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Fair Value Measurement

3 Months Ended

Mar. 31, 2020

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, 2020 and December 31, 2019 are shown in the following tables. Where applicable, the tables also indicate the fair value hierarchy of the valuation techniques utilized to determine those fair values. For some assets, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair value measurement. Assessments of the significance of a particular input to the fair value measurement require judgment and consideration of factors specific to the assets being valued.



	March 31, 2020
	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	$	—	$	129,260	$	—	$	129,260
U.S. Government-sponsored enterprise obligations	—		12,410		—		12,410
State and municipal bonds	—		291,667		—		291,667
Corporate debt, multiple observable inputs	—		1,285,278		—		1,285,278
Corporate debt, limited observable inputs	—		—		3,440		3,440
Residential mortgage-backed securities	—		229,905		693		230,598
Agency commercial mortgage-backed securities	—		13,363		—		13,363
Other commercial mortgage-backed securities	—		78,519		605		79,124
Other asset-backed securities	—		230,925		5,599		236,524
Fixed maturities, trading	—		47,680		—		47,680
Equity investments
Financial	14,953		—		—		14,953
Utilities/Energy	447		—		—		447
Consumer oriented	1,067		—		—		1,067
Industrial	1,286		—		—		1,286
Bond funds	34,923		—		—		34,923
All other	17,135		—		—		17,135
Short-term investments	336,426		10,914		—		347,340
Other investments	380		29,153		1,338		30,871
Other assets	—		465		—		465
Total assets categorized within the fair value hierarchy	$	406,617	$	2,359,539	$	11,675	2,777,831
Assets carried at NAV, which approximates fair value and which are not categorized within the fair value hierarchy, reported as a part of:
Equity investments							22,939
Investment in unconsolidated subsidiaries							280,842
Total assets at fair value							$	3,081,612



	December 31, 2019
	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	$	—	$	110,467	$	—	$	110,467
U.S. Government-sponsored enterprise obligations	—		17,340		—		17,340
State and municipal bonds	—		296,093		—		296,093
Corporate debt, multiple observable inputs	—		1,335,285		—		1,335,285
Corporate debt, limited observable inputs	—		—		5,079		5,079
Residential mortgage-backed securities	—		208,408		—		208,408
Agency commercial mortgage-backed securities	—		8,221		—		8,221
Other commercial mortgage-backed securities	—		71,868		—		71,868
Other asset-backed securities	—		233,032		2,992		236,024
Fixed maturities, trading	—		47,284		—		47,284
Equity investments
Financial	40,294		—		—		40,294
Utilities/Energy	21,195		—		—		21,195
Consumer oriented	29,288		—		—		29,288
Industrial	26,440		—		—		26,440
Bond funds	58,346		—		—		58,346
All other	52,512		—		—		52,512
Short-term investments	317,313		22,594		—		339,907
Other investments	219		32,713		3,086		36,018
Other assets	—		760		—		760
Total assets categorized within the fair value hierarchy	$	545,607	$	2,384,065	$	11,157	2,940,829
Assets carried at NAV, which approximates fair value and which are not categorized within the fair value hierarchy, reported as a part of:
Equity investments							22,477
Investment in unconsolidated subsidiaries							270,524
Total assets at fair value							$	3,233,830

The fair values for securities included in the Level 2 category, with the few exceptions described below, were developed by one of several third party, nationally recognized pricing services, including services that price only certain types of securities. Each service uses complex methodologies to determine values for securities and subject the values they develop to quality control reviews. Management selected a primary source for each type of security in the portfolio and reviewed the values provided for reasonableness by comparing data to alternate pricing services and to available market and trade data. Values that appeared inconsistent were further reviewed for appropriateness. Any value that did not appear reasonable was discussed with the service that provided the value and adjusted, if necessary. There were no material changes to the values supplied by the pricing services as of March 31, 2020 and December 31, 2019.

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.

State and municipal bonds were valued using a series of matrices that considered credit ratings, the structure of the security, the sector in which the security falls, yields, and contractual cash flows. Valuations were further adjusted, when necessary, to reflect the expected effect on fair value of recent significant economic or geographic events or ratings changes.

