PRA 10-K Annual Report Dec. 31, 2018

PRA 10-K Fiscal year ended Dec. 31, 2018

Exhibits

Exhibits

PROASSURANCE CORP

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10-K 1 pra-20181231x10k.htm 10-K Document

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United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

(Mark One)



ý	Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required]

for the fiscal year ended December 31, 2018 ,



¨	Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required]

for the transition period from to .

Commission file number: 001-16533

ProAssurance Corporation

(Exact name of registrant as specified in its charter)



Delaware		63-1261433
(State of incorporation or organization)		(I.R.S. Employer Identification No.)

100 Brookwood Place, Birmingham, AL		35209
(Address of principal executive offices)		(Zip Code)

(205) 877-4400

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class		Name of Each Exchange On Which Registered
Common Stock, par value $0.01 per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý

The aggregate market value of voting stock held by non-affiliates of the registrant at June 30, 2018 was $1,865,211,215 .

As of February 15, 2019 , the registrant had outstanding approximately 53,640,178 shares of its common stock.

Documents incorporated by reference in this Form 10-K


(i)	The definitive proxy statement for the 2019 Annual Meeting of the Stockholders of ProAssurance Corporation (File No. 001-16533) is incorporated by reference into Part III of this report.

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Glossary of Terms and Acronyms

When the following terms and acronyms appear in the text of this report, they have the meanings indicated below.



Term	Meaning
ACA	The Affordable Care Act
ALAE	Allocated loss adjustment expense
AOCI	Accumulated other comprehensive income (loss)
ASU	Accounting Standards Update
BEAT	Base erosion anti-abuse tax
Board	Board of Directors of ProAssurance Corporation
BOLI	Business owned life insurance
CIMA	Cayman Islands Monetary Authority
Council of Lloyd's	The governing body for Lloyd's of London
CODM	Chief Operating Decision Maker
COSO	Committee of Sponsoring Organizations of the Treadway Commission
Commutation	An agreement between a ceding insurer and the reinsurer that provides for the valuation, payment, and complete discharge of all obligations between the parties under a particular reinsurance contract
DDR	Death, disability and retirement
Dodd-Frank Act	The Dodd-Frank Wall Street Reform and Consumer Protection Act
DPAC	Deferred policy acquisition costs
Eastern Re	Eastern Re, LTD, S.P.C.
EBUB	Earned but unbilled premium
EEA	European Economic Area
ERM	Enterprise Risk Management
FAL	Funds at Lloyd's
FASB	Financial Accounting Standards Board
FHLB	Federal Home Loan Bank
FHLMC	Federal Home Loan Mortgage Corporation
FIO	Federal Insurance Office
FNMA	Federal National Mortgage Association
GAAP	Generally accepted accounting principles in the United States of America
GDPR	General Data Protection Regulation
GILTI	Global intangible low-taxed income
GNMA	Government National Mortgage Association
HCPL	Healthcare professional liability
IBNR	Incurred but not reported
Inova Re	Inova Re, LTD, S.P.C.
IRS	Internal Revenue Service
LAE	Loss adjustment expense
LIBOR	London Interbank Offered Rate
LLC	Limited liability company
Lloyd's	Lloyd's of London market
LP	Limited partnership
LPT	Loss portfolio transfer
Medical technology liability	Medical technology and life sciences products liability
Model Holding Co. Law	Model Insurance and Holding Company System Regulatory Act and Regulation

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Term	Meaning
NAIC	National Association of Insurance Commissioners
NAV	Net asset value
NFIP	National Flood Insurance Program
NOL	Net operating loss
NRSRO	Nationally recognized statistical rating organization
NYDFS	New York Department of Financial Services
NYSE	New York Stock Exchange
OCI	Other comprehensive income (loss)
ORSA	Risk Management and Own Risk and Solvency Assessment Model Act
OTTI	Other-than-temporary impairment
PCAOB	Public Company Accounting Oversight Board
PICA	Podiatry Insurance Company of America
ProAssurance Plan	Non-qualified deferred compensation plan
ProAssurance Savings Plan	Defined contribution savings and retirement plan
Revolving Credit Agreement	ProAssurance's $250 million revolving credit agreement
ROE	Return on equity
SAB	Staff Accounting Bulletin, which reflects the SEC staff's views regarding accounting-related disclosure practices
SAP	Statutory accounting principles
SEC	Securities and Exchange Commission
SPA	Special Purpose Arrangement
SPC	Segregated portfolio cell
Specialty P&C	Specialty Property and Casualty
Syndicate 1729	Lloyd's of London Syndicate 1729
Syndicate 6131	Lloyd's of London Syndicate 6131, a Special Purpose Arrangement with Lloyd's of London Syndicate 1729
Syndicate Credit Agreement	Unconditional revolving credit agreement with the Premium Trust Fund of Syndicate 1729
TCJA	Tax Cuts and Jobs Act H.R.1 of 2017
TRIA	Federal Terrorism Risk Insurance Act
U.K.	United Kingdom of Great Britain and Northern Ireland
ULAE	Unallocated loss adjustment expense
VIE	Variable interest entity

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	TABLE OF CONTENTS

PART I
Item 1.	Business	8
Item 1A.	Risk Factors	19
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosures	33

PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	34
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	130
Item 8.	Financial Statements and Supplementary Data	133
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	133
Item 9A.	Controls and Procedures	133
Item 9B.	Other Information	133

PART III
Item 10.	Directors, Executive Officers and Corporate Governance of the Registrant	135
Item 11.	Executive Compensation	135
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	135
Item 13.	Certain Relationships and Related Transactions, and Director Independence	135
Item 14.	Principal Accountant Fees and Services	135

PART IV
Item 15.	Exhibits and Financial Statement Schedules	136

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General Information

Throughout this report, references to ProAssurance, “we,” “us,” “our” or the "Company" refer to ProAssurance Corporation and its consolidated subsidiaries. Because ProAssurance is an insurance holding company and certain terms and phrases common to the insurance industry are used in this report that carry special and specific meanings, we encourage you to read the Glossary of Selected Insurance and Related Financial Terms posted on our website on the Investor Relations page under Other Information (www.proassurance.com/glossary).

Caution Regarding Forward-Looking Statements

Any statements in this Form 10-K that are not historical facts are specifically identified as forward-looking statements. These statements are based upon our estimates and anticipation of future events and are subject to significant risks, assumptions and uncertainties that could cause actual results to vary materially from the expected results described in the forward-looking statements. Forward-looking statements are identified by words such as, but not limited to, "anticipate," "believe," "estimate," "expect," "hope," "hopeful," "intend," "likely," "may," "optimistic," "possible," "potential," "preliminary," "project," "should," "will" and other analogous expressions. There are numerous factors that could cause our actual results to differ materially from those in the forward-looking statements. Thus, sentences and phrases that we use to convey our view of future events and trends are expressly designated as forward-looking statements as are sections of this Form 10-K that are identified as giving our outlook on future business.

Forward-looking statements relating to our business include among other things: statements concerning future liquidity and capital requirements, investment valuation and performance, return on equity, financial ratios, net income, premiums, losses and loss reserve, premium rates and retention of current business, competition and market conditions, the expansion of product lines, the development or acquisition of business in new geographical areas, the availability of acceptable reinsurance, actions by regulators and rating agencies, court actions, legislative actions, payment or performance of obligations under indebtedness, payment of dividends and other matters.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following factors that could affect the actual outcome of future events:



Ÿ	changes in general economic conditions, including the impact of inflation or deflation and unemployment;
Ÿ	our ability to maintain our dividend payments;
Ÿ	regulatory, legislative and judicial actions or decisions that could affect our business plans or operations, including the impact of Brexit;
Ÿ	the enactment or repeal of tort reforms;
Ÿ	formation or dissolution of state-sponsored insurance entities providing coverages now offered by ProAssurance which could remove or add sizable numbers of insureds from or to the private insurance market;
Ÿ	changes in the interest and tax rate environment;
Ÿ	resolution of uncertain tax matters and changes in tax laws, including the impact of the TCJA;
Ÿ	changes in laws or government regulations regarding financial markets or market activity that may affect our business;
Ÿ	changes in the ability of the U.S. government to meet its obligations that may affect the U.S. economy and our business;
Ÿ	performance of financial markets affecting the fair value of our investments or making it difficult to determine the value of our investments;
Ÿ	changes in requirements or accounting policies and practices that may be adopted by our regulatory agencies, the FASB, the SEC, the PCAOB or the NYSE that may affect our business;
Ÿ	changes in laws or government regulations affecting the financial services industry, the property and casualty insurance industry or particular insurance lines underwritten by our subsidiaries;
Ÿ	the effect on our insureds, particularly the insurance needs of our insureds, and our loss costs, of changes in the healthcare delivery system and/or changes in the U.S. political climate that may affect healthcare policy or our business;
Ÿ	consolidation of our insureds into or under larger entities which may be insured by competitors, or may not have a risk profile that meets our underwriting criteria or which may not use external providers for insuring or otherwise managing substantial portions of their liability risk;
Ÿ	uncertainties inherent in the estimate of our loss and loss adjustment expense reserve and reinsurance recoverable;
Ÿ	changes in the availability, cost, quality or collectability of insurance/reinsurance;

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Ÿ	the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;
Ÿ	effects on our claims costs from mass tort litigation that are different from that anticipated by us;
Ÿ	allegations of bad faith which may arise from our handling of any particular claim, including failure to settle;
Ÿ	loss or consolidation of independent agents, agencies, brokers or brokerage firms;
Ÿ	changes in our organization, compensation and benefit plans;
Ÿ	changes in the business or competitive environment may limit the effectiveness of our business strategy and impact our revenues;
Ÿ	our ability to retain and recruit senior management;
Ÿ	the availability, integrity and security of our technology infrastructure or that of our third-party providers of technology infrastructure, including any susceptibility to cyber-attacks which might result in a loss of information or operating capability;
Ÿ	the impact of a catastrophic event, as it relates to both our operations and our insured risks;
Ÿ	the impact of acts of terrorism and acts of war;
Ÿ	the effects of terrorism-related insurance legislation and laws;
Ÿ	guaranty funds and other state assessments;
Ÿ	our ability to achieve continued growth through expansion into new markets or through acquisitions or business combinations;
Ÿ	changes to the ratings assigned by rating agencies to our insurance subsidiaries, individually or as a group;
Ÿ	provisions in our charter documents, Delaware law and state insurance laws may impede attempts to replace or remove management or may impede a takeover;
Ÿ	state insurance restrictions may prohibit assets held by our insurance subsidiaries, including cash and investment securities, from being used for general corporate purposes;
Ÿ	taxing authorities can take exception to our tax positions and cause us to incur significant amounts of legal and accounting costs and, if our defense is not successful, additional tax costs, including interest and penalties; and
Ÿ	expected benefits from completed and proposed acquisitions may not be achieved or may be delayed longer than expected due to business disruption; loss of customers, employees or key agents; increased operating costs or inability to achieve cost savings; and assumption of greater than expected liabilities, among other reasons.
Additional risks, assumptions and uncertainties that could arise from our membership in the Lloyd's market and our participation in Lloyd's Syndicates include, but are not limited to, the following:
Ÿ	members of Lloyd's are subject to levies by the Council of Lloyd's based on a percentage of the member's underwriting capacity, currently a maximum of 3%, but can be increased by Lloyd's;
Ÿ	Syndicate operating results can be affected by decisions made by the Council of Lloyd's which the management of Syndicate 1729 and Syndicate 6131 have little ability to control, such as a decision to not approve the business plan of Syndicate 1729 or Syndicate 6131, or a decision to increase the capital required to continue operations, and by our obligation to pay levies to Lloyd's;
Ÿ	Lloyd's insurance and reinsurance relationships and distribution channels could be disrupted or Lloyd's trading licenses could be revoked, making it more difficult for a Lloyd's Syndicate to distribute and market its products;
Ÿ	rating agencies could downgrade their ratings of Lloyd's as a whole; and
Ÿ	Syndicate 1729 and Syndicate 6131 operations are dependent on a small, specialized management team and the loss of their services could adversely affect the Syndicate’s business. The inability to identify, hire and retain other highly qualified personnel in the future could adversely affect the quality and profitability of Syndicate 1729’s or Syndicate 6131's business.

Our results may differ materially from those we expect and discuss in any forward-looking statements. The principal risk factors that may cause these differences are described in “Item 1A, Risk Factors” in this report.

We caution readers not to place undue reliance on any such forward-looking statements, which are based upon conditions existing only as of the date made, and advise readers that these factors could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Except as required by law or regulations, we do not undertake and specifically decline any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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PART I

ITEM 1. BUSINESS

Overview

ProAssurance Corporation is a holding company for property and casualty insurance companies. For the year ended December 31, 2018 , our net premiums written totaled $835 million , and at December 31, 2018 we had total assets of $4.6 billion and $1.5 billion of shareholders' equity.

Our Mission

We exist to Protect Others

Our Vision

We will be the best in the world at understanding and providing solutions for the risks our customers encounter as healers, innovators, employers and professionals. Through an integrated family of specialty companies, products and services, we will be a trusted partner enabling those we serve to focus on their vital work. As the employer of choice, we embrace every day as a singular opportunity to reach for extraordinary outcomes, build and deepen superior relationships, and accomplish our mission with infectious enthusiasm and unbending integrity.

Our wholly owned insurance subsidiaries provide professional liability insurance for healthcare professionals and facilities, professional liability insurance for attorneys, liability insurance for medical technology and life sciences risks and workers' compensation insurance. We are also the majority capital provider for Syndicate 1729 which writes a range of property and casualty insurance and reinsurance lines. In addition, we are the sole ( 100% ) capital provider of a SPA, Syndicate 6131 , which began writing business effective January 1, 2018 and focuses on contingency and specialty property business.

Our executive offices are located at 100 Brookwood Place, Birmingham, Alabama 35209 and our telephone number is (205) 877-4400. Our stock trades on the NYSE under the symbol “PRA.” Our website is www.proassurance.com, and we maintain a dedicated Investor Relations section on that website (investor.proassurance.com) to provide specialized resources for investors and others seeking to learn more about us.

As part of our disclosure through the Investor Relations section of our website, we publish our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K and all other public SEC filings as soon as reasonably practicable after the report is electronically filed with, or furnished to, the SEC . These SEC filings can be found on our website at investor.proassurance.com/Docs. This section also includes information regarding stock trading by corporate insiders by providing access to SEC Forms 3, 4 and 5 when they are filed with the SEC . In addition to federal filings on our website, we make available other documents that provide important additional information about our financial condition and operations. Documents available on our website include the financial statements we file with state regulators (compiled under SAP as required by regulation), news releases that we issue, a listing of our investment holdings and certain investor presentations. The Governance section of our website provides copies of the charters for our governing committees and many of our governing policies. Printed copies of these documents may be obtained from our Investor Relations department, either by mail at P.O. Box 590009, Birmingham, Alabama 35259-0009, or by telephone at (205) 877-4400 or (800) 282-6242.

Our History

We were incorporated in Delaware in 2001 as the successor to Medical Assurance, Inc. in conjunction with its merger with Professionals Group, Inc. ProAssurance has a history of growth through acquisitions; the most significant and recent of which was the acquisition of Eastern Insurance Holdings, Inc., on January 1, 2014.

We provided the majority of the capital for Syndicate 1729 in November 2013, and Syndicate 1729 began active operations effective January 1, 2014. We provided 100% of the capital for a SPA , Syndicate 6131 , in December 2017, and Syndicate 6131 began writing business effective January 1, 2018.

Our Strategy

Our main business objective is to generate attractive total return for our shareholders. The basic components of our strategy for achieving this objective are as follows:

•

Provide specialized healthcare-centric expertise to meet evolving demands in the healthcare marketplace . Through our focus on healthcare, we provide traditional liability insurance products to healthcare providers. We also leverage our reach, expertise and financial strength to provide innovative and customized products to meet the risk management needs of larger healthcare organizations or groups.


•	Provide superior workers' compensation products and services. We provide workers' compensation products and services that focus on increasing an organization's productivity while reducing costs. We do this by providing

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innovative programs and solutions that address the specific needs of our customers and return injured workers to wellness.


•	Provide superior customer service. Our mission statement, "We exist to Protect Others," goes hand-in-hand with our corporate brand promise, "Treated Fairly." Our employees demonstrate our core values of integrity, leadership, relationships and enthusiasm every day and are focused on meeting the needs of our customers.


•	Effectively manage capital. We carefully monitor use of our capital and consider various options for capital deployment, such as business expansion by our existing subsidiaries, opportunities that arise for mergers or acquisitions, share repurchases and payment of dividends.


•	Pursue profitable underwriting opportunities. We emphasize profitability, not market share. Key elements of our approach are prudent risk selection using established underwriting guidelines, appropriate pricing, and adjusting our business mix as appropriate to effectively utilize capital and achieve market synergies.


•	Emphasize risk management. We actively manage our enterprise risk by maintaining strong internal controls. We also emphasize the importance of risk management to our insureds and offer them training in the use of risk reduction tools and techniques.


•	Manage claims effectively. Our experienced claims teams have industry and insurance expertise that, with our extensive local knowledge, allows us to resolve claims in an effective manner, considering the circumstances of each claim. When practicable, we utilize formalized claims management processes and protocols as a means of reducing claim costs.


•	Maintain a conservative investment strategy. We believe that we follow a conservative investment strategy designed to emphasize the preservation of our capital and provide adequate liquidity for the prompt payment of claims. Our investment portfolio consists primarily of investment-grade, fixed-maturity securities of short-to medium-term duration.


•	Maintain financial stability . We are committed to maintaining financial strength and adequate capital.

Organization and Segment Information

During the third quarter of 2018, we altered our internal management reporting structure and the financial results evaluated by our CODM; therefore, we changed our operating segments to align with how our CODM currently oversees the business, allocates resources and evaluates operating performance. As a result of the segment reorganization, we added an operating and reportable segment: Segregated Portfolio Cell Reinsurance.

We operate through multiple insurance organizations and report our operating results in five segments, as follows:

•

Specialty P&C - This segment includes our professional liability business and medical technology liability business. Professional liability insurance is primarily offered to healthcare providers and institutions and 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. The underwriting results of SPCs that assume healthcare professional liability business were previously reported in this segment and are now reported 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. The underwriting results of SPCs that assume workers’ compensation business were previously reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment.

•

Segregated Portfolio Cell Reinsurance - This segment reflects the operating results (underwriting profit or loss, plus investment results) of SPCs at Eastern Re and Inova Re, our Cayman Islands SPC operations. The SPCs assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from either our Workers' Compensation Insurance or Specialty P&C segments.

•

Lloyd's Syndicates - This segment includes the operating results from our participation in Lloyd's of London Syndicates 1729 and 6131. Syndicate 6131 is a SPA that began writing business effective January 1, 2018. The results of this segment are normally reported on a quarter delay, 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.

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•

Corporate - This segment includes our investment operations, interest expense and U.S. income taxes, all of which are managed at the corporate level with the exception of investment assets solely allocated to either SPC operations or Lloyd's Syndicate operations. The results of investment assets solely allocated to SPC operations were previously reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. This segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses.

Gross Premiums Written

Gross premiums written for the years ended December 31, 2018 , 2017 and 2016 were comprised as follows:



	Year Ended December 31
($ in thousands)	2018					2017					2016
Specialty P&C ⁽¹⁾	$	577,196		60	%	$	549,323		63	%	$	535,725		64	%
Workers' Compensation Insurance	293,230			31	%	264,048			30	%	248,875			30	%
Segregated Portfolio Cell Reinsurance ⁽²⁾	85,086			9	%	77,675			9	%	72,221			9	%
Lloyd's Syndicates ⁽³⁾	88,746			9	%	70,224			8	%	65,157			8	%
Inter-segment revenues ⁽²⁾⁽³⁾	(86,947		)	(9	%)	(86,394		)	(10	%)	(86,964		)	(11	%)
Total	$	957,311		100	%	$	874,876		100	%	$	835,014		100	%

⁽¹⁾ Primarily comprised of one-year term policies, but includes premium related to policies with a two-year term of $22.2 million in 2018 , $27.4 million in 2017 and $21.9 million in 2016 .

⁽²⁾ Premiums in our Segregated Portfolio Cell Reinsurance segment are 100% assumed from either our Workers' Compensation Insurance or Specialty P&C segments. We eliminate this inter-segment revenue.

⁽³⁾

Our written premium includes our participation in Syndicates 1729 and 6131, including casualty premium assumed by Syndicate 1729 from our Specialty P&C segment through a quota share reinsurance agreement. Syndicate 1729 did not renew the quota share reinsurance agreement with our Specialty P&C segment on January 1, 2018; however, gross premiums written for the year ended December 31, 2018 included one quarter of cession due to the previously mentioned quarter delay. We eliminate this inter-segment revenue.

Because our investments and other assets are predominately managed at the Corporate level we do not allocate assets to segments for financial reporting purposes. Additional detailed information regarding premium by individual product type within each of our insurance segments is provided in Item 7, Management's Discussion and Analysis, in the Results of Operations section, under the headings "Premiums Written."

Our insurance exposures are primarily within the U.S. As a result of our participation in Lloyd's Syndicates 1729 and 6131, we had net written premium of $29.3 million in 2018 , $21.3 million in 2017 and $12.2 million in 2016 associated with insurance exposures outside of the U.S.

Specialty Property and Casualty Segment

Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance. Professional liability insurance is primarily offered to healthcare providers and institutions and, to a lesser extent, 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.

Professional Liability Insurance

Our professional liability business is primarily focused on providing professional liability insurance to healthcare providers. We target the full spectrum of the HCPL market, covering multiple categories of healthcare professionals and healthcare entities, including hospitals and other healthcare facilities. While most of our business is written in the standard market, we also offer professional liability insurance on an excess and surplus lines basis; and we offer alternative risk and self-insurance products on a custom basis.

Our custom alternative risk solutions include complex risk valuation solutions and a loss portfolio transfer program for large healthcare entities who, most commonly, are exiting a line of business, changing an insurance approach or simply preferring to transfer risk. Our custom alternative risk solutions also include a turnkey captive solution whereby all or a portion of the healthcare premium written is ceded to certain SPC s of our wholly owned Cayman Islands reinsurance subsidiaries, Eastern Re and Inova Re , which are reported in our Segregated Portfolio Cell Reinsurance segment. The portion not ceded to the SPCs is retained within our Specialty P&C segment. Our Specialty P&C segment does not currently participate in the cells that assume HCPL premium; therefore, the segment retains no underwriting profit or loss. Total alternative market gross premiums written in this segment were approximately $5.8 million and $4.3 million during 2018 and 2017 , respectively.

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We utilize independent agencies and brokers as well as an internal sales force to write our HCPL business. For the year ended December 31, 2018 , approximately 61% of our HCPL gross premiums written were produced through independent insurance agencies or brokers. The agencies and brokers we use typically sell through healthcare insurance specialists who are able to convey the factors that differentiate our professional liability insurance products. In 2018 , our ten largest agents or brokers produced approximately 23% of our HCPL premium; individually, no one agency or broker produced more than 10% of our HCPL premium.

In marketing our professional liability products we emphasize our financial strength, product flexibility and excellent claims, underwriting and risk resource services. We market our insurance products through our direct sales force and through our agents as well as direct mailings and advertising in industry-related publications. We also are involved in professional societies and related organizations and support legislation that will have a positive effect on healthcare and legal liability issues. We maintain regional underwriting centers which permit us to consistently provide a high level of customer service to both small and large accounts.

We maintain claim processing centers where our internal claims personnel investigate and monitor the processing of our professional liability claims. We engage experienced, independent litigation attorneys in each venue to assist with the claims process as we believe this practice aids us in providing a defense that is aggressive, effective and cost-efficient. We evaluate the merit of each claim and determine the appropriate strategy for resolution of the claim, either seeking a reasonable good faith settlement appropriate for the circumstances of the claim or aggressively defending the claim. As part of the evaluation and preparation process for HCPL claims, we meet regularly with medical advisory committees in our key markets to examine claims, attempt to identify potentially troubling practice patterns and make recommendations to our staff.

We also provide professional liability coverage to attorneys in select areas of practice; and this is a less significant portion of our business, accounting for approximately 3% of our 2018 gross premiums written. Our legal professional liability business offers errors and omissions liability insurance policies for law firms engaged in the private practice of law. The program generally insures solo practitioner and smaller firms; over 97% of our insured attorneys are members of a firm employing five or fewer attorneys. The areas of practice of our insured firms include plaintiff, real estate, criminal defense and general corporate law. The program does not insure firms practicing in areas that are considered high hazard such as securities and intellectual property law.

Underwriting decisions for our legal professional liability coverage consider the firm’s areas of practice, the experience of the attorneys and the management controls and loss mitigation practices of the applicant. Our legal professional liability line of business operates in 32 states written through independent brokers. Brokers are appointed and must specialize in legal professional liability. The territory of appointed brokers is restricted to a state or a small number of states in order to maintain a level of exclusivity.

Medical Technology and Life Sciences Insurance

Our medical technology liability business offers products-completed operations liability as well as errors and omissions liability insurance policies for medical technology and life sciences companies. These companies manufacture or distribute products that are almost all regulated by the U.S. Food and Drug Administration or similar regulatory authorities in foreign jurisdictions. Products insured include imaging and non-invasive diagnostic medical devices, orthopedic implants, pharmaceuticals, clinical lab instruments, medical instruments and surgical supplies, dental products, and animal pharmaceuticals and medical devices. We also provide coverage for sponsors of clinical trials and contract manufacturers.

Underwriting decisions for our medical technology liability coverages consider the type of risk, the amount of coverage being sought, the expertise and experience of the applicant and the expected volume of product sales. Close to 100% of our medical technology liability business is written through independent brokers. In 2018 , our top ten largest brokers generated approximately 49% of our medical technology liability gross written premium, with no one broker representing more than 10% . We do not appoint agents for our medical technology liability business. We strongly defend our medical technology liability claims, with a negotiated settlement being the most frequent means of resolution.

Workers' Compensation Insurance Segment

Our Workers' Compensation Insurance segment offers workers' compensation products in the Mid-Atlantic, Southeast, Midwest, Gulf South and New England regions of the continental U.S. Our workers' compensation business consists of two major business activities:


•	Traditional workers' compensation insurance coverages provided to employers, generally those with 1,000 employees or less. Types of policies offered include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies and deductible policies.


•	Alternative market workers' compensation solutions provided to individual companies, groups and associations whereby the workers' compensation premium written is 100% ceded to either the SPC s at Eastern Re or Inova Re , which are reported in our Segregated Portfolio Cell Reinsurance segment, or, to a limited extent, unaffiliated

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captive insurers. Alternative market products include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Of our total alternative market premiums written, approximately 95% in 2018 and 92% in 2017 was ceded to the SPC s operated through Eastern Re or Inova Re.

All of our workers' compensation products are distributed through a group of appointed independent agents.

We utilize an individual account underwriting strategy for our workers' compensation business that is focused on selecting quality accounts. Our goal is to underwrite a diverse book of business with respect to risk classification, hazard level and geographic location. We target accounts with strong return to wellness and safety programs in primarily low to middle hazard levels such as clerical offices, light manufacturing, healthcare, auto dealers and service industries and maintain a strong risk management unit in order to better serve our customers' needs. During 2017, we established our Eastern Specialty Risk unit, which focuses on higher hazard risks in select industries. New business written totaled $2.7 million and $4.6 million in this unit in 2018 and 2017 , respectively.

We actively seek to reduce our workers' compensation loss costs by placing a concentrated focus on returning injured workers to wellness as quickly as possible. We emphasize early intervention and aggressive disability management, utilizing in-house and third-party specialists for case management, including medical cost management. Strategic vendor relationships have been established to reduce medical claim costs and include preferred provider, physical therapy, prescription drug and catastrophic medical services.

Segregated Portfolio Cell Reinsurance Segment

Our Segregated Portfolio Cell Reinsurance segment reflects the operating results (underwriting profit or loss, plus investment results) of SPC s at Eastern Re and Inova Re, our Cayman Islands SPC operations. The SPC s assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from the Workers' Compensation Insurance and Specialty P&C segments. Each SPC is owned, fully or in part, by an agency, group or association and the operating results of the SPC s are due to the participants of that cell. The SPC is operated solely for the benefit of cell participants of that particular cell, and the pool of assets of one SPC are statutorily protected from the creditors of any other SPC . The underwriting results and investment income of the SPC s are shared with the cell participants in accordance with the terms of the cell agreements. We participate to a varying degree in the results of certain SPC s and, for the SPC s in which we participate, our participation interest is as low as 25% and as high as 85% as of December 31, 2018 . In addition, the Segregated Portfolio Cell Reinsurance segment includes the SPC s' investment results as the investments are solely for the benefit of the cell participants and investment results due to external cell participants are reflected in the SPC dividend expense. The segment operating results reflect our share of the underwriting and investment results of the SPC s in which we participate.

During the first quarter of 2018, we restructured our Cayman Islands SPC operations. Beginning in 2018, all new and renewing alternative market business previously ceded to the SPC s at Eastern Re, with the exception of one program, is now ceded to SPC s operated by a newly formed wholly owned Cayman Islands subsidiary, Inova Re. As part of the restructuring, all SPC s previously operated by Eastern Re, with the exception of one program, ceased assuming new and renewing business on or after January 1, 2018. The external cell participants' cumulative undistributed earnings and the results of all SPC s for the current period due to external cell participants continue to be reported as SPC dividends payable and SPC dividend expense, respectively.

The marketing and distribution of alternative market policies are the same as that of the segment from which the policy was assumed: Workers' Compensation Insurance or Specialty P&C segments.

Lloyd's Syndicates Segment

Our Lloyd's Syndicates segment includes operating results from our participation in Syndicates 1729 and 6131. The results of this segment are normally reported on a quarter delay, except when information is available that is material to the current period. Furthermore, investment results associated with investment assets solely allocated to Lloyd's Syndicate operations and certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame. We have a total capital commitment to support Syndicate 1729 and Syndicate 6131 through 2019 of up to $200 million , referred to as FAL. The Board, through a non-binding resolution, extended this commitment through 2022. For the 2019 underwriting year, our FAL was comprised of investment securities deposited with Lloyd's which at December 31, 2018 had a fair value of approximately $142.7 million .

Lloyd's Syndicate 1729

We are the majority capital provider to Syndicate 1729 with the remaining capital provided by unrelated third parties, including private names and other corporate members. For the 2019 underwriting year, we slightly decreased our participation in the operating results of Syndicate 1729 from 62% to 61% . Syndicate 1729 covers a range of property and casualty insurance and reinsurance lines, primarily for risks within the U.S. as well as international markets, and for the 2019 underwriting year

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has a maximum underwriting capacity of £128 million (approximately $163.3 million at December 31, 2018 ), of which £78 million (approximately $99.5 million at December 31, 2018 ) is our allocated underwriting capacity as a corporate member.

Lloyd's Syndicate 6131

Beginning in the second quarter of 2018, our Lloyd's Syndicates segment includes the operating results of a SPA , Syndicate 6131 , which began writing business effective January 1, 2018. A Lloyd's SPA is only allowed to underwrite one quota share reinsurance contract with another Lloyd's syndicate, which in this arrangement is Syndicate 1729 . We are the sole ( 100% ) capital provider to Syndicate 6131 which focuses on contingency and specialty property business, primarily for risks within the U.S. as well as international markets. For the 2019 underwriting year, Syndicate 6131 has a maximum underwriting capacity of £12 million (approximately $15.3 million at December 31, 2018 ).

Our Lloyd's Syndicates segment products are distributed principally through retail brokers and coverholders (i.e., only those authorized by our retail brokers to enter into a contract but only in accordance with specified terms), which consist primarily of premium written through open-market channels and delegated underwriting authority arrangements. Our Lloyd's Syndicates write business in the Lloyd's marketplace and have access to international markets across the world.

Corporate Segment

Our Corporate segment includes our investment operations, other than those reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. The segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses. We apply a consistent management strategy to the entire investment portfolio managed at the corporate level. Accordingly, we report those investment results and net realized investment gains and losses within our Corporate segment. Our overall investment strategy is to maximize current income from our investment portfolio while maintaining safety, liquidity, duration targets and portfolio diversification. The portfolio is generally managed by professional third-party asset managers whose results we monitor and evaluate. The asset managers typically have the authority to make investment decisions within the asset classes they are responsible for managing, subject to our investment policy and oversight, including a requirement that available-for-sale securities in a loss position cannot be sold without specific authorization from us. See Note 3 of the Notes to Consolidated Financial Statements for more information on our investments.

Competition

The marketplace for all our lines of business is very competitive. Within the U.S. our competitors are primarily domestic insurance companies and range from large national insurers whose financial strength and resources may be greater than ours to smaller insurance entities that concentrate on a single state and as a result have an extensive knowledge of the local markets. Additionally, there are many providers, domestic and international, of alternative risk management solutions. Syndicate 1729 and Syndicate 6131, which are based in the U.K. , face significant competition from other Lloyd's syndicates as well as other international and domestic insurance and reinsurance firms operating in the country of the insured. Competitive distinctions include pricing, size, name recognition, service quality, market commitment, market conditions, breadth and flexibility of coverage, method of sale, financial stability, ratings assigned by rating agencies and regulatory conditions.

The changing healthcare environment within the U.S. during the past few years is providing both increased competitive challenges and opportunities for our largest segment, the Specialty P&C segment. Many physicians now practice as employees of larger healthcare entities. Further, healthcare services are increasingly provided by professionals other than physicians and outside of a traditional hospital or clinic setting. Such trends are widely expected to continue. Larger healthcare entities have customer service and risk management needs that differ from the traditional solo or small physician groups. Larger entities are more likely to combine risks such as workers' compensation and professional liability when purchasing insurance and are also more likely to manage all or a part of their risk through alternative insurance mechanisms. We have addressed these issues by enhancing our existing hospital/physician insurance programs, expanding our coverage of healthcare providers other than physician or hospitals, expanding our coverages to include workers' compensation and product liability, and by enhancing our customer service capabilities, particularly with regard to the needs of larger accounts. We have also increased our focus on offering unique, joint or cooperative insurance programs that are attractive to larger healthcare entities.

The workers’ compensation industry is highly competitive in the geographic markets in which we operate and price competition, including the leveraging of workers’ compensation business by multi-line insurers, continues to impact our renewal retention rate and we expect the trend to continue in 2019. We believe our product offerings allow us to provide flexibility in offering workers’ compensation solutions to our customers at a competitive price. In addition, we believe that our claims handling and risk management services are attractive to our customers and provide us with a competitive advantage even when our pricing is higher than our competitors.

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For all of our business, we recognize the importance of providing our products at competitive rates, but we do not price our products at rates that will not permit us to meet our profit targets. We base our rates on current loss projections, maintaining a long-term focus even when this approach reduces our top line growth. We believe that our size, reputation for effective claims management, unique customer service focus, multi-state presence and broad spectrum of coverages offered provides us with competitive advantages, even as the needs of our insureds change.

Rating Agencies

Our claims paying ability is regularly evaluated and rated by three major rating agencies: A.M. Best, Fitch and Moody’s. In developing their claims paying ratings, these agencies make an independent evaluation of an insurer’s ability to meet its obligations to policyholders. See "Risk Factors" for a table presenting the claims paying ratings of our principal insurance operations.

Our ability to service current debt and potential debt is regularly evaluated and rated by four rating agencies: A.M. Best, S&P, Fitch and Moody’s. These financial strength ratings reflect each agency’s independent evaluation of our ability to meet our obligation to holders of our debt, if any. While financial strength ratings may be of greater interest to investors than our claims paying ratings, these ratings are not evaluations of our equity securities nor a recommendation to buy, hold or sell our equity securities.

Insurance Regulatory Matters

We are subject to regulation under the insurance and insurance holding company statutes of various jurisdictions, including the domiciliary states of our insurance subsidiaries and other states in which our insurance subsidiaries do business. Our insurance subsidiaries are primarily domiciled in the U.S. Our states of domicile include Alabama, Illinois, Michigan, Pennsylvania and Vermont. Our foreign jurisdictions include our reinsurance operations based in the Cayman Islands, a territory of the U.K. , and, through our participation in Lloyd's Syndicates, our insurance and reinsurance operations based in the U.K.

United States

Our insurance subsidiaries are required to file detailed annual statements in their states of domicile, with the NAIC and, in some cases, with the state insurance regulators in each of the states in which they do business. The laws of the various states establish agencies with broad authority to regulate, among other things, licenses to transact business, premium rates for certain types of coverage, trade practices, agent licensing, policy forms, underwriting and claims practices, reserve adequacy, transactions with affiliates and insurer solvency. Such regulations may hamper our ability to meet operating or profitability goals, including preventing us from establishing premium rates for some classes of insureds that adequately reflect the level of risk assumed for those classes. Many states also regulate investment activities on the basis of quality, distribution and other quantitative criteria. States have also enacted legislation, typically based in whole or in part on NAIC model laws, which regulates insurance holding company systems, including acquisitions, the payment of dividends, the terms of affiliate transactions, enterprise risk and solvency management and other related matters.

Applicable state insurance laws, rather than federal bankruptcy laws, apply to the liquidation or reorganization of insurance companies.

Insurance companies are also subject to state and federal legislative and regulatory measures and judicial decisions. These could include new or updated definitions of risk exposure and limitations on business practices.

Insurance Regulation Concerning Change or Acquisition of Control

The insurance regulatory codes in each of the domiciliary states of our operating subsidiaries contain provisions (subject to certain variations) to the effect that the acquisition of “control” of a domestic insurer or of any person that directly or indirectly controls a domestic insurer cannot be consummated without the prior approval of the domiciliary insurance regulator. In general, a presumption of “control” arises from the direct or indirect ownership, control or possession with the power to vote or possession of proxies with respect to 10% (5% in Alabama) or more of the voting securities of a domestic insurer or of a person that controls a domestic insurer. Because of these regulatory requirements, any party seeking to acquire control of ProAssurance or any other domestic insurance company, whether directly or indirectly, would usually be required to obtain such approvals.

In addition, certain state insurance laws contain provisions that require pre-acquisition notification to state agencies of a change in control of a non-domestic insurance company admitted in that state. While such pre-acquisition notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the issuance of a cease and desist order with respect to the non-domestic admitted insurers doing business in the state if certain conditions exist, such as undue market concentration.

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Insurance Regulation Concerning Cybersecurity

In March 2017, the New York Cybersecurity Regulation took effect for financial institutions, insurers and other companies regulated by the NYDFS . The intent of the regulation is to encourage the protection of consumer information, as well as the technology systems of NYDFS regulated entities. We are currently compliant with the regulation according to the transition periods as defined in the NYDFS Cybersecurity Regulation.

In October 2017, the NAIC adopted the Insurance Data Security Model Law, which created rules for insurers, agents and other licensed entities covering data security and investigation and notification of breach. In May 2018, the European Union implemented the GDPR , designed to protect data privacy of individuals within the European Union and the EEA . We are compliant with the GDPR due to the global nature of our business, including a small amount of international activity in our Specialty P&C segment. In addition, managing agents of Lloyd's syndicates are required to ensure that they meet the requirements of the GDPR and any local data protection regulation based on territories in which they operate. Syndicate 1729 and Syndicate 6131, including their managing agent, are compliant with the GDPR .

Additionally, South Carolina enacted the South Carolina Department of Insurance Data Security Act effective January 1, 2019. California's Consumer Privacy Act of 2018 will go into effect January 1, 2020, and Michigan's Data Security Act will go into effect January 20, 2021. Ohio enacted the Data Protection Act which went into effect November 2, 2018. These regulations require an information security program based on an ongoing risk assessment, overseeing third-party service providers, investigating data breaches and notifying regulators of a cybersecurity event. The GDPR and the California Consumer Privacy Act of 2018 grant individuals the right to request that a company delete or de-identify their personal information. We expect other states, including our states of domicile, to either adopt the NAIC 's Insurance Data Security Model Law or enact their own data security regulations. We do not expect compliance with the Insurance Data Security Model Law, the South Carolina Department of Insurance Data Security Act, the California Consumer Privacy Act, Michigan's Data Security Act and Ohio's Data Protection Act to have a material impact on our financial condition or results of operations, as they closely resemble the NYDFS Cybersecurity Regulation.

Statutory Accounting and Reporting

Insurance companies are required to file detailed quarterly and annual reports with state insurance regulators in their state of domicile and each of the states in which they do business. Their business and accounts are subject to examination by such regulators at any time. The financial information in these reports is prepared in accordance with SAP . Insurance regulators periodically examine each insurer’s adherence to SAP , financial condition and compliance with insurance department rules and regulations.

Regulation of Dividends and Other Payments from Our Operating Subsidiaries

Our U.S. operating subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends or distributions an insurance company may pay to its shareholders, including our insurance holding company, without prior regulatory approval. Generally, dividends may be paid only out of unassigned earned surplus. In every case, surplus subsequent to the payment of any dividends must be reasonable in relation to an insurance company’s outstanding liabilities and must be adequate to meet its financial needs.

State insurance holding company regulations generally require domestic insurers to obtain prior approval of extraordinary dividends. Insurance holding company regulations that govern our principal operating subsidiaries deem a dividend as extraordinary if the combined dividends and distributions to the parent holding company in any twelve-month period exceed prescribed thresholds. Such thresholds are statutorily prescribed by the state of domicile and currently are based on either net income for the prior fiscal year (reduced by realized capital gains in certain domiciliary states) or a percentage of unassigned surplus at the end of the prior fiscal year, depending upon the wording of the statute.

If insurance regulators determine that payment of a dividend or any other payments within a holding company group, (such as payments under a tax-sharing agreement or payments for employee or other services) would, because of the financial condition of the paying insurance company or otherwise, be a detriment to such insurance company’s policyholders, the regulators may prohibit such payments that would otherwise be permitted.

Risk-Based Capital and Risk Assessment

In order to enhance the regulation of insurer solvency, each state of domicile in accordance with an NAIC -defined formula specifies risk-based capital requirements for property and casualty insurance companies. At December 31, 2018 , all of ProAssurance’s insurance subsidiaries substantially exceeded the minimum required risk-based capital levels.

In late 2010, the NAIC adopted the Model Holding Co. Law . The Model Holding Co. Law , as compared to previous NAIC guidance, increases regulatory oversight of and reporting by insurance holding companies, including reporting related to

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non-insurance entities, and requires reporting of risks affecting the holding company group. Additionally, in 2012 the NAIC adopted ORSA , which requires insurers to maintain a framework for identifying, assessing, monitoring, managing and reporting on the “material and relevant risks” associated with the insurer's (or insurance group's) current and future business plans. ORSA requires larger insurers, generally those with annual written premium volume greater than $1 billion as a group or $500 million as an individual insurer, to file an internal assessment of solvency with insurance regulators annually beginning in 2015. Although no specific capital adequacy standard is currently articulated in ORSA , it is possible that such standard will be developed over time. The Model Holding Co. Law and ORSA will be binding only if adopted by state legislatures and/or state insurance regulatory authorities and actual regulations adopted by any state may differ from that adopted by the NAIC. As of December 31, 2018 , all states have adopted the Model Holding Co. Law and 49 states have adopted ORSA . ProAssurance was not required to file an internal assessment of solvency under the ORSA criteria in 2018.

Also, the NAIC subsequently revised the Model Holding Co. Law to include provisions which allow regulatory supervision of the holding company group through supervisory colleges and which require reporting of risk and solvency assessments for the group. Certain states in which we operate adopted these revisions early and we began filing our risk and solvency assessment in 2014.

Investment Regulation

Our operating subsidiaries are subject to state laws and regulations that require diversification of investment portfolios and that limit the amount of investments in certain investment categories. Failure to comply with these laws and regulations may cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture of investments. We monitor the practices used by our operating subsidiaries for compliance with applicable state investment regulations and take corrective measures when deficiencies are identified.

Assessment Funds

Admitted insurance companies are required to be members of guaranty associations which administer state guaranty funds. To fund the payment of claims (up to prescribed limits) against insurance companies that become insolvent, these associations levy assessments on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the covered lines of business in that state. Maximum assessments permitted by law in any one year generally vary between 1% and 2% of annual premiums written by a member in that state, although state regulations may permit larger assessments if insolvency losses reach specified levels. Some states permit member insurers to recover assessments paid through surcharges on policyholders or through full or partial premium tax offsets, while other states permit recovery of assessments through the rate filing process. In recent years, participation in guaranty funds has not had a material effect on our results of operations.

Certain states in which we write workers’ compensation insurance have established administrative and/or second injury funds that levy assessments against insurers that write business in their state. The assessments are generally based on insurer’s proportionate share of premiums or losses in a particular state, and the assessment rate can vary from year to year.

Shared Markets

State insurance regulations may force us to participate in mandatory property and casualty shared market mechanisms or pooling arrangements that provide certain insurance coverage to individuals or other entities that are otherwise unable to purchase such coverage in the commercial insurance marketplace. Our operating subsidiaries’ participation in such shared markets or pooling mechanisms is not material to our business at this time.

Federal Regulation

The Dodd-Frank Act was enacted in July 2010 and established additional regulatory oversight of financial institutions. To date, the Dodd-Frank Act has not materially affected our business. However, development of regulations is not complete, and there could yet be changes in the regulatory environment that affect the way we conduct our operations or the cost of compliance, or both.

One of the federal government bodies created by the Dodd-Frank Act was the FIO which in December 2013 released a proposal on insurance modernization and improvement of the system of insurance regulation in the U.S. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance matters and has limited power to preempt certain types of state insurance laws. The proposal advocates significantly greater federal involvement in insurance regulation and identifies necessary reforms by the states to preclude further consideration of direct federal regulation. While the proposal does not necessarily imply that the federal government will displace state regulation completely, it does recommend more of a hybrid approach to insurance regulation. In response to the FIO proposal, the NAIC and a number of state legislatures have considered or adopted legislative proposals that alter and, in many cases,

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increase the authority of state agencies to regulate insurance companies and insurance holding company systems. We cannot predict whether the proposals will be adopted or what impact, if any, subsequently enacted laws might have on our business, financial condition or results of operations.

In June 2017, the U.S. House of Representatives passed the Financial CHOICE Act, which amends or repeals certain regulations in the Dodd-Frank Act , specifically modifying provisions related to insurance regulation. Revisions include the consolidation of two conflicting federal insurance positions into a single position established to advocate for the U.S. insurance industry at domestic and international levels, while preserving the traditional state-based system of insurance regulation. In March 2018, this legislation was passed by the U.S. Senate and signed into law by the President of the U.S. in May 2018.

Although the potential impacts of the Dodd-Frank Act and potential amendments to the Dodd-Frank Act , such as the Financial CHOICE Act, on the U.S. insurance industry are not clear, our business could be affected by changes to the U.S. system of insurance regulation.

In June 2012, Congress passed the Biggert-Waters Bill, which provided for a five-year renewal of the NFIP and, among other things, authorized the Federal Emergency Management Agency to carry out initiatives to determine the capacity of private insurers, reinsurers, and financial markets to assume a greater portion of the flood risk exposure in the U.S. and to assess the capacity of the private reinsurance market to assume some of the program’s risk. In August 2017, the President of the U.S. signed an executive order revoking the establishment of a federal flood risk management standard. In November 2017, the U.S. House of Representatives adopted a bill to reauthorize the NFIP for five years and implement several reforms, including provisions designed to spur additional private insurer involvement in covering flood risk, but the U.S. Senate has yet to vote on the measure. Due to the 2017 hurricane season, Congress adopted a short-term extension to fund the NFIP through January 2018, which lapsed on January 19, 2018; however, Congress subsequently extended the program through February 2018. Since then, the NFIP has received multiple short-term extensions and currently expires in May 2019. We cannot predict whether the proposals will be adopted or what impact, if any, subsequently enacted laws might have on our business, financial condition or results of operations.

U.S. Department of the Treasury Report

In February 2017, the President of the U.S. issued an executive order that calls for a comprehensive review of laws, treaties, regulations, policies and guidance regulating the U.S. financial system, and requires the Secretary of the Treasury to consult with the heads of the member agencies of the Financial Stability Oversight Council to identify any laws, regulations or requirements that inhibit federal regulation of the financial system in a manner consistent with the core principles identified in the executive order. The Secretary’s report on asset management and insurance was issued in October 2017 and recommended activities-based evaluations of systemic risk in the insurance industry rather than an entity-based approach. The report also supported primary regulation of the U.S. insurance industry by the states rather than the federal government. We cannot predict whether any of the recommendations will ultimately become laws, regulations or other requirements applicable to our business.

U.S. Tax Legislation

On December 22, 2017, the President of the U.S. signed the TCJA into law. The TCJA includes significant changes to the U.S. corporate income tax system, including a reduction in the federal corporate rate from 35% to 21% beginning after December 31, 2017, changes to loss reserve discounting factors, limitations on the deductibility of interest expense and executive compensation, and modifications of the taxation of non-U.S. subsidiaries. See further discussion of the impact of the TCJA on our results of operations and financial position provided in Item 7, Management's Discussion and Analysis, in the Critical Accounting Estimates section under the heading "Taxes" or Note 6 of the Notes to Consolidated Financial Statements.

Terrorism Risk Insurance Act

TRIA , initially enacted in 2002 and reauthorized in 2007 and 2015, ensures the availability of insurance coverage for certain acts of terrorism, as defined in the legislation. The 2015 reauthorization extended the program through 2020. TRIA currently provides that during 2019 a loss event must exceed $180 million to trigger coverage and that the federal government will reimburse 81% of an insurer’s losses in excess of the insurer’s deductible, up to the maximum annual federal liability of $100 billion . The event trigger will gradually increase to $200 million by 2020 and the reimbursement percentage will gradually decline to 80% by 2020. TRIA requires that we offer terrorism coverage to our commercial policyholders in our workers' compensation line of business, for which we may, when warranted, charge an additional premium. The policyholders may or may not accept such coverage.

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International

Cayman Islands

Our SPC business operates through our subsidiaries, Eastern Re and Inova Re , which are organized and licensed as Cayman Islands unrestricted Class B insurance companies. Eastern Re and Inova Re are subject to regulation by the CIMA . Applicable laws and regulations govern the types of policies that Eastern Re and Inova Re can insure or reinsure, the amount of capital they must maintain and the way it can be invested, and the payment of dividends without approval by the CIMA . Eastern Re and Inova Re are required to maintain minimum capital of approximately $200,000 and must receive approval from the CIMA before they can pay any dividends.

United Kingdom

Syndicate 1729 and Syndicate 6131 are regulated in the U.K. by the Prudential Regulation Authority and the Financial Conduct Authority. All Lloyd's Syndicates must also comply with the bylaws and regulations established by the Council of Lloyd's including submission and approval of an annual business plan and maintenance of stipulated capital levels. Also, the Council of Lloyd's may call or assess a percentage of a member's underwriting capacity (currently a maximum of 3% ) as a contribution to Lloyd's Central Fund, which, similar to state guaranty funds in the U.S., meets policyholder obligations if a Lloyd's member is otherwise unable to do so.

The European Union's executive body, the European Commission, has implemented new capital adequacy and risk management regulations called Solvency II that applies to businesses within the European Union. Solvency II became effective January 1, 2016. Both Syndicate 1729 and Syndicate 6131 follow the Solvency II compliance guidelines set out by the Council of Lloyd's.

In June 2016, the U.K. approved a referendum to exit the European Union, commonly referred to as "Brexit", which resulted in volatility in global stock markets and currency exchange rates, and has increased political, economic and global market uncertainty. The formal process for Brexit was triggered in March 2017 by the filing of a notice to withdraw and the legal deadline for the U.K. to withdraw from the European Union is set for March 2019. The effects of Brexit will depend in part on any agreements the U.K. makes to retain access to European Union markets either during a transitional period or more permanently. Until the withdrawal is finalized, Lloyd's is currently permitted to operate without the need for additional licensing or authorization from each individual country. In November 2018, Lloyd's opened a new European insurance company in Brussels in order to maintain access to European Union business for the 2019 renewal season. Lloyd's Brussels is Lloyd's first Europe wide operation and will bring Lloyd's expertise closer to its customers and partners in Europe. Lloyd's Brussels will also be moving all legacy EEA business to Brussels by the end of 2020 via a Part VII portfolio transfer, which allows insurers and reinsurers to transfer portfolios of insurance business from one legal entity to another, subject to court approval. We cannot predict the nature and extent of the impact that Brexit will have on regulation, interest rates, currency exchange rates and financial markets.

Employees

At December 31, 2018 , we had 991 employees, none of whom were represented by a labor union. We consider our employee relations to be good.

Enterprise Risk Management

As a large property and casualty insurance provider, we are exposed to many risks stemming from both our insurance operations and the environments in which we operate. Since certain risks can be correlated with other risks, an event or a series of events can impact multiple areas of the Company simultaneously and have a material effect on the Company's results of operations, financial position and/or liquidity. In response to these exposures we have implemented an ERM program. Our ERM program consists of numerous processes and controls that have been designed by our senior management with oversight by our Board and implemented across our organization. We utilize ERM to identify potential risks from all aspects of our operations and to evaluate these risks in a manner that is both prudent and balanced. Our primary objective is to develop a risk appetite that creates and preserves value for all of our stakeholders.

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ITEM 1A. RISK FACTORS.

There are a number of factors, many beyond our control, which may cause results to differ significantly from our expectations. Through our ERM program, as previously discussed, we have attempted to identify and understand the nature, caliber and sensitivity of material foreseeable risks, mitigate or avoid those risks and determine a course of action necessary to address such risks. These risk factors fall under the following three categories: Insurance, Financial and Operational. Any factor described in this report could by itself, or together with one or more other factors, have a negative effect on our business, results of operations and/or financial condition. There may be factors not described in this report that could also cause results to differ from our expectations.

Insurance

Insurance market conditions may alter the effectiveness of our current business strategy and impact our revenues.

The property and casualty insurance business is highly competitive. We compete in a fragmented market comprised of many insurers, ranging from smaller single state monoline insurers who have an extensive knowledge of local markets to large national insurers who offer multiple product lines and whose financial strength and resources may be greater than ours. In many instances, coverage we offer is also available through mutual entities whose ROE objectives may be lower than ours. Also, there are many opportunities for self-insurance and for participation in an alternative risk transfer mechanism, such as a captive insurer or a risk retention group.

Competition in the property and casualty insurance business is based on many factors, including premiums charged and other terms and conditions of coverage, services provided, financial ratings assigned by independent rating agencies, claims services, reputation, geographic scope, local presence, agent and client relationships, financial strength and the experience of the insurance company in the line of insurance to be written. Actions of competitors could adversely affect our ability to attract and retain business at current premium levels, impact our market share and reduce the profits that would otherwise arise from operations.

Because we are a property and casualty insurer, our business may suffer as a result of unforeseen catastrophe losses.

As a property and casualty insurer, we are exposed to claims arising out of catastrophes, primarily through our workers' compensation and Lloyd's Syndicate operations. Catastrophes can be caused by various events, including hurricanes, tsunamis, tornadoes, windstorms, earthquakes, hailstorms, explosions, flooding, severe winter weather and fires and may include man-made events, such as terrorist attacks or a widespread financial crisis. The incidence, frequency and severity of catastrophes are inherently unpredictable. While we use historical data and modeling tools to assess our potential exposure to catastrophic losses under various conditions and probability scenarios, such assessments do not necessarily accurately predict future losses or accurately measure our potential exposure. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.

Our loss exposure for a terrorist act meeting the TRIA definition is mitigated by our coverage provided by this program as described in Part I under the heading "Insurance Regulatory Matters." Congress has the ability to alter or repeal the provisions of TRIA at its discretion, and if altered or repealed our exposure could increase and result in premium increases for those types of coverages. Workers' compensation coverages cannot exclude damages related to an act of terrorism and if TRIA were repealed or the benefits were substantially reduced, this might affect our ability to offer these coverages at a reasonable rate.

Insurance companies are not permitted to reserve for a catastrophe until it has occurred. Although we purchase reinsurance protection for risks we believe bear a significant level of catastrophe exposure, actual losses resulting from a catastrophic event or events may exceed our reinsurance protection. Furthermore, for significant catastrophic exposure, the inability or unwillingness of the reinsurer to make timely payments under the terms of the reinsurance agreement could impact our liquidity. It is therefore possible that a catastrophic event or multiple catastrophic events could have a material adverse effect on our financial position, results of operations and liquidity.

Our results of operations and financial condition may be affected if actual insured losses differ from our loss reserves or if actual amounts recoverable under reinsurance agreements differ from our estimated recoverables.

We establish reserves as balance sheet liabilities representing our estimates of amounts needed to resolve reported and unreported losses and pay related loss adjustment expenses. Our largest liability is our reserve for losses and loss adjustment expenses. Due to the size of our reserve for losses and loss adjustment expenses, even a small percentage adjustment to our reserve can have a material effect on our results of operations for the period in which the change is made.

The process of estimating loss reserves is complex. Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss by the insured and payment of that loss. Ultimate loss costs, even for claims with similar characteristics, can vary significantly depending upon many factors including but not limited to the nature of the claim, including whether the claim is an individual or a mass tort claim, the personal situation of the claimant or the claimant’s family,

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the outcome of jury trials, the legislative and judicial climate where the insured event occurred, general economic conditions and, for claims involving bodily injury, the trend of healthcare costs. Consequently, the loss cost estimation process requires actuarial skill and the application of judgment and such estimates require periodic revision. As part of the reserving process, we review the known facts surrounding reported claims as well as historical claims data and consider the impact of various factors such as:


•	for reported claims, the nature of the claim and the jurisdiction in which the claim occurred;


•	trends in paid and incurred loss development;


•	trends in claim frequency and severity;


•	emerging economic and social trends;


•	trends in healthcare costs for claims involving bodily injury;


•	inflation and levels of employment; and


•	changes in the regulatory, legal and political environment.

This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate, but not necessarily accurate, basis for predicting future events. There is no precise method for evaluating the impact of any specific factor on the adequacy of reserves, and actual results are likely to differ from original estimates. We evaluate our reserves each period and increase or decrease reserves as necessary based on our estimate of future claims payments. An increase to reserves has a negative effect on our results of operations in the period of increase; a reduction to reserves has a positive effect on our results of operations in the period of reduction.

Our loss reserves also may be affected by court decisions that expand liability of our policies after they have been issued. In addition, a significant jury award or series of awards against one or more of our insureds could require us to pay large sums of money in excess of our reserved amounts. Due to uncertainties inherent in the jury system, any case that is litigated to a jury verdict has the potential to incur a loss that has a material adverse effect on our results of operations.

We purchase reinsurance to mitigate the effect of large losses. Our receivable from reinsurers on unpaid losses and loss adjustment expenses represents our estimate of the amount of our reserve for losses that will be recoverable under our reinsurance programs. We base our estimate of funds recoverable upon our expectation of ultimate losses and the portion of those losses that we estimate to be allocable to reinsurers based upon the terms and conditions of our reinsurance agreements. Given the uncertainty of the ultimate amounts of our losses, our estimates of losses and related amounts recoverable may vary significantly from the eventual outcome. Also, we estimate premiums ceded under reinsurance agreements wherein the premium due to the reinsurer, subject to certain maximums and minimums, is based in part on losses reimbursed or to be reimbursed under the agreement. Due to the size of our reinsurance balances, changes to our estimate of the amount of reinsurance that is due to us could have a material effect on our results of operations in the period for which the change is made.

We use analytical models to assist our decision-making in key areas such as pricing and reserving and may be adversely affected if actual results differ materially from the model outputs and related analyses.

We use various modeling techniques and data analytics to analyze and estimate exposures, loss trends and other risks associated with our assets and liabilities. This includes both proprietary and third party modeled outputs and related analyses to assist us in decision-making and maintain a competitive advantage. The modeled outputs and related analyses from both proprietary and third parties are subject to various assumptions, uncertainties, model design errors and the inherent limitations of any statistical analysis, including those arising from the use of historical internal and industry data and assumptions. In addition, the effectiveness of any model can be degraded by operational risks including, but not limited to, the improper use of the model. Consequently, actual results may differ materially from our modeled results. The profitability and financial condition of the Company substantially depends on the extent to which our actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our products or fail to appropriately estimate the risks we are exposed to, our business, financial condition, results of operations or liquidity may be adversely affected.

We are exposed to and may face adverse developments involving mass tort claims arising from coverages provided to our insureds.

Establishing claim and claim adjustment expense reserves for mass tort claims is subject to uncertainties due to many factors, including expanded theories of liability, geographical location and jurisdiction of the lawsuits. Moreover, it is difficult to estimate our ultimate liability for such claims due to evolving judicial interpretations of various tort theories of liability and defense theories, such as federal preemption and joint and several liability, as well as the application of insurance coverage to these claims.

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If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear increased risk or reduce the level of our underwriting commitments.

As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk underwritten by our insurance subsidiaries. Market conditions beyond our control determine the availability and cost of the reinsurance. We may be unable to maintain current reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew our expiring coverage or to obtain new reinsurance coverage, either our net exposure to risk would increase or, if we are unwilling to bear an increase in net risk exposures, we would need to reduce the amount of our underwritten risk.

Our claims handling could result in a bad faith claim against us.

We have been sued from time to time for allegedly acting in bad faith during our handling of a claim. The damages claimed in actions for bad faith may include amounts owed by the insured in excess of the policy limits as well as consequential and punitive damages. Awards above policy limits are possible whenever a case is taken to trial. These actions have the potential to have a material and adverse effect on our financial condition and results of operations.

If we are unable to maintain favorable financial strength ratings, it may be more difficult for us to write new business or renew our existing business.

Independent rating agencies assess and rate the claims-paying ability and the financial strength of insurers based upon criteria established by the agencies. Periodically the rating agencies evaluate us to confirm that we continue to meet the criteria of previously assigned ratings. The financial strength ratings assigned by rating agencies to insurance companies represent independent opinions of financial strength and ability to meet policyholder and debt obligations and are not directed toward the protection of equity investors.

Our principal operating subsidiaries hold favorable claims paying ratings with A.M. Best, Fitch and Moody’s. Claims-paying ratings are used by agents, brokers and customers as an important means of assessing the financial strength and quality of insurers. If our financial position deteriorates or the rating agencies significantly change the rating criteria that are used to determine ratings, we may not maintain our favorable financial strength ratings from the rating agencies. A downgrade or involuntary withdrawal of any such rating could limit or prevent us from writing desirable business.

The following table presents the claims paying ratings of our core insurance subsidiaries as of February 15, 2019 .



	Rating Agency ⁽¹⁾
	A.M. Best (www.ambest.com)	Fitch (www.fitchratings.com)	Moody’s (www.moodys.com)
ProAssurance Indemnity Company, Inc.	A+ (Superior)	A (Strong)	A2
ProAssurance Casualty Company	A+ (Superior)	A (Strong)	A2
ProAssurance Specialty Insurance Company, Inc.	A+ (Superior)	A (Strong)	NR
Podiatry Insurance Company of America	A+ (Superior)	A (Strong)	A2
PACO Assurance Company, Inc.	A- (Excellent)	A (Strong)	NR
Noetic Specialty Insurance Company	A+ (Superior)	A (Strong)	NR
Medmarc Casualty Insurance Company	A+ (Superior)	A (Strong)	NR
Lloyd's Syndicate 1729 and Syndicate 6131 ⁽²⁾	A (Excellent)	AA- (Strong)	NR
Eastern Alliance Insurance Company	A (Excellent)	A (Strong)	A3
Allied Eastern Indemnity Company	A (Excellent)	A (Strong)	A3
Eastern Advantage Assurance Company	A (Excellent)	A (Strong)	NR
Eastern Re Ltd., SPC	A (Excellent)	NR	NR
Inova Re Ltd., SPC	NR	NR	NR
⁽¹⁾ NR indicates that the subsidiary has not been rated by the listed rating agency.
⁽²⁾ Rating provided is the rating applicable to all Lloyd's syndicates.

In addition to the evaluation of our claims paying ability, four rating agencies evaluate and rate our ability to service current debt and potential debt. These financial strength ratings reflect each agency’s independent evaluation of our ability to meet our obligation to holders of our debt, if any. While these ratings may be of greater interest to investors than our claims-paying ratings, these are not ratings of our equity securities nor a recommendation to buy, hold or sell our equity securities.

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Our business could be adversely affected by the loss or consolidation of independent agents, agencies, brokers or brokerage firms.

We heavily depend on the services of independent agents and brokers in the marketing of our insurance products. We face competition from other insurance companies for their services and allegiance. These agents and brokers may choose to direct business to competing insurance companies.

As a member of the Lloyd's market and a capital provider to Lloyd's Syndicate 1729 and Syndicate 6131 we are subject to certain risks which could affect us.

As a participant in Lloyd's Syndicates, we are subject to certain risks and uncertainties, including the following:


•	reliance on insurance and reinsurance brokers and distribution channels to distribute and market products;


•	obligation to pay levies to Lloyd's ;


•	obligations to maintain funds to support underwriting activities and risk-based capital requirements that are assessed periodically by Lloyd's and subject to variation;


•	ability to maintain liquidity to fund claims payments, when due;


•	ability to obtain reinsurance and retrocessional coverage to protect against adverse loss activity;


•	reliance on ongoing approvals from Lloyd's and various regulators to conduct business, including a requirement that Annual Business Plans be approved by Lloyd's before the start of underwriting for each account year;


•	financial strength ratings are derived from the rating assigned to Lloyd's , although they have limited ability to directly affect the overall Lloyd's rating; and


•	reliance on Lloyd's trading licenses in order to underwrite business outside the U.K.

Financial

We cannot guarantee that our reinsurers will pay in a timely fashion or at all and as a result we could experience losses .

We transfer part of our risks to reinsurance companies in exchange for part of the premium we receive in connection with the risk. Although our reinsurance agreements make the reinsurer liable to us to the extent the risk is transferred, our liability to our policyholders remains our responsibility. Reinsurers may periodically dispute our demand for reimbursement from them based upon their interpretation of the terms of our agreements or may fail to pay us for financial or other reasons. If reinsurers refuse or fail to pay us or fail to pay on a timely basis, our financial results and/or cash flows could be adversely affected and could have a material effect on our results of operations in the period in which uncollectible amounts are identified.

At December 31, 2018 our receivable from reinsurers on unpaid losses and loss adjustment expenses was $344 million and our receivable from reinsurers on paid losses and loss adjustment expenses was $12 million . As of December 31, 2018 , no reinsurer, on an individual basis, had an estimated net amount due which exceeded $36 million .

If our businesses do not perform well, we may be required to recognize an impairment of our goodwill or intangible assets, which could have a material adverse effect on our results of operations and financial condition.

We review our definite–lived intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. We test goodwill and intangible assets with indefinite lives for impairment at least annually. If we determine that such goodwill or intangible assets are impaired, we would be required to write down the goodwill or the intangible asset by the amount of the impairment, with a corresponding charge to net income. Such write downs could have a material adverse effect on our results of operations or financial position.

Our investment results will fluctuate as interest rates change.

Our investment portfolio is primarily comprised of interest-earning assets, marked to fair value each period. Thus, prevailing economic conditions, particularly changes in market interest rates, may significantly affect our results of operations. Significant movements in interest rates potentially expose us to lower yields or lower asset values. Changes in market interest rate levels generally affect our net income to the extent that reinvestment yields are different than the yields on maturing securities. Changes in interest rates also can affect the value of our interest-earning assets, which are principally comprised of fixed and adjustable-rate investment securities. Generally, the values of fixed-rate investment securities fluctuate inversely with changes in interest rates. Interest rate fluctuations could affect our shareholders’ equity, income and/or cash flows.

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Our investments are subject to credit, prepayment and other risks.

A significant portion of our total assets ( $3.3 billion or 73% ) at December 31, 2018 are financial instruments whose value can be significantly affected by economic and market factors beyond our control including, among others, the unemployment rate, the strength of the domestic housing market, the price of oil, changes in interest rates and spreads, consumer confidence, investor confidence regarding the economic prospects of the entities in which we invest, corrective or remedial actions taken by the entities in which we invest, including mergers, spin-offs and bankruptcy filings, the actions of the U.S. government, and global perceptions regarding the stability of the U.S. economy. Adverse economic and market conditions could cause investment losses or OTTI s of our securities, which could affect our financial condition, results of operations or cash flows.

At December 31, 2018 approximately 13% of our investment portfolio was invested in mortgage and asset-backed securities. We utilize ratings determined by NRSRO s (Moody’s, Standard & Poor’s and Fitch) as an element of our evaluation of the creditworthiness of our securities. The ratings are subject to error by the agencies; therefore, we may be subject to additional credit exposure should the rating be misstated.

