10-Q 1 pra-20150331x10q.htm 10-Q PRA-2015.03.31-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2015 or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to                          
Commission file number 0-16533
ProAssurance Corporation
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
63-1261433
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS 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)
(Former Name, Former Address, and Former
Fiscal Year, if Changed Since Last Report)
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
ý
 
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of April 30, 2015, there were 55,014,196 shares of the registrant’s common stock outstanding.




Forward-Looking Statements
Any statements in this Form 10-Q 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 certain risks 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-Q 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;
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 rate environment;
Ÿ
changes in U.S. laws or government regulations regarding financial markets or market activity that may affect the U.S. economy and 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 Financial Accounting Standards Board, the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), or the New York Stock Exchange (NYSE) and 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, including changes attributable to the Patient Protection and Affordable Care Act (the Affordable Care Act);
Ÿ
consolidation of our insureds into or under larger entities which may be insured by competitors, 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;
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;

2


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
assessments from guaranty funds;
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 and key agents; increased operating costs or inability to achieve cost savings; and assumption of greater than expected liabilities, among other reasons.
Additional risks that could arise from our membership in the Lloyd's of London market (Lloyd's) and our participation in Lloyd's Syndicate 1729 (Syndicate 1729) 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 over which the management of Syndicate 1729 has little ability to control, such as a decision to not approve the business plan of the Syndicate, 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 Syndicate 1729 to distribute and market its products; and
Ÿ
rating agencies could downgrade their ratings of Lloyd's as a whole.
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 our Form 10-K and other documents we file with the SEC, such as our current reports on Form 8-K, and our regular reports on Form 10-Q.
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.

3


 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Investments
 
 
 
Fixed maturities, available for sale, at fair value; amortized cost, $2,942,635 and $3,055,477, respectively
$
3,045,497

 
$
3,145,027

Equity securities, trading, at fair value; cost, $300,863 and $283,107, respectively
332,649

 
314,482

Short-term investments
114,761

 
131,259

Business owned life insurance
56,837

 
56,381

Investment in unconsolidated subsidiaries
289,378

 
276,501

Other investments, $31,664 and $28,958 at fair value, respectively, otherwise at cost or amortized cost
92,487

 
86,057

Total Investments
3,931,609

 
4,009,707

Cash and cash equivalents
203,576

 
197,040

Premiums receivable
209,272

 
202,528

Receivable from reinsurers on paid losses and loss adjustment expenses
13,366

 
6,494

Receivable from reinsurers on unpaid losses and loss adjustment expenses
238,604

 
237,966

Prepaid reinsurance premiums
34,958

 
32,115

Deferred policy acquisition costs
40,954

 
38,790

Real estate, net
39,670

 
39,799

Intangible assets
98,666

 
100,733

Goodwill
210,725

 
210,725

Other assets
92,680

 
93,263

Total Assets
$
5,114,080

 
$
5,169,160

Liabilities and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Policy liabilities and accruals
 
 
 
Reserve for losses and loss adjustment expenses
$
2,044,230

 
$
2,058,266

Unearned premiums
373,451

 
345,828

Reinsurance premiums payable
26,458

 
17,451

Total Policy Liabilities
2,444,139

 
2,421,545

Deferred tax liability
30,392

 
18,818

Other liabilities
160,905

 
320,853

Long-term debt
350,000

 
250,000

Total Liabilities
2,985,436

 
3,011,216

Shareholders’ Equity
 
 
 
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 62,474,956 and 62,297,214 shares issued, respectively
625

 
623

Additional paid-in capital
359,135

 
359,577

Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $35,473 and $31,342, respectively
65,877

 
58,204

Retained earnings
2,012,328

 
1,991,704

Treasury shares, at cost, 7,022,298 shares and 5,763,388 shares, respectively
(309,321
)
 
(252,164
)
Total Shareholders’ Equity
2,128,644

 
2,157,944

Total Liabilities and Shareholders’ Equity
$
5,114,080

 
$
5,169,160

See accompanying notes.

5


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Capital (Unaudited)
(In thousands)
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total
Balance at December 31, 2014
$
623

 
$
359,577

 
$
58,204

 
$
1,991,704

 
$
(252,164
)
 
$
2,157,944

Common shares reacquired

 

 

 

 
(57,157
)
 
(57,157
)
Common shares issued for compensation and effect of shares reissued to stock purchase plan

 
1,270

 

 

 

 
1,270

Share-based compensation

 
2,703

 

 

 

 
2,703

Net effect of restricted and performance shares issued and stock options exercised
2

 
(4,415
)
 

 

 

 
(4,413
)
Dividends to shareholders

 

 

 
(17,190
)
 

 
(17,190
)
Other comprehensive income (loss)

 

 
7,673

 

 

 
7,673

Net income

 

