by $7.8 million of tail
premium written and fully earned during the second quarter of 2021 associated
with a Custom Physician policy and two large tail policies totaling $2.1 million
written and fully earned during the first quarter of 2021.
(11) NORCAL Tail Coverages represent premium contributed by NORCAL since the
date of acquisition and include endorsement coverages to insureds who
discontinue their claims-made coverage and may also periodically include tail
coverage offered through stand-alone policies. As detailed in the previous
footnote, tail coverage premiums are generally 100% earned in the period written
and the amount of tail coverage premium written can vary significantly from
period to period. NORCAL Tail Coverages for the 2021 three- and nine-month
periods included two tail policies totaling $1.7 million written and fully
earned in the current period and, for the 2021 nine-month period, several
individual tail policies totaling $2.5 million written and fully earned during
the second quarter of 2021.
(12) Our Medical Technology Liability business is marketed throughout the U.S.;
coverage is typically offered on a primary basis, within specified limits, to
manufacturers and distributors of medical technology and life sciences products
including entities conducting human clinical trials. In addition to the
previously listed factors that affect our premium volume, our Medical Technology
Liability premium is also impacted by the sales volume of insureds. Our Medical
Technology Liability premium increased during the 2021 three- and nine-month
periods as compared to the same respective periods of 2020 due to new business
written and, to a lesser extent, an increase in renewal pricing, partially
offset by retention losses. Retention losses during the 2021 three- and
nine-month periods are primarily attributable to an increase in competition on
terms and pricing, as well as merger activity within the industry. Renewal
pricing increases during the 2021 three- and nine-month periods are primarily
due to changes in the sales volume of certain insureds, including changes in
exposure.
(13) This component of gross premiums written includes all other product lines
within our Specialty P&C segment.
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(14) Certain components of our gross premiums written include alternative market
premiums. We currently cede either all or a portion of the alternative market
premium, net of reinsurance, to three SPCs of our wholly owned Cayman Islands
reinsurance subsidiaries, Inova Re and Eastern Re, which are reported in our
Segregated Portfolio Cell Reinsurance segment (see further discussion in the
Ceded Premiums Written section that follows). The portion not ceded to the SPCs
is retained within our Specialty P&C segment.
                                                 Three Months Ended September 30                                        Nine Months Ended September 30
        ($ in millions)              2021             2020                     Change                      2021              2020                     Change
Standard Physician               $       -          $    -          $    -                    nm       $      2.0          $  1.6          $  0.4              25.0  %
Custom Physician                         -               -               -                    nm                -             0.1            (0.1)                   nm
Hospitals and Facilities               0.1             0.6            (0.5)            (83.3  %)              0.1             0.7            (0.6)            (85.7  %)
Senior Care                            0.6             0.4             0.2              50.0  %               5.2             4.2             1.0              23.8  %
Tail Coverages                           -               -               -                    nm              0.7               -             0.7                    nm
Total                            $     0.7          $  1.0          $ (0.3)            (30.0  %)       $      8.0          $  6.6          $  1.4              21.2  %


Alternative market gross premiums written remained relatively unchanged during
the 2021 three-month period and increased during the 2021 nine-month period as
compared to the same respective periods of 2020. The increase in premium for the
2021 nine-month period was driven by renewal pricing increases, primarily due to
an increase in the rate charged for one program and, to a lesser extent, the
impact of tail coverages.
We are committed to a rate structure that will allow us to fulfill our
obligations to our insureds, while generating competitive long-term returns for
our shareholders. Our pricing continues to be based on expected losses as
indicated by our historical loss data and available industry loss data. In
recent years, this practice has resulted in gradual rate increases and we
anticipate further rate increases due to indications of increasing loss
severity. Additionally, the pricing of our business includes the effects of
filed rates, surcharges and discounts. Renewal pricing also reflects changes in
our exposure base, deductibles, self-insurance retention limits and other policy
terms and conditions.
The change in renewal pricing for our Specialty P&C segment, including by major
component, was as follows:
                                                        Three Months Ended                 Nine Months Ended
                                                           September 30                      September 30
                                                               2021                              2021
Specialty P&C segment                                                      9  %                              8  %
HCPL
Standard Physician(1)(2)                                                   9  %                              9  %
Specialty(1)(2)                                                           13  %                             11  %
Total HCPL                                                                10  %                              9  %
Small Business Unit(1)                                                     8  %                              6  %
Medical Technology Liability(1)                                            8  %                              5  %

(1) See the Gross Written Premiums section for further explanation of renewal price changes.
(2) Includes policies renewed by NORCAL since the acquisition date.

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New business written by major component on a direct basis was as follows:
                                          Three Months Ended                 Nine Months Ended
                                             September 30                      September 30
            (In millions)                   2021             2020            2021             2020
   HCPL
   Standard Physician(1)            $       2.3             $ 1.1      $      3.9           $  2.1
   Specialty(1)                             6.4               4.2            18.8              7.2
   Total HCPL                               8.7               5.3            22.7              9.3
   Small Business Unit                      1.3               1.4             3.1              3.7
   Medical Technology Liability             1.2               2.0             4.7              4.7
   Total                            $      11.2             $ 8.7      $     30.5           $ 17.7

(1) Includes the premium contributed by NORCAL since the acquisition date.

For our Specialty P&C segment, we calculate retention as annualized renewed
premium divided by all annualized premium subject to renewal. Retention is
affected by a number of factors. We may lose insureds to competitors or to
alternative insurance mechanisms such as risk retention groups, captive
arrangements, or self-insurance entities (often when physicians join hospitals
or large group practices) or due to pricing or other issues. We may choose not
to renew an insured as a result of our underwriting evaluation. Insureds may
also terminate coverage because they have left the practice of medicine for
various reasons, principally for retirement, death or disability, but also for
personal reasons.
Retention for our Specialty P&C segment, including by major component, was as
follows:
                                                    Three Months Ended                             Nine Months Ended
                                                       September 30                                  September 30
                                                 2021                   2020                   2021                   2020
Specialty P&C segment                                  84  %                81  %                    83  %                78  %
HCPL
Standard Physician(1)                                  85  %                85  %                    86  %                82  %
Specialty(1)                                           69  %                55  %                    66  %                59  %
Total HCPL                                             81  %                76  %                    80  %                74  %
Small Business Unit                                    91  %                92  %                    91  %                90  %
Medical Technology Liability                           90  %                85  %                    89  %                84  %

(1) Includes the premium contributed by NORCAL since the acquisition date. We are currently in the process of evaluating
NORCAL business book and implementation ProAssurance rigorous underwriting strategies, which will likely have an impact on retention in
future quarters.

Ceded Premiums Written
Ceded premiums represent the amounts owed to our reinsurers for their assumption
of a portion of our losses. For our HCPL and Medical Technology Liability excess
of loss reinsurance arrangements in effect prior to October 1, 2021, we
generally retained the first $2 million in risk insured by us and ceded
coverages in excess of this amount. Effective October 1, 2021, we will also
retain from 0% to 5% of the next $24 million of risk for our HCPL coverages in
excess of $2 million and our HCPL excess of loss reinsurance arrangements will
also incorporate NORCAL policies. For the NORCAL excess of loss reinsurance
arrangement in effect prior to October 1, 2021, NORCAL policies are reinsured
under separate reinsurance agreements, primarily excess of loss, which have
historically renewed annually on January 1. For the NORCAL excess of loss
reinsurance arrangement that renewed on January 1, 2021, retention is generally
the first $2 million in risk and coverages in excess of this amount are ceded up
to $24 million. These changes in terms for our HCPL treaty resulted in a
reduction to the gross rate paid for the treaty year effective October 1, 2021.
For our Medical Technology Liability treaty which also renewed effective October
1, 2021, we will also retain 2.5% of the next $8 million of risk for coverages
in excess of $2 million.
We pay our reinsurers a ceding premium in exchange for their accepting the risk,
and in certain of our excess of loss arrangements, the ultimate amount of which
is determined by the loss experience of the business ceded, subject to certain
minimum and maximum amounts. Given the length of time that it takes to resolve
our claims, many years may elapse before all losses recoverable under a
reinsurance arrangement are known. As a part of the process of estimating our
loss reserve we also make estimates regarding the amounts recoverable under our
reinsurance arrangements. As a result, we may have an adjustment to our estimate
of expected losses and associated recoveries for prior year ceded losses under
certain loss sensitive reinsurance
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agreements. Any changes to estimates of premiums ceded related to prior accident
years are fully earned in the period the changes in estimates occur.
Ceded premiums written were as follows:
                                             Three Months Ended September 30                              Nine Months Ended September 30
        ($ in thousands)                2021           2020              Change                     2021          2020              Change
Excess of loss reinsurance
arrangements (1)                 $     7,062        $  9,351    $ (2,289)   

(24.5%) $ 22,443 $ 26,079 $ (3,636) (13.9%)
Other shared risk agreements
(2)

                                    6,387          11,784      (5,397)      (45.8  %)           14,318        26,962      (12,644)      (46.9  %)
Premium ceded to SPCs (3)                443             876        (433)      (49.4  %)            7,046         5,958        1,088        18.3  %
NORCAL premiums ceded since
acquisition (4)                        1,691               -       1,691              nm            1,758             -        1,758              nm
Other ceded premiums written             872             847          25         3.0  %             2,466         2,366          100         4.2  %

Total written premiums ceded $ 16,455 $ 22,858 $ (6,403)

(28.0%) $ 48,031 $ 61,365 $ (13 334) (21.7%)

(1) We generally reinsure risks under our excess of loss reinsurance
arrangements pursuant to which the reinsurers agree to assume all or a portion
of all risks that we insure above our individual risk retention levels, up to
the maximum individual limits offered. Premium due to reinsurers also fluctuates
with the volume of written premium subject to cession under the arrangement. In
certain of our excess of loss reinsurance arrangements, the premium due to the
reinsurer is determined by the loss experience of that business reinsured,
subject to certain minimum and maximum amounts. The decrease in ceded premiums
written under our excess of loss reinsurance arrangements during the 2021 three-
and nine-month periods as compared to the same respective periods of 2020
primarily reflected a decrease in the overall volume of gross premiums written
subject to cession and, to a lesser extent, the reduced rate on the treaty year
effective October 1, 2020.
(2) We have entered into various shared risk arrangements, including quota
share, fronting, and captive arrangements, with certain large healthcare systems
and other insurance entities. While we cede a large portion of the premium
written under these arrangements, they provide us an opportunity to grow net
premium through strategic partnerships. These arrangements primarily include our
Ascension Health program and, prior to the fourth quarter of 2020, our
CAPAssurance program. Our CAPAssurance program was mutually dissolved on October
1, 2020. During the first quarter of 2021, we entered into a new shared risk
arrangement with a regional hospital group. The decrease in ceded premiums
written under our shared risk arrangements during the 2021 three- and nine-month
periods as compared to the same respective periods of 2020 was primarily due to
the aforementioned dissolution of our arrangement with CAPAssurance and, to a
lesser extent, a decrease in premium ceded to our Ascension Health Program,
somewhat offset by the premium ceded under our new shared risk arrangement, as
previously discussed.
(3) As previously discussed, as a part of our alternative market solutions, all
or a portion of certain healthcare premium written is ceded to SPCs in our
Segregated Portfolio Cell Reinsurance segment under either excess of loss or
quota share reinsurance agreements, depending on the structure of the individual
program. See the Segment Results - Segregated Portfolio Cell Reinsurance section
for further discussion on the cession to the SPCs from our Specialty P&C
segment. Premiums ceded to SPCs during the 2021 three-month period remained
relatively unchanged and increased during the 2021 nine-month period as compared
to the same respective periods of 2020. The increase in premiums ceded to SPCs
during the 2021 nine-month period was driven by renewal pricing increases (see
discussion in footnote 14 under the heading "Gross Premiums Written").
(4) NORCAL policies for the 2021 three- and nine-month periods were reinsured
under separate reinsurance agreements, primarily excess of loss; however, these
policies were incorporated into our existing HCPL excess of loss reinsurance
arrangements with the October 1, 2021 renewal, as previously discussed. For
NORCAL's excess of loss agreements, deposit ceded premium, as defined in the
contract, is initially estimated and recorded at the inception date of the
treaty, generally January 1, as an estimate of ceded premiums written for the
full contract year. These estimates of ceded premiums are based on information
provided by brokers and reinsurers and may be periodically adjusted as new
information is received and are fully earned in the period the changes in
estimates occur. NORCAL's ceded premiums written for the 2021 three- and
nine-month periods related almost entirely to an increase in our estimate of
premiums owed to reinsurers due to premium in excess of the deposit ceded
premium under NORCAL's excess of loss reinsurance arrangement and, to a lesser
extent, premium related to cyber liability coverages. The majority of ceded
premiums for NORCAL's excess of loss reinsurance arrangement were recorded by
NORCAL before the acquisition in their first quarter 2021 results, and were
expensed pro rata throughout the contract year. However, we incorporated NORCAL
policies into our existing HCPL excess of loss reinsurance arrangement with the
October 1, 2021 renewal, as previously discussed, and ceded premiums will
fluctuate with the volume of written premium subject to cession under the
arrangement each quarter, as discussed in footnote 1 above.
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Ceded Premiums Ratio
The ceded premiums ratio was as follows:
                                                    Three Months Ended September 30                                    Nine Months Ended September 30
                                        2021                      2020                   Change              2021                  2020                 Change
Ceded premiums ratio                    7.0%                      14.4%                 (7.4 pts)            9.3%                 14.6%                (5.3 pts)


The above table reflects ceded premiums written as a percent of gross premiums
written. Our ceded premiums ratio for the 2021 three- and nine-month periods was
impacted by the inclusion of NORCAL ceded and written premiums since the date of
acquisition, which accounted for 2.1 and 1.7 percentage points, respectively, of
the decrease in the ratio as the majority of ceded premiums for NORCAL's excess
of loss reinsurance arrangements were recorded before the acquisition, as
previously discussed. Excluding the impact of the NORCAL acquisition, our ceded
premium ratio for the 2021 three- and nine-month periods decreased 5.3 and 3.6
percentage points, respectively, as compared to the same respective periods of
2020 driven by a decrease in premiums ceded under our shared risk arrangements.
The decrease in our ceded premium ratio for the 2021 nine-month period was
partially offset by the effect of a large national healthcare account tail
policy written premium during the second quarter of 2020. See further discussion
on NORCAL ceded premiums and our shared risk arrangements above under the
heading "Ceded Premiums Written."
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned
premiums that we cede to our reinsurers for their assumption of a portion of our
losses. Because premiums are generally earned pro rata over the entire policy
period, fluctuations in premiums earned tend to lag those of premiums written.
The majority of our policies carry a term of one year; however, some of our
Medical Technology Liability policies have a multi-year term and some of our
NORCAL Standard Physician policies have a three-month term. In addition, prior
to the third quarter of 2020, we wrote certain Standard Physician policies with
a twenty-four month term. Tail coverage premiums are generally 100% earned in
the period written because the policies insure only incidents that occurred in
prior periods and are not cancellable. Retroactive coverage premiums are 100%
earned at the inception of the contract, as all of the associated underlying
loss events occurred in the past. Additionally, any ceded premium changes due to
changes to estimates of premiums owed under reinsurance agreements for prior
accident years are fully earned in the period of change.
Net premiums earned were as follows:
                                                         Three Months Ended September 30                                              Nine Months Ended 

