10-Q 1 pra-20150630x10q.htm 10-Q PRA-2015.06.30-10Q
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 June 30, 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 July 31, 2015, there were 53,667,668 shares of the registrant’s common stock outstanding.




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
AOCI
Accumulated other comprehensive income (loss)
BOLI
Business owned life insurance
DPAC
Deferred policy acquisition costs
Eastern Re
Eastern Re, LTD, S.P.C.
EBUB
Earned, but unbilled premium
FAL
Funds at Lloyd's
FASB
Financial Accounting Standards Board
FHLB
Federal Home Loan Bank
GAAP
Generally accepted accounting principles in the United States of America
HCPL
Healthcare professional liability
IRS
Internal Revenue Service
LLC
Limited liability company
Lloyd's
Lloyd's of London market
LP
Limited partnership
Medical Technology Liability
Medical technology and life sciences products liability
NAV
Net asset value
NYSE
New York Stock Exchange
NRSRO
Nationally recognized statistical rating organization
OCI
Other comprehensive income (loss)
OTTI
Other-than-temporary impairment
PCAOB
Public Company Accounting Oversight Board
Revolving Credit Agreement
ProAssurance's $250 million revolving credit agreement
ROE
Return on equity
SEC
Securities and Exchange Commission
SPC
Segregated portfolio cell
Specialty P&C
Specialty Property and Casualty
Syndicate 1729
Lloyd's of London Syndicate 1729
Syndicate Credit Agreement
Unconditional revolving credit agreement with the Premium Trust Fund of Syndicate 1729
TIPS
Treasury Inflation Protected Securities
U.K.
United Kingdom of Great Britain and Northern Ireland
ULAE
Unallocated loss adjustment expense
VIE
Variable interest entity

2



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 FASB, the SEC, the PCAOB, or the 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;
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;
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;

3


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 and our participation in 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.

4


 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Investments
 
 
 
Fixed maturities, available for sale, at fair value; amortized cost, $2,903,152 and $3,055,477, respectively
$
2,967,353

 
$
3,145,027

Equity securities, trading, at fair value; cost, $290,811 and $283,107 respectively
307,326

 
314,482

Short-term investments
144,351

 
131,259

Business owned life insurance
56,090

 
56,381

Investment in unconsolidated subsidiaries
291,661

 
276,501

Other investments, $31,600 and $28,958 at fair value, respectively, otherwise at cost or amortized cost
91,110

 
86,057

Total Investments
3,857,891

 
4,009,707

Cash and cash equivalents
151,366

 
197,040

Premiums receivable
219,993

 
202,528

Receivable from reinsurers on paid losses and loss adjustment expenses
9,024

 
6,494

Receivable from reinsurers on unpaid losses and loss adjustment expenses
237,801

 
237,966

Prepaid reinsurance premiums
35,673

 
32,115

Deferred policy acquisition costs
44,398

 
38,790

Real estate, net
39,374

 
39,799

Intangible assets
96,598

 
100,733

Goodwill
210,725

 
210,725

Other assets
98,648

 
93,263

Total Assets
$
5,001,491

 
$
5,169,160

Liabilities and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Policy liabilities and accruals
 
 
 
Reserve for losses and loss adjustment expenses
$
2,026,697

 
$
2,058,266

Unearned premiums
370,459

 
345,828

Reinsurance premiums payable
24,143

 
17,451

Total Policy Liabilities
2,421,299

 
2,421,545

Deferred tax liability
11,142

 
18,818

Other liabilities
161,866

 
320,853

Long-term debt
350,000

 
250,000

Total Liabilities
2,944,307

 
3,011,216

Shareholders’ Equity
 
 
 
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 62,496,623 and 62,297,214 shares issued, respectively
625

 
623

Additional paid-in capital
362,230

 
359,577

Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $21,784 and $31,342, respectively
41,049

 
58,204

Retained earnings
2,028,745

 
1,991,704

Treasury shares, at cost, 8,481,567 shares and 5,763,388 shares, respectively
(375,465
)
 
(252,164
)
Total Shareholders’ Equity
2,057,184

 
2,157,944

Total Liabilities and Shareholders’ Equity
$
5,001,491

 
$
5,169,160

See accompanying notes.