 

 
37,814

 

 
37,814

Balance at March 31, 2015
$
625

 
$
359,135

 
$
65,877

 
$
2,012,328

 
$
(309,321
)
 
$
2,128,644

 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total
Balance at December 31, 2013
$
621

 
$
349,894

 
$
59,661

 
$
2,015,603

 
$
(31,365
)
 
$
2,394,414

Common shares reacquired

 

 

 

 
(83,658
)
 
(83,658
)
Common shares issued for compensation and effect of shares reissued to stock purchase plan

 
1,416

 

 

 

 
1,416

Share-based compensation

 
3,240

 

 

 

 
3,240

Net effect of restricted and performance shares issued and stock options exercised
2

 
(3,002
)
 

 

 

 
(3,000
)
Dividends to shareholders

 

 

 
(17,906
)
 

 
(17,906
)
Other comprehensive income (loss)

 

 
10,745

 

 

 
10,745

Net income

 

 

 
46,731

 

 
46,731

Balance at March 31, 2014
$
623

 
$
351,548

 
$
70,406

 
$
2,044,428

 
$
(115,023
)
 
$
2,351,982

See accompanying notes.

6


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
(In thousands, except per share data)
 
Three Months Ended March 31
 
2015
 
2014
Revenues
 
 
 
Net premiums earned
$
171,899

 
$
171,730

Net investment income
27,304

 
29,732

Equity in earnings (loss) of unconsolidated subsidiaries
1,622

 
1,751

Net realized investment gains (losses):
 
 
 
Other-than-temporary impairment (OTTI) losses
(3,271
)
 
(50
)
Portion of OTTI losses recognized in (reclassified from) other comprehensive income before taxes
1,441

 

Net impairment losses recognized in earnings
(1,830
)
 
(50
)
Other net realized investment gains (losses)
6,669

 
2,794

Total net realized investment gains (losses)
4,839

 
2,744

Other income
2,169

 
2,094

Total revenues
207,833

 
208,051

Expenses
 
 
 
Losses and loss adjustment expenses
118,169

 
96,052

Reinsurance recoveries
(13,029
)
 
(6,544
)
Net losses and loss adjustment expenses
105,140

 
89,508

Underwriting, policy acquisition and operating expenses
51,356

 
52,515

Segregated portfolio cells dividend expense
2,184

 
1,049

Interest expense
3,631

 
3,570

Total expenses
162,311

 
146,642

Income before income taxes
45,522

 
61,409

Provision for income taxes
 
 
 
Current expense (benefit)
352

 
7,905

Deferred expense (benefit)
7,356

 
6,773

Total income tax expense (benefit)
7,708

 
14,678

Net income
37,814

 
46,731

Other comprehensive income (loss), after tax, net of reclassification adjustments
7,673

 
10,745

Comprehensive income
$
45,487

 
$
57,476

Earnings per share:
 
 
 
Basic
$
0.67

 
$
0.76

Diluted
$
0.67

 
$
0.76

Weighted average number of common shares outstanding:
 
 
 
Basic
56,592

 
61,251

Diluted
56,813

 
61,497

Cash dividends declared per common share
$
0.31

 
$
0.30

See accompanying notes.

7


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Three Months Ended March 31
 
2015
 
2014
Operating Activities
 
 
 
Net income
$
37,814

 
$
46,731

Adjustments to reconcile income to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net of accretion
12,086

 
11,587

Net realized investment gains
(4,839
)
 
(2,744
)
Share-based compensation
2,703

 
3,240

Deferred income taxes
7,356

 
6,773

Policy acquisition costs, net amortization (net deferral)
(2,164
)
 
(2,370
)
Other
(4,856
)
 
2,057

Other changes in assets and liabilities, excluding effect of business combinations:
 
 
 
Premiums receivable
(6,744
)
 
(16,698
)
Reinsurance related assets and liabilities
(1,346
)
 
(12,609
)
Other assets
(3,919
)
 
(1,803
)
Reserve for losses and loss adjustment expenses
(14,036
)
 
(20,230
)
Unearned premiums
27,623

 
30,439

Other liabilities
(12,835
)
 
(13,938
)
Net cash provided (used) by operating activities
$
36,843

 
$
30,435

Investing Activities
 
 
 
Purchases of:
 
 
 
Fixed maturities, available for sale
$
(215,122
)
 
$
(130,311
)
Equity securities, trading
(97,626
)
 
(20,976
)
Other investments
(9,288
)
 
(5,246
)
Funding of tax credit limited partnerships
(590
)
 
(1,811
)
Investment in unconsolidated subsidiaries
(15,416
)
 
(8,995
)
Proceeds from sales or maturities of:
 
 
 
Fixed maturities, available for sale
323,386

 
110,647

Equity securities, trading
82,984

 
62,786

Other investments
3,052

 
397

Distributions from unconsolidated subsidiaries
4,159

 

Net sales or maturities (purchases) of short-term investments
16,479

 
110,843

Cash received in acquisitions

 
35,013

Unsettled security transactions, net change
9,246

 
4,024

(Increase) decrease in restricted cash

 
78,000

Other
(2,857
)
 
4,968

Net cash provided (used) by investing activities
$
98,407

 
$
239,339

Continued on following page.
 