Our asset-backed securities are also subject to prepayment risk. A prepayment is the unscheduled return of principal. When rates decline, the propensity for refinancing may increase and the period of time we hold our asset-backed securities may shorten due to prepayments. Prepayments may cause us to reinvest cash proceeds at lower yields than the retired security. Conversely, as rates increase, and motivations for prepayments lessen, the period of time over which our asset-backed securities are repaid may lengthen, causing us to not reinvest cash flows at the higher available yields.

At December 31, 2018 the fair value of our state/municipal portfolio was $293.8 million (amortized cost basis of $289.5 million ). While our state/municipal portfolio had a high credit rating ( AA on average), which indicates a strong ability to pay, there is no assurance that there will not be a credit related event which would cause fair values to decline. An economic downturn could lessen tax receipts and other revenues in many states and their municipalities. With U.S. corporate tax rates decreasing, the overall attractiveness of owning municipal bonds may decline and impact the market valuations.

Our tax credit partnership interests are subject to risks related to the potential forfeiture of the tax credits and all or a portion of the previously claimed tax credits. Loss of all or a portion of the tax credits might occur if the property owner fails to meet the specified requirements of planning and constructing or, in the case of the qualified affordable housing project tax credits, fails to operate the property as required or below expected capacity. With U.S. corporate tax rates decreasing, the utilization of our tax credits may take longer than anticipated. While this would not impact the amount of tax credits we receive, a delay in recognition could be impactful from an economic perspective due to the time value of money. Additionally, the value of losses embedded in our tax credits could decrease due to a lower deduction value, which would reduce the carrying value of the partnership interests and could result in an OTTI. At December 31, 2018 the carrying value of our tax credit partnership interests was approximately $69.4 million .

In a period of market illiquidity and instability, the fair values of our investments are more difficult to assess and our assessments may prove to be greater or less than amounts received in actual transactions.

At December 31, 2018 and in accordance with applicable GAAP , we valued 95% of our investments at fair value and the remaining 5% at cost, equity, or cash surrender value. See Notes 1 , 2 and 3 of the Notes to Consolidated Financial Statements for additional information.

We determine the fair value of our investments using quoted exchange or over-the-counter prices, when available. At December 31, 2018 , we valued approximately 20% of our investments in this manner. When exchange or over-the-counter quotes are not available, we estimate fair values based on broker dealer quotes and various other valuation methodologies, which may require us to choose among various input assumptions and utilize judgment. At December 31, 2018 approximately 66% of our investments were valued in this manner. When markets exhibit significant volatility, there is more risk that we may utilize a quoted market price, broker dealer quote, valuation technique or input assumption that results in a fair value estimate that is either over or understated as compared to actual amounts that would be received upon disposition of the security. At December 31, 2018 approximately 9% of our investments are investment funds 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. NAV is provided by the asset managers and in some cases estimates are used for valuation and are subject to variations depending on those estimates. Our funds valued at NAV have various redemption requirements and lock-up provisions (see Note 2 of the Notes to the Consolidated Financial Statements for further information).

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Our ability to issue additional debt or letters of credit or other types of indebtedness on terms consistent with current debt is subject to market conditions, economic conditions at the time of proposed issuance, results of ratings reviews and the inclusion in certain bond indices of past and future issues. Also, certain of our current debt agreements and loans require a specific debt to capital ratio, and the issuance of debt by one of our insurance subsidiaries requires regulatory approval, both of which may limit or prohibit the issuance of additional debt.

D uring 2013, we issued $250 million of unsecured Senior Notes Payable due in 2023 at a 5.3% interest rate. There is no guarantee that additional debt could be issued on similar terms in the future as rates available to us may change due to changes in the economic climate or shifts in the yield curve may occur or an increase in our level of debt may result in rating agencies lowering our debt rating. Additionally, our Revolving Credit Agreement requires that our consolidated debt to capital ratio ( 0.16 to 1.0 at December 31, 2018 ) be 0.35 to 1.0 or less.

During 2017, two of our insurance subsidiaries entered into ten-year mortgage loans. These mortgage loans require each of the subsidiaries to have a leverage ratio of consolidated funded debt to consolidated total capitalization (principally, SAP consolidated net worth plus consolidated funded debt) be 0.35 to 1.0 or less. Furthermore, our insurance subsidiaries must obtain regulatory approval before incurring additional debt.

The interest rates on our mortgage loans and Revolving Credit Agreement are priced using a spread over LIBOR, which may be phased out in the future.

LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting interest rates on loans globally. The terms of certain of our debt agreements include interest rates which are calculated based on LIBOR.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, announced replacement of U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in April 2018 and was subsequently codified by the FASB in October 2018. The updated codification added the overnight index swap rate ("OIS") based on the SOFR to the list of U.S. benchmark interest rates that are eligible to be hedged. As a result, entities may designate changes in the OIS rate as the hedged risk in hedges of interest rate risk for fixed-rate financial instruments beginning in January 2019. If LIBOR ceases to exist, we may need to renegotiate our mortgage loans and Revolving Credit Agreement that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.

Resolution of uncertain tax matters and changes in tax laws or taxing authority interpretations of tax laws could result in actual tax benefits or deductions that are different than we have estimated, both with regard to amounts recognized and the timing of recognition. Such differences could affect our results of operations or cash flows.

Our provision for income taxes, our recorded tax liabilities and net deferred tax assets, including any valuation allowances, are recorded based on estimates. These estimates require us to make significant judgments regarding a number of factors, including, among others, the applicability of various federal and state laws, the interpretations given to those tax laws by taxing authorities, courts and the Company, the timing of future income and deductions, and our expected levels and sources of future taxable income. We believe our tax positions are supportable under current tax laws and that our estimates are prepared in accordance with GAAP . Additionally, from time to time, due to changes in economic and/or political conditions, there are changes in tax laws and interpretations of tax laws which could significantly change our estimates of the amount of tax benefits or deductions expected to be available to us in future periods. Specifically, recent changes in federal tax law included a reduction in the U.S. corporate income tax rate, changes to the cost of cross border reinsurance, changes to the overall tax base and a limitation on the deductibility of certain executive compensation in future periods. Changes to our prior estimates in these cases would be reflected in the period changed and could have a material effect on our effective tax rate, financial position, results of operations and cash flows. As the Company has reinsurance operations domiciled in the Cayman Islands, changes in the tax laws of the Cayman Islands as well as the recent change in U.S. federal tax law regarding outbound cross border affiliate reinsurance could result in the loss of profitability of that business.

We are subject to U.S. federal and various state income taxes as well as U.K. related taxes. We are periodically under examination by federal, state and local authorities regarding income tax matters and our tax positions could be successfully challenged; the costs of defending our tax positions could be considerable. Our estimate of our potential liability for known uncertain tax positions is reflected in our financial statements. As of December 31, 2018 we had a federal income tax receivable of approximately $3.5 million . We also had a liability for unrecognized current tax benefits of $3.6 million , and we had a net deferred tax asset of approximately $29.1 million .

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New or changes in existing accounting standards, practices and/or policies, as well as subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results or our ability to maintain investor confidence and shareholder value.

GAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, lease accounting, estimation of losses, determination of fair value, asset impairment (particularly investment securities and goodwill) and tax matters, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change our reported or expected financial performance or financial condition. See Note 1 of the Notes to Consolidated Financial Statements for a description of our significant accounting policies.

ProAssurance is primarily a holding company of insurance subsidiaries which are required to comply with SAP . SAP and its components are subject to review by the NAIC and state insurance departments. The NAIC Accounting Practices and Procedures Manual provides that a state insurance department may allow insurance companies that are domiciled in that state to depart from SAP by granting them permitted non- SAP accounting practices. This permission may permit a competitor or competitors to use a more favorable accounting policy.

It is uncertain whether or how SAP might be revised or whether any revisions will have a positive or negative effect. It is also uncertain whether any changes to SAP or its components or any permitted non- SAP accounting practices granted to our competitors will negatively affect our financial results or operations. See the full discussion on regulatory matters in Item I under the heading "Insurance Regulatory Matters."

Our interpretation, integration and/or compliance with new or changes to existing pronouncements by GAAP or SAP could materially impact us as a publicly traded company as it relates to investor confidence and shareholder value.

Operational

Changes in healthcare policy could have a material effect on our operations.

The ACA was enacted in March 2010, and many but not all of its provisions have become effective. To date, we do not believe that the primary provisions of ACA have directly affected our business. However, regulations to implement the law may be revised and the effect of currently enacted provisions may evolve over time. Specifically, presidential and congressional elections in the U.S. could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy. While it is not possible to predict whether and when any such changes will occur, proposals discussed by the current U.S. administration included the repeal or material amendment of the ACA . Thus, the ACA may yet have unanticipated or indirect effects on our business or alter the risk and cost environments in which we and our insureds operate. These risks include: further increases in the number of physicians choosing to practice as a part of a larger healthcare organization that utilizes a self-insurance or alternative risk management solution for its HCPL needs; use of electronic medical records may lead to additional medical malpractice litigation or increase the cost of litigation; patient dissatisfaction may increase due to greater strain on the patient-physician relationship; overall healthcare costs may increase which would increase loss costs for claims involving bodily injury; and additional health conditions may be identified as work-related which could increase the number of workers' compensation claims. Conversely, it is anticipated that there will be growth in the number of ancillary healthcare providers that will become customers for HCPL products. We are unable to predict with any certainty the effect that ACA or future related legislation will have on our insureds or our business.

Changes due to financial reform legislation could have a material effect on our operations.

The Dodd-Frank Act , enacted in July 2010 established additional regulatory oversight of financial institutions. While regulations are still in development for various portions of the Dodd-Frank Act , to date the Act has not materially affected our business. As detailed regulations are developed to implement the provisions of the Dodd-Frank Act , there may be changes in the regulatory environment that affect the way we conduct our operations or the cost of regulatory compliance, or both.

One of the federal government bodies created by the Dodd-Frank Act was the FIO which, in December 2013, released a proposal on insurance modernization and improvement of the system of insurance regulation in the U.S. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance matters and has limited power to preempt certain types of state insurance laws. The proposal advocates significantly greater federal involvement in insurance regulation and identifies necessary reforms by the states to preclude further consideration of direct federal regulation. While the proposal does not necessarily imply that the federal government will displace state regulation completely, it does recommend more of a hybrid approach to insurance regulation. We cannot predict whether the proposals will be adopted or what impact, if any, enacted laws may have on our business, financial condition or results of operations.

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During 2017, the U.S. House of Representatives passed the Financial CHOICE Act, which would amend or repeal certain regulations in the Dodd-Frank Act, specifically modifying provisions related to insurance regulation. Revisions include the consolidation of two conflicting federal insurance positions into a single position established to advocate for the U.S. insurance industry at domestic and international levels, while preserving the traditional state-based system of insurance regulation. In March 2018, this legislation was passed by the U.S. Senate and signed into law by the President of the U.S. in May 2018.

The passage of tort reform or other legislation, and the subsequent review of such laws by the courts could have a material impact on our operations.

Tort reforms generally restrict the ability of a plaintiff to recover damages by, among other limitations, eliminating certain claims that may be heard in a court, limiting the amount or types of damages, changing statutes of limitation or the period of time to make a claim, and limiting venue or court selection. A number of states in which we do business previously enacted tort reform legislation in an effort to reduce escalating loss trends.

Challenges to tort reform have been undertaken in most states where tort reforms have been enacted, and in some states the reforms have been fully or partially overturned. Additional challenges to tort reform may be undertaken. We cannot predict with any certainty how state appellate courts will rule on these laws. While the effects of tort reform have been generally beneficial to our business in states where these laws have been enacted, there can be no assurance that such reforms will be ultimately upheld by the courts. Furthermore, if tort reforms are effective, the business of providing professional liability insurance may become more attractive, thereby causing an increase in competition. In addition, the enactment of tort reforms could be accompanied by legislation or regulatory actions that may be detrimental to our business because of expected benefits which may or may not be realized. These expectations could result in regulatory or legislative action limiting the ability of professional liability insurers to maintain rates at adequate levels.

Coverage mandates or other expanded insurance requirements could also be imposed. States may also consider state-sponsored insurance entities that could remove our potential insureds from the private insurance market.

We continue to monitor developments on a state-by-state basis and make business decisions accordingly.

Our performance is dependent on the business, economic, regulatory and legislative conditions of states where we have a significant amount of business.

Our top five states, Pennsylvania, Alabama, Indiana, Texas and Michigan, represented 39% of our direct premiums written for the year ended December 31, 2018 . Moreover, on a combined basis, Pennsylvania, Alabama and Indiana accounted for 30% of our direct premiums written for each of the years ended December 31, 2018 , 2017 and 2016 . Unfavorable business, economic or regulatory conditions in any of these states could have a disproportionately greater effect on us than they would if we were less geographically concentrated.

From time to time we may identify opportunities for growth through acquisitions. However, approval of acquisitions may not be granted or conditions of approval may adversely alter the expected value and benefits of the acquisition. In addition, expected benefits from acquisitions may not be achieved or may be delayed longer than expected.

Growth through the acquisition of other companies or books of business is opportunistic and sporadic. If we are able to identify a target for acquisition, state insurance regulation concerning change or acquisition of control could delay or prevent us from completing the acquisition. State insurance regulatory codes provide that the acquisition of “control” of a domestic insurer or of any person that directly or indirectly controls a domestic insurer cannot be consummated without the prior approval of the domiciliary insurance regulator. There is no assurance that we will receive such approval from the respective insurance regulator or that such approvals will not be conditioned in a manner that materially and adversely affects the aggregate economic value and business benefits expected to be obtained and cause us to not complete the acquisition.

The Company performs thorough due diligence before agreeing to a merger or acquisition; however, there is no guarantee that the procedures we perform will adequately identify all potential weaknesses or liabilities of the target company or potential risks to the consolidated entity.

There is also no guarantee that businesses acquired in the future will be successfully integrated. Ineffective integration of our businesses and processes may result in substantial costs or delays and adversely affect our ability to compete. The process of integrating an acquired company or business can be complex and costly, and may create unforeseen operating difficulties and expenditures. Potential problems that may arise include but are not limited to: business disruption, loss of customers and employees, the ineffective integration of underwriting, claims handling and actuarial practices, an increase in the inherent

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uncertainty of reserve estimates for a period of time until stable trends reestablish themselves within the combined organization, diversion of management time and resources to acquisition integration challenges, the cultural challenges associated with integrating employees, increased operating costs, assumption of greater than expected liabilities, or inability to achieve cost savings.

Furthermore, claims may be asserted by either the policyholders or shareholders of any acquired entity related to payments or other issues associated with the acquisition and merger into the consolidated entity. Such claims may prove costly or difficult to resolve or may have unanticipated consequences.

Our success is dependent upon our ability to effectively design and execute our business strategy.

The Company depends upon the skill and work product of our officers and employees in executing our business strategy. While management and the Board monitor the strategic direction of the Company, strategic changes could be made that are not supportable by our capital base.

Our success is dependent upon our ability to adequately and appropriately serve our customers.

The operations of the Company are heavily dependent upon the delivery of superior customer service across a broad customer base, by which negative feedback from agents, brokers, insureds or internal staff could result in a loss of revenue for the Company.

Our business could be affected by the loss of one or more of our senior executives.

We are heavily dependent upon our senior management, and the loss of services of our senior executives could adversely affect our business. Our success has been, and will continue to be, dependent on our ability to retain the services of existing key employees and to attract and retain additional qualified personnel in the future. The loss of the services of key employees or senior managers, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect the quality and profitability of our business operations. Our Board regularly reviews succession planning relating to our Chief Executive Officer as well as other senior officers.

Provisions in our charter documents, Delaware law and state insurance law may impede attempts to replace or remove management or may impede a takeover, which could adversely affect the value of our common stock.

Our certificate of incorporation, bylaws and Delaware law contain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination. We currently have no preferred stock outstanding, and no present intention to issue any shares of preferred stock. In addition, our Corporate Governance Principles provide that the Board, subject to its fiduciary duties, will not issue any series of preferred stock for any defense or anti-takeover purpose, for the purpose of implementing any stockholders rights plan, or with features intended to make any acquisition more difficult or costly without obtaining stockholder approval. However, because the rights and preferences of any series of preferred stock may be set by the Board in its sole discretion, the rights and preferences of any such preferred stock may be superior to those of our common stock and thus may adversely affect the rights of the holders of common stock.

The voting structure of common stock and other provisions of our certificate of incorporation are intended to encourage a person interested in acquiring us to negotiate with and to obtain the approval of the Board in connection with a transaction. However, certain of these provisions may discourage our future acquisition, including an acquisition in which stockholders might otherwise receive a premium for their shares. As a result, stockholders who might desire to participate in such a transaction may not have the opportunity to do so.

In addition, state insurance laws provide that no person or entity may directly or indirectly acquire control of an insurance company unless that person or entity has received approval from the insurance regulator. An acquisition of control of ProAssurance would be presumed if any person or entity acquires 10% (5% in Alabama) or more of our outstanding common stock, unless the applicable insurance regulator determines otherwise. These provisions apply even if the offer may be considered beneficial by stockholders.

We are a holding company and are dependent on dividends and other payments from our operating subsidiaries, which may be subject to dividend restrictions.

We are a holding company whose principal source of funds is cash dividends and other permitted payments from operating subsidiaries. If our subsidiaries are unable to make payments to us, or are able to pay only limited amounts, we may be unable to make payments on our indebtedness, meet other holding company financial obligations, or pay dividends to shareholders. The payment of dividends by these operating subsidiaries is subject to restrictions set forth in the insurance laws and regulations of their respective states of domicile, as discussed in Item I under the heading "Insurance Regulatory Matters."

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Regulatory requirements or changes to regulatory requirements could have a material effect on our operations.

Our insurance businesses are subject to extensive regulation by state insurance authorities in each state in which they operate. Regulation is intended for the benefit of policyholders rather than shareholders. In addition to the amount of dividends and other payments that can be made to a holding company by insurance subsidiaries, these regulatory authorities have broad administrative and supervisory power relating to:


•	licensing requirements;


•	trade practices;


•	capital and surplus requirements;


•	investment practices; and


•	rates charged to insurance customers.

These regulations may impede or impose burdensome conditions on rate changes or other actions that we may desire to take in order to enhance our results of operations. In addition, we may incur significant costs in the course of complying with regulatory requirements. Most states also regulate insurance holding companies like us in a variety of matters such as acquisitions, solvency and risk assessment, changes of control and the terms of affiliated transactions.

Also, certain states sponsor insurance entities which affect the amount and type of liability coverages purchased in the sponsoring state. Changes to the number of state sponsored entities of this type could result in a large number of insureds changing the amount and type of coverage purchased from private insurance entities such as ProAssurance.

We own two subsidiaries domiciled in the Cayman Islands and subject to the laws of the Cayman Islands and regulations promulgated by the CIMA. Failure to comply with these laws, regulations and requirements could result in consequences ranging from a regulatory examination to a regulatory takeover of our Cayman Islands subsidiaries, which could potentially impact profitability of alternative market solutions offered through these subsidiaries.

Syndicate 1729 and Syndicate 6131 are regulated in the U.K. by the Prudential Regulation Authority and the Financial Conduct Authority. All Lloyd's Syndicates must also comply with the bylaws and regulations established by the Council of Lloyd's. Failure to comply with bylaws and regulations could affect our ability to underwrite as a Lloyd's Syndicate in the future and therefore affect our profitability. Changes in bylaws and regulations could also affect the profitability of the operations.

The European Union's executive body, the European Commission, has implemented new capital adequacy and risk management regulations called Solvency II that apply to businesses within the European Union. Solvency II became effective January 1, 2016. Syndicate 1729 and Syndicate 6131 follow the Solvency II compliance guidelines set out by the Council of Lloyd's.

The U.K. 's referendum vote in favor of leaving the European Union could have a material effect on our operations.

In June 2016, the U.K. approved a referendum to exit the European Union, commonly referred to as "Brexit" as described in Part I under the heading "Insurance Regulatory Matters." The possible exit of the U.K. from the European Union could result in significant macroeconomic deterioration including, but not limited to, a decrease in global stock exchange indices and an increase in foreign exchange volatility (in particular a further weakening of the pound sterling against the U.S. dollar). The full effects of Brexit are uncertain and will depend on any agreements the U.K. may make to retain access to European Union markets. However, we do not expect Brexit to have a material effect on our Lloyd's Syndicate operations as Lloyd's has opened a new European insurance company in Brussels in order to maintain access to European Union business for the 2019 renewal season (see further discussion in Part I under the heading "Insurance Regulatory Matters").

The assessments that we are required to pay to state associations may increase or our participation in mandatory risk retention pools could be expanded and our results of operations and financial condition could suffer as a result.

Each state in which we operate has separate insurance guaranty fund laws requiring admitted property and casualty insurance companies doing business within their respective jurisdictions to be members of their guaranty associations. These associations are organized to pay covered claims (as defined and limited by the various guaranty association statutes) under insurance policies issued by insurance companies that have become insolvent. Most guaranty association laws enable the associations to make assessments against member insurers to obtain funds to pay covered claims after a member insurer becomes insolvent. These associations levy assessments (up to prescribed limits) on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the covered lines of business in that state. Maximum assessments generally vary between 1% and 2% of annual premiums written by a member in that state. Some states permit member insurers to recover assessments paid through surcharges on policyholders or through full or partial premium tax offsets, while other states permit recovery of assessments through the rate filing process. We had no significant guaranty fund recoupments or assessments in 2018 , 2017 or 2016 . Our practice is to accrue for insurance insolvencies when notified of

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assessments. We are not able to reasonably estimate assessments or develop a meaningful range of possible assessments prior to notice because the guaranty funds do not provide sufficient information for development of such estimates or ranges.

Certain states in which we write workers’ compensation insurance have established administrative and/or second injury funds that levy assessments against insurers that write business in their state. The assessments are generally based on an insurer’s proportionate share of premiums or losses in a particular state, and the assessment rate can vary from year to year.

Risk pooling mechanisms have been established in certain states that offer insurance coverage to individuals or entities who are otherwise unable to purchase coverage from private insurers. Authorized property and casualty insurers in these states are generally required to share in the underwriting results of these pooled risks, which are typically adverse. Should our mandatory participation in such pools be increased or if the assessments from such pools increased, our results of operations and financial condition would be negatively affected, although that was not the case in 2018 , 2017 or 2016 .

Our Board may decide that our financial condition does not allow the continued payment of a quarterly cash dividend, or requires that we reduce the amount of our quarterly cash dividend.

Our Board approved a cash dividend policy in September 2011, and we most recently paid a $0.81 per share dividend for the three months ended December 31, 2018 , which included a $0.50 special dividend. However, any decision to pay future cash dividends is subject to the Board’s final determination after a comprehensive review of the Company’s financial performance, future expectations and other factors deemed relevant by the Board.

We are subject to numerous NYSE and SEC regulations including insider trading regulations, Regulation FD, and regulations requiring timely and accurate reporting of our operating results as well as certain events and transactions. Noncompliance with these regulations could subject us to enforcement actions by the NYSE or the SEC , and could affect the value of our shares and our ability to raise additional capital.

The Company carefully adheres to NYSE and SEC requirements as the loss of trading privileges on the NYSE or an SEC enforcement action could have a significant financial impact on the Company. Failure to comply with various SEC reporting and record keeping requirements could result in a decline in the value of our stock or a decline in investor confidence which could directly impact our ability to efficiently raise capital. Failure to adhere to NYSE requirements could result in fines, trading restrictions or delisting.

The operations of the Company are heavily reliant upon the Company's reputation as an ethical business organization providing needed services to its customers.

The Company's positive reputation is critical to its role as an insurance provider and as a publicly traded company. The Board adopted a Code of Ethics and Conduct and management is heavily focused on the integrity of our employees and third-party suppliers, agents or brokers. Illegal, unethical or fraudulent activities perpetrated by an employee or one of our third-party agencies or brokers for personal gain could expose the Company to a potential financial loss.

A natural disaster or pandemic event, or closely related series of events, could cause loss of lives or a substantial loss of property or operational ability at one or more of the Company's facilities.

The Company's disaster preparedness encompasses our Business Continuity Plan, Disaster Recovery Plan, Operations Plan and Pandemic Response Plan. Our disaster preparedness is focused on maintaining the continuity of the Company's data processing and telephone capabilities as well as the use of alternate and temporary facilities in the event of a natural disaster or medical event. The Company's plans are reviewed during the insurance department examinations of the statutory insurance companies. While the Company has plans in place to respond to both short- and long-term disaster scenarios, the loss of certain key operating facilities or data processing capabilities could have a significant impact on Company operations.

The operations of the Company are dependent upon the security, integrity and availability of our internal technology infrastructure and that of certain third parties. Any significant disruption of these infrastructures could result in unauthorized access to Company data or reduce our ability to conduct business effectively, or both.

The Company is dependent upon its technology infrastructure and that of certain third parties to operate and report financial and other Company information accurately and timely. We collect, use, store or transmit an increasingly large amount of confidential, proprietary and other information in connection with the operation of our business. Therefore, the Company has focused resources on securing and preserving the integrity of our data processing systems and related data. Despite our efforts to ensure the integrity of our systems, we are increasingly exposed to the risk that our technology infrastructure could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering.

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The Company also evaluates the integrity and security of the technology infrastructure of third parties that access, process or store data that the Company considers to be significant. While we review and assess our third party providers' cybersecurity controls, as appropriate, and make changes to our business processes to manage these risks, there is no guarantee that measures taken to date will completely prevent possible disruption, damage or destruction by intentional or unintentional acts or events such as cyber-attacks, viruses, sabotage, human error, system failure or the occurrence of numerous other human or natural events.

Disruption, damage or destruction of any of our systems or data could cause our normal operations to be disrupted or unauthorized internal or external knowledge or misuse of confidential Company data could occur, all of which could be harmful to the Company from a financial, legal and reputational perspective. We continually enhance our cyber and information security in order to identify and neutralize emerging threats and improve our ability to prevent, detect and respond to attempts to gain unauthorized access to our data and systems. We regularly add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches, including firewalls and penetration testing. However, it is impossible to defend against every risk being posed by changing technologies. The Company has a formal process in place for identifying, handling and disclosing of cybersecurity incidents. In addition, the Company's Board and Audit Committee are involved in the oversight of our cybersecurity policies and procedures and are continually updated on material cybersecurity risks and cybersecurity issues, if any, faced by executive management. To date, the Company has not suffered any material harm or loss relating to cyber-attacks or other security breaches at the Company or its third parties.

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ITEM 1B.	UNRESOLVED STAFF COMMENTS.

None.



ITEM 2.	PROPERTIES.

We own three office properties, one of which is unencumbered. Our properties in Birmingham, AL and Franklin, TN are encumbered by ten-year mortgage loans entered into during 2017 for the purpose of recapitalization of these properties:



	Square Footage of Properties
Property Location	Occupied by ProAssurance	Leased or Available for Lease	Total
Birmingham, AL*	120,000	45,000	165,000
Franklin, TN	52,000	51,000	103,000
Okemos, MI	53,000	—	53,000
* Corporate Headquarters



ITEM 3.	LEGAL PROCEEDINGS.

Our insurance subsidiaries are involved in various legal actions, a substantial number of which arise from claims made under insurance policies. While the outcome of all legal actions is not presently determinable, management and its legal counsel are of the opinion that these actions will not have a material adverse effect on our financial position or results of operations. See Note 9 of the Notes to Consolidated Financial Statements included herein.

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EXECUTIVE OFFICERS OF PROASSURANCE CORPORATION

The executive officers of ProAssurance Corporation serve at the pleasure of the Board. We have a knowledgeable and experienced management team with established track records in building and managing successful insurance operations. Following is a brief description of each executive officer of ProAssurance, including their principal occupation, and relevant background with ProAssurance and former employers.



W. Stancil Starnes		Mr. Starnes was appointed as Chief Executive Officer in 2007 and has served as the Chairman of the Board since 2008. Mr. Starnes served as President of ProAssurance from 2012 to December 2018. Mr. Starnes previously served as President, Corporate Planning and Administration of Brasfield & Gorrie, Inc., a large national commercial contractor. Prior to 2006, Mr. Starnes served as the Senior and Managing Partner of the law firm of Starnes & Atchison, LLP, where he was extensively involved with ProAssurance and its predecessors in the defense of healthcare professional liability claims for over 25 years. Mr. Starnes served as a director of Infinity Property and Casualty Corporation, a public insurance holding company, from 2008 to May 2017 where he served on the Audit and Investment Committees. Mr. Starnes currently serves on the Board of Trustees for the University of Alabama. He also serves on the Board of Directors of National Commerce Corporation, located in Birmingham, Alabama, where he serves as Chairman of the Nominating and Corporate Governance Committee, Chairman of the Pricing Committee and is a member of the Compensation Committee. (Age 70)

Edward L. Rand, Jr.		Mr. Rand was appointed as Chief Operating Officer and President of ProAssurance in 2018. Mr. Rand was appointed as an Executive Vice President in 2014. Mr. Rand also has served as President of our Medmarc subsidiary since 2016. Mr. Rand has previously served as Chief Financial Officer and Senior Vice President of Finance. Prior to joining ProAssurance, Mr. Rand was the Chief Accounting Officer and Head of Corporate Finance for PartnerRe Ltd. Prior to that time Mr. Rand served as the Chief Financial Officer of Atlantic American Corporation. (Age 52)

Howard H. Friedman		Mr. Friedman was appointed as President of our Healthcare Professional Liability Group in 2014, and is also our Chief Underwriting Officer and Chief Actuary. Mr. Friedman has previously served as a Co-President of our Professional Liability Group, Chief Financial Officer, Corporate Secretary, and as the Senior Vice President of Corporate Development. Mr. Friedman joined our predecessor in 1996. Mr. Friedman is an Associate of the Casualty Actuarial Society and a member of the American Academy of Actuaries. (Age 60)

Dana S. Hendricks		Ms. Hendricks was appointed as our Chief Financial Officer in 2018. Ms. Hendricks has previously served as Senior Vice President of Business Operations for our PICA subsidiary. Prior to that time, Ms. Hendricks served PICA as Vice President of Finance and Corporate Controller. Prior to joining PICA in 2001, Ms. Hendricks held various finance and data analysis positions with American General Life & Accident Insurance Company. Ms. Hendricks is a Certified Public Accountant. (Age 51)

Jeffrey P. Lisenby		Mr. Lisenby was appointed as an Executive Vice President in 2014 and is also our General Counsel, Corporate Secretary and head of the corporate Legal Department. Mr. Lisenby has previously served as Senior Vice President. Prior to joining ProAssurance, Mr. Lisenby practiced law privately in Birmingham, Alabama. Mr. Lisenby is a member of the Alabama State Bar and the United States Supreme Court Bar and is a Chartered Property Casualty Underwriter. (Age 50)

Frank B. O’Neil		Mr. O’Neil was appointed as our Senior Vice President and Chief Communications Officer in 2001. Mr. O’Neil has previously served as our Senior Vice President of Corporate Communications, having joined our predecessor in 1987. (Age 65)

Michael L. Boguski		Mr. Boguski is President of our Eastern subsidiary. Prior to the acquisition of Eastern, Mr. Boguski served as President and Chief Executive Officer of Eastern, and first joined Eastern in 1997. (Age 56)

Ross E. Taubman		Dr. Taubman is President and Chief Medical Officer of our PICA subsidiary. Prior to joining PICA, Dr. Taubman practiced podiatry for 26 years. During that time, Dr. Taubman served as Treasurer, Vice-President and President of the Maryland Podiatric Medical Association. Dr. Taubman also served as President of The American Podiatric Medical Association (APMA) from 2008 through 2009, and served in a number of executive leadership positions for the APMA. Dr. Taubman is a diplomate in the American Board of Podiatric Surgery. (Age 61)

We have adopted a Code of Ethics and Conduct that applies to our directors and executive officers, including but not limited to our principal executive officers and principal financial officer. We also have share ownership guidelines in place to ensure that management maintains a significant portion of their personal investments in the stock of ProAssurance. Both our Code of Ethics and Conduct and our Share Ownership Guidelines are available on the Governance section of our website. Printed copies of these documents may be obtained from our Investor Relations department either by mail at P.O. Box 590009, Birmingham, Alabama 35259-0009, or by telephone at (205) 877-4400 or (800) 282-6242.

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ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

At February 15, 2019 , ProAssurance Corporation had 3,028 stockholders of record and 53,640,178 shares of common stock outstanding. ProAssurance’s common stock currently trades on the NYSE under the symbol “PRA.”



	2018				2017
Quarter	High		Low		High		Low
First	$	56.00	$	47.35	$	61.85	$	53.90
Second	$	48.20	$	35.35	$	62.45	$	57.80
Third	$	49.40	$	35.50	$	61.80	$	51.30
Fourth	$	46.28	$	37.18	$	63.00	$	55.00

	Dividends Declared				Dividends Paid
Quarter	2018		2017		2018		2017
First	$	0.31	$	0.31	$	5.00	$	5.00
Second	$	0.31	$	0.31	$	0.31	$	0.31
Third	$	0.31	$	0.31	$	0.31	$	0.31
Fourth*	$	0.81	$	5.00	$	0.31	$	0.31

* Includes a special dividend of $0.50 and $4.69 per common share declared in 2018 and 2017 , respectively.

The Board declared a quarterly dividend in each quarter of 2018 and 2017 . Each dividend was paid in the month following the quarter in which it was declared. The Board also declared special dividends of $0.50 and $4.69 per common share during the fourth quarters of 2018 and 2017 , respectively, each of which were paid in January of the following year. Any decision to pay regular or special cash dividends in the future 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.

ProAssurance’s insurance subsidiaries are subject to restrictions on the payment of dividends to the parent. Information regarding restrictions on the ability of the insurance subsidiaries to pay dividends is incorporated herein by reference from the paragraphs under the heading “Insurance Regulatory Matters–Regulation of Dividends and Other Payments from Our Operating Subsidiaries” in Item 1 of this Form 10-K.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information regarding ProAssurance’s equity compensation plans as of December 31, 2018 .



Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	582,409	$—	*	1,976,325
Equity compensation plans not approved by security holders	—	—		—

* No outstanding options as of December 31, 2018 . Other outstanding share units have no exercise price.

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Issuer Purchases of Equity Securities



Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs* (In thousands)
October 1 - 31, 2018	—	N/A	—	$109,643
November 1 - 30, 2018	—	N/A	—	$109,643
December 1 - 31, 2018	—	N/A	—	$109,643
Total	—	$—	—

* Under its current plan begun in November 2010, the Board has authorized $600 million for the repurchase of common shares or the retirement of outstanding debt. This is ProAssurance's only plan for the repurchase of common shares, and the plan has no expiration date .

ITEM 6. SELECTED FINANCIAL DATA.



	Year Ended December 31
($ in thousands, except per share data)	2018			2017		2016			2015			2014
Selected Financial Data
Gross premiums written	$	957,311		$	874,876	$	835,014		$	812,218		$	779,609
Net premiums earned	$	818,853		$	738,531	$	733,281		$	694,149		$	699,731
Net investment income	$	91,884		$	95,662	$	100,012		$	108,660		$	125,557
Equity in earnings (loss) of unconsolidated subsidiaries	$	8,948		$	8,033	$	(5,762	)	$	3,682		$	3,986
Net realized investment gains (losses)	$	(43,488	)	$	16,409	$	34,875		$	(41,639	)	$	14,654
Other income	$	9,833		$	7,514	$	7,808		$	7,227		$	8,398
Total revenues	$	886,030		$	866,149	$	870,214		$	772,079		$	852,326
Net losses and loss adjustment expenses	$	593,210		$	469,158	$	443,229		$	410,711		$	363,084
Net income	$	47,057		$	107,264	$	151,081		$	116,197		$	196,565
Net income per share:
Basic	$	0.88		$	2.01	$	2.84		$	2.12		$	3.32
Diluted	$	0.88		$	2.00	$	2.83		$	2.11		$	3.30
Weighted average shares outstanding:
Basic	53,598			53,393		53,216			54,795			59,285
Diluted	53,749			53,611		53,448			55,017			59,525
Balance Sheet Data, as of December 31
Total investments	$	3,349,382		$	3,686,528	$	3,925,696		$	3,650,130		$	4,009,707
Total assets ⁽¹⁾	$	4,600,726		$	4,929,197	$	5,065,181		$	4,906,021		$	5,167,375
Reserve for losses and loss adjustment expenses	$	2,119,847		$	2,048,381	$	1,993,428		$	2,005,326		$	2,058,266
Debt less debt issuance costs ⁽¹⁾	$	287,757		$	411,811	$	448,202		$	347,858		$	248,215
Total liabilities ⁽¹⁾	$	3,077,724		$	3,334,402	$	3,266,479		$	2,947,667		$	3,009,431
Total capital	$	1,523,002		$	1,594,795	$	1,798,702		$	1,958,354		$	2,157,944
Total capital per share of common stock outstanding	$	28.39		$	29.83	$	33.78		$	36.88		$	38.17
Common stock outstanding, period end	53,637			53,457		53,251			53,101			56,534

⁽¹⁾ For all periods presented, debt is shown net of unamortized debt issuance costs which were previously reported as a part of other assets.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the 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 operating results 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 for healthcare professionals and facilities, professional liability insurance for attorneys, liability insurance for medical technology and life sciences risks and workers' compensation insurance. We are also the majority capital provider for Syndicate 1729 and the sole capital provider for 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. During the third quarter of 2018, we reorganized our segment reporting and as a result, the number of our segments increased from four to five, described as follows:

•

Specialty P&C - This segment includes our professional liability business and medical technology liability business. Professional liability insurance is primarily offered to healthcare providers and institutions and, to a lesser extent, 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. The underwriting results of SPCs that assume healthcare professional liability business were previously reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment.

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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, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market solutions. The underwriting results of SPCs that assume workers’ compensation business were previously reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment.

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Segregated Portfolio Cell Reinsurance - This segment reflects the operating results (underwriting profit or loss, plus investment results) of SPC s at Eastern Re and Inova Re , our Cayman Islands SPC operations. The SPC s assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from our Workers' Compensation Insurance and Specialty P&C segments.

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Lloyd's Syndicates - This segment includes the operating results from our participation ( 62% for 2018) in Lloyd's of London Syndicate 1729 and our 100% participation in Syndicate 6131 , which is a SPA that began writing business effective January 1, 2018. For the 2019 underwriting year, we slightly decreased our participation in the operating results of Syndicate 1729 from 62% to 61% . The results of this segment are normally reported on a quarter delay, 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.

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Corporate - This segment includes our investment operations, other than those reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. The results of investment assets solely allocated to SPC operations were previously reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. This segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses.

All prior period segment information has been recast to conform to the current period presentation and the segment reorganization had no impact on previously reported consolidated financial results. Additional information regarding our segments is included in Note 16 of the Notes to Consolidated Financial Statements, Part I and the Segment Operating Results sections that follow.

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Growth Opportunities and Outlook

Over the long-term we expect our growth to come primarily through controlled expansion of our existing operations. In addition, from time to time, we may identify opportunities for growth through the acquisition of other insurers, service providers or books of business. Growth through acquisition is often opportunistic and cannot be predicted.

We operate in very competitive markets and face strong competition from other insurance companies for all of our insurance products. HCPL insurance represents the largest product line in our gross premiums written ( 49% in 2018 , excluding tail) and the healthcare market has been trending toward the formation of larger medical practice groups and the employment of physicians by hospitals. Large medical groups and facilities frequently manage their healthcare professional liability exposure outside of the traditional first dollar insurance marketplace using self-insured mechanisms and other risk sharing arrangements. In response to these trends, we offer products designed to provide greater risk sharing options to hospitals and large physician groups.

In 2014, we strengthened our position in the healthcare liability space by acquiring Eastern, a provider of workers' compensation insurance which currently represents the second largest product line in our gross premiums written (31% in 2018, including alternative market premiums). The workers’ compensation industry is highly competitive in the geographic markets in which we operate and multi-line insurers continue to increase their leverage of workers’ compensation business in their product offerings. We believe our workers' compensation products allow us to provide flexibility in offering solutions to our customers at a competitive price. In addition, we believe that our claims handling and risk management services are attractive to our customers and provide us with a competitive advantage even when our pricing is higher than our competitors.

We have also been a consistent acquirer of other physician insurers, completing four acquisitions between 2009 and 2013 as well as acquiring an agency largely focused on the professional liability needs of allied healthcare providers, an insurer focused on the legal professional liability market and a mutual company that focused on medical technology liability insurance for companies that manufacture or distribute medical products.

Late in 2013, we completed the process of establishing a corporate member of Lloyd's of London, an internationally recognized specialist insurance market, by providing the majority of the capital to Syndicate 1729 . Syndicate 1729 covers a range of property and casualty insurance and reinsurance lines and began active operations effective January 1, 2014. For the 2019 underwriting year, we slightly decreased our participation in the operating results of Syndicate 1729 from 62% to 61% . Syndicate 1729 has a maximum underwriting capacity of £128 million (approximately $163.3 million at December 31, 2018 ) for the 2019 underwriting year, of which £78 million (approximately $99.5 million at December 31, 2018 ) is our allocated underwriting capacity as a corporate member.

Late in 2017, we began providing 100% of the capital for the newly formed SPA , Syndicate 6131 . Syndicate 6131 , which began writing business effective January 1, 2018, serves as a quota share reinsurer to Syndicate 1729 and focuses on contingency and specialty property business. For the 2019 underwriting year, Syndicate 6131 has a maximum underwriting capacity of £12 million (approximately $15.3 million at December 31, 2018 ). We have a total capital commitment to support our Lloyd's Syndicate operations through 2019 of up to $200 million , referred to as FAL. The Board, through a non-binding resolution, extended this commitment through 2022. See further discussion in our Segment Operating Results - Lloyd's Syndicates section that follows.

We believe our emphasis on the fair treatment of our insureds and other important stakeholders through our commitment to “Treated Fairly” has enhanced our market position and differentiated us from other insurers. We will continue to practice our values of integrity, leadership, relationships and enthusiasm in all of our activities. We will honor these values in the execution of “Treated Fairly” to perform our Mission and realize our Vision. We believe that as we reach more customers with this message we will continue to improve retention and add new insureds.

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Key Performance Measures

We have sustained our financial stability during difficult market conditions through responsible underwriting, pricing and loss reserving practices and through conservative investment practices. We are committed to maintaining prudent operating and financial leverage and to conservatively investing our assets. We recognize the importance that our customers and producers place on the financial strength of our insurance subsidiaries and we manage our business to protect our financial security.

In evaluating our performance, we consider a number of performance measures, including the following:


•	The net loss ratio which is calculated as net losses incurred divided by net premiums earned and is a component of underwriting profitability.


•	The underwriting expense ratio which is calculated as underwriting, policy acquisition and operating expenses incurred divided by net premiums earned and is a component of underwriting profitability.


•	The combined ratio which is the sum of the net loss ratio and the underwriting expense ratio and measures underwriting profitability.


•	The investment income ratio which is calculated as net investment income divided by net premiums earned and measures the contribution investment earnings provide to our overall profitability.


•	The operating ratio which is the combined ratio, less the investment income ratio. This ratio provides the combined effect of underwriting profitability and investment income.


•	The tax ratio which is calculated as total income tax expense divided by income (loss) before income taxes and measures our effective tax rate.


•	ROE which is calculated as net income 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.

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Book value per share which 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. The declaration of dividends decreases book value per share. Growth in book value per share, adjusted for dividends declared, is an indicator of overall profitability.

We particularly focus on our combined ratio and investment returns, both of which directly affect our ROE and growth in our book value. We currently target a dynamic ROE of 700 basis points above the 10-year U.S. Treasury rate, which at December 31, 2018 was approximately 9.7%.

Our emphasis on rate adequacy, selective underwriting, effective claims management and prudent investments is a key factor in our ability to achieve our ROE target. We closely monitor premium revenues, losses and loss adjustment costs, and underwriting and policy acquisition expenses. Our overall investment strategy is to focus on maximizing current income from our investment portfolio while maintaining safety, liquidity, duration and portfolio diversification. While we engage in activities that generate other income, these activities, such as insurance agency services, do not constitute a significant use of our resources or a significant source of revenues or profits.

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Critical Accounting Estimates

Our 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. There can be 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.

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 December 31, 2018 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, claims frequency and severity, historical paid and incurred loss development trends, the expected effect of inflation, general economic trends, the legal and political environment and 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.

We partition our reserves by accident year, which is the year in which the claim becomes our liability. As claims are incurred (reported) and claim payments are made, they are aggregated by accident year for analysis purposes. We also partition our reserves by reserve type: case reserves and IBNR reserves. Case reserves are established by our claims departments based upon the particular circumstances of each reported claim and represent our estimate of the future loss costs (often referred to as expected losses) that will be paid on reported claims. Case reserves are decremented as claim payments are made and are periodically adjusted upward or downward as estimates regarding the amount of future losses are revised; reported loss for an individual claim is the case reserve at any point in time plus the claim payments that have been made to date. IBNR reserves represent our estimate in the aggregate of future development on losses that have been reported to us and our estimate of losses that have been incurred but not reported to us.

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). A summary of the activity in our net reserve for losses during 2018 , 2017 and 2016 is provided under the heading "Losses" in the Liquidity and Capital Resources and Financial Condition section that follows.

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. 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.

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

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may occur, general economic conditions and, for claims involving bodily injury, the trend of healthcare costs. Within our Specialty P&C segment, for our HCPL business ( 75% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018 ), we set an initial reserve using the average loss ratio used in our pricing, plus an additional provision in consideration of the historical loss volatility we and others in the industry have experienced. The current accident year reserve also includes provisions for any loss portfolio transfers we enter into during the current period. For our HCPL business our target loss ratio during recent accident years has ranged from 77% to 80% and the provision for loss volatility has ranged from 8 to 10 percentage points, producing an overall average initial loss ratio for our HCPL business of approximately 90% . Changes in observed claim frequency and/or severity can result in variations from these levels. The reasons for the variability in loss provisions from period to period have included additional loss activity within our excess and surplus lines business, provisions for losses in excess of policy limits, adjustments to ULAE , adjustment to the reserve for the DDR provisions in our policies and additional losses recorded for particular exposures, such as mass torts. These specific adjustments are made if we believe the results for a given accident year are likely to vary from those anticipated by our pricing. We believe use of a provision for volatility appropriately considers the inherent risks and limitations of our rate development process and the historic volatility of professional liability losses (the industry has experienced accident year loss ratios as high as 138% and as low as 54% over the past 30 years) and produces a reasonable best estimate of the reserve required to cover actual ultimate unpaid losses. A similar practice is followed for our legal professional liability business ( 3% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018 ).

The risks insured in our medical technology liability business ( 4% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018 ) 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 ( 11% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018 ) including but not limited to the type and severity of the injury, the age 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 exposure base generally based upon payroll of the insured. 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.

Segregated Portfolio Cell Reinsurance Segment. The factors that affect the ultimate losses incurred for the workers' compensation and healthcare professional liability coverages assumed by the SPCs at Eastern Re and Inova Re ( 3% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018 ) are consistent with that of our Workers’ Compensation Insurance and Specialty P&C segments, respectively.

Lloyd's Syndicates Segment . Due to the relatively short history of Syndicate 1729 (January 1, 2014) we are influenced by historical claims experience of the Lloyd's market for similar risks in estimating the appropriate initial reserves for our Lloyd's Syndicates segment ( 4% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018 ). We expect loss ratios to fluctuate from quarter to quarter as Syndicate 1729 writes more business and the book begins to mature. Loss ratios can also fluctuate due to 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.

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Syndicate 6131, which began writing business effective January 1, 2018, follows a process similar to Syndicate 1729 for the establishment of initial reserves. Loss assumptions by risk category incorporated into the 2018 business plan submitted to Lloyd's were influenced by historical claims experience of the Lloyd's market for similar risks. We expect the loss ratios of Syndicate 6131 to fluctuate from quarter to quarter as Syndicate 6131 assumes more business from Syndicate 1729 and the book begins to mature.

Development of Prior Accident Years

In addition to setting the initial reserve for the current accident year, each period we reassess the amount of reserve required for prior accident years.

The foundation of our reserve re-estimation process is an actuarial analysis that is performed by both our internal and consulting actuaries. This very detailed analysis projects ultimate losses based on partitions which include line of business, geography, coverage layer and accident year. The procedure uses the most representative data for each partition, capturing its unique patterns of development and trends. In all there are over 200 different partitions of our business for purposes of this analysis. We believe that the use of consulting actuaries provides an independent view of our loss data as well as a broader perspective on industry loss trends.

For the Specialty P&C , Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments, the analysis performed by the consulting actuaries analyzes each partition of our business in a variety of ways and uses multiple actuarial methodologies in performing these analyses, including:


•	Bornhuetter-Ferguson (Paid and Reported) Method


•	Paid Development Method


•	Reported Development Method


•	Average Paid Value Method


•	Average Reported Value Method


•	Backward Recursive Development Method


•	The Adjusted Reported and the Adjusted Paid Methods

A brief description of each method follows.

Bornhuetter-Ferguson Method . We use both the Paid and the Reported Bornhuetter-Ferguson methods. The Paid method assigns partial weight to initial expected losses for each accident year (initial expected losses being the first established case and IBNR reserves for a specific accident year) and partial weight to paid to date losses. The Reported method assigns partial weight to the initial expected losses and partial weight to current expected losses. The weights assigned to the initial expected losses decrease as the accident year matures.

Paid Development and Reported Development Methods . These methods use historical, cumulative losses (paid losses for the Paid Development Method, reported losses for the Reported Development Method) by accident year and develop those actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years, adjusted as deemed appropriate for the expected effects of known changes in the claim payment environment (and case reserving environment for the Reported Development Method); and to the extent necessary, supplemented by analyses of the development of broader industry data.

Average Paid Value and Average Reported Value Methods. In these methods, average claim cost data (paid claim cost for the Average Paid Value Method and reported claim cost for the Reported Value Method) is developed to an ultimate average cost level by report year based on historical data. Claim counts are similarly developed to an ultimate count level. The average claim cost (after rounding and adjustment, if necessary, to accommodate report year data that is not considered to be predictive) is then multiplied by the ultimate claim counts by report year to derive ultimate loss and ALAE .

Backward Recursive Development Method . This method is an extrapolation of the movements in case reserve adequacy in order to estimate unpaid loss costs. Historical data showing incremental changes to case reserves over progressive time periods is used to derive factors that represent the ratio of case reserve values at successive maturities. Historical claims payment data showing the additional payments in progressive time periods is used to derive factors that represent the portion of a case reserve paid in the following period. Starting from the most mature period, after which all of the case reserve is paid and the case reserve is exhausted, the next prior ultimate development factor for the prior case reserve can be calculated as the case factor times the established ultimate development factor plus the paid factor. For each successive prior maturity, the ultimate development factor is calculated similarly. The result of multiplying the ultimate development factor times the case reserve is the total indicated unpaid amount.

The Adjusted Reported and the Adjusted Paid Methods. These methods are based on the premise that the relative change in a given accident year's adjusted reported loss estimates (Adjusted Reported Method) or adjusted paid losses (Adjusted Paid Method) from one evaluation point to the next is similar to changes observed for earlier accident years at the same evaluation

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points. In the Adjusted Reported Method reported loss estimates are adjusted to reflect a common case reserve adequacy basis. In the Adjusted Paid Method, the historical paid loss experience is adjusted to reflect a common claim settlement rate basis. We principally use these methods to evaluate reserves for our legal liability coverages.

Generally, methods such as the Bornhuetter-Ferguson method are used on more recent accident years where we have less data on which to base our analysis. As time progresses and we have an increased amount of data for a given accident year, we begin to give more confidence to the development and average methods, as these methods typically rely more heavily on our own historical data. These methods emphasize different aspects of loss reserve estimation and provide a variety of perspectives for our decisions.

Certain of the methodologies utilized to estimate the ultimate losses for each partition of our reserves consider the actual amounts paid. Paid data is particularly influential when a large portion of known claims have been closed, as is the case for older accident years. In selecting a point estimate for each partition, management considers the extent to which trends are emerging consistently for all partitions and known industry trends. Thus, actual, rather than estimated severity trends are given more consideration. If actual severity trends are lower than those estimated at the time that reserves were previously established, the recognition of favorable development is indicated. This is particularly true for older accident years where our actuarial methodologies give more weight to actual loss costs (severity).

The various actuarial methods discussed above are applied in a consistent manner from period to period. In addition, we perform statistical reviews of claims data such as claim counts, average settlement costs and severity trends when establishing our reserves.

We utilize the selected point estimates of ultimate losses to develop estimates of ultimate losses recoverable from reinsurers, based on the terms and conditions of our reinsurance agreements. An overall estimate of the amount receivable from reinsurers is determined by combining the individual estimates. Our net reserve estimate is the gross reserve point estimate less the estimated reinsurance recovery.

For our Workers’ Compensation Insurance segment and for the workers' compensation exposures in our Segregated Portfolio Cell Reinsurance segment, we utilize the reported development method, paid development method and Bornhuetter-Ferguson method, to develop our reserve for each accident year. The actuarial review includes the stratification of claims data (lost time claims, medical only claims) using different variations that allow us to identify trends that may not be readily identifiable if the data was evaluated only in the aggregate. Reported and paid loss development factors are key assumptions in the reserve estimation process and are based on our historical reported and paid loss development patterns. As accident years mature, the various actuarial methodologies produce more consistent loss estimates.

For our Lloyd's Syndicates segment we rely on the analysis of actual loss experience on the book of business written by Syndicate 1729 to determine loss development by accident year.

Acquired Reserve

The acquisition of Eastern on January 1, 2014 increased our loss reserve by $153.2 million which represented the fair value of Eastern's loss reserve at the time of the acquisition. The fair value of the reserve for losses and loss adjustment expenses and related reinsurance recoverables was based on an actuarial estimate of the expected future net cash flows, a reduction of those cash flows for the time value of money determined utilizing the U.S. Treasury Yield Curve, and a risk adjustment to reflect the net present value of profit that an investor would demand in return for the assumption of the associated risks. Expected net cash flows were derived from the expected loss payment patterns included in an actuarial analysis of Eastern's reserve performed as of December 31, 2013. The fair value of the reserve, including the risk margin discussed above, exceeded the undiscounted loss reserve previously established by Eastern by $9.3 million ; this fair value adjustment is being amortized over the average expected life of the reserve of 6 years. The unamortized fair value adjustment included in the acquired reserve as of December 31, 2018 was $1.5 million .

Use of Judgment

Even though the actuarial process is highly technical, it is also highly judgmental, both as to the selection of the data used in the various actuarial methodologies (e.g., initial expected loss ratios and loss development factors) and in the interpretation of the output of the various methods used. Each actuarial method generally returns a different value and for the more recent accident years the variations among the various methodologies can be significant. 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.

Given the potential for unanticipated volatility for long-tailed lines of business, we are cautious in giving full credibility to emerging trends that, when more fully mature, may lead to the recognition of either favorable or adverse development of our

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losses. There may be trends, both positive and negative, reflected in the numerical data both within our own information and in the broader marketplace that mitigate or reverse as time progresses and additional data becomes available. This is particularly true for our HCPL business which has historically exhibited significant volatility as previously discussed.

HCPL . Over the past several years the most influential factor affecting the analysis of our HCPL reserves and the related development recognized has been the change in the severity of claims. The severity trend is an explicit component of our pricing models, whereas in our reserving process the severity trend's impact is implicit. 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 a severity trend of approximately 3% in most states and products. We have observed potentially higher severity trends in our case reserve estimates but these have not yet been confirmed by actual claim payments. If the severity trend were to be higher by 1 percentage point, the impact would be an increase in our expected loss ratio for this business of 3.2 percentage points, based on current claim disposition patterns. An increase in the severity trend of 3 percentage points would result in a 10.1 percentage point increase in our expected loss ratio. 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. For example, on average, excluding our podiatry business acquired in 2009, we had gradually reduced the premium rates we charged on our standard physician renewal business (our largest HCPL line) by approximately 17% from the beginning of 2006 to December 31, 2016. However, from the beginning of 2017 to December 31, 2018 , the average charged rates on our standard physician renewal business have increased by 4% and we anticipate further rate increases due to indications of increasing loss severity. Loss ratios for recent accident years have thus remained fairly constant because expected loss changes have been reflected in our rates; however, we have recognized a higher current accident year net loss ratio during 2018 due to those recent severity indications.

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.

Loss Development

We recognized net favorable reserve development of $92.1 million for the year ended December 31, 2018 , of which $77.1 million related to our Specialty P&C segment, $8.0 million related to our Workers' Compensation Insurance segment and $9.0 million related to our Segregated Portfolio Cell Reinsurance segment, slightly offset by unfavorable development of $2.0 million related to our Lloyd's Syndicates segment.

Net favorable development recognized within our Specialty P&C segment was primarily attributable to the favorable resolution of HCPL claims during the period and an evaluation of established case reserves and paid claims data that indicated that the average severity trend associated with the remaining HCPL claims is less than we had previously estimated, principally related to accident years 2011 through 2014 . The favorable development in our Specialty P&C segment for the year ended December 31, 2018 included $13.3 million attributable to our medical technology liability line of business and $10.9 million attributable to our legal professionals liability line of business.

Net favorable development recognized within the Workers' Compensation Insurance segment reflected overall favorable trends in claim closing patterns primarily in the 2015 and 2016 accident years.

Net favorable development recognized within our Segregated Portfolio Cell Reinsurance segment primarily reflected better than expected claim trends in the 2015, 2016 and 2017 accident years. The improved claim trends reflected lower frequency and severity than anticipated at the time the reserves were established.

Net unfavorable development recognized within our Lloyd's Syndicates segment was driven by higher than expected losses and development on certain large claims which resulted in unfavorable development with respect to a previous year of account. See further discussion in our Segment Operating Results - Lloyd's Syndicates section that follows.

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Loss Development by Line of Business

Professional Liability

Our professional liability line of business includes both our HCPL and legal professional lines, with our HCPL line representing the largest component of our reserve. In support of our concern that the decline in frequency will result in a higher severity trend for our HCPL claims, we saw our closed-with-indemnity-payment ratio (i.e., the number of claims closed with an indemnity or loss payment as compared to the total number of closed claims) for our claims increase from 10% in 2005 to 15% in 2018 .

While this trend has been in keeping with our expectations, the anticipated increase in severity incorporated into our loss assumptions has not occurred. Rather, we have experienced lower than expected severity which has been the primary driver of the favorable development recognized in recent years.

The following table presents additional information about the loss development for our professional liability line of business:



($ in thousands)			2018					2017					2016
Accident Years	Estimated Ultimate Losses, Net of Reinsurance, December 31, 2018		Reserve Development (favorable) unfavorable			% of Known Claims Closed		Reserve Development (favorable) unfavorable			% of Known Claims Closed		Reserve Development (favorable) unfavorable			% of Known Claims Closed
2018	$	447,267	N/A			18.0	%	N/A			N/A		N/A			N/A
2017	$	403,256	$	13,637		46.4	%	N/A			20.4	%	N/A			N/A
2016	$	403,185	$	10,648		66.4	%	$	3,413		48.2	%	N/A			17.6	%
2015	$	395,158	$	(1,268	)	80.8	%	$	1,510		68.7	%	$	304		47.5	%
2014	$	352,845	$	(16,627	)	89.4	%	$	(15,782	)	82.3	%	$	(11,358	)	71.8	%
2013	$	371,888	$	(20,398	)	94.7	%	$	(23,164	)	90.4	%	$	(10,501	)	83.4	%
2012	$	388,945	$	(13,403	)	97.4	%	$	(17,187	)	95.3	%	$	(24,988	)	92.0	%
2011	$	377,782	$	(13,940	)	97.8	%	$	(18,277	)	96.4	%	$	(15,977	)	94.0	%
2010	$	380,469	$	(4,268	)	99.1	%	$	(17,224	)	98.7	%	$	(14,532	)	97.6	%
2009	$	335,851	$	(5,558	)	99.5	%	$	(8,380	)	99.0	%	$	(19,920	)	98.4	%
Prior to 2009	$	7,209,070	$	(12,616	)			$	(14,128	)			$	(28,674	)

An extended period of time is required to get a more precise estimate of the loss cost for a given accident year. As an example, looking at the 2013 accident year for our professional liability reserves, we had resolved 83.4% of the known claims by the end of 2016 , 90.4% of the known claims by the end of 2017 , and 94.7% of the known claims by the end of 2018 . These statistics are based on the number of reported claims; since many non-meritorious claims are resolved early, percentages of ultimate loss payments known at the same points in time are considerably lower. A similar pattern can be seen in each open accident year as demonstrated in the above table.

As a writer of third-party liability insurance, we have historically resolved more than 85% of our physician and hospital professional liability claims with no indemnity payment. As an accident year matures, the number of claims resolved with indemnity payments progressively increases. In a similar fashion, we typically expend more in loss adjustment expenses (legal fees) as claims mature.

At December 31, 2018 , 2017 and 2016 management reserve estimates for the three most recent prior accident years (which have closed claim percentages at or below 85%) were influenced by the initial reserve estimate set for these years, moderated to reflect consideration of better than anticipated claims experience observed during the periods. Estimates for older accident years with higher percentages of closed claims were more heavily influenced by the more moderate severity trend, particularly with regard to claims closed during the periods.

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This can be seen in looking at both the absolute amount of favorable reserve development recognized for the less developed accident years as well as the size of such development when compared to established ultimates for those same accident years at the end of the preceding calendar year. The following table provides this information for years ended December 31, 2018 , 2017 and 2016 with respect to the three then most recent prior accident years:



($ in millions)	2018			2017			2016
Prior accident years	2015-2017			2014-2016			2013-2015
Net favorable (unfavorable) development recognized for the specified years	$	(23.0	)	$	10.9		$	21.6
Development as a % of established ultimates, prior calendar year end	(2.0		%)	0.9		%	2.3		%

Medical Technology Liability

Our medical technology liability line of business has not experienced the change in claim frequency previously described for HCPL . However, the nature of the risks insured and volatility of the loss experience in this line of business has produced more variable loss development, as presented in the following table:



($ in thousands)			2018					2017					2016
Accident Years	Estimated Ultimate Losses, Net of Reinsurance, December 31, 2018		Reserve Development (favorable) unfavorable			% of Known Claims Closed		Reserve Development (favorable) unfavorable			% of Known Claims Closed		Reserve Development (favorable) unfavorable			% of Known Claims Closed
2018	$	14,105	N/A			52.4	%	N/A			N/A		N/A			N/A
2017	$	14,228	$	(695	)	72.2	%	N/A			42.2	%	N/A			N/A
2016	$	12,473	$	(1,114	)	62.8	%	$	(537	)	53.3	%	N/A			26.4	%
2015	$	10,832	$	(1,511	)	64.6	%	$	(1,755	)	79.5	%	$	(440	)	60.0	%
2014	$	11,971	$	(1,526	)	93.2	%	$	(187	)	92.5	%	$	(845	)	81.7	%
2013	$	5,312	$	(1,526	)	98.7	%	$	(2,622	)	96.4	%	$	(2,400	)	87.7	%
2012	$	9,867	$	585		98.8	%	$	(1,251	)	96.9	%	$	(1,826	)	90.5	%
2011	$	9,608	$	(5,273	)	99.8	%	$	92		73.9	%	$	(1,591	)	72.0	%
2010	$	24,330	$	1,449		99.6	%	$	(1,385	)	96.3	%	$	(800	)	90.6	%
2009	$	20,876	$	(753	)	99.7	%	$	(1,178	)	95.7	%	$	(1,382	)	92.2	%
Prior to 2009	$	534,144	$	(2,927	)			$	(1,250	)			$	(2,229	)

Approximately $5.7 million of the $13.3 million total net favorable development recognized in 2018 related to the 2013 to 2016 accident years. The development for the 2013 to 2016 accident years represents a 12.3% reduction to the ultimates established for those reserves at December 31, 2017 . Approximately $5.8 million of the $10.1 million total net favorable development recognized in 2017 related to the 2012 to 2015 accident years. The development for the 2012 to 2015 accident years represents a 12.1% reduction to the ultimates established for those reserves at December 31, 2016 . Approximately $5.8 million of the $11.5 million total net favorable development recognized in 2016 related to the 2011 to 2013 accident years. The development for the 2011 to 2013 accident years represents a 14.3% reduction to the ultimates established for those reserves at December 31, 2015 .

In 2018 , 2017 and 2016 the development was largely attributable to favorable results from claims closed during the year. As time has elapsed we have recognized that actual loss experience has on average been better than estimated. We have been cautious in recognizing the improvement, but as claims have matured and claims are closed or have become more certain for the remaining open claims, we have revised reserve estimates. We believe the need for a cautious approach is required as outcomes are uncertain and results can be significantly affected by outcomes for a small number of cases.

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Workers' Compensation

Claims in our workers’ compensation line of business have historically closed at a faster rate than in our HCPL or medical technology liability lines of business. This faster disposition rate, along with a lower net retention after the application of reinsurance, has resulted in less volatility in loss estimates on a net basis. However, a change in the number of individually-severe claims can create volatility in a given accident year. The following table presents additional information about the loss development for our workers' compensation line of business:



($ in thousands)			2018					2017					2016
Accident Years	Estimated Ultimate Losses, Net of Reinsurance, December 31, 2017		Reserve Development (favorable) unfavorable			% of Known Claims Closed		Reserve Development (favorable) unfavorable			% of Known Claims Closed		Reserve Development (favorable) unfavorable			% of Known Claims Closed
2018	$	139,426	N/A			40.0	%	N/A			N/A		N/A			N/A
2017	$	138,468	$	(4,203	)	80.8	%	N/A			37.0	%	N/A			N/A
2016	$	123,146	$	(8,257	)	91.8	%	$	(7,546	)	82.5	%	N/A			41.3	%
2015	$	125,202	$	(1,998	)	95.3	%	$	(5,773	)	92.4	%	$	(3,452	)	82.6	%
2014	$	121,310	$	(92	)	98.4	%	$	(1,428	)	97.0	%	$	77		92.5	%
2013	$	113,293	$	(227	)	99.2	%	$	441		98.3	%	$	944		97.1	%
2012	$	94,875	$	(565	)	99.5	%	$	(308	)	99.3	%	$	(577	)	98.4	%
2011	$	91,101	$	(60	)	99.3	%	$	241		99.0	%	$	156		98.9	%
2010	$	71,824	$	(54	)	99.4	%	$	(42	)	99.4	%	$	(820	)	99.3	%
Prior to 2010	$	401,859	$	(11	)			$	1,710				$	(782	)

In 2018 , we recognized $9.0 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $8.0 million of net favorable development in our Workers' Compensation Insurance segment. In 2017 , we recognized $8.5 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $5.7 million of net favorable development in our Workers' Compensation Insurance segment. In 2016 , we recognized $4.6 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $1.6 million of net favorable development in our Workers' Compensation Insurance segment. In each of the years ended December 31, 2018 , 2017 and 2016 , net favorable development in our Workers' Compensation Insurance segment included $1.6 million related to the amortization of the purchase accounting fair value adjustment.

Variability of Loss Reserves

As previously noted, the number of data points and variables considered and the subjective process followed in establishing our loss reserve makes it impractical to isolate individual variables and demonstrate their impact on our estimate of loss reserves. However, to provide a better understanding of the potential variability in our reserves, we have modeled implied reserve ranges around our single point net reserve estimates for our various lines of business assuming different confidence levels. The ranges have been developed by aggregating the expected volatility of losses across partitions of our business to obtain a consolidated distribution of potential reserve outcomes. The aggregation of this data takes into consideration correlations among our geographic and specialty mix of business. The result of the correlation approach to aggregation is that the ranges are narrower than the sum of the ranges determined for each partition.

We have used this modeled statistical distribution to calculate an 80% and 60% confidence interval for the potential outcome of our consolidated net reserve for losses. The high and low end points of the distributions are as follows:



	Low End Point	Carried Net Reserve	High End Point
80% Confidence Level	$1.392 billion	$1.776 billion	$2.227 billion
60% Confidence Level	$1.497 billion	$1.776 billion	$2.030 billion

Any change in our estimate of net ultimate losses for prior years is reflected in net income in the period in which such changes are made.

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.

Reinsurance

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, to provide protection against losses in excess of policy limits, and, in the case of risk sharing arrangements, to align our objectives with those of our strategic business partners and to provide custom insurance solutions for large customer groups. The purchase of reinsurance does not relieve us from the ultimate risk on our policies, however it does provide reimbursement for certain losses we pay.

We make a determination of the amount of insurance risk we choose to retain based upon numerous factors, including our risk tolerance and the capital we have to support it, the price and availability of reinsurance, the volume of business, our level of experience with a particular set of claims and our analysis of the potential underwriting results. We purchase excess of loss reinsurance to limit the amount of risk we retain and we do so from a number of companies to mitigate concentrations of credit risk. We utilize reinsurance brokers to assist us in the placement of these reinsurance programs and in the analysis of the credit quality of our reinsurers. The determination of which reinsurers we choose to do business with is based upon an evaluation of their then current financial strength, rating and stability.