September 30

          ($ in thousands)                 2021                 2020                      Change                       2021                2020                       Change
Gross premiums earned                $   221,956            $ 137,044          $ 84,912             62.0  %        $  540,489          $ 421,614          $ 118,875             28.2  %
Less: Ceded premiums earned               18,240               19,195              (955)            (5.0  %)           52,526             56,309             (3,783)            (6.7  %)
Net premiums earned                  $   203,716            $ 117,849          $ 85,867             72.9  %        $  487,963          $ 365,305          $ 122,658             33.6  %


Gross premiums earned during the 2021 three- and nine-month periods included
additional earned premiums of approximately $88.1 million and $138.8 million,
respectively, from our acquisition of NORCAL. Of that amount of earned premium,
approximately $59.4 million and $122.2 million, respectively, was associated
with NORCAL policies written prior to our acquisition. We expect NORCAL policies
to contribute approximately $70 million to $90 million of additional gross
premiums earned over the remainder of 2021. Excluding premiums associated with
the NORCAL acquisition, gross premiums earned decreased $3.2 million and $19.9
million, respectively, during the 2021 three- and nine-month periods as compared
to the same respective periods of 2020 driven by the pro rata effect of a
decrease in the volume of written premium during the preceding twelve months,
predominantly in our Specialty line of business, due to our re-underwriting
efforts and, to a lesser extent, the dissolution of our arrangement with
CAPAssurance. The decrease in gross premiums earned in the 2021 three- and
nine-month periods also reflected premium adjustments related to loss sensitive
policies which decreased earned premium by $0.9 million and $0.1 million for the
2021 three- and nine-month periods, respectively, as compared to an increase in
earned premium of $2.3 million and $2.6 million for the same respective periods
of 2020. In addition, the decrease during the 2021 nine-month period reflected
the prior year effect of a large national healthcare account that exercised its
contractual option to purchase tail coverage which resulted in $14.3 million of
one-time premiums written and fully earned during the second quarter of 2020
(see previous discussion in footnote 10 under the heading "Gross Premiums
Written"). The decrease in gross premiums earned during the 2021 nine-month
period was partially offset by tail premium associated with a Custom Physician
policy, which resulted in $7.8 million of one-time written and fully earned
during the second quarter of 2021 (see previous discussion in footnote 10 under
the heading "Gross Premiums Written") and $2.3 million of retroactive premium
written and fully earned associated with an assumed reinsurance program (see
previous discussion in footnote 8 under the heading "Gross Premiums Written").
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Ceded premiums earned during the 2021 three- and nine-month periods included
additional ceded premium of approximately $5.2 million and $7.5 million,
respectively, from our acquisition of NORCAL, which is primarily attributable to
NORCAL's excess of loss reinsurance arrangement and the effect of an adjustment
made during the current period to ceded premiums owed under this arrangement
(see previous discussion in footnote 4 under the heading "Ceded Premiums
Written"). We expect NORCAL to contribute approximately $2 million to $4 million
of additional ceded premiums earned over the remainder of 2021 under our HCPL
excess of loss reinsurance arrangements (see previous discussion in footnote 4
under the heading "Ceded Premiums Written"). Excluding ceded premiums from our
NORCAL acquisition, ceded premiums earned decreased $6.2 million and $11.3
million during the 2021 three- and nine-month periods, respectively, as compared
to the same respective periods of 2020 driven by the pro rata effect of a
decrease in premium ceded under our shared risk and excess of loss arrangements
during the preceding twelve months.
Losses and Loss Adjustment Expenses
The determination of calendar year losses involves the actuarial evaluation of
incurred losses for the current accident year and the actuarial re-evaluation of
incurred losses for prior accident years, including an evaluation of the reserve
amounts required for ECO/XPL losses. As part of the review of our prior accident
year reserves, we also make estimates of expected losses and associated
recoveries for prior year ceded losses under certain loss sensitive reinsurance
agreements. This analysis may result in changes to estimates of premiums owed
under reinsurance agreements for prior accident years which impact net premiums
earned (the denominator of the net loss ratio) in the period the adjustment is
made. No such adjustments were made during the three and nine months ended
September 30, 2021 or 2020. See previous discussion under the heading "Ceded
Premiums Written" for additional information.
Accident year refers to the accounting period in which the insured event becomes
a liability of the insurer. For claims-made policies, which represent the
majority of the premiums written in our Specialty P&C segment, the insured event
generally becomes a liability when the event is first reported to us. For
occurrence policies, the insured event becomes a liability when the event takes
place. For retroactive coverages, the insured event becomes a liability at
inception of the underlying contract. We believe that measuring losses on an
accident year basis is the best measure of the underlying profitability of the
premiums earned in that period, since it associates policy premiums earned with
the estimate of the losses incurred related to those policy premiums.
The following table summarizes calendar year net loss ratios for our Specialty
P&C segment by separating losses between the current accident year and all prior
accident years. In addition, net loss ratios in the following table include the
impact of NORCAL since the date of acquisition.
                                                                                       Net Loss Ratios (1)
                                               Three Months Ended September 30                                   Nine Months Ended September 30
                                       2021                2020                Change                  2021                 2020                   Change

Calendar year net loss ratio          86.6%               87.4%                 (0.8   pts)             85.6  %              102.2  %              (16.6   pts)
Less impact of prior accident
years on the net loss ratio           (3.4%)              (2.4%)                (1.0   pts)             (4.1  %)              (5.7  %)               1.6   pts
Current accident year net loss
ratio (2)                             90.0%               89.8%                  0.2   pts              89.7  %              107.9  %              (18.2   pts)


(1)Net losses, as specified, divided by net premiums earned.
(2)Our current accident year net loss ratio (as shown in the table above)
increased by 0.2 percentage points during the three months ended September 30,
2021 and decreased 18.2 percentage points during the nine months ended
September 30, 2021 as compared to the same respective periods of 2020. The
change in our current accident year net loss ratio in each period was primarily
attributable to the following:
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                                                                               Increase (Decrease)
                                                                                2021 versus 2020
                                                                 Comparative                        Comparative
                                                                 three-month                         nine-month
                  (In percentage points)                            period                             period

Estimated increase (decrease) in ratio due to:
NORCAL operations

                                                  5.7 pts                            3.2 pts
NORCAL Acquisition - Purchase Accounting Adjustment               (2.1 pts)                          (1.2 pts)
Premium adjustments on loss sensitive policies                     2.5 pts                            0.7 pts
Large National Healthcare Account                                   - pts                            (12.3 pts)
COVID-19 IBNR Reserve                                               - pts                            (2.9 pts)
Custom Physician Tail Policy                                        - pts                            (0.5 pts)
All other, net                                                    (5.9 pts)                          (5.2 pts)

Increase (decrease) in the net loss ratio for the current year 0.2 pts

                          (18.2 pts)


Excluding the impact of the items specifically identified in the table above,
our current accident year net loss ratios for the three and nine months ended
September 30, 2021 improved 5.9 and 5.2 percentage points, respectively, driven
by decreases to certain loss ratios during the first quarter of 2021 in our
Standard Physician and Specialty lines of business as we continue to recognize
the beneficial impacts of our re-underwriting efforts and focus on rate
adequacy. In addition, our current accident year net loss ratios for the three
and nine months ended September 30, 2021 reflected an additional reduction in
certain loss ratios in our Standard Physician line of business during the third
quarter of 2021 related to favorable frequency trends.
Loss ratios associated with NORCAL policies were higher than the average for our
other books of business in this segment, which increased our current accident
year net loss ratios for the three and nine months ended September 30, 2021 by
5.7 and 3.2 percentage points, respectively. However, we are currently in the
process of evaluating the NORCAL book of business and implementing
ProAssurance's rigorous underwriting strategies. Also as a result of our
acquisition of NORCAL, our current accident year net loss ratios for the three
and nine months ended September 30, 2021 were impacted by amortization of the
negative VOBA associated with NORCAL's assumed unearned premium which is
recorded as a reduction to current accident year net losses and accounted for a
2.1 and 1.2 percentage point decrease, respectively, in our current period
ratios. See Note 2 of the Notes to Condensed Consolidated Financial Statements
for additional information on the NORCAL acquisition and the related purchase
accounting adjustments. In addition, our current accident year net loss ratios
for the three and nine months ended September 30, 2021 were impacted by changes
in premium adjustments related to loss sensitive policies which increased the
current period ratios as compared to the same periods of 2020 by 2.5 and 0.7
percentage points, respectively (see previous discussion under the heading "Net
Premiums Earned"). For the nine months ended September 30, 2021, our current
accident year net loss ratio was also impacted by a Custom Physician tail policy
($7.8 million of net premiums earned recorded with a lower loss ratio than the
segment's average initial loss ratio), which accounted for 0.5 percentage points
of the decrease in the 2021 nine-month period ratio as compared to the prior
year period. For the nine months ended September 30, 2020, our current accident
year net loss ratio was higher due to the effect of a large national healthcare
account, net of the impact of related PDR amortization, which accounted for 12.3
percentage points of the decrease in the 2021 nine-month period ratio as
compared to the prior year period. In addition, our current accident year net
loss ratio for the nine months ended September 30, 2020 was impacted by a $10
million IBNR reserve we recorded during the second quarter of 2020 for COVID-19
which accounted for 2.9 percentage points of the decrease in the 2021 nine-month
period ratio as compared to the prior year period.
We re-evaluate our previously established reserve each quarter based upon the
most recently completed actuarial analysis supplemented by any new analysis,
information or trends that have emerged since the date of that study. We also
take into account currently available industry trend information. We observed a
reduction in claims frequency in 2020 that has continued into 2021, some of
which is likely associated with the COVID-19 pandemic. Given the consistent and
prolonged nature of these favorable trends we began to recognize some of these
favorable frequency trends in our HCPL current accident year reserve during the
third quarter of 2021.We continue to remain cautious in recognizing these
favorable trends due to the long-tailed nature of our HCPL claims as well as the
uncertainty surrounding the length and severity of the pandemic.
We recognized net favorable prior accident year reserve development of $6.8
million and $20.0 million during the three and nine months ended September 30,
2021, respectively, as compared to $2.9 million and $20.7 million during the
same respective periods of 2020. Development recognized during the three and
nine months ended September 30, 2021 principally related to accident years 2017
through 2020. Development recognized during the three and nine months ended
September 30, 2020 principally related to accident years 2014 through 2018. Net
favorable prior accident year reserve development recognized
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for the three and nine months ended September 30, 2021 included a $1.0 million
reduction in our IBNR reserve for COVID-19. In addition, net favorable prior
accident year reserve development recognized included a reduction in our reserve
for potential ECO/XPL claims of $0.4 million for the three months ended
September 30, 2021 and an increase for potential ECO/XPL claims of $1.0 million
for the nine months ended September 30, 2021 as compared to a reduction in this
same reserve of $0.4 million and $3.2 million during the same respective periods
of 2020. Furthermore, favorable development recognized during the three and nine
months ended September 30, 2021 included $2.9 million and $5.0 million,
respectively, related to the amortization of the purchase accounting fair value
adjustment on NORCAL's assumed net reserve and amortization of the negative VOBA
associated with NORCAL's DDR reserve which is recorded as a reduction to prior
accident year net losses and loss adjustment expenses. We have not recognized
any development related to NORCAL's prior accident year reserves since the date
of acquisition.
A detailed discussion of factors influencing our recognition of loss development
is included in our Critical Accounting Estimates section under the heading
"Reserve for Losses and Loss Adjustment Expenses" and in our December 31, 2020
report on Form 10-K under the same heading. Assumptions used in establishing our
reserve are regularly reviewed and updated by management as new data becomes
available. Any adjustments necessary are reflected in the then current
operations. Due to the size of our reserve, even a small percentage adjustment
to the assumptions can have a material effect on our results of operations for
the period in which the change is made, as was the case in both 2021 and 2020.
Underwriting, Policy Acquisition and Operating Expenses
Our Specialty P&C segment underwriting, policy acquisition and operating
expenses, including NORCAL expenses since the date of acquisition, were
comprised as follows:
                                              Three Months Ended September 30                                                 Nine Months Ended September 30
    ($ in thousands)            2021                  2020                      Change                          2021                 2020                      Change
DPAC amortization        $    16,145               $ 13,101          $ 3,044              23.2  %        $    42,328              $ 40,652          $ 1,676               4.1  %
Management fees                1,159                  1,838             (679)            (36.9  %)             3,015                 4,928           (1,913)            (38.8  %)
Other underwriting and
operating expenses            18,843                 13,135            5,708              43.5  %             46,026                37,314            8,712              23.3  %
Total                    $    36,147               $ 28,074          $ 8,073              28.8  %        $    91,369              $ 82,894          $ 8,475              10.2  %