 
 

8


 
Three Months Ended March 31
 
2015
 
2014
Financing Activities
 
 
 
Borrowing under revolving credit agreement
$
100,000

 
$

Repurchase of common stock
(57,157
)
 
(78,976
)
Dividends to shareholders
(167,211
)
 
(18,358
)
Other
(4,346
)
 
(5,580
)
Net cash provided (used) by financing activities
(128,714
)
 
(102,914
)
Increase (decrease) in cash and cash equivalents
6,536

 
166,860

Cash and cash equivalents at beginning of period
197,040

 
129,383

Cash and cash equivalents at end of period
$
203,576

 
$
296,243

 
 
 
 
Significant non-cash transactions
 
 
 
Deposit transferred as consideration for acquisition
$

 
$
205,244

Dividends declared and not yet paid
$
17,190

 
$
17,906

See accompanying notes.

9

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 


1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation and its consolidated subsidiaries (ProAssurance, PRA or the Company). The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. ProAssurance’s results for the three-month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2014 report on Form 10-K. In connection with its preparation of the Condensed Consolidated Financial Statements, ProAssurance evaluated events that occurred subsequent to March 31, 2015 for recognition or disclosure in its financial statements and notes to financial statements.
ProAssurance operates in four reportable segments as follows: Specialty Property and Casualty (Specialty P&C), Workers' Compensation, Lloyd's Syndicate, and Corporate. For more information on the nature of products and services provided and for financial information by segment, refer to Note 12 of the Notes to Condensed Consolidated Financial Statements.
Other Liabilities
Other liabilities consisted of the following:
(In millions)
 
March 31, 2015
 
December 31, 2014
Segregated portfolio cell dividends payable
 
$
18.0

 
$
15.8

Unpaid dividends
 
17.2

 
167.7

All other
 
125.7

 
137.4

Total other liabilities
 
$
160.9

 
$
320.9

Segregated portfolio cells (SPCs) are segregated pools of assets and liabilities that provide an insurance facility for a defined set of risks, with the net operating results of the SPC due to the preferred shareholders of that cell. ProAssurance uses SPCs to offer risk-sharing insurance solutions to certain customer groups, and typically owns some portion of each cell. SPC dividends payable represents the cumulative undistributed earnings of SPCs that are contractually payable to external preferred shareholders of the cells.
Unpaid dividends represents common stock dividends declared by ProAssurance's Board of Directors that have not yet been paid. Unpaid dividends were higher at December 31, 2014 due to a special dividend declared in late 2014 that was paid in January 2015.

10

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Accounting Changes Adopted
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
Effective for fiscal years beginning after December 15, 2014, the FASB issued guidance which changes the requirements for reporting discontinued operations. Under the new guidance, reporting entities are required to report disposals of business components only if the disposal represents a strategic shift in the entity’s operations that will have a major effect on the entity’s operations and financial results. The new guidance expands disclosure requirements for reported discontinued operations and requires disclosure of pre-tax profit or loss attributable to significant disposals that are not reported as discontinued operations. ProAssurance adopted the guidance as of January 1, 2015. Adoption of the guidance had no effect on ProAssurance’s results of operations or financial position.
Accounting Changes Not Yet Adopted
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
Effective for fiscal years beginning after December 15, 2015, the FASB issued guidance for share-based payments in which the terms of the award provide that a performance target can be achieved after completion of the requisite service period. The new guidance provides that compensation cost for such awards should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ProAssurance plans to adopt the guidance beginning January 1, 2016. Adoption of the guidance is expected to have no effect on ProAssurance’s results of operations or financial position as ProAssurance has no awards with performance targets extending beyond the requisite service period.
Revenue from Contracts with Customers
Effective for fiscal years beginning after December 15, 2016, the FASB issued guidance related to revenue from contracts with customers. The core principle of the new guidance is that revenue should be 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 plans to adopt the guidance beginning January 1, 2017. As the majority of ProAssurance's revenues come from insurance contracts which fall under the scope of other FASB standards, adoption of the guidance is expected to have no material effect on ProAssurance’s results of operations or financial position.
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
Effective for fiscal years ending after December 15, 2016 and interim periods beginning after December 15, 2016, the FASB issued guidance that establishes principles and definitions related to management's evaluation of whether there is substantial doubt about the organization's ability to continue as a going concern. For each interim and annual reporting period, the new guidance requires management to evaluate the organization's ability to meet its obligations as they are due within one year of the date the financial statements are issued and requires disclosure when there is substantial doubt regarding the organization's ability to continue as a going concern. ProAssurance plans to adopt the guidance on its effective date. Adoption is expected to have no effect on ProAssurance’s results of operations or financial position.
Simplifying the Presentation of Debt Issuance Costs
Effective for fiscal years beginning after December 15, 2015, the FASB issued guidance related to the presentation of debt issuance costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ProAssurance plans to adopt the guidance beginning January 1, 2016. Adoption of the guidance is not expected to have a material effect on ProAssurance’s results of operations or financial position.
Amendments to the Consolidation Analysis
Effective for fiscal years beginning after December 15, 2015, the FASB issued additional guidance regarding the consolidation of legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The new standard modifies the evaluation of whether or not entities are variable interest entities (VIEs) and the consolidation analysis of entities involved with VIEs, particularly those having fee arrangements and related party relationships. ProAssurance is in the process