6


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

 

 

 

 
(123,301
)
 
(123,301
)
Common shares issued for compensation

 
2,082

 

 

 

 
2,082

Share-based compensation

 
4,966

 

 

 

 
4,966

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

 
(4,395
)
 

 

 

 
(4,393
)
Dividends to shareholders

 

 

 
(33,931
)
 

 
(33,931
)
Other comprehensive income (loss)

 

 
(17,155
)
 

 

 
(17,155
)
Net income

 

 

 
70,972

 

 
70,972

Balance at June 30, 2015
$
625

 
$
362,230

 
$
41,049

 
$
2,028,745

 
$
(375,465
)
 
$
2,057,184

 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 

 

 
(122,281
)
 
(122,281
)
Common shares issued for compensation

 
2,685

 

 

 

 
2,685

Share-based compensation

 
5,641

 

 

 

 
5,641

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

 
(2,821
)
 

 

 

 
(2,819
)
Dividends to shareholders

 

 

 
(35,534
)
 

 
(35,534
)
Other comprehensive income (loss)

 

 
21,992

 

 

 
21,992

Net income

 

 

 
96,673

 

 
96,673

Balance at June 30, 2014
$
623

 
$
355,399

 
$
81,653

 
$
2,076,742

 
$
(153,646
)
 
$
2,360,771

See accompanying notes.

7


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
(In thousands, except per share data)
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
175,293

 
$
176,303

 
$
347,192

 
$
348,032

Net investment income
27,955

 
30,225

 
55,258

 
59,957

Equity in earnings (loss) of unconsolidated subsidiaries
2,420

 
719

 
4,041

 
2,470

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment (OTTI) losses
(1,209
)
 

 
(4,480
)
 
(50
)
Portion of OTTI losses recognized in (reclassified from) other comprehensive income before taxes
348

 

 
1,789

 

Net impairment losses recognized in earnings
(861
)
 

 
(2,691
)
 
(50
)
Other net realized investment gains (losses)
(2,967
)
 
13,046

 
3,702

 
15,840

Total net realized investment gains (losses)
(3,828
)
 
13,046

 
1,011

 
15,790

Other income
1,576

 
2,154

 
3,745

 
4,249

Total revenues
203,416

 
222,447

 
411,247

 
430,498

Expenses
 
 
 
 
 
 
 
Losses and loss adjustment expenses
112,747

 
104,052

 
230,915

 
200,104

Reinsurance recoveries
(8,808
)
 
(5,139
)
 
(21,837
)
 
(11,683
)
Net losses and loss adjustment expenses
103,939

 
98,913

 
209,078

 
188,421

Underwriting, policy acquisition and operating expenses
53,525

 
52,157

 
104,881

 
104,672

Segregated portfolio cells dividend expense
1,230

 
1,789

 
3,414

 
2,838

Interest expense
3,710

 
3,521

 
7,341

 
7,091

Total expenses
162,404

 
156,380

 
324,714

 
303,022

Income before income taxes
41,012

 
66,067

 
86,533

 
127,476

Provision for income taxes
 
 
 
 
 
 
 
Current expense (benefit)
13,776

 
14,389

 
14,128

 
22,294

Deferred expense (benefit)
(5,922
)
 
1,736

 
1,433

 
8,509

Total income tax expense (benefit)
7,854

 
16,125

 
15,561

 
30,803

Net income
33,158

 
49,942

 
70,972

 
96,673

Other comprehensive income (loss), after tax, net of reclassification adjustments
(24,828
)
 
11,247

 
(17,155
)
 
21,992

Comprehensive income
$
8,330

 
$
61,189

 
$
53,817

 
$
118,665

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.60

 
$
0.84

 
$
1.27

 
$
1.60

Diluted
$
0.60

 
$
0.84

 
$
1.26

 
$
1.59

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
55,445

 
59,524

 
56,016

 
60,383

Diluted
55,645

 
59,742

 
56,226

 
60,615

Cash dividends declared per common share
$
0.31

 
$
0.30

 
$
0.62

 
$
0.60

See accompanying notes.