DPAC amortization for the 2021 three- and nine-month periods included
approximately $3.2 million and $4.1 million, respectively, of DPAC amortization
associated with NORCAL policies written subsequent to our acquisition; however,
this level of DPAC amortization is approximately $5.5 million and $11.8 million
lower, respectively, than would be considered normal for the period of time
post-acquisition due to the application of GAAP purchase accounting rules
whereby the capitalized policy acquisition costs for policies written prior to
the acquisition date were written off rather than being expensed pro rata over
the remaining term of the associated policies (see Note 2 of the Notes to
Condensed Consolidated Financial Statements for more information). Excluding
NORCAL, DPAC amortization was relatively unchanged for the 2021 three-month
period and decreased for the 2021 nine-month period as compared to the same
respective periods of 2020. The decrease in DPAC amortization, excluding NORCAL,
during the 2021 nine-month period was driven by a decrease in earned premium,
excluding the effect of the premium earned from tail policies as there is
typically minimal deferred acquisition costs associated with tail premium (see
discussion on tail premium under the heading "Gross Premiums Written"). In
addition, the decrease reflected a decrease in compensation-related expenses
driven by a reduction in headcount as a result of the 2020 organizational
restructuring and a decrease in premium taxes due to a lower volume of premium
written. Partially offsetting the decrease in DPAC amortization for the 2021
nine-month period was a decrease in ceding commission income, which is an offset
to expense, from certain of our shared risk arrangements.
Management fees are charged pursuant to a management agreement by the Corporate
segment to the operating subsidiaries within our Specialty P&C segment,
excluding the acquired operating subsidiaries of NORCAL, for services provided
based on the extent to which services are provided to the subsidiary and the
amount of premium written by the subsidiary. Fluctuations in the amount of
premium written by each subsidiary can result in corresponding variations in the
management fee charged to each subsidiary during a particular period. Due to
organizational structure enhancements in our Specialty P&C segment during 2020,
the extent to which services are provided by the Corporate segment to the
operating subsidiaries within the segment decreased effective January 1, 2021.
Accordingly, we reduced the fee charged to the operating subsidiaries during the
2021 three- and nine-month periods.
Other underwriting and operating expenses increased during the 2021 three- and
nine-month periods primarily due to the addition of approximately $5.3 million
and $6.9 million, respectively, of expenses contributed by NORCAL since the date
of acquisition and higher amounts accrued for performance-related incentive
plans due to our improved combined ratio and other performance metrics. In
addition, the increase during the 2021 nine-month period reflected an increase
in amortization related to new software placed into service during the second
quarter of 2020. These increases in expenses during the 2021 three- and
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nine-month periods were partially offset by lower operating expenses in the 2021
three- and nine-month periods resulting from the operational and structural
changes implemented over the past year and a half as well as the effect of $1.5
million and $3.4 million, respectively, of one-time expenses incurred during the
prior year periods. One-time expenses in both the 2020 three- and nine-month
periods were mainly comprised of early retirement benefits granted to certain
employees during the third quarter of 2020. The remaining one-time costs were
primarily expenses associated with the restructuring of our HCPL field office
organization, largely during the first half of 2020, consisting of employee
severance charges and lease exit costs due to a reduction in physical office
locations. The remaining variance in other underwriting and operating expenses
for the 2021 three- and nine-month periods as compared to the same respective
periods of 2020 was comprised of individually insignificant components.
Underwriting Expense Ratio (the Expense Ratio)
Our expense ratio for the Specialty P&C segment was as follows:
                                                    Three Months Ended September 30                                     Nine Months Ended September 30
                                           2021                 2020                  Change                  2021                 2020                  Change
Underwriting expense ratio                   17.7  %              23.8  %              (6.1   pts)              18.7  %              22.7  %              (4.0   pts)


The change in our expense ratio for the 2021 three- and nine-month periods as
compared to the same respective periods of 2020 was primarily attributable to
the following:
                                                                             Increase (Decrease)
                                                                               2021 versus 2020
                                                                 Comparative               Comparative nine-month
                  (In percentage points)                      three-month period                   period

Estimated increase (decrease) in ratio due to:
Change in net earned premiums and DPAC amortization (1)

            (0.4 pts)                      (0.4 pts)
NORCAL Operations                                                 (5.2 pts)                      (3.8 pts)
One-time Expenses                                                 (1.3 pts)                      (1.0 pts)
Large National Healthcare Account Tail Premium(2)                   - pts                         0.9 pts
Custom Physician Tail Premium(2)                                    - pts                        (0.5 pts)
All other, net                                                     0.8 pts                        0.8 pts
Decrease in the underwriting expense ratio                        (6.1 pts)                      (4.0 pts)
(1) Excludes premium and DPAC amortization contributed by NORCAL since the date of acquisition (see Note 2 of the
Notes to Condensed Consolidated Financial Statements for additional information) as well as $7.8 million of
premium in the 2021 nine-month period associated with a Custom Physician tail policy and $14.3 million of premium
in the 2020 nine-month period associated with a large national healthcare account tail policy. In addition,
excludes certain one-time expenses included in DPAC amortization in the 2020 three- and nine-month periods of
$0.3 million and $0.6 million, respectively.
(2) See previous discussion under the heading "Gross Premiums Written."


Our underwriting expense ratios for the 2021 three- and nine-month periods were
impacted by our acquisition of NORCAL. The additional expenses of NORCAL of
approximately $8.5 million and $11.0 million for the 2021 three- and nine-month
periods, respectively, had a nominal effect on the ratio as it was more than
offset by the effect on the ratio of net premiums earned of $82.9 million and
$131.4 million, respectively, contributed by NORCAL which decreased our
Specialty P&C segment expense ratio for the 2021 three- and nine-month periods
by 5.2 and 3.8 percentage points, respectively. However, as previously
discussed, DPAC amortization associated with NORCAL recorded during the 2021
three- and nine-month periods was lower than would be considered normal due to
the application of GAAP purchase accounting rules. Normalizing this amortization
would have increased our expense ratio for the 2021 three- and nine-month
periods by an estimated 2.7 and 2.4 percentage points, respectively. Excluding
the impact of NORCAL and the remaining items identified in the table above, our
expense ratios for both the 2021 three- and nine-month periods increased by 0.8
percentage points primarily due to the impact of higher amounts accrued for
performance-related incentive plans, partially offset by decreased operating
expenses resulting from the operational and structural changes implemented over
the past year and a half, as well as the aforementioned reduction to the
management fee charged by the Corporate segment.
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Segment Results - Workers' Compensation Insurance
Our Workers' Compensation Insurance segment includes workers' compensation
products provided to employers generally with 1,000 or fewer employees, as
discussed in Note 15 of the Notes to Condensed Consolidated Financial
Statements. Workers' compensation products offered include guaranteed cost
policies, policyholder dividend policies, retrospectively-rated policies,
deductible policies and alternative market programs. Alternative market programs
include program design, fronting, claims administration, risk management, SPC
rental, asset management and SPC management services. Alternative market program
premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell
Reinsurance segment or, to a limited extent, an unaffiliated captive insurer for
one program. Our Workers' Compensation Insurance segment results reflect pre-tax
underwriting profit or loss from these workers' compensation products, exclusive
of investment results, which are included in our Corporate segment. Segment
results included the following:
                                             Three Months Ended September 30                                Nine Months Ended September 30
       ($ in thousands)                2021           2020               Change                       2021          2020              Change
Net premiums written            $    46,702        $ 44,758    $   1,944           4.3  %        $   134,370    $ 135,370    $  (1,000)       (0.7  %)

Net premiums earned             $    42,235        $ 42,516    $    (281)         (0.7  %)       $   122,872    $ 129,437    $  (6,565)       (5.1  %)
Other income                            437             441           (4)         (0.9  %)             1,730        1,717           13         0.8  %
Net losses and loss adjustment
expenses                            (31,364)        (26,455)      (4,909)         18.6  %            (85,323)     (84,648)        (675)        0.8  %
Underwriting, policy
acquisition and operating
expenses                            (13,521)        (14,983)       1,462          (9.8  %)           (38,519)     (42,604)       4,085        (9.6  %)
Segment results                 $    (2,213)       $  1,519    $  (3,732)       (245.7  %)       $       760    $   3,902    $  (3,142)      (80.5  %)

Net loss ratio                        74.3%           62.2%      12.1 pts                            69.4%         65.4%       4.0 pts
Underwriting expense ratio            32.0%           35.2%     (3.2 pts)                            31.3%         32.9%      (1.6 pts)



Premiums Written
Our workers' compensation premium volume is driven by five primary factors: (1)
the amount of new business written, (2) retention of our existing book of
business, (3) premium rates charged on our renewal book of business, (4) changes
in payroll exposure and (5) audit premium.
Gross, ceded and net premiums written were as follows:
                                            Three Months Ended September 30                              Nine Months Ended September 30
       ($ in thousands)                2021            2020             Change                     2021          2020              Change
Gross premiums written          $    64,594         $ 62,996    $ 1,598         2.5  %        $   194,767    $ 199,447    $ (4,680)       (2.3  %)
Less: Ceded premiums written         17,892           18,238       (346)       (1.9  %)            60,397       64,077      (3,680)       (5.7  %)
Net premiums written            $    46,702         $ 44,758    $ 1,944         4.3  %        $   134,370    $ 135,370    $ (1,000)       (0.7  %)


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Gross Premiums Written
Gross premiums written by product were as follows:
                                                    Three Months Ended September 30                                               Nine Months Ended September 30
       ($ in thousands)                2021                  2020                      Change                       2021                2020                      Change
Traditional business:
Guaranteed cost                 $    42,368               $ 40,540          $ 1,828              4.5  %        $   113,429          $ 117,651          $ (4,222)            (3.6  %)
Policyholder dividend                 3,560                  4,057             (497)           (12.3  %)            17,820             17,233               587              3.4  %
Deductible                            1,641                  1,642               (1)            (0.1  %)             4,080              4,120               (40)            (1.0  %)
Retrospective(1)                        447                    308              139             45.1  %              3,107              1,646             1,461             88.8  %
Other                                 1,743                  1,741                2              0.1  %              5,049              5,208              (159)            (3.1  %)
Alternative market business(2)       14,835                 15,138             (303)            (2.0  %)            52,492             54,879            (2,387)            (4.3  %)
Change in EBUB estimate                   -                   (430)             430                   nm            (1,210)            (1,290)               80             (6.2  %)
Total                           $    64,594               $ 62,996          $ 1,598              2.5  %        $   194,767          $ 199,447          $ (4,680)            (2.3  %)


(1) The change in retrospectively-rated policies included an adjustment that
decreased premium by $0.1 million and $0.4 million for the three and nine months
ended September 30, 2021, respectively, as compared to adjustments that
increased premium by $0.1 million and decreased premium by $1.6 million for the
same respective periods of 2020.
(2) A majority of alternative market premiums are ceded to SPCs in our
Segregated Portfolio Cell Reinsurance segment. See further discussion on
alternative market gross premiums written in our Segment Operating Results -
Segregated Portfolio Cell Reinsurance section under the heading "Gross Premiums
Written" that follows.
Gross premiums written increased during the three months ended September 30,
2021 as compared to the same period of 2020, reflecting an improvement in audit
premium, renewal retention and renewal rate changes, partially offset by a
decrease in new business. Policy audits processed during the 2021 three-month
period resulted in audit premium returned to policyholders totaling $0.2 million
as compared to $1.1 million during the same period of 2020. Additionally, the
2020 three-month period included a reduction in the EBUB estimate totaling $0.4
million. Renewal rate retention was 88% for the 2021 three-month period as
compared to 86% for same period of 2020. The renewal rate was unchanged for the
2021 three-month period as compared to a decrease of 3% for the same period of
2020. New business written decreased $3.1 million in the 2021 three-month period
as compared to the same period of 2020, reflecting the competitive market
conditions. New business submissions in the 2021 three-month period were 17%
lower than the same period of 2020.
Gross premiums written decreased during the nine months ended September 30, 2021
as compared to the same period of 2020, primarily reflecting a decrease in audit
premium and new business, partially offset by improvement in both renewal
retention and renewal rate changes. Policy audits processed during the 2021
nine-month period resulted in audit premium returned to policyholders totaling
$2.0 million as compared to a nominal amount for the same period in 2020. We
reduced our EBUB estimate by $1.2 million for the 2021 nine-month period as
compared to $1.3 million for the same period in 2020. The decrease in audit
premium processed as well as the reduction of our EBUB estimate for the 2021
nine-month period, primarily reflected the impact of COVID-19 on both actual and
expected final payroll audits for policies written prior to the onset of the
pandemic in 2020. Renewal rate retention was 88% for 2021 nine-month period as
compared to 85% for the same period of 2020. The 2020 nine-month period renewal
retention was impacted by the reduction in premium funding for a large
alternative market program. Renewal rate decreased 2% during the 2021 nine-month
period as compared to 4% during the same period of 2020. New business written
decreased $5.2 million during the 2021 nine-month period as compared to the same
respective period of 2020, reflecting the competitive market conditions. New
business submissions in the 2021 nine-month period were 16% lower than the same
period of 2020.
We retained 100% of the eighteen (three in the third quarter) workers'
compensation alternative market programs that were up for renewal during the
nine months ended September 30, 2021.
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New business, audit premium, renewal retention and renewal price changes for our
traditional business and the alternative market business are shown in the table
below:
                                                                       

Three months ended September 30

                                                       2021                                                   2020
                                                  Alternative
                                    Traditional     Market          Segment               Traditional     Alternative Market    Segment
         ($ in millions)             Business      Business         Results                Business            Business         Results
New business                       $     3.5     $     0.8     $      4.3              $      6.2        $       1.2          $    7.4

Audit premium (excluding EBUB) $ (0.1) $ (0.1) $ (0.2)

            $     (0.8)       $      (0.3)         $   (1.1)
Retention rate (1)                        87  %         93  %          88  %                   84  %              90  %             86  %
Change in renewal pricing (2)              1  %         (2  %)          -  %                   (3  %)             (1  %)            (3  %)

                                                                       Nine Months Ended September 30
                                                       2021                                                   2020
                                                  Alternative
                                    Traditional     Market          Segment               Traditional     Alternative Market    Segment
         ($ in millions)             Business      Business         Results                Business            Business         Results
New business                       $    15.5     $     2.3     $     17.8              $     20.0        $       3.0          $   23.0

Audit premium (excluding EBUB) $ (2.3) $ 0.3 $ (2.0)

            $      0.5        $      (0.5)         $      -
Retention rate (1)                        87  %         90  %          88  %                   85  %              83  %             85  %
Change in renewal pricing (2)             (1  %)        (4  %)         (2  %)                  (4  %)             (4  %)            (4  %)

(1) We calculate our workplace injury retention rate as the annualized expiring renewal premium divided by all annualized expiring premiums
premium subject to renewal. Our retention rate can be affected by various factors including price or other competitive issues, policyholders
being acquired, or a decision not to renew based on our underwriting valuation.
(2) The pricing of our business includes an assessment of the underlying policy exposure and market conditions. We continue to build our
pricing on expected losses, as reflected in our historical loss data.