11

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

of evaluating the effect, if any, of the new guidance on its results of operations and financial position and plans to adopt the guidance beginning January 1, 2016. The effect is not expected to be material.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
Effective for fiscal years beginning after December 15, 2015, the FASB issued additional guidance regarding accounting for cloud computing arrangements. Under the new guidance, customers participating in cloud computing arrangements that include a software license should account for the software license element of the arrangement consistent with the acquisition of other software licenses. Customers should account for cloud computing arrangements that do not include a software license as a service contract, following existing guidance for service contracts. ProAssurance is in the process of evaluating the effect that the use of the new method would have on its results of operations and financial position and plans to adopt the guidance beginning January 1, 2016. The effect is not expected to be material.


12

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

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 March 31, 2015 and December 31, 2014 are shown in the following tables. 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.

13

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

 
March 31, 2015
 
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
$

 
$
89,389

 
$

 
$
89,389

U.S. Government-sponsored enterprise obligations

 
37,558

 

 
37,558

State and municipal bonds

 
1,020,129

 
5,025

 
1,025,154

Corporate debt, multiple observable inputs

 
1,433,002

 

 
1,433,002

Corporate debt, limited observable inputs:
 
 
 
 
 
 

Other corporate debt, NRSRO ratings available

 

 
9,293

 
9,293

Other corporate debt, NRSRO ratings not available

 

 
684

 
684

Residential mortgage-backed securities

 
281,122

 

 
281,122

Agency commercial mortgage-backed securities

 
13,898

 

 
13,898

Other commercial mortgage-backed securities

 
44,826

 

 
44,826

Other asset-backed securities

 
105,783

 
4,788

 
110,571

Equity securities
 
 
 
 
 
 

Financial
81,753

 

 

 
81,753

Utilities/Energy
31,690

 

 

 
31,690

Consumer oriented
66,053

 

 

 
66,053

Industrial
60,755

 

 

 
60,755

Bond funds
69,945

 

 

 
69,945

All other
22,453

 

 

 
22,453

Short-term investments
114,761

 

 

 
114,761

Financial instruments carried at fair value, classified as a part of:
 
 
 
 
 
 
 
Investment in unconsolidated subsidiaries

 

 
145,888

 
145,888

Other investments
6,245

 
25,419

 

 
31,664

Total assets
$
453,655

 
$
3,051,126

 
$
165,678

 
$
3,670,459


14

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

 
December 31, 2014
 
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
$

 
$
166,512

 
$

 
$
166,512

U.S. Government-sponsored enterprise obligations

 
39,563

 

 
39,563

State and municipal bonds

 
1,057,590

 
5,025

 
1,062,615

Corporate debt, multiple observable inputs

 
1,404,020

 

 
1,404,020

Corporate debt, limited observable inputs:
 
 
 
 
 
 

Other corporate debt, NRSRO ratings available

 

 
10,474

 
10,474

Other corporate debt, NRSRO ratings not available

 

 
2,607

 
2,607

Residential mortgage-backed securities

 
276,056

 

 
276,056

Agency commercial mortgage-backed securities

 
15,493

 

 
15,493

Other commercial mortgage-backed securities

 
51,063

 

 
51,063

Other asset-backed securities

 
111,855

 
4,769

 
116,624

Equity securities
 
 
 
 
 
 

Financial
79,341

 

 

 
79,341

Utilities/Energy
25,629

 

 

 
25,629

Consumer oriented
65,670

 

 

 
65,670

Industrial
55,460

 

 

 
55,460

Bond funds
55,196

 

 

 
55,196

All other
33,186

 

 

 
33,186

Short-term investments
131,199

 
60

 

 
131,259

Financial instruments carried at fair value, classified as a part of:
 
 
 
 
 
 

Investment in unconsolidated subsidiaries

 

 
133,250

 
133,250

Other investments
6,050

 
22,908

 

 
28,958

Total assets
$
451,731


$
3,145,120


$
156,125


$
3,752,976

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. If a value did not appear reasonable, the valuation was discussed with the service that provided the value and would have been adjusted, if necessary. No such adjustments were necessary in 2015 or 2014.
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.
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.