8


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Six Months Ended June 30
 
2015
 
2014
Operating Activities
 
 
 
Net income
$
70,972

 
$
96,673

Adjustments to reconcile income to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net of accretion
23,668

 
23,974

Net realized investment gains
(1,011
)
 
(15,790
)
Share-based compensation
4,966

 
5,641

Deferred income taxes
1,433

 
8,509

Policy acquisition costs, net amortization (net deferral)
(5,608
)
 
(4,535
)
Equity in earnings of unconsolidated subsidiaries, excluding distributions received and tax credit partnership amortization
(7,973
)
 
(5,941
)
Other
(674
)
 
(439
)
Other changes in assets and liabilities, excluding effect of business combinations:
 
 
 
Premiums receivable
(17,465
)
 
(27,786
)
Reinsurance related assets and liabilities
769

 
(17,128
)
Other assets
(5,909
)
 
(6,017
)
Reserve for losses and loss adjustment expenses
(31,569
)
 
(50,284
)
Unearned premiums
24,631

 
27,441

Other liabilities
(2,478
)
 
(5,184
)
Net cash provided (used) by operating activities
$
53,752

 
$
29,134

Investing Activities
 
 
 
Purchases of:
 
 
 
Fixed maturities, available for sale
$
(375,552
)
 
$
(365,421
)
Equity securities, trading
(153,610
)
 
(56,006
)
Other investments
(15,786
)
 
(19,535
)
Funding of tax credit limited partnerships
(659
)
 
(5,348
)
Investment in unconsolidated subsidiaries
(26,275
)
 
(16,603
)
Proceeds from sales or maturities of:
 
 
 
Fixed maturities, available for sale
520,169

 
342,347

Equity securities, trading
157,005

 
85,477

Other investments
11,918

 
10,288

Distributions from unconsolidated subsidiaries
13,619

 

Net sales or maturities (purchases) of short-term investments
(13,130
)
 
99,244

Cash received in acquisitions

 
35,013

Unsettled security transactions, net change
1,229

 
19,866

(Increase) decrease in restricted cash

 
78,000

Other
(5,266
)
 
6,065

Net cash provided (used) by investing activities
$
113,662

 
$
213,387

Continued on following page.
 
 
 

9


 
Six Months Ended June 30
 
2015
 
2014
Financing Activities
 
 
 
Borrowing under revolving credit agreement
$
100,000

 
$

Repurchase of common stock
(123,301
)
 
(119,593
)
Dividends to shareholders
(184,411
)
 
(36,223
)
Other
(5,376
)
 
(5,429
)
Net cash provided (used) by financing activities
(213,088
)
 
(161,245
)
Increase (decrease) in cash and cash equivalents
(45,674
)
 
81,276

Cash and cash equivalents at beginning of period
197,040

 
129,383

Cash and cash equivalents at end of period
$
151,366

 
$
210,659

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

 
$
205,244

Dividends declared and not yet paid
$
16,728

 
$
17,607

See accompanying notes.

10

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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 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 six months ended June 30, 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 June 30, 2015 for recognition or disclosure in its financial statements and notes to financial statements.
ProAssurance operates in four reportable segments as follows: 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)
 
June 30, 2015
 
December 31, 2014
SPC dividends payable
 
$
18.6

 
$
15.8

Unpaid dividends
 
16.7

 
167.7

All other
 
126.6

 
137.4

Total other liabilities
 
$
161.9

 
$
320.9

SPC dividends payable are the cumulative undistributed earnings contractually payable to the external preferred shareholders of SPCs operated by ProAssurance's Cayman Islands subsidiary, Eastern Re.
Unpaid dividends represents common stock dividends declared by ProAssurance's Board of Directors that have not yet been paid. Unpaid dividends at December 31, 2014 reflect a special dividend declared in late 2014 that was paid in January 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 regarding 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.
Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)
Effective for fiscal years beginning after December 15, 2015, the FASB issued guidance which removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance also revised other disclosure requirements for investments measured or eligible to be measured at fair value using the net asset value per share practical expedient. ProAssurance adopted the guidance as of June 30, 2015 as early adoption is permitted. Adoption of the guidance had no effect on ProAssurance's results of operations or financial position as it affected disclosures only.