We evaluate each of our ceded reinsurance contracts at inception to confirm that there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting guidance. At December 31, 2018 , all ceded contracts were accounted for as risk transferring contracts.

Our receivable from reinsurers on unpaid losses and loss adjustment expenses represents our estimate of the amount of our reserve for losses that will be recoverable under our reinsurance programs. We base our estimate of funds recoverable upon our expectation of ultimate losses and the portion of those losses that we estimate to be allocable to reinsurers based upon the terms and conditions of our reinsurance agreements. Our assessment of the collectability of the recorded amounts receivable from reinsurers considers the payment history of the reinsurer, publicly available financial and rating agency data, our interpretation of the underlying contracts and policies and responses by reinsurers.

Given the uncertainty inherent in our estimates of losses and related amounts recoverable from reinsurers, these estimates may vary significantly from the ultimate outcome.

Under the terms of certain of our reinsurance agreements, the amount of premium that we cede to our reinsurers is based in part on the losses we recover under the agreements. Therefore we make an estimate of premiums ceded under these reinsurance agreements subject to certain maximums and minimums. Any adjustments to our estimates of losses recoverable under our reinsurance agreements or the premiums owed under our agreements are reflected in then current operations. Due to the size of our reinsurance balances, an adjustment to these estimates could have a material effect on our results of operations for the period in which the adjustment is made.

The financial strength of our reinsurers and their ability to pay us may change in the future due to forces or events we cannot control or anticipate. We have not experienced significant collection difficulties due to the financial condition of any reinsurer as of December 31, 2018 ; however, reinsurers may periodically dispute our demand for reimbursement from them based upon their interpretation of the terms of our agreements. We have established appropriate reserves for any balances that we believe may not be ultimately collected. Should future events lead us to believe that any reinsurer will not meet its obligations to us, adjustments to the amounts recoverable would be reflected in the results of current operations. Such an adjustment has the potential to be material to the results of operations in the period in which it is recorded; however, we would not expect such an adjustment to have a material effect on our capital position or our liquidity.

Investment Valuations

We record the majority of our investments at fair value as shown in the table below. At December 31, 2018 , the distribution of our investments based on GAAP fair value hierarchies (levels) was as follows:



	Distribution by GAAP Fair Value Hierarchy
	Level 1	Level 2	Level 3	Not Categorized	Total Investments
Investments recorded at:
Fair value	20%	65%	1%	9%	95%
Other valuations					5%
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.

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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 corporate debt, 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, for disclosure purposes we classify securities valued using an exchange-traded price as Level 1 securities.

Level 2 Investments

Most fixed income securities do not trade daily; and 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 , for disclosure purposes 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. For disclosure purposes, we classify securities valued using limited observable inputs as Level 3 securities.

Fair Values Not Categorized

We hold interests in certain investment funds, primarily LP s/ LLC s, 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 , for disclosure purposes 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 and equity method investments that do not provide a NAV , fixed assets, goodwill and other intangible assets.

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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 December 31, 2018 , these investments represented approximately 5% of total investments, and are detailed in the following table. Additional information about these investments is provided in Notes 2 and 3 of the Notes to Consolidated Financial Statements.



(In millions)	Carrying Value		GAAP Measurement Method
Other investments:
Other, principally FHLB capital stock	$	2.9	Principally Cost
Investment in unconsolidated subsidiaries:
Investments in tax credit partnerships	69.4		Equity
Equity method investments, primarily LPs/LLCs	29.9		Equity
	99.3
BOLI	64.1		Cash surrender value
Total investments - Other valuation methodologies	$	166.3

Other-than-temporary Impairments

We evaluate our available-for-sale investment securities on at least a quarterly basis for the purpose of determining whether declines in fair value below recorded cost basis represent OTTI . We consider an OTTI 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, particularly an asset-backed debt 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:

For non-structured fixed maturities (obligations of states, municipalities and political subdivisions and corporate debt) 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;


•	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; and


•	recoveries or additional declines in fair value subsequent to the balance sheet date.

For structured securities (primarily asset-backed securities), management estimates the present value of the security’s cash flows using the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment or changes in expected cash flows). We consider the most recently available six month averages of the levels of delinquencies, defaults, severities, and prepayments for the collateral (loans) underlying the securitization or, if historical data is not available, sector based assumptions, to estimate expected future cash flows of these securities.

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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, OTTI for debt securities is separated into a credit component and a non-credit component. The credit component of an OTTI 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. The credit component of the OTTI is recognized in earnings while the non-credit component is recognized in OCI .

Investments in tax credit partnerships are evaluated for OTTI by considering both qualitative and quantitative factors. These factors include, but are not limited to:


•	our ability and intent to hold the investment until the recovery of its carrying value; and


•	in situations where there was not a previous OTTI for the investment, whether the current expected cash flows from the investment, primarily tax benefits, are less than those expected at the time the investment was acquired due to various factors, such as a change in the statutory tax rate; or


•	in situations where there was a previous OTTI for the investment, whether the expected cash flows from the investment at the time of the OTTI , primarily tax benefits, are less than its current carrying value.

Investments which are accounted for under the equity method are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the investment might not be recoverable. These circumstances include, but are not limited to, evidence of the inability to recover the carrying value of the investment, the inability of the investee to sustain an earnings capacity that would justify the carrying value of the investment or the current fair value of the investment that is less than the carrying value.

We recognize OTTI , exclusive of non-credit OTTI , in earnings as a part of net realized investment gains (losses). In subsequent periods, any measurement of gain, loss or impairment is based on the revised amortized basis of the security. Non-credit OTTI on debt securities and declines in fair value of available-for-sale securities not considered to be other-than-temporary are recognized in OCI .

Asset-backed debt securities that have been impaired due to credit reasons or are below investment grade quality are accounted for under the effective yield method. Under the effective yield method, estimates of cash flows expected over the life of asset-backed securities are used to recognize income on the investment balance for subsequent accounting periods.

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 at the segment level each reporting period, and any amounts estimated to be unrecoverable are charged to expense in the current period. As of December 31, 2018 we have not determined that any amounts are unrecoverable.

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 reserve, unearned premiums, DPAC , unrealized investment gains (losses) and basis differences on fixed assets and investment assets. 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 (including its capital and operating characteristics) and tax planning strategies.

A valuation allowance has been established against the full value of the deferred tax asset related to the NOL carryforwards for the U.K. operations as management concluded that it was more likely than not that the deferred tax asset will not be realized. In 2018, we also established a valuation allowance of $0.3 million against the deferred tax assets of certain SPC s at our newly formed wholly owned Cayman Islands reinsurance subsidiary, Inova Re. Due to the limited operations of these newly formed SPCs as of December 31, 2018 , management concluded that a valuation allowance was required. See further discussion in Note 6 of the Notes to Consolidated Financial Statements.

Tax Cuts and Jobs Act

The TCJA was signed into law on December 22, 2017 and contains several key provisions that impact our business, including the reduction of the corporate tax rate to 21% effective January 1, 2018, the reduction in the amount of executive

compensation that could qualify as a tax deduction, a change in how property and casualty taxpayers discount loss reserves, a minimum tax on payments made to related foreign entities and a new tax on certain income of controlled foreign corporations. See Note 6 of the Notes to Consolidated Financial Statements for discussion of the current status of our accounting for certain provisions of the TCJA .

The TCJA placed limitations on the future deductibility of certain executive compensation. At December 31, 2017 , the IRS had not yet issued guidance in this area, and thus we made a reasonable estimate of the effects on our existing deferred tax balances related to executive compensation at that time. During the third quarter of 2018, the IRS issued guidance addressing the effects of the TCJA on executive compensation; therefore, we were able to complete our accounting for the impact of the TCJA on our December 31, 2017 deferred tax asset balances related to executive compensation. As a result, we did not record any measurement-period adjustments to the previously recorded provisional amount.

In computing taxable income, property and casualty insurance companies reduce their premiums earned by losses incurred. The tax deduction for losses incurred is discounted using interest rates and factors prescribed by the IRS . The TCJA modified the rules for discounting losses incurred by changing the definition of the applicable interest rate that is used and amending the time periods for the loss payment pattern. These new provisions are effective for tax years beginning after December 31, 2017 and are subject to a transition rule.

At December 31, 2017 , the IRS had not yet released the information necessary for us to determine a reasonable estimate for the tax effects of the TCJA on our deferred tax balances related to loss reserve discounting; therefore, no provisional amount was recorded at that time. We were able to complete our analysis during the measurement period following the release of new discount factors by the IRS on December 19, 2018. We used the new discount factors to determine the impact of the TCJA on our deferred tax balances related to loss reserve discounting. The adjustment, which is referred to as the transition rule adjustment, will be reflected as a component of taxable income evenly over eight years beginning in 2018. The transition rule adjustment is a taxable temporary difference and has no impact on total tax expense for the current year. The ultimate impact of the TCJA on our deferred tax balances for loss reserve discounting could be materially impacted if the IRS publishes any future revisions to the loss discount factors used in our analysis.

Effective January 1, 2018, the TCJA introduced a minimum tax on payments made to related foreign entities referred to as the BEAT . The BEAT is imposed by adding back into the U.S. tax base any base erosion payment made by the U.S. taxpayer to a related foreign entity and applying a minimum tax rate to this newly calculated modified taxable income. Base erosion payments represent any amount paid or accrued by the U.S. taxpayer to a related foreign entity for which a deduction is allowed. Premiums we cede to the SPC s at our newly formed wholly owned Cayman Islands reinsurance subsidiary, Inova Re, do not fall within the scope of base erosion payments as the SPC s at Inova Re intend to elect to be taxed as U.S. taxpayers. However, premiums that we cede to any active SPC at our other wholly owned Cayman Islands reinsurance subsidiary, Eastern Re, fall within the scope of base erosion payments and therefore could be significantly impacted by the BEAT . We have evaluated our exposure to the BEAT and have concluded that our expected outbound deductible payments to related foreign entities are below the threshold for application of the BEAT; therefore, we have not recognized any incremental tax expense for the BEAT provision of the TCJA as of December 31, 2018 . See further discussion on our new subsidiary, Inova Re, and our Cayman Islands SPC operations in the Segment Operating Results - Segregated Portfolio Cell Reinsurance section that follows.

The TCJA also requires a U.S. shareholder of a controlled foreign corporation to include its GILTI in U.S. taxable income. The GILTI amount is based on the U.S. shareholder’s aggregate share of the gross income of the controlled foreign corporation reduced by certain exceptions and a net deemed tangible income return. The net deemed tangible income return is based on the controlled foreign corporation’s basis in the tangible depreciable business property. Cell rental fee income earned by Inova Re and Eastern Re fall within the scope of the GILTI provisions of the TCJA . We have evaluated the new GILTI provisions of the TCJA and we have made an accounting policy election to treat the taxes due on inclusions of GILTI in U.S. taxable income as a current period expense when incurred.

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 period, 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 2018 or 2017 . At December 31, 2018 , our liability for unrecognized tax benefits approximated $3.6 million .

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Goodwill

Impairment of goodwill is tested at the reporting unit level, which is consistent with our reportable segments identified in Note 16 of the Notes to Consolidated Financial Statements. Of the five reporting units, three have goodwill - Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance. We evaluate goodwill for impairment annually on October 1, upon the occurrence of certain triggering events or substantive changes in circumstances that indicate the fair value of goodwill may be impaired, and immediately before and after a reorganization that affects the composition of one or more of our reporting units.

Annual Goodwill Impairment Test

When testing goodwill for impairment on our annual test date, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. As of the most recent annual evaluation date on October 1, 2018 , we elected to perform a quantitative goodwill impairment assessment for our Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units.

In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is determined using income and market approaches and is compared to its carrying value, as described above. The estimate of fair value derived from the income approach is based on the present value of expected future cash flows, including terminal value, utilizing a market based weighted average cost of capital determined separately for each reporting unit. The estimate of fair value derived from the market approach is based on earnings multiple data derived from market information. The determination of fair value involves the use of significant estimates and assumptions, including revenue growth rates, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rates, comparable public companies and synergistic benefits available to market participants. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount of each reporting unit. To corroborate the reporting units’ valuation, we perform a reconciliation of the estimate of the aggregate fair value of the reporting units to ProAssurance's market capitalization, including consideration of a control premium. Because not all of our reporting units have goodwill, we make certain assumptions regarding the fair value of our other reporting units in reconciling to our market capitalization.

If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment of goodwill, if any. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied fair value of goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.

As a result of the quantitative assessments performed on October 1, 2018 , management concluded that the fair value of each of our three reporting units that have goodwill were greater than their carrying value as of the testing date; therefore, goodwill was not impaired and no further impairment testing was required. No goodwill impairment was recorded in 2018 , 2017 or 2016.

Goodwill Impairment Test - Result of Segment Reorganization

As discussed in Note 16 of the Notes to Consolidated Financial Statements, we reorganized our segment reporting in the third quarter of 2018 to align with how our CODM currently oversees the business, allocates resources and evaluates operating performance. As a result of the segment reorganization, we added an operating and reportable segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment also became a reporting unit for purposes of testing goodwill for impairment. We allocated goodwill to our revised reporting units using a relative fair value approach which resulted in a nominal amount of goodwill reallocated from the Workers' Compensation Insurance reporting unit to the Segregated Portfolio Cell Reinsurance reporting unit. We performed a quantitative goodwill impairment assessment for the Workers' Compensation Insurance reporting unit immediately prior to the reallocation and a quantitative goodwill impairment assessment for the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units immediately after the reallocation and determined that no impairment existed.

We estimated the fair value of the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units using both an income approach and market approach using the same valuation methodologies and process for developing assumptions that we use in our annual impairment assessment, as discussed above. To corroborate the reporting units’ valuation, we performed a reconciliation of the estimate of the aggregate fair value of the reporting units to ProAssurance's market capitalization, including consideration of a control premium. Because we were not required to estimate the fair value of

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all of our reporting units as part of this interim goodwill impairment assessment, we made certain assumptions regarding the fair value of our other reporting units in reconciling to our market capitalization.

The Specialty P&C reporting unit's net operating results were not impacted by the segment reorganization and there was no change to the amount of goodwill allocated to that reporting unit. Consequently, a quantitative goodwill impairment assessment was not required for this reporting unit due to the segment reorganization.

Intangibles

Intangible assets with definite lives are amortized over the estimated useful life of the asset. Amortizable intangible assets primarily consist of agency and policyholder relationships, renewal rights and trade names. Intangible assets with an indefinite life, primarily state licenses, are not amortized. Intangible assets are evaluated for impairment on an annual basis or upon the occurrence of certain triggering events or substantive changes in circumstances that indicate the fair value of the asset may be impaired. The third quarter 2018 segment reorganization had no impact on how we evaluate our intangible assets for impairment. Additional information regarding intangible assets is included in Note 1 of the Notes to Consolidated Financial Statements.

Audit Premium

Workers’ compensation premiums are determined based upon the payroll of the insured, applicable premium rates and an experience-based modification factor, where applicable. An audit of the policyholders’ records is conducted after policy expiration to make a final determination of applicable premiums. Audit premium due from or due to a policyholder as a result of an audit is reflected in net premiums written and earned when billed. We track, by policy, the amount of additional premium billed in final audit invoices as a percentage of payroll exposure and use this information to estimate the probable additional amount of EBUB premium as of the balance sheet date. We include changes to the EBUB premium estimate in net premiums written and earned in the period recognized.

Lloyd’s Premium Estimates

For certain insurance policies and reinsurance contracts written in our Lloyd’s Syndicates segment, premiums are initially recognized based upon estimates of ultimate premium. Estimated ultimate premium consists primarily of premium written under delegated underwriting authority arrangements, which consist primarily of binding authorities, and certain assumed reinsurance agreements. These estimates of ultimate premium are judgmental and are dependent upon certain assumptions, including historical premium trends for similar agreements. As reports are received from programs, ultimate premium estimates are revised, if necessary, with changes reflected in current operations.

Accounting Changes

We did not have any change in accounting estimate or policy that had a material effect on our results of operations or financial position during 2018 . We are not aware of any accounting changes not yet adopted as of December 31, 2018 that would have a material effect on our results of operations or financial position. Note 1 of the Notes to Consolidated Financial Statements provides additional detail regarding accounting changes.

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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 a significant source of funds for our obligations, including debt service and shareholder dividends. We also charge our operating subsidiaries within our Specialty P&C 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 December 31, 2018 , we held cash and liquid investments of approximately $236 million outside our insurance subsidiaries that were available for use without regulatory approval or other restriction, of which $43 million was used to pay shareholder dividends in January 2019. We also have $200 million in permitted borrowings under our Revolving Credit Agreement and an accordion feature available which, if subscribed successfully, would allow another $50 million in available funds. As of February 15, 2019 , no borrowings were outstanding under our Revolving Credit Agreement .

During 2018 , our operating subsidiaries paid dividends to us of approximately $178 million , including extraordinary dividends from our insurance subsidiaries of approximately $48 million . Our insurance subsidiaries, in the aggregate, are permitted to pay dividends of approximately $128 million over the course of 2019 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).

Cash Flows

Cash flows between periods compare as follows:



	Year Ended December 31
(In thousands)	2018			2017			Change
Net cash provided (used) by:
Operating activities	$	177,265		$	173,388		$	3,877
Investing activities	214,897			200,275			14,622
Financing activities	(446,186		)	(356,515		)	(89,671		)
Increase (decrease) in cash and cash equivalents	$	(54,024	)	$	17,148		$	(71,172	)



	Year Ended December 31
(In thousands)	2017			2016			Change
Net cash provided (used) by:
Operating activities	$	173,388		$	178,983		$	(5,595	)
Investing activities	200,275			(288,802		)	489,077
Financing activities	(356,515		)	(13,934		)	(342,581		)
Increase (decrease) in cash and cash equivalents	$	17,148		$	(123,753	)	$	140,901



	Year Ended December 31
(In thousands)	2016			2015			Change
Net cash provided (used) by:
Operating activities	$	178,983		$	139,141		$	39,842
Investing activities	(288,802		)	199,770			(488,572		)
Financing activities	(13,934		)	(294,851		)	280,917
Increase (decrease) in cash and cash equivalents	$	(123,753	)	$	44,060		$	(167,813	)

During the first quarter of 2018, we retrospectively adopted accounting guidance that resulted in a change in classification

of distributions received from unconsolidated subsidiaries. Additional information regarding the impact of accounting guidance adopted during the current period can be found in Note 1 to the Notes to Consolidated Financial Statements.

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The principal components of our operating cash flows are the excess of premiums collected and net investment income received 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 increase in operating cash flows in 2018 as compared to 2017 of $3.9 million was primarily due to an increase in premium receipts of $60.8 million , a decrease in 2018 estimated tax payments as compared to 2017 of $11.5 million and a decrease in cash paid for operating expenses of $1.6 million , partially offset by an increase in paid losses of $64.3 million and a decrease in cash received from investment income of $5.1 million . The increase in premium receipts was driven by our Specialty P&C segment, primarily due to premiums received from a loss portfolio transfer entered into during the second quarter of 2018 and, to a lesser extent, our Workers' Compensation Insurance segment, primarily due to premiums received related to the third quarter 2017 acquisition of the Great Falls book of business. The decrease in 2018 estimated tax payments was primarily due to the lower statutory federal income tax rate in 2018 as compared to 2017 . The increase in paid losses was driven by all of our operating segments, particularly in our Specialty P&C segment, primarily due to the timing of loss payments between periods, and our Lloyd's Syndicates segment, primarily due to 2017 storm-related losses which were paid in the current year. The decrease in cash paid for operating expenses was primarily due to a decrease in compensation related costs, largely offset by an increase in cash paid for operating expenses in our Lloyd's Syndicates segment primarily due to the start-up of Syndicate 6131. The decrease in cash received from investment income was primarily due to a reduction in interest received on our fixed maturities portfolio resulting from lower average balances.

The decrease in operating cash flows in 2017 as compared to 2016 of $5.6 million was primarily driven by an increase in tax payments of $25.1 million and an increase in cash paid for other underwriting and operating expenses of approximately $17.0 million . The increase in tax payments was due to the effect of a $15.0 million tax refund received in 2016 for the 2015 tax year and a $10.1 million increase in 2017 estimated tax payments. The increase in cash paid for other underwriting and operating expenses was primarily due to an increase in policy acquisition costs and an increase in cash paid for interest, primarily due to the increase in our weighted average outstanding debt in 2017. These decreases in operating cash flows were largely offset by an increase in premium receipts of $16.1 million , driven by our Workers' Compensation Insurance segment, a decrease in loss payments of $11.9 million , driven by our Specialty P&C segment and an increase in cash received from investment income of $10.8 million primarily due to distributions from unconsolidated subsidiaries.

The increase in operating cash flows in 2016 as compared to 2015 of $39.8 million was primarily due to a decrease in net tax payments driven by a $35.5 million reduction in estimated tax payments and a $15.0 million refund received in 2016 for the 2015 tax year. In addition, the increase reflected premium receipts of $11.8 million from a novation entered into during the fourth quarter of 2016. The increase in operating cash flows was partially offset by a decrease in cash received from investment income of $33.0 million primarily due to a reduction in interest received on our fixed maturities portfolio resulting from lower average balances.

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 composed of dividend payments and borrowings and repayments under our Revolving Credit Agreement . See further discussion of our financing activities in this section under "Financing Activities and Related Cash Flows."

Operating Activities and Related Cash Flows

Losses

The following table, known as the Analysis of Reserve Development, presents information over the preceding ten years regarding the payment of our losses as well as changes to (the development of) our estimates of losses during that time period. As noted in the table, we have completed various acquisitions over the ten year period which have affected original and re-estimated gross and net reserve balances as well as loss payments.

The table includes losses on both a direct and an assumed basis and is net of anticipated reinsurance recoverables. The gross liability for losses before reinsurance, as shown on the balance sheet, and the reconciliation of that gross liability to amounts net of reinsurance are reflected below the table. We do not discount our reserve for losses to present value. Information presented in the table is cumulative and, accordingly, each amount includes the effects of all changes in amounts for prior years. The table presents the development of our balance sheet reserve for losses; it does not present accident year or policy year development data. Conditions and trends that have affected the development of liabilities in the past may not

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necessarily occur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on this table.

The following may be helpful in understanding the Analysis of Reserve Development:


•	The line entitled “Reserve for losses, undiscounted and net of reinsurance recoverables” reflects our reserve for losses and loss adjustment expense, less the receivables from reinsurers, each as reported in our consolidated financial statements at the end of each year (the Balance Sheet Reserves).


•	The section entitled “Cumulative net paid, as of” reflects the cumulative amounts paid as of the end of each succeeding year with respect to the previously recorded Balance Sheet Reserves.


•	The section entitled “Re-estimated net liability as of” reflects the re-estimated amount of the liability previously recorded as Balance Sheet Reserves that includes the cumulative amounts paid and an estimate of the remaining net liability based upon claims experience as of the end of each succeeding year (the Net Re-estimated Liability).


•	The line entitled “Net cumulative redundancy (deficiency)” reflects the difference between the previously recorded Balance Sheet Reserve for each applicable year and the Net Re-estimated Liability relating thereto as of the end of the most recent fiscal year.

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Analysis of Reserve Development

	December 31
(In thousands)	2008			2009			2010			2011			2012			2013			2014			2015			2016			2017			2018
Reserve for losses, undiscounted and net of reinsurance recoverables	$	2,111,112		$	2,159,571		$	2,136,664		$	2,000,114		$	1,860,076		$	1,825,304		$	1,820,300		$	1,755,976		$	1,719,953		$	1,712,796		$	1,776,027
Cumulative net paid, as of:
One Year Later	278,655			291,654			264,597			300,703			311,835			343,197			390,849			383,062			369,682			412,711
Two Years Later	468,277			476,682			491,657			526,903			563,805			571,690			646,878			633,246			644,422
Three Years Later	584,410			614,369			639,220			682,576			704,795			732,892			804,624			818,102
Four Years Later	666,105			706,091			737,253			763,703			800,189			826,384			917,236
Five Years Later	724,377			761,659			789,965			821,742			852,873			891,615
Six Years Later	758,863			793,528			828,043			852,119			893,529
Seven Years Later	778,795			811,333			844,810			876,840
Eight Years Later	790,950			821,435			859,561
Nine Years Later	796,125			829,217
Ten Years Later	798,022
Re-estimated net liability as of:
End of Year	2,111,112			2,159,571			2,136,664			2,000,114			1,860,076			1,825,304			1,820,300			1,755,976			1,719,953			1,712,796
One Year Later	1,903,812			1,925,581			1,810,799			1,728,076			1,644,203			1,644,516			1,659,120			1,612,198			1,612,198			1,620,680
Two Years Later	1,665,832			1,615,603			1,543,650			1,498,158			1,472,259			1,483,378			1,519,078			1,485,357			1,481,292
Three Years Later	1,383,189			1,362,538			1,324,906			1,342,996			1,331,828			1,358,560			1,396,130			1,380,687
Four Years Later	1,154,552			1,172,091			1,205,737			1,224,597			1,231,337			1,252,605			1,296,074
Five Years Later	1,019,407			1,086,027			1,111,591			1,148,793			1,157,493			1,173,975
Six Years Later	961,808			1,012,597			1,050,549			1,091,646			1,108,716
Seven Years Later	915,935			961,987			1,010,802			1,056,053
Eight Years Later	885,698			940,035			988,980
Nine Years Later	871,466			919,089
Ten Years Later	855,145

Net cumulative redundancy (deficiency)	$	1,255,967		$	1,240,482		$	1,147,684		$	944,061		$	751,360		$	651,329		$	524,226		$	375,289		$	238,661		$	92,116
Original gross liability - end of year	$	2,379,468		$	2,422,230		$	2,414,100		$	2,247,772		$	2,051,428		$	2,072,822		$	2,058,266		$	2,005,326		$	1,993,428		$	2,048,381
Reinsurance recoverables	(268,356		)	(262,659		)	(277,436		)	(247,658		)	(191,352		)	(247,518		)	(237,966		)	(249,350		)	(273,475		)	(335,585		)
Original net liability - end of year	$	2,111,112		$	2,159,571		$	2,136,664		$	2,000,114		$	1,860,076		$	1,825,304		$	1,820,300		$	1,755,976		$	1,719,953		$	1,712,796
Gross re-estimated liability - latest	$	1,002,251		$	1,049,576		$	1,122,573		$	1,195,275		$	1,245,263		$	1,338,250		$	1,483,540		$	1,598,594		$	1,730,277		$	1,937,847
Re-estimated reinsurance recoverables	(147,106		)	(130,487		)	(133,593		)	(139,222		)	(136,547		)	(164,275		)	(187,466		)	(217,907		)	(248,985		)	(317,167		)
Net re-estimated liability - latest	$	855,145		$	919,089		$	988,980		$	1,056,053		$	1,108,716		$	1,173,975		$	1,296,074		$	1,380,687		$	1,481,292		$	1,620,680
Gross cumulative redundancy (deficiency)	$	1,377,217		$	1,372,654		$	1,291,527		$	1,052,497		$	806,165		$	734,572		$	574,726		$	406,732		$	263,151		$	110,534

See table notes on following page.

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Table Notes


•	Reserves for 2009 and thereafter include gross and net reserves acquired in 2009 business combinations of $169.4 million and $163.9 million , respectively.


•	Reserves for 2010 and thereafter include gross and net reserves acquired in 2010 business combinations of $88.1 million and $82.2 million , respectively.


•	Reserves for 2012 and thereafter include gross and net reserves acquired in 2012 business combinations of $21.8 million and $19.2 million , respectively, which considers reductions of $3.6 million and $3.3 million , respectively, recorded in 2013 due to the re-estimation of the fair value of the acquired reserves.


•	Reserves for 2013 include gross and net reserves acquired in 2013 business combinations of $201.1 million and $126.0 million , respectively.


•	Reserves for 2014 include gross and net reserves acquired in 2014 business combinations of $153.2 million and $139.5 million , respectively.

In each year reflected in the table, we have estimated our reserve for losses utilizing the management and actuarial processes discussed under the heading "Reserve for Losses and Loss Adjustment Expenses" in the Critical Accounting Estimates section. Factors that have contributed to the variation in loss development are primarily related to the extended period of time required to resolve professional liability claims and include the following:

•

The HCPL legal environment deteriorated in the late 1990’s and severity began to increase at a greater pace than anticipated in our rates and reserve estimates. We addressed the adverse severity trends through increased rates, stricter underwriting and modifications to claims handling procedures, and reflected this adverse severity trend when we established our initial reserves for subsequent years.

•

These adverse severity trends later moderated, with that moderation becoming more pronounced beginning in 2009. We have been cautious in giving full recognition to indications that the pace of severity increase had slowed, however we have given measured recognition of the improved trend in our reserve estimates, as discussed more fully under the heading “Reserve for Losses and Loss Adjustment Expenses" in the Critical Accounting Estimates section (reserve for losses or reserve). The favorable development was most pronounced for years 2004 to 2008, as the initial reserves for these accident years were established prior to substantial indication that severity trends were moderating. We have given stronger recognition to the lower severity trend as time has elapsed and a greater percentage of claims have closed.

•

A general decline in claim frequency has also been a contributor to favorable loss development. A significant portion of our policies through 2003 were issued on an occurrence basis, and a smaller portion of our ongoing business results from the issuance of extended reporting endorsements which have occurrence-like exposure. As claim frequency declined, the number of reported claims related to these coverages was less than originally expected.

•

In 2017, we became concerned again around potential higher severity trends in HCPL business and began to reflect this concern in our case reserve estimates for both 2017 and 2018. This concern was also reflected in more conservative estimates of ultimate losses for open claims for earlier accident years. Furthermore, we are responding to these initial loss indications by seeking rate increases where we believe appropriate and maintaining our underwriting discipline.

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Activity in our net reserve for losses during 2018 , 2017 and 2016 is summarized below:



	Year Ended December 31
(In thousands)	2018			2017			2016
Balance, beginning of year	$	2,048,381		$	1,993,428		$	2,005,326
Less reinsurance recoverables on unpaid losses and loss adjustment expenses	335,585			273,475			249,350
Net balance, beginning of year	1,712,796			1,719,953			1,755,976
Net losses:
Current year	685,326			603,518			587,007
Favorable development of reserves established in prior years, net	(92,116		)	(134,360		)	(143,778		)
Total	593,210			469,158			443,229
Paid related to:
Current year	(117,268		)	(106,633		)	(96,190		)
Prior years	(412,711		)	(369,682		)	(383,062		)
Total paid	(529,979		)	(476,315		)	(479,252		)
Net balance, end of year	1,776,027			1,712,796			1,719,953
Plus reinsurance recoverables on unpaid losses and loss adjustment expenses	343,820			335,585			273,475
Balance, end of year	$	2,119,847		$	2,048,381		$	1,993,428

At December 31, 2018 our gross reserve for losses included case reserves of approximately $1.4 billion and IBNR reserves of approximately $0.7 billion . Our consolidated gross reserve for losses on a GAAP basis exceeds the combined gross reserves of our insurance subsidiaries on a statutory basis by approximately $0.2 billion , which is principally due to the portion of the GAAP reserve for losses that is reflected for statutory accounting purposes as unearned premiums. These unearned premiums are applicable to extended reporting endorsements (“tail” coverage) issued without a premium charge upon death, disability or retirement of an insured who meets certain qualifications.

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. The purchase of reinsurance does not relieve us from the ultimate risk on our policies; however, it does provide reimbursement for certain losses we pay. We pay our reinsurers a premium in exchange for reinsurance of the risk. In the majority of our excess of loss arrangements, the premium due to the reinsurer is determined by the loss experience of the business reinsured, subject to certain minimum and maximum amounts. Until all loss amounts are known, we estimate the premium due to the reinsurer. Changes to the estimate of premium owed under reinsurance agreements related to prior periods are recorded in the period in which the change in estimate occurs and can have a significant effect on net premiums earned.

We offer alternative market solutions whereby we cede certain premiums from our Workers' Compensation Insurance and Specialty P&C segments to either the SPCs at Eastern Re or Inova Re , our Cayman Islands reinsurance subsidiaries which are reported in our Segregated Portfolio Cell Reinsurance segment, or, to a limited extent, unaffiliated captive insurers. During 2018 and 2017, we wrote total alternative market premium of approximately $89.6 million and $84.5 million, respectively. The majority of these policies ( $85.1 million and $77.7 million in 2018 and 2017, respectively) are reinsured to the SPC s at Eastern Re or Inova Re , net of a ceding commission. Each SPC at Eastern Re and Inova Re is owned, fully or in part, by an agency, group or association and the operating results of the SPC s are due to the participants of that cell. We participate to a varying degree in the results of selected SPC s and, for the SPC s in which we participate, our participation interest is as low as 25% and as high as 85% . SPC operating results due to external cell participants are reflected as a SPC dividend expense in our Segregated Portfolio Cell Reinsurance segment. See further discussion on our SPC operations in the Segment Operating Results - Segregated Portfolio Cell Reinsurance section that follows. The alternative market workers' compensation policies are ceded from our Workers' Compensation Insurance segment to the SPC s under 100% quota share reinsurance agreements. The

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alternative market professional liability policies are ceded from our Specialty P&C segment to the SPC s under either excess of loss or quota share reinsurance agreements, depending on the structure of the individual program, and the portion of the risk that is not ceded to an SPC may also be reinsured under our standard healthcare professional liability reinsurance program depending on the policy limits provided. The remaining premium written in our alternative market business of $4.5 million and $6.8 million in 2018 and 2017, respectively, is 100% ceded to unaffiliated captive insurers.

Prior to January 1, 2018, Syndicate 1729 served as a reinsurer on a quota share basis for a wholly owned insurance subsidiary in our Specialty P&C segment. Syndicate 1729 did not renew the quota share agreement with our Specialty P&C segment on January 1, 2018.

For all of our segments, we make a determination of the amount of insurance risk we choose to retain based upon numerous factors, including our risk tolerance and the capital we have to support it, the price and availability of reinsurance, the volume of business, our level of experience with a particular set of claims and our analysis of the potential underwriting results. We purchase excess of loss reinsurance to limit the amount of risk we retain and we do so from a number of companies to mitigate concentrations of credit risk. We utilize reinsurance brokers to assist us in the placement of these reinsurance programs and in the analysis of the credit quality of our reinsurers. The determination of which reinsurers we choose to do business with is based upon an evaluation of their then current financial strength, rating and stability. However, the financial strength of our reinsurers and their corresponding ability to pay us may change in the future due to forces or events we cannot control or anticipate. As of December 31, 2018 , there is no reinsurer, on an individual basis, for which our recoverables for both paid and unpaid claims (net of amounts due to the reinsurer) and our prepaid balances are aggregately $36 million or more.

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. These agreements are negotiated and renewed annually. Renewal dates for our healthcare professional liability, medical technology liability and workers' compensation treaties are October 1, January 1 and May 1, respectively. There were no significant changes in the cost or structure of our healthcare professional liability and medical technology liability treaties which renewed October 1, 2018 and January 1, 2019, respectively. Our workers' compensation treaty renewed May 1, 2018 at a higher rate than the previous agreement. The significant coverages provided by our current excess of loss reinsurance agreements are detailed in the following table.

Excess of Loss Reinsurance Agreements



Healthcare Professional Liability	Medical Technology & Life Sciences Products	Workers' Compensation - Traditional

⁽¹⁾ Historically, retention has ranged from 5% to 32.5%.

⁽²⁾ Historically, retention has been as high as $2M.

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Large professional liability 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 and with certain insurance agencies that produce business for us.

Other Reinsurance Arrangements

For the workers' compensation business ceded to Eastern Re and Inova Re , each SPC has in place its own reinsurance arrangements; which are illustrated in the following table.

Segregated Portfolio Cell Reinsurance



Per Occurrence Coverage		Aggregate Coverage ⁽¹⁾

⁽¹⁾ Prior to May 1, 2018, ProAssurance assumed 100% of aggregate losses in excess of an aggregate attachment point with a maximum loss limit of $100K. Effective May 1, 2018, ProAssurance no longer participates in the aggregate reinsurance coverage.

⁽²⁾ The attachment point is based on a percentage of written premium (average is 89%) and varies by cell.

Each SPC has participants and the profit or loss of each cell accrues fully to these cell participants. We participate in certain SPC s and as of December 31, 2018 , our ownership interest in the SPC s in which we participate is as low as 25% and as high as 85% . 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 a letter of credit to us 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, a SPC 's retained profits are considered in the determination of the collateral amount required to be provided by the cell's external participants.

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 level of reinsurance that Syndicate 1729 purchases is dependent on a number of factors, including its underwriting risk appetite for catastrophic exposure, the specific risks inherent in each line or class of business written and the pricing, coverage and terms and conditions available from the reinsurance market. Reinsurance protection by line of business is as follows:


•	Reinsurance is utilized on a per risk basis for the property insurance and casualty coverages in order to mitigate risk volatility.

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•	Catastrophic protection is utilized on both our property insurance and casualty coverages to protect against losses in excess of policy limits as well as natural catastrophes.


•	Both quota share reinsurance and excess of loss reinsurance are utilized to manage the net loss exposure on our property reinsurance coverages.


•	Property umbrella excess of loss reinsurance is utilized for peak catastrophe and frequency of catastrophe exposures.


•	External excess of loss reinsurance is utilized by Syndicate 1729 to manage the net loss exposure on the specialty property and contingency coverages ceded to Syndicate 6131 (see further discussion in Segment Operating Results - Lloyd’s Syndicates section that follows).

Syndicate 1729 may still be exposed to losses that exceed the level of reinsurance purchased as well as to reinstatement premiums triggered by losses exceeding specified levels. Cash demands on Syndicate 1729 can vary significantly depending on the nature and intensity of a loss event. For significant reinsured catastrophe losses, the inability or unwillingness of the reinsurer to make timely payments under the terms of the reinsurance agreement could have an adverse effect on Syndicate 1729 's liquidity.

Litigation

We are involved in various legal actions related to insurance policies and claims handling including, but not limited to, claims asserted against us by policyholders. These types of legal actions arise in the ordinary course of business and, in accordance with GAAP for insurance entities, are generally considered as a part of our loss reserving process, which is described in detail in our Critical Accounting Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." We also have other direct actions against the Company unrelated to our claims activity which we evaluate and account for as a part of our other liabilities. For these corporate legal actions, we evaluate each case separately and establish what we believe is an appropriate reserve based on GAAP guidance related to contingent liabilities. As of December 31, 2018 there were no material reserves established for corporate legal actions.

Taxes

We are subject to the tax laws and regulations of the U.S. and U.K. We file a consolidated U.S. federal income tax return that includes the holding 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. As a result of the TCJA that was signed into law at the end of 2017, the corporate tax rate effective for the 2018 tax year is 21% as compared to 35% for the 2017 tax year. The lower corporate tax rate had no material effect on our liquidity for the year ended December 31, 2018 .

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Investing Activities and Related Cash Flows

Our investments at December 31, 2018 and December 31, 2017 are comprised as follows:



	December 31, 2018				December 31, 2017
($ in thousands)	Carrying Value		% of Total Investment		Carrying Value		% of Total Investment
Fixed maturities, available for sale:
U.S. Treasury obligations	$	120,201	4	%	$	133,627	4	%
U.S. Government-sponsored enterprise obligations	35,354		1	%	20,956		1	%
State and municipal bonds	293,772		9	%	632,243		17	%
Corporate debt	1,223,475		37	%	1,167,158		31	%
Residential mortgage-backed securities	181,238		5	%	197,844		5	%
Commercial mortgage-backed securities	44,101		1	%	26,703		1	%
Other asset-backed securities	195,657		6	%	101,711		3	%
Total fixed maturities, available for sale	2,093,798		63	%	2,280,242		62	%
Fixed maturities, trading	38,188		1	%	—		—	%
Total fixed maturities	2,131,986		64	%	2,280,242		62	%

Equity investments	442,937		13	%	470,609		13	%
Short-term investments	308,319		9	%	432,126		12	%
BOLI	64,096		1	%	62,113		1	%
Investment in unconsolidated subsidiaries	367,757		11	%	330,591		9	%
Other investments	34,287		2	%	110,847		3	%
Total investments	$	3,349,382	100	%	$	3,686,528	100	%

The distribution of our investments in available-for-sale fixed-maturity securities by rating were as follows:



	December 31, 2018				December 31, 2017
($ in thousands)	Carrying Value		% of Total Investment		Carrying Value		% of Total Investment
Rating*
AAA	$	645,300	31	%	$	617,091	27	%
AA+	101,328		5	%	183,221		8	%
AA	120,801		6	%	173,488		8	%
AA-	155,352		7	%	195,110		9	%
A+	190,595		9	%	210,263		9	%
A	311,036		15	%	296,852		13	%
A-	146,721		7	%	202,581		9	%
BBB+	133,199		6	%	103,023		4	%
BBB	118,864		6	%	100,025		4	%
BBB-	50,466		2	%	48,207		2	%
Below investment grade	100,447		5	%	119,310		6	%
Not rated	19,689		1	%	31,071		1	%
Total	$	2,093,798	100	%	$	2,280,242	100	%
*Average of three NRSRO sources, presented as an S&P equivalent. Source: S&P, Copyright ©2018, S&P Global Market Intelligence

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A detailed listing of our investment holdings as of December 31, 2018 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. In addition to the interest and dividends we will receive, we anticipate that between $30 million and $70 million of our investments 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. 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. As of February 15, 2019 , $250 million could be made available for use through our Revolving Credit Agreement , as discussed in this section under the heading "Debt." 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 10 of the Notes to Consolidated Financial Statements.

As discussed in Note 3 of the Notes to Consolidated Financial Statements, our fixed maturity and short-term investments include securities deposited with Lloyd's in order to meet our FAL requirement. At December 31, 2018 , securities on deposit with Lloyd's included fixed maturities having a fair value of $123.4 million and short-term investments with a fair value of $19.3 million .

Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately 94% 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 December 31, 2018 was 2.99 years; the weighted average effective duration of our fixed maturity securities combined with our short-term securities was 2.60 years.

The carrying value and unfunded commitments for certain of our investments were as follows:



	Carrying Value				December 31, 2018
($ in thousands, except expected funding period)	December 31, 2018		December 31, 2017		Unfunded Commitment		Expected funding period in years
Qualified affordable housing project tax credit partnerships ⁽¹⁾	$	65,677	$	84,607	$	960	6
Historic tax credit partnerships ⁽²⁾	3,757		6,118		276		1
All other investments, primarily investment fund LPs/LLCs	298,323		294,924		221,612		5
Total	$	367,757	$	385,649	$	222,848
⁽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.
⁽²⁾ The carrying value reflects our funded commitments less any amortization.

Investment fund LP s/ LLC s 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 December 31, 2018 , we had investments in 34 separate investment funds with a total carrying value, as shown in the table above, which represented approximately 9% of our total investments. We review and monitor the performance of these investments on a quarterly basis.

Business Combinations and Ventures

There were no business combinations during the years ended December 31, 2018 , 2017 or 2016 .

In the fourth quarter of 2017, we provided 100% of the capital for the newly formed SPA , Syndicate 6131 , which began writing business effective January 1, 2018. The capital for Syndicate 6131 was provided through an increase in our FAL securities, which at December 31, 2018 had a fair value of approximately $142.7 million , as discussed in Note 3 of the Notes to Consolidated Financial Statements. We have a total capital commitment to support our Lloyd's Syndicate operations through 2019 of up to $200 million , referred to as FAL. The Board, through a non-binding resolution, extended this commitment through 2022. See further discussion in our Segment Operating Results - Lloyd's Syndicates section that follows.

Financing Activities and Related Cash Flows

Treasury Shares

Treasury share activity for 2018 , 2017 and 2016 was as follows:



(In thousands)	2018		2017		2016
Treasury shares at the beginning of the period	9,368		9,409		9,403
Shares reacquired, at cost of $2 million for 2016	—		—		44
Shares reissued, primarily those reissued pursuant to the ProAssurance 2011 Employee Stock Ownership Plan, had a fair value of approximately $1 million in 2018 and approximately $2 million in both 2017 and 2016	(16	)	(41	)	(38	)
Treasury shares at the end of the period	9,352		9,368		9,409

We did not repurchase any common shares subsequent to December 31, 2018 and as of February 15, 2019 our remaining Board authorization was approximately $110 million .

Shareholder Dividends

Our Board declared cash dividends during 2018 , 2017 and 2016 as follows:



	Quarterly Cash Dividends Declared, per Share
	2018		2017		2016
First Quarter	$	0.31	$	0.31	$	0.31
Second Quarter	$	0.31	$	0.31	$	0.31
Third Quarter	$	0.31	$	0.31	$	0.31
Fourth Quarter	$	0.31	$	0.31	$	0.31
Fourth Quarter - Special dividend	$	0.50	$	4.69	$	4.69

Each dividend was paid in the month following the quarter in which it was declared. Cash dividends totaling $316 million , $315 million and $119 million were paid during the years ended December 31, 2018 , 2017 and 2016 , respectively. 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.

Debt

At December 31, 2018 , 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.

We have a Revolving Credit Agreement which 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 $200 million , and has available a $50 million accordion feature, which, if successfully subscribed, would expand permitted borrowings up to $250 million . At December 31, 2018 , there were no outstanding borrowings on our Revolving Credit Agreement and we are in compliance with the financial covenants of the Revolving Credit Agreement , which expires in June 2020.

During 2017, two of our subsidiaries each entered into ten-year mortgage loans collectively totaling approximately $40 million (Mortgage Loans) with one lender in connection with the recapitalization of two office buildings. The Mortgage Loans accrue interest at three-month LIBOR plus 1.325% with principal and interest payable on a quarterly basis. At December 31, 2018 , the outstanding balance of the Mortgage Loans was approximately $39 million and we are in compliance with the financial covenant of the Mortgage Loans, which mature in December 2027.

Additional information regarding our debt is provided in Note 10 of the Notes to Consolidated Financial Statements.

During 2017, we entered into an interest rate cap agreement with a notional amount of $35 million to manage our exposure to increases in LIBOR on our Mortgage Loans. Per the interest rate cap agreement, we are entitled to receive cash payments if and when the three-month LIBOR exceeds 2.35% . Additional information on our interest rate cap agreement is provided in Note 11 of the Notes to Consolidated Financial Statements.

Two 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

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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.

Off-Balance Sheet Arrangements/Guarantees

We have no significant off-balance sheet arrangements/guarantees that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. See more information on our off-balance sheet arrangements in Note 9 of the Notes to Consolidated Financial Statements.

Contractual Obligations

We believe that our operating cash flow and funds from our investment portfolio are adequate to meet our contractual obligations.

A schedule of our non-cancellable contractual obligations at December 31, 2018 was as follows:



	Payments due by period
(In thousands)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Losses and loss adjustment expenses	$	2,119,847	$	580,902	$	815,498	$	381,397	$	342,050
Debt obligations including interest and fees	366,010		19,640		32,684		60,678		253,008
Operating lease obligations	27,124		4,829		7,577		4,506		10,212
Funding commitments primarily related to non-public investment entities	231,942		107,585		87,914		36,325		118
Total	$	2,744,923	$	712,956	$	943,673	$	482,906	$	605,388

The anticipated payout of losses and loss adjustment expenses is based upon our historical payout patterns. Both the timing and amount of these payments may vary from the payments indicated.

At December 31, 2018 , there were no outstanding borrowings on our Revolving Credit Agreement ; however, the above table includes unused commitment fees associated with our Revolving Credit Agreement as we presume the full unused facility will remain available through expiration of the agreement in June 2020. Additionally, we presume the current interest rate on our Mortgage Loans at December 31, 2018 will remain constant until maturity of the Mortgage Loans. For more information regarding these agreements see Note 10 of the Notes to Consolidated Financial Statements.

Our operating lease obligations are primarily for the rental of office space and, to a lesser extent, office equipment. Our funding commitments are primarily related to non-public investment entities but also include the unused commitment under our Syndicate Credit Agreement as we presume it will be fully advanced within the next year for purposes of the disclosure in the table above. For more information regarding these agreements see Note 9 of the Notes to Consolidated Financial Statements.

The above table excludes our remaining capital commitment to support our underwriting capacity in our Lloyd's Syndicates through 2019 of up to $200 million , referred to as FAL . The Board, through a non-binding resolution, extended this commitment through 2022. In order to satisfy the FAL requirement, we transfer funds from our Corporate segment to our Lloyd's Syndicates segment which are used to invest in securities that are placed on deposit with Lloyd's. See further discussion of the securities on deposit with Lloyd's in Note 3 of the Notes to Consolidated Financial Statements. In addition, the table above excludes a short-term loan commitment where we have agreed to advance funds on a 30 day basis. See more information regarding this agreement in Note 9 of the Notes to Consolidated Financial Statements.

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Results of Operations - Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Selected consolidated financial data for each period is summarized in the table below.



	Year Ended December 31
($ in thousands, except per share data)	2018			2017			Change
Revenues:
Net premiums written	$	834,914		$	764,018		$	70,896
Net premiums earned	$	818,853		$	738,531		$	80,322
Net investment result	100,832			103,695			(2,863		)
Net realized investment gains (losses)	(43,488		)	16,409			(59,897		)
Other income	9,833			7,514			2,319
Total revenues	886,030			866,149			19,881

Expenses:
Net losses and loss adjustment expenses	593,210			469,158			124,052
Underwriting, policy acquisition and operating expenses	238,556			235,753			2,803
Segregated portfolio cells dividend expense (income)	9,122			15,771			(6,649		)
Interest expense	16,117			16,844			(727		)
Total expenses	857,005			737,526			119,479
Income before income taxes	29,025			128,623			(99,598		)
Income tax expense (benefit)	(18,032		)	21,359			(39,391		)
Net income	$	47,057		$	107,264		$	(60,207	)
Non-GAAP operating income	$	79,527		$	108,538		$	(29,011	)
Earnings per share:
Basic	$	0.88		$	2.01		$	(1.13	)
Diluted	$	0.88		$	2.00		$	(1.12	)
Non-GAAP operating earnings per share:
Basic	$	1.48		$	2.03		$	(0.55	)
Diluted	$	1.48		$	2.02		$	(0.54	)
Net loss ratio	72.4		%	63.5		%	8.9			pts
Underwriting expense ratio	29.1		%	31.9		%	(2.8		)	pts
Combined ratio	101.5		%	95.4		%	6.1			pts
Operating ratio	90.3		%	82.4		%	7.9			pts
Effective tax rate	(62.1		%)	16.6		%	(78.7		)	pts
Return on equity	3.0		%	6.3		%	(3.3		)	pts
In all tables that follow, the abbreviation " nm " indicates that the information or the percentage change is not meaningful.

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Executive Summary of Operations

As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third quarter of 2018 to include a new segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment reflects the operating results (underwriting profit or loss, plus investment results) of SPCs which assume workers ‘compensation, healthcare professional liability or a combination of the two from our Workers' Compensation Insurance and Specialty P&C segments. The underwriting results of the SPCs that assume workers’ compensation business and healthcare professional liability business were previously reported in our Workers’ Compensation and Specialty P&C segments, respectively, and the results of investment assets solely allocated to SPC operations were previously reported in our Corporate segment, are now reported in the Segregated Portfolio Cell Reinsurance segment. The Workers' Compensation segment has also been renamed "Workers' Compensation Insurance." All prior period segment information has been recast to conform to the current period presentation and the segment reorganization had no impact on previously reported consolidated financial results. See further information regarding the segment reorganization in Note 16 of the Notes to Consolidated Financial Statements.

The following sections provide an overview of our consolidated and segment results of operations for the year ended December 31, 2018 as compared to 2017 . See the Segment Operating Results sections that follow for additional information regarding each segment's operating results.

Revenues

The following table shows our consolidated and segment net premiums earned:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Net Premiums Earned
Specialty P&C	$	491,787	$	449,823	$	41,964	9.3	%
Workers' Compensation Insurance	186,079		163,309		22,770		13.9	%
Segregated Portfolio Cell Reinsurance	73,940		68,197		5,743		8.4	%
Lloyd's Syndicates	67,047		57,202		9,845		17.2	%
Consolidated total	$	818,853	$	738,531	$	80,322	10.9	%

All of our operating segments contributed to the increase in net premiums earned during the year ended December 31, 2018 as compared to 2017 . The largest component of the increase in consolidated net premiums earned during 2018 was $26.6 million of premium written and fully earned from a loss portfolio transfer entered into during the second quarter of 2018 in our Specialty P&C segment (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). The increase in net premiums earned in our Workers' Compensation Insurance segment primarily reflected the late 2017 acquisition of the Great Falls book of business (see further discussion in our Segment Operating Results - Workers' Compensation Insurance section that follows).

The following table shows our consolidated net investment result:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Net investment income	$	91,884	$	95,662	$	(3,778	)	(3.9	%)
Equity in earnings (loss) of unconsolidated subsidiaries	8,948		8,033		915			11.4	%
Net investment result	$	100,832	$	103,695	$	(2,863	)	(2.8	%)

The decrease in our consolidated net investment result in 2018 as compared to 2017 was primarily attributable to a decrease in net investment income primarily due to reduced earnings from our fixed income portfolio which reflected lower average investment balances. The decrease in equity in earnings (loss) of unconsolidated subsidiaries was primarily due to lower reported earnings from a few LP investments and increases in the amortization on our tax credit partnerships. In addition, equity in earnings (loss) of unconsolidated subsidiaries reflected the impact of the adoption of an accounting standard during the first quarter of 2018 around the recognition and measurement of financial assets and financial liabilities (see Note 1 of the Notes to Consolidated Financial Statements for additional detail regarding accounting changes adopted during the period).

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The following table shows our total consolidated net realized investment gains (losses):



	Year Ended December 31
($ in thousands)	2018			2017			Change
Net impairment losses recognized in earnings	$	(490	)	$	(12,952	)	$	12,462		96.2	%
Other net realized investment gains (losses)	(42,998		)	29,361			(72,359		)	(246.4	%)
Net realized investment gains (losses)	$	(43,488	)	$	16,409		$	(59,897	)	(365.0	%)

During 2018 , we recognized OTTI in earnings of $0.5 million related to debt instruments from two issuers in the energy sector. During 2017 , we recognized OTTI in earnings of $13.0 million , including an $8.5 million impairment related to an early stage business investment. Other net realized investment losses during 2018 was driven by changes in the fair value of our equity trading portfolio, partially offset by gains realized on the sale of certain equity securities. See further discussion in our Segment Operating Results - Corporate section that follows.

Expenses

The following table shows our consolidated and segment net loss ratios and net loss development:



	Year Ended December 31
($ in millions)	2018			2017			Change
Current accident year net loss ratio
Consolidated ratio	83.7		%	81.7		%	2.0			pts
Specialty P&C	93.8		%	89.9		%	3.9			pts
Workers' Compensation Insurance	68.0		%	66.1		%	1.9			pts
Segregated Portfolio Cell Reinsurance	64.5		%	67.4		%	(2.9		)	pts
Lloyd's Syndicates	74.0		%	78.7		%	(4.7		)	pts

Calendar year net loss ratio
Consolidated ratio	72.4		%	63.5		%	8.9			pts
Specialty P&C	78.2		%	63.4		%	14.8			pts
Workers' Compensation Insurance	63.7		%	62.6		%	1.1			pts
Segregated Portfolio Cell Reinsurance	52.4		%	54.9		%	(2.5		)	pts
Lloyd's Syndicates	76.9		%	77.3		%	(0.4		)	pts

Favorable (unfavorable) net loss development, prior accident years
Consolidated	$	92.1		$	134.4		$	(42.3	)
Specialty P&C	$	77.0		$	119.4		$	(42.4	)
Workers' Compensation Insurance	$	8.1		$	5.7		$	2.4
Segregated Portfolio Cell Reinsurance	$	9.0		$	8.5		$	0.5
Lloyd's Syndicates	$	(2.0	)	$	0.8		$	(2.8	)

The increase in our consolidated current accident year net loss ratio for the year ended December 31, 2018 as compared to 2017 was primarily due to a higher current accident year net loss ratio in our Specialty P&C segment. The higher current accident year net loss ratio in our Specialty P&C segment was driven by an increase in expected losses in our excess and surplus lines business and, to a lesser extent, the decrease to net premiums earned as a result of an increase in our estimate of premiums owed to reinsurers for expected recoveries on prior year ceded losses. Additionally, the higher current accident year net loss ratio in our Specialty P&C segment reflected the effect of a loss portfolio transfer (net premiums earned at a 95% loss ratio) entered into during the second quarter of 2018 (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). Partially offsetting the increase in the consolidated current accident year net loss ratio in 2018 was a decrease in the current accident year net loss ratio in our Lloyd's Syndicates segment driven by higher net premiums earned, partially offset by an increase in net losses incurred related to natural catastrophes and large property losses as compared to 2017, including the impact of estimated losses recognized in connection with Hurricane Michael (see further discussion in our Segment Operating Results - Lloyd's Syndicates section that follows).

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In both 2018 and 2017 , 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 loss development, as shown in the previous table.

Our consolidated and segment underwriting expense ratios were as follows:



	Year Ended December 31
	2018		2017		Change
Underwriting Expense Ratio
Consolidated	29.1	%	31.9	%	(2.8	)	pts
Specialty P&C	22.9	%	24.0	%	(1.1	)	pts
Workers' Compensation Insurance	29.9	%	32.2	%	(2.3	)	pts
Segregated Portfolio Cell Reinsurance	30.3	%	30.4	%	(0.1	)	pts
Lloyd's Syndicates	47.3	%	47.1	%	0.2		pts
Corporate*	2.3	%	4.0	%	(1.7	)	pts
*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).

Our consolidated underwriting expense ratio decreased for the year ended December 31, 2018 as compared to 2017 driven by an increase in net premiums earned across all of our operating segments and, to a lesser extent, a decrease in operating expenses in our Corporate segment, primarily driven by a decrease in share-based compensation expenses and other compensation related costs. In addition, the decrease reflected a loss portfolio transfer (net premiums earned with minimal associated operating expenses) entered into during the second quarter of 2018 in our Specialty P&C segment, which accounted for 1.0 percentage point of the decrease in our consolidated underwriting expense ratio (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). The decrease in our consolidated underwriting expense ratio for 2018 was partially offset by an increase in consolidated DPAC amortization, primarily in our Specialty P&C segment due to an increase in commission and brokerage expenses, and an increase in operating expenses in our Lloyd's Syndicates segment, primarily due to the establishment of Syndicate 6131.

Taxes

Our effective tax rates for the years ended December 31, 2018 and 2017 were a benefit of 62.1% and an expense of 16.6% , respectively. The largest drivers of the change in the effective tax rate between 2018 and 2017 were the lower statutory federal income tax rate in 2018 as compared to 2017 used to develop the effective tax rate due to the TCJA and the impact of tax credits on the effective tax rate due to lower pre-tax income in 2018 as compared to 2017 .

Our effective tax rates for the years ended December 31, 2018 and 2017 were different from the statutory federal income tax rates in effect for each year primarily due to the utilization of tax credits transferred to us from our tax credit partnership investments and a portion of our investment income being tax-exempt. See further discussion, including notable items during 2018 and 2017 in the Segment Operating Results - Corporate section that follows under the heading "Taxes."

Operating Ratio

Our operating ratio is our combined ratio, less our investment income ratio. This ratio is the effect of underwriting profitability and investment income. Our operating ratio for the years ended December 31, 2018 and 2017 was as follows:



	Year Ended December 31
	2018		2017		Change
Operating ratio	90.3	%	82.4	%	7.9	pts

The increase in 2018 primarily reflected a higher consolidated net loss ratio driven by our Specialty P&C segment primarily due to a lower amount of prior year favorable development and a lower investment income ratio driven by a decline in income from our fixed maturity securities due to lower average investment balances. The lower investment income ratio also reflected the decrease to net investment income due to the adoption of an accounting standard during the first quarter of 2018 around the recognition and measurement of financial assets and financial liabilities (see previous discussion under the heading "Revenues"). The increase was partially offset by a lower expense ratio in our Corporate segment primarily driven by a decrease in share-based compensation expenses and other compensation related costs.

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ROE

ROE is calculated as net income 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. ROE for the years ended December 31, 2018 and 2017 was as follows:



	Year Ended December 31
	2018		2017		Change
ROE	3.0	%	6.3	%	(3.3	)	pts

The decrease in our ROE in 2018 was primarily due to the decrease in net income, partially offset by a lower average equity base as compared to 2017 . The decrease in net income was driven by the change in the fair value of our equity trading portfolio and a lower amount of prior year favorable development in our Specialty P&C segment. The lower average equity base was primarily due to cumulative dividend declarations since the 2017 in excess of net income and, to a lesser extent, lower AOCI primarily resulting from changes in unrealized gains and losses in our fixed maturity available-for-sale securities.

Book Value per Share

We believe the payment of dividends is currently our most effective tool for the deployment of excess capital even though, in the short-term, dividend declarations dampen growth in book value per share. Our book value per share at December 31, 2018 as compared to December 31, 2017 is shown in the following table.



	Book Value Per Share
Book Value Per Share at December 31, 2017	$	29.83
Increase (decrease) to book value per share during the year ended December 31, 2018 attributable to:
Dividends declared	(1.74		)
Net income	0.88
OCI	(0.66		)
Other *	0.08
Book Value Per Share at December 31, 2018	$	28.39
* Includes the impact of cumulative effect adjustments related to ASUs adopted during 2018.

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Non- GAAP Financial Measures

Non-GAAP operating income is a financial measure that is widely used to evaluate performance within the insurance sector. In calculating Non-GAAP operating income, we have excluded the after-tax effects of the items listed in the following table that do not reflect normal operating results. We believe Non-GAAP operating income presents a useful view of the performance of our insurance operations, however it should be considered in conjunction with net income computed in accordance with GAAP.

The following table is a reconciliation of net income to Non-GAAP operating income:



	Year Ended December 31
(In thousands, except per share data)	2018			2017
Net income	$	47,057		$	107,264
Items excluded in the calculation of Non-GAAP operating income:
Net realized investment (gains) losses	43,488			(16,409		)
Net realized gains (losses) attributable to SPCs which no profit/loss is retained ⁽¹⁾	(2,535		)	3,083
Guaranty fund assessments (recoupments)	148			(157		)
Pre-tax effect of exclusions	41,101			(13,483		)
Tax effect ⁽²⁾	(8,631		)	4,719
After-tax effect of exclusions	32,470			(8,764		)
Non-GAAP operating income, before tax reform adjustments	79,527			98,500
Tax reform adjustments on our deferred tax balances excluded in the calculation of Non-GAAP operating income:
Adjustment of deferred taxes upon the change in corporate tax rate ⁽³⁾	—			6,541
Adjustment of deferred taxes upon the change in limitation of future deductibility of certain executive compensation ⁽³⁾	—			3,497
Non-GAAP operating income	$	79,527		$	108,538
Per diluted common share:
Net income	$	0.88		$	2.00
Effect of exclusions	0.60			0.02
Non-GAAP operating income per diluted common share	$	1.48		$	2.02

⁽¹⁾ Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell Reinsurance segment and the portion of SPC operating earnings, including the gain or loss, net of our participation, is due to the external cell participants through 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 due to the external cell participants.

⁽²⁾ The annual expected incremental tax rate for 2018 is 21% as compared to 35% for 2017, associated with the taxable or tax deductible items listed above. Excluding certain discrete items, which are tax effected at the annual expected incremental tax rate in the period they are included in net income, our effective tax rate for the respective years was applied to these items in calculating net income. See previous discussion in this section under the heading "Taxes."

⁽³⁾ Due to tax reform enacted by the TCJA , we remeasured our deferred tax assets and liabilities based on the newly enacted tax rate of 21% and recognized a charge of $6.5 million , which is included as a component of income tax expense from continuing operations for the year ended December 31, 2017 . In addition, we made a reasonable estimate of the effects on our deferred tax asset balances at December 31, 2017 as it related to the limitation on the future deductibility on certain executive compensation and recorded a provisional charge to income tax expense of $3.5 million for the year ended December 31, 2017 . During 2018 , we were able to complete our accounting for the impact of the TCJA on our December 31, 2017 deferred tax asset balances related to executive compensation; no measurement period adjustment was recorded in 2018 as a result (see further discussion in Note 6 of the Notes to Consolidated Financial Statements).

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Segment Operating Results - Specialty Property & Casualty

As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The underwriting results of the SPCs that assume healthcare professional liability business were previously reported in our Specialty P&C segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. All prior period segment information has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.

Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance. Segment operating results reflected pre-tax underwriting profit or loss from these insurance lines, exclusive of investment results, which are included in our Corporate segment. Segment operating results included the following:



	Year Ended December 31
($ in thousands)	2018			2017			Change
Net premiums written	$	494,148		$	466,621		$	27,527			5.9	%

Net premiums earned	$	491,787		$	449,823		$	41,964			9.3	%
Other income	5,844			5,688			156				2.7	%
Net losses and loss adjustment expenses	(384,431		)	(285,250		)	(99,181		)		34.8	%
Underwriting, policy acquisition and operating expenses	(112,419		)	(107,972		)	(4,447		)		4.1	%
Segregated portfolio cells dividend (expense) income	—			(5,181		)	5,181				(100.0	%)
Segment operating results	$	781		$	57,108		$	(56,327	)		(98.6	%)

Net loss ratio	78.2%			63.4%			14.8			pts
Underwriting expense ratio	22.9%			24.0%			(1.1		)	pts

In the second quarter of 2018, we entered into a loss portfolio transfer with a large healthcare organization. Per the agreement, we will cover a specific inventory of existing claims as well as provide tail coverage. As the contract included both prospective (tail) coverage and retroactive coverage, we bifurcated the provisions of the contract and accounted for each component separately. As of the effective date, we recognized total net premiums written and earned of $26.6 million , comprised of $7.9 million of prospective coverage and $18.7 million of retroactive coverage, and total net losses and loss adjustment expenses of $25.4 million within our Specialty P&C segment for the year ended December 31, 2018 . See further discussion in Note 4 of the Notes to Consolidated Financial Statements.

Premiums Written

Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of new business, (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. The healthcare 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.

Gross, ceded and net premiums written were as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Gross premiums written	$	577,196	$	549,323	$	27,873	5.1	%
Less: Ceded premiums written	83,048		82,702		346		0.4	%
Net premiums written	$	494,148	$	466,621	$	27,527	5.9	%

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Gross Premiums Written

Gross premiums written by component were as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Professional liability
Physicians ⁽¹⁾⁽⁸⁾
Twelve month term	$	352,279	$	360,232	$	(7,953	)	(2.2	%)
Twenty-four month term	22,171		27,370		(5,199		)	(19.0	%)
Total Physicians	374,450		387,602		(13,152		)	(3.4	%)
Healthcare facilities ⁽²⁾⁽⁸⁾	65,014		47,697		17,317			36.3	%
Other healthcare providers ⁽³⁾	32,200		32,599		(399		)	(1.2	%)
Legal professionals ⁽⁴⁾	26,227		25,628		599			2.3	%
Tail coverages ⁽⁵⁾⁽⁶⁾	25,579		21,206		4,373			20.6	%
Retroactive coverages ⁽⁶⁾	18,708		—		18,708			nm
Total professional liability	542,178		514,732		27,446			5.3	%
Medical technology liability ⁽⁷⁾	34,528		34,164		364			1.1	%
Other	490		427		63			14.8	%
Total	$	577,196	$	549,323	$	27,873		5.1	%

⁽¹⁾

Physician policies were our greatest source of premium revenues in both 2018 and 2017 . The decrease in twelve month term policies in 2018 was due to timing differences of $10.9 million primarily related to the shifting in 2018 renewal dates of a few large policies that were renewed in the first quarter of 2019. Excluding the effect of these timing differences, twelve month term policies increased $2.9 million as compared to 2017. This increase was primarily due to new business written, an increase in premiums assumed in which we participate on a quota share basis and an increase in renewal pricing, largely offset by retention losses during the period. Renewal pricing increases in 2018 is reflective of our concern about potential increases in loss severity as well as more moderate marketplace price competition. Twelve month term premium in 2018 also reflected an increase in coverage from one insured who acquired an entity that was not previously insured by us. We also offer twenty-four month term policies to our physician insureds in one selected jurisdiction. The decrease in twenty-four month term policies in 2018 as compared to 2017 primarily reflected the normal cycle of renewals (policies subject to renewal in 2018 were previously written in 2016 rather than in 2017 ).

⁽²⁾

Our healthcare facilities premium (which includes hospitals, surgery centers and other similar facilities) increase d in 2018 as compared to 2017 driven by new business written, primarily due to the addition of two large policies in 2018, and, to a lesser extent, an increase in coverage pertaining to one large entity which consolidated certain policies that were not previously insured by us. Additionally, given the loss environment and initial loss indications we are seeing in the healthcare facilities space, we are seeking rate increases where we believe appropriate. These increases were partially offset by retention losses during the period.