Ceded Premiums Written
Ceded premiums written were as follows:
                                              Three Months Ended September 30                                               Nine Months Ended September 30
     ($ in thousands)           2021                2020                      Change                         2021                 2020                       Change
Premiums ceded to SPCs     $     14,801          $ 15,057          $ (256)              (1.7  %)       $    49,409             $ 52,110          $ (2,701)              (5.2  %)
Premiums ceded to external
reinsurers                        3,290             3,154             136                4.3  %              9,476                9,610              (134)              (1.4  %)
Premiums ceded to
unaffiliated captive
insurer                              34                81             (47)             (58.0  %)             3,083                2,769               314               11.3  %
Change in return premium
estimate under external
reinsurance                         (55)              200            (255)            (127.5  %)              (550)                 247              (797)            (322.7  %)
Estimated revenue share
under external reinsurance         (178)             (254)             76              (29.9  %)            (1,021)                (659)             (362)              54.9  %
Total ceded premiums
written                    $     17,892          $ 18,238          $ (346)              (1.9  %)       $    60,397             $ 64,077          $ (3,680)              (5.7  %)


Premiums ceded to SPCs represent alternative market business that is ceded under
100% quota share reinsurance agreements to the SPCs in our Segregated Portfolio
Cell Reinsurance segment. Premiums ceded to unaffiliated captive insurer
represent alternative market business for one program that is ceded under a 100%
quota share reinsurance agreement. Alternative market premiums written decreased
for the 2021 three- and nine-month periods, which resulted in lower premium
ceded to SPCs. See further discussion on alternative market gross premiums
written in our Segment Operating Results - Segregated Portfolio Cell Reinsurance
section under the heading "Gross Premiums Written" that follows.
Under our external reinsurance agreement for traditional business, we retain the
first $0.5 million in risk insured by us and cede losses in excess of this
amount on each loss occurrence under our primary external reinsurance treaty,
subject to an AAD, equal to 3.5% of ceded earned premium for the treaty year
effective May 1, 2021. Per our reinsurance agreements, we cede premiums related
to our traditional business on an earned premium basis. The increase in premiums
ceded to external reinsurers during the 2021 three-month period primarily
reflected the increase in reinsurance rates effective May 1, 2021. The decrease
in
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premiums ceded to external reinsurers during the 2021 nine-month period
primarily reflected lower earned premium, partially offset by the increase in
reinsurance rates.
Changes in the return premium estimate reflected adjustments to our estimate of
expected future recovery of ceded premium based on the underlying loss
experience of our reinsurance contracts that include a provision for return
premium. We increased our estimate of return premium by $0.1 million and $0.6
million during the 2021 three- and nine-month periods as compared to a decrease
of $0.2 million during the same respective periods in 2020. The change in
estimated return premium for the 2021 three- and nine-month periods primarily
reflected favorable prior year loss development on previously reported reinsured
claims.
Our reinsurance program includes a revenue share agreement with our reinsurance
broker under which we participate and receive a percentage of the brokerage
revenue above an agreed upon minimum retention. The revenue share estimate is
based on premium ceded under the reinsurance contract.
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
                                                    Three Months Ended September 30                                   Nine Months Ended September 30
                                           2021                 2020                 Change                  2021                 2020                 Change
Ceded premiums ratio, as reported           31.8  %              32.3  %              (0.5   pts)             32.2  %              32.5  %              (0.3   pts)
Less the effect of:
Premiums ceded to SPCs (100%)               23.4  %              24.1  %              (0.7   pts)             24.6  %              24.5  %               0.1   pts
Retrospective premium adjustments              -  %                 -  %                 -   pts                 -  %               0.1  %              (0.1   pts)
Premiums ceded to unaffiliated
captive insurers (100%)                      1.6  %               1.4  %               0.2   pts               1.7  %               1.4  %               0.3   pts
Change in EBUB                                 -  %               0.1  %              (0.1   pts)                -  %               0.1  %              (0.1   pts)
Change in return premium estimate
under external reinsurance                  (0.1  %)              0.4  %              (0.5   pts)             (0.4  %)              0.1  %              (0.5   pts)
Estimated revenue share                     (0.4  %)             (0.6  %)              0.2   pts              (0.8  %)             (0.5  %)             (0.3   pts)
Assumed premiums earned (not ceded to
external reinsurers)                        (0.3  %)             (0.2  %)             (0.1   pts)             (0.2  %)             (0.2  %)                -   pts
Ceded premiums ratio (related to
external reinsurance), less the
effects of above                             7.6  %               7.1  %               0.5   pts               7.3  %               7.0  %               0.3   pts


The above table reflects traditional ceded premiums earned as a percent of
traditional gross premiums earned. As discussed above, we cede premiums in our
traditional business to external reinsurers on an earned premium basis. The
increase in the ceded premiums ratio for the three and nine months ended
September 30, 2021 as compared to the same respective periods in 2020 primarily
reflected an increase in reinsurance rates.
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned
premiums that we cede to SPCs in our Segregated Portfolio Cell Reinsurance
segment, external reinsurers (including changes related to the return premium
and revenue share estimates) and the unaffiliated captive insurer. Because
premiums are generally earned pro rata over the entire policy period,
fluctuations in premiums earned tend to lag those of premiums written. Our
workers' compensation policies are twelve month term policies, and premiums are
earned on a pro rata basis over the policy period. Net premiums earned also
include premium adjustments related to the audit of our insureds' payrolls,
changes in our EBUB estimate and premium adjustments related to
retrospectively-rated policies. Payroll audits are conducted subsequent to the
end of the policy period and any related premium adjustments processed are
recorded as fully earned in the current period. In addition, we record an
estimate for EBUB and evaluate the estimate on a quarterly basis.
Net premiums earned were as follows:
                                                 Three Months Ended September 30                            Nine Months Ended September 30
           ($ in thousands)                  2021          2020             Change                   2021          2020              Change
Gross premiums earned                   $     61,964    $ 62,807    $ (843)

(1.3%) $ 181,306 $ 191,849 $ (10,543) (5.5%)
Less: Ceded earned premiums

                   19,729      20,291      (562)       (2.8  %)           58,434       62,412       (3,978)       (6.4  %)
Net premiums earned                     $     42,235    $ 42,516    $ (281)       (0.7  %)       $  122,872    $ 129,437    $  (6,565)       (5.1  %)


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Net premiums earned were relatively unchanged during the three months ended
September 30, 2021 as compared to the same period in 2020, which primarily
reflected the pro rata effect of a reduction in net premiums written during the
preceding twelve months, partially offset by improvement in audit premium
results and the impact of the reduction in the EBUB estimate totaling $0.4
million in the prior year period. The decrease in net premiums earned during the
nine months ended September 30, 2021 as compared to the same period in 2020
primarily reflected the pro rata effect of a reduction in net premiums written
during the preceding twelve months and a decrease in audit premium, partially
offset by a decrease in negative premium adjustments under retrospectively-rated
policies and an increase in the revenue share and return premium estimates under
our reinsurance contract.
Losses and Loss Adjustment Expenses
We estimate our current accident year loss and loss adjustment expenses by
developing actual reported losses using historical loss development factors,
adjusted to reflect current and expected trends based on various internal
analyses and supplemental information. The following table summarizes calendar
year net loss ratios by separating losses between the current accident year and
all prior accident years. Calendar year and current accident year net loss
ratios by component were as follows:
                                                 Three Months Ended September 30                                  Nine Months Ended September 30
                                         2021                 2020                Change                 2021                 2020                 Change
Calendar year net loss ratio              74.3  %              62.2  %             12.1   pts             69.4  %              65.4  %              4.0 

points

Less impact of prior accident years
on the net loss ratio                     (3.5  %)             (4.7  %)             1.2   pts             (4.6  %)             (3.8  %)            (0.8 

points)

Current accident year net loss
ratio                                     77.8  %              66.9  %             10.9   pts             74.0  %              69.2  %              4.8   pts


During the third quarter of 2021, reported loss activity increased for the
current accident year in relation to prior years and management expectations
and, as a result, we increased our full-year 2021 accident year loss ratio to
74.0%, from 72.0% as of June 30, 2021. The higher claim activity is attributable
to the current pandemic conditions and the impact of workers returning to full
employment with the easing of pandemic-related restrictions in our operating
territories, including the impact of labor shortages on the existing workforce.
In addition, the increase in the current accident year net loss ratio for the
2021 nine-month period reflected the continuation of intense price competition
and the resulting renewal rate decreases as well as the effect of lower net
premiums earned driven by a reduction in audit premium and a reduction in our
EBUB estimate, as previously discussed. As a result of the COVID-19 pandemic,
legislative and regulatory bodies in certain states have changed or are
considering changes to compensability requirements and presumptions for certain
types of workers related to COVID-19 claims. Such changes could have an adverse
impact on the frequency and severity related to COVID-19 claims.
Calendar year incurred losses (excluding IBNR) in excess of our per occurrence
reinsurance retention, before consideration of the AAD (see previous discussion
under the heading "Ceded Premiums Written"), increased $3.9 million and $7.4
million for the three and nine months ended September 30, 2021, respectively, as
compared to the same periods of 2020. Current accident year ceded incurred
losses totaled $0.9 million and $3.9 million for the 2021 three- and nine-month
periods, respectively, as compared to $0.4 million for the 2020 nine-month
period. We retained calendar year incurred losses in excess of our per
occurrence retention totaling $1.4 million and $4.2 million for the three and
nine months ended September 30, 2021, respectively, which reflected losses
within the AAD.
We recognized net favorable prior year development related to our previously
established reserve of $1.5 million and $5.6 million for the three and nine
months ended September 30, 2021, respectively, as compared to $2.0 million and
$5.0 million for the same respective periods of 2020. The net favorable prior
year reserve development for the three and nine months ended September 30, 2021
and 2020 reflected overall favorable trends in claim closing patterns. Net
favorable development for the 2021 three and nine months ended was primarily
related to the 2017 accident year and prior and, to a lesser extent, the 2019
accident year. Net favorable development for the 2020 three-month period was
primarily related to the 2013 and 2015 accident years and accident years prior
to 2010. Net favorable development for the 2020 nine-month period was primarily
related to the 2013 through 2016 accident years and accident years prior to
2010.
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Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses include the amortization
of commissions, premium taxes and underwriting salaries, which are capitalized
and deferred over the related workers' compensation policy period, net of ceding
commissions earned. The capitalization of underwriting salaries can vary as they
are subject to the success rate of our contract acquisition efforts. These
expenses also include a management fee charged by our Corporate segment, which
represents intercompany charges pursuant to a management agreement, and the
amortization of intangible assets, primarily related to the acquisition of
Eastern by ProAssurance. The management fee is based on the extent to which
services are provided to the subsidiary and the amount of premium written by the
subsidiary.
Our Workers' Compensation Insurance segment underwriting, policy acquisition and
operating expenses were comprised as follows:
                                                Three Months Ended September 30                                                 Nine Months Ended September 30
     ($ in thousands)             2021                 2020                       Change                         2021                 2020                       Change
DPAC amortization          $     7,464              $  8,410          $   (946)            (11.2  %)       $    21,454             $ 23,547          $ (2,093)             (8.9  %)
Management fees                    485                   476                 9               1.9  %              1,461                1,505               (44)             (2.9  %)
Other underwriting and
operating expenses               8,611                 9,974            (1,363)            (13.7  %)            25,205               28,689            (3,484)            (12.1  %)
Policyholder dividend
expense                            329                   157               172             109.6  %                831                  779                52               6.7  %
SPC ceding commission
offset                          (3,368)               (4,034)              666             (16.5  %)           (10,432)             (11,916)            1,484             (12.5  %)
Total                      $    13,521              $ 14,983          $ (1,462)             (9.8  %)       $    38,519             $ 42,604          $ (4,085)             (9.6  %)


The decrease in DPAC amortization for the three and nine months ended
September 30, 2021 as compared to the same respective periods in 2020 primarily
reflected the decrease in net premiums earned, as previously discussed.
The decrease in other underwriting and operating expenses for the three and nine
months ended September 30, 2021 as compared to the same respective periods of
2020 primarily reflected a decrease in compensation-related costs driven by a
reduction in headcount as a result of the 2020 organizational restructuring, a
reduction in our allowance for expected credit losses and, for the 2021
nine-month period, a decrease in travel-related costs related to the COVID-19
pandemic, partially offset by an increase in expenses related to our policy
administration and claim system implementation project. Additionally, the
decrease in other underwriting and operating expenses for the three and nine
months ended September 30, 2021 as compared to the same respective periods of
2020 reflected the prior year effect of one-time costs of $0.9 million primarily
comprised of employee severance costs associated with the restructuring of our
workers' compensation business during the third quarter of 2020.
As previously discussed, alternative market premiums written by our Workers'
Compensation Insurance segment are 100% ceded, less a ceding commission, to
either the SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a
limited extent, an unaffiliated captive insurer. The ceding commission consists
of an amount for fronting fees, cell rental fees, commissions, premium taxes and
risk management fees. The fronting fees, commissions, premium taxes and risk
management fees are recorded as an offset to underwriting, policy acquisition
and operating expenses. Cell rental fees are recorded as a component of other
income and claims administration fees are recorded as ceded ULAE. The decrease
in SPC ceding commissions earned for the three and nine months ended
September 30, 2021 as compared to the same respective periods of 2020, primarily
reflected the decrease in alternative market ceded earned premium.
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Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
                                                       Three Months Ended September 30                                 Nine Months Ended September 30
                                              2021                2020                 Change                 2021                2020                 Change
Underwriting expense ratio, as reported        32.0  %             35.2  %              (3.2   pts)            31.3  %             32.9  %              (1.6   pts)
Less estimated ratio increase (decrease)
attributable to:
Impact of ceding commissions received
from SPCs                                       3.3  %              2.6  %               0.7   pts              3.1  %              3.1  %                 -   pts
Retrospective premium adjustment                  -  %                -  %                 -   pts              0.1  %              0.3  %              (0.2   pts)
Impact of audit premium                         0.1  %              0.7  %              (0.6   pts)             0.6  %              0.3  %               0.3   pts
Change in return premium estimate under
external reinsurance                              -  %                -  %                 -   pts             (0.1  %)               -  %              (0.1   pts)
Estimated revenue share                        (0.1  %)            (0.1  %)                -   pts             (0.2  %)            (0.1  %)             (0.1   pts)
Underwriting expense ratio, less listed
effects                                        28.7  %             32.0  %              (3.3   pts)            27.8  %             29.3  %              (1.5   pts)


Excluding the items noted in the table above, the expense ratio decreased for
the three and nine months ended September 30, 2021, primarily reflecting the
reduction in various operating expenses and the prior year effect of the
one-time costs during the third quarter of 2020, as discussed above, partially
offset by the decrease in net premiums earned.
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Segment Results - Segregated Portfolio Cell Reinsurance
The Segregated Portfolio Cell Reinsurance segment includes the results
(underwriting profit or loss, plus investment results, net of U.S. federal
income taxes) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC
operations, as discussed in Note 15 of the Notes to Condensed Consolidated
Financial Statements. SPCs are segregated pools of assets and liabilities that
provide an insurance facility for a defined set of risks. Assets of each SPC are
solely for the benefit of that individual cell and each SPC is solely
responsible for the liabilities of that individual cell. Assets of one SPC are
statutorily protected from the creditors of the others. Each SPC is owned, fully
or in part, by an agency, group or association and the results of the SPCs are
attributable to the participants of that cell. We participate to a varying
degree in the results of selected SPCs and, for the SPCs in which we
participate, our participation interest ranges from a low of 20% to a high of
85%. SPC results attributable to external cell participants are reported as an
SPC dividend (expense) income in our Segregated Portfolio Cell Reinsurance
segment. In addition, our Segregated Portfolio Cell Reinsurance segment includes
the investment results of the SPCs as the investments are solely for the benefit
of the cell participants and investment results attributable to external cell
participants are reflected in the SPC dividend (expense) income. As of
September 30, 2021, there were 27 (3 inactive) SPCs. The SPCs assume workers'
compensation insurance, healthcare professional liability insurance or a
combination of the two from our Workers' Compensation Insurance and Specialty
P&C segments. As of September 30, 2021, there were two SPCs that assumed both
workers' compensation insurance and healthcare professional liability insurance
and one SPC that assumed only healthcare professional liability insurance.
Segment results reflects our share of the underwriting and investment results of
the SPCs in which we participate, and included the following:
                                         Three Months Ended September 30                                 Nine Months Ended September 30
     ($ in thousands)            2021           2020                 Change                        2021           2020              Change
Net premiums written        $     13,260    $   14,011    $     (751)         (5.4  %)       $    49,656       $ 51,246    $ (1,590)        (3.1  %)