11

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2015
 

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 VIEs and the consolidation analysis of entities involved with VIEs, particularly those having fee arrangements and related party relationships. ProAssurance is in the process 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)
June 30, 2015
 

Disclosures about Short-Duration Contracts
Effective for fiscal years beginning after December 15, 2015, the FASB issued guidance that requires insurance entities to provide detailed discloses relative to the reserve for losses and loss adjustment expenses in annual reporting periods and a roll-forward of the reserve for losses and loss adjustment expenses in interim reporting periods. The guidance also requires disclosures regarding significant changes in the methodologies and assumptions used to calculate the reserve for losses and loss adjustment expenses, including reasons for and the effects of such changes. 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 as it affects disclosures only.


13

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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 June 30, 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.

14

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2015
 

 
June 30, 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
$

 
$
99,506

 
$

 
$
99,506

U.S. Government-sponsored enterprise obligations

 
29,735

 

 
29,735

State and municipal bonds

 
1,003,611

 

 
1,003,611

Corporate debt, multiple observable inputs
2,262

 
1,396,416

 

 
1,398,678

Corporate debt, limited observable inputs:
 
 
 
 
 
 

Other corporate debt, NRSRO ratings available

 

 
7,927

 
7,927

Other corporate debt, NRSRO ratings not available

 

 
541

 
541

Residential mortgage-backed securities

 
267,273

 

 
267,273

Agency commercial mortgage-backed securities

 
11,348

 

 
11,348

Other commercial mortgage-backed securities

 
45,617

 

 
45,617

Other asset-backed securities

 
98,340

 
4,777

 
103,117

Equity securities
 
 
 
 
 
 

Financial
71,102

 

 

 
71,102

Utilities/Energy
38,219

 

 

 
38,219

Consumer oriented
48,270

 

 
76

 
48,346

Industrial
40,846

 

 

 
40,846

Bond funds
79,419

 

 

 
79,419

All other
16,391

 
13,003

 

 
29,394

Short-term investments
141,496

 
2,855

 

 
144,351

Other investments
3,346

 
27,294

 
960

 
31,600

Total assets categorized within the fair value hierarchy
$
441,351

 
$
2,994,998

 
$
14,281

 
$
3,450,630

LP/LLC interests carried at NAV which approximates fair value. These interests, reported as a part of Investment in unconsolidated subsidiaries, are not categorized within the fair value hierarchy.
 
 
 
 
 
 
149,083

Total assets at fair value
 
 
 
 
 
 
$
3,599,713


15

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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

Other investments
6,050

 
22,908

 

 
28,958

Total assets categorized within the fair value hierarchy
$
451,731


$
3,145,120


$
22,875


$
3,619,726

LP/LLC interests carried at NAV which approximates fair value. These interests, reported as a part of Investment in unconsolidated subsidiaries, are not categorized within the fair value hierarchy.
 
 
 
 
 
 
133,250

Total assets at fair value
 
 
 
 
 
 
$
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.

16

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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 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 on a regular basis to permit assessment of the reliability of the quotes; unreliable quotes were 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.
Equity securities were securities not traded on an exchange on the valuation date. The securities were valued using the most recently available quotes for the securities.
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.
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.
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 June 30, 2015, 94% of the securities were rated; the average rating was A-.
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.

17

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2015
 

Equity securities and Other investments consisted of common stock and convertible securities for which limited observable inputs were available at June 30, 2015. 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 millions)
 
June 30, 2015
 
December 31, 2014
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
Assets:
 
 
 
 
 
 
 
 
 
 
State and municipal bonds
 
$—
 
$5.0
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 10% (5%)
 
 
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 10% (5%)
Corporate debt with limited observable inputs
 
$8.5
 
$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%)
Equity securities and Other investments
 
$1.1
 
$—
 
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.