⁽³⁾	Our other healthcare providers are primarily dentists, chiropractors and allied health professionals.


⁽⁴⁾	Our legal professionals policies are primarily individual and small group policies in select areas of practice. The increase in 2018 as compared to 2017 was primarily due to new business written and, to a lesser extent, an increase in the rate charged for certain renewed policies in select states due to rate filings, largely offset by retention losses.

⁽⁵⁾

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 custom policies. The amount of tail coverage premium written can vary significantly from period to period. The increase in tail premiums in 2018 was driven by $7.9 million of tail coverage provided in connection with a loss portfolio transfer with a large healthcare organization entered into during the second quarter of 2018 (see further discussion in footnote 6 that follows), partially offset by the effect of tail coverage purchased in 2017 for a few large claims-made policies in one jurisdiction that were rewritten to occurrence coverage. These policies are a part of one of our shared risk arrangements and therefore, a large portion of the premium written was also ceded during 2017 (see further discussion in the Ceded Premiums Written section that follows).

⁽⁶⁾

We offer custom alternative risk solutions including loss portfolio transfers for large healthcare entities who, most commonly, are exiting a line of business, changing an insurance approach, or simply preferring to transfer risk. In the second quarter of 2018, we entered into a loss portfolio transfer with a large healthcare organization. Per the agreement, we will cover a specific inventory of existing claims as well as provide tail coverage. The premiums received for the

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coverage provided for the existing inventory of claims was classified as retroactive coverage and resulted in $18.7 million of one-time premium written and fully earned during 2018 . The premiums received for the prospective (tail) coverage resulted in $7.9 million of one-time premium written and fully earned during 2018 . See Note 4 of the Notes to Consolidated Financial Statements for further information on this transaction.

⁽⁷⁾

Our medical technology liability business is marketed throughout the U.S.; coverage is 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 volume is impacted by the sales volume of insureds. The slight increase in 2018 was primarily due to new business written and, to a lesser extent, an increase in the premium charged for certain renewed policies as a result of an increase in the sales volume of the insureds, partially offset by retention losses. Retention losses in 2018 are largely attributable to an increase in competition on terms and pricing.

⁽⁸⁾

Certain components of our gross premiums written include alternative market premiums. We cede either all or a portion of the alternative market premium, net of reinsurance, to certain SPCs of our wholly owned Cayman Islands reinsurance subsidiaries, Eastern Re and Inova 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. Alternative market gross premiums written by component were as follows:



	Year Ended December 31
($ in millions)	2018		2017		Change
Physicians	$	1.4	$	1.2	$	0.2	16.7	%
Healthcare facilities	4.4		3.1		1.3		41.9	%
Total	$	5.8	$	4.3	$	1.5	34.9	%

The increase in our alternative market healthcare facilities premium during 2018 was primarily due to new business written and, to a lesser extent, an increase in renewal pricing primarily due to increases in exposure related to a few policies, partially offset by retention losses.

New business written by component on a direct basis was as follows:



	Year Ended December 31
(In millions)	2018		2017
Physicians	$	19.8	$	31.6
Healthcare facilities	19.8		5.8
Other healthcare providers	2.5		2.1
Legal professionals	2.8		3.6
Medical technology liability	3.0		5.4
Total	$	47.9	$	48.5

For our Specialty P&C segment, we calculate our retention rate as annualized renewed premium divided by all annualized premium subject to renewal. Retention rates are affected by a number of factors. We may lose insureds to competitors or to alternative insurance mechanisms such as risk retention groups 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 by component was as follows:



	Year Ended December 31
	2018		2017
Physicians*	90	%	90	%
Healthcare facilities*	87	%	86	%
Other healthcare providers*	87	%	85	%
Legal professionals	86	%	84	%
Medical technology liability	87	%	87	%
* Excludes certain policies written on an excess and surplus lines basis.

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We are committed to a rate structure that will allow us to fulfill our obligations to our insureds, while generating competitive 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 items.

Changes in renewal pricing by component was as follows:



	Year Ended December 31
	2018
Physicians ⁽¹⁾⁽²⁾	3	%
Healthcare facilities ⁽¹⁾⁽²⁾	7	%
Other healthcare providers ⁽¹⁾	4	%
Legal professionals ⁽²⁾	5	%
Medical technology liability	3	%
⁽¹⁾ Excludes certain policies written on an excess and surplus lines basis.
⁽²⁾ See Gross Premiums Written section for further explanation of renewal pricing increase.

Ceded Premiums Written

Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. Through our current excess of loss reinsurance arrangements we generally retain the first $1 million in risk insured by us and cede coverages in excess of this amount. For our healthcare professional liability coverages, we also retain from 3% - 12.5% of the next $25 million of risk for coverages in excess of $1 million. For our medical technology liability coverages, we also retain 10% of the next $9 million of risk for coverages in excess of $1 million. We pay our reinsurers a ceding premium in exchange for their accepting the risk, the ultimate amount of which is determined by the loss experience of the business ceded, subject to certain minimum and maximum amounts.

Ceded premiums written were as follows:



	Year Ended December 31
($ in thousands)	2018		2017			Change
Excess of loss reinsurance arrangements ⁽¹⁾	$	35,591	$	31,853		$	3,738		11.7	%
Premium ceded to Syndicate 1729 ⁽²⁾	2,105		13,983			(11,878		)	(84.9	%)
Other shared risk arrangements ⁽³⁾	31,358		30,780			578			1.9	%
Premium ceded to SPCs ⁽⁴⁾	5,159		3,914			1,245			31.8	%
Other ceded premiums written	3,310		3,361			(51		)	(1.5	%)
Adjustment to premiums owed under reinsurance agreements, prior accident years, net ⁽⁵⁾	5,525		(1,189		)	6,714			(564.7	%)
Total ceded premiums written	$	83,048	$	82,702		$	346		0.4	%

⁽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. In the majority 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 increase in ceded premiums written under our excess of loss reinsurance arrangements in 2018 primarily reflected an increase in the premiums we expect to owe our reinsurers based upon increases to our estimates of losses recoverable from our reinsurance partners.

⁽²⁾

As previously discussed, we are the majority participant in Syndicate 1729 and normally record our pro rata share of its operating results in our Lloyd's Syndicates segment on a quarter delay, except when information is available that is material to the current period. We also recorded the cession to Syndicate 1729 from our Specialty P&C segment on a quarter delay as the amounts were not material and that permitted the cession to be reported by both our Lloyd's Syndicates segment and our Specialty P&C segment in the same reporting period. The decrease in premiums ceded to Syndicate 1729 during 2018 primarily reflected the non-renewal of our quota share agreement with Syndicate 1729 on January 1, 2018; the impact of which was not reflected in ceded premiums written until the second quarter of 2018

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due to the quarter delay. Additionally, the decrease in premiums ceded to Syndicate 1729 during 2018 reflected the revised contract terms on our previous quota share agreement effective January 1, 2017 which reduced the premiums ceded by essentially half. See the Segment Operating Results - Lloyd's Syndicates section for further discussion on the quota share agreement. As our premiums are earned, we recognize the related ceding commission income which reduces underwriting expense by offsetting DPAC amortization. For 2018 and 2017 , the related ceding commission income was approximately 27% of ceded premiums written. For our consolidated results, eliminations of the inter-segment portion ( 58% of the Specialty P&C cession) of the transactions are also recorded on a quarter delay.

⁽³⁾

We have entered into various shared risk arrangements, including quota share, fronting, and captive arrangements, with certain large healthcare systems and other insurance entities. These arrangements include our Ascension Health and CAPAssurance programs. 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. The increase in 2018 was primarily driven by growth in our Ascension Health and CAPAssurance programs, largely offset by the effect of a few large tail endorsements that were written, and substantially ceded, during 2017 related to one of these shared risk arrangements, as previously discussed under the heading "Gross Premiums Written."

⁽⁴⁾

As previously discussed, as a part of our alternative market solutions, all or a portion of certain healthcare premium written is ceded to the 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 Operating Results - Segregated Portfolio Cell Reinsurance section for further discussion on the cession to the SPCs from our Specialty P&C segment. The increase in premiums ceded to the SPCs during 2018 was primarily driven by new business written (see discussion in footnote 8 under the heading "Gross Premiums Written").

⁽⁵⁾

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 previously discussed, the premiums ultimately ceded under certain of our excess of loss reinsurance arrangements are subject to the losses ceded under the arrangements. For 2018, we increased our estimate of expected losses and associated recoveries for prior year ceded losses, as well as our estimate of ceded premiums owed to reinsurers. The increase in our estimate of ceded premiums owed to reinsurers during 2018 as compared to 2017 was due to an increase in the number of claims that exceeded our individual risk retention levels under certain loss-sensitive treaties. We believe that this increase in claim severity is reflective of the evolving loss trends within the industry. For 2017, we reduced our estimate of expected losses and associated recoveries for prior year ceded losses, as well as our estimate of ceded premiums owed to reinsurers. Changes to estimates of premiums ceded related to prior accident years are fully earned in the period the changes in estimates occur.

Ceded Premiums Ratio

As shown in the table below, our ceded premiums ratio was affected in both 2018 and 2017 by revisions to our estimate of premiums owed to reinsurers related to coverages provided in prior accident years.



	Year Ended December 31
	2018		2017		Change
Ceded premiums ratio, as reported	14.4	%	15.1	%	(0.7	)	pts
Less the effect of adjustments in premiums owed under reinsurance agreements, prior accident years (as previously discussed)	1.0	%	(0.2	%)	1.2		pts
Ratio, current accident year	13.4	%	15.3	%	(1.9	)	pts

The decrease in the current accident year ceded premiums ratio for the year ended December 31, 2018 was primarily due to the decrease in premiums ceded to Syndicate 1729 and the effect of the loss portfolio transfer entered into during the second quarter of 2018 (increase in gross premiums written with no premium ceded), partially offset by an increase in premiums ceded under our excess of loss reinsurance arrangements. See discussion above under the heading "Ceded Premiums Written."

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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. Generally, our policies carry a term of one year, however, as discussed above, we write certain policies with a twenty-four month term, and a few of our medical technology liability policies have a multi-year 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 underlying loss events occurred in the past. Additionally, 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:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Gross premiums earned	$	580,022	$	537,583	$	42,439	7.9	%
Less: Ceded premiums earned	88,235		87,760		475		0.5	%
Net premiums earned	$	491,787	$	449,823	$	41,964	9.3	%

The increase in gross premiums earned in 2018 was driven by the effect of the loss portfolio transfer entered into during the second quarter of 2018 which resulted in $26.6 million of one-time premium written and fully earned in the current period (see discussion under the heading "Gross Premiums Written"). The increase also included the pro rata effect of higher premiums written during the preceding twelve months, predominantly in our healthcare facilities and physicians lines of business, partially offset by the effect of a few large tail policies written and earned during 2017.

The slight increase in ceded premiums earned during 2018 was driven by the increase in our estimate of ceded premiums owed to reinsurers for expected recoveries on prior year ceded losses in 2018 as compared to a decrease in our estimate in 2017 and, to a lesser extent, an increase in premium ceded under our excess of loss reinsurance arrangements. These increases in ceded premiums earned were offset by the decrease in premiums ceded to Syndicate 1729 during the preceding twelve months (see discussion under the heading "Ceded Premiums Written").

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 losses in excess of policy limits.

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.

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The following table summarizes calendar year net loss ratios by separating losses between the current accident year and all prior accident years. Additionally, the table shows our current accident year net loss ratio was affected by revisions to our estimate of premiums owed to reinsurers related to coverages provided in prior accident years. Net loss ratios were as follows:



	Net Loss Ratios ⁽¹⁾
	Year Ended December 31
	2018		2017		Change
Calendar year net loss ratio	78.2	%	63.4	%	14.8	pts
Less impact of prior accident years on the net loss ratio	(15.6	%)	(26.5	%)	10.9	pts
Current accident year net loss ratio	93.8	%	89.9	%	3.9	pts
Less estimated ratio increase (decrease) attributable to:
Ceded premium adjustments, prior accident years ⁽²⁾	1.0	%	(0.2	%)	1.2	pts
Current accident year net loss ratio, excluding the effect of prior year ceded premium ⁽³⁾	92.8	%	90.1	%	2.7	pts


⁽¹⁾	Net losses, as specified, divided by net premiums earned.

⁽²⁾

During 2018 , we increased the premiums owed under reinsurance agreements for prior accident years which decreased net premiums earned (the denominator of the current accident year ratio). During 2017 , reductions to premiums owed under reinsurance agreements for prior accident years increased net premiums earned. See the discussion in the Premiums section for our Specialty P&C segment under the heading "Ceded Premiums Written" for additional information.

⁽³⁾

The current accident year net loss ratio, excluding the effect of prior year ceded premium adjustments, increased 2.7 percentage points as compared to 2017 driven by our consideration of potential higher severity trends associated with our excess and surplus lines business, which accounted for approximately 2.0 percentage points of the increase. The remaining increase in the current accident year net loss ratio was primarily due our continued concern around potential loss trends in the broader HCPL industry including large, more complex risks. The increase in the current accident year net loss ratio was partially offset by a decrease to our reserves related to DDR coverage endorsements as compared to an increase in 2017. In addition, the current accident year net loss ratio for 2018 also reflected the effect of a loss portfolio transfer (net premiums earned at a 95% loss ratio) entered into during the second quarter of 2018. See discussion in the Premiums section for our Specialty P&C segment under the heading "Gross Premiums Written" for additional information on the loss portfolio transfer.

We recognized net favorable loss development related to our previously established reserve of $77.0 million and $119.4 million for the years ended December 31, 2018 and 2017 , respectively. The net favorable loss development in 2018 and 2017 included $13.3 million and $10.1 million , respectively, attributable to our medical technology liability line of business and $10.9 million and $5.2 million , respectively, attributable to our legal professionals liability line of business. We re-evaluate our previously established reserve each quarter based on our most recently available claims data and currently available industry trend information. Development recognized during 2018 principally related to accident years 2011 through 2014 . Development recognized during 2017 principally related to accident years 2010 through 2014 .

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." 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 2018 and 2017 .

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Underwriting, Policy Acquisition and Operating Expenses

Our Specialty P&C segment underwriting, policy acquisition and operating expenses for the years ended December 31, 2018 and 2017 were comprised as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
DPAC amortization	$	52,253	$	47,611	$	4,642		9.7	%
Management fees	6,968		6,620		348			5.3	%
Other underwriting and operating expenses	53,198		53,741		(543		)	(1.0	%)
Total	$	112,419	$	107,972	$	4,447		4.1	%

DPAC amortization increased during the year ended December 31, 2018 as compared to 2017 driven by an increase in commission and brokerage expenses due to the increase in written and assumed premium during 2018 and a decrease in ceding commission income, which is an offset to expense, due to the reduction in premiums ceded to Syndicate 1729.

Management fees are charged pursuant to a management agreement by the Corporate segment to the operating subsidiaries within our Specialty P&C segment for services provided, based on the extent to which services are provided to the subsidiary and the amount of gross premium written by the subsidiary. While the terms of the management agreement were consistent between 2018 and 2017 , fluctuations in the amount of gross premium written by each subsidiary can result in corresponding variations in the management fee charged to each subsidiary during a particular period. The management fees charged to the Specialty P&C segment during 2018 primarily reflected the increase in gross premiums written due to a loss portfolio transfer entered into during the second quarter of 2018 (see discussion under the heading "Gross Premiums Written").

Other underwriting and operating expenses decreased slightly during the year ended December 31, 2018 as compared to 2017 . Other underwriting and operating expenses in 2018 included $1.0 million associated with a data analytics services agreement entered into during the fourth quarter of 2018 (see Note 9 of the Notes to Consolidated Financial Statements for further information), which was more than offset by slight decreases in other expense categories as compared to 2017, none of which were individually significant.

Underwriting Expense Ratio (the Expense Ratio)

Our expense ratio for the Specialty P&C segment for the year ended December 31, 2018 as compared to 2017 , was as follows:



	Year Ended December 31
	2018		2017		Change
Underwriting expense ratio	22.9	%	24.0	%	(1.1	)	pts

The decrease in the underwriting expense ratio for 2018 was primarily due to the impact of the loss portfolio transfer entered into during the second quarter of 2018 (net premiums earned with minimal associated operating expenses), which accounted for 1.2 percentage points of decrease in the underwriting expense ratio (see further discussion under the heading "Gross Premiums Written"). After removing the impact of the loss portfolio transfer, the underwriting expense ratio for 2018 remained relatively flat as compared to 2017 .

Segregated Portfolio Cell Dividend Expense (Income)

In the third quarter of 2018 , we reorganized our segment reporting which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance (see further discussion under the heading "ProAssurance Overview"). The Segregated Portfolio Cell Reinsurance segment provides the results of SPC s at our Eastern Re and Inova Re subsidiaries, including SPC s that assume healthcare professional liability business which were previously reported within our Specialty P&C segment. As such, there is no longer a SPC dividend expense reported in the Specialty P&C segment associated with these SPC s. See more information on our Cayman Islands SPC operations in the Segment Operating Results - Segregated Portfolio Cell Reinsurance section that follows.

The SPC dividend expense for the year ended December 31, 2017 represented a one-time $5.2 million pre-tax expense related to previously unrecognized SPC dividend expense for the cumulative earnings of unrelated parties that have owned SPC s at various times since 2003 within a Bermuda captive insurance operation. Historically, within our HCPL business, we have written a limited number of segregated cell captive programs through this Bermuda captive arrangement and the use of this facility declined as the HCPL insurance market has softened. The SPC dividend expense attributable to those cells was unrelated to our Cayman Islands captive operations.

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Segment Operating Results - Workers' Compensation Insurance

As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The underwriting results of the SPCs at Eastern Re and Inova Re that assume workers' compensation business were previously reported in our Workers' Compensation segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. The traditional workers' compensation business remains in the Workers' Compensation segment which has been renamed to "Workers' Compensation Insurance." All prior period segment information has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.

Our Workers' Compensation Insurance segment provides workers' compensation products to employers generally with 1,000 or fewer employees. Workers' compensation products offered include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market solutions. Alternative market products include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Alternative market premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, unaffiliated captive insurers. Our Workers' Compensation Insurance segment operating results reflected pre-tax underwriting profit or loss from these workers' compensation products, exclusive of investment results, which are included in our Corporate segment. Segment operating results included the following:



	Year Ended December 31
($ in thousands)	2018			2017			Change
Net premiums written	$	195,350		$	173,566		$	21,784			12.6	%

Net premiums earned	$	186,079		$	163,309		$	22,770			13.9	%
Other income	2,412			2,096			316				15.1	%
Net losses and loss adjustment expenses	(118,483		)	(102,233		)	(16,250		)		15.9	%
Underwriting, policy acquisition and operating expenses	(55,693		)	(52,576		)	(3,117		)		5.9	%
Segment operating results	$	14,315		$	10,596		$	3,719			35.1	%

Net loss ratio	63.7%			62.6%			1.1			pts
Underwriting expense ratio	29.9%			32.2%			(2.3		)	pts

Premiums Written

Our workers’ compensation premium volume is driven by five primary factors: (1) the amount of new business written, (2) audit premium, (3) retention of our existing book of business, (4) premium rates charged on our renewal book of business and (5) changes in payroll exposure.

Gross, ceded and net premiums written were as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Gross premiums written	$	293,230	$	264,048	$	29,182	11.1	%
Less: Ceded premiums written	97,880		90,482		7,398		8.2	%
Net premiums written	$	195,350	$	173,566	$	21,784	12.6	%

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Gross Premiums Written

Gross premiums written by product were as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Traditional business:
Guaranteed cost	$	163,138	$	143,141	$	19,997		14.0	%
Policyholder dividend	21,203		20,388		815			4.0	%
Deductible	8,143		8,362		(219		)	(2.6	%)
Retrospective	6,911		3,428		3,483			101.6	%
Other	9,413		8,185		1,228			15.0	%
Alternative market business	84,422		80,544		3,878			4.8	%
Total	$	293,230	$	264,048	$	29,182		11.1	%

Gross premiums written in our traditional business increased during the year ended December 31, 2018 as compared to 2017 , which primarily reflected new business written, including $11.7 million of new business premium related to the third quarter 2017 acquisition of the Great Falls book of business, an improvement in renewal pricing and an increase in audit premium. The growth in our alternative market business for the year ended December 31, 2018 primarily reflected new business written and an improvement in renewal pricing. We retained 22 of the 23 available alternative market programs up for renewal for the year ended December 31, 2018 , including 6 programs available for renewal during the fourth quarter of 2018.

New business, audit premium, retention and renewal price changes for both the traditional business and the alternative market business are shown in the table below:



	Year Ended December 31
	2018									2017
($ in millions)	Traditional Business			Alternative Market Business			Segment Results			Traditional Business			Alternative Market Business			Segment Results
New business	$	43.2		$	8.3		$	51.5		$	37.8		$	9.9		$	47.7
Audit premium (including EBUB)	$	4.3		$	1.6		$	5.9		$	2.7		$	1.4		$	4.1
Retention rate ⁽¹⁾	84		%	91		%	86		%	85		%	92		%	87		%
Change in renewal pricing ⁽²⁾	(1		%)	—		%	(1		%)	(3		%)	(4		%)	(3		%)
⁽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 the effects of current 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:



	Year Ended December 31
($ in thousands)	2018			2017		Change
Premiums ceded to SPCs	$	79,927		$	73,761	$	6,166		8.4	%
Premiums ceded to external reinsurers	13,515			9,823		3,692			37.6	%
Premiums ceded to unaffiliated captive insurers	4,495			6,784		(2,289		)	(33.7	%)
Change in return premium estimate under external reinsurance	(57		)	114		(171		)	(150.0	%)
Total ceded premiums written	$	97,880		$	90,482	$	7,398		8.2	%

Our Workers' Compensation Insurance segment cedes alternative market business under a 100% quota share reinsurance agreement, net of a ceding commission, to SPCs in our Segregated Portfolio Cell Reinsurance segment. The ceding commission consists of an amount for fronting fees, cell rental fees, commissions, premium taxes, claims administration fees 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 (see discussion that follows under the heading "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 increase in premiums ceded to SPCs in 2018 primarily reflected growth in our alternative market premium, as previously discussed, as well as the designed consolidation of certain unaffiliated captive insurers into SPCs at Inova Re (see discussion below).

Under our external reinsurance agreement, we retain the first $0.5 million in risk insured by us and cede losses in excess of this amount up to $119.5 million on each loss occurrence under our primary external reinsurance contract. 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 year ended December 31, 2018 was driven by an increase in earned premium, an increase in reinsurance rates effective May 1, 2018 and a decrease in revenue sharing with our reinsurance broker, primarily due to a change in estimate during the second quarter of 2017.

The decrease in premiums ceded to unaffiliated captive insurers during the year ended December 31, 2018 primarily reflected the impact of the 2017 designed consolidation of two unaffiliated captive programs. During 2017, we added one new SPC at Inova Re that writes business previously ceded to two non-renewed unaffiliated captive programs. The premium now written through this new SPC is reflected in premiums ceded to SPCs in the table above. During the fourth quarter of 2018, one of the two remaining unaffiliated captive programs was also moved to Inova Re.

Changes in the return premium estimate reflected the loss experience under the reinsurance contract for the years ended December 31, 2018 and 2017 . The increase in the return premium estimate for the year ended December 31, 2018 primarily reflected favorable loss experience in prior contract years.

Ceded Premiums Ratio

The ceded premiums ratio was as follows:



	Year Ended December 31
	2018		2017		Change
Ceded premiums ratio, as reported	34.2	%	35.7	%	(1.5	)	pts
Less the effect of:
Premiums ceded to SPCs (100%)	25.1	%	25.9	%	(0.8	)	pts
Premiums ceded to unaffiliated captive insurers (100%)	2.4	%	4.1	%	(1.7	)	pts
Return premium estimated under external reinsurance	—	%	(0.1	%)	0.1		pts
Assumed premiums earned (not ceded to external reinsurers)	(0.3	%)	(0.3	%)	—		pts
Ceded premiums ratio, less the effects of above	7.0	%	6.1	%	0.9		pts

The above table reflects ceded premiums earned as a percent of gross premiums earned. As discussed above, we cede premiums related to our traditional business to external reinsurers on an earned premium basis. The increase in the ceded premiums ratio for the year ended December 31, 2018 when compared to 2017 primarily reflected an increase in reinsurance rates and the impact of broker revenue sharing, as previously discussed.

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Net Premiums Earned

Net premiums earned were as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Gross premiums earned	$	282,974	$	253,944	$	29,030	11.4	%
Less: Ceded premiums earned	96,895		90,635		6,260		6.9	%
Net premiums earned	$	186,079	$	163,309	$	22,770	13.9	%

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 or unaffiliated captive insurers. 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 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. 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. In addition, we record an estimate for EBUB and evaluate the estimate on a quarterly basis. We did not adjust the EBUB estimate during the years ended December 31, 2018 or 2017 . The increase in net premiums earned primarily reflected the pro rata effect of higher net premiums written during the preceding twelve months.

Losses and Loss Adjustment Expenses

We estimate our current accident year loss and loss adjustment expenses based on an expected loss ratio. Incurred losses and loss adjustment expenses are determined by applying the expected loss ratio to net premiums earned, which includes audit premium, for the respective period. 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:



	Year Ended December 31
	2018		2017		Change
Calendar year net loss ratio	63.7	%	62.6	%	1.1		pts
Less impact of prior accident years on the net loss ratio	(4.3	%)	(3.5	%)	(0.8	)	pts
Current accident year net loss ratio	68.0	%	66.1	%	1.9		pts

The current accident year net loss ratio for the year ended December 31, 2018 was 68.0% as compared to 66.1% for 2017 . The increase in the current accident year net loss ratio reflected an increase in claim trends in 2018, including the impact of severity-related claim activity related to economic growth trends and the increase in new and less experienced workers to the workforce.

Current accident year incurred losses (excluding IBNR) ceded to our external reinsurers totaled $12.6 million for the year ended December 31, 2018 compared to $9.8 million for 2017 . The increase in ceded incurred losses for the year ended December 31, 2018 primarily reflected the aforementioned increase in severity-related claim activity.

We recognized net favorable prior year development related to our previously established reserve of $8.0 million for the year ended December 31, 2018 as compared to $5.7 million for 2017 . The net favorable prior year development for the year ended December 31, 2018 reflected overall favorable trends in claim closing patterns, primarily in the 2015 and 2016 accident years. For each of the years ended December 31, 2018 and 2017 , the net favorable prior year development included $1.6 million related to the amortization of the purchase accounting fair value adjustment.

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Underwriting, Policy Acquisition and Operating Expenses

Underwriting, policy acquisition and operating expenses includes 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 the 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 gross premium written by the subsidiary.

Our Workers' Compensation Insurance segment underwriting, policy acquisition and operating expenses were comprised as follows:



	Year Ended December 31
($ in thousands)	2018			2017			Change
DPAC amortization	$	33,352		$	31,433		$	1,919	6.1	%
Management fees	2,193			1,975			218		11.0	%
Other underwriting and operating expenses	37,407			36,791			616		1.7	%
SPC ceding commission offset	(17,259		)	(17,623		)	364		(2.1	%)
Total	$	55,693		$	52,576		$	3,117	5.9	%

The increase in DPAC amortization for the year ended December 31, 2018 as compared to 2017 primarily reflected the increase in net premiums earned. The increase in other underwriting and operating expenses for the year ended December 31, 2018 as compared to 2017 primarily reflected an increase in expenses associated with the start-up of our New England region through the Great Falls acquisition and an increase in compensation related costs.

As previously discussed, alternative market premiums written through our Workers' Compensation Insurance segment's alternative market business unit are 100% ceded, less a ceding commission, to either the SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, unaffiliated captive insurers. SPC ceding commission income includes fronting fees, commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy acquisition and operating expenses. The increase in SPC ceding commissions earned in 2018 as compared to 2017 was due to growth in the alternative market business over the preceding twelve months.

Underwriting Expense Ratio (the Expense Ratio)

The underwriting expense ratio included the impact of the following:



	Year Ended December 31
	2018		2017		Change
Underwriting expense ratio, as reported	29.9	%	32.2	%	(2.3	)	pts
Less estimated ratio increase (decrease) attributable to:
Impact of ceding commissions received from SPCs	2.9	%	3.4	%	(0.5	)	pts
Amortization of intangible assets	1.3	%	1.2	%	0.1		pts
Management fees	0.8	%	0.8	%	—		pts
Impact of audit premium	(0.4	%)	(0.3	%)	(0.1	)	pts
Underwriting expense ratio, less listed effects	25.3	%	27.1	%	(1.8	)	pts

The decrease in the expense ratio for the year ended December 31, 2018 , exclusive of the items noted in the table, primarily reflected the increase in net premiums earned. There were no other individually significant variances by expense category that contributed to the remaining decrease in the expense ratio.

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Segment Operating Results - Segregated Portfolio Cell Reinsurance

As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting during the third quarter of 2018 which resulted in the creation of the Segregated Portfolio Cell Reinsurance segment. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.

The Segregated Portfolio Cell Reinsurance segment reflects the operating results (underwriting profit or loss, plus investment results) of SPC s at Eastern Re and Inova Re , our Cayman Islands SPC operations. As of December 31, 2018 , there were 26 ( 22 active) SPC s. The SPC s assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from our Workers' Compensation Insurance and Specialty P&C segments. SPC s 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 operating results of the SPC s are due to the participants of that cell. We participate to a varying degree in the results of selected SPC s and, for the SPC s in which we participate, our participation interest is as low as 25% and as high as 85% . SPC operating results due to external cell participants are reflected as a SPC dividend expense in our Segregated Portfolio Cell Reinsurance segment. In addition, our Segregated Portfolio Cell Reinsurance segment includes the SPC investment results as the investments are solely for the benefit of the cell participants and investment results due to external cell participants are reflected in the SPC dividend expense.

Segment operating results reflects our share of the underwriting and investment results of the SPC s in which we participate, and included the following:



	Year Ended December 31
($ in thousands)	2018			2017			Change
Net premiums written	$	75,547		$	68,862		$	6,685		9.7	%

Net premiums earned	$	73,940		$	68,197		$	5,743		8.4	%
Net investment income	1,566			1,059			507			47.9	%
Net realized gains (losses)	(3,149		)	3,914			(7,063		)	(180.5	%)
Other income	211			115			96			83.5	%
Net losses and loss adjustment expenses	(38,726		)	(37,455		)	(1,271		)	3.4	%
Underwriting, policy acquisition and operating expenses	(22,426		)	(20,764		)	(1,662		)	8.0	%
SPC net operating results	11,416			15,066			(3,650		)	(24.2	%)
SPC dividend (expense) income ⁽¹⁾	(9,122		)	(10,590		)	1,468			(13.9	%)
Segment operating results ⁽²⁾	$	2,294		$	4,476		$	(2,182	)	(48.7	%)

Net loss ratio	52.4%			54.9%			(2.5		)	pts
Underwriting expense ratio	30.3%			30.4%			(0.1		)	pts
⁽¹⁾ Represents the operating (profit) loss due to external cell participants.
⁽²⁾ Represents our share of the operating profit (loss) of the SPCs in which we participate.

In 2018, we restructured our Cayman Islands SPC operations. Effective January 1, 2018, all new and renewing alternative market business previously ceded to the SPC s at Eastern Re , with the exception of one program, is now ceded to SPC s operated by a newly formed wholly owned Cayman Islands subsidiary, Inova Re . As part of the restructuring, all SPC s previously operated by Eastern Re , with the exception of one program, ceased assuming new and renewing business on or after January 1, 2018. The external cell participants' cumulative undistributed earnings and the results of all SPC s for the current period due to external cell participants continue to be reported as SPC dividends payable and SPC dividend expense, respectively.

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Premiums Written

Premiums in our Segregated Portfolio Cell Reinsurance segment are 100% 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) audit premium and (5) changes in payroll exposure.

Gross, ceded and net premiums written were as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Gross premiums written	$	85,086	$	77,675	$	7,411	9.5	%
Less: Ceded premiums written	9,539		8,813		726		8.2	%
Net premiums written	$	75,547	$	68,862	$	6,685	9.7	%

Gross Premiums Written

Gross premiums written reflected reinsurance premiums assumed by component as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Workers' compensation	$	79,927	$	73,761	$	6,166	8.4	%
Healthcare professional liability	5,159		3,914		1,245		31.8	%
Gross Premiums Written	$	85,086	$	77,675	$	7,411	9.5	%

Gross premiums written for the years ended December 31, 2018 and 2017 was primarily comprised of workers' compensation coverages assumed from our Workers' Compensation Insurance segment. Gross premiums written increased during 2018 as compared to 2017 , driven by new business written and an improvement in renewal pricing. We retained 22 of the 23 available alternative market programs up for renewal for the year ended December 31, 2018 . In addition, we added a new program at Inova Re during the fourth quarter of 2018 related to the designed consolidation of an unaffiliated captive insurer (see further discussion in our Segment Operating Results - Workers' Compensation Insurance section).

New business, audit premium, retention and renewal price changes for the assumed workers' compensation premium is shown in the table below:



	Year Ended December 31
($ in millions)	2018			2017
New business	$	8.3		$	9.9
Audit premium (including EBUB)	$	1.6		$	1.4
Retention rate ⁽¹⁾	91		%	92		%
Change in renewal pricing ⁽²⁾	—		%	(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 the effects of current 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:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Ceded premiums written	$	9,539	$	8,813	$	726	8.2	%

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 ranges from $0.3 million to $0.35 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 and the slight increase in premiums ceded to external reinsurers for the year ended December 31, 2018 primarily reflected an increase in written premium. External reinsurance rates vary based on the alternative market program.

Ceded Premiums Ratio

Ceded premiums ratio was as follows:



	Year Ended December 31
	2018		2017		Change
Ceded premiums ratio	11.9	%	11.9	%	—	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 remained unchanged for the year ended December 31, 2018 as compared to 2017.

Net Premiums Earned

Gross, ceded and net premiums earned were as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
Gross premiums earned	$	83,264	$	76,911	$	6,353	8.3	%
Less: Ceded premiums earned	9,324		8,714		610		7.0	%
Net premiums earned	$	73,940	$	68,197	$	5,743	8.4	%

Net premiums earned consist of gross premiums earned less the portion of earned premiums that the SPC s 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 SPC s 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. The increase in net premiums earned primarily reflected the pro rata effect of higher net premiums written during the preceding twelve months.

Net Investment Income and Net Realized Investment Gains (Losses)

Net investment income for the years ended December 31, 2018 and 2017 was primarily attributable to interest earned on available-for-sale fixed maturity investments, which primarily includes investment-grade corporate debt securities. Net realized investment losses for the years ended December 31, 2018 and 2017 primarily reflected changes in the value of the SPC s' 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. Calendar year and current accident year net loss ratios were as follows:



	Year Ended December 31
	2018		2017		Change
Calendar year net loss ratio	52.4	%	54.9	%	(2.5	)	pts
Less impact of prior accident years on the net loss ratio	(12.1	%)	(12.5	%)	0.4		pts
Current accident year net loss ratio	64.5	%	67.4	%	(2.9	)	pts
Less impact of audit premium related to workers' compensation business	(1.5	%)	(1.4	%)	(0.1	)	pts
Current accident year net loss ratio, excluding the effect of audit premium	66.0	%	68.8	%	(2.8	)	pts

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 claims activity can cause the current accident year net loss ratio to fluctuate significantly from period to period. The current accident year net loss ratio decreased as compared to 2017 primarily due to a decrease in severity-related claims activity.

Current accident year incurred losses (excluding IBNR ) ceded to our external reinsurers totaled $2.0 million and $3.2 million for the years ended December 31, 2018 and 2017 , respectively.

We recognized net favorable prior year development of $9.0 million and $8.5 million for the years ended December 31, 2018 and 2017 , respectively, which primarily reflected better than expected claim trends in the 2015, 2016 and 2017 accident years. The improved claim trends reflected lower frequency and severity than anticipated at the time the reserves were established.

Audit premium from workers' compensation insureds results in a decrease in the net loss ratio, whereas audit premium returned to workers' compensation insureds results in an increase in the net loss ratio. We recognized audit premium of $1.6 million and $1.4 million for the years ended December 31, 2018 and 2017 , respectively, the effect of which is reflected in the previous table. We estimate our current accident year losses and loss adjustment expenses based on the underlying actuarial methodologies without consideration of audit premium. As a result, we removed the effects of audit premium in the previous table for purposes of evaluating the current accident year net loss ratio.

Underwriting, Policy Acquisition and Operating Expenses

Our Segregated Portfolio Cell Reinsurance segment underwriting, policy acquisition and operating expenses were comprised as follows:



	Year Ended December 31
($ in thousands)	2018		2017		Change
DPAC amortization	$	21,039	$	19,927	$	1,112	5.6	%
Other underwriting and operating expenses	1,387		837		550		65.7	%
Total	$	22,426	$	20,764	$	1,662	8.0	%

DPAC amortization primarily represented 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 within our Workers' Compensation Insurance segment.

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Underwriting Expense Ratio (the Expense Ratio)

The underwriting expense ratio included the impact of the following:



	Year Ended December 31
	2018		2017		Change
Underwriting expense ratio, as reported	30.3	%	30.4	%	(0.1	)	pts
Less impact of audit premium on expense ratio	(0.7	%)	(0.6	%)	(0.1	)	pts
Underwriting expense ratio, excluding the effect of audit premium	31.0	%	31.0	%	—		pts

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Segment Operating Results - Lloyd's Syndicates

Our Lloyd's Syndicates segment includes operating results from our participation in certain Syndicates at Lloyd's of London. We have a total capital commitment to support our Lloyd's Syndicate operations through 2019 of up to $200 million , referred to as FAL . The Board, through a non-binding resolution, extended this commitment through 2022. For the 2018 underwriting year, our FAL was comprised of investment securities deposited with Lloyd's which at December 31, 2018 had a fair value of approximately $142.7 million , as discussed in Note 3 of the Notes to Consolidated Financial Statements. During the fourth quarter of 2018, we increased our FAL securities in order to support Syndicate 1729 's accumulated losses from prior years, stemming primarily from property and natural catastrophe losses.

We normally report results from our involvement in Lloyd's Syndicates on a quarter delay, except when information is available that is material to the current period (see discussion that follows under the heading "Property and Natural Catastrophe Losses"). 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 are the majority capital provider to Syndicate 1729 , which covers a range of property and casualty insurance and reinsurance lines. For the 2018 underwriting year, we increased our participation in the operating results of Syndicate 1729 from 58% to 62% which, due to the quarter delay, was not reflected in our Lloyd's Syndicates segment results until the second quarter of 2018. The remaining capital for Syndicate 1729 is provided by unrelated third parties, including private names and other corporate members. Syndicate 1729 had a maximum underwriting capacity of £132.0 million for the 2018 underwriting year, of which £82.0 million ( $104.6 million based on December 31, 2018 exchange rates) was our allocated underwriting capacity. For the 2019 underwriting year, we slightly decreased our participation in the operating results of Syndicate 1729 from 62% to 61% which, due to the quarter delay, will not be reflected in our Lloyd's Syndicates segment results until the second quarter of 2019 . Syndicate 1729 's maximum underwriting capacity for the 2019 underwriting year is £128 million (approximately $163.3 million at December 31, 2018 ), of which £78 million (approximately $99.5 million at December 31, 2018 ) is our allocated underwriting capacity.

Lloyd's Syndicate 6131. Beginning in the second quarter of 2018, our Lloyd's Syndicates segment includes the operating results of a SPA , Syndicate 6131 , which began writing business effective January 1, 2018 and focuses on contingency and specialty property business. As a SPA , Syndicate 6131 is only allowed to underwrite one quota share reinsurance contract with Syndicate 1729 . We are the sole ( 100% ) capital provider to Syndicate 6131 and for the 2018 underwriting year Syndicate 6131 had a maximum underwriting capacity of £8.0 million ( $10.2 million based on December 31, 2018 exchange rates). For the 2019 underwriting year, Syndicate 6131 has a maximum underwriting capacity of £12 million (approximately $15.3 million at December 31, 2018 ).

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 operating results of our wholly owned subsidiaries that support our operations at Lloyd's. For the years ended December 31, 2018 and 2017 , the results of our Lloyd's Syndicates segment were as follows:



	Year Ended December 31
($ in thousands)	2018			2017			Change
Gross premiums written	$	88,746		$	70,224		$	18,522		26.4	%
Ceded premiums written	(18,877		)	(15,255		)	(3,622		)	23.7	%
Net premiums written	$	69,869		$	54,969		$	14,900		27.1	%

Net premiums earned	$	67,047		$	57,202		$	9,845		17.2	%
Net investment income	3,358			1,736			1,622			93.4	%
Net realized gains (losses)	(460		)	107			(567		)	(529.9	%)
Other income (loss)	322			(1,476		)	1,798			121.8	%
Net losses and loss adjustment expenses	(51,570		)	(44,220		)	(7,350		)	16.6	%
Underwriting, policy acquisition and operating expenses	(31,686		)	(26,963		)	(4,723		)	17.5	%
Income tax benefit (expense)	317			568			(251		)	(44.2	%)
Segment operating results	$	(12,672	)	$	(13,046	)	$	374		2.9	%

Net loss ratio	76.9		%	77.3		%	(0.4		)	pts
Underwriting expense ratio	47.3		%	47.1		%	0.2			pts

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Property and Natural Catastrophe Losses

As previously mentioned, we normally report results from our involvement in Lloyd's Syndicates on a quarter delay; however, during the fourth quarter of 2018, Syndicate 1729 reported loss estimates in connection with Hurricane Michael, which affected the northwest portion of Florida during October 2018. We estimated our allocated share of the net pre-tax losses in connection with Hurricane Michael to be approximately $6.8 million , net of reinsurance and reinstatement premiums. These losses would normally be reported in the first quarter of 2019 due to the aforementioned quarter delay. However, due to the availability and significance of these estimates, we have accelerated our reporting of these storm-related losses into the fourth quarter of 2018, which is consistent with our policy of disclosing significant losses in the period in which they become known to us.

Segment operating results for both of the years ended December 31, 2018 and 2017 also included our allocated share of the estimates for losses in connection with other significant natural catastrophes that occurred during the past two years. These estimates also included reinstatement premiums we expect to receive from insureds as well as pay reinsurers, both of which were written and earned during the respective period. For the year ended December 31, 2018 , we estimate our allocated share of the net pre-tax losses associated with these natural catastrophe and property losses to be approximately $12.1 million , which includes the estimated $6.8 million in losses in connection with Hurricane Michael, as discussed above. The remaining estimated losses in 2018 were primarily in connection with lava damage caused by the volcanic eruptions in Hawaii and storm damage related to Hurricane Florence, which affected several states along the Mid-Atlantic U.S. Estimated net pre-tax losses in 2018 were partially offset by subsequent adjustments of approximately $2.1 million related to prior year storm-related losses. For the year ended December 31, 2017, our estimated allocated share of net pre-tax losses associated with natural catastrophe and property losses was $7.1 million and was primarily in connection with Hurricanes Harvey, Irma and Maria, which affected Texas, several states in the Southeastern U.S. and islands in the Caribbean.

The impact of these natural catastrophe and property losses on our Lloyd's Syndicates segment's operating results for the years ended December 31, 2018 and 2017 was as follows:



	Year Ended December 31
($ in thousands)	2018			2017			Change
Gross premiums written	$	913		$	234		$	679		290.2	%
Ceded premiums written	(230		)	(2,209		)	1,979			(89.6	%)
Net premiums written	$	683		$	(1,975	)	$	2,658		(134.6	%)
Net premiums earned	$	683		$	(1,975	)	$	2,658		(134.6	%)
Gross losses	(14,761		)	(36,297		)	21,536			(59.3	%)
Reinsurance recoveries	1,952			31,198			(29,246		)	(93.7	%)
Net losses and loss adjustment expenses	(12,809		)	(5,099		)	(7,710		)	151.2	%
Segment operating results, current year, before tax	(12,126		)	(7,074		)	(5,052		)	71.4	%
Net adjustments to estimated losses, prior year	2,116			—			2,116			nm
Segment operating results, before tax	$	(10,010	)	$	(7,074	)	$	(2,936	)	41.5	%

Gross Premiums Written

Changes in our premium volume within our Lloyd's Syndicates segment are driven by four primary factors: (1) the amount of new business and the channels in which the business is 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.

Gross premiums written in 2018 consisted of property insurance coverages ( 41% of total gross premiums written), casualty coverages ( 30% ), catastrophe reinsurance coverages ( 21% ), property reinsurance coverages ( 4% ) and specialty property coverages ( 4% ). The increase in gross premiums written during 2018 as compared to 2017 was primarily driven by our increased participation in the operating results of Syndicate 1729 , our participation in the operating results of Syndicate 6131 and, to a lesser extent, the effect of reinstatement premiums received in 2018 of approximately $0.9 million as compared to $0.2 million in 2017. The reinstatement premiums represented the additional premium payable to Syndicate 1729 to restore coverage limits that were exhausted under certain excess of loss reinsurance treaties as a result of the previously discussed natural catastrophe-related losses.

As discussed in our Specialty P&C segment operating results, prior to January 1, 2018 Syndicate 1729 served as a reinsurer on a quota share basis for a wholly owned insurance subsidiary in our Specialty P&C segment. For premiums assumed, we include in gross premiums written an estimate of all premiums to be earned over the entire period covered by the

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reinsurance agreement, generally one year, in the quarter in which the reinsurance agreement becomes effective. Results from this ceding arrangement are reported in our Specialty P&C segment on the same quarter delay in order to be consistent with our Lloyd's Syndicates segment as the effect of doing so is not material. The quota share agreement with our Specialty P&C segment effective January 1, 2017 reflected revised contract terms which reduced premiums assumed by Syndicate 1729 by essentially half. Syndicate 1729 did not renew the quota share agreement with our Specialty P&C segment on January 1, 2018; however, due to the previously discussed quarter delay, the impact began to be reflected in each segment's operating results in second quarter of 2018.

The 2016 and 2015 calendar year quota share arrangements with our Specialty P&C segment were commuted in December 2017 and 2016, respectively. Due to the quarter delay, the effect of the 2016 and 2015 commutation was reported in both segments' results during the first quarters of 2018 and 2017, respectively, and is reflected in the Lloyd's Syndicates segment results for the years ended December 31, 2018 and 2017, respectively. The commutations did not differ significantly from previously recorded amounts.

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. Ceded premiums written increased for the year ended December 31, 2018 primarily due to the increased utilization of reinsurance on new business written directly by Syndicate 1729 to replace the business previously assumed through the quota share agreement with our Specialty P&C segment. The increase in ceded premiums written was partially offset by a decrease in reinsurance reinstatement premiums Syndicate 1729 expects to owe to reinsurers in connection to the previously mentioned natural catastrophe-related losses. Reinsurance reinstatement premiums were approximately $0.2 million in 2018 as compared to $2.2 million in 2017.

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. Premiums written through open-market channels are generally earned pro rata over the entire policy period, which is predominately twelve months, whereas premiums written through delegated underwriting authority arrangements are earned over twenty-four 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, 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.

The increase in net premiums earned for the year ended December 31, 2018 primarily reflected the pro rata effect of shifts in the mix of premiums written during the preceding twelve months; a larger proportion of premiums were written through the open-market, as compared to previous years, which are predominately earned over twelve months. The increase in gross premiums earned in 2018 as compared to 2017 was partially offset by an increase in ceded premiums earned which reflected the effect of higher ceded premiums written during the preceding twelve months primarily due to a revision in our reinsurance agreements at the beginning of 2017 and, to a lesser extent, the effect of reinstatement premiums earned, net of reinsurance reinstatement premiums recognized, in 2018 as compared to 2017 in connection with the natural catastrophe-related losses, as previously discussed. Net premiums earned for the years ended December 31, 2018 and 2017 included premium assumed from our Specialty P&C segment of approximately $5.0 million and $11.8 million , respectively.

Net Losses and Loss Adjustment Expenses

Losses for the year were primarily recorded using the loss assumptions by risk category incorporated into the business plan submitted to Lloyd's for Syndicate 1729 with consideration given to loss experience incurred to date. The assumptions used in the business plan were consistent with loss results reflected in Lloyd's historical data for similar risks. Syndicate 6131, which began writing business effective January 1, 2018, follows a process similar to Syndicate 1729 for the establishment of initial reserves. We expect loss ratios to fluctuate from quarter to quarter as Syndicate 1729 writes more business and the book begins to mature. We also expect loss ratios of Syndicate 6131 to fluctuate from quarter to quarter as Syndicate 6131 assumes more business from Syndicate 1729 . The loss ratios will also fluctuate due to 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 cedants 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.

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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 period were as follows:



	Year Ended December 31
	2018		2017		Change
Calendar year net loss ratio	76.9	%	77.3	%	(0.4	)	pts
Less impact of prior accident years on the net loss ratio	2.9	%	(1.4	%)	4.3		pts
Current accident year net loss ratio	74.0	%	78.7	%	(4.7	)	pts

The decrease in the current accident year net loss ratio was driven by the effect of higher net premiums earned, excluding reinstatement premiums recognized, and, to a lesser extent, lower non-catastrophe related current accident year losses. Partially offsetting this decrease was the net effect of natural catastrophes in 2018 as compared to 2017. While gross losses incurred related to natural catastrophes was lower in 2018, a larger portion of natural catastrophe-related losses in 2017 exceeded the reinsurance retention limits whereas Syndicate 1729 retained more of these losses in 2018 due to certain excess of loss reinsurance agreement terms; this impact on the current accident year net loss ratio was partially offset by the change in reinstatement premiums recognized in connection with these losses in 2018 as compared to 2017.

We recognized $2.0 million of unfavorable prior year development for the year ended December 31, 2018 as compared to $0.8 million of favorable prior year development for the year ended December 31, 2017 . The unfavorable prior year development for the year ended December 31, 2018 was driven by higher than expected losses and development on certain large claims which resulted in unfavorable development with respect to a previous year of account.

Underwriting, Policy Acquisition and Operating Expenses

Underwriting, policy acquisition and operating expenses increased by $4.7 million for the year ended December 31, 2018 as compared to 2017 primarily due to the anticipated growth in Syndicate 1729 operations, an increase in various operational expenses associated with establishing Syndicate 6131 and, to a lesser extent, an increase in DPAC amortization primarily due to an increase in broker commissions.

The slight increase in the underwriting expense ratio for the year ended December 31, 2018 was primarily due to the previously mentioned increase in operating expenses and broker commissions, partially offset by an increase in net premiums earned, as previously discussed.

Investments

Net investment income for the years ended December 31, 2018 and 2017 was primarily attributable to interest earned on our FAL investments, which primarily includes investment-grade corporate debt securities. In the fourth quarter of 2017, Syndicate 1729 expanded its fixed maturities portfolio to include certain debt securities classified as trading securities. Investment results associated with these fixed maturity trading securities are reported on the same quarter delay.

Taxes

Operating results of this segment are subject to U.K. income tax law.

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Segment Operating Results - Corporate

As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment includes the results of investment assets solely allocated to SPC operations at our Cayman Islands reinsurance subsidiaries, Eastern Re and Inova Re, which were previously reported in our Corporate segment. All prior period segment information has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.



	Year Ended December 31
($ in thousands)	2018			2017		Change
Net investment income	$	86,960		$	92,867	$	(5,907	)	(6.4	%)
Equity in earnings (loss) of unconsolidated subsidiaries	$	8,948		$	8,033	$	915		11.4	%
Net realized gains (losses)	$	(39,879	)	$	12,388	$	(52,267	)	(421.9	%)
Operating expense	$	18,767		$	29,275	$	(10,508	)	(35.9	%)
Interest expense	$	16,163		$	16,844	$	(681	)	(4.0	%)
Income tax expense (benefit)	$	(17,715	)	$	21,927	$	(39,642	)	(180.8	%)

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. Investment fees and expenses are deducted from investment income.

Net investment income by investment category was as follows:



	Year Ended December 31
($ in thousands)	2018			2017			Change
Fixed maturities	$	64,523		$	72,665		$	(8,142	)	(11.2	%)
Equities	21,418			17,198			4,220			24.5	%
Short-term investments, including Other	5,351			7,643			(2,292		)	(30.0	%)
BOLI	1,983			1,979			4			0.2	%
Investment fees and expenses	(6,315		)	(6,618		)	303			(4.6	%)
Net investment income	$	86,960		$	92,867		$	(5,907	)	(6.4	%)

Fixed Maturities

The decrease in our investment income from fixed maturity securities during 2018 was due to lower average fixed maturity investment balances. We reduced the size of our fixed portfolio over the last year in order to pay dividends and invest in other asset classes. On an overall basis, our average investment in fixed maturity securities was approximately 16.0% lower in 2018 as compared to 2017 .

Average yields for our fixed maturity portfolio were as follows:



	Year Ended December 31
	2018	2017
Average income yield	3.3%	3.1%
Average tax equivalent income yield	3.4%	3.5%

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Equities

Income from our equity portfolio increased during 2018 as compared to 2017 which reflected an increase in our allocation to this asset category as well as a different mix of equities owned.

Other Investments and Short-term 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 decreased for the year ended December 31, 2018 as compared to 2017 primarily due to certain other investments which were affected by the adoption of an accounting standard during the first quarter of 2018 around the recognition and measurement of financial assets and financial liabilities (see further discussion in the Equity in Earnings (Loss) of Unconsolidated Subsidiaries section that follows).

Equity in Earnings (Loss) of Unconsolidated Subsidiaries

Equity in earnings (loss) of unconsolidated subsidiaries was as follows:



	Year Ended December 31
($ in thousands)	2018			2017			Change
All other investments, primarily investment fund LPs/LLCs	$	33,270		$	28,685		$	4,585		16.0	%
Tax credit partnerships	(24,322		)	(20,652		)	(3,670		)	17.8	%
Equity in earnings (loss) of unconsolidated subsidiaries	$	8,948		$	8,033		$	915		11.4	%

We hold interests in certain LP s/ LLC s that generate earnings from trading portfolios, secured debt, debt securities, multi-strategy funds and private equity investments. The performance of the LP s/ LLC s is affected by the volatility of equity and credit markets. For our investments in LP s/ LLC s, we record our allocable portion of the partnership operating income or loss as

the results of the LP s/ LLC s become available. Our investment results from our portfolio of investments in LP s/ LLC s decreased for the year ended December 31, 2018 primarily due to lower reported earnings from a few LP investments. In addition, our portfolio of investments in LP s/ LLC s in 2018 were affected by the adoption of an accounting standard during the first quarter of 2018 around the recognition and measurement of financial assets and financial liabilities (see Note 1 of the Notes to Consolidated Financial Statements for additional detail regarding accounting changes adopted during the period). Under the new accounting standard, LP s/ LLC s previously reported using the cost method are now reported at fair value with changes in fair value recognized in equity in earnings (loss) of unconsolidated subsidiaries.

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 historic tax credit partnerships. 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. Our historic tax credit partnerships are short-term in nature and remaining operating losses are expected to be recognized primarily in 2018. Based on operating results received, we increased our estimate of partnership operating losses by $3.0 million for the year ended December 31, 2018 , as compared to $2.3 million for the same respective period in 2017 . The results from our tax credit partnership investments for the year ended December 31, 2018 reflected an increase in partnership operating losses as compared to the same respective period of 2017.

The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above, reduced our tax expenses in 2018 and 2017 as follows:



	Year Ended December 31
(In millions)	2018		2017
Tax credits recognized during the period	$	21.0	$	23.1
Tax benefit of tax credit partnership operating losses	$	5.1	$	7.2

Tax credits provided by the underlying projects of the historic tax credit partnerships 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. The decrease in tax credits recognized in 2018 was primarily attributable to our qualified affordable housing project tax credit partnerships.

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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.



	Year Ended December 31
(In thousands)	2018		2017
GAAP net investment result:
Net investment income	$	86,960	$	92,867
Equity in earnings (loss) of unconsolidated subsidiaries	8,948		8,033
GAAP net investment result	$	95,908	$	100,900

Pro forma tax-equivalent investment result	$	125,533	$	148,553

Reconciliation of pro forma and GAAP tax-equivalent investment result:
GAAP net investment result	$	95,908	$	100,900
Taxable equivalent adjustments, calculated using the 21% and 35% federal statutory tax rate for 2018 and 2017, respectively:
State and municipal bonds	1,693		9,103
BOLI	527		1,065
Dividends received	772		1,930
Tax credit partnerships	26,633		35,555
Pro forma tax-equivalent investment result	$	125,533	$	148,553

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Net Realized Investment Gains (Losses)

The following table provides detailed information regarding our net realized investment gains (losses).



	Year Ended December 31
(In thousands)	2018			2017
OTTI losses, total:
State and municipal bonds	$	—		$	(850	)
Corporate debt	(490		)	(419		)
Investment in unconsolidated subsidiaries	—			(11,931		)
Portion of OTTI losses recognized in other comprehensive income before taxes:
Corporate debt	—			248
Net impairment losses recognized in earnings	(490		)	(12,952		)
Gross realized gains, available-for-sale fixed maturities	5,940			6,622
Gross realized (losses), available-for-sale fixed maturities	(5,715		)	(3,092		)
Net realized gains (losses), equity investments	12,030			10,109
Net realized gains (losses), other investments	1,340			2,963
Change in unrealized holding gains (losses), equity investments	(49,398		)	7,837
Change in unrealized holding gains (losses), convertible securities, carried at fair value as a part of other investments	(3,849		)	896
Other	263			5
Net realized investment gains (losses)	$	(39,879	)	$	12,388

During 2018, we recognized OTTI in earnings of $0.5 million related to debt instruments from two issuers in the energy sector. We recognized $39.9 million of net realized investment losses during 2018, primarily driven by unrealized holding losses on our equity trading portfolio of $49.4 million and, to a lesser extent, $3.8 million of unrealized holding losses on convertible securities. The primary driver of these unrealized holding losses was market volatility throughout 2018, which caused our equity securities to decline in value. The most significant sectors impacted were the financial and energy sectors, although all sectors were impacted. The net realized investment losses recognized in 2018 were partially offset by realized gains of $12.0 million on the sale of certain equity securities, primarily in the industrial sector.

During 2017, we recognized OTTI in earnings of $13.0 million , including an $8.5 million impairment related to an early stage business investment accounted for under the equity method. This impairment charge represented the difference between the investment's carrying value and fair value, which was measured as our ownership percentage in the projected earnings expected to be generated by the investment. In addition, we recognized OTTI in earnings of $3.4 million in 2017 related to our qualified affordable housing project tax credit investments. The current estimated tax benefits expected to be received from our allocable portion of the operating losses of the underlying properties have declined, due to the newly enacted corporate tax rate of 21%, as compared to those at the time the investments were acquired. During 2017, we also recognized credit-related OTTI in earnings of $0.2 million and non-credit OTTI of $0.2 million in OCI , both of which related to corporate bonds.

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Operating Expenses

Corporate segment operating expenses were comprised as follows:



	Year Ended December 31
($ in thousands)	2018			2017			Change
Operating expenses	$	34,437		$	44,034		$	(9,597	)	(21.8	%)
Management fee offset	(15,670		)	(14,759		)	(911		)	6.2	%
Segment Total	$	18,767		$	29,275		$	(10,508	)	(35.9	%)

The decrease in operating expenses during 2018 was primarily driven by a decrease in share-based compensation expenses and other compensation related costs and, to a lesser extent, a decrease in professional fees. The decrease in share-based compensation expense in 2018 was attributable to fewer awards outstanding and an adjustment of the projected award value based upon the decline of one of the performance metrics associated with a particular year's award.

Operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments 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 gross 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. While the terms of the arrangement were consistent between 2017 and 2018 , fluctuations in the amount of gross premium written by each subsidiary can result in corresponding variations in the management fee charged to each subsidiary during a particular period. The management fees charged during 2018 primarily reflected the increase in gross premiums written in our Specialty P&C segment due to a loss portfolio transfer entered into during 2018 (see further discussion in our Segment Operating Results - Specialty Property & Casualty section).

Interest Expense

Consolidated interest expense for the years ended December 31, 2018 and 2017 was comprised as follows:



	Year Ended December 31
($ in thousands)	2018			2017		Change
Senior Notes due 2023	$	13,429		$	13,429	$	—		—	%
Revolving Credit Agreement (including fees and amortization)	1,388			2,974		(1,586		)	(53.3	%)
Mortgage Loans (including amortization)	1,425			65		1,360			2,092.3	%
(Gain)/loss on interest rate cap	(153		)	339		(492		)	(145.1	%)
Other	28			37		(9		)	(24.3	%)
Interest expense	$	16,117		$	16,844	$	(727	)	(4.3	%)

Consolidated interest expense decreased during 2018 as compared to 2017 driven primarily by a decrease in the weighted average outstanding borrowings on our Revolving Credit Agreement and, to a lesser extent, the change in the fair value of our interest rate cap, partially offset by interest expense incurred on our Mortgage Loans. The weighted average outstanding borrowings on our Revolving Credit Agreement were $41 million for the year ended December 31, 2018 as compared to $169 million for the year ended December 31, 2017 . The interest rate cap was entered into during the fourth quarter of 2017 and is designated as an economic hedge of interest rate risk associated with our variable rate Mortgage Loans. See further discussion of our outstanding debt in Note 10 and further discussion of our interest rate cap agreement in Note 11 of the Notes to Consolidated Financial Statements.

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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 and tax expense incurred from SPC s at Inova Re, one of our Cayman Islands reinsurance subsidiaries, which intend to elect to be taxed as U.S. taxpayers. The U.K. tax expense incurred by the U.K. based subsidiaries of our Lloyd's Syndicates segment is allocated to that segment. Consolidated tax expense reflects tax expense of both segments, as shown in the table below:



	Year Ended December 31
(In thousands)	2018			2017
Corporate segment income tax expense (benefit)	$	(17,715	)	$	21,927
Lloyd's Syndicates segment income tax expense (benefit)	(317		)	(568		)
Consolidated income tax expense (benefit)	$	(18,032	)	$	21,359

Factors affecting our consolidated effective tax rate include the following:



	Year Ended December 31
	2018		2017
Statutory rate ⁽¹⁾	21.0	%	35.0	%
Tax-exempt income ⁽²⁾	(8.6	%)	(6.5	%)
Tax credits	(72.6	%)	(18.0	%)
Non-U.S. operating results	7.8	%	0.7	%
Excess tax benefit on share-based compensation	(0.9	%)	(2.1	%)
Change in federal corporate tax rate	—	%	5.1	%
Change in limitation of future deductibility of certain executive compensation	—	%	2.7	%
Provision-to-return differences	(8.0	%)	(1.5	%)
Other	(0.8	%)	1.2	%
Effective tax rate	(62.1	%)	16.6	%
⁽¹⁾ Effective January 1, 2018, the corporate statutory tax rate changed from 35% to 21% as a result of tax reform enacted by the TCJA.
⁽²⁾ Includes tax-exempt interest, dividends received deduction and change in cash surrender value of BOLI.

Our effective tax rate for 2018 and 2017 was a benefit of 62.1% and an expense of 16.6% , respectively, and differs from the statutory federal income tax rate primarily due to the utilization of tax credits transferred to us from our tax credit partnership investments and a portion of our investment income being tax-exempt. Tax credits utilized were $21.0 million for 2018 as compared to $23.1 million for 2017 while tax-exempt income was $2.5 million and $8.4 million in the same respective years. The impact of tax credits and tax-exempt income on our effective tax rate was greater in 2018 due to lower pre-tax income in 2018 as compared to 2017 . While the enactment of the TCJA will not impact the amount of the tax credits we will receive, we expect the future utilization of our tax credits to take longer than in previous years due to the lower corporate tax rate. Additionally, our effective tax rate in 2018 was impacted by a tax benefit of 8.0% related to provision-to-return differences. These differences primarily reflected the impact of the change in the federal corporate tax rate on our temporary provision-to-return differences as well as higher tax credits received for the 2017 tax year than the previously estimated tax benefit.

For 2017 , the most significant item that decreased our effective tax rate, other than the previously mentioned tax credits and tax-exempt investment income, was the excess tax benefit on share-based compensation that resulted from the application of revised accounting guidance, which was effective January 1, 2017, and lowered the effective tax rate by 2.1% . Under the revised guidance, the difference between the deduction for tax purposes, which is based upon the fair market value of share-based awards and the time of vesting, and the compensation cost recognized for financial reporting purposes, which is based upon the fair market value of the share-based awards on the date of grant, is to be recognized as income tax expense (benefit) in the current period rather than an adjustment to OCI as was required under prior guidance.

The effective tax rate for 2017 also reflects the impact of the remeasurement of our deferred tax assets and liabilities at December 31, 2017 and the impact of a change in the limitation of future deductibility of certain executive compensation as a result of the enactment of the TCJA . As previously discussed, the TCJA was signed into law on December 22, 2017. Under

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current accounting guidance, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. Due to the enactment of the TCJA in 2017 , we remeasured our deferred tax assets and liabilities based on the new corporate tax rate and recognized a charge of $6.5 million to income tax expense for the year ended December 31, 2017, which resulted in a 5.1% increase to our effective tax rate in 2017 . Additionally, we made a reasonable estimate of the effects on our existing deferred tax asset balances at December 31, 2017 as it relates to the limitation on the future deductibility of certain executive compensation and recorded a provisional charge to income tax expense of $3.5 million, which resulted in a 2.7% increase to our effective tax rate in 2017. During 2018 , we were able to complete our accounting for the impact of the TCJA on our December 31, 2017 deferred tax asset balances related to executive compensation; no measurement-period adjustment was recorded in 2018 as a result (see further discussion in Note 6 of the Notes to Consolidated Financial Statements). These one-time charges to income tax expense in 2017 as a result of the enactment of the TCJA did not reoccur in 2018 .

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Results of Operations - Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Selected consolidated financial data for each period is summarized in the table below.



	Year Ended December 31
($ in thousands, except per share data)	2017			2016			Change
Revenues:
Net premiums written	$	764,018		$	738,533		$	25,485
Net premiums earned	$	738,531		$	733,281		$	5,250
Net investment result	103,695			94,250			9,445
Net realized investment gains (losses)	16,409			34,875			(18,466		)
Other income	7,514			7,808			(294		)
Total revenues	866,149			870,214			(4,065		)

Expenses:
Net losses and loss adjustment expenses	469,158			443,229			25,929
Underwriting, policy acquisition and operating expenses	235,753			227,610			8,143
Segregated portfolio cells dividend expense (income)	15,771			8,142			7,629
Interest expense	16,844			15,032			1,812
Total expenses	737,526			694,013			43,513
Income before income taxes	128,623			176,201			(47,578		)
Income tax expense (benefit)	21,359			25,120			(3,761		)
Net income	$	107,264		$	151,081		$	(43,817	)
Non-GAAP operating income	$	108,538		$	129,844		$	(21,306	)
Earnings per share:
Basic	$	2.01		$	2.84		$	(0.83	)
Diluted	$	2.00		$	2.83		$	(0.83	)
Non-GAAP operating earnings per share:
Basic	$	2.03		$	2.44		$	(0.41	)
Diluted	$	2.02		$	2.43		$	(0.41	)
Net loss ratio	63.5		%	60.4		%	3.1			pts
Underwriting expense ratio	31.9		%	31.0		%	0.9			pts
Combined ratio	95.4		%	91.4		%	4.0			pts
Operating ratio	82.4		%	77.8		%	4.6			pts
Effective tax rate	16.6		%	14.3		%	2.3			pts
Return on equity	6.3		%	8.0		%	(1.7		)	pts
In all tables that follow, that abbreviation " nm " indicates that the information or the percentage change is not meaningful.

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Executive Summary of Operations

As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third quarter of 2018 to include a new segment: Segregated Portfolio Cell Reinsurance. All prior period segment information has been recast to conform to the current period presentation and the segment reorganization had no impact on previously reported consolidated financial results. See further information regarding the segment reorganization in Note 16 of the Notes to Consolidated Financial Statements.

The following sections provide an overview of our consolidated and segment results of operations for the year ended December 31, 2017 as compared to 2016 . See the Segment Operating Results sections that follow for additional information regarding each segment's operating results.