Net premiums earned         $     15,344    $   16,052    $     (708)         (4.4  %)       $    47,500       $ 49,780    $ (2,280)        (4.6  %)
Net investment income                193           273           (80)        (29.3  %)               620            832        (212)       (25.5  %)
Net realized gains (losses)          204         1,495        (1,291)        (86.4  %)             2,772            894       1,878        210.1  %
Other income                           -            12           (12)       (100.0  %)                 2            203        (201)       (99.0  %)
Net losses and loss
adjustment expenses               (8,693)       (6,858)       (1,835)         26.8  %            (26,560)       (23,890)     (2,670)        11.2  %
Underwriting, policy
acquisition and operating
expenses                          (4,758)       (5,036)          278          (5.5  %)           (15,078)       (15,474)        396         (2.6  %)
SPC U.S. federal income tax
expense (1)                         (431)         (871)          440         (50.5  %)            (1,291)        (1,573)        282        (17.9  %)
SPC net results                    1,859         5,067        (3,208)        (63.3  %)             7,965         10,772      (2,807)       (26.1  %)
SPC dividend (expense)
income (2)                        (1,320)       (3,854)        2,534         (65.7  %)            (5,926)        (7,988)      2,062        (25.8  %)
Segment results (3)         $        539    $    1,213    $     (674)        (55.6  %)       $     2,039       $  2,784    $   (745)       (26.8  %)

Net loss ratio                   56.7%          42.7%       14.0 pts                               55.9%          48.0%      7.9 pts
Underwriting expense ratio       31.0%          31.4%       (0.4 pts)                              31.7%          31.1%      0.6 pts
(1) Represents the provision for U.S. federal income taxes for SPCs at Inova Re, which have elected to be taxed as a U.S. corporation under Section
953(d) of the Internal Revenue Code. U.S. federal income taxes are included in the total SPC net results and are paid by the individual SPCs.
(2) Represents the net (profit) loss attributable to external cell participants.
(3) Represents our share of the net profit (loss) of the SPCs in which we participate.




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Premiums Written
Premiums in our Segregated Portfolio Cell Reinsurance segment are assumed from
either our Workers' Compensation Insurance or Specialty P&C segments. Premium
volume is driven by five primary factors: (1) the amount of new business
written, (2) retention of the existing book of business, (3) premium rates
charged on the renewal book of business and, for workers' compensation business,
(4) changes in payroll exposure and (5) audit premium.
Gross, ceded and net premiums written were as follows:
                                                 Three Months Ended September 30                                             Nine Months Ended September 30
       ($ in thousands)             2021                2020                     Change                        2021                 2020                      Change
Gross premiums written         $     15,244          $ 15,933          $ (689)            (4.3  %)       $    56,455             $ 58,068          $ (1,613)            (2.8  %)
Less: Ceded premiums written          1,984             1,922              62              3.2  %              6,799                6,822               (23)            (0.3  %)
Net premiums written           $     13,260          $ 14,011          $ (751)            (5.4  %)       $    49,656             $ 51,246          $ (1,590)            (3.1  %)


Gross Premiums Written
Gross premiums written reflected reinsurance premiums assumed by component as
follows:
                                              Three Months Ended September 30                                             Nine Months Ended September 30
     ($ in thousands)            2021                2020                     Change                        2021                 2020                   

Switch

Workers’ compensation $ 14,801 $ 15,057 $ (256)

           (1.7  %)       $    49,409             $ 52,110          $ (2,701)            (5.2  %)
Healthcare professional
liability                            443               876            (433)           (49.4  %)             7,046                5,958             1,088             18.3  %

Gross written premiums $ 15,244 $ 15,933 ($ 689)

           (4.3  %)       $    56,455             $ 58,068          $ (1,613)            (2.8  %)


Gross premiums written for the three and nine months ended September 30, 2021
and 2020 were primarily comprised of workers' compensation coverages assumed
from our Workers' Compensation Insurance segment. Workers' compensation gross
premiums written decreased during the three and nine months ended September 30,
2021 as compared to the same respective periods of 2020. The decrease in gross
premiums written for the 2021 three- and nine-month periods primarily reflected
the competitive workers' compensation market conditions and the resulting
renewal rate decreases of 2% and 4%, respectively, partially offset by an
improvement in the renewal retention rate. The renewal retention rate for the
nine months ended September 30, 2020 included the impact of a reduction in
premium funding for a large workers' compensation alternative market program. We
do not participate in this program; therefore, the reduction in premium funding
had no effect on the segment results for the nine months ended September 30,
2020. Healthcare professional liability gross premiums written decreased during
the three months ended September 30, 2021 as compared to the same period of 2020
driven by renewal retention losses. The increase in healthcare professional
liability gross premiums written during the nine months ended September 30, 2021
as compared to the same respective period of 2020 was driven by renewal pricing
increases, primarily due to increases in exposure for one program. We retained
100% of the seventeen (three in the third quarter) workers' compensation
programs and two healthcare professional liability programs up for renewal
during the nine months ended September 30, 2021.
New business, audit premium, retention and renewal price changes for the assumed
workers' compensation premium is shown in the table below:
                                             Three Months Ended September 30             Nine Months Ended September 30
             ($ in millions)                    2021                 2020                  2021                   2020
New business                               $      0.8           $      1.2           $       2.3             $      3.0
Audit premium (including EBUB)             $     (0.1)          $     (0.3)          $       0.3             $     (0.5)
Retention rate (1)                                 93  %                90  %                 90  %                  83  %
Change in renewal pricing (2)                      (2  %)               (1  %)                (4  %)                 (4  %)
(1) We calculate our workers' compensation retention rate as annualized expiring renewed premium divided by all annualized
expiring premium subject to renewal. Our retention rate can be impacted by various factors, including price or other
competitive issues, insureds being acquired, or a decision not to renew based on our underwriting evaluation.
(2) The pricing of our business includes an assessment of the underlying policy exposure and market conditions. We continue
to base our pricing on expected losses, as indicated by our historical loss data.


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Ceded Premiums Written
Ceded premiums written were as follows:
                                          Three Months Ended September 30                         Nine Months Ended September 30
        ($ in thousands)               2021          2020           Change                    2021         2020            Change
Ceded premiums written            $      1,984    $ 1,922    $    62        3.2  %       $     6,799    $ 6,822    $  (23)       (0.3  %)


For the workers' compensation business, each SPC has in place its own external
reinsurance arrangements. The healthcare professional liability business is
assumed net of reinsurance from our Specialty P&C segment; therefore, there are
no ceded premiums related to the healthcare professional liability business
reflected in the table above. The risk retention for each loss occurrence for
the workers' compensation business ranges from $0.3 million to $0.4 million
based on the program, with limits up to $119.7 million. In addition, each
program has aggregate reinsurance coverage between $1.1 million and $2.1 million
on a program year basis. Per the SPC external reinsurance agreements, premiums
are ceded on a written premium basis. The change in ceded premiums written
during the three and nine months ended September 30, 2021 as compared to the
same respective periods of 2020 primarily reflected the change in workers'
compensation gross premiums written and the impact of rate increases under the
external reinsurance contract. External reinsurance rates vary based on the
alternative market program.
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
                                                      Three Months Ended September 30                                      Nine Months Ended September 30
                                          2021                       2020                   Change               2021                   2020                  Change
Ceded premiums ratio                     13.4%                      12.8%                   0.6 pts              13.8%                  13.1%                 0.7 pts


The above table reflects ceded premiums as a percent of gross premiums written
for the workers' compensation business only; healthcare professional liability
business is assumed net of reinsurance, as discussed above. The ceded premiums
ratio reflects the weighted average reinsurance rates of all SPC programs. The
increase in the ceded premiums ratio for the three and nine months ended
September 30, 2021 primarily reflected an increase in reinsurance rates.
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned
premiums that the SPCs cede to external reinsurers. Because premiums are
generally earned pro rata over the entire policy period, fluctuations in
premiums earned tend to lag those of premiums written. Policies ceded to the
SPCs are twelve month term policies and premiums are earned on a pro rata basis
over the policy period. Net premiums earned also include premium adjustments
related to the audit of workers' compensation insureds' payrolls. Payroll audits
are conducted subsequent to the end of the policy period and any related
adjustments are recorded as fully earned in the current period.
Gross, ceded and net premiums earned were as follows:
                                                  Three Months Ended September 30                           Nine Months Ended September 30
            ($ in thousands)                  2021          2020            Change                     2021           2020             Change
Gross premiums earned                    $     17,495    $ 18,175    $ 

(680) (3.7%) $ 53,890 $ 56,277 ($ 2,387) (4.2

%)

Less: Ceded premiums earned                     2,151       2,123        28        1.3  %              6,390          6,497        (107)      (1.6  %)
Net premiums earned                      $     15,344    $ 16,052    $ (708)      (4.4  %)       $    47,500       $ 49,780    $ (2,280)      (4.6  %)


The decrease in net premiums earned during the three and nine months ended
September 30, 2021 primarily reflected the pro rata effect of a reduction in net
premiums written during the preceding twelve months.
Net Investment Income and Net Realized Investment Gains (Losses)
Net investment income for the three and nine months ended September 30, 2021 and
2020 was primarily attributable to interest earned on available-for-sale fixed
maturity investments, which primarily include investment-grade corporate debt
securities. We recognized $0.2 million and $2.8 million of net realized
investment gains during the three and nine months ended September 30, 2021,
respectively, as compared to $1.5 million and $0.9 million for the same
respective periods of 2020, which primarily reflected an increase in the fair
value of our equity portfolio.
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Losses and Loss Adjustment Expenses
The following table summarizes the calendar year net loss ratios by separating
losses between the current accident year and all prior accident years. The
current accident year net loss ratio reflected the aggregate loss ratio for all
programs. Loss reserves are estimated for each program on a quarterly basis. Due
to the size of some of the programs, quarterly loss results can create
volatility in the current accident year net loss ratio from period to period.
Calendar year and current accident year net loss ratios for the three and nine
months ended September 30, 2021 and 2020 were as follows:
                                                Three Months Ended September 30                                       Nine Months Ended September 30
                                      2021                   2020                   Change                   2021                  2020                  Change
Calendar year net loss ratio            56.7  %                42.7  %               14.0   pts                55.9  %               48.0  %               7.9   pts
Less impact of prior accident
years on the net loss ratio            (10.5  %)              (24.6  %)              14.1   pts               (10.4  %)             (15.3  %)              4.9   pts
Current accident year net loss
ratio                                   67.2  %                67.3  %               (0.1   pts)               66.3  %               63.3  %               3.0   pts


The current accident year net loss ratio was relatively unchanged for the three
months ended September 30, 2021 and increased for the nine months ended
September 30, 2021 as compared to the same periods of 2020. The increase in the
current accident year net loss ratio for the nine months ended September 30,
2021 primarily reflected the continuation of intense price competition and the
resulting renewal rate decreases in the workers' compensation business as well
as the impact of higher claim activity as workers return to full employment with
the easing of pandemic-related restrictions in our operating territories. The
impact of renewal rate decreases and increased claim activity was partially
offset by favorable trends in prior accident year claim results and their impact
on our analysis of the current accident year loss estimate. As a result of the
COVID-19 pandemic, legislative and regulatory bodies in certain states have
changed or are considering changes to compensability requirements and
presumptions for certain types of workers related to COVID-19 claims. Such
changes could have an adverse impact on the frequency and severity related to
COVID-19 claims.
Calendar year incurred losses (excluding IBNR) ceded to our external reinsurers
increased $1.0 million and $4.4 million for the 2021 for the three and nine
months ended September 30, 2021, respectively, as compared to the same
respective periods of 2020. Current accident year ceded incurred losses
(excluding IBNR) increased $5.2 million and $1.7 million for the 2021 three- and
nine-month periods, respectively, as compared to the same periods of 2020.
We recognized net favorable prior year reserve development of $1.6 million and
$4.9 million for the three and nine months ended September 30, 2021,
respectively, as compared to $4.0 million and $7.6 million for the same
respective periods of 2020. The net favorable prior year reserve development for
the three and nine months ended September 30, 2021 related entirely to workers'
compensation business, which reflected overall favorable trends in claim closing
patterns primarily in the 2019 accident year and prior and, to a lesser extent,
the 2020 accident year. The net favorable prior year reserve development for the
three and nine months ended September 30, 2020 included $4.0 million and $6.6
million related to the workers' compensation business, respectively, which
primarily reflected overall favorable claim trends in claim closing patterns in
the 2016 through 2018 accident years. In addition, net favorable prior year
reserve development for the nine months ended September 30, 2020 included $1.0
million related to the healthcare professional liability business.
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Contents
Underwriting, policy acquisition and operating costs
Underwriting, the policy of our separate portfolio cell reinsurance segment
acquisition and operating costs break down as follows:

                                               Three Months Ended September 30                                            Nine Months Ended September 30
      ($ in thousands)             2021               2020                    Change                         2021                  2020                     Change
DPAC amortization             $     4,526          $ 4,714          $ (188)            (4.0  %)       $    13,930               $ 14,787          $ (857)            (5.8  %)
Policyholder dividend expense          64               37              27             73.0  %                348                    106             242            228.3  %
Other underwriting and
operating expenses                    168              285            (117)           (41.1  %)               800                    581             219             37.7  %
Total                         $     4,758          $ 5,036          $ (278)            (5.5  %)       $    15,078               $ 15,474          $ (396)            (2.6  %)