Corporate debt, multiple observable inputs consisted primarily of corporate bonds, but also included a small number of bank loans. The methodology used to value Level 2 corporate bonds was the same as the methodology previously described for U.S. Government-sponsored enterprise obligations. Bank loans were valued based on an average of broker quotes for the loans in question, if available. If quotes were not available, the loans were valued based on quoted prices for comparable loans or, if the loan was newly issued, by comparison to similar seasoned issues. Broker quotes were compared to actual trade prices to permit assessment of the reliability of the quotes; unreliable quotes were not considered in quoted averages.

Residential and commercial mortgage-backed securities were valued using a pricing matrix which considers the issuer type, coupon rate and longest cash flows outstanding. The matrix used was based on the most recently available market information. Agency and non-agency collateralized mortgage obligations were both valued using models that consider the structure of the security, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data.

Other asset-backed securities were valued using models that consider the structure of the security, monthly payment information, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data. Spreads and prepayment speeds consider collateral type.

Fixed maturities, trading, are held by the Lloyd's Syndicates segment and include U.S. Treasury obligations, corporate debt with multiple observable inputs and residential mortgage-backed securities. These securities were valued using the respective valuation methodologies discussed above for each security type.

Short-term investments were securities maturing within one year, carried at fair value which approximated the cost of the securities due to their short-term nature.

Other investments consisted primarily of convertible bonds valued using a pricing model that incorporated selected dealer quotes as well as current market data regarding equity prices and risk free rates. If dealer quotes were unavailable for the security being valued, quotes for securities with similar terms and credit status were used in the pricing model. Dealer quotes selected for use were those considered most accurate based on parameters such as underwriter status and historical reliability.

Other assets consisted of an interest rate cap derivative instrument, valued using a model which considers the volatilities from other instruments with similar maturities, strike prices, durations and forward yield curves. Under the terms of the interest rate cap agreement, ProAssurance paid a premium of $2 million for the right to receive cash payments based upon a notional amount of $35 million if and when the three-month LIBOR rises above 2.35%. The Company's variable-rate Mortgage Loans bear an interest rate of three-month LIBOR plus 1.325%. For additional information regarding the interest rate cap agreement, see Note 12 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2019 report on Form 10-K.

Level 3 Valuations

Below is a summary description of the valuation methodologies used as well as quantitative information regarding securities in the Level 3 category, by security type:

Level 3 Valuation Methodologies

Corporate debt, limited observable inputs consisted of corporate bonds valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities of comparable credit quality that have like terms and payment features. Assessments of credit quality were based on NRSRO ratings, if available, or were determined by management if not available. At March 31, 2020, 100% of the securities were rated and the average rating was BB+. At December 31, 2019, 66% of the securities were rated and the average rating was BBB-.

Residential mortgage-backed, other commercial mortgage-backed and other asset-backed securities consisted of securitizations of receivables valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities of comparable credit quality that have like terms and payment features. Assessments of credit quality were based on NRSRO ratings, if available, or were subjectively determined by management if not available. At March 31, 2020, 75% of the securities were rated and the average rating was AA-. At December 31, 2019, 100% of the securities were rated and the average rating was AA.

Other investments consisted of convertible securities for which limited observable inputs were available at March 31, 2020 and December 31, 2019. The securities were valued internally based on expected cash flows, including the expected final recovery, discounted at a yield that considered the lack of liquidity and the financial status of the issuer.

Quantitative Information Regarding Level 3 Valuations



	Fair Value at
($ in thousands)	March 31, 2020	December 31, 2019	Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
Corporate debt, limited observable inputs	$3,440	$5,079	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Residential mortgage-backed and other commercial mortgage-backed securities	$1,298	—	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other asset-backed securities	$5,599	$2,992	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other investments	$1,338	3,086	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.