Revenues

Our consolidated and segment net premiums earned were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Net Premiums Earned
Specialty P&C	$	449,823	$	454,506	$	(4,683	)	(1.0	%)
Workers' Compensation Insurance	163,309		161,988		1,321			0.8	%
Segregated Portfolio Cell Reinsurance	68,197		62,137		6,060			9.8	%
Lloyd's Syndicate	57,202		54,650		2,552			4.7	%
Consolidated total	$	738,531	$	733,281	$	5,250		0.7	%

Consolidated net premiums earned increased in 2017 as compared to 2016. The decrease in net premiums earned in our Specialty P&C segment was due to the effect of a prior year novation which resulted in $11.8 million in premium earned in 2016 (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). After removing the impact of the prior year novation in the Specialty P&C segment, net premiums earned increased in all our operating segments in 2017 as compared to 2016.

The following table shows our consolidated net investment result:



	Year Ended December 31
($ in thousands)	2017		2016			Change
Net investment income	$	95,662	$	100,012		$	(4,350	)	(4.3	%)
Equity in earnings (loss) of unconsolidated subsidiaries	8,033		(5,762		)	13,795			239.4	%
Net investment result	$	103,695	$	94,250		$	9,445		10.0	%

The increase in our consolidated net investment result in 2017 was primarily attributable to an increase in earnings from our unconsolidated subsidiaries of $13.8 million due to higher reported earnings from our investments in LP/LLCs and the effect of a smaller increase in the estimate of partnership operating losses related to our tax credit partnerships in 2017 as compared to 2016. The increase was partially offset by a decrease in net investment income primarily attributable to reduced earnings from our fixed income portfolio, which reflected both lower yields and lower average investment income balances.

The following table shows our total consolidated net realized investment gains (losses):



	Year Ended December 31
($ in thousands)	2017			2016			Change
Net impairment losses recognized in earnings	$	(12,952	)	$	(9,766	)	$	(3,186	)	32.6	%
Other net realized investment gains (losses)	29,361			44,641			(15,280		)	(34.2	%)
Net realized investment gains (losses)	$	16,409		$	34,875		$	(18,466	)	(52.9	%)

During 2017, we recognized OTTI in earnings of $13.0 million, including an $8.5 million impairment related to an early stage business investment. See further discussion in our Segment Operating Results - Corporate section that follows. Other net realized investment gains during 2017 was primarily composed of changes in unrealized holding gains and net realized investment gains related to our trading portfolio.

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Expenses

The following table shows our consolidated and segment net loss ratios:



	Year Ended December 31
($ in millions)	2017			2016			Change
Current accident year net loss ratio
Consolidated ratio	81.7		%	80.1		%	1.6			pts
Specialty P&C	89.9		%	88.7		%	1.2			pts
Workers' Compensation Insurance	66.1		%	67.5		%	(1.4		)	pts
Segregated Portfolio Cell Reinsurance	67.4		%	64.1		%	3.3			pts
Lloyd's Syndicate	78.7		%	63.3		%	15.4			pts
Calendar year net loss ratio
Consolidated ratio	63.5		%	60.4		%	3.1			pts
Specialty P&C	63.4		%	58.5		%	4.9			pts
Workers' Compensation Insurance	62.6		%	66.5		%	(3.9		)	pts
Segregated Portfolio Cell Reinsurance	54.9		%	56.7		%	(1.8		)	pts
Lloyd's Syndicate	77.3		%	62.4		%	14.9			pts
Favorable (unfavorable) net loss development, prior accident years
Consolidated	$	134.4		$	143.8		$	(9.4	)
Specialty P&C	$	119.4		$	137.2		$	(17.8	)
Workers' Compensation Insurance	$	5.7		$	1.6		$	4.1
Segregated Portfolio Cell Reinsurance	$	8.5		$	4.6		$	3.9
Lloyd's Syndicate	$	0.8		$	0.5		$	0.3

Our consolidated current accident year net loss ratio increased 1.6 percentage points for the year ended December 31, 2017 as compared to 2016 primarily driven by higher current accident year net loss ratios in our Lloyd's Syndicate and Specialty P&C segments. The higher current accident year net loss ratio in our Lloyd's Syndicate segment was primarily due to losses related to Hurricanes Harvey, Irma and Maria during 2017 which resulted in a 0.9 percentage point increase in our consolidated current accident year net loss ratio (see further discussion in the Segment Operating Results - Lloyd's Syndicate section that follows).

In both 2017 and 2016, our consolidated calendar year net loss ratio was lower than our consolidated current accident year net loss ratio due to the recognition of favorable net loss development for prior accident years, as shown in the previous table.

Our consolidated and segment underwriting expense ratios were as follows:



	Year Ended December 31
	2017		2016		Change
Underwriting Expense Ratio
Consolidated	31.9	%	31.0	%	0.9		pts
Specialty P&C	24.0	%	22.8	%	1.2		pts
Workers' Compensation Insurance	32.2	%	33.1	%	(0.9	)	pts
Segregated Portfolio Cell Reinsurance	30.4	%	30.5	%	(0.1	)	pts
Lloyd's Syndicate	47.1	%	41.8	%	5.3		pts
Corporate*	4.0	%	4.2	%	(0.2	)	pts
*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).

Our consolidated underwriting expense ratio increased 0.9 percentage points for the year ended December 31, 2017 as compared to 2016 primarily due to the increase in DPAC amortization relative to consolidated net premiums earned. Although consolidated net premiums earned increased in 2017, the increase was largely reduced by the effect of a prior year novation in

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our Specialty P&C segment, as previously discussed, which resulted in a 0.5 percentage point increase in the consolidated underwriting expense ratio. After removing the impact of the prior year novation, the remaining increase in the consolidated underwriting expense ratio was driven by an increase in DPAC amortization, particularly in our Specialty P&C segment, as a result of an increase in commission expense and a decrease in ceding commission income, which is an offset to expense.

Taxes

Our effective tax rate was 16.6% for the year ended December 31, 2017, as compared to our 2016 effective tax rate of 14.3%. The increase in the effective tax rate in 2017 was primarily due to the impact to our deferred tax balances at December 31, 2017 as a result of the enactment of the TCJA, which increased the rate by 7.8%, somewhat offset by the application of new guidance adopted in the first quarter of 2017 related to the improvement in accounting for share-based payments, which reduced the rate by 2.1%. Excluding those impacts, our effective tax rate would have been 10.9% for 2017 (see further discussion under the heading "Taxes" within our Segment Operating Results - Corporate section that follows).

Operating Ratio and Return on Equity

Our operating ratio (calculated as our combined ratio, less our investment income ratio) increased by 4.6 percentage points in the year ended December 31, 2017 as compared to 2016. The increase reflected a higher consolidated net loss ratio driven by a lower amount of prior year favorable development in our Specialty P&C segment and estimated losses recognized during 2017 related to Hurricanes Harvey, Irma and Maria in our Lloyd's Syndicate segment (see further discussion in the Segment Operating Results - Lloyd's Syndicate section that follows).

ROE was 6.3% for the year ended December 31, 2017 as compared to 8.0% for the same respective period of 2016. The decrease in 2017 was primarily due to a decrease in net income, partially offset by a lower average equity base (the denominator of the ROE ratio) as compared to 2016. The lower average equity base in 2017 as compared to 2016 was primarily due to dividends declared during the year ended December 31, 2017.

Book Value per Share

Our book value per share at December 31, 2017 as compared to December 31, 2016 is shown in the following table.



	Book Value Per Share
Book Value Per Share at December 31, 2016	$	33.78
Increase (decrease) to book value per share during the year ended December 31, 2017 attributable to:
Dividends declared	(5.93		)
Net income	2.01
Decrease in AOCI	(0.05		)
Other	0.02
Book Value Per Share at December 31, 2017	$	29.83

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Non-GAAP Financial Measures

The following table is a reconciliation of net income to Non-GAAP operating income:



	Year Ended December 31
(In thousands, except per share data)	2017			2016
Net income	$	107,264		$	151,081
Items excluded in the calculation of Non-GAAP operating income:
Net realized investment (gains) losses	(16,409		)	(34,875		)
Net realized gains (losses) attributable to SPCs which no profit/loss is retained ⁽¹⁾	3,083			2,049
Guaranty fund assessments (recoupments)	(157		)	153
Pre-tax effect of exclusions	(13,483		)	(32,673		)
Tax effect, at 35% ⁽²⁾	4,719			11,436
After-tax effect of exclusions	(8,764		)	(21,237		)
Non-GAAP operating income, before tax reform adjustments	98,500			129,844
Tax reform adjustments on our deferred tax balances excluded in the calculation of Non-GAAP operating income:
Adjustment of deferred taxes upon the change in corporate tax rate ⁽³⁾	6,541			—
Adjustment of deferred taxes upon the change in limitation of future deductibility of certain executive compensation ⁽³⁾	3,497			—
Non-GAAP operating income	$	108,538		$	129,844
Per diluted common share:
Net income	$	2.00		$	2.83
Effect of exclusions	0.02			(0.40		)
Non-GAAP operating income per diluted common share	$	2.02		$	2.43

⁽¹⁾ Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell Reinsurance segment and the portion of operating earnings, including the gain or loss, net of our participation, is due to the external cell participants through 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 due to the external cell participants.

⁽²⁾ The 35% rate above is the annual expected incremental tax rate associated with the taxable or tax deductible items listed. The effective tax rate for the respective years was applied to these items in calculating net income. See previous discussion in this section under the heading "Taxes."

⁽³⁾ Due to tax reform enacted by the TCJA, we remeasured our deferred tax assets and liabilities based on the newly enacted tax rate of 21% and recognized a charge of $6.5 million, which is included as a component of income tax expense from continuing operations for the year ended December 31, 2017. In addition, we have made a reasonable estimate of the effects on our deferred tax asset balances at December 31, 2017 as it relates to the limitation on the future deductibility on certain executive compensation and recorded a provisional charge to income tax expense of $3.5 million for the year ended December 31, 2017. Any future guidance from the IRS addressing the effects of the TCJA on executive compensation could result in a change to this provisional amount. See further discussion under the heading "Deferred Taxes" in the Critical Accounting Estimates section.

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Segment Operating Results - Specialty Property & Casualty

As previously discussed, we reorganized our segment reporting in the third quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The underwriting results of the SPCs that assume healthcare professional liability business were previously reported in our Specialty P&C segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. All prior period segment information has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.

Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance. Specialty P&C segment operating results reflect pre-tax underwriting profit or loss from these insurance lines, exclusive of investment results, which are included in our Corporate segment. Segment operating results included the following:



	Year Ended December 31
($ in thousands)	2017			2016			Change
Net premiums written	$	466,621		$	454,718		$	11,903			2.6	%

Net premiums earned	$	449,823		$	454,506		$	(4,683	)		(1.0	%)
Other income	5,688			5,306			382				7.2	%
Net losses and loss adjustment expenses	(285,250		)	(266,090		)	(19,160		)		7.2	%
Underwriting, policy acquisition and operating expenses	(107,972		)	(103,656		)	(4,316		)		4.2	%
Segregated portfolio cells dividend (expense) income	(5,181		)	—			(5,181		)		nm
Segment operating results	$	57,108		$	90,066		$	(32,958	)		(36.6	%)

Net loss ratio	63.4%			58.5%			4.9			pts
Underwriting expense ratio	24.0%			22.8%			1.2			pts

Premiums Written

Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of new business, (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. The healthcare 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 impact our ability to write new business and retain existing business.

Gross, ceded and net premiums written were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Gross premiums written	$	549,323	$	535,725	$	13,598	2.5	%
Less: Ceded premiums written	82,702		81,007		1,695		2.1	%
Net premiums written	$	466,621	$	454,718	$	11,903	2.6	%

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Gross Premiums Written

Gross premiums written by component were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Professional liability
Physicians ⁽¹⁾⁽⁷⁾
Twelve month term	$	360,232	$	344,150	$	16,082		4.7	%
Twenty-four month term	27,370		21,869		5,501			25.2	%
Total Physicians	387,602		366,019		21,583			5.9	%
Healthcare facilities ⁽²⁾⁽⁷⁾	47,697		59,361		(11,664		)	(19.6	%)
Other healthcare providers ⁽³⁾	32,599		33,353		(754		)	(2.3	%)
Legal professionals ⁽⁴⁾	25,628		25,351		277			1.1	%
Tail coverages ⁽⁵⁾	21,206		18,092		3,114			17.2	%
Total professional liability	514,732		502,176		12,556			2.5	%
Medical technology liability ⁽⁶⁾	34,164		33,067		1,097			3.3	%
Other	427		482		(55		)	(11.4	%)
Total	$	549,323	$	535,725	$	13,598		2.5	%

⁽¹⁾

Physician policies were our greatest source of premium revenues in both 2017 and 2016. The increase in twelve month term policies in 2017 was primarily driven by new business written, including the addition of several large policies, and timing differences related to the renewal of certain policies, largely offset by retention losses. In addition, written premium reflected an increase in renewal pricing, driven by an increase in exposures for a few large policies. We offer twenty-four month term policies to our physician insureds in one selected jurisdiction. The increase in twenty-four month premium, as compared to 2016, primarily reflected the normal cycle of renewals (policies subject to renewal in 2017 were previously written in 2015 rather than in 2016).

⁽²⁾

Our healthcare facilities premium (which includes hospitals, surgery centers and other facilities) declined in 2017 as compared to 2016 driven by the effect of a novation agreement entered into during the fourth quarter of 2016. A novation represents a legal replacement of one insurer by another extinguishing the ceding entity's liability to the policyholder. The novation resulted in approximately $11.8 million of one-time gross premiums written and earned during the fourth quarter of 2016 as all the underlying loss events covered by the policy occurred in the past. After removing the impact of the novation, our healthcare facilities premium was relatively flat compared to 2016 due to several offsetting factors. While an increase in renewal pricing and new business written, including one large policy, increased written premium in 2017, the impact was offset by a timing difference related to the renewal of one large policy and retention losses during the period. Renewal pricing increased during 2017 due to changes in loss experience related to a few large policies.


⁽³⁾	Our other healthcare providers are primarily dentists, chiropractors and allied health professionals.


⁽⁴⁾	Our legal professionals policies are primarily individual and small group policies in select areas of practice. The increase in 2017 as compared to 2016 was primarily due to new business written and, to a lesser extent, an increase in the rate charged for certain renewed policies, largely offset by retention losses. Retention losses were primarily driven by competitive market conditions.

⁽⁵⁾

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 custom policies. The amount of tail coverage premium written can vary widely from period to period. The increase in 2017 as compared to 2016 was driven by the purchase of tail coverage for a few large claims-made policies in one jurisdiction that were rewritten to occurrence coverage in 2017. These policies are part of one of our shared risk arrangements and therefore, a large portion of the premium written was ceded during the current period (see further discussion in the Ceded Premiums Written section that follows).

⁽⁶⁾

Our medical technology liability business is marketed throughout the U.S.; coverage is 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 volume is impacted by the sales volume of insureds. The increase in 2017 primarily reflected new business written, including two large policies during the fourth quarter of 2017, partially offset

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by retention losses, including the loss of one large policy in the first quarter of 2017. Retention losses in 2017 are largely attributable to price competition and merger activity within the industry.

⁽⁷⁾

Certain components of our gross premiums written include alternative market premiums. We cede either all or a portion of the alternative market premium, net of reinsurance, to certain SPCs of our wholly owned Cayman Islands reinsurance subsidiary, 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. Alternative market gross premiums written by component were as follows:



	Year Ended December 31
($ in millions)	2017		2016		Change
Physicians	$	1.2	$	1.2	$	—	—	%
Healthcare facilities	3.1		2.9		0.2		6.9	%
Total	$	4.3	$	4.1	$	0.2	4.9	%

The slight increase in our alternative market healthcare facilities premium during 2017 was primarily due to new business written and, to a lesser extent, an increase in renewal pricing primarily due to increases in exposure related to a few policies, partially offset by retention losses.

New business written by component on a direct basis was as follows:



	Year Ended December 31
(In millions)	2017		2016
Physicians	$	31.6	$	32.8
Healthcare facilities	5.8		17.4
Other healthcare providers	2.1		3.4
Legal professionals	3.6		3.8
Medical technology liability	5.4		5.1
Total	$	48.5	$	62.5

Retention by component was as follows:



	Year Ended December 31
	2017		2016
Physicians*	90	%	88	%
Healthcare facilities*	86	%	79	%
Other healthcare providers*	85	%	85	%
Legal professionals	84	%	78	%
Medical technology liability	87	%	85	%
* Excludes certain policies written on an excess and surplus lines basis.

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 items. We continue to base our pricing on expected losses, as indicated by our historical loss data and available industry loss data. We are committed to a rate structure that will allow us to fulfill our obligations to our insureds, while generating competitive returns for our shareholders.

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Changes in renewal pricing by component was as follows:



	Year Ended December 31
	2017
Physicians ⁽¹⁾⁽²⁾	1	%
Healthcare facilities ⁽¹⁾⁽²⁾	8	%
Other healthcare providers ⁽¹⁾	2	%
Legal professionals ⁽²⁾	3	%
Medical technology liability	1	%
⁽¹⁾ Excludes certain policies written on an excess and surplus lines basis.
⁽²⁾ See Gross Premiums Written section for further explanation of renewal pricing increase.

Ceded Premiums Written

Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. Through our current excess of loss reinsurance arrangements we generally retain the first $1 million in risk insured by us and cede coverages in excess of this amount. For our healthcare professional liability coverages, we also retain from 5% - 12.5% of the next $25 million of risk for coverages in excess of $1 million. For our medical technology liability coverages, we also retain 10% of the next $9 million of risk for coverages in excess of $1 million. We pay our reinsurers a ceding premium in exchange for their accepting the risk, the ultimate amount of which is determined by the loss experience of the business ceded, subject to certain minimum and maximum amounts.

Ceded premiums written for the years ended December 31, 2017 and 2016 were as follows:



	Year Ended December 31
($ in thousands)	2017			2016			Change
Excess of loss reinsurance arrangements ⁽¹⁾	$	31,853		$	30,037		$	1,816		6.0	%
Premium ceded to Syndicate 1729 ⁽²⁾	13,983			23,832			(9,849		)	(41.3	%)
Other shared risk arrangements ⁽³⁾	30,780			26,737			4,043			15.1	%
Premiums ceded to SPCs ⁽⁴⁾	3,914			3,963			(49		)	(1.2	%)
Other ceded premiums written	3,361			3,521			(160		)	(4.5	%)
Reduction in premiums owed under reinsurance agreements, prior accident years, net ⁽⁵⁾	(1,189		)	(7,083		)	5,894			(83.2	%)
Total ceded premiums written	$	82,702		$	81,007		$	1,695		2.1	%

⁽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. In the majority 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 increase in ceded premiums written under our excess of loss reinsurance arrangements for 2017 was primarily due to revised contract terms on our medical technology liability reinsurance arrangement effective January 1, 2017, which reduced the amount of excess premium we retain from 20% to 10%.

⁽²⁾

As previously discussed, we are the majority participant in Syndicate 1729 and normally record our pro rata share of its operating results in our Lloyd's Syndicate segment on a quarter delay, except when information is available that is material to the current period. We also record the cession to the Lloyd's Syndicate segment from our Specialty P&C segment on a quarter delay as the amounts are not material and this permits the cession to be reported by both the Lloyd's Syndicate segment and the Specialty P&C segment in the same reporting period. The decrease in ceded premiums to Syndicate 1729 for the year ended December 31, 2017 reflected the revised contract terms effective January 1, 2017 which reduced the premiums ceded by essentially half. We did not renew our quota share agreement with Syndicate 1729 on January 1, 2018, however the impact will not be reflected in ceded premiums until the second quarter of 2018 due to the previously mentioned quarter delay. See Lloyd's Syndicate segment results for further discussion on the quota share agreement. As our premiums are earned, we recognize the related ceding commission income which reduces underwriting expense by offsetting

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DPAC amortization. For the years ended December 31, 2017 and 2016, the related ceding commission income was approximately 27% of ceded premiums written. For our consolidated results, eliminations of the inter-segment portion (58% of the Specialty P&C cession) of the transactions are also recorded on a quarter delay.

⁽³⁾

We have entered into various shared risk arrangements, including quota share, fronting, and captive arrangements, with certain large healthcare systems and other insurance entities. These arrangements include our Ascension Health and CAPAssurance programs. 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. The increase in 2017 was primarily driven by a few large tail endorsements that were written, and substantially ceded, related to one of these shared risk arrangements, as previously discussed. The remaining increase was due to growth in our Ascension Health and CAPAssurance programs.

⁽⁴⁾

As previously discussed, as a part of our alternative market solutions, all or a portion of certain healthcare premium written is ceded to the 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 Operating Results - Segregated Portfolio Cell Reinsurance section for further discussion on the cession to the SPCs from our Specialty P&C segment. The slight decrease in premiums ceded to the SPCs during 2017 was primarily driven by retention losses (see discussion in footnote 7 under the heading "Gross Premiums Written").

⁽⁵⁾

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 previously discussed, the premiums ultimately ceded under certain of our excess of loss reinsurance arrangements are subject to the losses ceded under the arrangements. Based upon adjustments in 2017 and 2016 to our estimate of expected losses and associated recoveries for prior year ceded losses, we reduced our estimate of ceded premiums owed to reinsurers. However, prior accident year ceded premium reductions were lower in 2017 as compared to 2016. In addition, the lower prior accident year ceded premium reduction in 2017 reflected an overall change in expected loss recoveries attributable to one large claim during the second quarter of 2017. We do not believe this isolated claim indicates a change in overall loss trends for us or the industry. Changes to estimates of premiums ceded related to prior accident years are fully earned in the period the changes in estimates occur.

Ceded Premiums Ratio

As shown in the table below, our ceded premiums ratio was affected in both 2017 and 2016 by revisions to our estimate of premiums owed to reinsurers related to coverages provided in prior accident years.



	Year Ended December 31
	2017		2016		Change
Ceded premiums ratio, as reported	15.1	%	15.1	%	—		pts
Less the effect of reduction in premiums owed under reinsurance agreements, prior accident years (as previously discussed)	(0.2	%)	(1.3	%)	1.1		pts
Ratio, current accident year	15.3	%	16.4	%	(1.1	)	pts

The decline in the current accident year ceded premiums ratio for the year ended December 31, 2017 was primarily attributable to a decrease in premium ceded to Syndicate 1729, partially offset by an increase in premium ceded under our other shared risk and excess of loss reinsurance arrangements (see discussion under the heading "Ceded Premiums Written").

Net Premiums Earned

Net premiums earned were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Gross premiums earned	$	537,583	$	535,931	$	1,652		0.3	%
Less: Ceded premiums earned	87,760		81,425		6,335			7.8	%
Net premiums earned	$	449,823	$	454,506	$	(4,683	)	(1.0	%)

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period, fluctuations in premiums earned tend to lag those of premiums written. Generally, our policies carry a term of one year, however, as discussed above, we write certain policies with a twenty-four month term, and a few of our medical technology liability policies have a multi-year 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. Additionally, 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.

The increase in gross premiums earned in 2017 primarily reflected the pro rata effect of the higher premiums written during the preceding twelve months, primarily in our healthcare facilities line of business, and a few large tail policies written and earned during 2017. This increase was largely offset by the effect of a large novation written and earned during the fourth quarter of 2016, as discussed above under the heading "Gross Premiums Written." In addition, prior accident year ceded premiums reductions were $5.9 million lower in 2017 than in 2016 (see discussion under the heading "Ceded Premiums Written").

Losses and Loss Adjustment Expenses

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. 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.



	Net Loss Ratios ⁽¹⁾
	Year Ended December 31
	2017		2016		Change
Calendar year net loss ratio	63.4	%	58.5	%	4.9	pts
Less impact of prior accident years on the net loss ratio	(26.5	%)	(30.2	%)	3.7	pts
Current accident year net loss ratio	89.9	%	88.7	%	1.2	pts
Less estimated ratio increase (decrease) attributable to:
Ceded premium reductions, prior accident years ⁽²⁾	(0.2	%)	(1.4	%)	1.2	pts
Current accident year net loss ratio, excluding the effect of prior year ceded premium ⁽³⁾	90.1	%	90.1	%	—	pts


⁽¹⁾	Net losses, as specified, divided by net premiums earned.


⁽²⁾	Reductions to premiums owed under reinsurance agreements for prior accident years increased net premiums earned (the denominator of the current accident year ratio) in both 2017 and 2016, however, the reduction was substantially less in 2017 than in 2016. See the discussion in the Premiums section for our Specialty P&C segment under the heading "Ceded Premiums Written" for additional information.

⁽³⁾

The current accident year net loss ratio was unchanged as compared to 2016 primarily due to offsetting factors. Changes in the mix of business resulted in an 1.2 percentage point increase in the current accident year net loss ratio in 2017 as compared to 2016. However, the effect of a DDR reinsurance commutation during the fourth quarter of 2017 (reduction in current year net losses) partially offset the increase by 0.5 percentage points and the effect of a prior year novation (net premiums earned at a high loss ratio) partially offset the increase by 0.4 percentage points. Additional information regarding the prior year novation is included in the Premiums section for our Specialty P&C segment under the heading "Gross Premiums Written."

We recognized net favorable loss development related to our previously established reserve of $119.4 million and $137.2 million for the years ended December 31, 2017 and 2016, respectively. The net favorable loss development in 2017 and 2016 included $10.1 million and $12.0 million, respectively, attributable to our medical technology liability line of business and $5.2

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million and $9.4 million, respectively, attributable to our legal professionals liability line of business. We re-evaluate our previously established reserve each quarter based on our most recently available claims data and currently available industry trend information. Development recognized during 2017 principally related to accident years 2010 through 2014. Development recognized during 2016 principally related to accident years 2009 through 2013.

Underwriting, Policy Acquisition and Operating Expenses

Our Specialty P&C segment underwriting, policy acquisition and operating expenses for the years ended December 31, 2017 and 2016 were comprised as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Specialty P&C segment:
DPAC amortization	$	47,611	$	44,342	$	3,269	7.4	%
Management fees	6,620		6,447		173		2.7	%
Other underwriting and operating expenses	53,741		52,867		874		1.7	%
Total	$	107,972	$	103,656	$	4,316	4.2	%

DPAC amortization increased during the year ended December 31, 2017 as compared to 2016 primarily driven by an increase in commission expense in 2017 and a decrease in ceding commission income, which is an offset to expense, primarily due to a reduction in premiums ceded to Syndicate 1729. In addition, the increase in DPAC amortization reflected the effect of higher gross premiums earned in 2017 as compared to 2016.

Other underwriting and operating expenses increased during the year ended December 31, 2017 as compared to 2016 primarily driven by an increase in compensation related expenses and costs associated with the amortization of new software placed into service during the first quarter of 2017. The increase was partially offset by the effect of non-recurring costs in 2016, including state assessments and a donation to a scholarship fund for which we received a wholly offsetting tax credit during 2016.

Underwriting Expense Ratio (the Expense Ratio)

Our expense ratio for the Specialty P&C segment for the year ended December 31, 2017 as compared to 2016, was as follows:



	Year Ended December 31
	2017		2016		Change
Underwriting expense ratio	24.0	%	22.8	%	1.2	pts

The increase in the underwriting expense ratio for 2017 was primarily due to the effect of a reduction in net premiums earned as compared to 2016, primarily attributable to a prior year novation (see further discussion under the heading "Gross Premiums Written") and, to a lesser extent, the effect of an increase in DPAC amortization and software amortization in 2017, as previously discussed.

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Segregated Portfolio Cell Dividend Expense (Income)

In the third quarter of 2018 , we reorganized our segment reporting which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment provides the results of SPC s at our Eastern Re and Inova Re subsidiaries, including SPC s that assume healthcare professional liability business which were previously reported within our Specialty P&C segment. As such, there is no longer an SPC dividend expense reported in the Specialty P&C segment associated with these SPC s and prior period information has been recast to conform to the current period presentation. See more information on our Cayman Islands SPC operations in the Segment Operating Results - Segregated Portfolio Cell Reinsurance section that follows.

The SPC dividend expense for the year ended December 31, 2017 represented a one-time $5.2 million pre-tax expense related to previously unrecognized SPC dividend expense for the cumulative earnings of unrelated parties that have owned SPC s at various times since 2003 within a Bermuda captive insurance operation. Historically, within our HCPL business, we have written a limited number of segregated cell captive programs through this Bermuda captive arrangement and the use of this facility has declined as the HCPL insurance market has softened. The SPC dividend expense attributable to those cells was unrelated to the captive operations of our Eastern Re subsidiary.

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Segment Operating Results - Workers' Compensation Insurance

As previously discussed, we reorganized our segment reporting in the third quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The underwriting results of the SPCs that assume workers' compensation business were previously reported in our Workers' Compensation segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. The traditional workers' compensation business remains in the Workers' Compensation segment which has been renamed to "Workers' Compensation Insurance." All prior period segment information has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.



	Year Ended December 31
($ in thousands)	2017			2016			Change
Net premiums written	$	173,566		$	163,513		$	10,053		6.1	%

Net premiums earned	$	163,309		$	161,988		$	1,321		0.8	%
Other income	2,096			2,218			(122		)	(5.5	%)
Net losses and loss adjustment expenses	(102,233		)	(107,791		)	5,558			(5.2	%)
Underwriting, policy acquisition and operating expenses	(52,576		)	(53,597		)	1,021			(1.9	%)
Segment operating results	$	10,596		$	2,818		$	7,778		276.0	%

Net loss ratio	62.6%			66.5%			(3.9		)	pts
Underwriting expense ratio	32.2%			33.1%			(0.9		)	pts

Premiums Written

Gross, ceded and net premiums written were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Gross premiums written	$	264,048	$	248,875	$	15,173	6.1	%
Less: Ceded premiums written	90,482		85,362		5,120		6.0	%
Net premiums written	$	173,566	$	163,513	$	10,053	6.1	%

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Gross Premiums Written

Gross premiums written by product were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Traditional business:
Guaranteed cost	$	143,141	$	128,304	$	14,837		11.6	%
Policyholder dividend	20,388		21,547		(1,159		)	(5.4	%)
Deductible	8,362		9,006		(644		)	(7.2	%)
Retrospective	3,428		5,337		(1,909		)	(35.8	%)
Other	8,185		8,766		(581		)	(6.6	%)
Alternative market business	80,544		75,915		4,629			6.1	%
Total	$	264,048	$	248,875	$	15,173		6.1	%

Gross premiums written in our traditional business business increased during the year ended December 31, 2017 as compared to 2016, which reflected new business written, partially offset by a decrease in renewal pricing and a decrease in audit premium. New business written included $4.6 million of premium related to our Eastern Specialty Risk unit and $3.4 million of premium related to the acquisition of Great Falls' book of business. The growth in our alternative market business was driven by new business written, partially offset by a decrease in renewal pricing. We retained the 23 alternative market programs up for renewal for the year ended December 31, 2017. During 2017, we added one new alternative market program at Eastern Re that was a designed consolidation of two unaffiliated captive programs.

New business, audit premium, retention and renewal price changes for both the traditional business and the alternative market business are shown in the table below:



	Year Ended December 31
	2017									2016
($ in millions)	Traditional Business			Alternative Market Business			Segment Results			Traditional Business			Alternative Market Business			Segment Results
New business	$	37.8		$	9.9		$	47.7		$	22.8		$	10.2		$	33.0
Audit premium (including EBUB)	$	2.7		$	1.4		$	4.1		$	5.2		$	1.1		$	6.3
Retention rate ⁽¹⁾	85		%	92		%	87		%	84		%	88		%	85		%
Change in renewal pricing ⁽²⁾	(3		%)	(4		%)	(3		%)	(1		%)	(1		%)	(1		%)
⁽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 the effects of current 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:



	Year Ended December 31
($ in thousands)	2017		2016			Change
Premiums ceded to SPCs	$	73,761	$	68,258		$	5,503		8.1	%
Premiums ceded to external reinsurers	9,823		10,255			(432		)	(4.2	%)
Premiums ceded to unaffiliated captive insurers	6,784		7,658			(874		)	(11.4	%)
Change in return premium estimate under external reinsurance	114		(809		)	923			(114.1	%)
Total ceded premiums written	$	90,482	$	85,362		$	5,120		6.0	%

Our Workers' Compensation Insurance segment cedes alternative market business under a 100% quota share reinsurance agreement, net of a ceding commission, to SPCs in our Segregated Portfolio Cell Reinsurance segment. The ceding commission consists of an amount for fronting fees, cell rental fees, commissions, premium taxes, claims administration fees 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 (see discussion that follows under the heading "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 increase in premiums ceded to SPCs primarily reflected growth in our alternative market business, as previously discussed.

Under our external reinsurance agreement, 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 contract. Per our reinsurance agreements, we cede premiums related to our traditional business on an earned premium basis. The decrease in premiums ceded to external reinsurers during the year ended December 31, 2017 as compared to 2016 primarily reflected an increase in revenue sharing with our reinsurance broker, partially offset by an increase in premiums earned and reinsurance rates.

The decrease in premiums ceded to unaffiliated captive insurers reflected the consolidation of the two programs into the new alternative market program at Eastern Re, as discussed above under the heading "Gross Premiums Written."

Changes in the return premium estimate reflected the loss experience under the reinsurance contract for the years ended December 31, 2017 and 2016. The decrease in the return premium estimate for the year ended December 31, 2017 primarily reflected severity-related claims activity during 2017.

Ceded Premiums Ratio

Ceded premiums ratio was as follows:



	Year Ended December 31
	2017		2016		Change
Ceded premiums ratio, as reported	35.7	%	34.4	%	1.3		pts
Less the effect of:
Premiums ceded to SPCs (100%)	25.9	%	24.3	%	1.6		pts
Premiums ceded to unaffiliated captive insurer (100%)	4.1	%	4.6	%	(0.5	)	pts
Return premium estimated under external reinsurance	(0.1	%)	0.5	%	(0.6	)	pts
Assumed premiums earned	(0.3	%)	(0.3	%)	—		pts
Ceded premiums ratio, less the effects of above	6.1	%	5.3	%	0.8		pts

The above table reflects ceded premiums earned as a percent of gross premiums earned. As discussed above, we cede premiums related to our traditional business to external reinsurers on an earned premium basis. The increase in the ceded premiums ratio for the year ended December 31, 2017 as compared to 2016 primarily reflected the increase in reinsurance rates.

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Net Premiums Earned

Net premiums earned were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Gross premiums earned	$	253,944	$	247,092	$	6,852	2.8	%
Less: Ceded premiums earned	90,635		85,104		5,531		6.5	%
Net premiums earned	$	163,309	$	161,988	$	1,321	0.8	%

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 or unaffiliated captive insurers. 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 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. 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. In addition, we record an estimate for EBUB and evaluate the estimate on a quarterly basis. We did not adjust the EBUB estimate for the year ended December 31, 2017. We increased the EBUB estimate by $0.4 million for the year ended December 31, 2016. The increase in net premiums earned primarily reflected the pro rata effect of higher net premiums written during the preceding twelve months.

Losses and Loss Adjustment Expenses

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:



	Year Ended December 31
	2017		2016		Change
Calendar year net loss ratio	62.6	%	66.5	%	(3.9	)	pts
Less impact of prior accident years on the net loss ratio	(3.5	%)	(1.0	%)	(2.5	)	pts
Current accident year net loss ratio	66.1	%	67.5	%	(1.4	)	pts

The current accident year net loss ratio for the year ended December 31, 2017 was 66.1% as compared to 67.5% for 2016. The improvement in the current accident year net loss ratio primarily reflected more favorable trends in claims closing results in 2017 as compared to 2016, which reduced loss indications for the 2017 accident year.

Current accident year incurred losses (excluding IBNR) ceded to our external reinsurers totaled $9.8 million for the year ended December 31, 2017 as compared to ceded incurred losses of $6.9 million for 2016. The increase in ceded incurred losses in 2017 primarily reflected the aforementioned increase in severity-related claim activity.

We recognized net favorable prior year development related to our previously established reserve of $5.7 million for the year ended December 31, 2017 as compared to $1.6 million for 2016. The net favorable prior year development in 2017 reflected overall favorable trends in claim closing patterns, primarily in the 2015 and 2016 accident years. For each of the years ended December 31, 2017 and 2016, the net favorable prior year development included $1.6 million related to amortization of the purchase accounting fair value adjustment.

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Underwriting, Policy Acquisition and Operating Expenses

Underwriting, policy acquisition and operating expenses includes 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 gross premium written by the subsidiary.

Our Workers' Compensation Insurance segment underwriting, policy acquisition and operating expenses were comprised as follows:



	Year Ended December 31
($ in thousands)	2017			2016			Change
DPAC amortization	$	31,433		$	29,325		$	2,108		7.2	%
Management fees	1,975			1,857			118			6.4	%
Other underwriting and operating expenses	36,791			39,159			(2,368		)	(6.0	%)
SPC commission income offset	(17,623		)	(16,744		)	(879		)	5.2	%
Total	$	52,576		$	53,597		$	(1,021	)	(1.9	%)

The increase in DPAC amortization for the year ended December 31, 2017 as compared to 2016 primarily reflected the increase in net premiums earned. The decrease in other underwriting and operating expenses for the year ended December 31, 2017 as compared to 2016 was driven by a decrease in intangible asset amortization of $2.2 million and the effect of a $1.0 million pension settlement charge recorded during 2016 related to the termination of a legacy Eastern pension plan, partially offset by an increase in acquisition and operating expenses during 2017.

Alternative market premiums written through our Workers' Compensation Insurance segment's alternative market business unit are 100% ceded, less a ceding commission, to either the SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, unaffiliated captive insurers. SPC ceding commission income includes fronting fees, commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy acquisition and operating expenses.

Underwriting Expense Ratio (the Expense Ratio)

The underwriting expense ratio included the impact of the following:



	Year Ended December 31
	2017		2016		Change
Underwriting expense ratio, as reported	32.2	%	33.1	%	(0.9	)	pts
Less estimated ratio increase (decrease) attributable to:
Impact of commission income received from SPCs	3.4	%	3.5	%	(0.1	)	pts
Amortization of intangible assets	1.2	%	2.2	%	(1.0	)	pts
Management fees	0.8	%	0.8	%	—		pts
Impact of audit premium	(0.3	%)	(0.6	%)	0.3		pts
Underwriting expense ratio, less listed effects	27.1	%	27.2	%	(0.1	)	pts

The expense ratio, exclusive of the items noted in the table above, was consistent from 2016 to 2017.

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Segment Operating Results - Segregated Portfolio Cell Reinsurance

As previously discussed, we reorganized our segment reporting during the third quarter of 2018 which resulted in the creation of the Segregated Portfolio Cell Reinsurance segment. All prior period information has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.

The Segregated Portfolio Cell Reinsurance segment for the years ended December 31, 2017 and 2016 reflects the operating results (underwriting profit or loss, plus investment results) of SPC s at Eastern Re , our Cayman Islands SPC operation. As of December 31, 2017 , there were 24 (21 active) SPC s. 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. SPC s 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 operating results of the SPC s are due to the participants of that cell. We participate to a varying degree in the results of selected SPC s and, for the SPC s in which we participate, our ownership interest is as low as 25% and as high as 85%. SPC operating results due to external cell participants are reflected as a SPC dividend expense in our Segregated Portfolio Cell Reinsurance segment. In addition, our Segregated Portfolio Cell Reinsurance segment includes the SPC investment results as the investments are solely for the benefit of the cell participants and investment results due to external cell participants are reflected in the SPC dividend expense. Segment operating results reflects our share of the underwriting and investment results of the SPC s in which we participate, and included the following:



	Year Ended December 31
($ in thousands)	2017			2016			Change
Net premiums written	$	68,862		$	64,028		$	4,834		7.5	%

Net premiums earned	$	68,197		$	62,137		$	6,060		9.8	%
Net investment income	1,059			711			348			48.9	%
Net realized gains (losses)	3,914			2,525			1,389			55.0	%
Other income	115			18			97			538.9	%
Net losses and loss adjustment expenses	(37,455		)	(35,232		)	(2,223		)	6.3	%
Underwriting, policy acquisition and operating expenses	(20,764		)	(18,936		)	(1,828		)	9.7	%
SPC net operating results	15,066			11,223			3,843			34.2	%
SPC dividend (expense) income ⁽¹⁾	(10,590		)	(8,142		)	(2,448		)	30.1	%
Segment operating results ⁽²⁾	$	4,476		$	3,081		$	1,395		45.3	%

Net loss ratio	54.9%			56.7%			(1.8		)	pts
Underwriting expense ratio	30.4%			30.5%			(0.1		)	pts
⁽¹⁾ Represents the operating (profit) loss due to external cell participants.
⁽²⁾ Represents our share of the operating profit (loss) of the SPCs in which we participate.

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Premiums Written

Premiums in our Segregated Portfolio Cell Reinsurance segment are 100% assumed from either our Workers' Compensation Insurance or Specialty P&C segments. SPC 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) audit premium and (5) changes in payroll exposure.

Gross, ceded and net premiums written were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Gross premiums written	$	77,675	$	72,221	$	5,454	7.6	%
Less: Ceded premiums written	8,813		8,193		620		7.6	%
Net premiums written	$	68,862	$	64,028	$	4,834	7.5	%

Gross Premiums Written

Gross premiums written reflected reinsurance premiums assumed by component as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Workers' compensation	$	73,761	$	68,258	$	5,503		8.1	%
Healthcare professional liability	3,914		3,963		(49		)	(1.2	%)
Gross Premiums Written	$	77,675	$	72,221	$	5,454		7.6	%

Gross premiums written for the years ended December 31, 2017 and 2016 was primarily comprised of workers' compensation coverages assumed from our Workers' Compensation Insurance segment. Gross premiums written increased during 2017 as compared 2016 , driven by new business written and an increase in the retention rate, partially offset by a decrease in renewal pricing. We retained the 23 alternative market programs up for renewal for the year ended December 31, 2017 . During 2017, we added one new alternative market program at Eastern Re that was a designed consolidation of two unaffiliated captive insurers included our Workers' Compensation Insurance segment.

New business, audit premium, retention and renewal price changes for the assumed workers' compensation premium is shown in the table below:



	Year Ended December 31
($ in millions)	2017			2016
New business	$	9.9		$	10.2
Audit premium (including EBUB)	$	1.4		$	1.1
Retention rate ⁽¹⁾	92		%	88		%
Change in renewal pricing ⁽²⁾	(4		%)	(1		%)
⁽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 the effects of current market conditions. We continue to base our pricing on expected losses, as indicated by our historical loss data.

Ceded Premiums Written

Ceded premiums written were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Ceded premiums written	$	8,813	$	8,193	$	620	7.6	%

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occurrence ranges from $0.3 million to $0.35 million based on the program. Per the SPC external reinsurance agreements, premiums are ceded on a written premium basis and the increase in premiums ceded to external reinsurers for the year ended December 31, 2017 primarily reflected an increase in premiums written in certain programs. External reinsurance rates vary based on the alternative market program.

Ceded Premiums Ratio

Ceded premiums ratio was as follows:



	Year Ended December 31
	2017	2016	Change
Ceded premiums ratio	11.9%	12.0%	(0.1	)	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 remained relatively unchanged for the year ended December 31, 2017 as compared to 2016 .

Net Premiums Earned

Gross, ceded and net premiums earned were as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Gross premiums earned	$	76,911	$	70,209	$	6,702	9.5	%
Less: Ceded premiums earned	8,714		8,072		642		8.0	%
Net premiums earned	$	68,197	$	62,137	$	6,060	9.8	%

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. The increase in net premiums earned primarily reflected the pro rata effect of higher net premiums written during the preceding twelve months.

Net Investment Income and Net Realized Investment Gains (Losses)

Net investment income for the years ended December 31, 2017 and 2016 was primarily attributable to interest earned on available-for-sale fixed maturity investments, which primarily includes investment-grade corporate debt securities. Net realized investment gains for the years ended December 31, 2017 and 2016 primarily reflected changes in the value of the SPCs' equity trading portfolio.

Losses and Loss Adjustment Expenses



	Year Ended December 31
	2017		2016		Change
Calendar year net loss ratio	54.9	%	56.7	%	(1.8	)	pts
Less impact of prior accident years on the net loss ratio	(12.5	%)	(7.4	%)	(5.1	)	pts
Current accident year net loss ratio	67.4	%	64.1	%	3.3		pts
Less impact of audit premium related to workers' compensation business	(1.4	%)	(1.2	%)	(0.2	)	pts
Current accident year net loss ratio, excluding the effect of audit premium	68.8	%	65.3	%	3.5		pts

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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 claims activity can cause the current accident year net loss ratio to fluctuate significantly from period to period. The increase in the accident year net loss ratio primarily reflected severity-related claims activity during the fourth quarter of 2017.

Current accident year incurred losses ceded to our external reinsurers totaled $3.2 million for the year ended December 31, 2017 , compared to $3.0 million for 2016 .

We recognized net favorable prior year development of $8.5 million and $4.6 million for the years ended December 31, 2017 and 2016 , respectively. The 2017 favorable development primarily reflected better than expected claim trends related to accident years 2015 and 2016, and the 2016 favorable development primarily reflected favorable claim trends related to accident year 2015. The improved claim trends reflected lower frequency and severity than anticipated at the time the reserves were established.

Audit premium from workers' compensation insureds results in a decrease in the net loss ratio, whereas audit premium returned to workers' compensation insureds results in an increase in the net loss ratio. We recognized audit premium of $1.4 million and $1.1 million for the years ended December 31, 2017 and 2016 , respectively, the effect of which is reflected in the previous table. We estimate our current accident year losses and loss adjustment expenses based on the underlying actuarial methodologies without consideration of audit premium. As a result, we removed the effects of audit premium in the previous table for purposes of evaluating the current accident year net loss ratio.

Underwriting, Policy Acquisition and Operating Expenses

Our Segregated Portfolio Cell Reinsurance segment underwriting, policy acquisition and operating expenses were comprised as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
DPAC amortization	$	19,927	$	18,385	$	1,542	8.4	%
Other underwriting and operating expenses	837		551		286		51.9	%
Total	$	20,764	$	18,936	$	1,828	9.7	%

DPAC amortization primarily represented the amortization of 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 within our Workers' Compensation Insurance segment.

Underwriting Expense Ratio (the Expense Ratio)

The underwriting expense ratio included the impact of the following:



	Year Ended December 31
	2017		2016		Change
Underwriting expense ratio, as reported	30.4	%	30.5	%	(0.1	)	pts
Less impact of audit premium on expense ratio	(0.6	%)	(0.6	%)	—		pts
Underwriting expense ratio, excluding the effect of audit premium	31.0	%	31.1	%	(0.1	)	pts

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Segment Operating Results - Lloyd's Syndicate

Our Lloyd's Syndicate segment includes operating results from our participation in Lloyd's of London. We have a total capital commitment to support our Lloyd's Syndicate operations through 2019 of up to $200 million , referred to as FAL . The Board, through a non-binding resolution, extended this commitment through 2022. For the 2018 underwriting year, our FAL was comprised of investment securities deposited with Lloyd's which at December 31, 2017 had a fair value of approximately $123.9 million, as discussed in Note 3 of the Notes to Consolidated Financial Statements.

We are the majority (58% for the 2017 underwriting year) capital provider to Syndicate 1729, which covers a range of property and casualty insurance and reinsurance lines. The remaining capital for Syndicate 1729 is provided by unrelated third parties, including private names and other corporate members. Syndicate 1729 had a maximum underwriting capacity of £100.0 million for the 2017 underwriting year, of which £57.6 million ($77.8 million based on December 31, 2017 exchange rates) was our allocated underwriting capacity. For the 2018 underwriting year, we increased our participation in the operating results of Syndicate 1729 from 58% to 62%.

Beginning in 2018, our Lloyd's Syndicate segment will include the operating results of a newly formed SPA, Syndicate 6131. As a SPA, Syndicate 6131 is only allowed to underwrite one quota share reinsurance contract with Syndicate 1729. We are the sole (100%) capital provider to Syndicate 6131 and for the 2018 underwriting year Syndicate 6131 had a maximum underwriting capacity of £8.0 million (approximately $10.8 million at December 31, 2017) and focuses on contingency and specialty property business.

We normally report results from our involvement in Lloyd's Syndicates on a quarter delay, 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.

In addition to the results of our participation in Syndicate 1729, as discussed above, our Lloyd's Syndicate segment also includes 100% of the operating results of our wholly owned subsidiaries that support our operations at Lloyd's. For the years ended December 31, 2017 and 2016, the results of our Lloyd's Syndicate segment were as follows:



	Year Ended December 31
($ in thousands)	2017			2016			Change
Gross premiums written	$	70,224		$	65,157		$	5,067		7.8	%
Ceded premiums written	(15,255		)	(8,883		)	(6,372		)	71.7	%
Net premiums written	$	54,969		$	56,274		$	(1,305	)	(2.3	%)

Net premiums earned	$	57,202		$	54,650		$	2,552		4.7	%
Net investment income	1,736			1,410			326			23.1	%
Net realized gains (losses)	107			76			31			40.8	%
Other income	(1,476		)	1,415			(2,891		)	(204.3	%)
Net losses and loss adjustment expenses	(44,220		)	(34,116		)	(10,104		)	29.6	%
Underwriting, policy acquisition and operating expenses	(26,963		)	(22,832		)	(4,131		)	18.1	%
Income tax benefit (expense)	568			(384		)	952			(247.9	%)
Segment operating results	$	(13,046	)	$	219		$	(13,265	)	(6,057.1	%)

Net loss ratio	77.3		%	62.4		%	14.9			pts
Underwriting expense ratio	47.1		%	41.8		%	5.3			pts

Segment operating results for the year ended December 31, 2017 included loss estimates in connection with Hurricanes Harvey, Irma and Maria, which affected Texas, several states in the southeastern U.S. and islands in the Caribbean in 2017. We estimated our allocated share (58%) of the net pre-tax losses to be approximately $7.1 million, which includes reinstatement premiums we expect to receive from insureds as well as pay reinsurers, both of which are written and earned during the period.

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The pre-tax impact of the recognition of these storm-related losses on the segment's operating results for the year ended December 31, 2017 was as follows:



(In thousands)	Year Ended December 31, 2017
Gross premiums written	$	234
Ceded premiums written	(2,209		)
Net premiums written	$	(1,975	)
Net premiums earned	$	(1,975	)
Gross losses	(36,297		)
Reinsurance recoveries	31,198
Net losses and loss adjustment expenses	(5,099		)
Segment operating results, before tax	$	(7,074	)

Premiums Written

Gross premiums written in 2017 consisted of casualty coverages (41% of total gross written premium), property insurance coverages (37%), catastrophe reinsurance coverages (15%) and property reinsurance coverages (7%). Gross premiums written increased during 2017 primarily due to new business written and volume increases on renewal business, partially offset by a reduction in premiums assumed from our Specialty P&C segment, as discussed below. The increase in ceded premiums written during 2017 was primarily due to the effect of revised terms on our reinsurance arrangements. In addition, the increase in ceded premiums written during 2017 reflected the effect of reinsurance reinstatement premiums which represent premiums ceded to reinsurers to restore coverage limits that have been exhausted as a result of storm-related losses under certain excess of loss reinsurance treaties. Excluding the effects of the storm-related losses, net premiums written in 2017 increased slightly as compared to 2016.

As discussed in our Specialty P&C segment operating results, Syndicate 1729 serves as a reinsurer on a quota share basis for a wholly owned insurance subsidiary in our Specialty P&C segment. For premium assumed, we include in gross premiums written an estimate of all premiums to be earned over the entire period covered by the reinsurance agreement, generally one year, in the quarter in which the reinsurance agreement becomes effective. The quota share agreement with our Specialty P&C segment renewed effective January 1, 2017 and reflected revised contract terms which reduced premium assumed by Syndicate 1729 by essentially half. Results from this ceding arrangement are reported in the Specialty P&C segment on the same quarter delay in order to be consistent with the Lloyd's Syndicate segment as the effect of doing so is not material. We did not renew the quota share agreement with our Specialty P&C segment on January 1, 2018, however, the impact will not be reflected in either segment's operating results until the second quarter of 2018 due to the previously mentioned quarter delay.

The 2015 and 2014 calendar year quota share arrangements with our Specialty P&C segment were commuted in December 2016 and 2015, respectively. Due to the reporting delay, the effect of the 2015 and 2014 commutation was reported by both segments in results during the first quarters of 2017 and 2016, respectively, and is reflected in the years ended December 31, 2017 and 2016, respectively. The commutations did not differ significantly from previously recorded amounts.

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. Policies written to date primarily carry a term of one year. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Additionally, 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. Net premiums earned for the years ended December 31, 2017 and 2016 included premium assumed from our Specialty P&C segment of approximately $11.7 million and $14.0 million. In addition, net premiums earned in 2017 were reduced by the effect of net reinsurance reinstatement premiums associated with the storm-related losses, as previously discussed.

Net Losses and Loss Adjustment Expenses

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will also fluctuate due to 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 cedants 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 net loss ratio increased 14.9 percentage points in 2017 as compared to 2016 driven by the storm-related losses and associated net reinsurance reinstatement premiums recognized during 2017, as previously discussed, which accounted for approximately 11.2 percentage points of the increase in the net loss ratio. Additionally, the net loss ratio for 2016 was lower than in prior periods and reflected reductions attributable to shifts in the mix of business.

Underwriting, Policy Acquisition and Operating Expenses

Underwriting expenses increased by $4.1 million for the year ended December 31, 2017 as compared to 2016 and primarily reflected the anticipated growth in Syndicate 1729 operations. As operations have matured, the total amount of underwriting salaries has increased along with the number of policies successfully written. Underwriting compensation is capitalized as DPAC only when efforts are successful. The increase in the expense ratio for 2017 was primarily due to the timing of certain expenses relative to the increase in earned premiums.

Net Investment Income

Net investment income for the years ended December 31, 2017 and 2016 was primarily attributable to interest earned on the FAL investments. Our FAL investments are primarily short-term investments and investment-grade corporate debt securities.

Taxes

Operating results of this segment are subject to U.K. income tax law. Tax expense incurred in 2016 reflected the use of prior year Syndicate 1729 operating losses to offset current period Syndicate 1729 operating results.

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Segment Operating Results - Corporate

As previously discussed, we reorganized our segment reporting during the third quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment includes the results of investment assets solely allocated to SPC operations at our Cayman Islands reinsurance subsidiaries which were previously reported in our Corporate segment. All prior period segment information has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.

Our Corporate segment includes our investment operations, other than those reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicate segments, interest expense and U.S. income taxes. Our Corporate segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses. Segment operating results for our Corporate segment were net earnings of $48.1 million and $54.9 million for the years ended December 31, 2017 and 2016, respectively, and included the following:



	Year Ended December 31
($ in thousands)	2017		2016			Change
Net investment income	$	92,867	$	97,891		$	(5,024	)	(5.1	%)
Equity in earnings (loss) of unconsolidated subsidiaries	$	8,033	$	(5,762	)	$	13,795		239.4	%
Net realized gains (losses)	$	12,388	$	32,274		$	(19,886	)	61.6	%
Operating expense	$	29,275	$	30,807		$	(1,532	)	(5.0	%)
Interest expense	$	16,844	$	15,032		$	1,812		12.1	%
Income tax expense (benefit)	$	21,927	$	24,736		$	(2,809	)	(11.4	%)

Net Investment Income, Equity in Earnings (Loss) of Unconsolidated Subsidiaries, Net Realized Investment Gains (Losses)

Net Investment Income

Net investment income by investment category was as follows:



	Year Ended December 31
($ in thousands)	2017			2016			Change
Fixed maturities	$	72,665		$	83,517		$	(10,852	)	(13.0	%)
Equities	17,198			14,887			2,311			15.5	%
Other investments, including Short-term	7,643			3,343			4,300			128.6	%
BOLI	1,979			2,008			(29		)	(1.4	%)
Investment fees and expenses	(6,618		)	(5,864		)	(754		)	12.9	%
Net investment income	$	92,867		$	97,891		$	(5,024	)	(5.1	%)

Fixed Maturities

The decrease in our income from fixed maturity securities during 2017 was due to lower yields and lower average investment balances. We reduced the size of our fixed portfolio over 2017 in order to pay dividends and invest in other asset classes. On an overall basis, our average investment in fixed maturity securities was approximately 8% lower in 2017 as compared to 2016.

Average yields for our fixed maturity portfolio were as follows:



	Year Ended December 31
	2017	2016
Average income yield	3.1%	3.3%
Average tax equivalent income yield	3.5%	3.8%

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Equities

Income from our equity portfolio increased for the year ended December 31, 2017 as compared to 2016 which reflected an increase in our allocation to this asset category as well as a different mix of equities owned.

Other Investments and Short-term Investments

Income from our other investments and short-term investments consists primarily of distributions from our LPs that are accounted for under the cost method. Distributions from LPs are affected by the volatility of equity and credit markets. The increase in this category during 2017 was primarily due to higher reported earnings from one of our LPs which focuses on the energy sector.

Investment Fees and Expenses

Investment fees and expenses increased for the year ended December 31, 2017 as compared to 2016 primarily due to an increase in subsequent interest expense on our LP subscriptions and incentive fees on our convertible bond portfolio. Subsequent interest expense on some of our LPs is paid on subscriptions that occur later in the fund-raising process and incentive fees for returns that exceed a high water mark on our convertible bond portfolio reflected an increase in the fair value of the portfolio.

Equity in Earnings (Loss) of Unconsolidated Subsidiaries

Equity in earnings (loss) of unconsolidated subsidiaries was as follows:



	Year Ended December 31
($ in thousands)	2017			2016			Change
Investment LPs/LLCs	$	28,685		$	19,055		$	9,630	50.5	%
Tax credit partnerships	(20,652		)	(24,817		)	4,165		(16.8	%)
Equity in earnings (loss) of unconsolidated subsidiaries	$	8,033		$	(5,762	)	$	13,795	239.4	%

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. Our investment results from our portfolio of investments in LPs/LLCs for 2017 were affected primarily by our share of higher reported earnings from our LP/LLC investments.

Our tax credit 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 partnership interests and historic tax credit interests. We account for our tax credit 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 partnership interests we adjust our estimates of our allocable portion of operating losses periodically as actual operating results of the underlying properties become available. Our historic tax credit investments are short-term in nature and remaining operating losses are expected to be recognized primarily in 2018. Based on operating results received, we increased our estimate of partnership operating losses by $2.1 million for the year ended December 31, 2017, as compared to $10.2 million for the same respective period in 2016, predominantly related to our qualified affordable housing project tax credit partnership interests.

The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above, reduced our tax expenses in 2017 and 2016 as follows:



	Year Ended December 31
(In millions)	2017		2016
Tax credits recognized during the period	$	23.1	$	27.5
Tax benefit of tax credit partnership operating losses	$	7.2	$	8.7

Tax credits provided by the underlying projects of the historic tax credit partnerships 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. The decrease in tax credits recognized in 2017 was primarily attributable to our historic tax credit partnership investments.

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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 (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 is a reconciliation of our GAAP net investment result to our tax equivalent investment result.



	Year Ended December 31
(In thousands)	2017		2016
GAAP net investment result:
Net investment income	$	92,867	$	97,891
Equity in earnings (loss) of unconsolidated subsidiaries	8,033		(5,762		)
GAAP net investment result	$	100,900	$	92,129

Pro forma tax-equivalent investment result	$	148,553	$	149,248

Reconciliation of pro forma and GAAP tax-equivalent investment result:
GAAP net investment result	$	100,900	$	92,129
Taxable equivalent adjustments, calculated using the 35% federal statutory tax rate:
State and municipal bonds	9,103		11,698
BOLI	1,065		1,081
Dividends received	1,930		1,957
Tax credit partnerships	35,555		42,383
Pro forma tax-equivalent investment result	$	148,553	$	149,248

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Net Realized Investment Gains (Losses)

The following table provides detailed information regarding our net realized investment gains (losses).



	Year Ended December 31
(In thousands)	2017			2016
OTTI losses, total:
State and municipal bonds	$	(850	)	$	(100	)
Corporate debt	(419		)	(7,604		)
Investment in unconsolidated subsidiaries	(11,931		)	—
Other investments	—			(3,130		)
Portion recognized in OCI:
Corporate debt	248			1,068
Net impairment losses recognized in earnings	(12,952		)	(9,766		)
Gross realized gains, available-for-sale fixed maturities	6,622			12,369
Gross realized (losses), available-for-sale fixed maturities	(3,092		)	(7,027		)
Net realized gains (losses), equity investments	10,109			6,646
Net realized gains (losses), other investments	2,963			1,115
Change in unrealized holding gains (losses), equity investments	7,837			28,013
Change in unrealized holding gains (losses), convertible securities, carried at fair value as a part of other investments	896			899
Other	5			25
Net realized investment gains (losses)	$	12,388		$	32,274

During 2017, we recognized OTTI in earnings of $13.0 million, including an $8.5 million impairment related to an early stage business investment accounted for under the equity method. This impairment charge represented the difference between the investment's carrying value and fair value, which was measured as our ownership percentage in the projected earnings expected to be generated by the investment. In addition, we recognized OTTI in earnings of $3.4 million related to our qualified affordable housing project tax credit investments. The current estimated tax benefits expected to be received from our allocable portion of the operating losses of the underlying properties have declined, due to the newly enacted corporate tax rate of 21%, as compared to those at the time the investments were acquired. During 2017, we also recognized credit-related OTTI in earnings of $0.2 million and non-credit OTTI of $0.2 million in OCI, both of which related to corporate bonds.

During 2016, we recognized OTTI in earnings of $9.8 million, including credit-related OTTI of $5.5 million related to debt instruments from ten issuers in the energy sector. The fair value of these bonds declined during 2016 as did the credit quality of the issuers, and we recognized credit-related OTTI to reduce the amortized cost basis of the bonds to the present value of future cash flows we expected to receive from the bonds. During 2016, we also recognized non-credit impairments of $0.9 million in OCI relative to the bonds of these issuers, as the fair value of the bonds was less than the present value of the expected future cash flows from the securities.

We also recognized $3.1 million OTTI in earnings during 2016 related to our interest in an investment fund that is accounted for using the cost method (classified as other investments). The fund is focused on the energy sector and securities held by the fund declined in value during 2016. An OTTI was recognized to reduce our carrying value of the investment to the NAV reported by the fund.

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Operating Expenses

Corporate segment operating expenses for the years ended December 31, 2017 and 2016 were comprised as follows:



	Year Ended December 31
($ in thousands)	2017			2016			Change
Operating expenses	$	44,034		$	45,116		$	(1,082	)	(2.4	%)
Management fee offset	(14,759		)	(14,309		)	(450		)	3.1	%
Segment Total	$	29,275		$	30,807		$	(1,532	)	(5.0	%)

The decrease in operating expenses during 2017 was primarily due to the effect of costs incurred in 2016 related to a pre-acquisition liability from a discontinued operation that did not reoccur in 2017 and, to a lesser extent, a decrease in compensation related costs in 2017. The decrease in compensation related costs in 2017 was primarily due to lower share based compensation expense, partially offset by higher salaries and benefits. The decrease in operating expenses was partially offset by an increase in costs incurred for technology enhancements in 2017.

Operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments 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 gross 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. While the terms of the management arrangement were consistent between 2016 and 2017, fluctuations in the amount of gross premium written by each subsidiary can result in corresponding variations in the management fee charged to each subsidiary during a particular period.

Interest Expense

Interest expense for the years ended December 31, 2017 and 2016 was comprised as follows:



	Year Ended December 31
($ in thousands)	2017		2016		Change
Senior Notes due 2023	$	13,429	$	13,429	$	—		—	%
Revolving Credit Agreement (including fees and amortization)	2,974		1,564		1,410			90.2	%
Mortgage Loans (including amortization)	65		—		65			nm
(Gain)/loss on interest rate cap	339		—		339			nm
Other	37		39		(2		)	(5.1	%)
Interest expense	$	16,844	$	15,032	$	1,812		12.1	%

Interest expense increased during 2017 as compared to 2016 driven primarily by an increase in our weighted average outstanding debt, which was $421 million for the year ended December 31, 2017, as compared to $351 million for the same respective period of 2016, and, to a lesser extent, an increase in the average interest rate on the outstanding borrowings under our Revolving Credit Agreement. In addition, interest expense for the year ended December 31, 2017 included the change in fair value recognized on the interest rate cap entered into during the fourth quarter of 2017. The interest rate cap is designated as an economic hedge of interest rate risk associated with our variable rate Mortgage Loans. See further discussion of our outstanding debt in Note 10 and further discussion of our interest rate cap agreement in Note 11 of the Notes to Consolidated Financial Statements.

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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 Syndicate segment is allocated to that segment. Consolidated tax expense reflects tax expense of both segments, as shown in the table below:



	Year Ended December 31
(In thousands)	2017			2016
Corporate segment income tax expense (benefit)	$	21,927		$	24,736
Lloyd's Syndicate segment income tax expense (benefit)	(568		)	384
Consolidated income tax expense (benefit)	$	21,359		$	25,120

Factors affecting our consolidated effective tax rate include the following:



	Year Ended December 31
	2017		2016
Statutory rate	35.0	%	35.0	%
Tax-exempt income ^*	(6.5	%)	(5.6	%)
Tax credits	(18.0	%)	(15.6	%)
Non-U.S. operating results	0.7	%	(1.0	%)
Excess tax benefit on share-based compensation	(2.1	%)	—	%
Change in federal corporate tax rate	5.1	%	—	%
Change in limitation of future deductibility of certain executive compensation	2.7	%	—	%
Provision-to-return differences	(1.5	%)	0.7	%
Other	1.2	%	0.8	%
Effective tax rate	16.6	%	14.3	%
^* Includes tax-exempt interest, dividends received deduction and change in cash surrender value of BOLI.

Our effective tax rate for 2017 and 2016 was 16.6% and 14.3%, respectively, and differs from the statutory federal income tax rate primarily due to a portion of our investment income being tax-exempt, the utilization of tax credits transferred to us from our tax credit partnership investments and the impact of the remeasurement of our deferred tax assets and liabilities as a result of the enactment of the TCJA in 2017.

As previously discussed, the TCJA was signed into law on December 22, 2017. Under current accounting guidance, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. Due to the enactment of the TCJA in 2017, we remeasured our deferred tax assets and liabilities based on the new corporate tax rate and recognized a charge of $6.5 million to income tax expense for the year ended December 31, 2017, which resulted in a 5.1% increase to our effective tax rate in 2017. Additionally, we made a reasonable estimate of the effects on our existing deferred tax asset balances at December 31, 2017 as it relates to the limitation on the future deductibility of certain executive compensation and recorded a provisional charge to income tax expense of $3.5 million, which resulted in a 2.7% increase to our effective tax rate in 2017. Any future guidance addressing the effects of the TCJA on executive compensation could result in a change to this provisional amount. See further discussion on the impact of the TCJA under the heading "Deferred Taxes" in our Critical Accounting Estimates section.

Tax credits utilized were $23.1 million for 2017 as compared to $27.5 million for 2016. The reducing effect of tax credits on the effective tax rate was greater in 2017 due to lower pre-tax income in 2017 as compared to 2016. As previously discussed, the enactment of the TCJA in 2017 lowered the corporate tax rate effective January 1, 2018. While the enactment of the TCJA will not impact the amount of the tax credits we will receive, we expect the future utilization of our tax credits to take longer than in previous years due to the lower corporate tax rate.

One additional item of note impacting our effective tax rate in 2017 was the excess tax benefit on share-based compensation that resulted from the application of revised accounting guidance, which was effective January 1, 2017 and resulted in a 2.1% reduction to our effective tax rate in 2017. Under the revised accounting guidance, the difference between

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the income tax deduction, which is based upon the fair market value of share-based awards and the time of vesting, and the compensation cost recognized in the financial statements, which is based upon the fair market value of the share-based awards on the date of grant, is to be recognized as income tax expense (benefit) in the current period rather than an adjustment to OCI as was required under the previous guidance. See Note 1 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2017 Form 10-K for further discussion on the adoption of this guidance.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We believe that we are principally exposed to three types of market risk related to our investment operations. These risks are interest rate risk, credit risk and equity price risk. We are also exposed to interest rate risk related to our variable rate Mortgage Loans and Revolving Credit Agreement . We have limited exposure to foreign currency risk as we issue few insurance contracts denominated in currencies other than the U.S. dollar and we have few monetary assets or obligations denominated in foreign currencies.

Interest Rate Risk

Investments

Our fixed maturities portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. As interest rates rise, market values of fixed income portfolios fall and vice versa. Certain of the securities are held in an unrealized loss position; we do not intend to sell and believe we will not be required to sell any of the debt securities held in an unrealized loss position before its anticipated recovery.

The following tables summarize estimated changes in the fair value of our available-for-sale fixed maturity securities for specific hypothetical changes in interest rates by asset class at December 31, 2018 and December 31, 2017 . There are principally two factors that determine interest rates on a given security: changes in the level of yield curves and credit spreads. As different asset classes can be affected in different ways by movements in those two factors, we have separated our portfolio by asset class in the following tables.