15

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

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 with 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 are not available, the loans are valued based on quoted prices for comparable loans or, if the loan is newly issued, by comparison to similar seasoned issues. Broker quotes are compared to actual trade prices on a regular basis to permit assessment of the reliability of the quotes; unreliable quotes are not considered in quoted averages.
Residential and commercial mortgage backed securities. Agency pass-through 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 considered collateral type.
Short-term investments are securities maturing within one year, carried at cost which approximated the fair value of the security due to the short term to maturity.
 Other investments consisted 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.
 Level 3 Valuations
Below is a summary description of the valuation processes and methodologies used as well as quantitative information regarding securities in the Level 3 category.
Level 3 Valuation Processes
Level 3 securities are priced by the Chief Investment Officer.
Level 3 valuations are computed quarterly. Prices are evaluated quarterly against prior period prices and the expected change in price.
Exclusive of Investments in unconsolidated subsidiaries, which are valued at net asset value (NAV), the securities noted in the disclosure are primarily NRSRO rated debt instruments for which comparable market inputs are commonly available for evaluating the securities in question. Valuation of these debt instruments is not overly sensitive to changes in the unobservable inputs used.
Level 3 Valuation Methodologies
State and municipal bonds consisted of auction rate municipal bonds valued internally using either published quotes for similar securities or values produced by discounted cash flow models using yields currently available on fixed rate securities with a similar term and collateral, adjusted to consider the effect of a floating rate and a premium for illiquidity. At March 31, 2015, 100% of the securities were rated; the average rating was A-.
Corporate debt with 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 March 31, 2015, the average rating of rated securities was BBB+.
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.

16

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Investment in unconsolidated subsidiaries consisted of limited partnership (LP) and limited liability company (LLC) interests valued using the NAV provided by the LP/LLC, which approximated the fair value of the interest.
Such interests include the following:
 
Unfunded
Commitments
 
Fair Value
(In thousands)
March 31,
2015
 
March 31,
2015
 
December 31,
2014
Investments in LPs/LLCs:
 
 
 
 
 
Private debt funds (1)
$24,285
 
$
40,325

 
$
37,296

Long equity fund (2)
None
 
6,949

 
6,747

Long/short equity funds (3)
None
 
25,262

 
25,301

Non-public equity funds (4)
$59,893
 
61,060

 
51,811

Multi-strategy fund of funds (5)
None
 
8,402

 
8,271

Structured credit fund (6)
None
 
3,890

 
3,824

 
 
 
$
145,888

 
$
133,250

(1)
Comprised of interests in two 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 does not permit redemption. Income and capital are to be periodically distributed at the discretion of the LPs over an anticipated time frame that spans from 3 to 8 years.
(2)
The fund is an 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.
(3)
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 event-driven 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.
(4)
Comprised of interests in three unrelated LP funds, each structured to provide capital appreciation through diversified investments in private equity, which can include investments in buyout, venture capital, mezzanine debt, distressed debt and other private equity-oriented LPs. One LP allows redemption by special consent; 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 of up to 9 years.
(5)
This fund is an 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 the LLC Board is permitted discretion to periodically extend offers to repurchase units of the LLC.
(6)
This fund is an LP seeking to obtain superior risk-adjusted absolute returns by acquiring and actively managing a diversified portfolio of debt securities, including bonds, loans and other asset-backed instruments. Redemptions are allowed at any quarter-end with a prior notice requirement of 90 days.
ProAssurance may not sell, transfer or assign its interest in any of the above LPs/LLCs without special consent from the LPs/LLCs.

17

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Quantitative Information Regarding Level 3 Valuations
Quantitative Information about Level 3 Fair Value Measurements
 
 
Fair Value at
 
 
 
 
 
 
(In millions)
 
March 31, 2015
 
December 31, 2014
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
Assets:
 
 
 
 
 
 
 
 
 
 
State and municipal bonds
 
$5.0
 
$5.0
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 10% (5%)
 
 
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 10% (5%)
Corporate debt with limited observable inputs
 
$10.0
 
$13.1
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 5% (2.5%)
 
 
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 5% (2.5%)
Other asset-backed securities
 
$4.8
 
$4.8
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 5% (2.5%)
 
 
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 5% (2.5%)
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.
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.
 