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, 2020
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities			Other investments			Total
Balance December 31, 2019	$	5,079		$	2,992		$	3,086		$	11,157
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	—			—			—			—
Net realized investment gains (losses)	—			—			(222		)	(222		)
Included in other comprehensive income	(83		)	(122		)	—			(205		)
Purchases	—			3,422			—			3,422
Sales	(1,707		)	—			—			(1,707		)
Transfers in	945			605			—			1,550
Transfers out	(794		)	—			(1,526		)	(2,320		)
Balance March 31, 2020	$	3,440		$	6,897		$	1,338		$	11,675
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	(222	)	$	(222	)



	March 31, 2019
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities			Other investments		Total
Balance December 31, 2018	$	4,322		$	3,850		$	3	$	8,175
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	2			(118		)	—		(116		)
Net realized investment gains (losses)	—			—			—		—
Included in other comprehensive income	3			157			—		160
Purchases	1,305			—			—		1,305
Sales	(136		)	(6		)	—		(142		)
Transfers in	—			1,200			—		1,200
Transfers out	(1,200		)	(951		)	—		(2,151		)
Balance March 31, 2019	$	4,296		$	4,132		$	3	$	8,431
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—	$	—

Transfers

Transfers shown in the preceding Level 3 tables were as of the end of the quarter in which the transfer occurred. All transfers were to or from Level 2.

All transfers in and out of Level 3 during the three months ended March 31, 2020 and 2019 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.

Fair Values Not Categorized

At March 31, 2020 and December 31, 2019, certain LPs/LLCs and investment funds measure fund assets at fair value on a recurring basis and provide a NAV for ProAssurance's interest. The carrying value of these interests is based on the NAV provided and was considered to approximate the fair value of the interests. For investment in unconsolidated subsidiaries, ProAssurance recognizes any changes in the NAV of its interests in equity in earnings (loss) of unconsolidated subsidiaries during the period of change. In accordance with GAAP, the fair value of these investments was not classified within the fair value hierarchy. The amount of ProAssurance's unfunded commitments related to these investments as of March 31, 2020 and fair values of these investments as of March 31, 2020 and December 31, 2019 were as follows:



	Unfunded Commitments		Fair Value
(In thousands)	March 31, 2020		March 31, 2020		December 31, 2019
Equity investments:
Mortgage fund ⁽¹⁾	$	—	$	22,939	$	22,477
Investment in unconsolidated subsidiaries:
Private debt funds ⁽²⁾	$12,040		19,275		19,011
Long equity fund ⁽³⁾	None		4,863		5,293
Long/short equity funds ⁽⁴⁾	None		29,107		30,542
Non-public equity funds ⁽⁵⁾	$62,272		131,238		120,343
Multi-strategy fund of funds ⁽⁶⁾	None		1,993		1,951
Credit funds ⁽⁷⁾	$2,048		42,959		42,415
Long/short commodities fund ⁽⁸⁾	None		14,409		14,519
Strategy focused funds ⁽⁹⁾	$42,991		36,998		36,450
			280,842		270,524
Total investments carried at NAV			$	303,781	$	293,001

Below is additional information regarding each of the investments listed in the table above as of March 31, 2020.


⁽¹⁾	This investment fund is focused on the structured mortgage market. The fund will primarily invest in U.S. Agency mortgage-backed securities. Redemptions are allowed at the end of any calendar quarter with a prior notice requirement of 65 days and are paid within 45 days at the end of the redemption dealing day.

⁽²⁾

This investment is comprised of interests in three unrelated LP funds that are structured to provide interest distributions primarily through diversified portfolios of private debt instruments. One LP allows redemption by special consent; the other two do not permit redemption. Income and capital are to be periodically distributed at the discretion of the LPs over an anticipated time frame that spans from three to eight years.


⁽³⁾	This fund is a LP that holds long equities of public international companies. Redemptions are allowed at the end of any calendar month with a prior notice requirement of 15 days and are paid within 10 days of the end of the calendar month of the redemption request.

⁽⁴⁾

This investment is comprised of interests in multiple unrelated LP funds. The funds hold primarily long and short North American equities and target absolute returns using strategies designed to take advantage of market opportunities. The funds generally permit quarterly or semi-annual capital redemptions subject to notice requirements of 30 to 90 days. For some funds, redemptions above specified thresholds (lowest threshold is 90%) may be only partially payable until after a fund audit is completed and are then payable within 30 days.

⁽⁵⁾

This investment is comprised of interests in multiple unrelated LP funds, each structured to provide capital appreciation through diversified investments in private equity, which can include investments in buyout, venture capital, debt including senior, second lien and mezzanine, distressed debt, collateralized loan obligations and other private equity-oriented LPs. Two of the LPs allow redemption by terms set forth in the LP agreements; the others do not permit redemption. Income and capital are to be periodically distributed at the discretion of the LP over time frames that are anticipated to span up to ten years.