	Interest Rate Shift in Basis Points
	December 31, 2018
($ in millions)	(200)		(100)		Current		100		200
Fair Value:
Fixed maturities, available for sale:
U.S. Treasury obligations	$	127	$	124	$	120	$	117	$	114
U.S. Government-sponsored enterprise obligations	36		36		35		34		33
State and municipal bonds	316		305		294		283		273
Corporate debt	1,300		1,261		1,224		1,187		1,153
Asset-backed securities	443		432		421		409		396
Total fixed maturities, available for sale	$	2,222	$	2,158	$	2,094	$	2,030	$	1,969

Duration:
Fixed maturities, available for sale:
U.S. Treasury obligations	2.77		2.70		2.63		2.57		2.50
U.S. Government-sponsored enterprise obligations	0.66		0.98		2.65		3.77		4.18
State and municipal bonds	3.61		3.58		3.59		3.64		3.73
Corporate debt	2.98		2.97		2.93		2.89		2.83
Asset-backed securities	2.18		2.46		2.86		3.11		3.23
Total fixed maturities, available for sale	2.86		2.91		2.99		3.04		3.04

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	Interest Rate Shift in Basis Points
	December 31, 2017
($ in millions)	(200)		(100)		Current		100		200
Fair Value:
Fixed maturities, available for sale:
U.S. Treasury obligations	$	142	$	138	$	134	$	130	$	126
U.S. Government-sponsored enterprise obligations	22		21		21		20		19
State and municipal bonds	683		657		632		609		585
Corporate debt	1,249		1,208		1,167		1,128		1,090
Asset-backed securities	341		335		326		315		302
Total fixed maturities, available for sale	$	2,437	$	2,359	$	2,280	$	2,202	$	2,122

Duration:
Fixed maturities, available for sale:
U.S. Treasury obligations	3.11		3.02		2.94		2.86		2.79
U.S. Government-sponsored enterprise obligations	1.38		1.34		3.59		4.58		4.87
State and municipal bonds	3.83		3.79		3.78		3.80		3.85
Corporate debt	3.37		3.33		3.38		3.38		3.34
Asset-backed securities	1.72		2.21		3.15		3.89		4.24
Total fixed maturities, available for sale	3.23		3.26		3.43		3.55		3.59

Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the maintenance of the existing level and composition of fixed income security assets, and should not be relied on as indicative of future results.

Certain shortcomings are inherent in the method of analysis presented in the computation of the fair value of fixed rate instruments. Actual values may differ from the projections presented should market conditions vary from assumptions used in the calculation of the fair value of individual securities, including non-parallel shifts in the term structure of interest rates and changing individual issuer credit spreads.

At December 31, 2018 , our fixed maturities portfolio includes an immaterial amount of fixed maturities classified as trading securities. Because these trading securities are immaterial, there is not a significant amount of exposure to market interest rates or credit spreads.

Our cash and short-term investments portfolio at December 31, 2018 was carried at fair value which approximates their cost basis due to their short-term nature. Our cash and short-term investments portfolio lacks significant interest rate sensitivity due to its short duration.

Debt

Our variable interest rate Mortgage Loans are exposed to interest rate risk. However, a 1% change in LIBOR will not materially impact our annualized interest expense. Additionally, we have economically hedged the risk of a change in interest rates in excess of 1% on the Mortgage Loans through the purchase of an interest rate cap derivative instrument, which effectively caps our annual interest rate on the Mortgage Loans at a maximum of 3.675% (see Note 11 of the Notes to Consolidated Financial Statements for additional information). The fair value of the interest rate cap is not materially impacted by a 1% change in LIBOR ; however, the carrying value of the interest rate cap is impacted by future expectations for LIBOR as well as estimations of volatility in the future yield curve.

Our Revolving Credit Agreement is exposed to interest rate risk as it is LIBOR based and a 1% change in LIBOR will impact annual interest expense only to the extent that there is an outstanding balance. For every $100 million drawn on our Revolving Credit Agreement , a 1% change in interest rates will change our annual interest expense by $1 million. Any outstanding balances on the Revolving Credit Agreement can be repaid on each maturity date, which has typically ranged from one to three months. As of December 31, 2018 , no borrowings were outstanding under our Revolving Credit Agreement .

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Credit Risk

We have exposure to credit risk primarily as a holder of fixed income securities. We control this exposure by emphasizing investment grade credit quality in the fixed income securities we purchase.

As of December 31, 2018 , 94% of our fixed maturity securities were rated investment grade as determined by NRSRO s, such as Fitch, Moody’s and Standard & Poor’s. We believe that this concentration in investment grade securities reduces our exposure to credit risk on our fixed income investments to an acceptable level. However, investment grade securities, in spite of their rating, can rapidly deteriorate and result in significant losses. Ratings published by the NRSRO s are one of the tools used to evaluate the credit worthiness of our securities. The ratings reflect the subjective opinion of the rating agencies as to the credit worthiness of the securities; therefore, we may be subject to additional credit exposure should the ratings prove to be unreliable.

We also have exposure to credit risk related to our receivables from reinsurers. Our receivables from reinsurers (with regard to both paid and unpaid losses) approximated $355 million at December 31, 2018 and $343 million at December 31, 2017 . We monitor the credit risk associated with our reinsurers using publicly available financial and rating agency data.

Equity Price Risk

At December 31, 2018 , the fair value of our equity investments, excluding our equity investments in bond investment funds as discussed in the following paragraph, was $248 million . These equity securities are subject to equity price risk, which is defined as the potential for loss in fair value due to a decline in equity prices. The weighted average beta of this group of securities was 0.90 . Beta measures the price sensitivity of an equity security or group of equity securities to a change in the broader equity market, in this case the S&P 500 Index. If the value of the S&P 500 Index increased by 10%, the fair value of these securities would be expected to increase by 9.0% to $270 million . Conversely, a 10% decrease in the S&P 500 Index would imply a decrease of 9.0% in the fair value of these securities to $226 million . The selected hypothetical changes of plus or minus 10% do not reflect what could be considered the best or worst case scenarios and are used for illustrative purposes only.

Our equity investments include equity investments in certain bond investment funds which are not subject to significant equity price risk, and thus we have excluded these investments from the above analysis.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	138

Consolidated Balance Sheets - December 31, 2018 and December 31, 2017	139

Consolidated Statements of Changes in Capital - Years Ended December 31, 2018, 2017 and 2016	140

Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, 2018, 2017 and 2016	141

Consolidated Statements of Cash Flows - Years Ended December 31, 2018, 2017 and 2016	142

Notes to Consolidated Financial Statements	144

The Supplementary Financial Information required by Item 302 of Regulation S-K is included in Note 19 of the Notes to Consolidated Financial Statements of ProAssurance and its subsidiaries.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not Applicable.

ITEM 9A. CONTROLS AND PROCEDURES.

Disclosure Controls

Under the supervision and with the participation of management, including the principal executive and principal financial officers, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal year ended December 31, 2018 . Based on that evaluation, the principal executive and principal financial officers have concluded that these controls and procedures are effective.

Disclosure controls and procedures are defined in Exchange Act Rule 13a-15(e) and include the Company’s controls and other procedures that are designed to ensure that information, required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018 based on the framework in Internal Control–Integrated Framework issued by the COSO (2013 Framework). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2018 and that there was no change in the Company's internal controls during the fiscal year then ended that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Ernst & Young LLP, an independent registered public accounting firm, has audited the effectiveness of our internal controls over financial reporting as of December 31, 2018 as stated in their report which is included elsewhere herein.

ITEM 9B. OTHER INFORMATION

None.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of ProAssurance Corporation

Opinion on Internal Control over Financial Reporting

We have audited ProAssurance Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, ProAssurance Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2018 and 2017, the related consolidated statements of changes of capital, income and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “financial statements”) of the Company and our report dated February 21, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Birmingham, Alabama

February 21, 2019

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT.

The information required by this Item regarding executive officers is included in Part I of the Form 10-K in accordance with Instruction 3 of the Instructions to Paragraph (b) of Item 401 of Regulation S-K.

The information required by this Item regarding directors is incorporated by reference pursuant to General Instruction G (3) of Form 10-K from ProAssurance’s definitive proxy statement for the 2019 Annual Meeting of its Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or about April 12, 2019 .

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is incorporated by reference pursuant to General Instruction G (3) of Form 10-K from ProAssurance’s definitive proxy statement for the 2019 Annual Meeting of its Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or about April 12, 2019 .

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.


(a)	Financial Statements . The following consolidated financial statements of ProAssurance Corporation and subsidiaries are included herein in accordance with Item 8 of Part II of this report.

Report of Registered Public Accounting Firm

Consolidated Balance Sheets – December 31, 2018 and 2017

Consolidated Statements of Changes in Capital – years ended December 31, 2018 , 2017 and 2016

Consolidated Statements of Income and Comprehensive Income – years ended December 31, 2018 , 2017 and 2016

Consolidated Statements of Cash Flows – years ended December 31, 2018 , 2017 and 2016

Notes to Consolidated Financial Statements

Financial Statement Schedules . The following consolidated financial statement schedules of ProAssurance Corporation and subsidiaries are included herein in accordance with Item 14(d):

Schedule I – Summary of Investments – Other than Investments in Related Parties

Schedule II – Condensed Financial Information of ProAssurance Corporation (Registrant Only)

Schedule III – Supplementary Insurance Information

Schedule IV – Reinsurance

All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.


(b)	The exhibits required to be filed by Item 15(b) are listed herein in the Exhibit Index.

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SIGNATURES

Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this the 21 st day of February 2019 .



PROASSURANCE CORPORATION

By:	/ S / W. S TANCIL S TARNES
	W. Stancil Starnes

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Name	Title	Date

/ S / W. S TANCIL S TARNES , J.D.	Chairman of the Board, Chief Executive Officer	February 21, 2019
W. Stancil Starnes, J.D.	(Principal Executive Officer)

/ S / E DWARD L. R AND , J R .	President and Chief Operating Officer	February 21, 2019
Edward L. Rand, Jr.	(Principal Financial Officer)

/ S / D ANA S. H ENDRICKS	Chief Financial Officer	February 21, 2019
Dana S. Hendricks	(Principal Accounting Officer)

/ S / S AMUEL A. D I P IAZZA, J R.	Director	February 21, 2019
Samuel A. Di Piazza, Jr.

/ S / R OBERT E. F LOWERS, M.D .	Director	February 21, 2019
Robert E. Flowers, M.D.

/ S / M. J AMES G ORRIE	Director	February 21, 2019
M. James Gorrie

/ S / B RUCE D. A NGIOLILLO, J.D.	Director	February 21, 2019
Bruce D. Angiolillo, J.D.

/ S / J OHN J. M C M AHON, J R.	Director	February 21, 2019
John J. McMahon, Jr.

/S/ K ATISHA T. V ANCE, M.D.	Director	February 21, 2019
Katisha T. Vance, M.D.

/ S / F RANK A. S PINOSA , D.P.M.	Director	February 21, 2019
Frank A. Spinosa, D.P.M.

/ S / Z IAD R. H AYDAR , M.D.	Director	February 21, 2019
Ziad R. Haydar, M.D.

/ S / T HOMAS A.S. W ILSON , J R ., M.D.	Director	February 21, 2019
Thomas A. S. Wilson, Jr., M.D.

/ S / K EDRICK D. A DKINS , J R .	Director	February 21, 2019
Kedrick D. Adkins, Jr.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of ProAssurance Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of ProAssurance Corporation and subsidiaries (the Company) as of December 31, 2018 and 2017 , the related consolidated statements of changes in capital, income and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2018 , and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 , in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 21, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young, LLP

We have served as the Company's auditor since 1977.

Birmingham, Alabama

February 21, 2019

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ProAssurance Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)



	December 31, 2018			December 31, 2017
Assets
Investments
Fixed maturities, at fair value; cost or amortized cost, $2,155,270 and $2,257,188, respectively	$	2,131,986		$	2,280,242
Equity investments, at fair value; cost, $450,931 and $425,942, respectively	442,937			470,609
Short-term investments	308,319			432,126
Business owned life insurance	64,096			62,113
Investment in unconsolidated subsidiaries	367,757			330,591
Other investments, $31,344 and $52,301 at fair value, respectively, otherwise at cost or amortized cost	34,287			110,847
Total Investments	3,349,382			3,686,528
Cash and cash equivalents	80,471			134,495
Premiums receivable	261,466			238,085
Receivable from reinsurers on paid losses and loss adjustment expenses	11,558			7,317
Receivable from reinsurers on unpaid losses and loss adjustment expenses	343,820			335,585
Prepaid reinsurance premiums	40,631			39,916
Deferred policy acquisition costs	54,116			50,261
Deferred tax asset, net	29,108			9,930
Real estate, net	31,114			31,975
Intangible assets, net	76,776			82,952
Goodwill	210,725			210,725
Other assets	111,559			101,428
Total Assets	$	4,600,726		$	4,929,197
Liabilities and Shareholders' Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses	$	2,119,847		$	2,048,381
Unearned premiums	415,211			398,884
Reinsurance premiums payable	55,614			37,726
Total Policy Liabilities	2,590,672			2,484,991
Other liabilities	199,295			437,600
Debt less debt issuance costs	287,757			411,811
Total Liabilities	3,077,724			3,334,402
Shareholders' Equity
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 62,989,421 and 62,824,523 shares issued, respectively	630			628
Additional paid-in capital	384,713			383,077
Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of ($4,355) and $5,218, respectively	(16,911		)	14,911
Retained earnings	1,571,847			1,614,186
Treasury shares, at cost, 9,352,373 shares and 9,367,502 shares, respectively	(417,277		)	(418,007		)
Total Shareholders' Equity	1,523,002			1,594,795
Total Liabilities and Shareholders' Equity	$	4,600,726		$	4,929,197

See accompanying notes.

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Consolidated Statements of Changes in Capital

(In thousands)



	Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total
Balance at January 1, 2016	$	625	$	365,399		$	23,855		$	1,988,035		$	(419,560	)	$	1,958,354
Common shares reacquired	—		—			—			—			(2,106		)	(2,106		)
Common shares issued for compensation and effect of shares reissued to stock purchase plan	—		1,696			—			—			1,736			3,432
Share-based compensation	—		12,455			—			—			—			12,455
Net effect of restricted and performance shares issued	2		(3,032		)	—			—			—			(3,030		)
Dividends to shareholders	—		—			—			(315,028		)	—			(315,028		)
Other comprehensive income (loss)	—		—			(6,456		)	—			—			(6,456		)
Net income	—		—			—			151,081			—			151,081
Balance at December 31, 2016	627		376,518			17,399			1,824,088			(419,930		)	1,798,702
Cumulative-effect adjustment- ASU 2016-09 adoption	—		425			—			(276		)	—			149
Common shares issued for compensation and effect of shares reissued to stock purchase plan	—		957			—			—			1,923			2,880
Share-based compensation	—		10,615			—			—			—			10,615
Net effect of restricted and performance shares issued	1		(5,438		)	—			—			—			(5,437		)
Dividends to shareholders	—		—			—			(316,890		)	—			(316,890		)
Other comprehensive income (loss)	—		—			(2,488		)	—			—			(2,488		)
Net income	—		—			—			107,264			—			107,264
Balance at December 31, 2017	628		383,077			14,911			1,614,186			(418,007		)	1,594,795
Cumulative-effect adjustment- ASU 2016-01 adoption*	—		—			—			8,334			—			8,334
Cumulative-effect adjustment- ASU 2018-02 adoption*	—		—			3,416			(3,416		)	—			—
Common shares issued for compensation and effect of shares reissued to stock purchase plan	—		314			—			—			730			1,044
Share-based compensation	—		5,258			—			—			—			5,258
Net effect of restricted and performance shares issued	2		(3,936		)	—			—			—			(3,934		)
Dividends to shareholders	—		—			—			(94,314		)	—			(94,314		)
Other comprehensive income (loss)	—		—			(35,238		)	—			—			(35,238		)
Net income	—		—			—			47,057			—			47,057
Balance at December 31, 2018	$	630	$	384,713		$	(16,911	)	$	1,571,847		$	(417,277	)	$	1,523,002

* See Note 1 of the Notes to Consolidated Financial Statements for discussion of accounting guidance adopted during the year.

See accompanying notes.

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Consolidated Statements of Income and Comprehensive Income

(In thousands, except per share data)



	Year Ended December 31
	2018			2017			2016
Revenues
Net premiums earned	$	818,853		$	738,531		$	733,281
Net investment income	91,884			95,662			100,012
Equity in earnings (loss) of unconsolidated subsidiaries	8,948			8,033			(5,762		)
Net realized investment gains (losses):
OTTI losses	(490		)	(13,200		)	(10,834		)
Portion of OTTI losses recognized in other comprehensive income before taxes	—			248			1,068
Net impairment losses recognized in earnings	(490		)	(12,952		)	(9,766		)
Other net realized investment gains (losses)	(42,998		)	29,361			44,641
Total net realized investment gains (losses)	(43,488		)	16,409			34,875
Other income	9,833			7,514			7,808
Total revenues	886,030			866,149			870,214
Expenses
Net losses and loss adjustment expenses	593,210			469,158			443,229
Underwriting, policy acquisition and operating expenses
Operating expense	134,055			140,002			139,232
DPAC Amortization	104,501			95,751			88,378
Segregated portfolio cells dividend expense (income)	9,122			15,771			8,142
Interest expense	16,117			16,844			15,032
Total expenses	857,005			737,526			694,013
Income before income taxes	29,025			128,623			176,201
Provision for income taxes
Current expense (benefit)	(6,208		)	19,666			16,586
Deferred expense (benefit)	(11,824		)	1,693			8,534
Total income tax expense (benefit)	(18,032		)	21,359			25,120
Net income	47,057			107,264			151,081
Other comprehensive income (loss), after tax, net of reclassification adjustments	(35,238		)	(2,488		)	(6,456		)
Comprehensive income (loss)	$	11,819		$	104,776		$	144,625
Earnings per share
Basic	$	0.88		$	2.01		$	2.84
Diluted	$	0.88		$	2.00		$	2.83
Weighted average number of common shares outstanding:
Basic	53,598			53,393			53,216
Diluted	53,749			53,611			53,448
Cash dividends declared per common share	$	1.74		$	5.93		$	5.93

See accompanying notes.

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Consolidated Statements of Cash Flows

(In thousands)



	Year Ended December 31
	2018			2017			2016
Operating Activities
Net income	$	47,057		$	107,264		$	151,081
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization, net of accretion	21,255			28,796			32,789
(Increase) decrease in cash surrender value of BOLI	(1,983		)	(1,979		)	(2,008		)
Net realized investment (gains) losses	43,488			(16,409		)	(34,875		)
Share-based compensation	5,321			10,615			12,455
Deferred income tax expense (benefit)	(11,824		)	1,693			8,534
Policy acquisition costs, net of amortization (net deferral)	(3,855		)	(3,452		)	(2,421		)
Equity in (earnings) loss of unconsolidated subsidiaries	(8,948		)	(8,033		)	5,762
Distributed earnings from unconsolidated subsidiaries	31,219			24,392			9,863
Other	1,168			108			1,772
Other changes in assets and liabilities:
Premiums receivable	(23,381		)	(14,605		)	(6,446		)
Reinsurance related assets and liabilities	4,697			(56,449		)	(26,108		)
Other assets	(4,206		)	(792		)	15,665
Reserve for losses and loss adjustment expenses	71,466			54,953			(11,898		)
Unearned premiums	16,327			26,321			10,497
Other liabilities	(10,536		)	20,965			14,321
Net cash provided (used) by operating activities	177,265			173,388			178,983
Investing Activities
Purchases of:
Fixed maturities, available for sale	(780,698		)	(614,440		)	(636,377		)
Fixed maturities, trading	(38,544		)	—			—
Equity investments	(203,157		)	(207,857		)	(112,912		)
Other investments	(32,153		)	(50,362		)	(18,613		)
Funding of qualified affordable housing project tax credit partnerships	—			(507		)	(1,019		)
Investment in unconsolidated subsidiaries	(78,141		)	(42,183		)	(50,890		)
Proceeds from sales or maturities of:
Fixed maturities, available for sale	914,021			932,070			752,516
Equity investments	210,481			146,356			85,226
Other investments	29,815			25,372			13,797
Return of invested capital from unconsolidated subsidiaries	84,534			32,539			7,084
Net sales or maturities (purchases) of short-term investments	123,886			4,167			(322,872		)
Unsettled security transactions, net change	(4,022		)	(2,031		)	1,388
Purchases of capital assets	(9,636		)	(10,485		)	(10,922		)
Repayments (advances) under Syndicate Credit Agreement	(184		)	(10,339		)	(1,395		)
Other	(1,305		)	(2,025		)	6,187
Net cash provided (used) by investing activities	214,897			200,275			(288,802		)
Continued on following page.

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	Year Ended December 31
	2018			2017			2016
Continued from the previous page.
Financing Activities
Borrowings (repayments) under Revolving Credit Agreement	(123,000		)	(77,000		)	100,000
Proceeds (repayments) of Mortgage Loans	(1,396		)	40,460			—
Repurchase of common stock	—			—			(2,106		)
Dividends to shareholders	(316,476		)	(315,228		)	(118,812		)
Capital contribution received from (return of capital to) external segregated portfolio cell participants	(1,005		)	2,936			9,952
Other	(4,309		)	(7,683		)	(2,968		)
Net cash provided (used) by financing activities	(446,186		)	(356,515		)	(13,934		)
Increase (decrease) in cash and cash equivalents	(54,024		)	17,148			(123,753		)
Cash and cash equivalents at beginning of period	134,495			117,347			241,100
Cash and cash equivalents at end of period	$	80,471		$	134,495		$	117,347

Supplemental Disclosure of Cash Flow Information
Cash paid during the year for income taxes, net of refunds	$	5,726		$	17,193		$	(8,683	)
Cash paid during the year for interest	$	16,165		$	15,892		$	14,732

Significant Non-Cash Transactions
Dividends declared and not yet paid	$	43,446		$	267,292		$	265,659

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018

1 . Accounting Policies

Organization and Nature of Business

ProAssurance Corporation (ProAssurance, PRA or the Company), a Delaware corporation, is an insurance holding company primarily for wholly owned specialty property and casualty insurance entities including an entity that is the majority capital provider to Syndicate 1729 and the sole (100%) capital provider of a SPA , Syndicate 6131 at Lloyd's. Risks insured are primarily liability risks located within the U.S.

Beginning in the third quarter of 2018, ProAssurance operates in five reportable segments as follows: Specialty P&C , Workers' Compensation Insurance, Segregated Portfolio Cell Reinsurance, Lloyd's Syndicates and Corporate. For more information on the Company's segment reporting, including the nature of products and services provided and financial information by segment, refer to Note 16 .

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of ProAssurance Corporation and its wholly owned subsidiaries. Investments in entities where ProAssurance holds a greater than minor interest but does not hold a controlling interest are accounted for using the equity method. All significant intercompany accounts and transactions are eliminated in consolidation. ProAssurance subsidiaries located in the U.K. are normally reported on a quarter delay due to timing issues regarding the availability of information, except when information is available that is material to the current period. Furthermore, investment results associated with ProAssurance's FAL investments and certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame.

Basis of Presentation

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosures related to these amounts at the date of the financial statements. Actual results could differ from those estimates.

Reclassifications

As a result of the third quarter of 2018 segment reorganization, prior year segment information in Note 16 has been recast to conform to the Company's current segment reporting (see Note 16 for further information).

Certain other insignificant prior year amounts have been reclassified to conform to the current year presentation.

Accounting Policies

The significant accounting policies followed by ProAssurance in making estimates that materially affect financial reporting are summarized in these Notes to Consolidated Financial Statements.

Recognition of Revenues

Insurance premiums are recognized as revenues pro rata over the terms of the policies, which are principally one year in duration.

Credit Losses

ProAssurance's premium and agency receivables are exposed to credit losses, but to-date have not experienced any significant amount of credit losses. Recorded allowances for credit losses were less than $1.5 million at both December 31, 2018 and 2017 . Neither estimated credit losses nor actual credit write-offs, net of recoveries, exceeded $0.5 million during the years ended December 31, 2018 and 2017 .

Earned But Unbilled Premiums

Workers’ compensation premiums are determined based upon the payroll of the insured, the applicable premium rates and an experience-based modification factor, where applicable. An audit of the policyholders’ records is conducted after policy expiration to make a final determination of applicable premiums. Audit premium due from or due to a policyholder as a result of an audit is reflected in net premiums written and earned when billed. ProAssurance tracks, by policy, the amount of

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Notes to Consolidated Financial Statements

December 31, 2018

additional premium billed in final audit invoices as a percentage of payroll exposure and uses this information to estimate the probable additional amount of EBUB premium as of the balance sheet date. Changes to the EBUB estimate are included in net premiums written and earned in the period recognized. As of December 31, 2018 and 2017 , ProAssurance carried EBUB of $4.3 million as a part of premiums receivable.

Losses and Loss Adjustment Expenses

ProAssurance establishes its reserve for losses and LAE ("reserve for losses" or "reserve") based on estimates of the future amounts necessary to pay claims and expenses associated with the investigation and settlement of claims. The reserve for losses is determined on the basis of individual claims and payments thereon as well as actuarially determined estimates of future losses based on past loss experience, available industry data and projections as to future claims frequency, severity, inflationary trends, judicial trends, legislative changes and settlement patterns.

Management establishes the reserve for losses after taking into consideration a variety of factors including premium rates, claims frequency and severity, historical paid and incurred loss development trends, the expected effect of inflation, general economic trends, the legal and political environment and the conclusions reached by internal and consulting actuaries. Management updates and reviews the data underlying the estimation of the reserve for losses each reporting period and makes adjustments to loss estimation assumptions that best reflect emerging data. Both internal and consulting actuaries perform an in-depth review of the reserve for losses on at least a semi-annual basis using the loss and exposure data of ProAssurance's subsidiaries. Consulting actuaries provide reports to management regarding the adequacy of reserves.

Estimating casualty insurance reserves, and particularly long-tailed insurance reserves, is a complex process. Long-tailed insurance is characterized by the extended period of time between collecting the premium for insuring a risk and the ultimate payment of losses. For a high proportion of the risks insured or reinsured by ProAssurance, the period of time required to resolve a claim is often five years or more, and claims may be subject to litigation. Estimating losses for these long-tailed claims requires ProAssurance to make and revise judgments and assessments regarding multiple uncertainties over an extended period of time. As a result, reserve estimates may vary significantly from the eventual outcome. Reserve estimates and the assumptions on which these estimates are predicated are regularly reviewed and updated as new information becomes available. Any adjustments necessary are reflected in then current operations. Due to the size of ProAssurance’s reserve for losses, even a small percentage adjustment to these estimates could have a material effect on earnings in the period in which the adjustment is made, as was the case in 2018 , 2017 and 2016 .

The effect of adjustments made to reinsured losses is mitigated by the corresponding adjustment that is made to reinsurance recoveries. Thus, in any given year, ProAssurance may make significant adjustments to gross losses that have little effect on its net losses.

Reinsurance Receivables

ProAssurance enters into reinsurance agreements whereby other insurance entities agree to assume a portion of the risk associated with certain policies issued by ProAssurance. In return, ProAssurance agrees to pay a premium to the reinsurer. ProAssurance uses reinsurance to provide capacity to write larger limits of liability, to provide reimbursement for losses incurred under the higher limit coverages the Company offers, to provide protection against losses in excess of policy limits, and, in the case of risk sharing arrangements, to align the Company's objectives with those of its strategic business partners and to provide custom insurance solutions for large customer groups.

Receivable from reinsurers on paid losses and LAE is the estimated amount of losses already paid that will be recoverable from reinsurers. Receivable from reinsurers on unpaid losses and LAE is the estimated amount of future loss payments that will be recoverable from reinsurers. Reinsurance recoveries are the portion of losses incurred during the period that are estimated to be allocable to reinsurers. Premiums ceded are the estimated premiums that will be due to reinsurers with respect to premiums earned and losses incurred during the period.

These estimates are based upon management’s estimates of ultimate losses and the portion of those losses that are allocable to reinsurers under the terms of the related reinsurance agreements. Given the uncertainty of the ultimate amounts of losses, these estimates may vary significantly from the ultimate outcome. Management regularly reviews these estimates and any adjustments necessary are reflected in the period in which the estimate is changed. Due to the size of the receivable from reinsurers, even a small adjustment to the estimates could have a material effect on ProAssurance’s results of operations for the period in which the change is made.

Reinsurance contracts do not relieve ProAssurance from its obligations to policyholders. ProAssurance continually monitors its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Any amount determined to be uncollectible is written off in the period in which the uncollectible amount is identified.

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Notes to Consolidated Financial Statements

December 31, 2018

Retroactive Insurance Contracts

In certain instances, ProAssurance’s insurance contracts cover losses both on a prospective basis and retroactive basis and, accordingly, ProAssurance bifurcates the prospective and retroactive provisions of these contracts and accounts for each component separately, where practicable.

Under the retroactive provisions of a contract, all premiums received and losses assumed are recognized immediately in earnings at the inception of the contract as all of the underlying loss events occurred in the past. If the estimated losses assumed differ from the premium received related to the retroactive provision of a contract, the resulting difference is deferred and recognized over the estimated claim payment period with the periodic amortization reflected in earnings as a component of net losses and LAE . Deferred gains are included as a component of the reserve for losses and LAE and deferred losses are included as a component of other assets on the Consolidated Balance Sheet. Subsequent changes to the estimated timing or amount of future loss payments in relation to the losses assumed under retroactive provisions also produce changes in deferred balances. Changes in such estimates are applied retrospectively and the resulting changes in deferred balances, together with periodic amortization, are included in earnings in the period of change.

Lloyd’s Premium Estimates

For certain insurance policies and reinsurance contracts written in the Lloyd’s Syndicates segment, premiums are initially recognized based upon estimates of ultimate premium. Estimated ultimate premium consists primarily of premium written under delegated underwriting authority arrangements, which consist primarily of binding authorities, and certain assumed reinsurance agreements. These estimates of ultimate premium are judgmental and are dependent upon certain assumptions, including historical premium trends for similar agreements. As reports are received from programs, ultimate premium estimates are revised, if necessary, with changes reflected in current operations.

Investments

Recurring Fair Value Measurements

Fair values of investment securities are primarily provided by independent pricing services. The pricing services provide an exchange-traded price, if available, or provide an estimated price determined using multiple observable inputs, including exchange-traded prices for similar assets. Management reviews valuations of securities obtained from the pricing services for accuracy based upon the specifics of the security, including class, maturity, credit rating, durations, collateral and comparable markets for similar securities. Multiple observable inputs are not available for certain of the Company's investments, including corporate debt not actively traded, other asset-backed securities and investments in LP s/ LLC s. Management values the corporate debt not actively traded and the other asset-backed securities either using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Management values certain investment funds, primarily LP s/ LLC s, based on the NAV of the interest held, as provided by the fund.

Nonrecurring Fair Value Measurements

Management measures the fair value of certain assets on a nonrecurring basis either quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investments carried principally at cost, investments in tax credit partnerships and equity method investments that do not provide a NAV , fixed assets, goodwill and other intangible assets.

Fixed Maturities

Fixed maturities are considered as either available-for-sale or trading securities.

Available-for-sale securities are carried at fair value, determined as described above. Exclusive of OTTI losses, discussed in a separate section that follows, unrealized gains and losses on available-for-sale securities are included, net of related tax effects, in shareholders’ equity as a component of AOCI .

Investment income includes amortization of premium and accretion of discount related to available-for-sale debt securities acquired at other than par value. Debt securities and mandatorily redeemable preferred stock with maturities beyond one year when purchased are classified as fixed maturities.

Trading securities are carried at fair value, determined as described above, with the holding gains and losses included as a component of net realized investment gains (losses) during the period of change.

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Notes to Consolidated Financial Statements

December 31, 2018

Equity Investments

Equity investments are carried at fair value, as described above, with the holding gains and losses included as a component of net realized investment gains (losses) during the period of change. Equity investments are primarily comprised of stocks, bond funds and investment funds.

Short-term Investments

Short-term investments, which have a maturity at purchase of one year or less, are primarily comprised of investments in U.S. Treasury obligations, commercial paper and money market funds. All balances are carried at fair value which approximates the cost of the securities due to their short-term nature.

Other Investments

Investments in convertible bond securities are carried at fair value as permitted by the accounting guidance for hybrid financial instruments, with changes in fair value recognized in income as a component of net realized investment gains (losses) during the period of change. Interest on convertible bond securities is recorded on an accrual basis based on contractual interest rates and is included in net investment income.

Investments in certain funds measure fund assets at fair value on a recurring basis and provide ProAssurance with a NAV for its interest. As a practical expedient, ProAssurance considers the NAV provided to approximate the fair value of its interest. Changes in fair value are included as a component of net realized investment gains (losses) during the period of change.

Investment in Unconsolidated Subsidiaries

Equity investments, primarily investments in LP s/ LLC s, where ProAssurance is deemed to have influence because it holds a greater than a minor interest are accounted for using the equity method. Under the equity method, the recorded basis of the investment is adjusted each period for the investor’s pro rata share of the investee’s income or loss. Investments in unconsolidated subsidiaries include tax credit partnerships accounted for using the equity method, whereby ProAssurance’s proportionate share of income or loss is included in equity in earnings (loss) of unconsolidated subsidiaries. Tax credits received from the partnerships are recognized in the period received as a reduction to current tax expenses.

Business Owned Life Insurance

ProAssurance owns life insurance contracts on certain management employees. The life insurance contracts are carried at their current cash surrender value. Changes in the cash surrender value are included in income in the current period as investment income. Death proceeds from the contracts are recorded when the proceeds become payable under the policy terms.

Realized Gains and Losses

Realized investment gains and losses are recognized on the first-in, first-out basis for GAAP purposes and on the specific identification basis for tax purposes.

Other-than-temporary Impairments

ProAssurance evaluates its available-for-sale investment securities, which at December 31, 2018 and 2017 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 OTTI . The Company considers an OTTI 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.

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December 31, 2018

For non-structured fixed maturities (obligations of states, municipalities and political subdivisions and corporate debt) 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. ProAssurance considers 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;


•	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 the Company's 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; and


•	recoveries or additional declines in fair value subsequent to the balance sheet date.

For structured securities (primarily asset-backed securities), ProAssurance estimates the present value of the security’s cash flows using the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment or changes in expected cash flows). ProAssurance considers the most recently available six month averages of the levels of delinquencies, defaults, severities, and prepayments for the collateral (loans) underlying the securitization or, if historical data is not available, sector based assumptions, to estimate expected future cash flows of these securities.

Investments in tax credit partnerships are evaluated for OTTI by considering both qualitative and quantitative factors. These factors include, but are not limited to:


•	ProAssurance's ability and intent to hold the investment until the recovery of its carrying value; and


•	in situations where there was not a previous OTTI for the investment, whether the current expected cash flows from the investment, primarily tax benefits, are less than those expected at the time the investment was acquired due to various factors, such as a change in the statutory tax rate; or


•	in situations where there was a previous OTTI for the investment, whether the expected cash flows from the investment at the time of the OTTI, primarily tax benefits, are less than its current carrying value.

Investments which are accounted for under the equity method are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the investment may not be recoverable. These circumstances include, but are not limited to, evidence of the inability to recover the carrying value of the investment, the inability of the investee to sustain an earnings capacity that would justify the carrying value of the investment or a current fair value of the investment that is less than the carrying value.

ProAssurance recognizes OTTI , exclusive of non-credit OTTI , in earnings as a part of net realized investment gains (losses). In subsequent periods, any measurement of gain, loss or impairment is based on the revised amortized basis of the security. Non-credit OTTI on debt securities and declines in fair value of available-for-sale securities not considered to be other-than-temporary are recognized in OCI .

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December 31, 2018

Derivatives

ProAssurance records derivative instruments at fair value in the Consolidated Balance Sheets. ProAssurance accounts for the changes in fair value of derivatives depending on whether the derivative is designated as a hedging instrument and if so, the type of hedging relationship. For derivative instruments not designated as hedging instruments, ProAssurance recognizes the change in fair value of the derivative in earnings during the period of change. As of December 31, 2018 , ProAssurance has not designated any derivative instruments as hedging instruments and does not use derivative instruments for trading purposes.

Foreign Currency

The functional currency of all ProAssurance foreign subsidiaries is the U.S. dollar. In recording foreign currency transactions, revenue and expense items are converted to U.S. dollars at the exchange rate prevailing at the transaction date. Monetary assets and liabilities originating in currencies other than the U.S. dollar are remeasured to U.S. dollars at the rates of exchange in effect as of the balance sheet date. The resulting foreign currency gains or losses are recognized in the Consolidated Statements of Income and Comprehensive Income as a component of other income. Monetary assets and liabilities include investments, cash and cash equivalents, accrued expenses and other liabilities. In addition, monetary assets and liabilities include certain premiums receivable and reserve for losses and LAE as a result of reinsurance transactions conducted with foreign cedants denominated in their local functional currencies.

Cash and Cash Equivalents

For purposes of the Consolidated Balance Sheets and Consolidated Statements of Cash Flows, ProAssurance considers all demand deposits and overnight investments to be cash equivalents.

Deferred Policy Acquisition Costs; Ceding Commission Income

Costs that vary with and are directly related to the successful production of new and renewal premiums (primarily premium taxes, commissions and underwriting salaries) are deferred to the extent they are recoverable against unearned premiums and are amortized as related premiums are earned. Unearned ceding commission income is reported as an offset to DPAC and ceding commission earned is reported as an offset to DPAC amortization.

Income Taxes/Deferred Taxes

ProAssurance files a consolidated federal income tax return. Tax-related interest and penalties are recognized as components of tax expense.

ProAssurance evaluates tax positions taken on tax returns and recognizes positions in the financial statements when it is more likely than not that the position will be sustained upon resolution with a taxing authority. If recognized, the benefit is measured as the largest amount of benefit that has a greater than fifty percent probability of being realized. Uncertain tax positions are reviewed each period by considering changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law, and adjustments would be made if considered necessary. Adjustments to unrecognized tax benefits may affect income tax expense and the 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 years ended December 31, 2018 or 2017 .

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. ProAssurance’s temporary differences principally relate to loss reserves, unearned premium, DPAC , unrealized investment gains (losses) and basis differentials in fixed assets and investments. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when such benefits are realized. ProAssurance reviews its deferred tax assets quarterly for impairment. If management determines 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 the future operations of ProAssurance based on historical experience and information as of the measurement date regarding reversal of existing temporary differences, carryback capacity, future taxable income, including its capital and operating characteristics, and tax planning strategies.

A valuation allowance has been established against the full value of the deferred tax asset related to the NOL carryforwards for the U.K. operations as management concluded that it was more likely than not that the deferred tax asset will not be realized. In 2018, ProAssurance also established a valuation allowance against the deferred tax assets of certain SPC s at its newly formed wholly owned Cayman Islands reinsurance subsidiary, Inova Re. As of December 31, 2018 , these newly

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formed SPC s are in a cumulative pre-tax loss position, and management concluded that a valuation allowance was required based upon the weight of this negative evidence. See further discussion in Note 6 .

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. On December 22, 2017, the TCJA was signed into law and contains several key provisions that impact ProAssurance, including the reduction of the corporate tax rate to 21% effective January 1, 2018, the reduction in the amount of executive compensation that could qualify as a tax deduction, a minimum tax on payments made to related foreign entities, a change in how property and casualty taxpayers discount loss reserves, a minimum tax on payments made to related foreign entities and a new tax on certain income of controlled foreign corporations. See Note 6 for further discussion of the TCJA .

Real Estate

Real Estate balances are reported at cost or, for properties acquired in business combinations, estimated fair value on the date of acquisition, less accumulated depreciation. Real estate principally consists of properties in use as corporate offices. Depreciation is computed over the estimated useful lives of the related property using the straight-line method. Excess office capacity is leased or made available for lease; rental income is included in other income and real estate expenses are included in operating expense.

Real estate accumulated depreciation was approximately $25.2 million and $24.0 million at December 31, 2018 and 2017 , respectively. Real estate depreciation expense was $1.2 million , $1.1 million and $1.4 million for the years ended December 31, 2018 , 2017 and 2016 , respectively.

Intangible Assets

Intangible assets with definite lives are amortized over the estimated useful life of the asset. Amortizable intangible assets primarily consist of policyholder relationships, renewal rights and trade names. Intangible assets with an indefinite life, primarily state licenses, are not amortized. All intangible assets are evaluated for impairment on an annual basis or upon the occurrence of certain triggering events or substantive changes in circumstances that indicate the fair value of the asset may be impaired. The third quarter 2018 segment reorganization had no impact on how ProAssurance's evaluates intangible assets for impairment. The following table provides additional information regarding ProAssurance's intangible assets.



	Gross Carrying Value				Accumulated Amortization				Amortization Expense
	December 31				December 31				Year Ended December 31
(In millions)	2018		2017		2018		2017		2018		2017		2016
Intangible Assets
Non-amortizable	$	25.8	$	25.8
Amortizable	97.5		97.5		$	46.5	$	40.3	$	6.2	$	5.8	$	8.1
Total Intangible Assets	$	123.3	$	123.3

Aggregate amortization expense for intangible assets is estimated to be $6.1 million for each of the years ended December 31, 2019 and 2020 and $6.0 million for each of the years ended December 31, 2021 , 2022 and 2023 .

Goodwill

Goodwill is recognized in conjunction with business acquisitions as the excess of the purchase consideration for the business acquisition over the fair value of identifiable assets acquired and liabilities assumed. The fair value of identifiable assets and liabilities, and thus goodwill, is subject to redetermination within a measurement period of up to one year following completion of a business acquisition.

Management evaluates goodwill for impairment annually on October 1, upon the occurrence of certain triggering events or substantive changes in circumstances that indicate the fair value of goodwill may be impaired, and immediately before and after a reorganization that affects the composition of one or more of the Company's reporting units. Impairment of goodwill is tested at the reporting unit level, which is consistent with the reportable segments identified in Note 16 . Of the five reporting units, three have goodwill: Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance.

Annual Goodwill Impairment Test

When testing goodwill for impairment, management has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a

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reporting unit is less than its carrying amount. If management elects to perform a qualitative assessment and determines that an impairment is more likely than not, management is then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. Management also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. As of the most recent annual evaluation date on October 1, 2018, management elected to perform a quantitative goodwill impairment assessment for Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units.

In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is determined using income and market approaches and is compared to its carrying value, as described above. The estimate of fair value derived from the income approach is based on the present value of expected future cash flows, including terminal value, utilizing a market based weighted average cost of capital determined separately for each reporting unit. The estimate of fair value derived from the market approach is based on earnings multiple data derived from market information. The determination of fair value involves the use of significant estimates and assumptions, including revenue growth rates, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rates, comparable public companies and synergistic benefits available to market participants. In addition, management makes certain judgments and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount of each reporting unit. To corroborate the reporting units’ valuation, management performs a reconciliation of the estimate of the aggregate fair value of the reporting units to ProAssurance's market capitalization, including consideration of a control premium. Because not all of ProAssurance's reporting units have goodwill, management makes certain assumptions regarding the fair value of the Company's other reporting units in reconciling to ProAssurance's market capitalization.

As a result of the quantitative assessments performed on October 1, 2018, management concluded that the fair value of each of the Company's three reporting units that have goodwill were greater than their carrying value as of the testing date; therefore, goodwill was not impaired and no further impairment testing was required. No goodwill impairment was recorded in 2018 , 2017 or 2016 .

Goodwill Impairment Test - Result of Segment Reorganization

As discussed in Note 16 , ProAssurance reorganized its segment reporting in the third quarter of 2018 to align with how the Company's CODM currently oversees the business, allocates resources and evaluates operating performance. As a result of the segment reorganization, ProAssurance added an operating and reportable segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment also became a reporting unit for purposes of testing goodwill for impairment. Management allocated goodwill to the Company's revised reporting units using a relative fair value approach which resulted in a nominal amount of goodwill reallocated from the Workers' Compensation Insurance reporting unit to the Segregated Portfolio Cell Reinsurance reporting unit. Management performed a quantitative goodwill impairment assessment for the Workers' Compensation Insurance reporting unit immediately prior to the reallocation and a quantitative goodwill impairment assessment for the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units immediately after the reallocation and determined that no impairment existed.

Management estimated the fair value of the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units using both an income approach and market approach using the same valuation methodologies and process for developing assumptions that management uses in the annual impairment assessment, as discussed above. To corroborate the reporting units’ valuation, management performed a reconciliation of the estimate of the aggregate fair value of the reporting units to ProAssurance's market capitalization, including consideration of a control premium. Because management was not required to estimate the fair value of all of the Company's reporting units as part of this interim goodwill impairment assessment, management made certain assumptions regarding the fair value of the Company's other reporting units in reconciling to ProAssurance's market capitalization.

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Other Liabilities

Other liabilities at December 31, 2018 and 2017 consisted of the following:



(In thousands)	2018		2017
SPC dividends payable	$	53,604	$	46,925
Unpaid dividends	43,446		267,292
All other	102,245		123,383
Total other liabilities	$	199,295	$	437,600

SPC dividends payable are the cumulative undistributed earnings contractually payable to the external participants of SPC s operated by ProAssurance's Cayman Islands subsidiaries, Eastern Re and Inova Re.

Unpaid dividends represent common stock dividends declared by ProAssurance's Board that had not yet been paid. Unpaid dividends at both December 31, 2018 and 2017 included a special dividend declared in the fourth quarter period that was paid in January of the following year.

Treasury Shares

Treasury shares are reported at cost, and are reflected on the Consolidated Balance Sheets as an unallocated reduction of total equity.

Share-Based Payments

Compensation cost for share-based payments is measured based on the grant-date fair value of the award, recognized over the period in which the employee is required to provide service in exchange for the award. Excess tax benefits (tax deductions realized in excess of the compensation costs recognized for the exercise of the awards, multiplied by the incremental tax rate) are reported as operating cash inflows.

Subsequent Events

ProAssurance evaluates events that occurred subsequent to December 31, 2018 , for recognition or disclosure in its Consolidated Financial Statements.

Accounting Changes Adopted

Restricted Cash ( ASU 2016-18)

Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB issued guidance related to the classification of restricted cash presented in the statement of cash flows with the objective of reducing diversity in practice. Under the new guidance, entities are required to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts as presented on the statement of cash flows. ProAssurance adopted the guidance as of January 1, 2018. Adoption of the guidance had no material effect on ProAssurance’s results of operations, financial position or cash flows.

Intra-Entity Transfers of Assets Other than Inventory ( ASU 2016-16)

Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB issued guidance which reduces the complexity in accounting standards related to the income tax consequences of intra-entity transfers of assets other than inventory between tax-paying components. A tax-paying component is an individual entity or group of entities that is consolidated for tax purposes. Under the new guidance, entities are required to recognize income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs instead of delaying recognition until the asset has been sold to an outside party. ProAssurance adopted the guidance as of January 1, 2018. Adoption of the guidance had no material effect on ProAssurance’s results of operations, financial position or cash flows.

Classification of Certain Cash Receipts and Cash Payments ( ASU 2016-15)

Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB issued guidance related to the classification of certain cash receipts and cash payments presented in the statement of cash flows with the objective of reducing diversity in practice. ProAssurance adopted the guidance as of January 1, 2018 and elected to use the cumulative earnings approach for presenting distributions from equity method investees. Adoption of the guidance had no

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December 31, 2018

material effect on ProAssurance’s results of operations or financial position; however, ProAssurance reclassified approximately $24.4 million and $9.9 million in distributions from unconsolidated subsidiaries from investing activities to operating activities in the Consolidated Statement of Cash Flows for the years ended December 31, 2017 and 2016 , respectively.

Revenue from Contracts with Customers ( ASU 2014-09)

Effective for fiscal years beginning after December 15, 2017 the FASB issued guidance related to revenue from contracts with customers. The core principle of the new guidance is that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ProAssurance adopted the guidance as of January 1, 2018 under the modified retrospective method. Adoption of the guidance had no material effect on ProAssurance’s results of operations, financial position or cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities ( ASU 2016-01)

Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB issued guidance that requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The new guidance also specifies that an entity use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and present financial assets and liabilities by measurement category and form of financial asset. Other provisions of the new guidance include: revised disclosure requirements related to the presentation in comprehensive income of changes in the fair value of liabilities; elimination, for public companies, of disclosure requirements relative to the methods and significant assumptions underlying fair values disclosed for financial instruments measured at amortized cost; and simplified impairment assessments for equity investments without readily determinable fair values. ProAssurance adopted the guidance as of January 1, 2018 using a modified retrospective application and recorded a cumulative-effect after-tax adjustment of approximately $8.3 million to beginning retained earnings in the Consolidated Statement of Changes in Capital for the year ended December 31, 2018 . LP s/ LLC s previously reported using the cost method are now reported at fair value with increases in fair value of approximately $12.8 million recognized as a component of equity in earnings (loss) of unconsolidated subsidiaries on the Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2018 . ProAssurance received dividends of approximately $22.0 million from these investments during 2018 that was recorded as a reduction in the carrying value of the investments instead of as a component of net investment income on the Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2018 .

Modification Accounting for Employee Share-Based Payment Awards ( ASU 2017-09)

Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB issued guidance which reduces the complexity in accounting standards when there is a change in the terms or conditions of a share-based payment award. The new guidance clarifies that an entity should apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. ProAssurance adopted the guidance as of January 1, 2018. Adoption of the guidance had no material effect on ProAssurance’s results of operations, financial position or cash flows.

Reclassification of Certain Tax Effects from AOCI ( ASU 2018-02)

Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted, the FASB issued guidance which permits a reclassification from AOCI to retained earnings for stranded tax effects resulting from the newly enacted federal corporate tax rate from the TCJA . The amount of the reclassification from AOCI to retained earnings will be the difference between the historical corporate tax rate and the newly enacted 21% corporate tax rate on deferred tax items originally established through OCI and not net income. The guidance allows entities to adopt in any interim or annual period for which financial statements have not yet been issued and apply the guidance either (1) in the period of adoption or (2) retrospectively to each period in which the effect of the change in the tax rate is recognized. ProAssurance adopted this guidance as of January 1, 2018 and elected to apply this guidance in the period of adoption using the specific identification method. Using a modified retrospective application, ProAssurance recorded a cumulative-effect adjustment which increased beginning AOCI by approximately $3.4 million and decreased beginning retained earnings by the same amount in the Consolidated Statement of Changes in Capital for the year ended December 31, 2018 . Adoption of this guidance had no material effect on ProAssurance's financial position, results of operations or cash flows.

Technical Corrections and Improvements to Financial Instruments - Overall ( ASU 2018-03)

Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018, the FASB amended the new standard on recognizing and measuring financial assets and financial liabilities to clarify certain aspects of the guidance. Under the amended guidance, an entity that uses the measurement alternative for equity investments without readily determinable fair values can change its measurement approach to a fair value method through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Also, entities

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are required to use the prospective transition approach only for equity investments they elect to measure using the new measurement alternative. Additionally, the guidance clarifies how to apply the measurement alternative and presentation requirements for financial liabilities measured under the fair value option. ProAssurance adopted the guidance as of July 1, 2018 and adoption had no material effect on ProAssurance's financial position, results of operations or cash flows as ProAssurance does not have any equity investments without readily determinable fair values or financial liabilities measured under the fair value option.

Accounting Changes Not Yet Adopted

Leases ( ASU 2016-02)

Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB issued guidance that requires a lessee to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. ProAssurance plans to adopt the guidance beginning January 1, 2019 using a prospective application and plans to elect the transition option provided that allows companies to continue to apply legacy GAAP in comparative periods. Also, ProAssurance plans to elect the package of practical expedients permitted under the guidance, which allows the Company to carryforward its historical lease classification, its assessment on whether a contract is or contains a lease and its initial direct costs for any leases that exist prior to adoption of the new standard. Furthermore, ProAssurance plans to elect to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the Consolidated Balance Sheet and recognize the associated lease payments in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the lease term. ProAssurance estimates approximately $19 million that would be recognized upon adoption as total right-of-use assets and total lease liabilities on the Consolidated Balance Sheet as of January 1, 2019 which relate to ProAssurance's real estate operating leases; the Company does not consider these leases to be material to its financial position. Adoption of this guidance will have no material impact on ProAssurance's results of operation or cash flows.

ProAssurance's Revolving Credit Agreement contains a financial covenant regarding permitted leverage ratios based upon Consolidated Funded Indebtedness to Consolidated Total Capitalization; however, adoption of this guidance would have no material impact on this covenant. ProAssurance’s Mortgage Loans also contain a financial covenant regarding permitted leverage ratios, principally based upon SAP Consolidated Net Worth; however, as the NAIC is not anticipated to adopt the principles found in ASU 2016-02, adoption of the guidance would have no impact on this covenant.

Premium Amortization on Purchased Callable Debt Securities ( ASU 2017-08)

Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB issued guidance that will require the premium for certain callable debt securities to be amortized over a shorter period than is currently required. Currently amortization is permitted over the contractual life of the instrument and the guidance shortens the amortization to the earliest call date. The purpose of the guidance is to more closely align the amortization period of premiums to expectations incorporated in market pricing on the underlying securities. ProAssurance plans to adopt the guidance beginning January 1, 2019. As ProAssurance amortizes premium on callable debt securities to the earliest call date, adoption of the guidance is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.

Derivatives and Hedging ( ASU 2017-12)

Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB issued guidance to improve financial reporting of hedging relationships to better portray the entity's risk management activities in the consolidated financial statements. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. ProAssurance plans to adopt the guidance beginning January 1, 2019. ProAssurance's derivative instrument at December 31, 2018 is not designated as a hedging instrument; therefore, adoption is not expected to have a material effect on ProAssurance's results of operations, financial position or cash flows.

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Improvements to Nonemployee Share-Based Payment Accounting ( ASU 2018-07)

Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB issued guidance which reduces the complexity in accounting for nonemployee share-based payment awards. The new guidance substantially aligns the accounting for nonemployee share-based payment awards with the accounting guidance for employee share-based payment awards with certain exceptions, including the inputs used in estimating the fair value of the nonemployee awards and the period of time and pattern of expense recognition. ProAssurance plans to adopt the guidance as of January 1, 2019. Adoption of the guidance is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.

Derivatives and Hedging - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap as a Benchmark Interest Rate for Hedge Accounting Purposes ( ASU 2018-16)

Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB issued new guidance that permits the use of the Overnight Index Swap Rate based on the Secured Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes. ProAssurance plans to adopt the guidance beginning January 1, 2019. ProAssurance's derivative instrument at December 31, 2018 is not designated as a hedging instrument; therefore, adoption is not expected to have a material effect on ProAssurance's results of operations, financial position or cash flows.

Improvements to Financial Instruments - Credit Losses ( ASU 2016-13)

Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB issued guidance that replaces the incurred loss impairment methodology, which delays recognition of credit losses until a probable loss has been incurred, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, credit losses are required to be recorded through an allowance for credit losses account and the income statement reflects the measurement for newly recognized financial assets, as well as increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale fixed maturity securities will be measured in a manner similar to current GAAP , although the new guidance requires that credit losses be presented as an allowance, rather than as a write-down of the asset, limited to the amount by which the fair value is below amortized cost. In addition, this guidance could impact ProAssurance's receivables from reinsurers; however, ProAssurance has not historically experienced material credit losses due to the financial condition of a reinsurer. ProAssurance plans to adopt the guidance beginning January 1, 2020 and is in the process of evaluating the effect the new guidance would have on its results of operations and financial position.

Simplifying the Test for Goodwill Impairment ( ASU 2017-04)

Effective for the fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB issued guidance that simplifies the requirements to test goodwill for impairment for business entities that have goodwill reported in their financial statements. The guidance eliminates the second step of the impairment test which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount. In addition, the guidance also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. ProAssurance plans to adopt the guidance beginning January 1, 2020. Adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.

Changes to the Disclosure Requirements for Fair Value Measurement ( ASU 2018-13)

Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB issued guidance that eliminates, modifies and adds certain disclosure requirements related to fair value measurements. The new guidance eliminates the requirements to disclose the transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the timing of transfers between levels of the fair value hierarchy and the valuation process for Level 3 fair value measurements while it modifies existing disclosure requirements related to measurement uncertainty and the requirement to disclose the timing of liquidation of an investee's assets for investments in certain entities that calculate NAV . The new guidance also adds requirements to disclose changes in unrealized gains and losses included in OCI for recurring Level 3 fair value measurements as well as the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. An entity is permitted to early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until the guidance is effective. As of December 31, 2018 , ProAssurance has elected to early adopt the provisions that eliminate and modify certain disclosure requirements within Note 2 on a retrospective basis and adoption of these certain provisions had no material effect on ProAssurance’s results of operations, financial position or cash flows as it affected disclosures only. ProAssurance plans to adopt the additional disclosure requirements beginning January 1, 2020 and adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.

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Intangibles - Goodwill and Other-Internal-Use Software ( ASU 2018-15)

Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB amended the new standard regarding accounting for implementation costs in cloud computing arrangements. The amended guidance substantially aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ProAssurance plans to adopt the guidance beginning January 1, 2020. Adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.

Targeted Improvements to Related Party Guidance for VIE s ( ASU 2018-17)

Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB amended guidance which improves the consistency of the application of the VIE guidance for common control arrangements. The amended guidance requires an entity to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable interest. ProAssurance plans to adopt the guidance beginning January 1, 2020. As of December 31, 2018 ProAssurance does not have any material indirect interests held through related parties under common control; therefore, adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.

Collaborative Arrangements ( ASU 2018-18)

Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB issued new guidance which clarifies how to assess whether certain transactions between participants in a collaborative arrangement should be accounted for under the revenue from contracts with customers accounting standard when the counterpart is a customer. In addition, the guidance precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. ProAssurance plans to adopt the guidance beginning January 1, 2020 and adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.

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December 31, 2018

2 . Fair Value Measurement

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. A three level hierarchy has been established for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs considered most observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy levels are defined as follows:



	Level 1:	quoted (unadjusted) market prices in active markets for identical assets and liabilities. For ProAssurance, Level 1 inputs are generally quotes for debt or equity securities actively traded in exchange or over-the-counter markets.



	Level 2:	market data obtained from sources independent of the reporting entity (observable inputs). For ProAssurance, Level 2 inputs generally include quoted prices in markets that are not active, quoted prices for similar assets or liabilities, and results from pricing models that use observable inputs such as interest rates and yield curves that are generally available at commonly quoted intervals.



	Level 3:	the reporting entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (non-observable inputs). For ProAssurance, Level 3 inputs are used in situations where little or no Level 1 or 2 inputs are available or are inappropriate given the particular circumstances. Level 3 inputs include results from pricing models for which some or all of the inputs are not observable, discounted cash flow methodologies, single non-binding broker quotes and adjustments to externally quoted prices that are based on management judgment or estimation.

Fair values of assets measured at fair value on a recurring basis as of December 31, 2018 and December 31, 2017 are shown in the following tables. Where applicable, the tables also indicate the fair value hierarchy of the valuation techniques utilized to determine those fair values. For some assets, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair value measurement. Assessments of the significance of a particular input to the fair value measurement require judgment and consideration of factors specific to the assets being valued.

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December 31, 2018



	December 31, 2018
	Fair Value Measurements Using						Total
(In thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Fixed maturities, available for sale
U.S. Treasury obligations	$	—	$	120,201	$	—	$	120,201
U.S. Government-sponsored enterprise obligations	—		35,354		—		35,354
State and municipal bonds	—		293,772		—		293,772
Corporate debt, multiple observable inputs	2,319		1,216,834		—		1,219,153
Corporate debt, limited observable inputs	—		—		4,322		4,322
Residential mortgage-backed securities	—		181,238		—		181,238
Agency commercial mortgage-backed securities	—		13,108		—		13,108
Other commercial mortgage-backed securities	—		30,993		—		30,993
Other asset-backed securities	—		191,807		3,850		195,657
Fixed maturities, trading	—		38,188		—		38,188
Equity investments
Financial	62,344		—		—		62,344
Utilities/Energy	46,533		—		—		46,533
Consumer oriented	47,462		—		—		47,462
Industrial	41,487		—		—		41,487
Bond funds	174,753		—		—		174,753
All other	50,066		—		—		50,066
Short-term investments	265,910		42,409		—		308,319
Other investments	—		31,341		3		31,344
Other assets	—		1,884		—		1,884
Total assets categorized within the fair value hierarchy	$	690,874	$	2,197,129	$	8,175	2,896,178
Assets carried at NAV, which approximates fair value and which are not categorized within the fair value hierarchy, reported as a part of:
Equity investments							20,292
Investment in unconsolidated subsidiaries							268,436
Total assets at fair value							$	3,184,906

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	December 31, 2017
	Fair Value Measurements Using						Total
(In thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Fixed maturities, available for sale
U.S. Treasury obligations	$	—	$	133,627	$	—	$	133,627
U.S. Government-sponsored enterprise obligations	—		20,956		—		20,956
State and municipal bonds	—		632,243		—		632,243
Corporate debt, multiple observable inputs	2,371		1,151,084		—		1,153,455
Corporate debt, limited observable inputs	—		—		13,703		13,703
Residential mortgage-backed securities	—		196,789		1,055		197,844
Agency commercial mortgage-backed securities	—		10,742		—		10,742
Other commercial mortgage-backed securities	—		15,961		—		15,961
Other asset-backed securities	—		97,780		3,931		101,711
Equity investments
Financial	76,051		—		—		76,051
Utilities/Energy	54,388		—		—		54,388
Consumer oriented	54,529		—		—		54,529
Industrial	53,936		—		—		53,936
Bond funds	156,563		—		—		156,563
All other	75,142		—		—		75,142
Short-term investments	404,204		27,922		—		432,126
Other investments	607		31,155		409		32,171
Other assets	—		1,731		—		1,731
Total assets categorized within the fair value hierarchy	$	877,791	$	2,319,990	$	19,098	3,216,879
Assets carried at NAV, which approximates fair value and which are not categorized within the fair value hierarchy, reported as a part of:
Investment in unconsolidated subsidiaries							210,759
Other investments							20,130
Total assets at fair value							$	3,447,768

The fair values for securities included in the Level 2 category, with the few exceptions described below, were developed by one of several third party, nationally recognized pricing services, including services that price only certain types of securities. Each service uses complex methodologies to determine values for securities and subject the values they develop to quality control reviews. Management selected a primary source for each type of security in the portfolio and reviewed the values provided for reasonableness by comparing data to alternate pricing services and to available market and trade data. Values that appeared inconsistent were further reviewed for appropriateness. Any value that did not appear reasonable was discussed with the service that provided the value and adjusted, if necessary. There were no material changes to the values supplied by the pricing services during the years ended December 31, 2018 and 2017 .

Level 2 Valuations

Below is a summary description of the valuation methodologies primarily used by the pricing services for securities in the Level 2 category, by security type:

U.S. Treasury obligations were valued based on quoted prices for identical assets, or, in markets that are not active, quotes for similar assets, taking into consideration adjustments for variations in contractual cash flows and yields to maturity.

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December 31, 2018

U.S. Government-sponsored enterprise obligations were valued using pricing models that consider current and historical market data, normal trading conventions, credit ratings, and the particular structure and characteristics of the security being valued, such as yield to maturity, redemption options, and contractual cash flows. Adjustments to model inputs or model results were included in the valuation process when necessary to reflect recent regulatory, government or corporate actions or significant economic, industry or geographic events affecting the security’s fair value.

State and municipal bonds were valued using a series of matrices that considered credit ratings, the structure of the security, the sector in which the security falls, yields and contractual cash flows. Valuations were further adjusted, when necessary, to reflect the expected effect on fair value of recent significant economic or geographic events or ratings changes.

Corporate debt, multiple observable inputs consisted primarily of corporate bonds, but also included a small number of bank loans. The methodology used to value Level 2 corporate bonds was the same as the methodology previously described for U.S. Government-sponsored enterprise obligations. Bank loans were valued based on an average of broker quotes for the loans in question, if available. If quotes were not available, the loans were valued based on quoted prices for comparable loans or, if the loan was newly issued, by comparison to similar seasoned issues. Broker quotes were compared to actual trade prices to permit assessment of the reliability of the quotes; unreliable quotes were not considered in quoted averages.

Residential and commercial mortgage-backed securities were valued using a pricing matrix which considers the issuer type, coupon rate and longest cash flows outstanding. The matrix used was based on the most recently available market information. Agency and non-agency collateralized mortgage obligations were both valued using models that consider the structure of the security, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data.

Other asset-backed securities were valued using models that consider the structure of the security, monthly payment information, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data. Spreads and prepayment speeds consider collateral type.

Fixed maturities, trading , are held by the Lloyd's Syndicates segment and include U.S. Treasury obligations, U.S. Government-sponsored enterprise obligations, corporate debt with multiple observable inputs and other asset-backed securities. These securities were valued using the respective valuation methodologies discussed above for each security type.

Short-term investments were securities maturing within one year, carried at fair value which approximated the cost of the securities due to their short-term nature.

Other investments consisted primarily of convertible bonds valued using a pricing model that incorporated selected dealer quotes as well as current market data regarding equity prices and risk free rates. If dealer quotes were unavailable for the security being valued, quotes for securities with similar terms and credit status were used in the pricing model. Dealer quotes selected for use were those considered most accurate based on parameters such as underwriter status and historical reliability.

Other assets consisted of an interest rate cap derivative instrument, which is discussed in Note 11 , valued using a model which considers the volatilities from other instruments with similar maturities, strike prices, durations and forward yield curves.

Level 3 Valuations

Below is a summary description of the valuation methodologies used as well as quantitative information regarding securities in the Level 3 category, by security type:

Level 3 Valuation Methodologies

Corporate debt, limited observable inputs consisted of corporate bonds valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities of comparable credit quality that have like terms and payment features. Assessments of credit quality were based on NRSRO ratings, if available, or were subjectively determined by management if not available. At December 31, 2018 , 54% of the securities were rated and the average rating was BBB+ . At December 31, 2017 , 84% of the securities were rated and the average rating was BBB+ .

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December 31, 2018

Residential mortgage-backed and other asset-backed securities consisted of securitizations of receivables valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities of comparable credit quality that have like terms and payment features. Assessments of credit quality were based on NRSRO ratings, if available, or were subjectively determined by management if not available. At December 31, 2018 , 25% of the securities were rated and the average rating was AAA . At December 31, 2017 , 21% of the securities were rated and the average rating was AAA .

Other investments consisted of convertible securities for which limited observable inputs were available at December 31, 2018 and December 31, 2017 . The securities were valued internally based on expected cash flows, including the expected final recovery, discounted at a yield that considered the lack of liquidity and the financial status of the issuer.

Quantitative Information Regarding Level 3 Valuations



	Fair Value at
($ in thousands)	December 31, 2018	December 31, 2017	Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
Corporate debt, limited observable inputs	$4,322	$13,703	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Residential mortgage-backed and other asset-backed securities	$3,850	$4,986	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other investments	$3	$409	Discounted Cash Flows	Comparability Adjustment	0% - 10% (5%)

The significant unobservable inputs used in the fair value measurement of the above listed securities were the valuations of comparable securities with similar issuers, credit quality and maturity. Changes in the availability of comparable securities could result in changes in the fair value measurements.

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Fair Value Measurements - Level 3 Assets

The following tables (the Level 3 Tables) present summary information regarding changes in the fair value of assets measured at fair value using Level 3 inputs.



	December 31, 2018
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities			Other investments			Total
Balance December 31, 2017	$	13,703		$	4,986		$	409		$	19,098
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	(148		)	2			—			(146		)
Net realized investment gains (losses)	(8		)	—			(40		)	(48		)
Included in other comprehensive income	(233		)	(105		)	—			(338		)
Purchases	8,005			20,093			—			28,098
Sales	(6,406		)	(438		)	(366		)	(7,210		)
Transfers in	2,627			—			—			2,627
Transfers out	(13,218		)	(20,688		)	—			(33,906		)
Balance December 31, 2018	$	4,322		$	3,850		$	3		$	8,175
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—



	December 31, 2017
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities			Other investments			Total
Balance December 31, 2016	$	14,810		$	3,007		$	3		$	17,820
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	(163		)	—			—			(163		)
Net realized investment gains (losses)	13			—			(143		)	(130		)
Included in other comprehensive income	(369		)	(71		)	140			(300		)
Purchases	13,016			2,627			—			15,643
Sales	(4,837		)	—			(912		)	(5,749		)
Transfers in	999			—			1,321			2,320
Transfers out	(9,766		)	(577		)	—			(10,343		)
Balance December 31, 2017	$	13,703		$	4,986		$	409		$	19,098
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—

Transfers

Transfers shown in the preceding Level 3 tables were as of the end of the quarter in which the transfer occurred. All transfers during both 2018 and 2017 were to or from Level 2.