March 31, 2015
 
Level 3 Fair Value Measurements – Assets
(In thousands)
U.S. Government-sponsored Enterprise Obligations
 
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Investment in Unconsolidated Subsidiaries
 
Total
Balance December 31, 2014
$

 
$
5,025

 
$
13,081

 
$
4,769

 
$
133,250

 
$
156,125

Total gains (losses) realized and unrealized:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, as a part of:
 
 
 
 
 
 
 
 
 
 
 
Net investment income

 

 
17

 

 

 
17

Equity in earnings of unconsolidated subsidiaries

 

 

 

 
3,501

 
3,501

Net realized investment gains (losses)

 

 
2

 

 

 
2

Included in other comprehensive income

 

 
(283
)
 
19

 

 
(264
)
Purchases

 

 
1,516

 

 
13,570

 
15,086

Sales

 

 
(301
)
 

 
(4,433
)
 
(4,734
)
Transfers in

 

 

 

 

 

Transfers out

 

 
(4,055
)
 

 

 
(4,055
)
Balance March 31, 2015
$

 
$
5,025

 
$
9,977

 
$
4,788

 
$
145,888

 
$
165,678

Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end
$

 
$

 
$

 
$

 
$
3,501

 
$
3,501


18

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

 
March 31, 2014
 
Level 3 Fair Value Measurements – Assets
(In thousands)
U.S. Government-sponsored Enterprise Obligations
 
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Investment in Unconsolidated Subsidiaries
 
Total
Balance December 31, 2013
$

 
$
7,338

 
$
14,176

 
$
6,814

 
$
72,062

 
$
100,390

Total gains (losses) realized and unrealized:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, as a part of:
 
 
 
 
 
 
 
 
 
 
 
Net investment income

 
(2
)
 
16

 

 

 
14

Equity in earnings of unconsolidated subsidiaries

 

 

 

 
2,865

 
2,865

Net realized investment gains (losses)

 
(95
)
 
3

 

 

 
(92
)
Included in other comprehensive income
(1
)
 
68

 
669

 
44

 

 
780

Purchases
1,000

 
1,861

 

 
2,165

 
18,436

 
23,462

Sales

 
(257
)
 
(458
)
 

 
(1,456
)
 
(2,171
)
Transfers in

 
570

 

 
305

 

 
875

Transfers out

 
(1,993
)
 
(2,025
)
 
(2,102
)
 

 
(6,120
)
Balance March 31, 2014
$
999

 
$
7,490

 
$
12,381

 
$
7,226

 
$
91,907

 
$
120,003

Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end
$

 
$

 
$

 
$

 
$
2,865

 
$
2,865


Transfers
There were no transfers between the Level 1 and Level 2 categories during the three months ended March 31, 2015 or 2014.
Transfers shown in the preceding Level 3 Tables were as of the end of the period and were to or from Level 2, unless otherwise noted.
All transfers during the three months ended March 31, 2015 and March 31, 2014 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.

19

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Financial Instruments - Methodologies Other Than Fair Value
The following table provides the estimated fair value of our 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 fall within the Level 3 fair value category.
 
March 31, 2015
 
December 31, 2014
(In thousands)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
Business Owned Life Insurance (BOLI)
$
56,837

 
$
56,837

 
$
56,381

 
$
56,381

Other investments
$
60,823

 
$
58,855

 
$
57,099

 
$
57,994

Other assets
$
24,017

 
$
23,989

 
$
22,440

 
$
22,399

Financial liabilities:
 
 
 
 
 
 
 
Senior notes due 2023
$
250,000

 
$
277,100

 
$
250,000

 
$
276,503

Revolving credit agreement
$
100,000

 
$
100,000

 
$

 
$

Other liabilities
$
15,117

 
$
15,111

 
$
14,656

 
$
14,645

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 interests in certain investment fund LPs/LLCs accounted for using the cost method, investments in Federal Home Loan Bank (FHLB) common stock carried at cost, and an annuity investment carried at amortized cost. The estimated fair value of the LP/LLC interests was based on the NAVs provided by the LP/LLC managers. The estimated fair value of the FHLB common stock was based on the amount ProAssurance would receive if its membership were canceled, as the membership 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. Fair values of the funded deferred compensation assets and liabilities were based on the NAVs of the underlying securities. Other assets also included a secured note receivable and an unsecured receivable under a revolving credit agreement. Fair value of these receivables was based on the present value of expected cash flows from the receivables, discounted at market rates on the valuation date for receivables with similar credit standings and similar payment structures. Other liabilities also included certain contractual liabilities related to prior business combinations. The fair values of the business combination liabilities were based on the present value of the expected future cash outflows, discounted at ProAssurance’s assumed incremental borrowing rate on the valuation date for unsecured liabilities with similar repayment structures.
The fair value of the long-term 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.