DPAC amortization primarily represents ceding commissions, which vary by program
and are paid to our Workers' Compensation Insurance and Specialty P&C segments
for premiums assumed. Ceding commissions include an amount for fronting fees,
commissions, premium taxes and risk management fees, which are reported as an
offset to underwriting, policy acquisition and operating expenses within our
Workers' Compensation Insurance and Specialty P&C segments. In addition, ceding
commissions paid to our Workers' Compensation Insurance segment include cell
rental fees which are recorded as other income and claims administration fees
which are recorded as ceded ULAE within our Workers' Compensation Insurance
segment.
Other underwriting and operating expenses primarily include bank fees,
professional fees and changes in the allowance for expected credit losses. The
decrease in other underwriting and operating expenses for the three months ended
September 30, 2021 as compared to the same period of 2020 primarily reflected
the change in our allowance for expected credit losses and a decrease in
professional fees. The increase in other underwriting and operating expenses for
2021 nine-month period reflects the prior year effect of recoveries of premiums
receivables during the first quarter of 2020 that were previously written off,
which resulted in a reduction to our allowance for expected credit losses in
2020. Excluding the receivable recoveries, other underwriting and operating
expenses decreased for 2021 nine-month period as compared to the same respective
periods of 2020, which primarily reflected a decrease in professional fees.
The increase in policyholder dividend expense for the three and nine months
ended September 30, 2021 as compared to the same periods of 2020, related
primarily to one SPC program, in which we do not participate.
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
                                                     Three Months Ended September 30                                     Nine Months Ended September 30
                                         2021                      2020                   Change               2021                   2020                 Change
Underwriting expense ratio, as
reported                                 31.0%                     31.4%                 (0.4 pts)             31.7%                 31.1%                 0.6 pts
Less: impact of audit premium on
expense ratio                            0.2%                      0.6%                  (0.4 pts)            (0.1%)                  0.4%                (0.5 pts)

Underwriting expense ratio,
excluding the effect of audit
premium                                  30.8%                     30.8%                   - pts               31.8%                 30.7%                 1.1 pts


Excluding the effect of audit premium, the underwriting expense ratio was
unchanged for the 2021 three-month period and increased for the 2021 nine-month
period. The increase in the underwriting expense ratio for the 2021 nine-month
period primarily reflected the change in the allowance for expected credit
losses and policyholder dividend expense, as discussed above, as well as the
decrease in net premiums earned, partially offset by a decrease in the weighted
average ceding commission percentage of all SPC programs.
SPC U.S. Federal Income Tax Expense
The SPCs at Inova Re have made a 953(d) election under the U.S. Internal Revenue
Code and are subject to U.S. federal income tax. U.S. federal income taxes
incurred totaled $0.4 million and $1.3 million for the three and nine months
ended September 30, 2021, respectively, as compared to $0.9 million and $1.6
million for the same respective periods of 2020. U.S. federal income taxes are
included in the total SPC net results and are paid by the individual SPCs.
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Segment Results - Lloyd's Syndicates
Our Lloyd's Syndicates segment includes the results from our participation in
certain Syndicates at Lloyd's of London. In addition to our participation in
Syndicate results, we have investments in and other obligations to our Lloyd's
Syndicates consisting of a Syndicate Credit Agreement and FAL requirements. For
the 2021 underwriting year, our FAL was comprised of investment securities and
cash and cash equivalents deposited with Lloyd's which at September 30, 2021 had
a fair value of approximately $72.5 million, as discussed in Note 4 of the Notes
to Condensed Consolidated Financial Statements. During the second quarter of
2021, we received a return of approximately $24.5 million of cash and cash
equivalents from our FAL balances given the reduction in our participation in
the results of Syndicate 1729, to 5% from 29%, and Syndicate 6131, to 50% from
100%, for the 2021 underwriting year.
We normally report results from our involvement in Lloyd's Syndicates on a
quarter lag, except when information is available that is material to the
current period. Furthermore, the investment results associated with our FAL
investments and certain U.S. paid administrative expenses are reported
concurrently as that information is available on an earlier time frame.
Lloyd's Syndicate 1729. We provide capital to Syndicate 1729, which covers a
range of property and casualty insurance and reinsurance lines in both the U.S.
and international markets. The remaining capital for Syndicate 1729 is provided
by unrelated third parties, including private names and other corporate members.
As previously discussed, we decreased our participation in the results of
Syndicate 1729 for the 2021 underwriting year to 5% to support and grow our core
insurance operations. Due to the quarter lag, this reduced participation was not
reflected in our results until the second quarter of 2021. Syndicate 1729's
maximum underwriting capacity for the 2021 underwriting year is £185 million
(approximately $249 million based on September 30, 2021 exchange rates), of
which £9 million (approximately $12 million based on September 30, 2021 exchange
rates) is our allocated underwriting capacity.
Lloyd's Syndicate 6131. We provide capital to an SPA, Syndicate 6131, which
focuses on contingency and specialty property business, primarily for risks in
both U.S. and international markets. The remaining capital for Syndicate 6131 is
provided by an unrelated corporate member. As an SPA, Syndicate 6131 underwrites
on a quota share basis with Syndicate 1729. Effective July 1, 2020, Syndicate
6131 entered into a six-month quota share reinsurance agreement with an
unaffiliated insurer. Under this agreement, Syndicate 6131 ceded essentially
half of the premium assumed from Syndicate 1729 to the unaffiliated insurer; the
agreement was non-renewed on January 1, 2021 and we decreased our participation
in the results of Syndicate 6131 for the 2021 underwriting year to 50%, as
previously discussed. Due to the quarter lag, this reduced participation was not
reflected in our results until the second quarter of 2021. Syndicate 6131's
maximum underwriting capacity for the 2021 underwriting year is £20 million
(approximately $27 million based on September 30, 2021 exchange rates), of which
£10 million (approximately $14 million based on September 30, 2021 exchange
rates) is our allocated underwriting capacity.
In addition to the results of our participation in Lloyd's Syndicates, as
discussed above, our Lloyd's Syndicates segment also includes 100% of the
results of our wholly owned subsidiaries that support our operations at Lloyd's.
For the three and nine months ended September 30, 2021 and 2020, the results of
our Lloyd's Syndicates segment were as follows:
                                          Three Months Ended September 30                              Nine Months Ended September 30
      ($ in thousands)              2021           2020              Change                      2021          2020              Change

Net premiums written          $     8,445       $ 19,092    $ (10,647)      (55.8  %)       $   26,118      $ 59,269    $ (33,151)      (55.9  %)
Net premiums earned           $    10,953       $ 18,142    $  (7,189)      (39.6  %)       $   40,263      $ 61,186    $ (20,923)      (34.2  %)
Net investment income                 431            951         (520)      (54.7  %)            1,677         3,236       (1,559)      (48.2  %)
Net realized gains (losses)            35            489         (454)      (92.8  %)                9         1,100       (1,091)      (99.2  %)
Other income (loss)                   283            411         (128)      (31.1  %)              864           219          645       294.5  %
Net losses and loss
adjustment expenses                (6,846)        (9,317)       2,471       (26.5  %)          (25,257)      (39,432)      14,175       (35.9  %)
Underwriting, policy
acquisition and operating
expenses                           (3,909)        (6,938)       3,029       (43.7  %)          (15,219)      (23,373)       8,154       (34.9  %)
Income tax benefit (expense)            -              -            -              nm                -            29          (29)             nm
Segment results               $       947       $  3,738    $  (2,791)      (74.7  %)       $    2,337      $  2,965    $    (628)      (21.2  %)
Net loss ratio                      62.5%          51.4%      11.1 pts                           62.7%         64.4%     (1.7 pts)
Underwriting expense ratio          35.7%          38.2%     (2.5 pts)                           37.8%         38.2%     (0.4 pts)


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Premiums Written
Changes in premium volume within our Lloyd's Syndicates segment are driven by
five primary factors: (1) changes in our participation in the Syndicates, (2)
the amount of new business and the channels in which the business is written,
(3) the retention of existing business, (4) the premium charged for business
that is renewed, which is affected by rates charged and by the amount and type
of coverage an insured chooses to purchase, and (5) the timing of premium
written through multi-period policies.
Gross, ceded and net premiums written were as follows:
                                          Three Months Ended September 30                              Nine Months Ended September 30
      ($ in thousands)              2021           2020              Change                      2021          2020              Change

Gross premiums written $ 8,970 $ 23,862 ($ 14,892) (62.4%) $ 31,702 $ 72,441 ($ 40,739) (56.2%)
Less: Ceded written premiums 525

           4,770       (4,245)      (89.0  %)            5,584        13,172       (7,588)      (57.6  %)
Net premiums written          $    8,445        $ 19,092    $ (10,647)      (55.8  %)       $   26,118      $ 59,269    $ (33,151)      (55.9  %)


Gross Premiums Written
Gross premiums written during the nine months ended September 30, 2021 consisted
of property insurance coverages (29% of total gross premiums written), specialty
property coverages (29%), casualty coverages (27%), contingency coverages (8%),
catastrophe reinsurance coverages (6%) and property reinsurance coverages (1%).
The decrease in gross premiums written during the 2021 three- and nine-month
periods as compared to the same respective periods of 2020 was primarily driven
by our decreased participation in the results of Syndicates 1729 and 6131,
partially offset by volume increases on renewal business and renewal pricing
increases, primarily on property insurance and reinsurance coverages, and new
business written, primarily on property insurance and specialty property
coverages.
Ceded Premiums Written
Syndicate 1729 utilizes reinsurance to provide the capacity to write larger
limits of liability on individual risks, to provide protection against
catastrophic loss and to provide protection against losses in excess of policy
limits. As previously discussed, for the second half of 2020 Syndicate 6131
utilized external quota share reinsurance to manage the net loss exposure on the
specialty property and contingency coverages it assumed from Syndicate 1729 by
ceding essentially half of the premium assumed to an unaffiliated insurer; this
agreement was non-renewed on January 1, 2021. Due to the quarter lag, the effect
of this six-month reinsurance arrangement was not reflected in our results until
the fourth quarter of 2020. Ceded premiums written decreased for the three and
nine months ended September 30, 2021 as compared to the same respective periods
of 2020 primarily driven by our decreased participation in the results of
Syndicates 1729 and 6131. The decrease in ceded premiums written for the 2021
nine-month period was partially offset by the impact of premiums ceded under
Syndicate 6131's six-month quota share agreement.
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned
premiums that the Syndicates cede to reinsurers for their assumption of a
portion of losses. Premiums written through open-market channels are generally
earned pro rata over the entire policy period, which is predominantly twelve
months, whereas premiums written through delegated underwriting authority
arrangements are generally earned over the policy period plus twelve months.
Therefore, net premiums earned is affected by shifts in the mix of policies
written between the open-market and delegated underwriting authority
arrangements. Additionally, net premiums earned consists of a mix of policies
earned from different open underwriting years. As previously discussed, we
participate to a varying degree in each open underwriting year which may cause
fluctuations in premiums earned. Furthermore, fluctuations in premiums earned
tend to lag those of premiums written. Premiums for certain policies and assumed
reinsurance contracts are reported subsequent to the coverage period and/or may
be subject to adjustment based on loss experience. These premium adjustments are
earned when reported, which can result in further fluctuation in earned premium.
Gross, ceded and net premiums earned were as follows:
                                                       Three Months Ended September 30                                          Nine Months Ended September 30
          ($ in thousands)                  2021                 2020                    Change                     2021                2020                    Change
Gross premiums earned                $    13,262              $ 22,777          $ (9,515)      (41.8  %)       $   50,282            $ 77,309          $ (27,027)      (35.0  %)
Less: Ceded premiums earned                2,309                 4,635            (2,326)      (50.2  %)           10,019              16,123             (6,104)      (37.9  %)
Net premiums earned                  $    10,953              $ 18,142          $ (7,189)      (39.6  %)       $   40,263            $ 61,186          $ (20,923)      (34.2  %)


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The decrease in net premiums earned during the 2021 three- and nine-month
periods was primarily driven by our decreased participation in Syndicates 1729
and 6131.
Net Losses and Loss Adjustment Expenses
Losses for the period were primarily recorded using the loss assumptions by risk
category incorporated into the business plans submitted to Lloyd's for Syndicate
1729 and Syndicate 6131 with consideration given to loss experience incurred to
date. The assumptions used in each business plan were consistent with loss
results reflected in Lloyd's historical data for similar risks. The loss ratios
may fluctuate due to the mix of earned premium and the timing of earned premium
adjustments (see discussion in this section under the heading "Net Premiums
Earned"). Premium and exposure for some of Syndicate 1729's insurance policies
and reinsurance contracts are initially estimated and subsequently adjusted over
an extended period of time as underlying premium reports are received from
cedents and insureds. When reports are received, the premium, exposure and
corresponding loss estimates are revised accordingly. Changes in loss estimates
due to premium or exposure fluctuations are incurred in the accident year in
which the premium is earned.
The following table summarizes calendar year net loss ratios by separating
losses between the current accident year and all prior accident years. Net loss
ratios for the periods were as follows:
                                                                                         Net Loss Ratios
                                                   Three Months Ended September 30                               Nine Months Ended September 30
                                          2021               2020          
      Change                2021              2020                 Change
Calendar year net loss ratio              62.5  %             51.4  %              11.1   pts           62.7  %            64.4  %              (1.7  

points)

Less: impact of prior accident years
on the net loss ratio                     12.1  %            (14.5  %)             26.6   pts            8.2  %            (2.1  %)             10.3  

points

Current accident year net loss ratio      50.4  %             65.9  %             (15.5   pts)          54.5  %            66.5  %             (12.0  

points)