18

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2015
 

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.
 
June 30, 2015
 
Level 3 Fair Value Measurements – Assets
(In thousands)
U.S. Government-sponsored Enterprise Obligations
 
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Equity Securities and Other Investments
 
Total
Balance March 30, 2015
$

 
$
5,025

 
$
9,977

 
$
4,788

 
$

 
$
19,790

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

 

 

 

 

 

Net realized investment gains (losses)

 

 

 

 

 

Included in other comprehensive income

 
(459
)
 
21

 
(11
)
 
(80
)
 
(529
)
Purchases

 

 

 

 
1,116

 
1,116

Sales

 

 
(536
)
 

 

 
(536
)
Transfers in

 

 

 

 

 

Transfers out

 
(4,566
)
 
(994
)
 

 

 
(5,560
)
Balance June 30, 2015
$

 
$

 
$
8,468

 
$
4,777

 
$
1,036

 
$
14,281

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

 
$

 
$

 
$

 
$

 
$

 
June 30, 2015
 
Level 3 Fair Value Measurements – Assets
(In thousands)
U.S. Government-sponsored Enterprise Obligations
 
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Equity Securities and Other Investments
 
Total
Balance December 31, 2014
$

 
$
5,025

 
$
13,081

 
$
4,769

 
$

 
$
22,875

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

 

 
17

 

 

 
17

Net realized investment gains (losses)

 

 
2

 

 

 
2

Included in other comprehensive income

 
(459
)
 
(262
)
 
8

 
(80
)
 
(793
)
Purchases

 

 
1,515

 

 
1,116

 
2,631

Sales

 

 
(836
)
 

 

 
(836
)
Transfers in

 

 

 

 

 

Transfers out

 
(4,566
)
 
(5,049
)
 

 

 
(9,615
)
Balance June 30, 2015
$

 
$

 
$
8,468

 
$
4,777


$
1,036

 
$
14,281

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

 
$

 
$

 
$

 
$

 
$


19

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2015
 

 
June 30, 2014
 
Level 3 Fair Value Measurements – Assets
(In thousands)
U.S. Government-sponsored Enterprise Obligations
 
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Equity Securities and Other Investments
 
Total
Balance March 30, 2014
$
999

 
$
7,490

 
$
12,381

 
$
7,226

 
$

 
$
28,096

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

 
(4
)
 
16

 

 

 
12

Net realized investment gains (losses)

 

 

 

 

 

Included in other comprehensive income
2

 
(26
)
 
(2
)
 
25

 

 
(1
)
Purchases

 

 
2,499

 
1,175

 

 
3,674

Sales

 

 
(350
)
 
(61
)
 

 
(411
)
Transfers in

 
1,549

 

 

 

 
1,549

Transfers out
(1,001
)
 
(1,861
)
 

 
(2,405
)
 

 
(5,267
)
Balance June 30, 2014
$

 
$
7,148

 
$
14,544

 
$
5,960


$

 
$
27,652

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

 
$

 
$

 
$

 
$

 
$

 
June 30, 2014
 
Level 3 Fair Value Measurements – Assets
(In thousands)
U.S. Government-sponsored Enterprise Obligations
 
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Equity Securities and Other Investments
 
Total
Balance December 31, 2013
$

 
$
7,338

 
$
14,176

 
$
6,814

 
$

 
$
28,328

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

 
(6
)
 
32

 

 

 
26

Net realized investment gains (losses)

 
(95
)
 
3

 

 

 
(92
)
Included in other comprehensive income
1

 
42

 
667

 
69

 

 
779

Purchases
1,000

 
1,861

 
2,499

 
3,340

 

 
8,700

Sales

 
(257
)
 
(808
)
 
(61
)
 

 
(1,126
)
Transfers in

 
2,119

 

 
305

 

 
2,424

Transfers out
(1,001
)
 
(3,854
)
 