⁽⁶⁾	This fund is a LLC structured to build and manage low volatility, multi-manager portfolios that have little or no correlation to the broader fixed income and equity security markets. Redemptions are not permitted but offers to repurchase units of the LLC may be extended periodically.

⁽⁷⁾

This investment is comprised of four unrelated LP funds. Two funds seek to obtain superior risk-adjusted absolute returns through a diversified portfolio of debt securities, including bonds, loans and other asset-backed instruments. A third fund focuses on private middle market company mezzanine loans, while the remaining fund seeks event driven opportunities across the corporate credit spectrum. Two funds are allowed redemptions at any quarter-end with a prior notice requirement of 90 days; one fund permits redemption at any quarter-end with a prior notice requirement of 180 days and one fund does not allow redemptions. For the fund that does not allow redemptions, income and capital are to be periodically distributed at the discretion of the LP over time frames that are anticipated to span up to twelve years.


⁽⁸⁾	This fund is a LLC invested across a broad range of commodities and focuses primarily on market neutral, relative value strategies, seeking to generate absolute returns with low correlation to broad commodity, equity and fixed income markets. Following an initial one-year lock-up period, redemptions are allowed with a prior notice requirement of 30 days and are payable within 30 days.

⁽⁹⁾ This investment is comprised of multiple unrelated LPs/LLCs funds. One fund is a LLC focused on investing in North American consumer products companies, comprised of equity and equity-related securities, as well as debt instruments. A second fund is focused on aircraft investments, along with components and assets related to aircrafts. For both funds, redemptions are not permitted. Another fund is a LP focused on North American energy infrastructure assets that allows redemption with consent of the General Partner. The remaining funds are real estate focused LPs, one of which allows for redemption with prior notice.

ProAssurance may not sell, transfer or assign its interest in any of the above LPs/LLCs without special consent from the LPs/LLCs.

Nonrecurring Fair Value Measurement

At March 31, 2020 and December 31, 2019, ProAssurance did not have any assets or liabilities that were measured at fair value on a nonrecurring basis.

Financial Instruments - Methodologies Other Than Fair Value

The following table provides the estimated fair value of the Company's financial instruments that, in accordance with GAAP for the type of investment, are measured using a methodology other than fair value. Fair values provided primarily fall within the Level 3 fair value category.



	March 31, 2020				December 31, 2019
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
BOLI	$	66,569	$	66,569	$	66,112	$	66,112
Other investments	$	2,907	$	2,907	$	2,931	$	2,931
Other assets	$	23,353	$	23,361	$	28,645	$	28,650
Financial liabilities:
Senior notes due 2023*	$	250,000	$	255,235	$	250,000	$	273,865
Mortgage Loans*	$	37,240	$	37,240	$	37,617	$	37,617
Other liabilities	$	22,495	$	22,495	$	27,953	$	27,953
* Carrying value excludes unamortized debt issuance costs.

The fair value of the BOLI was equal to the cash surrender value associated with the policies on the valuation date.

Other investments listed in the table above include FHLB common stock carried at cost and an annuity investment carried at amortized cost. Two of ProAssurance's insurance subsidiaries are members of an FHLB. The estimated fair value of the FHLB common stock was based on the amount the subsidiaries would receive if their memberships were canceled, as the memberships cannot be sold. The fair value of the annuity represents the present value of the expected future cash flows discounted using a rate available in active markets for similarly structured instruments.

Other assets and other liabilities primarily consisted of related investment assets and liabilities associated with funded deferred compensation agreements. The fair value of the funded deferred compensation assets was based upon quoted market prices, which is categorized as a Level 1 valuation, and had a fair value of $22.6 million and $26.9 million at March 31, 2020 and December 31, 2019, respectively. The deferred compensation liabilities are adjusted to match the fair value of the deferred compensation assets. Other assets also included an unsecured note receivable under a separate line of credit agreement. Fair value of the note receivable was based on the present value of expected cash flows from the note receivable, discounted at market rates on the valuation date for receivables with similar credit standings and similar payment structures.

The fair value of the debt was estimated based on the present value of expected future cash outflows, discounted at rates available on the valuation date for similar debt issued by entities with a similar credit standing to ProAssurance.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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