The decrease in the current accident year net loss ratios for the three and nine
months ended September 30, 2021 as compared to the same respective periods of
2020 was primarily driven by decreases to certain loss estimates during the
current period and, for the 2021 nine-month period, higher reinsurance
recoveries as a proportion of gross losses as compared to the prior year period.
We recognized $1.3 million and $3.3 million of unfavorable prior year
development for the three and nine months ended September 30, 2021,
respectively, as compared to favorable prior year development of $2.6 million
and $1.3 million for the same respective periods of 2020. The unfavorable
development recognized during the three and nine months ended September 30, 2021
was driven by higher than expected losses and development on certain large
claims, primarily catastrophe related losses.
We have exposures to potential COVID-19 claims through our participation in
Syndicates 1729 and 6131. During the nine months ended September 30, 2021, we
recognized losses related to COVID-19 of approximately $1.6 million, net of
reinsurance, as compared to $1.4 million and $2.9 million during three and nine
months ended September 30, 2020, respectively, primarily in Syndicate 6131's
contingency and Syndicate 1729's casualty books of business. In addition, we
decreased our net loss estimate related to COVID-19 by approximately $0.1
million during the three months ended September 30, 2021. Please see the
"Insurance Regulatory Matters" section in Part 1, Item 1 in our December 31,
2020 report on Form 10-K for additional information.
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses decreased by $3.0
million and $8.2 million for the 2021 three- and nine-month periods,
respectively, as compared to the same respective periods of 2020 and reflected
our decreased participation in Syndicate 1729 and Syndicate 6131.
The underwriting expense ratio decreased by 2.5 percentage points for the three
months ended September 30, 2021 and was relatively unchanged for the nine months
ended September 30, 2021 as compared to the same respective periods of 2020. The
decrease in the underwriting expense ratio in both the 2021 three- and
nine-month periods primarily reflected the impact of our reduced participation
in Syndicate 1729 and Syndicate 6131. Operating expenses incurred during the
2021 three-month period primarily were related to the 2021 underwriting year for
which our participation is 5% and 50% in Syndicate 1729 and Syndicate 6131,
respectively, whereas the net premiums earned during the same period also
includes premium from other open underwriting years to which we participate at a
higher degree.
Investments
Syndicate 1729's fixed maturity portfolio includes certain debt securities
classified as trading securities. Investment results associated with these fixed
maturity trading securities are reported on the same quarter lag. The decrease
in net investment income for the 2021 three- and nine-month periods as compared
to the same respective periods of 2020 was primarily attributable to lower
average investment balances and lower yields, primarily from investment-grade
corporate debt securities.
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The lower average investment balances for the 2021 three- and nine-month periods
were driven by the return of approximately $32.3 million of cash and cash
equivalents from our FAL balances during the third quarter of 2020 given the
reduction in our participation in the results of Syndicate 1729 for the 2020
underwriting year (see Note 6 of the Notes to Consolidated Financial Statements
in our December 31, 2020 report on Form 10-K). In addition, we received a return
of approximately $24.5 million of FAL during the second quarter of 2021, and we
expect to receive a return of approximately $8.0 million during the fourth
quarter of 2021 given the additional reduction in our participation in the
results of Syndicate 1729 for the 2021 underwriting year, as previously
discussed. Our lower FAL balances will continue to impact the segment's net
investment income in future periods.
Taxes
The results of this segment are subject to U.K. income tax law.
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Segment Results - Corporate
Our Corporate segment includes our investment operations, including the
investment operations of NORCAL since the date of acquisition and excludes those
reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates
segments, as well as interest expense and U.S. income taxes as discussed in Note
15 of the Notes to Condensed Consolidated Financial Statements. Our Corporate
segment also includes non-premium revenues generated outside of our insurance
entities and corporate expenses. Segment results for the three and nine months
ended September 30, 2021 exclude transaction-related costs and the associated
income tax benefit related to the NORCAL acquisition as we do not consider these
items in assessing the financial performance of the segment (Note 2 of the Notes
to Condensed Consolidated Financial Statements provides additional information
regarding this acquisition). Segment results for our Corporate segment were net
earnings of $22.8 million and $70.0 million for the three and nine months ended
September 30, 2021, respectively, as compared to $17.1 million and $48.9 million
for the same respective periods of 2020 and included the following:
                                           Three Months Ended September 30                               Nine Months Ended September 30
       ($ in thousands)               2021           2020              Change                     2021           2020              Change
Net investment income          $    18,654        $ 15,700    $  2,954     

18.8% $ 49,416 $ 51,809 ($ 2,393) (4.6%)
Equity in profits (losses) of
unconsolidated subsidiaries $ 15,244 $ 4,853 $ 10,391

214.1% $ 33,959 ($ 22,065) $ 56,024 253.9%
Net realized gains (losses) $ 291 $ 6,854 ($ 6,563)

 (95.8  %)       $   17,431      $  (1,844)   $ 19,275      1,045.3  %
Other income                   $     1,542        $    775    $    767        99.0  %        $    3,786      $   1,813    $  1,973        108.8  %
Operating expense              $     6,872        $  5,044    $  1,828        36.2  %        $   19,050      $  17,632    $  1,418          8.0  %
Interest expense               $     5,814        $  3,881    $  1,933     

49.8% $ 14,203 $ 11,725 ​​$ 2,478 21.1%
Income tax expense (benefit) $ 219 $ 2,141 $ (1,922)

(89.8%) $ 1,369 (48,592) $ 49,961 102.8%

Net Investment Income, Equity in Earnings (Loss) of Unconsolidated Subsidiaries,
Net Realized Investment Gains (Losses)
Net Investment Income
Net investment income is primarily derived from the income earned by our fixed
maturity securities and also includes dividend income from equity securities,
income from our short-term and cash equivalent investments, earnings from other
investments and increases in the cash surrender value of BOLI contracts, net of
investment fees and expenses. Net investment income for the three and nine
months ended September 30, 2021 also includes income earned, net of investment
fees and expenses, from investments acquired from NORCAL since the date of
acquisition.
Net investment income by investment category was as follows:
                                                 Three Months Ended September 30                                                Nine Months Ended September 30
      ($ in thousands)              2021                  2020                      Change                        2021                 2020                      Change
Fixed maturities             $    19,447               $ 15,731          $ 3,716             23.6  %        $    51,523             $ 49,037          $  2,486              5.1  %
Equities                             648                    706              (58)            (8.2  %)             1,790                3,598            (1,808)           (50.3  %)
Short-term investments,
including Other                      561                    297              264             88.9  %              1,440                1,995              (555)           (27.8  %)
BOLI                                 623                    655              (32)            (4.9  %)             1,752                1,568               184             11.7  %
Investment fees and expenses      (2,625)                (1,689)            (936)            55.4  %             (7,089)              (4,389)           (2,700)            61.5  %
Net investment income        $    18,654               $ 15,700          $ 2,954             18.8  %        $    49,416             $ 51,809          $ (2,393)            (4.6  %)


Fixed Maturities
Income from our fixed maturities increased during the 2021 three- and nine-month
periods as compared to the same periods of 2020 driven by higher average
investment balances primarily attributable to the addition of fixed maturity
securities valued at $1.1 billion to our portfolio on May 5, 2021 as a result of
the NORCAL acquisition (see Note 2 of the Notes to Condensed Consolidated
Financial Statements for additional information). The increase in income from
our fixed maturities during the 2021 three- and nine-month periods was partially
offset by lower yields from our corporate debt securities and, for the 2021
nine-month period, the impact of capital planning in anticipation of closing the
acquisition. As a result of the NORCAL acquisition, average investment balances
were approximately 72% and 44% higher for the 2021 three- and nine-month periods
as compared to the same respective periods of 2020; excluding the impact of the
acquisition, average investment balances were approximately 12% and 9% higher,
respectively.
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Average yields for our fixed maturity portfolio were as follows:
                                                  Three Months Ended September 30                           Nine Months Ended September 30
                                               2021                              2020                    2021                              2020
Average income yield                           2.2%                              3.0%                    2.2%                              3.1%
Average tax equivalent income yield            2.2%                              3.0%                    2.2%                              3.2%


Yields on fixed maturity securities decreased during the 2021 three- and
nine-month periods as compared to the same respective periods of 2020. The
decrease in the 2021 nine-month period was primarily driven by the application
of GAAP purchase accounting rules whereby all NORCAL fixed maturity securities
acquired were valued at fair value on the date of acquisition resulting in lower
average yields on those securities as compared to the average yields on our
other securities.
Equities
Income from our equity portfolio decreased during the 2021 three- and nine-month
periods as compared to the same respective periods of 2020 due to the
reallocation in our mix of securities within this asset category.
Short-term Investments and Other Investments
Short-term investments, which have a maturity at purchase of one year or less
are carried at fair value, which approximates their cost basis, and are
primarily composed of investments in U.S. treasury obligations, commercial paper
and money market funds. Income from our short-term and other investments
increased during the 2021 three-month period as compared to the same period of
2020 primarily due to income contributed by investments acquired from NORCAL.
The decrease in income from our short-term and other investments during the 2021
nine-month period as compared to the same period of 2020 was primarily
attributable to lower yields given the actions taken by the Federal Reserve to
aggressively reduce interest rates in response to COVID-19.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries was comprised as
follows:
                                                   Three Months Ended September 30                                                Nine Months Ended September 30
       ($ in thousands)               2021                  2020                     Change                        2021                 2020                      Change
All other investments,
primarily investment fund
LPs/LLCs                       $    18,835               $ 9,387          $  9,448            100.6  %        $   45,489            $  (6,093)         $ 51,582            846.6  %
Tax credit partnerships             (3,591)               (4,534)              943            (20.8  %)          (11,530)             (15,972)            4,442            (27.8  %)
Equity in earnings (loss) of
unconsolidated subsidiaries    $    15,244               $ 4,853          $ 10,391            214.1  %        $   33,959            $ (22,065)         $ 56,024            253.9  %


We hold interests in certain LPs/LLCs that generate earnings from trading
portfolios, secured debt, debt securities, multi-strategy funds and private
equity investments. The performance of the LPs/LLCs is affected by the
volatility of equity and credit markets. For our investments in LPs/LLCs, we
record our allocable portion of the partnership operating income or loss as the
results of the LPs/LLCs become available, typically following the end of a
reporting period. Our investment results from our portfolio of investments in
LPs/LLCs for the three and nine months ended September 30, 2021 included
additional earnings of approximately $0.4 million from acquired interests in
four LPs as a result of the NORCAL acquisition; given the results of our
investments in LPs/LLCs are often reported to us on a one quarter lag, these
investments were not captured in our results until the third quarter of 2021.
The increase in our investment results from our portfolio of investments in
LPs/LLCs for the 2021 three- and nine-month periods as compared to the same
respective periods of 2020 was due to higher earnings from several LPs/LLCs and,
for the 2021 nine-month period, the prior year effect of the volatility in
global financial markets related to COVID-19.
Our tax credit partnership investments are designed to generate returns in the
form of tax credits and tax-deductible project operating losses and are
comprised of qualified affordable housing project tax credit partnerships and a
historic tax credit partnership. We account for our tax credit partnership
investments under the equity method and record our allocable portion of the
operating losses of the underlying properties based on estimates provided by the
partnerships. For our qualified affordable housing project tax credit
partnerships, we adjust our estimates of our allocable portion of operating
losses periodically as actual operating results of the underlying properties
become available. The primary benefit of credits and losses from our historic
tax credit partnership are earned in a short period with potential for
additional cash flows extending over several years. The results from our tax
credit partnership investments for the three and nine months ended September 30,
2021 reflected lower partnership operating losses as compared to the same
respective periods of 2020. In addition, based on results received, we increased
our estimate of operating losses by $0.2 million and $1.7 million in the three
and nine months ended September 30, 2021, respectively, as compared to $0.8
million and $4.2 million for the same respective periods of 2020.
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The tax benefits received from our tax credit partnerships, which are not
reflected in our investment results, reduced our tax expense in 2021 and 2020 as
follows:
                                             Three Months Ended September 

30 Nine months ended September 30

               (In millions)                      2021               2020                 2021                 2020

Tax credits recognized during the period $ 3.1 $ 4.5

         $          9.9          $   13.4
Tax benefit of tax credit partnership
operating losses                             $       0.8          $    1.0  

$ 2.4 $ 3.4

The tax credits generated from our tax credit partnership investments of $3.1
million and $9.9 million for the three and nine months ended September 30, 2021,
respectively, were deferred for use in future periods due to the utilization of
NOLs available to us following our acquisition of NORCAL. For the three and nine
months ended September 30, 2020, due to our consolidated pre-tax loss in those
periods, the tax credits recognized were deferred to be utilized in future
periods. As of September 30, 2021, we had approximately $45.4 million of
available tax credit carryforwards generated from our investments in tax credit
partnerships.
Tax credits provided by the underlying projects of our historic tax credit
partnership are typically available in the tax year in which the project is put
into active service, whereas the tax credits provided by qualified affordable
housing project tax credit partnerships are provided over approximately a ten
year period.
Non-GAAP Financial Measure - Tax Equivalent Investment Result
We believe that to fully understand our investment returns it is important to
consider the current tax benefits associated with certain investments as the tax
benefit received represents a portion of the return provided by our tax-exempt
bonds, BOLI, common and preferred stocks, and tax credit partnership investments
(collectively, our tax-preferred investments). We impute a pro forma
tax-equivalent result by estimating the amount of fully-taxable income needed to
achieve the same after-tax result as is currently provided by our tax-preferred
investments. We believe this better reflects the economics behind our decision
to invest in certain asset classes that are either taxed at lower rates and/or
result in reductions to our current federal income tax expense. Our pro forma
tax-equivalent investment result is shown in the table that follows as well as a
reconciliation of our GAAP net investment result to our tax equivalent result.
                                                Three Months Ended 

September

                                                             30             

Nine months ended September 30

                (In thousands)                     2021              2020               2021              2020
GAAP net investment result:
Net investment income                          $  18,654          $ 15,700          $  49,416          $ 51,809
Equity in earnings (loss) of unconsolidated
subsidiaries                                      15,244             4,853             33,959           (22,065)
GAAP net investment result                     $  33,898          $ 20,553  

$ 83,375 $ 29,744

Tax-equivalent pro forma investment income $ 34,221 $ 20,872

$ 84,244 $ 30,705

Reconciliation of pro forma and GAAP
tax-equivalent investment result:
GAAP net investment result                     $  33,898          $ 20,553          $  83,375          $ 29,744
Taxable equivalent adjustments, calculated
using the 21% federal statutory tax rate
State and municipal bonds                            160               143                378               461
BOLI                                                 166               174                466               417
Dividends received                                    (3)                2                 25                83

Tax-equivalent pro forma investment income $ 34,221 $ 20,872

$ 84,244 $ 30,705

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Net Realized Investment Gains (Losses)
The following table provides detailed information regarding our net realized
investment gains (losses).
                                                         Three Months Ended September
                                                                      30                    Nine Months Ended September 30
                     (In thousands)                         2021              2020              2021              2020
Total impairment losses

Corporate debt                                           $      -          $     -          $       -          $ (1,745)

Portion of impairment losses recognized in other
comprehensive income before taxes:
Corporate debt                                                  -                -                  -               237
Net impairment losses recognized in earnings                    -                -                  -            (1,508)
Gross realized gains, available-for-sale fixed
maturities                                                  2,066            3,903             11,663            10,573
Gross realized (losses), available-for-sale fixed
maturities                                                   (254)            (395)              (756)           (2,264)
Net realized gains (losses), equity investments                (1)              (6)             5,274            10,627
Net realized gains (losses), other investments              1,699              530              6,192             2,442

Change in unrealized holding gains (losses), equity
investments

                                                  (699)           1,400             (3,257)          (21,772)

Change in unrealized, convertible holding gains (losses)
securities, recognized at fair value in connection with other
investments

                                                (2,456)           1,170             (2,117)             (190)
Other                                                         (64)             252                432               248
Net realized investment gains (losses)                   $    291          

$ 6,854 $ 17,431 ($ 1,844)