(2,025
)
 
(4,507
)
 

 
(11,387
)
Balance June 30, 2014
$

 
$
7,148

 
$
14,544

 
$
5,960


$

 
$
27,652

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

 
$

 
$

 
$

 
$

 
$


Transfers
There were no transfers between the Level 1 and Level 2 categories during the three and six months ended June 30, 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.
All transfers during the three and six months ended June 30, 2015 and June 30, 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

20

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2015
 

using multiple observable inputs when those inputs were available; otherwise the securities were valued using limited observable inputs.
Fair Values Not Categorized
Investments in unconsolidated subsidiaries at both June 30, 2015 and December 31, 2014 included interests in investment fund LPs/LLCs that measure fund assets at fair value on a recurring basis and that provide a NAV for the interest. The carrying value of these interests is based on the NAV provided, and was considered to approximate the fair value of the interests. In accordance with GAAP, the fair value of these investments was not classified within the fair value hierarchy. Additional information regarding these investments is as follows:
 
Unfunded
Commitments
 
Fair Value
(In thousands)
June 30,
2015
 
June 30,
2015
 
December 31,
2014
Investments in LPs/LLCs:
 
 
 
 
 
Private debt funds (1)
$25,946
 
$
38,812

 
$
37,296

Long equity fund (2)
None
 
7,058

 
6,747

Long/short equity funds (3)
None
 
25,356

 
25,301

Non-public equity funds (4)
$53,356
 
65,374

 
51,811

Multi-strategy fund of funds (5)
None
 
8,534

 
8,271

Structured credit fund (6)
None
 
3,949

 
3,824

 
 
 
$
149,083

 
$
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 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 LP/LLC.

21

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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.
 
June 30, 2015
 
December 31, 2014
(In thousands)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
BOLI
$
56,090

 
$
56,090

 
$
56,381

 
$
56,381

Other investments
$
59,510

 
$
56,672

 
$
57,099

 
$
57,994

Other assets
$
23,079

 
$
23,052

 
$
22,440

 
$
22,399

Financial liabilities:
 
 
 
 
 
 
 
Senior notes due 2023
$
250,000

 
$
267,853

 
$
250,000

 
$
276,503

Revolving credit agreement
$
100,000

 
$
100,000

 
$

 
$

Other liabilities
$
15,259

 
$
15,253

 
$
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 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 equity value of the interest provided by the LP/LLC managers for the most recent quarter, which approximates the fair value of the interest. 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 provided by the underlying funds. 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.

22

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2015
 

3. Investments
Available-for-sale securities at June 30, 2015 and December 31, 2014 included the following:
 
June 30, 2015
(In thousands)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Fixed maturities
 
 
 
 
 
 
 
U.S. Treasury obligations
$
97,491

 
$
2,223

 
$
208

 
$
99,506

U.S. Government-sponsored enterprise obligations
28,452

 
1,328

 
45

 
29,735

State and municipal bonds
969,667

 
36,244

 
2,300

 
1,003,611

Corporate debt
1,387,556

 
36,992

 
17,402

 
1,407,146

Residential mortgage-backed securities
261,015

 
7,738

 
1,480

 
267,273

Agency commercial mortgage-backed securities
11,135

 
238

 
25

 
11,348

Other commercial mortgage-backed securities
45,032

 
698

 
113

 
45,617

Other asset-backed securities
102,804

 
368

 
55

 
103,117

 
$
2,903,152

 
$
85,829

 
$
21,628

 
$
2,967,353

 
 
 
 
 
 
 
 
 
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


23

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2015
 

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at June 30, 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
$
97,491

 
$
14,924

 
$
69,645

 
$
11,744

 
$
3,193

 
$
99,506

U.S. Government-sponsored enterprise obligations
28,452

 
2,649

 
19,404

 
7,345

 
337

 
29,735

State and municipal bonds
969,667

 
50,386

 
341,963

 
443,042

 
168,220

 
1,003,611

Corporate debt
1,387,556

 
106,506

 
731,107

 
540,308

 
29,225