20

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

3. Investments
Available-for-sale securities at March 31, 2015 and December 31, 2014 included the following:
 
March 31, 2015
(In thousands)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Fixed maturities
 
 
 
 
 
 
 
U.S. Treasury obligations
$
86,729

 
$
2,732

 
$
72

 
$
89,389

U.S. Government-sponsored enterprise obligations
35,972

 
1,616

 
30

 
37,558

State and municipal bonds
978,713

 
46,830

 
389

 
1,025,154

Corporate debt
1,402,723

 
52,957

 
12,701

 
1,442,979

Residential mortgage-backed securities
270,934

 
10,403

 
215

 
281,122

Agency commercial mortgage-backed securities
13,635

 
285

 
22

 
13,898

Other commercial mortgage-backed securities
43,852

 
1,005

 
31

 
44,826

Other asset-backed securities
110,077

 
545

 
51

 
110,571

 
$
2,942,635

 
$
116,373

 
$
13,511

 
$
3,045,497

 
 
 
 
 
 
 
 
 
December 31, 2014
(In thousands)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Fixed maturities
 
 
 
 
 
 
 
U.S. Treasury obligations
$
163,714

 
$
3,785

 
$
987

 
$
166,512

U.S. Government-sponsored enterprise obligations
38,022

 
1,641

 
100

 
39,563

State and municipal bonds
1,015,555

 
47,395

 
335

 
1,062,615

Corporate debt
1,389,970

 
44,234

 
17,103

 
1,417,101

Residential mortgage-backed securities
266,306

 
10,198

 
448

 
276,056

Agency commercial mortgage-backed securities
15,344

 
208

 
59

 
15,493

Other commercial mortgage-backed securities
50,025

 
1,137

 
99

 
51,063

Other asset-backed securities
116,541

 
288

 
205

 
116,624

 
$
3,055,477

 
$
108,886

 
$
19,336

 
$
3,145,027


21

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at March 31, 2015, 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
$
86,729

 
$
5,317

 
$
69,599

 
$
11,131

 
$
3,342

 
$
89,389

U.S. Government-sponsored enterprise obligations
35,972

 
2,807

 
25,696

 
8,710

 
345

 
37,558

State and municipal bonds
978,713

 
53,150

 
361,772

 
443,677

 
166,555

 
1,025,154

Corporate debt
1,402,723

 
106,913

 
733,014

 
573,797

 
29,255

 
1,442,979

Residential mortgage-backed securities
270,934

 

 

 

 

 
281,122

Agency commercial mortgage-backed securities
13,635

 

 

 

 

 
13,898

Other commercial mortgage-backed securities
43,852

 

 

 

 

 
44,826

Other asset-backed securities
110,077

 

 

 

 

 
110,571

 
$
2,942,635

 
 
 
 
 
 
 
 
 
$
3,045,497

Excluding obligations of the U.S. Government or U.S. Government-sponsored enterprises, no investment in any entity or its affiliates exceeded 10% of Shareholders’ equity at March 31, 2015.
Cash and securities with a carrying value of $50.0 million at March 31, 2015 were on deposit with various state insurance departments to meet regulatory requirements. ProAssurance also held securities with a carrying value of $127.5 million at March 31, 2015 that are pledged as collateral security for advances under the Revolving Credit Agreement (see Note 8 of the Notes to Condensed Consolidated Financial Statements).
As a member of Lloyd's and a capital provider to Syndicate 1729, ProAssurance is required to maintain capital at Lloyd's, referred to as Funds at Lloyd's (FAL). ProAssurance investments at March 31, 2015 included fixed maturities with a fair value of $84.7 million and short term investments with a fair value of approximately $1.0 million on deposit with Lloyd's in order to satisfy these FAL requirements.
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 management employees 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 principal beneficiary of these policies.
Other Investments
Other investments at March 31, 2015 and December 31, 2014 were comprised as follows:
(In thousands)
March 31,
2015
 
December 31,
2014
Investments in LPs/LLCs, at cost
$
57,218

 
$
53,258

Convertible securities, at fair value
31,664

 
28,958

Other, principally FHLB capital stock, at cost
3,605

 
3,841

 
$
92,487

 
$
86,057

Investments in convertible 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 or losses during the period of change. Interest on convertible securities is recorded on an accrual basis based on contractual interest rates and is included in Net investment income.
FHLB capital stock is not marketable, but may be liquidated by terminating membership in the FHLB. The liquidation process can take up to five years.