We did not recognize any credit-related impairment losses in earnings or
non-credit impairment losses in OCI for the three and nine months ended
September 30, 2021 or the three months ended September 30, 2020. For the nine
months ended September 30, 2020, we recognized credit-related impairment losses
in earnings of $1.5 million and a nominal amount of non-credit impairment losses
in OCI. The credit-related impairment losses recognized during the 2020
nine-month period related to corporate bonds in the energy and consumer sectors.
Additionally, the 2020 nine-month period included credit-related impairment
losses related to four corporate bonds in various sectors, which were sold
during 2020. The non-credit related impairment losses recognized during the 2020
nine-month period related to three corporate bonds in the energy and consumer
sectors.
We recognized $0.3 million and $17.4 million of net realized investment gains
during the 2021 three- and nine-month periods, respectively, which include
approximately $0.4 million of net realized investment losses during the 2021
three-month period and $1.7 million of net realized investment gains during the
2021 nine-month period related to investments acquired from NORCAL. Net realized
investment gains during the 2021 three- and nine-month periods were driven by
realized gains on the sale of certain available-for-sale fixed maturities and
other investments, which were partially offset by unrealized holding losses
resulting from changes in the fair value of our convertible securities. We
recognized $6.9 million of net realized investment gains during the 2020
three-month period, driven primarily by gains on our available-for-sale fixed
maturities due to the sale of corporate bonds and, to a lesser extent,
unrealized holding gains resulting from an increase in the fair value of our
equity portfolio and convertible securities. We recognized $1.8 million of net
realized investment losses during the 2020 nine-month period driven by changes
in the fair value of our equity portfolio and convertible securities due to the
volatility in the global financial markets related to COVID-19 during 2020,
which were partially offset by realized gains on the sale of available-for-sale
fixed maturities and equity investments.
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Operating Expenses
Corporate segment operating expenses were comprised as follows:
                                                  Three Months Ended September 30                                             Nine Months Ended September 30
        ($ in thousands)              2021               2020                     Change                        2021                 2020                      Change
Operating expenses               $     9,675          $ 9,196          $   479              5.2  %        $    26,542             $ 28,994          $ (2,452)            (8.5  %)
Management fee offset                 (2,803)          (4,152)           1,349            (32.5  %)            (7,492)             (11,362)            3,870            (34.1  %)
Total                            $     6,872          $ 5,044          $ 1,828             36.2  %        $    19,050             $ 17,632          $  1,418              8.0  %


Operating expenses increased $0.5 million during the 2021 three-month period and
decreased $2.5 million during the 2021 nine-month period as compared to the same
respective periods of 2020. The increase during the 2021 three-month period was
driven by higher amounts accrued for performance-related incentive plans due to
our improved performance metrics, partially offset by a decrease in professional
fees and the effect of $0.5 million of one-time expenses incurred during the
prior year period. One-time expenses during the 2020 three-month period were
primarily comprised of employee severance and early retirement benefits granted
to certain employees. The decrease in operating expenses during the 2021
nine-month period was primarily attributable to a decrease in professional fees
and, to a lesser extent, a decrease in compensation-related costs. The decrease
in professional fees during the 2021 three- and nine-month periods was driven by
a decrease in corporate legal expenses. The decrease in compensation-related
costs during the 2021 nine-month period was primarily attributable to lower
salaries due to a reduction in headcount as a result of the 2020 organizational
restructuring, largely offset by higher amounts accrued for performance-related
incentive plans, as previously discussed.
Operating subsidiaries within our Specialty P&C segment (excluding the acquired
operating subsidiaries of NORCAL) and our Workers' Compensation Insurance
segment are charged a management fee by the Corporate segment for services
provided to these subsidiaries. The management fee is based on the extent to
which services are provided to the subsidiary and the amount of premium written
by the subsidiary. Under the arrangement, the expenses associated with such
services are reported as expenses of the Corporate segment, and the management
fees charged are reported as an offset to Corporate operating expenses.
Fluctuations in the amount of premium written by each subsidiary can result in
corresponding variations in the management fee charged to each subsidiary during
a particular period. Due to organizational structure enhancements in our
Specialty P&C segment during 2020, the extent to which services are provided by
the Corporate segment to the operating subsidiaries within that segment
decreased effective January 1, 2021. Accordingly, we reduced the fee charged to
the operating subsidiaries within the Specialty P&C segment during the 2021
three- and nine-month periods. There were no changes to the extent to which
services are provided by the Corporate segment to the operating subsidiaries
within our Workers' Compensation Insurance segment in 2021.
Interest Expense
Consolidated interest expense for the three and nine months ended September 30,
2021 and 2020 was comprised as follows:
                                                  Three Months Ended September 30                                              Nine Months Ended September 30
       ($ in thousands)              2021               2020                     Change                          2021                 2020                       Change
Senior Notes due 2023           $     3,357          $ 3,357          $     -                 -  %        $    10,071              $ 10,071          $     -                  -  %
Contribution Certificates
(including accretion)*                1,962                -            1,962                    nm             3,090                     -            3,090                     nm
Revolving Credit Agreement
(including fees and
amortization)                           364              312               52              16.7  %                870                   579              291               50.3  %
Mortgage Loans (including
amortization)                            79              166              (87)            (52.4  %)               444                   657             (213)             (32.4  %)
(Gain)/loss on interest rate
cap                                      52               46                6              13.0  %               (272)                  418             (690)            (165.1  %)
Interest expense                $     5,814          $ 3,881          $ 1,933              49.8  %        $    14,203              $ 11,725          $ 2,478               21.1  %


* Includes accretion of approximately $0.6 million and $0.8 million for the
three and nine months ended September 30, 2021, respectively, which is recorded
as an increase to interest expense as a result of the difference between the
recorded acquisition date fair value and the principal balance of the
Contribution Certificates associated with our acquisition of NORCAL.
Consolidated interest expense increased during the three and nine months ended
September 30, 2021 as compared to the same respective periods of 2020 driven by
the addition of interest expense on the Contribution Certificates associated
with our acquisition of NORCAL (See Note 2 and Note 11 of the Notes to Condensed
Consolidated Financial Statements) and, to a lesser extent, an increase in the
borrowings on our Revolving Credit Agreement. During the third quarter of 2021,
we repaid the balance outstanding on the Revolving Credit Agreement of $15.0
million and there were no outstanding borrowings on this agreement during the
2020 three- and nine-month periods; interest expense in both the 2021 and 2020
three- and nine-month
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periods primarily reflected unused commitment fees. The increase in consolidated
interest expense for the 2021 three- and nine-month periods was partially offset
by lower interest expense on our Mortgage Loans. In June 2021 and July 2021, we
repaid the balance outstanding on our Mortgage Loans of $15.6 million and $19.7
million, respectively. Interest expense on the Mortgage Loans during the three
and nine months ended September 30, 2021 included the write-off of the related
unamortized debt issuance costs which were nominal in amount. In addition,
consolidated interest expense during the 2021 three- and nine-month periods was
impacted by the change in the fair value of our interest rate cap.
See further discussion of our outstanding debt in Note 11 of the Notes to
Condensed Consolidated Financial Statements and further discussion of our
interest rate cap agreement in Note 11 of the Notes to Consolidated Financial
Statements in our December 31, 2020 report on Form 10-K.
Taxes
Tax expense allocated to our Corporate segment includes U.S. tax only, which
would include U.S. tax expense incurred from our corporate membership in Lloyd's
of London. The U.K. tax expense incurred by the U.K. based subsidiaries of our
Lloyd's Syndicates segment is allocated to that segment. The SPCs at Inova Re,
one of our Cayman Islands reinsurance subsidiaries, have each made a 953(d)
election under the U.S. Internal Revenue Code and are subject to U.S. federal
income tax; therefore, tax expense allocated to our Corporate segment also
includes tax expense incurred from any SPC at Inova Re in which we have a
participation interest of 80% or greater as those SPCs are required to be
included in our consolidated tax return. Consolidated tax expense (benefit)
reflects the tax expense (benefit) of both segments and the tax impact of items
excluded from segment reporting, as shown in the table below:
                                                          Three Months Ended                   Nine Months Ended
                                                             September 30                         September 30
                   (In thousands)                       2021              2020              2021               2020
Corporate segment income tax expense (benefit)       $    219          $  2,141          $  1,369          $ (48,592)
Lloyd's Syndicates segment income tax expense
(benefit)                                                   -                 -                 -                (29)

Income tax expense (profit) – related to the transaction
costs*

                                                   (489)                -            (4,501)                 -
Consolidated income tax expense (benefit)            $   (270)         $  2,141          $ (3,132)         $ (48,621)
*Represents the income tax benefit associated with the transaction-related costs related to our acquisition of NORCAL
that are not included in a segment as we do not consider these costs in assessing the financial performance of any of
our operating or reportable segments. See Note 15 of the Notes to Condensed Consolidated Financial Statements for a
reconciliation of our segment results to our consolidated results.


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Listed below are the primary factors affecting our consolidated effective tax
rate for the three and nine months ended September 30, 2021 and 2020. The
comparability of each factor's impact on our effective tax rate is affected by
the consolidated pre-tax income recognized during the three and nine months
ended September 30, 2021 as compared to the consolidated pre-tax loss recognized
during the same respective periods of 2020. Factors that have the same
directional impact on income tax expense in each period have an opposite impact
on our effective tax rate due to the effective tax rate being calculated based
upon a pre-tax income during the three and nine months ended September 30, 2021
versus the pre-tax loss during the same respective periods of 2020. These
factors include the following:
                                                                    Three Months Ended September 30
                                                                                  2021                                       2020
                                                                    Income tax                                 Income tax
                                                                     (benefit)                                  (benefit)
                  ($ in thousands)                                    expense         Rate Impact                expense         Rate Impact
Computed "expected" tax expense (benefit) at
statutory rate                                                    $      2,505                21.0  %        $    (31,046)               21.0  %
Tax-exempt income (1)                                                     (418)               (3.5  %)               (252)                0.1  %
Tax credits                                                             (3,126)              (26.2  %)             (4,472)                3.0  %
Non-U.S. operating results                                                (199)               (1.7  %)               (785)                0.6  %

Tax rate differential on loss carryback                                      -                   -  %               2,848                (1.9  %)
Goodwill impairment (2)                                                      -                   -  %              31,413               (21.3  %)

Estimated annual tax rate differential (3)                                   -                   -  %               4,171                (2.9  %)

Other                                                                      968                 8.1  %                 264                   -  %
Total income tax expense (benefit)                                $       (270)               (2.3  %)       $      2,141                (1.4  %)

                                                                                          Nine Months Ended September 30
                                                                                  2021                                       2020
                                                                    Income tax                                 Income tax
                                                                     (benefit)                                  (benefit)
                  ($ in thousands)                                    expense         Rate Impact                expense         Rate Impact
Computed "expected" tax expense (benefit) at
statutory rate                                                    $     22,859                21.0  %        $      (50,117)             21.0  %
Tax-exempt income (1)                                                     (895)               (0.8  %)                 (759)              0.3  %
Tax credits                                                             (9,880)               (9.1  %)              (13,415)              5.6  %
Non-U.S. operating results                                                (491)               (0.4  %)                 (622)              0.2  %

Tax rate differential on loss carryback                                      -                   -  %                (6,482)              2.7  %
Goodwill impairment (2)                                                      -                   -  %                 31,413            (13.2  %)

Estimated annual tax rate differential (3)                                   -                   -  %                (9,984)              4.2  %

Non-taxable gain on bargain purchase (4)                               (15,626)              (14.4  %)                     -                -  %
Other                                                                      901                 0.8  %                  1,345             (0.4  %)
Total income tax expense (benefit)                                $     (3,132)               (2.9  %)       $    (48,621)               20.4  %


(1) Includes tax-exempt interest, dividends received deduction and change in
cash surrender value of BOLI.
(2) Represents the tax impact of the impairment of non-deductible goodwill in
relation to the Specialty P&C reporting unit during the third quarter of 2020
(see further discussion on the impairment charge under the heading "Goodwill /
Intangibles" in the Critical Accounting Estimates section and in Note 7 of the
Notes to Condensed Consolidated Financial Statements).
(3) Represents the tax rate differential between our actual effective tax rate
for the three and nine months ended September 30, 2020 and our projected annual
effective tax rate as of September 30, 2020 as calculated under the estimated
annual effective tax rate method. There was no tax rate differential recorded
for the three and nine months ended September 30, 2021 as we utilized the
discrete effective tax rate method at September 30, 2021 (see further discussion
on these methods in the Critical Accounting Estimates section under the heading
"Estimation of Taxes/Tax Credits").
(4) Represents the tax impact of the non-taxable gain on bargain purchase as a
result of our acquisition of NORCAL on May 5, 2021. See further discussion on
the gain on bargain purchase in Note 2 of the Notes to Condensed Consolidated
Financial Statements.
For the three and nine months ended September 30, 2021, we utilized the discrete
effective tax rate method for recording the provision (benefit) for income taxes
which treats the income tax expense (benefit) for the period as if it were the
income tax expense (benefit) for the full year and determines the income tax
expense (benefit) on that basis (see further discussion on this method in the
Critical Accounting Estimates section under the heading "Estimation of Taxes/Tax
Credits"). For the three and nine months ended September 30, 2020, the provision
(benefit) for income taxes and the effective tax rate were determined utilizing
the estimated annual effective tax rate method which is based upon our current
estimate of our annual effective tax rate at the end of each quarterly reporting
period (the projected annual effective tax rate) plus the impact of certain
discrete items
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that are not included in the projected annual effective tax rate. Our effective
tax rate for the 2021 nine-month period was different from the statutory federal
income tax rate of 21% primarily due the gain on bargain purchase of $74.4
million related to the NORCAL acquisition, all of which was non-taxable.
Additionally, our effective tax rates for both the 2021 and 2020 three- and
nine-month periods include the benefit recognized from the tax credits
transferred to us from our tax credit partnership investments. Tax credits
recognized during the three and nine months ended September 30, 2021 were $3.1
million and $9.9 million, respectively, as compared to $4.5 million and $13.4
million for the same respective periods of 2020. While projected tax credits for
2021 are less than 2020, they continue to have a significant impact on the
effective tax rate for the 2021 three- and nine-month periods. For the 2020
three- and nine-month periods, our effective tax rate was also affected by the
additional statutory tax rate differential of 14% on the carryback of our 2019
NOL to the 2014 tax year as a result of changes made by the CARES Act to the NOL
provisions of the tax law.
Our effective tax rate for the 2020 nine-month period, as shown in the table
above, differed from our projected annual effective tax rate of 59.3% due to
certain discrete items. These discrete items decreased our effective tax rate by
38.9% for the 2020 nine-month period. For the 2020 nine-month period, our
pre-tax loss included a $161.1 million goodwill impairment recognized in
relation to the Specialty P&C reporting unit during the third quarter of 2020
which was the most significant discrete item that impacted our effective tax
rate. Of the $161.1 million goodwill impairment, $149.6 million was
non-deductible for which no tax benefit was recognized while the remaining $11.5
million was deductible for which a 21% tax benefit was recognized. Consequently,
the total impact of the goodwill impairment on the effective rate for the 2020
nine-month period was approximately 38.7%. See further discussion on this
goodwill impairment in Note 7 of the Notes to Condensed Consolidated Financial
Statements. The remaining discrete items that affected our effective tax rate
for the 2020 nine-month period were comprised of individually insignificant
components.
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