All transfers during 2018 and 2017 related to securities held for which the level of market activity for identical or nearly identical securities varies from period to period. The securities were valued using multiple observable inputs when those inputs were available; otherwise the securities were valued using limited observable inputs.

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Fair Values Not Categorized

At December 31, 2018 and 2017, certain LP s/ LLC s and investment funds measure fund assets at fair value on a recurring basis and provide a NAV for ProAssurance's interest. The carrying value of these interests is based on the NAV provided and was considered to approximate the fair value of the interests. For investment in unconsolidated subsidiaries, ProAssurance recognizes any changes in the NAV of its interests in equity in earnings (loss) of unconsolidated subsidiaries during the period of change. In accordance with GAAP , the fair value of these investments was not classified within the fair value hierarchy. The amount of ProAssurance's unfunded commitments related to these investments as of December 31, 2018 and fair values of these investments as of December 31, 2018 and 2017 was as follows:



	Unfunded Commitments		Fair Value
(In thousands)	December 31, 2018		December 31, 2018		December 31, 2017
Equity investments:
Mortgage fund ^(1)*	$	—	$	20,292	$	—
Investment in unconsolidated subsidiaries:
Private debt funds ⁽²⁾	$	20,954	18,196		42,206
Long equity fund ⁽³⁾	None		6,561		7,847
Long/short equity funds ⁽⁴⁾	None		28,805		31,352
Non-public equity funds ⁽⁵⁾	$	80,076	114,811		100,062
Multi-strategy fund of funds ⁽⁶⁾	None		9,322		9,100
Credit funds ⁽⁷⁾	$	8,916	29,164		6,561
Long/short commodities fund ⁽⁸⁾	None		12,958		13,025
Strategy focused funds ⁽⁹⁾	$	24,539	48,619		606
			268,436		210,759
Other investments:
Mortgage fund ^(1)*	See above		—		20,130

Total investments carried at NAV			$	288,728	$	230,889
* In the first quarter of 2018, ProAssurance began presenting this investment previously reported as a part of other investments as a part of equity investments on the Consolidated Balance Sheet. Prior year amounts have not been reclassified.

Below is additional information regarding each of the investments listed in the table above as of December 31, 2018 .


⁽¹⁾	This investment fund is focused on the structured mortgage market. The fund will primarily invest in U.S. Agency mortgage-backed securities. Redemptions are allowed at the end of any calendar quarter with a prior notice requirement of 65 days and are paid within 45 days at the end of the redemption dealing day.

⁽²⁾

This investment is comprised of interests in three unrelated LP funds that are structured to provide interest distributions primarily through diversified portfolios of private debt instruments. One LP allows redemption by special consent; the other two do not permit redemption. Income and capital are to be periodically distributed at the discretion of the LP s over an anticipated time frame that spans from three to eight years.


⁽³⁾	This fund is a LP that holds long equities of public international companies. Redemptions are allowed at the end of any calendar month with a prior notice requirement of 15 days and are paid within 10 days of the end of the calendar month of the redemption request.

⁽⁴⁾

This investment is comprised of interests in multiple unrelated LP funds. The funds hold primarily long and short North American equities and target absolute returns using strategies designed to take advantage of market opportunities. The funds generally permit quarterly or semi-annual capital redemptions subject to notice requirements of 30 to 90 days . For some funds, redemptions above specified thresholds (lowest threshold is 90% ) may be only partially payable until after a fund audit is completed and are then payable within 30 days .


⁽⁵⁾	This investment is comprised of interests in multiple unrelated LP funds, each structured to provide capital appreciation through diversified investments in private equity, which can include investments in buyout, venture capital, debt including senior, second lien and mezzanine, distressed debt and other private equity-oriented LP s. Two

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of the LP s allow redemption by terms set forth in the LP agreements; the others do not permit redemption. Income and capital are to be periodically distributed at the discretion of the LP over time frames that are anticipated to span up to nine years.


⁽⁶⁾	This fund is a LLC structured to build and manage low volatility, multi-manager portfolios that have little or no correlation to the broader fixed income and equity security markets. Redemptions are not permitted but offers to repurchase units of the LLC may be extended periodically.

⁽⁷⁾

This investment is comprised of three unrelated LP funds. Two funds seek to obtain superior risk-adjusted absolute returns through a diversified portfolio of debt securities, including bonds, loans and other asset-backed instruments. The remaining fund seeks event driven opportunities across the corporate credit spectrum. Two funds are allowed redemptions at any quarter-end with a prior notice requirement of 90 days ; one fund permits redemption at any quarter-end with a prior notice requirement of 180 days .


⁽⁸⁾	This fund is a LLC invested across a broad range of commodities and focuses primarily on market neutral, relative value strategies, seeking to generate absolute returns with low correlation to broad commodity, equity and fixed income markets. Following an initial one -year lock-up period, redemptions are allowed with a prior notice requirement of 30 days and are payable within 30 days .

⁽⁹⁾

This investment is comprised of multiple unrelated LPs/LLCs funds. One fund is a LLC focused on investing in North American consumer products companies, comprised of equity and equity-related securities, as well as debt instruments. Redemptions are not permitted. Another fund is a LP focused on North American energy infrastructure assets that allows redemption with consent of the General Partner. The remaining funds are real estate focused LPs, one of which allows for redemption with prior notice.

ProAssurance may not sell, transfer or assign its interest in any of the above LP s/ LLC s without special consent from the LP s/ LLC s.

Nonrecurring Fair Value Measurement

At December 31, 2018 , ProAssurance did not have any assets or liabilities that were measured at fair value on a nonrecurring basis. At December 31, 2017 , ProAssurance held an equity method early stage business investment measured at fair value on a nonrecurring basis due to a recognized OTTI of $8.5 million . The investment was valued using significant unobservable inputs (Level 3) and had a fair value of $1.2 million at December 31, 2017 . The fair value of the investment was measured as ProAssurance's ownership percentage in the projected earnings and cash flows expected to be generated by the investment.

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Financial Instruments - Methodologies Other Than Fair Value

The following table provides the estimated fair value of ProAssurance's financial instruments that, in accordance with GAAP for the type of investment, are measured using a methodology other than fair value. All fair values provided primarily fall within the Level 3 fair value category.



	December 31, 2018				December 31, 2017
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
BOLI	$	64,096	$	64,096	$	62,113	$	62,113
Other investments	$	2,943	$	2,943	$	58,546	$	69,095
Other assets	$	35,921	$	35,468	$	34,020	$	33,742
Financial liabilities:
Senior notes due 2023*	$	250,000	$	264,810	$	250,000	$	273,153
Revolving Credit Agreement*	$	—	$	—	$	123,000	$	123,000
Mortgage Loans*	$	39,064	$	39,064	$	40,460	$	40,460
Other liabilities	$	21,300	$	21,300	$	21,154	$	21,154
* Carrying value excludes debt issuance costs.

The fair value of the BOLI was equal to the cash surrender value associated with the policies on the valuation date.

Other investments listed in the table above include FHLB common stock carried at cost and an annuity investment carried at amortized cost. Two of ProAssurance's insurance subsidiaries are members of an FHLB . The estimated fair value of the FHLB common stock was based on the amount the subsidiaries would receive if their memberships were canceled, as the memberships cannot be sold. The fair value of the annuity represents the present value of the expected future cash flows discounted using a rate available in active markets for similarly structured instruments.

Other assets and other liabilities primarily consisted of related investment assets and liabilities associated with funded deferred compensation agreements. The fair value of the funded deferred compensation assets was based upon quoted market prices, which is categorized as a Level 1 valuation, and had a fair value of $24.1 million and $20.2 million at December 31, 2018 and 2017 , respectively. The deferred compensation liabilities are adjusted to match the fair value of the deferred compensation assets. Other assets also included a secured note receivable and unsecured note receivable under two separate line of credit agreements. Fair value of these notes receivable was based on the present value of expected cash flows from the notes receivable, discounted at market rates on the valuation date for receivables with similar credit standings and similar payment structures.

The fair value of the debt was estimated based on the present value of expected future cash outflows, discounted at rates available on the valuation date for similar debt issued by entities with a similar credit standing to ProAssurance.

3 . Investments

Available-for-sale fixed maturities at December 31, 2018 and December 31, 2017 included the following:



	December 31, 2018
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities, available for sale
U.S. Treasury obligations	$	121,274	$	331	$	1,404	$	120,201
U.S. Government-sponsored enterprise obligations	35,758		25		429		35,354
State and municipal bonds	289,544		4,877		649		293,772
Corporate debt	1,244,577		3,328		24,430		1,223,475
Residential mortgage-backed securities	184,463		814		4,039		181,238
Agency commercial mortgage-backed securities	13,296		12		200		13,108
Other commercial mortgage-backed securities	31,330		38		375		30,993
Other asset-backed securities	196,583		254		1,180		195,657
	$	2,116,825	$	9,679	$	32,706	$	2,093,798

	December 31, 2017
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities, available for sale
U.S. Treasury obligations	$	134,323	$	485	$	1,181	$	133,627
U.S. Government-sponsored enterprise obligations	21,089		73		206		20,956
State and municipal bonds	618,414		14,248		419		632,243
Corporate debt	1,157,660		15,205		5,707		1,167,158
Residential mortgage-backed securities	196,741		2,438		1,335		197,844
Agency commercial mortgage-backed securities	10,827		23		108		10,742
Other commercial mortgage-backed securities	16,004		91		134		15,961
Other asset-backed securities	102,130		47		466		101,711
	$	2,257,188	$	32,610	$	9,556	$	2,280,242

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Notes to Consolidated Financial Statements

December 31, 2018

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at December 31, 2018 , by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



(In thousands)	Amortized Cost		Due in one year or less		Due after one year through five years		Due after five years through ten years		Due after ten years		Total Fair Value
Fixed maturities, available for sale
U.S. Treasury obligations	$	121,274	$	27,187	$	74,196	$	18,416	$	402	$	120,201
U.S. Government-sponsored enterprise obligations	35,758		3,279		12,301		19,640		134		35,354
State and municipal bonds	289,544		10,506		126,225		129,118		27,923		293,772
Corporate debt	1,244,577		147,223		726,570		324,467		25,215		1,223,475
Residential mortgage-backed securities	184,463										181,238
Agency commercial mortgage-backed securities	13,296										13,108
Other commercial mortgage-backed securities	31,330										30,993
Other asset-backed securities	196,583										195,657
	$	2,116,825									$	2,093,798

Excluding obligations of the U.S. Government, U.S. Government-sponsored enterprises and a U.S. Government obligations money market fund, no investment in any entity or its affiliates exceeded 10% of shareholders’ equity at December 31, 2018 .

Cash and securities with a carrying value of $47.1 million at December 31, 2018 were on deposit with various state insurance departments to meet regulatory requirements.

As a member of Lloyd's and a capital provider to Syndicate 1729 and Syndicate 6131, ProAssurance is required to maintain capital at Lloyd's , referred to as FAL . ProAssurance's FAL investments at December 31, 2018 included available-for-sale fixed maturities with a fair value of $123.4 million and short-term investments with a fair value of $19.3 million on deposit with Lloyd's in order to satisfy these FAL requirements.

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December 31, 2018

Investments Held in a Loss Position

The following tables provide summarized information with respect to investments held in an unrealized loss position at December 31, 2018 and December 31, 2017 , including the length of time the investment had been held in a continuous unrealized loss position.



	December 31, 2018
	Total				Less than 12 months				12 months or longer
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Loss		Value		Loss		Value		Loss
Fixed maturities, available for sale
U.S. Treasury obligations	$	97,969	$	1,405	$	20,221	$	119	$	77,748	$	1,286
U.S. Government-sponsored enterprise obligations	33,677		429		20,479		126		13,198		303
State and municipal bonds	63,094		648		30,924		143		32,170		505
Corporate debt	938,651		24,429		447,891		8,804		490,760		15,625
Residential mortgage-backed securities	157,120		4,039		27,311		209		129,809		3,830
Agency commercial mortgage-backed securities	9,822		200		4,566		22		5,256		178
Other commercial mortgage-backed securities	22,924		375		13,348		164		9,576		211
Other asset-backed securities	142,470		1,181		70,218		236		72,252		945
	$	1,465,727	$	32,706	$	634,958	$	9,823	$	830,769	$	22,883



	December 31, 2017
	Total				Less than 12 months				12 months or longer
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Loss		Value		Loss		Value		Loss
Fixed maturities, available for sale
U.S. Treasury obligations	$	110,788	$	1,181	$	67,135	$	554	$	43,653	$	627
U.S. Government-sponsored enterprise obligations	17,032		206		10,182		64		6,850		142
State and municipal bonds	23,122		419		15,168		102		7,954		317
Corporate debt	487,578		5,707		365,541		2,730		122,037		2,977
Residential mortgage-backed securities	109,659		1,335		64,121		402		45,538		933
Agency commercial mortgage-backed securities	4,423		108		2,458		34		1,965		74
Other commercial mortgage-backed securities	12,878		134		7,939		82		4,939		52
Other asset-backed securities	85,358		466		70,924		346		14,434		120
	$	850,838	$	9,556	$	603,468	$	4,314	$	247,370	$	5,242

As of December 31, 2018 , excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 1,044 debt securities ( 50.6% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 550 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.6 million and $0.5 million , respectively. The securities were evaluated for OTTI as of December 31, 2018 .

As of December 31, 2017 , excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 629 debt securities ( 26.5% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 375 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.4 million and $0.3 million , respectively. The securities were evaluated for OTTI as of December 31, 2017 .

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Notes to Consolidated Financial Statements

December 31, 2018

Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds in an unrealized loss position has suffered an OTTI . A detailed discussion of the factors considered in the assessment is included in Note 1 .

Fixed maturity securities held in an unrealized loss position at December 31, 2018 , excluding asset-backed securities, have paid all scheduled contractual payments and are expected to continue doing so. Expected future cash flows of asset-backed securities, excluding those issued by GNMA , FNMA and FHLMC , held in an unrealized loss position were estimated as part of the December 31, 2018 OTTI evaluation using the most recently available six -month historical performance data for the collateral (loans) underlying the security or, if historical data was not available, sector based assumptions, and equaled or exceeded the current amortized cost basis of the security.

Other information regarding sales and purchases of fixed maturity available-for-sale securities is as follows:



	Year Ended December 31
(In millions)	2018		2017		2016
Proceeds from sales (exclusive of maturities and paydowns)	$	599.6	$	530.2	$	361.8
Purchases	$	780.7	$	614.4	$	636.4

Equity Investments

ProAssurance's equity investments are carried at fair value with changes in fair value recognized in income as a component of net realized investment gains (losses) during the period of change. Equity investments on the Consolidated Balance Sheet as of December 31, 2018 primarily included stocks, bonds and investment funds.

Short-term Investments

ProAssurance's short-term investments, which have a maturity at purchase of one year or less, are primarily comprised of investments in U.S. treasury obligations, commercial paper and money market funds. Short-term investments are carried at fair value which approximates the cost of the securities due to their short-term nature.

BOLI

ProAssurance holds BOLI policies that are carried at the current cash surrender value of the policies (original cost $33 million ). All insured individuals were members of ProAssurance management at the time the policies were acquired. The primary purpose of the program is to offset future employee benefit expenses through earnings on the cash value of the policies. ProAssurance is the owner and beneficiary of these policies.

Net Investment Income

Net investment income by investment category was as follows:



	Year Ended December 31
(In thousands)	2018			2017			2016
Fixed maturities	$	69,515		$	75,669		$	85,818
Equities	21,418			17,198			14,887
Short-term investments, including Other	5,649			7,793			3,402
BOLI	1,983			1,979			2,008
Investment fees and expenses	(6,681		)	(6,977		)	(6,103		)
Net investment income	$	91,884		$	95,662		$	100,012

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December 31, 2018

Investment in Unconsolidated Subsidiaries

ProAssurance's investment in unconsolidated subsidiaries were as follows:



	December 31, 2018	Carrying Value
(In thousands)	Percentage Ownership	December 31, 2018		December 31, 2017
Qualified affordable housing project tax credit partnerships	See below	$	65,677	$	84,607
Other tax credit partnerships	See below	3,757		6,118
All other investments, primarily investment fund LPs/LLCs	See below	298,323		239,866
		$	367,757	$	330,591

Qualified affordable housing project tax credit partnership interests held by ProAssurance generate investment returns by providing tax benefits to fund investors in the form of tax credits and project operating losses. The carrying value of these investments reflects ProAssurance's total commitments (both funded and unfunded) to the partnerships, less any amortization. ProAssurance's ownership percentage relative to two of the tax credit partnership interests is almost 100% ; these interests had a carrying value of $25.0 million and $32.5 million at December 31, 2018 and 2017 , respectively. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests is less than 20% ; these interests had a carrying value of $40.7 million and $52.1 million at December 31, 2018 and 2017 , respectively. Since ProAssurance has the ability to exert influence over the partnerships but does not control them, all are accounted for using the equity method. See further discussion of the entities in which ProAssurance holds passive interests in Note 14 .

Other tax credit partnerships are comprised entirely of investments in historic tax credit partnerships. The historic tax credit partnerships generate investment returns by providing benefits to fund investors in the form of tax credits, tax deductible project operating losses and positive cash flows. The carrying value of these investments reflects ProAssurance's total funded commitments less any amortization. ProAssurance's ownership percentage relative to the historic tax credit partnerships is almost 100% . Since ProAssurance has the ability to exert influence over the partnerships but does not control them, all are accounted for using the equity method. See further discussion of the entities in which ProAssurance holds passive interests in Note 14 .

ProAssurance holds interests in investment fund LP s/ LLC s and other equity method investments and LP s/ LLC s which are not considered to be investment funds. ProAssurance's ownership percentage relative to one of the LP s/ LLC s is greater than 25% , which is expected to be reduced as the funds mature and other investors participate in the funds; these investments had a carrying value of $25.9 million at December 31, 2018 and $30.8 million at December 31, 2017 . ProAssurance's ownership percentage relative to the remaining investments and LP s/ LLC s is less than 25% ; these interests had a carrying value of $272.4 million at December 31, 2018 and $209.1 million at December 31, 2017 . ProAssurance does not have the ability to exert control over any of these funds.

Equity in Earnings (Loss) of Unconsolidated Subsidiaries

Equity in earnings (loss) of unconsolidated subsidiaries included losses from qualified affordable housing project tax credit partnerships and historic tax credit partnerships. Losses recorded reflect ProAssurance's allocable portion of partnership operating losses. Tax credits reduce income tax expense in the period they are recognized. Losses recorded and tax credits recognized related to ProAssurance's tax credit partnership investments were as follows:



	Year Ended December 31
(In thousands)	2018		2017		2016
Qualified affordable housing project tax credit partnerships
Losses recorded	$	18,889	$	14,297	$	20,047
Tax credits recognized	$	18,474	$	17,774	$	18,531

Historic tax credit partnerships
Losses recorded	$	5,434	$	6,355	$	4,771
Tax credits recognized	$	2,567	$	5,337	$	9,018

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December 31, 2018

Net Realized Investment Gains (Losses)

Realized investment gains and losses are recognized on the first-in, first-out basis. The following table provides detailed information regarding net realized investment gains (losses):



	Year Ended December 31
(In thousands)	2018			2017			2016
Total OTTI losses:
State and municipal bonds	$	—		$	(850	)	$	(100	)
Corporate debt	(490		)	(419		)	(7,604		)
Investment in unconsolidated subsidiaries	—			(11,931		)	—
Other investments	—			—			(3,130		)
Portion of OTTI losses recognized in other comprehensive income before taxes:
Corporate debt	—			248			1,068
Net impairment losses recognized in earnings	(490		)	(12,952		)	(9,766		)
Gross realized gains, available-for-sale fixed maturities	5,942			6,653			12,451
Gross realized (losses), available-for-sale fixed maturities	(5,799		)	(3,123		)	(7,038		)
Net realized gains (losses), short-term investments	(1		)	(2		)	18
Net realized gains (losses), trading fixed maturities	(100		)	—			—
Net realized gains (losses), equity investments	12,230			10,724			6,632
Net realized gains (losses), other investments	1,340			2,963			1,115
Change in unrealized holding gains (losses), trading fixed maturities	(317		)	—			—
Change in unrealized holding gains (losses), equity investments	(52,707		)	11,243			30,557
Change in unrealized holding gains (losses), convertible securities, carried at fair value	(3,849		)	896			899
Other	263			7			7
Net realized investment gains (losses)	$	(43,488	)	$	16,409		$	34,875

During 2018, ProAssurance recognized OTTI in earnings of $0.5 million related to debt instruments from two issuers in the energy sector.

During 2017, ProAssurance recognized OTTI in earnings of $13.0 million , including an $8.5 million impairment related to an early stage business investment accounted for under the equity method. The impairment charge represented the difference between the investment's carrying value and fair value, which was measured as ProAssurance's ownership percentage in the projected earnings expected to be generated by the investment. In addition, ProAssurance recognized OTTI in earnings of $3.4 million related to qualified affordable housing project tax credit investments. The current estimated tax benefits expected to be received from ProAssurance's allocable portion of the operating losses of the underlying properties have declined, due to the newly enacted corporate tax rate of 21%, as compared to those at the time the investments were acquired. During 2017, ProAssurance also recognized credit-related OTTI of $0.2 million and non-credit OTTI of $0.2 million in OCI , both of which related to corporate bonds.

During 2016, ProAssurance recognized OTTI in earnings of $9.8 million , including credit-related OTTI of $5.5 million related to debt instruments from ten issuers in the energy sector. The fair value of the bonds and the credit quality of the issuers had declined during 2016 and ProAssurance recognized credit-related OTTI to reduce the amortized cost basis of the bonds to the present value of future cash flows expected to be received from the bonds. During 2016, ProAssurance also recognized non-credit OTTI of $0.9 million in OCI related to certain of these same bonds, as the fair value of the bonds was less than the present value of the expected future cash flows from the securities.

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Notes to Consolidated Financial Statements

December 31, 2018

The following table presents a roll forward of cumulative credit losses recorded in earnings related to impaired debt securities for which a portion of the OTTI was recorded in OCI .



(In thousands)	2018			2017			2016
Balance beginning of period	$	1,313		$	1,158		$	5,751
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized	—			171			2,398
OTTI has been previously recognized	—			—			2,154
Reductions due to:
Securities sold during the period (realized)	(1,220		)	(16		)	(9,145		)
Balance December 31	$	93		$	1,313		$	1,158

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December 31, 2018

4 . Retroactive Insurance Contracts

ProAssurance offers custom alternative risk solutions including loss portfolio transfers for large healthcare entities who, most commonly, are exiting a line of business, changing an insurance approach or simply preferring to transfer risk. A loss portfolio transfer is a form of retroactive insurance coverage as the Company is assuming and accepting an entity’s existing open and future claim liabilities through the transfer of the entity’s loss reserves.

In the second quarter of 2018, ProAssurance entered into a loss portfolio transfer with a large healthcare organization. Per the agreement, ProAssurance will cover a specific inventory of existing claims as well as provide tail coverage. As the contract included both prospective (tail) coverage and retroactive coverage, ProAssurance bifurcated the provisions of the contract and accounted for each component separately. As of the contract effective date, ProAssurance recognized total net premiums written and earned of $26.6 million , comprised of $7.9 million of prospective coverage and $18.7 million of retroactive coverage, and total net losses and loss adjustment expenses of $25.4 million in the Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2018 . In addition, ProAssurance recorded a deferred gain of $0.6 million in the reserve for losses and loss adjustment expenses in the second quarter of 2018 representing the excess of premiums received over losses assumed related to the retroactive coverage which is amortized into earnings over the estimated claim payment period. ProAssurance recognized a nominal amount of amortization related to this deferred gain during the year ended December 31, 2018 . For additional information regarding ProAssurance's accounting policy for retroactive insurance contracts, see Note 1 .

5 . Reinsurance

ProAssurance purchases reinsurance from third-party reinsurers and insurance enterprises in order to reduce its net exposure to losses, to provide capacity to write larger limits of liability, to provide reimbursement for losses incurred under the higher limit coverages the Company offers and as a mechanism for providing custom insurance solutions. ProAssurance also uses reinsurance arrangements as a mechanism for sharing risk with insureds or their affiliates.

The effects of reinsurance for the years ended December 31, 2018 , 2017 and 2016 were as follows:



	Year Ended December 31
(In thousands)	2018			2017			2016
Direct	$	910,198		$	842,968		$	794,377
Assumed	47,113			31,908			40,637
Ceded	(122,397		)	(110,858		)	(96,481		)
Net premiums written	$	834,914		$	764,018		$	738,533

Direct	$	903,354		$	821,249		$	790,791
Assumed	41,535			27,629			37,805
Ceded	(126,036		)	(110,347		)	(95,315		)
Net premiums earned	$	818,853		$	738,531		$	733,281

Losses and loss adjustment expenses	$	675,784		$	592,218		$	515,242
Reinsurance recoveries	(82,574		)	(123,060		)	(72,013		)
Net losses and loss adjustment expenses	$	593,210		$	469,158		$	443,229

The receivable from reinsurers on unpaid losses and LAE represents management’s estimated amount of future loss payments that will be recoverable under ProAssurance reinsurance agreements. Most Company reinsurance agreements base the amount of premium that is due to the reinsurer in part on losses reimbursed or to be reimbursed under the agreement, and terms may also include maximum and minimum amounts of ceded premium. Ceded premium amounts are estimated based on management’s expectation of ultimate losses and the portion of those losses that are allocable to reinsurers according to the terms of the agreements, including any minimums or maximums. Given the uncertainty of the ultimate amounts of losses, management’s estimates of losses and related amounts recoverable may vary significantly from the eventual outcome. Due to changes in management’s estimates of amounts due to reinsurers related to prior accident year loss recoveries, ProAssurance increased premiums ceded by $5.5 million during the year ended December 31, 2018 and reduced premiums ceded by $1.2 million and $7.1 million during the years ended December 31, 2017 and 2016 , respectively.

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December 31, 2018

Reinsurance contracts do not relieve ProAssurance from its obligations to policyholders and ProAssurance remains liable to its policyholders whether or not reinsurers honor their contractual obligations. ProAssurance continually monitors its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.

At December 31, 2018 , the net total amounts due from reinsurers was $340.4 million (receivables related to paid and unpaid losses and LAE and prepaid reinsurance premiums, less reinsurance premiums payable). No single reinsurer had an individual balance which exceeded $36.0 million .

At December 31, 2018 reinsurance recoverables totaling approximately $77.1 million were collateralized by letters of credit or funds withheld. ProAssurance had no allowance for credit losses related to its reinsurance receivables at December 31, 2018 or 2017 as all reinsurance balances were considered collectible. During the years ended December 31, 2018 and 2016 , no reinsurance balances were written off for credit reasons. During the year ended December 31, 2017 , reinsurance balances written off for credit reasons were nominal in amount.

During 2018 , 2017 and 2016, ProAssurance commuted the 2016, 2015 and 2014 calendar year quota share reinsurance arrangements, respectively, between the Specialty P&C segment and Syndicate 1729 which resulted in a net cash receipt of approximately $6.1 million , $6.3 million and $6.8 million , respectively. The commutation s reduced the receivable from reinsurers on unpaid losses and LAE, combined, by approximately $6.7 million , $6.6 million and $7.1 million during the years ended December 31, 2018 , 2017 and 2016, respectively.

During 2017, ProAssurance commuted an outstanding DDR reinsurance arrangement with one of its reinsurers which resulted in a net cash receipt of approximately $7.8 million and reduced its receivable from reinsurers on unpaid losses and LAE by approximately $5.4 million .

During 2016, ProAssurance entered into a novation agreement which represents a legal replacement of one insurer by another extinguishing the ceding entity's liability to the policyholder. The novation resulted in approximately $11.8 million of one-time assumed premium which was fully earned at the inception of the agreement as all of the underlying loss events covered by the policy occurred in the past.

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December 31, 2018

6 . Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of ProAssurance’s deferred tax assets and liabilities were as follows:



	December 31
(In thousands)	2018			2017
Deferred tax assets
Unpaid loss discount	$	30,629		$	20,368
Unearned premium adjustment	16,620			14,449
Compensation related	9,879			11,467
Unrealized losses on investments, net	4,403			—
Basis differentials–investments	912			—
Intangibles	433			514
Foreign NOL	6,795			4,116
Total gross deferred tax assets	69,671			50,914
Valuation allowance	(7,074		)	(4,116		)
Total deferred tax assets, net of valuation allowance	62,597			46,798
Deferred tax liabilities
Deferred policy acquisition costs	(9,972		)	(6,333		)
Unpaid loss discount–transition	(10,128		)	—
Unrealized gains on investments, net	—			(5,166		)
Fixed assets	(542		)	(826		)
Basis differentials–investments	—			(10,397		)
Intangibles	(11,243		)	(12,548		)
Other	(1,604		)	(1,598		)
Total deferred tax liabilities	(33,489		)	(36,868		)
Net deferred tax assets (liabilities)	$	29,108		$	9,930

ProAssurance had $34.0 million of available NOL carryforwards at December 31, 2018 related to the Company's U.K. operations which may be carried forward indefinitely. At December 31, 2018 and 2017 , ProAssurance established a deferred tax asset related to the NOL carryforwards of $6.8 million and $4.1 million , respectively. In 2018 and 2017, management evaluated the realizability of the deferred tax asset related to the U.K. NOL carryforwards and concluded that it was more likely than not that the deferred tax asset will not be realized; therefore, a valuation allowance was recorded against the full value of the deferred tax asset related to the U.K. NOL carryforwards in both 2018 and 2017. The increase in the deferred tax asset related to the U.K. NOL carryforwards and the related valuation allowance in 2018 as compared to 2017 of $2.7 million was primarily due to natural catastrophe-related losses recognized in the Lloyd's Syndicates segment during 2018 related to Hurricanes Michael and Florence as well as volcanic eruptions in Hawaii.

During 2018, the Company restructured its Cayman Islands operations which resulted in the formation of a new subsidiary, Inova Re. Our deferred tax assets and liabilities include those of the SPCs at Inova Re, net of a valuation allowance of $0.3 million at December 31, 2018 . Due to the limited operations of these newly formed SPCs as of December 31, 2018 , management concluded that a valuation allowance was required.

ProAssurance had no available capital loss carryforwards or Alternative Minimum Tax credit carryforwards as of December 31, 2018 .

ProAssurance files income tax returns in various states, the U.S. federal jurisdiction and the U.K. ProAssurance had a receivable for U.S. federal and U.K. income taxes of $3.5 million at December 31, 2018 , carried as a part of other assets. At December 31, 2017 , ProAssurance had a liability for U.S. federal and U.K. income taxes of $8.0 million , carried as a part other liabilities.

The statute of limitations is now closed for all tax years prior to 2015 .

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December 31, 2018

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2018 , 2017 and 2016 , were as follows:



(In thousands)	2018			2017			2016
Balance at January 1	$	5,341		$	8,353		$	8,195
Increases for tax positions taken during the current year	—			—			361
(Decreases) for tax positions taken during the current year	(777		)	(3,500		)	—
(Decreases)/increases for tax positions taken during prior years	(800		)	700			—
(Decreases) relating to a lapse of the applicable statute of limitations	(163		)	(212		)	(203		)
Balance at December 31	$	3,601		$	5,341		$	8,353

At December 31, 2018 and 2017 , approximately $1.2 million and $1.3 million , respectively, of ProAssurance's uncertain tax positions, if recognized, would affect the effective tax rate. As with any uncertain tax position, there is a possibility that the ultimate benefit realized could differ from the estimate management has established. Management believes that it is reasonably possible that a portion of unrecognized tax benefits at December 31, 2018 may change during the next twelve months. However, an estimate of the change cannot be made at this time.

ProAssurance recognizes interest and/or penalties related to income tax matters in income tax expense. Interest recognized in the income statement was nominal for the year ended December 31, 2018 and was approximately $0.3 million and $0.2 million for the years ended December 31, 2017 and 2016 , respectively. The accrued liability for interest was approximately $0.6 million at December 31, 2018 and $0.5 million at December 31, 2017 .

Income tax expense (benefit) for each of the years ended December 31, 2018 , 2017 and 2016 consisted of the following:



(In thousands)	2018			2017		2016
Provision for income taxes
Current expense (benefit)
Federal and foreign	$	(6,509	)	$	19,546	$	15,857
State	301			120		729
Total current expense (benefit)	(6,208		)	19,666		16,586
Deferred expense (benefit)
Federal and foreign	(11,765		)	1,331		8,284
State	(59		)	362		250
Total deferred expense (benefit)	(11,824		)	1,693		8,534
Total income tax expense (benefit)	$	(18,032	)	$	21,359	$	25,120

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December 31, 2018

A reconciliation of “expected” income tax expense (benefit) (21% of income before income taxes for 2018; 35% of income before income taxes for 2017 and 2016) to actual income tax expense (benefit) for each of the years ended December 31, 2018 , 2017 and 2016 were as follows:



(In thousands)	2018			2017			2016
Computed “expected” tax expense	$	6,095		$	45,018		$	61,670
Tax-exempt income	(2,505		)	(8,356		)	(9,917		)
Tax credits	(21,059		)	(23,111		)	(27,549		)
Non-U.S. operating results	2,269			918			(1,688		)
Excess tax benefit on share-based compensation	(275		)	(2,762		)	—
Change in federal corporate tax rate	—			6,541			—
Change in limitation of future deductibility of certain executive compensation	—			3,497			—
Provision-to-return differences	(2,309		)	(1,979		)	1,209
Other	(248		)	1,593			1,395
Total income tax expense (benefit)	$	(18,032	)	$	21,359		$	25,120

Tax Cuts and Jobs Act

The TCJA was signed into law on December 22, 2017 and contains several key provisions that impact the Company's business, including the reduction of the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, the reduction in the amount of executive compensation that could qualify as a tax deduction, a change in how property and casualty taxpayers discount loss reserves, a minimum tax on payments made to related foreign entities and a new tax on certain income of controlled foreign corporations.

Effective January 1, 2018, the TCJA introduced a minimum tax on payments made to related foreign entities referred to as the BEAT . The BEAT is imposed by adding back into the U.S. tax base any base erosion payment made by the U.S. taxpayer to a related foreign entity and applying a minimum tax rate to this newly calculated modified taxable income. Base erosion payments represent any amount paid or accrued by the U.S. taxpayer to a related foreign entity for which a deduction is allowed. Premiums the Company cedes to the SPC s at its newly formed wholly owned Cayman Islands reinsurance subsidiary, Inova Re , do not fall within the scope of base erosion payments as the SPC s at Inova Re intend to elect to be taxed as U.S. taxpayers. However, premiums the Company cedes to any active SPC at its wholly owned Cayman Islands reinsurance subsidiary, Eastern Re , fall within the scope of base erosion payments and therefore could be significantly impacted by the BEAT . See further discussion on the Company’s new subsidiary, Inova Re , and its Cayman Islands SPC operations in Note 16 . Management has evaluated its exposure to the BEAT and has concluded that the Company’s expected outbound deductible payments to related foreign entities are below the threshold for application of the BEAT; therefore, ProAssurance has not recognized any incremental tax expense for the BEAT provision of the TCJA for the year ended December 31, 2018 .

The TCJA also requires a U.S. shareholder of a controlled foreign corporation to include its GILTI in U.S. taxable income. The GILTI amount is based on the U.S. shareholder’s aggregate share of the gross income of the controlled foreign corporation reduced by certain exceptions and a net deemed tangible income return. The net deemed tangible income return is based on the controlled foreign corporation’s basis in the tangible depreciable business property. Cell rental fee income earned by Inova Re and Eastern Re fall within the scope of the GILTI provisions of the TCJA . Management has evaluated the new GILTI provisions of the TCJA and has made an accounting policy election to treat the taxes due on inclusions of GILTI in U.S. taxable income as a current period expense when incurred.

Under current accounting guidance, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. However, due to the timing of the enactment of the TCJA and its proximity to December 31, 2017, the SEC issued SAB 118 which provided a framework for companies to account for uncertainties in applying the provisions of the TCJA . SAB 118 allowed companies to record a provisional amount in situations where a company did not have the necessary information available but could make a reasonable estimate. In situations where companies could not make a reasonable estimate due to various factors, including lack of information, a provisional amount was not recorded. Instead, companies continued to apply current accounting guidance based on the provision of the tax laws that were in effect immediately prior to the TCJA being enacted. The measurement period, as defined in SAB 118 for the TCJA , began on the enactment date of the TCJA and ended when a company obtained, prepared and analyzed the information that was needed in

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December 31, 2018

order to complete the accounting requirements under current accounting guidance. However, under no circumstances would the measurement period extend beyond one year from the enactment date of the TCJA .

Other than the areas discussed below, ProAssurance was able to complete its accounting for all areas of the TCJA during the period of enactment and recognized a charge of $6.5 million , which was included as a component of income tax expense from continuing operations for the year ended December 31, 2017.

Provisional amount finalized during the third quarter of 2018

The TCJA placed limitations on the future deductibility of certain executive compensation. At December 31, 2017, the IRS had not yet issued guidance in this area, and thus ProAssurance made a reasonable estimate of the effects on its existing deferred tax balances related to executive compensation at that time and recorded a provisional charge of $3.5 million to income tax expense from continuing operations for the year ended December 31, 2017.

During the third quarter of 2018, the IRS issued guidance addressing the effects of the TCJA on executive compensation; therefore, ProAssurance was able to complete its accounting for the impact of the TCJA on its December 31, 2017 deferred tax balances related to executive compensation. As a result, ProAssurance did not record any measurement-period adjustments to the previously recorded provisional amount.

Provisional amounts finalized during the fourth quarter of 2018

At December 31, 2017, the IRS had not yet released the information necessary for the Company to determine a reasonable estimate for the tax effects of the TCJA on its deferred tax balances related to loss reserve discounting; therefore, no provisional amount was recorded at that time. During the fourth quarter of 2018, ProAssurance was able to complete its analysis during the measurement period following the release of new discount factors by the IRS on December 19, 2018. ProAssurance used the new discount factors to determine the impact of the TCJA on its deferred tax balances related to loss reserve discounting. The adjustment, which is referred to as the transition rule adjustment, will be reflected as a component of taxable income evenly over eight years beginning in 2018. This transition rule adjustment is a taxable temporary difference and has no impact on total tax expense for the current year. The ultimate impact of the TCJA on the Company's deferred tax balances for loss reserve discounting could differ, perhaps materially, if the IRS publishes any future revisions to the loss discount factors used in its analysis.

7 . Deferred Policy Acquisition Costs

Policy acquisition costs that are incremental and directly related to the successful production of new and renewal insurance contracts, most significantly agent commissions, premium taxes, and underwriting salaries and benefits, are capitalized as policy acquisition costs and amortized to expense, net of ceding commissions earned, as the related premium revenues are earned.

Amortization of DPAC was $104.5 million , $95.8 million and $88.4 million for the years ended December 31, 2018 , 2017 and 2016 , respectively.

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December 31, 2018

8 . Reserve for Losses and Loss Adjustment Expenses

The reserve for losses is established based on estimates of individual claims and actuarially determined estimates of future losses based on ProAssurance’s past loss experience, available industry data and projections as to future claims frequency, severity, inflationary trends and settlement patterns. Estimating the reserve, particularly the reserve appropriate for liability exposures, is a complex process. For a high proportion of the risks insured or reinsured by ProAssurance, claims may be resolved over an extended period of time, often five years or more, and may be subject to litigation. Estimating losses requires ProAssurance to make and revise judgments and assessments regarding multiple uncertainties over an extended period of time. As a result, the reserve estimate may vary considerably from the eventual outcome. The assumptions used in establishing ProAssurance’s reserve are regularly reviewed and updated by management as new data becomes available. Changes to estimates of previously established reserves are included in earnings in the period in which the estimate is changed.

ProAssurance believes that the methods it uses to establish reserves are reasonable and appropriate. Each year, ProAssurance uses internal actuaries to review the reserve for losses of each insurance subsidiary. ProAssurance also engages consulting actuaries to review ProAssurance claims data and provide observations regarding cost trends, rate adequacy and ultimate loss costs. ProAssurance considers the views of the actuaries as well as other factors, such as known, anticipated or estimated changes in frequency and severity of claims, loss retention levels and premium rates, in establishing the amount of its reserve for losses. The statutory filings of each insurance company with the insurance regulators must be accompanied by a consulting actuary's certification as to their respective reserves.

ProAssurance partitions its reserve by accident year, which is the year in which the claim becomes its liability. As claims are incurred (reported) and claim payments are made, they are aggregated by accident year for analysis purposes. ProAssurance also partitions its reserve by reserve type: case reserves and IBNR reserves. Case reserves are established by the claims department based upon the particular circumstances of each reported claim and represent ProAssurance’s estimate of the future loss costs (often referred to as expected losses) that will be paid on reported claims. Case reserves are decremented as claim payments are made and are periodically adjusted upward or downward as estimates regarding the amount of future losses are revised; a reported loss for an individual claim equates to the case reserve at any point in time plus the claim payments that have been made to date. IBNR reserves represent an estimate, in the aggregate, of future development on losses that have been reported to ProAssurance plus an estimate of losses that have been incurred but not reported. IBNR reserves are not estimated directly, but are calculated by subtracting claim payments to-date and case reserves as of the evaluation date from the projected ultimate losses which are determined as described below.

Development of Prior Accident Years

In addition to setting the initial reserve for the current accident year, each period ProAssurance reassesses the amount of reserve required for prior accident years. The foundation of ProAssurance’s reserve re-estimation process is an actuarial analysis that is performed by both the internal and consulting actuaries. This detailed analysis projects ultimate losses based on partitions which include line of business, geography, coverage layer and accident year. The procedure uses the most representative data for each partition, capturing its unique patterns of development and trends. In all, there are over 200 different partitions of ProAssurance's business for purposes of this analysis. ProAssurance believes that the use of consulting actuaries provides an independent view of the loss data as well as a broader perspective on industry loss trends.

Reserving Methodologies

For the HCPL, medical technology and workers’ compensation lines of business, the analysis performed by the consulting actuaries analyzes each partition of the business in a variety of ways and uses multiple actuarial methodologies in performing these analyses, including: Bornhuetter-Ferguson (Paid and Reported) Method, Paid Development Method, Reported Development Method, Average Paid Value Method, Average Reported Value Method, Backward Recursive Development Method, the Adjusted Reported and the Adjusted Paid Methods. Generally, methods such as the Bornhuetter-Ferguson method are used on more recent accident years where there is less data available on which to base the analysis. As time progresses and an increased amount of data is available for a given accident year, management gives more confidence to the development and average methods, as these methods typically rely more heavily on ProAssurance's own historical data. These methods emphasize different aspects of loss reserve estimation and provide a variety of perspectives for ProAssurance's decisions.

For the workers’ compensation line of business in both the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments, ProAssurance utilizes the Reported Development Method, Paid Loss Development Method and Bornhuetter-Ferguson, to develop the reserve for each accident year. The actuarial review includes the stratification of claims data (lost time claims and medical only claims) using different variations that allow for identification of trends that may not be readily identifiable if the data was evaluated only in the aggregate. Reported and paid loss development factors are key

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December 31, 2018

assumptions in the reserve estimation process and are based on ProAssurance’s historical reported and paid loss development patterns. As accident years mature, the various actuarial methodologies produce more consistent loss estimates.

For the Lloyd’s Syndicates segment business, given the immaturity of Syndicate 1729 and Syndicate 6131’s own experience, losses are initially estimated using the loss assumptions by risk category incorporated into the business plan submitted to Lloyd’s with consideration given to loss experience incurred to date. These assumptions were influenced by loss results reflected in Lloyd’s historical data for similar risks. As losses are reported and resolved and loss experience becomes more credible from a statistical perspective, actual loss experience is incorporated into the estimates.

Certain of the methodologies utilized to estimate the ultimate losses for each partition of the reserve consider the actual amounts paid. Paid data is particularly influential when a large portion of known claims have been closed, as is the case for older accident years. In selecting a point estimate for each partition, management considers the extent to which trends are emerging consistently for all partitions and known industry trends. Thus, actual, rather than estimated severity trends are given more consideration. If actual severity trends are lower than those estimated at the time that reserves were previously established, the recognition of favorable development is indicated. This is particularly true for older accident years where actuarial methodologies give more weight to actual loss costs (severity).

The various actuarial methods discussed above are applied in a consistent manner from period to period. In addition, ProAssurance performs statistical reviews of claims data such as claim counts, average settlement costs and severity trends when establishing the reserve.

Selected point estimates of ultimate losses are utilized to develop estimates of ultimate losses recoverable from reinsurers, based on the terms and conditions of ProAssurance’s reinsurance agreements. An overall estimate of the amount receivable from reinsurers is determined by combining the individual estimates. ProAssurance’s net reserve estimate is the gross reserve point estimate less the estimated reinsurance recovery.

Activity in the reserve for losses and loss adjustment expenses is summarized as follows:



(In thousands)	2018			2017			2016
Balance, beginning of year	$	2,048,381		$	1,993,428		$	2,005,326
Less reinsurance recoverables on unpaid losses and loss adjustment expenses	335,585			273,475			249,350
Net balance, beginning of year	1,712,796			1,719,953			1,755,976
Net losses:
Current year*	685,326			603,518			587,007
Favorable development of reserves established in prior years, net	(92,116		)	(134,360		)	(143,778		)
Total	593,210			469,158			443,229
Paid related to:
Current year	(117,268		)	(106,633		)	(96,190		)
Prior years	(412,711		)	(369,682		)	(383,062		)
Total paid	(529,979		)	(476,315		)	(479,252		)
Net balance, end of year	1,776,027			1,712,796			1,719,953
Plus reinsurance recoverables on unpaid losses and loss adjustment expenses	343,820			335,585			273,475
Balance, end of year	$	2,119,847		$	2,048,381		$	1,993,428
* Current year net losses in 2018 included incurred losses of $25.4 million related to a loss portfolio transfer entered into during the second quarter of 2018 (see Note 4).

As discussed in Note 1 , estimating liability reserves is complex and requires the use of many assumptions. As time passes and ultimate losses for prior years are either known or become subject to a more precise estimation, ProAssurance increases or decreases the reserve estimates established in prior periods. The favorable loss development recognized in 2018 primarily reflected a lower than anticipated claims severity trend (i.e. the average size of a claim) for accident years 2011 through 2014 . The favorable development recognized in 2017 and 2016 was primarily due to lower than anticipated claims severity trends for accident years 2010 through 2014 and accident years 2009 through 2013 , respectively.

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December 31, 2018

On January 1, 2016, ProAssurance adopted new guidance that requires detailed disclosures related to its reserve for losses and loss adjustment expenses, including significant changes in methodologies and assumptions used in the calculation of its reserve. ProAssurance establishes its reserve and manages claims activity by coverage, product or line of business and various categories of reserves have similar characteristics. Therefore, ProAssurance has aggregated these reserve categories into several reserve groups that provide a more meaningful view of the amount, timing and uncertainty of cash flows arising from the liability. At the same time, these reserve groups present a disaggregated view of the major elements of the overall loss reserve liability. The reserve groups include HCPL claims-made reserve, HCPL occurrence reserve, medical technology liability claims-made reserve, workers’ compensation insurance reserve, segregated portfolio cell reinsurance - workers' compensation reserve, Syndicate 1729 casualty reserve, Syndicate 1729 property insurance reserve and Syndicate 1729 property reinsurance reserve. All other loss reserve categories are deemed to be less homogeneous or relatively small on a standalone basis and are included in other short-duration lines in the claims development reconciliation.

The composition of the reserve groups is based on similar characteristics with respect to the risks being insured and the reporting and payout pattern of the underlying claims. In most instances the groups follow the coverage categorizations used in statutory financial reporting for U.S.-domiciled property-casualty insurance companies.

HCPL claims are disaggregated into those claims covered by claims-made policies and those claims covered by occurrence policies. For claims-made policies, the insured event generally becomes a liability when the event is first reported to the insurer. For occurrence policies, the insured event becomes a liability when the event takes place, even if unknown at that time. Claims-made coverage has a short reporting pattern, with virtually all claims known shortly after the end of the policy period. Occurrence coverage claims can have an extended reporting pattern, with the time from the loss event until the filing of the claim often measured in years, at which point the claims resolution process begins. Although the resolution process and time frame is similar once a claim is reported, combining claims from claims-made and occurrence coverage types would result in distortion due to the difference in reporting lag. Medical technology liability reserves are grouped separately due to the nature of the risk, including the potential for mass torts and multiple claims arising out of the same product or service. The small amount of medical technology liability occurrence reserves are included in other short-duration lines.

Workers' compensation reserves in the Workers' Compensation Insurance and the Segregated Portfolio Cell Reinsurance segment are each grouped separately due to the difference in the type of coverage provided and the differences in the claims resolution process as compared to other liability insurance. The small amount of HCPL reserves in the Segregated Portfolio Cell Reinsurance segment are included in other short-duration lines.

Finally, claims arising from the Company's involvement in Syndicate 1729 are segregated into casualty (insurance and reinsurance), property insurance and property reinsurance groups. Property insurance claims generally have a shorter reporting and resolution time frame as compared to most casualty claims. The reporting and resolution patterns of property reinsurance claims differs from that of property insurance claims due to predominant coverage of catastrophic loss events on an aggregate basis rather than coverage of individual claims. Casualty reinsurance, on the other hand, generally provides coverage on a per-claim basis and the reporting and resolution time frame for these claims is not substantially different than those arising from casualty insurance written by Syndicate 1729. The small amount of reserves associated with Syndicate 6131 related to contingency and special property business are included in other short-duration lines.

ProAssurance has elected to present reserve history for acquired entities in all periods shown in the tables below, including periods prior to acquisition. With the exception of the workers' compensation insurance and segregated portfolio cell workers' compensation reinsurance lines of business, virtually all other acquired entities are captured within the HCPL line of business.

All information prior to 2018 disclosed in the Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance, Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance and Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance tables that follow is presented as supplementary information. The “Cumulative Number of Reported Claims” in the tables that follow includes the combined number of claims for an accident year and excludes projected unreported IBNR claims. A claim is considered reported when ProAssurance becomes aware of and accepts it for coverage under the terms of the Company's insurance contracts.

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December 31, 2018

Healthcare Professional Liability Reserve

HCPL loss costs 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 conditions and, for claims involving bodily injury, the trend of healthcare costs. ProAssurance sets an initial reserve using the average loss ratio used in pricing, plus an additional provision in consideration of the historical loss volatility ProAssurance and others in the industry have experienced. The average initial loss ratio for HCPL business has approximated 90% for recent years, which is higher than the underlying expected loss ratio due to provisions for loss volatility. Changes in observed claim frequency, severity or a combination of the two can result in variations in loss provisions. The reasons for the variability in loss provisions from period to period have included additional loss activity within ProAssurance’s excess and surplus lines business, provisions for losses in excess of policy limits, adjustments to ULAE, adjustments to the reserve for the DDR provisions in ProAssurance's policies and additional losses recorded for particular exposures, such as mass torts. These specific adjustments are made if ProAssurance believes the results for a given accident year are likely to exceed those anticipated by pricing. ProAssurance believes the use of a provision for volatility appropriately considers the inherent risks and limitations of the rate development process and the historic volatility of professional liability losses and produces a reasonable best estimate of the reserve required to cover actual ultimate unpaid losses.

Healthcare Professional Liability Claims-Made



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																					December 31, 2018
($ in thousands)	Year Ended December 31,																				IBNR*			Cumulative Number of Reported Claims
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
Accident Year	Unaudited
2009	$	379,259	$	370,642	$	345,714	$	320,368	$	284,511	$	265,478	$	246,146	$	230,849	$	224,768	$	220,703	$	(455	)	3,828
2010	—		$	364,996	$	354,787	$	338,170	$	312,813	$	291,553	$	279,713	$	270,484	$	258,466	257,714		$	(243	)	3,847
2011	—		—		$	348,916	$	344,808	$	331,884	$	305,540	$	289,400	$	278,258	$	264,777	254,329		$	(2,091	)	3,532
2012	—		—		—		$	341,289	$	324,418	$	319,613	$	306,956	$	291,075	$	279,589	271,110		$	276		3,702
2013	—		—		—		—		$	315,346	$	304,209	$	296,550	$	287,140	$	272,364	258,251		$	173		3,783
2014	—		—		—		—		—		$	290,020	$	289,397	$	280,043	$	267,442	256,968		$	(5,200	)	3,320
2015	—		—		—		—		—		—		$	276,492	$	269,980	$	271,138	270,814		$	(8,030	)	3,266
2016	—		—		—		—		—		—		—		$	271,765	$	274,643	287,551		$	(21,456	)	3,481
2017	—		—		—		—		—		—		—		—		$	283,746	295,883		$	(11,228	)	3,677
2018	—		—		—		—		—		—		—		—		—		320,772		$	129,334		3,558
Total																			$	2,694,095
* Includes expected development on reported claims



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)	Year Ended December 31,
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
Accident Year	Unaudited
2009	$	15,051	$	71,272	$	114,318	$	153,563	$	178,445	$	191,420	$	200,425	$	205,372	$	209,016	$	213,568
2010	—		$	15,464	$	69,551	$	137,712	$	180,432	$	209,777	$	221,693	$	236,171	$	240,945	243,675
2011	—		—		$	14,417	$	71,208	$	133,004	$	177,089	$	198,112	$	214,502	$	224,982	233,103
2012	—		—		—		$	15,382	$	73,571	$	145,488	$	190,997	$	215,220	$	231,652	244,512
2013	—		—		—		—		$	16,938	$	69,657	$	127,496	$	171,681	$	197,265	213,879
2014	—		—		—		—		—		$	16,764	$	59,485	$	116,791	$	154,236	186,239
2015	—		—		—		—		—		—		$	9,172	$	55,731	$	111,741	161,896
2016	—		—		—		—		—		—		—		$	9,027	$	51,869	109,756
2017	—		—		—		—		—		—		—		—		$	16,309	63,171
2018	—		—		—		—		—		—		—		—		—		14,051
Total																			1,683,850

All outstanding liabilities before 2009, net of reinsurance																			11,724
Liabilities for losses and loss adjustment expenses, net of reinsurance																			$	1,021,969

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December 31, 2018

Healthcare Professional Liability Occurrence



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																					December 31, 2018
($ in thousands)	Year Ended December 31,																				IBNR*		Cumulative Number of Reported Claims
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
Accident Year	Unaudited
2009	$	34,450	$	35,366	$	36,802	$	37,437	$	34,099	$	32,675	$	28,731	$	26,340	$	24,572	$	23,387	$	1,519	246
2010	—		$	41,721	$	43,238	$	43,195	$	42,233	$	37,920	$	35,831	$	33,361	$	29,338	26,501		$	946	290
2011	—		—		$	45,882	$	44,956	$	41,453	$	39,917	$	37,150	$	35,004	$	32,343	29,784		$	2,136	342
2012	—		—		—		$	45,703	$	46,513	$	44,848	$	40,692	$	34,774	$	32,691	29,857		$	3,816	399
2013	—		—		—		—		$	32,746	$	36,602	$	35,624	$	34,393	$	30,906	26,919		$	971	356
2014	—		—		—		—		—		$	30,420	$	29,918	$	32,143	$	29,869	25,885		$	2,778	355
2015	—		—		—		—		—		—		$	35,648	$	35,347	$	37,346	40,960		$	4,667	355
2016	—		—		—		—		—		—		—		$	29,609	$	28,790	27,240		$	6,244	322
2017	—		—		—		—		—		—		—		—		$	24,571	23,760		$	19,890	270
2018	—		—		—		—		—		—		—		—		—		38,420		$	36,196	118
Total																			$	292,713
* Includes expected development on reported claims



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)	Year Ended December 31,
	2009		2010		2011		2012		2013		2014		2015			2016			2017			2018
Accident Year	Unaudited
2009	$	175	$	2,255	$	5,067	$	7,947	$	10,823	$	13,248	$	15,380		$	16,025		$	16,270		$	17,022
2010	—		$	285	$	1,881	$	5,647	$	9,120	$	15,147	$	21,837		$	22,804		$	23,313		23,832
2011	—		—		$	291	$	2,803	$	8,059	$	16,544	$	19,197		$	21,416		$	23,194		24,539
2012	—		—		—		$	363	$	2,430	$	7,705	$	12,212		$	19,275		$	21,435		23,095
2013	—		—		—		—		$	369	$	3,170	$	7,826		$	14,753		$	16,787		18,949
2014	—		—		—		—		—		$	394	$	2,260		$	7,460		$	10,519		14,604
2015	—		—		—		—		—		—		$	(350	)	$	786		$	4,854		11,626
2016	—		—		—		—		—		—		—			$	(182	)	$	(195	)	2,883
2017	—		—		—		—		—		—		—			—			$	(6,809	)	(5,858		)
2018	—		—		—		—		—		—		—			—			—			65
Total																						130,757

All outstanding liabilities before 2009, net of reinsurance																						7,985
Liabilities for losses and loss adjustment expenses, net of reinsurance																						$	169,941



Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance

Years	1	2	3	4	5	6	7	8	9	10
	Unaudited
Healthcare Professional Liability Claims-Made	5.4%	19.5%	22.8%	17.0%	10.4%	5.9%	4.6%	2.4%	1.4%	2.1%
Healthcare Professional Liability Occurrence	(2.3%)	6.1%	15.0%	17.6%	15.2%	11.7%	6.1%	3.1%	1.5%	3.2%

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Notes to Consolidated Financial Statements

December 31, 2018

Medical Technology Liability Reserve

The risks insured in the medical technology liability line of business are more varied and policies are individually priced based on the risk characteristics of the policy and the account. These policies often have substantial deductibles or self-insured retentions and the insured risks range from startup operations to large multinational entities. Premiums are established using the 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 the HCPL line of business. For the medical technology liability line of business, ProAssurance also establishes an initial reserve using a loss ratio approach, including a provision in consideration of historical loss volatility that this line of business has exhibited.

Medical Technology Liability Claims-Made



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																					December 31, 2018
($ in thousands)	Year Ended December 31,																				IBNR*		Cumulative Number of Reported Claims
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
Accident Year	Unaudited
2009	$	30,462	$	31,183	$	27,523	$	26,181	$	23,425	$	21,733	$	20,551	$	19,264	$	18,176	$	17,984	$	251	699
2010	—		$	26,077	$	27,063	$	25,175	$	23,307	$	19,315	$	17,439	$	16,047	$	16,878	18,611		$	402	498
2011	—		—		$	17,249	$	20,930	$	19,166	$	15,836	$	13,794	$	12,487	$	12,358	8,202		$	500	521
2012	—		—		—		$	11,162	$	9,989	$	8,906	$	7,441	$	5,824	$	4,797	5,051		$	732	220
2013	—		—		—		—		$	9,807	$	9,955	$	9,536	$	7,226	$	4,697	3,566		$	380	218
2014	—		—		—		—		—		$	9,989	$	10,306	$	9,012	$	8,984	7,679		$	2,544	272
2015	—		—		—		—		—		—		$	9,376	$	8,757	$	7,193	5,929		$	2,770	155
2016	—		—		—		—		—		—		—		$	9,200	$	8,467	7,413		$	3,482	180
2017	—		—		—		—		—		—		—		—		$	11,049	10,143		$	7,834	95
2018	—		—		—		—		—		—		—		—		—		10,141		$	9,818	188
Total																			$	94,719
* Includes expected development on reported claims



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)	Year Ended December 31,
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
Accident Year	Unaudited
2009	$	116	$	5,071	$	7,742	$	14,675	$	14,933	$	15,097	$	15,184	$	15,186	$	16,515	$	17,522
2010	—		$	485	$	3,557	$	8,491	$	12,283	$	11,725	$	12,146	$	12,253	$	15,366	17,660
2011	—		—		$	118	$	2,034	$	3,846	$	5,062	$	7,376	$	7,240	$	7,799	7,664
2012	—		—		—		$	568	$	1,520	$	2,805	$	3,247	$	3,366	$	3,676	3,800
2013	—		—		—		—		$	102	$	1,029	$	1,967	$	2,599	$	3,092	3,102
2014	—		—		—		—		—		$	388	$	1,527	$	2,564	$	3,046	3,724
2015	—		—		—		—		—		—		$	25	$	440	$	1,625	2,097
2016	—		—		—		—		—		—		—		$	53	$	1,690	2,365
2017	—		—		—		—		—		—		—		—		$	56	1,681
2018	—		—		—		—		—		—		—		—		—		6
Total																			59,621

All outstanding liabilities before 2009, net of reinsurance																			1,101
Liabilities for losses and loss adjustment expenses, net of reinsurance																			$	36,199



Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8		9		10
	Unaudited
Medical Technology Liability	2.6	%	19.1	%	19.7	%	16.4	%	8.6	%	1.6	%	2.6	%	5.0	%	9.9	%	5.6	%

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Notes to Consolidated Financial Statements

December 31, 2018

Workers' Compensation Insurance Reserve

Many factors affect the ultimate losses incurred for the workers' compensation coverages in the Workers' Compensation Insurance segment including, but not limited to, the type and severity of the injury, the age 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 injury occurrence. ProAssurance uses various actuarial methodologies in developing the workers’ compensation reserve combined with a review of the exposure base generally based upon payroll of the insured. For the current accident year, given the lack of seasoned information, the different actuarial methodologies produce results with considerable 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.

Workers' Compensation Insurance



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																					December 31, 2018
($ in thousands)	Year Ended December 31,																				IBNR*		Cumulative Number of Reported Claims
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
Accident Year	Unaudited
2009	$	45,354	$	45,354	$	45,354	$	45,354	$	47,811	$	48,372	$	47,905	$	47,480	$	47,480	$	47,480	$	80	10,129
2010	—		$	55,852	$	55,852	$	55,852	$	54,837	$	54,779	$	55,200	$	54,600	$	54,600	54,600		$	58	12,913
2011	—		—		$	65,665	$	65,783	$	71,521	$	72,280	$	72,420	$	72,495	$	72,795	72,795		$	354	15,244
2012	—		—		—		$	80,285	$	76,551	$	75,848	$	76,357	$	75,836	$	75,636	75,136		$	724	16,204
2013	—		—		—		—		$	86,973	$	85,935	$	86,928	$	88,010	$	88,810	88,810		$	1,017	16,429
2014	—		—		—		—		—		$	93,019	$	93,529	$	93,029	$	92,229	92,229		$	3,350	16,210
2015	—		—		—		—		—		—		$	100,101	$	100,454	$	98,454	97,654		$	8,522	16,548
2016	—		—		—		—		—		—		—		$	101,348	$	97,348	92,148		$	13,540	15,972
2017	—		—		—		—		—		—		—		—		$	99,874	99,874		$	12,489	16,058
2018	—		—		—		—		—		—		—		—		—		118,095		$	32,816	17,556
Total																			$	838,821
* Includes expected development on reported claims



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)	Year Ended December 31,
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
Accident Year	Unaudited
2009	$	14,701	$	31,465	$	39,351	$	43,436	$	45,689	$	46,321	$	46,928	$	47,012	$	47,089	$	47,189
2010	—		$	20,086	$	39,098	$	46,762	$	51,117	$	52,530	$	53,443	$	53,734	$	53,974	54,014
2011	—		—		$	21,993	$	50,900	$	62,307	$	67,945	$	70,146	$	70,934	$	71,662	71,856
2012	—		—		—		$	27,448	$	56,122	$	65,908	$	70,558	$	72,766	$	73,662	73,676
2013	—		—		—		—		$	30,554	$	63,825	$	76,813	$	82,369	$	85,689	86,783
2014	—		—		—		—		—		$	30,368	$	65,922	$	77,631	$	85,022	87,314
2015	—		—		—		—		—		—		$	32,078	$	65,070	$	78,947	83,483
2016	—		—		—		—		—		—		—		$	28,377	$	58,192	69,237
2017	—		—		—		—		—		—		—		—		$	31,586	70,333
2018	—		—		—		—		—		—		—		—		—		41,619
Total																			685,504

All outstanding liabilities before 2009, net of reinsurance																			2,208
Liabilities for losses and loss adjustment expenses, net of reinsurance																			$	155,525



Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8		9		10
	Unaudited
Workers' Compensation Insurance	33.2	%	36.5	%	14.1	%	7.1	%	3.3	%	1.3	%	0.7	%	0.3	%	0.1	%	0.2	%

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Notes to Consolidated Financial Statements

December 31, 2018

Segregated Portfolio Cell Reinsurance - Workers' Compensation Reserve

The Company estimates and reserves for the workers' compensation business assumed by the Segregated Portfolio Cell Reinsurance segment in the same manner as for its workers' compensation business in the Workers' Compensation Insurance segment, as previously discussed.

Segregated Portfolio Cell Reinsurance - Workers' Compensation



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																					December 31, 2018
($ in thousands)	Year Ended December 31,																				IBNR*		Cumulative Number of Reported Claims
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
Accident Year	Unaudited
2009	$	17,790	$	16,337	$	15,886	$	15,948	$	15,809	$	15,695	$	15,618	$	15,277	$	15,277	$	15,279	$	107	2,962
2010	—		$	19,767	$	18,265	$	17,715	$	17,825	$	17,736	$	17,541	$	17,320	$	17,278	17,224		$	275	2,914
2011	—		—		$	18,790	$	19,360	$	19,629	$	19,282	$	18,644	$	18,725	$	18,666	18,606		$	363	3,154
2012	—		—		—		$	22,940	$	21,513	$	21,048	$	20,028	$	19,972	$	19,864	19,799		$	441	3,454
2013	—		—		—		—		$	23,809	$	25,310	$	26,758	$	26,619	$	26,260	26,033		$	544	3,723
2014	—		—		—		—		—		$	28,248	$	28,423	$	29,000	$	28,373	28,281		$	942	4,433
2015	—		—		—		—		—		—		$	36,423	$	32,519	$	28,746	27,548		$	1,601	4,949
2016	—		—		—		—		—		—		—		$	37,601	$	34,055	30,998		$	2,528	5,326
2017	—		—		—		—		—		—		—		—		$	42,725	38,594		$	7,314	5,699
2018	—		—		—		—		—		—		—		—		—		43,654		$	18,788	6,228
Total																			$	266,016
* Includes expected development on reported claims



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)	Year Ended December 31,
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
Accident Year	Unaudited
2009	$	5,000	$	10,782	$	13,202	$	14,660	$	14,881	$	14,954	$	15,147	$	15,165	$	15,166	$	15,172
2010	—		$	6,503	$	12,904	$	15,087	$	16,214	$	16,757	$	16,842	$	16,810	$	16,850	16,904
2011	—		—		$	5,940	$	14,045	$	17,197	$	17,869	$	18,054	$	18,177	$	18,176	18,185
2012	—		—		—		$	7,808	$	14,740	$	17,728	$	18,474	$	19,208	$	19,402	19,328
2013	—		—		—		—		$	8,131	$	19,054	$	24,268	$	25,209	$	25,366	25,489
2014	—		—		—		—		—		$	9,933	$	21,880	$	26,173	$	26,810	26,959
2015	—		—		—		—		—		—		$	11,257	$	21,706	$	23,977	24,781
2016	—		—		—		—		—		—		—		$	10,980	$	23,003	26,285
2017	—		—		—		—		—		—		—		—		$	12,404	24,791
2018	—		—		—		—		—		—		—		—		—		12,517
Total																			210,411

All outstanding liabilities before 2009, net of reinsurance																			912
Liabilities for losses and loss adjustment expenses, net of reinsurance																			$	56,517



Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8		9		10
	Unaudited
Segregated Portfolio Cell Reinsurance - Workers' Compensation	34.5	%	38.5	%	14.3	%	4.6	%	1.7	%	0.6	%	0.2	%	0.1	%	0.2	%	—	%

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Notes to Consolidated Financial Statements

December 31, 2018

Syndicate 1729 Reserve

Given the recent inception date for Syndicate 1729 (January 1, 2014) there is limited reliable historical claims data to use in establishing initial reserves for the exposures in the Lloyd's Syndicates segment. Consequently, ProAssurance estimates initial losses using the loss assumptions by risk category incorporated into the business plan submitted to Lloyd’s with consideration given to loss experience incurred to date. These assumptions are influenced by loss results in Lloyd's historical data for similar risks. In addition, Lloyd's market data for payment patterns is utilized to develop the payout patterns in the tables shown below. As the book of business matures and additional loss information becomes available, the actual loss experience of Syndicate 1729's book of business will be utilized to a greater extent. This will occur sooner for property coverages than for casualty coverages due to the shorter claim reporting and resolution time described above.

Claim count information for assumed reinsurance coverage written by Syndicate 1729 is not meaningful in many instances. Certain reinsurance contracts provide aggregate coverage for loss events involving numerous underlying claims, resulting in a single claim count for reinsurance purposes, while other reinsurance contracts provide individual per-claim coverage. Still others may provide aggregate stop loss coverage based on the total losses or loss ratio of a class of business. As a result, claim count information is not included in the Syndicate 1729 Casualty and Syndicate 1729 Property Reinsurance tables shown below.