22

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Unconsolidated Subsidiaries
ProAssurance holds investments in unconsolidated subsidiaries, accounted for under the equity method. The investments include the following:
 
March 31, 2015
 
Carrying Value
(In thousands)
Unfunded
Commitments*
 
Percentage
Ownership
 
March 31,
2015
 
December 31,
2014
Investment in LPs/LLCs:
 
 
 
 
 
 
 
 
Qualified affordable housing tax credit partnerships
$14,947
 
See below
 
$
130,622

 
$
133,143

Other tax credit partnerships
$17,881
 
See below
 
2,119

 

Private debt funds
$24,285
 
<
20%
 
40,325

 
37,296

Long equity fund
None
 
<
20%
 
6,949

 
6,747

Long/short equity funds
None
 
<
25%
 
25,262

 
25,301

Non-public equity funds
$73,419
 
<
20%
 
67,646

 
58,128

Multi-strategy fund of funds
None
 
<
20%
 
8,402

 
8,271

Structured credit fund
None
 
<
20%
 
3,890

 
3,824

Real estate fund
$6,526
 
<
20%
 
4,163

 
3,791

 
 
 
 
 
 
$
289,378

 
$
276,501

* Unfunded commitments are included in the carrying value of tax credit partnerships only.
Qualified affordable housing 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. ProAssurance's ownership percentage relative to two of the tax credit partnership interests is almost 100%; these interests had a carrying value of $56.9 million at March 31, 2015. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of $73.7 million at March 31, 2015. ProAssurance does not have the ability to exert control over the partnerships; all are accounted for using the equity method.
Other tax credit partnerships are comprised entirely of historic tax credits. The historic tax credits generate investment returns by providing tax benefits to fund investors in the form of tax credits, project operating losses as well as returns of cash from operations. ProAssurance's ownership percentage relative to the tax credit partnership is almost 100%. ProAssurance does not have the ability to exert control over the partnership; the interests are accounted for using the equity method.
The Private debt funds are structured to provide interest distributions primarily through a diversified portfolio of private debt investments.
The Long equity fund targets long-term total returns through holdings in public international companies.
The Long/Short equity funds target absolute returns using strategies designed to take advantage of event-driven market opportunities.
The Non-public equity funds hold diversified private equities and are structured to provide capital appreciation.
The Multi-strategy fund of funds holds portfolios having little or no correlation to the broader fixed income and equity security markets.
The Structured credit fund seeks to obtain superior risk-adjusted absolute returns by acquiring and actively managing a diversified portfolio of debt securities.
The Real estate fund invests in multi-tenant industrial real estate with the objective of achieving superior absolute returns in all market cycles.

23

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2015
 

Investments Held in a Loss Position
The following tables provide summarized information with respect to investments held in an unrealized loss position at March 31, 2015 and December 31, 2014, including the length of time the investment had been held in a continuous unrealized loss position.
 
March 31, 2015
 
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
$
16,584

 
$
72

 
$
10,446

 
$
26

 
$
6,138

 
$
46

U.S. Government-sponsored enterprise obligations
5,210

 
30

 
5,210

 
30

 

 

State and municipal bonds
41,323

 
389

 
34,413

 
214

 
6,910

 
175

Corporate debt
251,302

 
12,701

 
198,137

 
9,631

 
53,165

 
3,070

Residential mortgage-backed securities
41,413

 
215

 
31,352

 
121

 
10,061

 
94

Agency commercial mortgage-backed securities
428

 
22

 

 

 
428

 
22

Other commercial mortgage-backed securities
8,260

 
31

 
4,225

 
11

 
4,035

 
20

Other asset-backed securities
32,062

 
51

 
31,157

 
51

 
905

 

 
$
396,582

 
$
13,511

 
$
314,940

 
$
10,084

 
$
81,642

 
$
3,427

Other investments
 
 
 
 
 
 
 
 
 
 
 
Investments in LPs/LLCs carried at cost
$
31,660

 
$
3,208

 
$
31,660

 
$
3,208

 
$

 
$


 
December 31, 2014
 
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
$
61,209

 
$
987

 
$
46,869

 
$
617

 
$
14,340

 
$
370

U.S. Government-sponsored enterprise obligations
6,268

 
100

 
2,775

 
44

 
3,493

 
56

State and municipal bonds
39,831

 
335

 
18,910

 
84

 
20,921

 
251

Corporate debt
423,107

 
17,103

 
326,804

 
13,236

 
96,303

 
3,867

Residential mortgage-backed securities
45,006

 
448

 
14,406

 
31

 
30,600

 
417

Agency commercial mortgage-backed securities
4,783

 
59

 
70

 

 
4,713

 
59

Other commercial mortgage-backed securities
13,860

 
99

 
7,005

 
28

 
6,855

 
71

Other asset-backed securities
62,577

 
205

 
59,176

 
109

 
3,401

 
96

 
$
656,641

 
$
19,336

 
$
476,015

 
$
14,149

 
$
180,626

 
$
5,187

Other investments
 
 
 
 
 
 
 
 
 
 
 
Investments in LPs/LLCs carried at cost
$
23,683

 
$
3,948