Syndicate 1729 writes coverage in a variety of jurisdictions and currencies, although the majority of its business is in U.S. dollars. For purposes of the tables below, ProAssurance has elected to convert losses from their original currency to U.S. dollars using the exchange rate as of the end of the current period. This provides the purest trend information with respect to loss development, since the amounts in the table are not affected by exchange rate movements. However, the amounts for prior periods shown in the tables will not reconcile to previously-issued financial statements which used existing exchange rates at the date of the financial statement.

Syndicate 1729 Casualty



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
($ in thousands)	Year Ended December 31,										IBNR ⁽¹⁾		Cumulative Number of Reported Claims ⁽²⁾
	2014		2015		2016		2017		2018
Accident Year			Unaudited
2014	$	6,110	$	5,812	$	5,610	$	5,547	$	5,472	$	1,086	nm
2015	—		$	14,810	$	14,510	$	14,398	14,232		$	1,984	nm
2016	—		—		$	19,535	$	19,669	19,552		$	5,098	nm
2017	—		—		—		$	22,069	21,824		$	9,960	nm
2018	—		—		—		—		18,688		$	16,014	nm
Total									$	79,768
⁽¹⁾ Includes expected development on reported claims
⁽²⁾ The abbreviation " nm " indicates that the information is not meaningful



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)	Year Ended December 31,
	2014		2015		2016		2017		2018
Accident Year			Unaudited
2014	$	20	$	474	$	4,092	$	4,214	$	4,320
2015	—		$	724	$	6,307	$	10,313	10,947
2016	—		—		$	2,495	$	8,441	12,869
2017	—		—		—		$	2,611	8,301
2018	—		—		—		—		1,852
Total									38,289

All outstanding liabilities before 2014, net of reinsurance									—
Liabilities for losses and loss adjustment expenses, net of reinsurance									$	41,479

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Notes to Consolidated Financial Statements

December 31, 2018

Syndicate 1729 Property Insurance



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
($ in thousands)	Year Ended December 31,										IBNR*			Cumulative Number of Reported Claims
	2014		2015		2016		2017		2018
Accident Year	Unaudited
2014	$	890	$	1,089	$	888	$	864	$	866	$	(6	)	118
2015	—		$	5,519	$	5,917	$	6,194	6,159		$	1,128		921
2016	—		—		$	11,896	$	12,984	12,823		$	12		2,484
2017	—		—		—		$	15,018	17,634		$	(883	)	4,240
2018	—		—		—		—		20,636		$	6,898		3,681
Total									$	58,118
* Includes expected development on reported claims



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)	Year Ended December 31,
	2014		2015		2016		2017		2018
Accident Year	Unaudited
2014	$	267	$	1,005	$	836	$	854	$	857
2015	—		$	3,165	$	4,022	$	4,808	4,869
2016	—		—		$	7,751	$	10,939	12,343
2017	—		—		—		$	8,221	16,439
2018	—		—		—		—		9,918
Total									44,426

All outstanding liabilities before 2014, net of reinsurance									—
Liabilities for losses and loss adjustment expenses, net of reinsurance									$	13,692

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Notes to Consolidated Financial Statements

December 31, 2018

Syndicate 1729 Property Reinsurance



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
($ in thousands)	Year Ended December 31,										IBNR ⁽¹⁾			Cumulative Number of Reported Claims ⁽²⁾
	2014		2015		2016		2017		2018
Accident Year	Unaudited
2014	$	831	$	929	$	989	$	989	$	1,125	$	—		nm
2015			$	2,788	$	2,825	$	2,275	2,328		$	(91	)	nm
2016					$	4,497	$	4,050	3,368		$	943		nm
2017							$	6,861	7,832		$	371		nm
2018									8,840		$	8,154		nm
Total									$	23,493
⁽¹⁾ Includes expected development on reported claims
⁽²⁾ The abbreviation " nm " indicates that the information is not meaningful



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)	Year Ended December 31,
	2014		2015		2016		2017		2018
Accident Year	Unaudited
2014	$	79	$	917	$	984	$	984	$	1,125
2015	—		$	1,313	$	1,804	$	1,996	2,234
2016	—		—		$	613	$	1,667	2,136
2017	—		—		—		$	4,147	7,300
2018	—		—		—		—		547
Total									13,342

All outstanding liabilities before 2014, net of reinsurance									—
Liabilities for losses and loss adjustment expenses, net of reinsurance									$	10,151



Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8		9		10
	Unaudited
Syndicate 1729 Casualty	18.7	%	40.3	%	22.6	%	12.8	%	3.2	%	1.1	%	1.0	%	0.4	%	—	%	—	%
Syndicate 1729 Property Insurance	81.4	%	15.9	%	2.1	%	0.2	%	0.2	%	0.1	%	0.1	%	0.1	%	—	%	—	%
Syndicate 1729 Property Reinsurance	82.0	%	13.3	%	2.8	%	1.1	%	0.4	%	0.2	%	0.1	%	—	%	—	%	—	%

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Notes to Consolidated Financial Statements

December 31, 2018

Below is a reconciliation of the claims development information to the Consolidated Balance Sheet:



(In thousands)	December 31, 2018
Net outstanding liabilities
Healthcare professional liability claims-made	$	1,021,969
Healthcare professional liability occurrence	169,941
Medical technology liability claims-made	36,199
Workers' compensation insurance	155,525
Segregated portfolio cell reinsurance - workers' compensation	56,517
Syndicate 1729 casualty	41,479
Syndicate 1729 property insurance	13,692
Syndicate 1729 property reinsurance	10,151
Other short-duration lines	91,365
Liabilities for losses and loss adjustment expenses, net of reinsurance	1,596,838

Reinsurance recoverable on unpaid losses
Healthcare professional liability claims-made	151,870
Healthcare professional liability occurrence	37,683
Medical technology liability claims-made	32,604
Workers' compensation insurance	67,631
Segregated portfolio cell reinsurance - workers' compensation	24,177
Syndicate 1729 casualty	678
Syndicate 1729 property insurance	10,323
Syndicate 1729 property reinsurance	9,717
Other short-duration lines	9,137
Total reinsurance recoverable on unpaid losses and loss adjustment expenses	343,820

Reserve for the future utilization of the DDR benefit	67,200
Unallocated loss adjustment expenses	100,123
Loss portfolio transfer*	18,252
Purchase accounting	1,551
Other	(7,937		)
	179,189
Gross liability for losses and loss adjustment expenses	$	2,119,847
* Represents the reserve for retroactive coverage, net of a deferred gain, related to a loss portfolio transfer entered into in the second quarter of 2018 (see Note 4).

9 . Commitments and Contingencies

ProAssurance is involved in various legal actions related to insurance policies and claims handling including, but not limited to, claims asserted by policyholders. These types of legal actions arise in the Company’s ordinary course of business and, in accordance with GAAP for insurance entities, are considered as a part of the Company’s loss reserving process, which is described in detail under the heading "Losses and Loss Adjustment Expenses” in the Accounting Policies section of Note 1 .

On occasion, ProAssurance has entered into financial instrument transactions that may present off-balance sheet credit risk or market risk. These transactions include a short-term loan commitment and commitments to provide funding to non-public investment entities. Under the short-term loan commitment, ProAssurance has agreed to advance funds on a 30 day basis to a counterparty provided there is no violation of any condition established in the contract. ProAssurance had total funding commitments of approximately $297.8 million which primarily represented funding commitments related to non-public investment entities as well as the short-term loan commitment which included the amount at risk if the full short-term loan is extended and the counterparties default. However, the credit risk associated with the short-term loan commitment is minimal as the counterparties to the contract are highly rated commercial institutions and to-date have been performing in accordance with their contractual obligations. Of these total funding commitments, $1.0 million is related to qualified affordable housing project tax credit investments and is expected to be paid as follows: $0.2 million in 2019, $0.3 million in 2020 and 2021 combined, $0.4 million in 2022 and 2023 combined and $0.1 million thereafter.

As a member of Lloyd's , ProAssurance is required to provide capital to support its Lloyd's Syndicates through 2019 of up to $200.0 million , referred to as FAL . The Board, through a non-binding resolution, extended this commitment through 2022. At December 31, 2018 , ProAssurance's FAL was comprised of investment securities on deposit with Lloyd's with a carrying value of $142.7 million (see Note 3 ).

ProAssurance has issued an unconditional revolving credit agreement to the Premium Trust Fund of Syndicate 1729 for the purpose of providing working capital. Permitted borrowings were expanded from £20.0 million to £30.0 million under an amended Syndicate Credit Agreement executed in February 2018. Under the amended Syndicate Credit Agreement advances bear interest at 3.8% annually, and may be repaid at any time but are repayable upon demand after December 31, 2019 . As of December 31, 2018 , the unused commitment under the Syndicate Credit Agreement approximated £7.1 million (approximately $9.1 million ). In January 2019, the Syndicate Credit Agreement was amended to extend the current maturity to December 31, 2020 and to implement an annual auto-renewal feature which allows for ProAssurance to elect to non-renew if notice is given at least 30 days prior to the next auto-renewal date, which is one year prior to the maturity date.

In October 2018, ProAssurance entered into an agreement with a company to provide data analytics services for certain product lines within the Company's HCPL book of business. The agreement contains a minimum two year commitment with optional extension features for an annual fee of approximately $4.8 million per year with additional variable quarterly incentive fees based on service utilization metrics prescribed in the contract. ProAssurance incurred operating expense associated with this agreement of $1.0 million in the fourth quarter of 2018 and as of December 31, 2018 , the remaining commitment under this agreement was approximately $8.6 million .

ProAssurance is involved in a number of operating leases, primarily for office space. The following is a schedule of future minimum lease payments for operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2018 .



Operating Leases
(In thousands)
2019	$	4,829
2020	4,020
2021	3,557
2022	2,618
2023	1,888
Thereafter	10,212
Total minimum lease payments	$	27,124

ProAssurance incurred rent expense of $7.9 million , $6.7 million and $5.9 million in the years ended December 31, 2018 , 2017 and 2016 , respectively.

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10 . Debt

ProAssurance’s outstanding debt consisted of the following:



(In thousands)	December 31, 2018		December 31, 2017
Senior Notes due 2023, unsecured, interest at 5.3% annually	$	250,000	$	250,000
Revolving Credit Agreement, outstanding borrowings were fully secured and carried at a weighted average interest rate of 1.91%. The interest rate on borrowings is set at the time the respective borrowing is initiated or renewed.	—		123,000
Mortgage Loans, outstanding borrowings are secured by first priority liens on two office buildings, and bear an interest rate of three-month LIBOR plus 1.325% (4.10% and 2.86%, respectively) determined on a quarterly basis.	39,064		40,460
Total principal	289,064		413,460
Less debt issuance costs	1,307		1,649
Debt less debt issuance costs	$	287,757	$	411,811

Senior Notes due 2023 (the Senior Notes)

The Senior Notes are the unsecured obligations of ProAssurance Corporation, due in full in November 2023, unless redeemed sooner, with interest payable semiannually. Redemptions may be made prior to maturity, in whole or part, at the greater of par or the sum of the present values of the outstanding principal and remaining interest payments calculated at 0.4% above the then current rate for U.S. Treasury Notes with a term comparable to the remaining term of the Senior Notes. There are no financial covenants associated with the Senior Notes.

Revolving Credit Agreement

ProAssurance has entered into a Revolving Credit Agreement with seven participating lenders with an expiration date of June 2020 . The Revolving Credit Agreement permits ProAssurance to borrow, repay and reborrow from the lenders during the term of the Revolving Credit Agreement ; aggregate outstanding borrowings are not permitted to exceed $250 million at any time, which includes $50 million made available for use, if subscribed successfully, under an accordion feature. All borrowings are required to be repaid prior to the expiration date of the Revolving Credit Agreement . ProAssurance is required to pay a commitment fee, ranging from 0.125% to 0.25% based on ProAssurance’s credit ratings, on the average unused portion of the credit line during the term of the Revolving Credit Agreement . Borrowings under the Revolving Credit Agreement may be secured or unsecured and accrue interest at a selected base rate, adjusted by a margin, which can vary from 0% to 1.63% , based on ProAssurance’s credit ratings and whether the borrowing is secured or unsecured. The base rate selected may either be the current one-, three- or six-month LIBOR , with the LIBOR term selected fixing the interest period for which the rate is effective. If no selection is made, the base rate defaults to the highest of (1) the Prime rate (2) the Federal Funds rate plus 0.5% or (3) the one month LIBOR plus 1.0% , determined daily. Rates are reset each successive interest period until the borrowing is repaid.

The Revolving Credit Agreement contains customary representations, covenants and events constituting default, and remedies for default. Additionally, the Revolving Credit Agreement carries the following financial covenants:

(1)

ProAssurance is not permitted to have a leverage ratio of Consolidated Funded Indebtedness (principally, obligations for borrowed money, obligations evidenced by instruments such as notes or acceptances, standby and commercial Letters of Credit, and contingent obligations) to Consolidated Total Capitalization (principally, total non-trade liabilities on a consolidated basis plus consolidated shareholders’ equity, exclusive of AOCI ) greater than 0.35 to 1.0 , determined at the end of each fiscal quarter.


(2)	ProAssurance is required to maintain a minimum net worth, excluding AOCI , of at least $1.3 billion .

Funds borrowed under the terms of the Revolving Credit Agreement will be used for general corporate purposes, including, but not limited to, use as short-term working capital, funding for share repurchases as authorized by the Board and support for other activities.

Mortgage Loans

During 2017, two of ProAssurance's subsidiaries each entered into ten -year mortgage loans collectively totaling $40.5 million (Mortgage Loans) with one lender in connection with the recapitalization of two office buildings. The Mortgage Loans, which mature in December 2027 , accrue interest at three-month LIBOR plus 1.325% with principal and interest payable on a

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quarterly basis. To manage the Company's exposure to increases in LIBOR on the Mortgage Loans, ProAssurance entered into an interest rate cap agreement with a notional amount of $35.0 million . Per the interest rate cap agreement, the Company is entitled to receive cash payments if and when the three-month LIBOR exceeds 2.35% . Additional information on the Company's derivative instruments is provided in Note 11 .

The Mortgage Loans contain customary representations, covenants and events constituting default, and remedies for default. Additionally, the Mortgage Loans carry the following financial covenant:

(1)

Each of the two ProAssurance subsidiaries are not permitted to have a leverage ratio of Consolidated Funded Debt (principally, obligations for borrowed money, obligations for deferred purchase price of property or services, obligations evidenced by notes, bonds, debentures, standby and commercial Letters of Credit and contingent obligations of the subsidiary) to Consolidated Total Capitalization (principally, SAP Consolidated Net Worth plus Consolidated Funded Debt of the subsidiary) greater than 0.35 , determined at the end of each fiscal quarter.

At December 31, 2018 , contractual maturities of the Mortgages Loans for each of the next five years, excluding interest payments, are as follows:



(In thousands)	Principal Payments Due by Period
(In thousands)	Principal Payments Due by Period
2019	$	1,448
2020	1,503
2021	1,559
2022	1,617
2023	1,677
Thereafter	31,260
Total principal payments	$	39,064

Covenant Compliance

ProAssurance is currently in compliance with all covenants.

11 . Derivatives

ProAssurance is exposed to certain risks relating to its ongoing business and investment activities. ProAssurance utilizes derivative instruments as part of its risk management strategy to reduce the market risk related to fluctuations in future interest rates associated with a portion of its variable-rate debt. As of December 31, 2018 , ProAssurance has not designated any derivative instruments as hedging instruments and does not use derivative instruments for trading purposes.

ProAssurance utilizes an interest rate cap agreement with the objective of reducing the Company's exposure to interest rate risk related to its variable-rate Mortgage Loans. Additional information regarding the Company's Mortgage Loans is provided in Note 10 . Under the terms of the interest rate cap agreement, ProAssurance paid a premium of $2 million in 2017 for the right to receive cash payments based upon a notional amount of $35 million if and when the three-month LIBOR rises above 2.35% . The Company's variable-rate Mortgage Loans bear an interest rate of three-month LIBOR plus 1.325% . Therefore, this derivative instrument is effectively ensuring the interest rate related to the Mortgage Loans is capped at a maximum of 3.675% until expiration of the interest rate cap agreement in October 2027 . ProAssurance has designated the interest rate cap as an economic hedge (non-hedging instrument) of interest rate exposure and any change in fair value of the derivative is immediately recognized in earnings during the period of change.

The following table provides a summary of the volume and fair value position of the interest rate cap as well as the reporting location in the Consolidated Balance Sheets as of December 31, 2018 and 2017 .



($ in thousands)		December 31, 2018					December 31, 2017
Derivatives Not Designated as Hedging Instruments	Location in the Consolidated Balance Sheets	Number of Instruments	Notional Amount ⁽¹⁾		Estimated Fair Value ⁽²⁾		Number of Instruments	Notional Amount ⁽¹⁾		Estimated Fair Value ⁽²⁾
Interest Rate Cap	Other assets	1	$	35,000	$	1,884	1	$	35,000	$	1,731
⁽¹⁾ Volume is represented by the derivative instrument's notional amount.
⁽²⁾ Additional information regarding the fair value of the Company's interest rate cap is provided in Note 2.

The following table presents the pre-tax impact of the change in the fair value of the interest rate cap and the reporting location in the Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2018 , 2017 and 2016 .



		Gains (Losses) Recognized in Income on Derivatives
(In thousands)		Year Ended December 31
Derivatives Not Designated as Hedging Instruments	Location in the Consolidated Statements of Income and Comprehensive Income	2018		2017			2016
Interest Rate Cap	Interest expense	$	153	$	(339	)	$	—

As a result of this derivative instrument, ProAssurance is exposed to risk that the counterparty will fail to meet its contractual obligations. To mitigate this counterparty credit risk, ProAssurance only enters into derivative contracts with carefully selected major financial institutions based upon their credit ratings and monitors their creditworthiness. As of December 31, 2018 , the counterparty had an investment grade rating of BBB- and has performed in accordance with their contractual obligations.

12 . Shareholders’ Equity

At December 31, 2018 and 2017 , ProAssurance had 100 million shares of authorized common stock and 50 million shares of authorized preferred stock. The Board has the authority to determine provisions for the issuance of preferred shares, including the number of shares to be issued, the designations, powers, preferences and rights, and the qualifications, limitations or restrictions of such shares. To date, the Board has not approved the issuance of preferred stock.

The following is a summary of changes in common shares issued and outstanding during the years ended December 31, 2018 , 2017 and 2016 :



(In thousands)	2018	2017	2016
Issued and outstanding shares - January 1	53,457	53,251	53,101
Repurchase of shares, at cost of $2 million for 2016	—	—	(44	)
Shares issued due to exercise of options and vesting of share-based compensation awards	135	132	108
Other shares issued for compensation and shares reissued to stock purchase plan *	45	74	86
Issued and outstanding shares - December 31	53,637	53,457	53,251
* Shares issued were valued at fair value (the market price of a ProAssurance common share on the date of issue).

As of December 31, 2018 , approximately 2.0 million of ProAssurance's authorized common shares were reserved by the Board for award or issuance under the incentive compensation plans described in Note 13 and an additional 0.6 million of authorized common shares were reserved for the issuance of currently outstanding restricted share and performance share unit awards.

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ProAssurance declared cash dividends during 2018 , 2017 and 2016 as follows:



	Cash Dividends Declared, per Share
	2018		2017		2016
First Quarter	$	0.31	$	0.31	$	0.31
Second Quarter	$	0.31	$	0.31	$	0.31
Third Quarter	$	0.31	$	0.31	$	0.31
Fourth Quarter*	$	0.81	$	5.00	$	5.00

* Includes special dividends of $0.50 per share in 2018 and $4.69 per share in both 2017 and 2016 .

Quarterly dividends were paid in the month following the quarter in which they were declared. Dividends declared during 2018 , 2017 and 2016 totaled $94.3 million , $316.9 million and $315.0 million , respectively.

ProAssurance's ability to pay dividends to its shareholders is limited by its holding company structure, to the extent of the net assets held by its insurance subsidiaries, as discussed in Note 18 . Otherwise, there are no other regulatory restrictions on ProAssurance's retained earnings or net income that materially impact its ability to pay dividends. Based on shareholders' equity at December 31, 2018 , total equity of $165.3 million was free of debt covenant restrictions regarding the payment of dividends. However, 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.

As of December 31, 2018 , Board authorizations for the repurchase of common shares or the retirement of outstanding debt of $109.6 million remained available for use. The timing and quantity of purchases depends upon market conditions and changes in ProAssurance's capital requirements and is subject to limitations that may be imposed on such purchases by applicable securities laws and regulations as well as the rules of the NYSE .

Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

For the years ended December 31, 2018 , 2017 and 2016 , OCI was almost entirely comprised of unrealized gains and losses, including non-credit impairment losses, arising during the period related to fixed maturity available-for-sale securities, less reclassification adjustments as shown in the table that follows, net of tax. For the years ended December 31, 2018 and 2017 , OCI included changes related to the reestimation of the defined benefit plan liability assumed in the Eastern acquisition which were nominal in amount. The defined benefit plan is frozen as to the earnings of additional benefits and the benefit plan liability is reestimated annually. For the year ended December 31, 2016 , OCI included $1.0 million of unrecognized losses reclassified to earnings, net of tax, due to the termination of one of the defined benefit plans assumed in the Eastern acquisition.

At December 31, 2018 and 2017 , AOCI was almost entirely comprised of accumulated unrealized gains and losses from fixed maturity available-for-sale securities, including accumulated non-credit impairments recognized through OCI of $0.1 million and $0.5 million , respectively, net of tax. At December 31, 2018 and 2017 , accumulated changes in the defined benefit plan liability not yet recognized in earnings were nominal in amount. Due to the adoption of accounting guidance in the first quarter of 2018 related to certain impacts of the TCJA , ProAssurance increased AOCI by approximately $3.4 million with a corresponding decrease to retained earnings of the same amount as of the beginning of 2018. See Note 1 for additional information on accounting guidance adopted during the period. At December 31, 2018 and 2017 , tax effects were computed using the enacted federal corporate tax rate of 21% and 35% , respectively, with the exception of unrealized gains and losses on available-for-sale securities held at our U.K. and Cayman Islands entities which in both periods were immaterial in amount.

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Amounts reclassified from AOCI to net income and the amounts of deferred tax expense (benefit) included in OCI were as follows:



(In thousands)	2018			2017			2016
Reclassifications from AOCI to net income:
Realized investment gains (losses)	$	274		$	2,512		$	2,417
Non-credit impairment losses reclassified to earnings, due to sale of securities or reclassification as a credit loss	(621		)	(3		)	(3,641		)
Unrecognized losses in defined benefit plan liabilities reclassified to earnings, due to the termination and settlement of the plan	—			—			(1,500		)
Total gains (losses) reclassified, before-tax effect	(347		)	2,509			(2,724		)
Tax effect*	73			(878		)	953
Net reclassification adjustments	$	(274	)	$	1,631		$	(1,771	)

Deferred tax expense (benefit) included in OCI	$	(9,573	)	$	(4,676	)	$	(3,078	)
* Tax effects were computed using a 21% for the year ended December 31, 2018 and a 35% rate for the years ended December 31, 2017 and 2016.

13 . Share-Based Payments

Share-based compensation costs are primarily classified as a component of operating expense.

During 2018 , 2017 and 2016 , ProAssurance provided share-based compensation to employees utilizing three types of awards: restricted share units, performance share units and purchase match units. The awards were made under either the ProAssurance Corporation Amended and Restated 2014 Equity Incentive Plan or the ProAssurance Corporation 2008 Equity Incentive Plan. The Compensation Committee of the Board is responsible for the administration of both plans.

The following table provides a summary of compensation expense and the total related tax benefit recognized during each period as well as estimated compensation cost that will be charged to expense in future periods.



	Share-Based Compensation Expense						Unrecognized Compensation Cost
	Year Ended December 31						December 31, 2018
($ in millions, except remaining recognition period)	2018		2017		2016		Amount		Weighted Average Remaining Recognition Period
Total share-based compensation expense	$	5.3	$	10.6	$	12.5	$	5.9	1.5
Tax benefit recognized	$	1.1	$	3.7	$	4.4

The majority of awards are equity classified awards and are charged to expense as an increase to additional paid-in capital over the service period (generally the vesting period) associated with the award. However, a nominal amount of awards are liability classified awards and are recorded as a liability as they are structured to be settled in cash. As of December 31, 2018 , the majority of share-based compensation expense related to restricted share units. Restricted share and performance share units vest in their entirety at the end of a three -year period following the grant date based on a continuous service requirement and, for performance share units, achievement of a performance objective; partial vesting is permitted for retirees. Purchase match units vest over a three -year period based on a service requirement with partial vesting permitted for all participants. For the restricted share and purchase match units, a single share is issued per vested unit. For performance share units, the number of shares issued per vested unit varies based on performance goals achieved. For equity classified awards, units sufficient to satisfy required tax withholdings are paid in cash rather than in shares. Liability classified awards, which are nominal in amount, are settled in cash at the end of the vesting period.

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Restricted Share Units

Activity for restricted share units during 2018 , 2017 and 2016 is summarized below. Grant date fair values are based on the market value of a ProAssurance common share on the date of grant less the estimated net present value of dividends during the vesting period.



	2018				2017				2016
	Units		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value
Beginning non-vested balance	269,520		$	48.63	240,149		$	44.07	178,468		$	43.13
Granted	85,797		$	44.73	84,565		$	58.35	109,181		$	45.59
Forfeited	(3,878	)	$	50.07	(4,087	)	$	52.35	(5,954	)	$	43.99
Vested and released	(84,116	)	$	42.90	(51,107	)	$	43.01	(41,546	)	$	44.04
Ending non-vested balance	267,323		$	49.16	269,520		$	48.63	240,149		$	44.07

The aggregate grant date fair value of restricted share units vested and released in 2018 , 2017 and 2016 totaled $3.6 million , $2.2 million and $1.8 million , respectively. The aggregate intrinsic value of restricted share units vested and released in 2018 , 2017 and 2016 (including units paid in cash to cover tax withholdings) totaled $4.1 million , $3.1 million and $2.1 million , respectively.

Performance Share Units

Performance share units vest only if minimum performance objectives are met, and the number of units earned varies from 50% to 200% of a base award depending upon the degree to which stated performance objectives are achieved. Performance share unit activity for 2018 , 2017 and 2016 is summarized below. The table reflects the base number of units; actual awards that vest depend upon the extent to which performance objectives are achieved. Grant date fair values are based on the market value of a ProAssurance common share on the date of grant less the estimated net present value of dividends during the vesting period.



	2018				2017				2016
	Base Units		Weighted Average Grant Date Fair Value		Base Units		Weighted Average Grant Date Fair Value		Base Units		Weighted Average Grant Date Fair Value
Beginning non-vested balance	212,105		$	47.11	305,240		$	43.41	390,350		$	44.65
Granted	27,202		$	44.73	48,000		$	58.35	60,000		$	45.59
Forfeited	—		$	—	(227	)	$	42.79	(5,162	)	$	43.02
Vested and released	(104,105	)	$	42.79	(140,908	)	$	42.95	(139,948	)	$	44.05
Ending non-vested balance	135,202		$	49.95	212,105		$	47.11	305,240		$	43.41

The aggregate grant date fair value of performance share units (base level) vested and released in 2018 , 2017 and 2016 totaled $4.5 million , $6.1 million and $6.2 million , respectively. The aggregate intrinsic value of performance share units (base level) vested and released in 2018 , 2017 and 2016 (including units paid in cash to cover tax withholdings) totaled $5.0 million , $8.7 million and $6.9 million , respectively. The weighted average level at which the vested units were issued was 125% , 119% and 98% during 2018 , 2017 and 2016 , respectively, based on performance levels achieved.

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Purchase Match Units

The ProAssurance Corporation 2011 Employee Stock Ownership Plan provides a purchase match unit for each share purchased with contributions by eligible plan participants, with participant contributions subject to a $5,000 annual limit per participant. During 2017, the ProAssurance Corporation 2011 Employee Stock Ownership Plan was discontinued and existing purchase match units will continue to vest according to the vesting period. Purchase match unit activity during 2018 , 2017 and 2016 is summarized below. Grant date fair values are based on the market value of a ProAssurance common share on the date of grant less the estimated net present value of dividends during the vesting period.



	2018				2017				2016
	Units		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value
Beginning non-vested balance	70,292		$	49.40	72,615		$	45.77	74,483		$	42.80
Granted	—		$	—	24,444		$	51.83	23,903		$	50.18
Forfeited	(1,594	)	$	50.19	(2,012	)	$	48.29	(2,875	)	$	43.77
Vested and released	(24,016	)	$	46.28	(24,755	)	$	41.33	(22,896	)	$	40.88
Ending non-vested balance	44,682		$	51.05	70,292		$	49.40	72,615		$	45.77

The aggregate grant date fair value of purchase match units vested and released in 2018 , 2017 and 2016 totaled $1.1 million , $1.0 million and $0.9 million , respectively. The aggregate intrinsic value of purchase match share units vested and released in 2018 , 2017 and 2016 (including units paid in cash to cover tax withholdings) totaled $1.1 million , $1.4 million and $1.2 million , respectively.

Stock Options

ProAssurance also had certain fully-vested employee stock options outstanding during 2016 , as summarized below. ProAssurance had no options exercised during 2018 and 2017 and no outstanding options at December 31, 2018 , 2017 or 2016 .



	2018			2017			2016
	Options	Weighted Average Exercise Price		Options	Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding, vested and exercisable, beginning of year	—	$	—	—	$	—	2,144		$	25.02
Exercised	—	$	—	—	$	—	(2,144	)	$	25.02
Outstanding, vested and exercisable, end of year	—	$	—	—	$	—	—		$	—

The aggregate intrinsic value of options exercised totaled $0.1 million for the year ended December 31, 2016 . There were no cash proceeds from options exercised during the year ended December 31, 2016 .

14 . Variable Interest Entities

ProAssurance holds passive interests in a number of entities that are considered to be VIE s under GAAP guidance. ProAssurance's VIE interests principally consist of interests in LP s/ LLC s formed for the purpose of achieving diversified equity and debt returns. ProAssurance's VIE interests, carried as a part of investment in unconsolidated subsidiaries, totaled $285.8 million at December 31, 2018 and $269.0 million at December 31, 2017 . ProAssurance's VIE interests, carried as a part of other investments, totaled $33.9 million at December 31, 2017 .

ProAssurance does not have power over the activities that most significantly impact the economic performance of these VIE s and thus is not the primary beneficiary. Therefore, ProAssurance has not consolidated these VIE s. ProAssurance’s involvement with each VIE is limited to its direct ownership interest in the VIE . Except for the funding commitments disclosed in Note 9 , ProAssurance has no arrangements with any of the VIE s to provide other financial support to or on behalf of the VIE . At December 31, 2018 , ProAssurance’s maximum loss exposure relative to these investments was limited to the carrying value of ProAssurance’s investment in the VIE .

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15 . Earnings Per Share

Diluted weighted average shares is calculated as basic weighted average shares plus the effect, calculated using the treasury stock method, of assuming that restricted share units, performance share units and purchase match units have vested. The following table provides the weighted average number of common shares outstanding used in the calculation of the Company's basic and diluted earnings per share:



(In thousands, except per share data)	Year Ended December 31
(In thousands, except per share data)	2018		2017			2016
Weighted average number of common shares outstanding, basic	53,598		53,393			53,216
Dilutive effect of securities:
Restricted Share Units	70		85			73
Performance Share Units	63		110			135
Purchase Match Units	18		23			24
Weighted average number of common shares outstanding, diluted	53,749		53,611			53,448
Effect of dilutive shares on earnings per share	$	—	$	(0.01	)	$	(0.01	)

All dilutive common share equivalents are reflected in the earnings per share calculation while antidilutive common share equivalents are not reflected in the earnings per share calculation. The diluted weighted average number of common shares outstanding for the years ended December 31, 2018 and 2017 exclude approximately 2,000 and 7,000 common share equivalents issuable under the Company's stock compensation plans, respectively, as their effect would be antidilutive. There were no common share equivalents that were antidilutive for the year ended December 31, 2016 .

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16 . Segment Information

ProAssurance's segments are based on the Company's internal management reporting structure for which financial results are regularly evaluated by the Company's CODM to determine resource allocation and assess operating performance. The Company continually assesses its internal management reporting structure and information evaluated by the CODM to determine whether any changes have occurred that would impact its segment reporting structure.

Segment Reorganization

During the third quarter of 2018, ProAssurance altered its internal management reporting structure and the financial results evaluated by its CODM ; therefore, ProAssurance changed its operating segments to align with how the CODM currently oversees the business, allocates resources and evaluates operating performance. As a result of the segment reorganization, ProAssurance added an operating and reportable segment: Segregated Portfolio Cell Reinsurance.

The Segregated Portfolio Cell Reinsurance segment provides the operating results of SPC s that assume workers’ compensation insurance, healthcare professional liability insurance or a combination of the two. The underwriting results of the SPC s that assume workers’ compensation business and healthcare professional liability business were previously reported in the Company's Workers’ Compensation and Specialty P&C segments, respectively, and the results of investment assets solely allocated to SPC operations, previously reported in the Company's Corporate segment, are now reported in the Segregated Portfolio Cell Reinsurance segment. The Workers' Compensation segment has also been renamed "Workers' Compensation Insurance." All prior period segment information has been recast to conform to the current period presentation. The segment reorganization had no impact on previously reported consolidated financial results.

Descriptions of ProAssurance's five operating and reportable segments are as follows:

Specialty P&C is primarily focused on professional liability insurance and medical technology liability insurance. Professional liability insurance is primarily offered to healthcare providers and institutions and 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. Prior to 2018, the Specialty P&C segment ceded certain premium to the Lloyd's Syndicates segment under a quota share agreement with Syndicate 1729 ; however, this agreement was not renewed on January 1, 2018. As discussed below, the Lloyd's Syndicates segment results are typically reported on a quarter delay. For consistency purposes, results from this ceding arrangement, other than cash receipts or disbursements, are reported within the Specialty P&C segment on the same one-quarter delay. Additionally, the Specialty P&C segment cedes healthcare professional liability business to certain SPC s in the Company's Segregated Portfolio Cell Reinsurance segment.

Workers' Compensation Insurance provides workers' compensation products primarily to employers with 1,000 or fewer employees. The segment's products include guaranteed cost, policyholder dividend policies, retrospectively-rated policies, deductible polices and alternative market solutions. Alternative market products include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Alternative market premiums are 100% ceded to either SPC s in the Company's Segregated Portfolio Cell Reinsurance segment or, to a limited extent, to captive insurers unaffiliated with ProAssurance.

Segregated Portfolio Cell Reinsurance reflects the operating results (underwriting profit or loss, plus investment results) of SPC s at Eastern Re and Inova Re , the Company's Cayman Islands SPC operations. The SPC s assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from the Workers' Compensation Insurance and Specialty P&C segments. Each SPC is owned, fully or in part, by an agency, group or association and the operating results of the SPC s are due to the participants of that cell. ProAssurance participates to a varying degree in the results of selected SPC s. SPC operating results due to external cell participants are reflected as a SPC dividend expense in the Segregated Portfolio Cell Reinsurance segment and in ProAssurance's Consolidated Statements of Income and Comprehensive Income. In addition, the Segregated Portfolio Cell Reinsurance segment includes the SPC investment results as the investments are solely for the benefit of the cell participants and investment results due to external cell participants are reflected in the SPC dividend expense. The segment operating results reflects ProAssurance's share of the underwriting and investment results of the SPC s in which ProAssurance participates.

During the first quarter of 2018, ProAssurance restructured its Cayman Islands SPC operations. Beginning in 2018, all new and renewing alternative market business previously ceded to the SPC s at Eastern Re , with the exception of one program, is now ceded to SPC s operated by a newly formed wholly owned Cayman Islands subsidiary, Inova Re . As part of the restructuring, all SPC s previously operated by Eastern Re , with the exception of one program, ceased assuming new and renewing business on or after January 1, 2018. The external cell participants' cumulative undistributed earnings and the results of all SPC s for the current period due to external cell participants continue to be reported as SPC dividends payable and SPC dividend expense, respectively.

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Notes to Consolidated Financial Statements

December 31, 2018

Lloyd's Syndicates includes operating results from ProAssurance's participation in Lloyd's of London Syndicate 1729 and Syndicate 6131 , which is a SPA that began writing business effective January 1, 2018. The results of this segment are normally reported on a quarter delay, except when information is available that is material to the current period. Furthermore, investment results associated with the majority of investment assets solely allocated to Lloyd's Syndicate operations and certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame. Beginning in 2018, ProAssurance increased its participation in the operating results of Syndicate 1729 from 58% to 62% and began its 100% participation in the operating results of Syndicate 6131 ; however, due to the quarter delay these changes were not reflected in the Lloyd's Syndicates segment results until the second quarter of 2018. Syndicate 1729 underwrites risks over a wide range of property and casualty insurance and reinsurance lines in both the U.S. and international markets. Syndicate 6131 focuses on contingency and specialty property business, also within the U.S. and international markets.

Corporate includes ProAssurance's investment operations, other than those reported in the Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. The segment also includes non-premium revenues generated outside of the Company's insurance entities and corporate expenses.

The accounting policies of the segments are described in Note 1 . ProAssurance evaluates the performance of its Specialty P&C and Workers' Compensation Insurance segments based on before tax underwriting profit or loss, which excludes investment performance. ProAssurance evaluates the performance of its Segregated Portfolio Cell Reinsurance segment based on before tax operating profit or loss, which includes the investment performance of assets solely allocated to SPC operations. Performance of the Lloyd's Syndicates segment is evaluated based on underwriting profit or loss, plus investment results of investment assets solely allocated to Lloyd's Syndicate operations, net of U.K. income tax expense. Performance of the Corporate segment is evaluated based on the contribution made to consolidated after-tax results. ProAssurance accounts for inter-segment transactions as if the transactions were to third parties at current market prices. Assets are not allocated to segments because investments, other than the investments discussed above that are solely allocated to the Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, and other assets are not managed at the segment level.

Financial results by segment were as follows:



	Year Ended December 31, 2018
(In thousands)	Specialty P&C			Workers' Compensation Insurance			Segregated Portfolio Cell Reinsurance			Lloyd's Syndicates			Corporate			Inter-segment Eliminations			Consolidated
Net premiums earned	$	491,787		$	186,079		73,940			$	67,047		$	—		$	—		$	818,853
Net investment income	—			—			1,566			3,358			86,960			—			91,884
Equity in earnings (loss) of unconsolidated subsidiaries	—			—			—			—			8,948			—			8,948
Net realized gains (losses)	—			—			(3,149		)	(460		)	(39,879		)	—			(43,488		)
Other income (expense) ⁽¹⁾	5,844			2,412			211			322			3,525			(2,481		)	9,833
Net losses and loss adjustment expenses	(384,431		)	(118,483		)	(38,726		)	(51,570		)	—			—			(593,210		)
Underwriting, policy acquisition and operating expenses ⁽¹⁾	(112,419		)	(55,693		)	(22,426		)	(31,686		)	(18,767		)	2,435			(238,556		)
Segregated portfolio cells dividend (expense) income	—			—			(9,122		)	—			—			—			(9,122		)
Interest expense	—			—			—			—			(16,163		)	46			(16,117		)
Income tax benefit (expense)	—			—			—			317			17,715			—			18,032
Segment operating results	$	781		$	14,315		$	2,294		$	(12,672	)	$	42,339		$	—		$	47,057
Significant non-cash items:
Depreciation and amortization, net of accretion	$	7,050		$	3,850		$	441		$	(8	)	$	9,922		$	—		$	21,255

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Notes to Consolidated Financial Statements

December 31, 2018



	Year Ended December 31, 2017
(In thousands)	Specialty P&C			Workers' Compensation Insurance			Segregated Portfolio Cell Reinsurance			Lloyd's Syndicates			Corporate			Inter-segment Eliminations			Consolidated
Net premiums earned	$	449,823		$	163,309		$	68,197		$	57,202		$	—		$	—		$	738,531
Net investment income	—			—			1,059			1,736			92,867			—			95,662
Equity in earnings (loss) of unconsolidated subsidiaries	—			—			—			—			8,033			—			8,033
Net realized gains (losses)	—			—			3,914			107			12,388			—			16,409
Other income (expense) ⁽¹⁾	5,688			2,096			115			(1,476		)	2,888			(1,797		)	7,514
Net losses and loss adjustment expenses	(285,250		)	(102,233		)	(37,455		)	(44,220		)	—			—			(469,158		)
Underwriting, policy acquisition and operating expenses ⁽¹⁾	(107,972		)	(52,576		)	(20,764		)	(26,963		)	(29,275		)	1,797			(235,753		)
Segregated portfolio cells dividend (expense) income ⁽²⁾	(5,181		)	—			(10,590		)	—			—			—			(15,771		)
Interest expense	—			—			—			—			(16,844		)	—			(16,844		)
Income tax benefit (expense) ⁽²⁾	—			—			—			568			(21,927		)	—			(21,359		)
Segment operating results	$	57,108		$	10,596		$	4,476		$	(13,046	)	$	48,130		$	—		$	107,264
Significant non-cash items:
Depreciation and amortization, net of accretion	$	7,922		$	3,480		$	680		$	(20	)	$	16,734		$	—		$	28,796



	Year Ended December 31, 2016
(In thousands)	Specialty P&C			Workers' Compensation Insurance			Segregated Portfolio Cell Reinsurance			Lloyd's Syndicates			Corporate			Inter-segment Eliminations			Consolidated
Net premiums earned	$	454,506		$	161,988		$	62,137		$	54,650		$	—		$	—		$	733,281
Net investment income	—			—			711			1,410			97,891			—			100,012
Equity in earnings (loss) of unconsolidated subsidiaries	—			—			—			—			(5,762		)	—			(5,762		)
Net realized gains (losses)	—			—			2,525			76			32,274			—			34,875
Other income (expense) ⁽¹⁾	5,306			2,218			18			1,415			1,069			(2,218		)	7,808
Net losses and loss adjustment expenses	(266,090		)	(107,791		)	(35,232		)	(34,116		)	—			—			(443,229		)
Underwriting, policy acquisition and operating expenses ⁽¹⁾	(103,656		)	(53,597		)	(18,936		)	(22,832		)	(30,807		)	2,218			(227,610		)
Segregated portfolio cells dividend (expense) income	—			—			(8,142		)	—			—			—			(8,142		)
Interest expense	—			—			—			—			(15,032		)	—			(15,032		)
Income tax benefit (expense)	—			—			—			(384		)	(24,736		)	—			(25,120		)
Segment operating results	$	90,066		$	2,818		$	3,081		$	219		$	54,897		$	—		$	151,081
Significant non-cash items:
Depreciation and amortization, net of accretion	$	7,268		$	5,600		$	595		$	132		$	19,194		$	—		$	32,789
⁽¹⁾ As a result of the third quarter 2018 segment reorganization, certain fees for services provided to the SPCs at Eastern Re and Inova Re are recorded as expenses within the Segregated Portfolio Cell Reinsurance segment and as other income within the Workers' Compensation Insurance segment. These fees are eliminated between segments in consolidation. These services primarily include SPC rental fees and were previously eliminated within the Company's Workers' Compensation segment.
⁽²⁾ During 2017, ProAssurance recognized a $5.2 million pre-tax expense related to previously unrecognized SPC dividend expense for the cumulative earnings of unrelated parties that have owned segregated portfolio cells at various periods since 2003 in a Bermuda captive insurance operation managed by the Company's HCPL line of business within the Specialty P&C segment. The expense recorded in 2017 related to periods prior to the then current period and was unrelated to the Company's Cayman Islands captive operations. The $1.8 million tax impact of the expense recognized in 2017 was included in the Corporate segment's income tax benefit (expense).

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Notes to Consolidated Financial Statements

December 31, 2018

The following table provides detailed information regarding ProAssurance's gross premiums earned by product as well as a reconciliation to net premiums earned. All gross premiums earned are from external customers except as noted. ProAssurance's insured risks are primarily within the U.S.



	Year Ended December 31
(In thousands)	2018			2017			2016
Specialty P&C Segment
Gross premiums earned:
Healthcare professional liability	$	518,303		$	477,561		$	474,981
Legal professional liability	26,094			25,771			26,125
Medical technology liability	35,157			33,836			34,158
Other	468			415			667
Ceded premiums earned	(88,235		)	(87,760		)	(81,425		)
Segment net premiums earned	491,787			449,823			454,506

Workers' Compensation Insurance Segment
Gross premiums earned:
Traditional business	199,466			173,246			171,434
Alternative market business	83,508			80,698			75,658
Ceded premiums earned	(96,895		)	(90,635		)	(85,104		)
Segment net premiums earned	186,079			163,309			161,988

Segregated Portfolio Cell Reinsurance Segment
Gross premiums earned:
Workers' compensation ⁽¹⁾	78,255			72,814			66,899
Healthcare professional liability ⁽²⁾	5,009			4,097			3,310
Ceded premiums earned	(9,324		)	(8,714		)	(8,072		)
Segment net premiums earned	73,940			68,197			62,137

Lloyd's Syndicates Segment
Gross premiums earned:
Property and casualty ⁽³⁾	83,307			69,749			60,564
Ceded premiums earned	(16,260		)	(12,547		)	(5,914		)
Segment net premiums earned	67,047			57,202			54,650

Consolidated net premiums earned	$	818,853		$	738,531		$	733,281

⁽¹⁾ Premium for all periods is assumed from the Workers' Compensation Insurance segment.

⁽²⁾ Premium for all periods is assumed from the Specialty P&C segment.

⁽³⁾ Includes premium assumed from the Specialty P&C segment of $5.0 million , $11.8 million and $14.0 million for years ended December 31, 2018 , 2017 and 2016 , respectively.

17 . Benefit Plans

ProAssurance maintains the ProAssurance Savings Plan that is intended to provide retirement income to eligible employees. ProAssurance provides employer contributions to the plan of up to 10% of salary for qualified employees. ProAssurance incurred expense related to the ProAssurance Savings Plan of $7.0 million , $7.8 million and $6.9 million during the years ended December 31, 2018 , 2017 and 2016 , respectively.

ProAssurance also maintains the ProAssurance Plan that allows participating management employees to defer a portion of their current salary. ProAssurance incurred expense related to the ProAssurance Plan of $0.3 million during each of the years ended December 31, 2018 , 2017 and 2016. ProAssurance deferred compensation liabilities totaled $21.3 million and $20.5

million at December 31, 2018 and 2017 , respectively. The liabilities included amounts due under the ProAssurance Plan and amounts due under individual agreements with current or former employees.

18 . Statutory Accounting and Dividend Restrictions

ProAssurance’s domestic U.S. insurance subsidiaries are required to file statutory financial statements with state insurance regulatory authorities, prepared based upon SAP prescribed or permitted by regulatory authorities. ProAssurance did not use any prescribed or permitted SAP that differed from the NAIC 's SAP at December 31, 2018 , 2017 or 2016 . Differences between net income prepared in accordance with GAAP and statutory net income are principally due to: (a) policy acquisition and certain software and equipment costs which are deferred under GAAP but expensed for statutory purposes and (b) certain deferred income taxes which are recognized under GAAP but are not recognized for statutory purposes.

The NAIC specifies risk-based capital requirements for property and casualty insurance providers. At December 31, 2018 , actual statutory capital and surplus for each of ProAssurance’s insurance subsidiaries substantially exceeded the regulatory requirements. Net earnings and capital and surplus of ProAssurance’s insurance subsidiaries on a statutory basis are shown in the following table.



(In millions)
Statutory Net Earnings			Statutory Capital and Surplus
2018	2017	2016	2018	2017
$135	$139	$163	$1,041	$1,175

At December 31, 2018 , $1.3 billion of ProAssurance's consolidated net assets were held at its domestic insurance subsidiaries, of which approximately $128 million are permitted to be paid as dividends over the course of 2019 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 prevent the dividend if, in its judgment, payment of the dividend would have an adverse effect on the capital and surplus of the insurance subsidiary.

19 . Quarterly Results of Operations (unaudited)

The following is a summary of unaudited quarterly results of operations for 2018 and 2017 :



	2018*
(In thousands, except per share data)	1st			2nd			3rd			4th
Net premiums earned	$	187,159		$	223,591		$	206,070		$	202,033
Net losses and loss adjustment expenses:
Current year	$	152,572		$	184,543		$	169,154		$	179,056
Favorable development of reserves established in prior years, net	$	(22,786	)	$	(22,815	)	$	(21,549	)	$	(24,967	)
Net income (loss)	$	11,856		$	28,423		$	31,228		$	(24,450	)
Basic earnings per share	$	0.22		$	0.53		$	0.58		$	(0.46	)
Diluted earnings per share	$	0.22		$	0.53		$	0.58		$	(0.46	)

	2017*
(In thousands, except per share data)	1st			2nd			3rd			4th
Net premiums earned	$	182,903		$	180,353		$	192,303		$	182,972
Net losses and loss adjustment expenses:
Current year	$	147,927		$	144,562		$	161,631		$	149,399
Favorable development of reserves established in prior years, net	$	(28,776	)	$	(29,012	)	$	(32,275	)	$	(44,297	)
Net income (loss)	$	41,455		$	19,518		$	28,949		$	17,342
Basic earnings per share	$	0.78		$	0.37		$	0.54		$	0.32
Diluted earnings per share	$	0.77		$	0.36		$	0.54		$	0.32
*Due to rounding, the sum of quarterly amounts may not equal the total amount for the respective year-to-date periods

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Schedule I -- Summary of Investments -- Other than Investments in Related Parties

(In thousands)



	December 31, 2018
Type of Investment	Recorded Cost Basis		Fair Value		Amount Which is Presented in the Balance Sheet
Fixed maturities
Bonds:
U.S. Government or government agencies and authorities	$	171,770	$	170,154	$	170,154
States, municipalities and political subdivisions	289,544		293,772		293,772
Foreign governments	30,318		29,892		29,892
Public utilities	76,735		76,059		76,059
All other corporate bonds	1,160,474		1,140,356		1,140,356
Certificates of deposit	100		100		100
Mortgage-backed securities	426,329		421,653		421,653
Total Fixed Maturities	2,155,270		2,131,986		2,131,986
Equity Securities
Common Stocks:
Public utilities	7,553		9,177		9,177
Banks, trusts and insurance companies	64,148		62,344		62,344
Industrial, miscellaneous and all other	379,230		371,416		371,416
Total Equity Securities, trading	450,931		442,937		442,937
Other long-term investments	352,654		466,140		466,140
Short-term investments	308,367		308,319		308,319
Total Investments	$	3,267,222	$	3,349,382	$	3,349,382

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Schedule II – Condensed Financial Information of Registrant

Condensed Balance Sheet

(In thousands)



	December 31, 2018		December 31, 2017
Assets
Investment in subsidiaries, at equity	$	1,599,486	$	1,713,656
Fixed maturities available for sale, at fair value	78,076		155,094
Short-term investments	76,347		268,181
Investment in unconsolidated subsidiaries	875		1,200
Cash and cash equivalents	25,757		81,009
Due from subsidiaries	—		2,666
Other assets	45,683		33,829
Total Assets	$	1,826,224	$	2,255,635
Liabilities and Shareholders’ Equity
Liabilities:
Due to subsidiaries	$	4,067	$	—
Dividends payable	43,446		267,292
Other liabilities	6,823		22,008
Debt less debt issuance costs	248,886		371,540
Total Liabilities	303,222		660,840
Shareholders’ Equity:
Common stock	630		628
Other shareholders’ equity, including unrealized gains (losses) on securities of subsidiaries	1,522,372		1,594,167
Total Shareholders’ Equity	1,523,002		1,594,795
Total Liabilities and Shareholders’ Equity	$	1,826,224	$	2,255,635

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Schedule II – Condensed Financial Information of Registrant

Condensed Statements of Income

(In thousands)



	Year Ended December 31
	2018			2017			2016
Revenues
Net investment income	$	3,495		$	7,646		$	6,359
Equity in earnings (loss) of unconsolidated subsidiaries	(325		)	(137		)	(155		)
Net realized investment gains (losses)	(789		)	(8,606		)	405
Other income (loss)	977			921			(960		)
Total revenues	3,358			(176		)	5,649
Expenses
Interest expense	14,844			16,440			15,030
Other expenses	17,092			26,351			28,305
Total expenses	31,936			42,791			43,335
Income (loss) before income tax expense (benefit) and equity in net income of consolidated subsidiaries	(28,578		)	(42,967		)	(37,686		)
Income tax expense (benefit)	(7,142		)	(13,293		)	(12,583		)
Income (loss) before equity in net income of consolidated subsidiaries	(21,436		)	(29,674		)	(25,103		)
Equity in net income of consolidated subsidiaries	68,493			136,938			176,184
Net income	47,057			107,264			151,081
Other comprehensive income (loss)	(35,238		)	(2,488		)	(6,456		)
Comprehensive income	$	11,819		$	104,776		$	144,625

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Schedule II – Condensed Financial Information of Registrant

Condensed Statements of Cash Flow

(In thousands)



	Year Ended December 31
	2018			2017			2016
Net cash provided (used) by operating activities	$	27,981		$	67,779		$	41,356
Investing activities
(Investments in) distributions from unconsolidated subsidiaries, net:
Other partnership investments	—			—			(1,000		)
Proceeds from sales or maturities of:
Fixed maturities, available for sale	169,822			295,035			100,240
Net decrease (increase) in short-term investments	194,035			11,811			(262,169		)
Dividends from subsidiaries	29,395			99,694			70,125
Contribution of capital to subsidiaries	—			—			(1,983		)
Unsettled security transactions, net of change	—			1,100			(1,100		)
Funds (advanced) repaid for Lloyd's FAL deposit	(21,576		)	(25,449		)	—
Funds (advanced) repaid under Syndicate Credit Agreement	(11,232		)	(6,883		)	1,695
Funds (advanced) repaid under a business investment line of credit	—			(4,066		)	(3,090		)
Other	330			(2,276		)	(2,805		)
Net cash provided (used) by investing activities	360,774			368,966			(100,087		)
Financing activities
Borrowings (repayments) under Revolving Credit Agreement	(123,000		)	(77,000		)	100,000
Repurchase of common stock	—			—			(2,106		)
Subsidiary payments for common shares and share-based compensation awarded to subsidiary employees	1,154			12,030			11,384
Dividends to shareholders	(316,476		)	(315,228		)	(118,812		)
Other	(5,685		)	(6,868		)	(3,697		)
Net cash provided (used) by financing activities	(444,007		)	(387,066		)	(13,231		)
Increase (decrease) in cash and cash equivalents	(55,252		)	49,679			(71,962		)
Cash and cash equivalents at beginning of period	81,009			31,330			103,292
Cash and cash equivalents at end of period	$	25,757		$	81,009		$	31,330

Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes, net of refunds	$	4,966		$	17,193		$	(8,519	)
Cash paid during the year for interest	$	14,777		$	15,892		$	14,732

Significant non-cash transactions:
Dividends declared and not yet paid	$	43,446		$	267,292		$	265,659
Securities transferred at fair value as dividends from subsidiaries	$	98,292		$	190,709		$	174,270

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Schedule II – Condensed Financial Information of Registrant

Note to Condensed Financial Statements of Registrant

Basis of Presentation

The registrant-only financial statements should be read in conjunction with ProAssurance Corporation’s Consolidated Financial Statements and Notes thereto.

At December 31, 2018 and 2017 , PRA investment in subsidiaries is stated at the initial consolidation value plus equity in the undistributed earnings of subsidiaries since the date of acquisition.

ProAssurance Corporation has a management agreement with several of its insurance subsidiaries whereby ProAssurance Corporation charges the subsidiaries a management fee for various management services provided to the subsidiary. Under the arrangement, the expenses associated with such services remain as expenses of ProAssurance Corporation and the management fee charged is reported as an offset to ProAssurance Corporation expenses. Prior to 2015, a substantial portion of expenses associated with services provided to insurance subsidiaries were directly allocated or directly charged to the insurance subsidiaries.

Reclassifications

Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, ProAssurance Corporation adopted ASU 2016-15 which provides guidance related to the classification of certain cash receipts and cash payments presented in the statement of cash flows. As a result of the adoption, ProAssurance Corporation reclassified approximately $24.4 million and $9.9 million in distributions from unconsolidated subsidiaries from investing activities to operating activities in the registrant-only Condensed Statements of Cash Flow for the years ended December 31, 2017 and 2016 , respectively. See Note 1 of the Notes to Consolidated Financial Statements for additional information.

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Schedule III – Supplementary Insurance Information

(In thousands)



	2018			2017			2016
Net premiums earned
Specialty P&C	$	491,787		$	449,823		$	454,506
Workers' Compensation Insurance	186,079			163,309			161,988
Segregated Portfolio Cell Reinsurance	73,940			68,197			62,137
Lloyd's Syndicates	67,047			57,202			54,650
Consolidated	$	818,853		$	738,531		$	733,281
Net investment income ⁽¹⁾
Segregated Portfolio Cell Reinsurance	$	1,566		$	1,059		$	711
Lloyd's Syndicates	3,358			1,736			1,410
Corporate	86,960			92,867			97,891
Consolidated	$	91,884		$	95,662		$	100,012
Losses and loss adjustment expenses incurred related to current year, net of reinsurance
Specialty P&C	$	461,516		$	404,543		$	403,249
Workers' Compensation Insurance	126,534			107,975			109,342
Segregated Portfolio Cell Reinsurance	47,693			45,968			39,801
Lloyd's Syndicates	49,583			45,032			34,615
Consolidated	$	685,326		$	603,518		$	587,007
Losses and loss adjustment expenses incurred related to prior year, net of reinsurance
Specialty P&C	$	(77,085	)	$	(119,293	)	$	(137,159	)
Workers' Compensation Insurance	(8,051		)	(5,742		)	(1,551		)
Segregated Portfolio Cell Reinsurance	(8,967		)	(8,513		)	(4,569		)
Lloyd's Syndicates	1,987			(812		)	(499		)
Consolidated	$	(92,116	)	$	(134,360	)	$	(143,778	)
Paid losses and loss adjustment expenses, net of reinsurance
Specialty P&C	$	354,221		$	320,776		$	341,189
Workers' Compensation Insurance	108,742			96,734			89,418
Segregated Portfolio Cell Reinsurance	29,320			28,761			27,391
Lloyd's Syndicates	37,496			29,926			21,254
Inter-segment eliminations	200			118			—
Consolidated	$	529,979		$	476,315		$	479,252
Amortization of DPAC
Specialty P&C	$	52,253		$	47,615		$	44,344
Workers' Compensation Insurance	16,864			14,551			13,273
Segregated Portfolio Cell Reinsurance	21,039			19,927			18,385
Lloyd's Syndicate	15,913			15,194			13,769
Inter-segment eliminations	(1,568		)	(1,536		)	(1,393		)
Consolidated	$	104,501		$	95,751		$	88,378
Other underwriting, policy acquisition and operating expenses
Specialty P&C	$	60,166		$	60,357		$	59,312
Workers' Compensation Insurance	38,829			38,025			40,324
Segregated Portfolio Cell Reinsurance	1,387			837			551
Lloyd's Syndicates	15,773			11,769			9,063
Corporate	18,767			29,275			30,807
Inter-segment eliminations	(867		)	(261		)	(825		)
Consolidated	$	134,055		$	140,002		$	139,232
Continued on the following page.

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ProAssurance Corporation and Subsidiaries

Schedule III – Supplementary Insurance Information

(In thousands)



	2018		2017		2016
Continued from previous page
Net premiums written
Specialty P&C	$	494,148	$	466,621	$	454,718
Workers' Compensation Insurance	195,350		173,566		163,513
Segregated Portfolio Cell Reinsurance	75,547		68,862		64,028
Lloyd's Syndicates	69,869		54,969		56,274
Consolidated	$	834,914	$	764,018	$	738,533
Deferred policy acquisition costs ⁽¹⁾	$	54,116	$	50,261	$	46,809
Reserve for losses and loss adjustment expenses ⁽¹⁾	$	2,119,847	$	2,048,381	$	1,993,428
Unearned premiums ⁽¹⁾	$	415,211	$	398,884	$	372,563

⁽¹⁾ Assets are not allocated to segments because investments and assets are not managed at the segment level.

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ProAssurance Corporation and Subsidiaries

Schedule IV - Reinsurance

($ in thousands)



	2018			2017			2016
Property and Liability *
Premiums earned	$	903,354		$	821,249		$	790,791
Premiums ceded	(126,036		)	(110,347		)	(95,315		)
Premiums assumed	41,535			27,629			37,805
Net premiums earned	$	818,853		$	738,531		$	733,281
Percentage of amount assumed to net	5.07%			3.74%			5.16%
* All of ProAssurance’s premiums are related to property and liability coverages.

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EXHIBIT INDEX



Exhibit Number		Description

2		Schedules to the following documents are omitted; the contents of the schedules are generally described in the documents; and ProAssurance will upon request furnish to the Commission supplementally a copy of any omitted schedule

2.2		Agreement and Plan of Merger by and among ProAssurance Corporation, PA Merger Company and Eastern Insurance Holdings, Inc., dated September 23, 2013, filed as an Exhibit to ProAssurance's Current Report on Form 8-K for event occurring September 24, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

3.1(a)		Certificate of Incorporation of ProAssurance, filed as an Exhibit to ProAssurance’s Registration Statement on Form S-4 (File No. 333-49378) and incorporated herein by reference pursuant to SEC Rule 12b-32.

3.1(b)		Certificate of Amendment to Certificate of Incorporation of ProAssurance, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

3.2		Fourth Restatement of the Bylaws of ProAssurance, effective December 2, 2015, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

4.1		Indenture, dated November 21, 2013, between ProAssurance and Wilmington Trust Company, filed as an Exhibit to ProAssurance's Current Report on Form 8-K for event occurring November 21, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

4.2		First Supplemental Indenture, dated November 21, 2013, between ProAssurance and Wilmington Trust Company relating to the $250,000 5.30% Senior Notes due 2023, filed as an Exhibit to ProAssurance's Current Report on Form 8-K for event occurring November 21, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

		ProAssurance will file with the Commission upon request pursuant to the requirements of Item 601 (b)(4) of Regulation S-K documents defining rights of holders of ProAssurance’s long-term indebtedness that has not been registered. See also the documents related to long-term indebtedness filed as material contracts under Exhibits 10.10(a), (b), (c), (d), (e) and (f) to this Form 10-K.

10.1		Form of Release and Severance Compensation Agreement dated as of January 1, 2008 between ProAssurance and each of the following named executive officers:*
		Howard H. Friedman Dana S. Hendricks Jeffrey P. Lisenby Frank B. O’Neil Edward L. Rand Jr.
		Filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC Rule 12b-32.

10.2		Employment Agreement between ProAssurance and W. Stancil Starnes dated as of May 1, 2007, filed as an Exhibit to ProAssurance’s Current Report on Form 8-K for the event occurring May 12, 2007 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*

10.2(a)		Amendment to Employment Agreement with W. Stancil Starnes (May 1, 2007), effective as of January 1, 2008, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC Rule 12b-32.*

10.2(b)		Amendment to Employment Agreement with W. Stancil Starnes (May 1, 2007), effective as of June 1, 2015, filed as an Exhibit to ProAssurance's Current Report on Form 8-K dated May 27, 2015 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC Rule 12b-32.*

10.2(c)		Amendment to Employment Agreement with W. Stancil Starnes (May 1, 2007), effective as of June 1, 2017, filed as an Exhibit to ProAssurance's Current Report on Form 8-K dated May 31, 2017 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC Rule 12b-32.*

10.3		Form of Release and Severance Compensation Agreement dated as of September 1, 2011 between ProAssurance and Ross E. Taubman, filed as an Exhibit to ProAssurance’s Definitive Proxy Statement (File No. 001-16533) on April 11, 2008 and incorporated herein by reference pursuant to SEC Rule 12b-32.*

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10.4		Form of Indemnification Agreement between ProAssurance and each of the following named executive officers and directors of ProAssurance*:
		Bruce D. Angiolillo Michael L. Boguski Samuel A. Di Piazza, Jr. Robert E. Flowers Howard H. Friedman M. James Gorrie Ziad R. Haydar Jeffrey P. Lisenby John J. McMahon Frank B. O’Neil Katisha T. Vance Edward L. Rand, Jr. Frank A. Spinosa W. Stancil Starnes Ross E. Taubman Thomas A. S. Wilson, Jr.
		Filed as an Exhibit to ProAssurance’s Definitive Proxy Statement (File No. 001-16533) on April 11, 2008 and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.5		ProAssurance Group Employee Benefit Plan which includes the Executive Supplemental Life Insurance Program (Article VIII), filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*

10.6		Amendment and Restatement of the Executive Non-Qualified Excess Plan and Trust effective January 1, 2008, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC Rule 12b-32.*

10.7		Director Deferred Compensation Plan as amended and restated December 7, 2011, filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*

10.7(a)		Amendment No. 1 to the Amended and Restated Director Deferred Compensation Plan dated May 22, 2013, filed as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*

10.8		Revolving Credit Agreement, dated April 15, 2011, between ProAssurance and U.S. Bank National Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to ProAssurance’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.8(a)		Amendment No. 1 to Revolving Credit Agreement between ProAssurance and U.S. Bank National Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.8(b)		Amendment No. 2 to Revolving Credit Agreement between ProAssurance and U.S. Bank National Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to ProAssurance's Current Report on Form 8-K for event occurring November 8, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.8(c)		Form of the Augmenting Lender Supplement to Revolving Credit Agreement between ProAssurance and U.S. Bank National Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the quarter ending June 30, 2014 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.8(d)		Copy of the Augmenting Lender Supplement to Revolving Credit Agreement between ProAssurance and U.S. Bank N.A., Wells Fargo Bank, N.A., Branch Banking and Trust Company, First Tennessee Bank, N.A., Key Bank, Cadence Bank, N.A., and Regions Bank, N.A., dated June 19, 2015, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

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10.8(e)		Amendment No. 5 to Revolving Credit Agreement between ProAssurance and U.S. Bank National Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to ProAssurance's to ProAssurance’s Annual Report on Form 10-K for the Year ended December 31, 2017 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.9		Pledge and Security Agreement between ProAssurance and U.S. Bank National Association, filed as an Exhibit to ProAssurance’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.10		ProAssurance Corporation Amended and Restated 2014 Equity Incentive Plan, filed as an Exhibit to ProAssurance’s Current Report on Form 8-K for event occurring May 14, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*

10.11		ProAssurance Corporation 2014 Annual Incentive Plan, filed as an Exhibit to ProAssurance’s Definitive Proxy Statement (File No. 001-16533) filed on May 22, 2013 and incorporated herein by reference pursuant to SEC Rule 12b-32.*

10.13		Facility Agreement between ProAssurance and the Premiums Trust Fund of Syndicate 1729, filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.13(a)		Amendment to Facility Agreement effective April 6, 2016, between ProAssurance and the Premiums Trust Fund of Syndicate 1729 filed as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.14		Retention and Severance Compensation Agreement effective January 1, 2014, between ProAssurance and Michael L. Boguski, filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*

10.15		Mortgage Agreement, dated December 11, 2017, between ProAssurance Indemnity Company, Inc. and First Tennessee Bank National Association, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.16		Mortgage Agreement, dated December 11, 2017, between Podiatry Insurance Company of America and First Tennessee Bank National Association, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the Year ended December 31, 2017 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

10.17		Interest Rate Cap Agreement, dated October 23, 2017, between Podiatry Insurance Company of America and First Tennessee Bank National Association, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the Year ended December 31, 2017 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.

21.1		Subsidiaries of ProAssurance Corporation

23.1		Consent of Ernst & Young LLP

31.1		Certification of Principal Executive Officer of ProAssurance as required under SEC Rule 13a-14(a)

31.2		Certification of Principal Financial Officer of ProAssurance as required under SEC Rule 13a-14(a)

32.1		Certification of Principal Executive Officer of ProAssurance as required under SEC Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as amended (18 U.S.C. 1350)

32.2		Certification of Principal Financial Officer of ProAssurance as required under SEC Rule 13a-14(b) and 18 U.S.C. 1350

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
* Denotes a management contract or compensatory plan, contract or arrangement required to be filed as an Exhibit to this report.

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Part I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures Part II Item 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities Item 6. Selected Financial Data Item 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Part III Item 10. Directors, Executive Officers and Corporate Governance Of The Registrant Item 11. Executive Compensation Item 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services Part IV Item 15. Exhibits and Financial Statement Schedules

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Smaller reporting company

Emerging growth company