Fair Value Measurement (Tables)

9 Months Ended

Sep. 30, 2013

Assets and liabilities measured at fair value

Fair values of assets measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, including financial instruments for which ProAssurance has elected fair value, 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 requires judgment and consideration of factors specific to the assets being valued.



	September 30, 2013
	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	$	—	$	176,548	$	—	$	176,548
U.S. Government-sponsored enterprise obligations	—		36,374		—		36,374
State and municipal bonds	—		1,182,087		5,025		1,187,112
Corporate debt, multiple observable inputs	—		1,372,499		—		1,372,499
Corporate debt, limited observable inputs:
Private placement senior notes	—		—		—		—
Other corporate debt, NRSRO ratings available	—		—		9,853		9,853
Other corporate debt, NRSRO ratings not available	—		—		881		881
Residential mortgage-backed securities	—		247,883		—		247,883
Agency commercial mortgage-backed securities	—		31,366		—		31,366
Other commercial mortgage-backed securities	—		66,031		—		66,031
Other asset-backed securities	—		78,815		4,695		83,510
Equity securities
Financial	80,016		—		—		80,016
Utilities/Energy	32,515		—		—		32,515
Consumer oriented	64,330		—		—		64,330
Industrial	57,149		—		—		57,149
All other	15,689		—		—		15,689
Short-term investments	108,765		7,181		—		115,946
Financial instruments carried at fair value, classified as a part of:
Investment in unconsolidated subsidiaries	—		—		44,656		44,656
Total assets	$	358,464	$	3,198,784	$	65,110	$	3,622,358



	December 31, 2012
	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	$	—	$	205,857	$	—	$	205,857
U.S. Government-sponsored enterprise obligations	—		56,947		—		56,947
State and municipal bonds	—		1,212,804		7,175		1,219,979
Corporate debt, multiple observable inputs	—		1,455,333		—		1,455,333
Corporate debt, limited observable inputs:
Private placement senior notes	—		—		346		346
Other corporate debt, NRSRO ratings available	—		—		13,835		13,835
Other corporate debt, NRSRO ratings not available	—		—		1,010		1,010
Residential mortgage-backed securities	—		289,850		—		289,850
Agency commercial mortgage-backed securities	—		59,464		—		59,464
Other commercial mortgage-backed securities	—		74,106		—		74,106
Other asset-backed securities	—		67,237		4,035		71,272
Equity securities
Financial	70,900		—		—		70,900
Utilities/Energy	31,383		—		—		31,383
Consumer oriented	51,100		—		—		51,100
Industrial	29,695		—		—		29,695
All other	19,540		—		—		19,540
Short-term investments	59,761		11,976		—		71,737
Financial instruments carried at fair value, classified as a part of:
Investment in unconsolidated subsidiaries	—		—		33,739		33,739
Total assets	$	262,379	$	3,433,574	$	60,140	$	3,756,093

Investments in Limited liability companies and limited partnerships

Investment in unconsolidated subsidiaries consist of limited partnership (LP) and limited liability company (LLC) interests valued using the NAV provided by the LP/LLC, which approximates the fair value of the interest.

Such interests include the following:



	Unfunded Commitments		Fair Value
(In thousands)	September 30, 2013		September 30, 2013		December 31, 2012
Investments in LPs/LLCs:
Secured debt fund (1)	$	27,800	$	12,342	$	—
Long equity fund (2)	None		5,813		—
Long/Short equity fund (3)	None		6,128		17,115
Non-public equity funds (4)	40,353		20,373		16,624
			$	44,656	$	33,739


(1)	The LP is structured to provide income and capital appreciation primarily through investments in senior secured debt. Redemptions are not allowed. Income and capital are to be periodically distributed at the discretion of the LP over an anticipated time frame that spans from 7 to 9 years.


(2)	The LP 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)

The LP holds both long and short U.S. and North American equities, and targets absolute returns using a strategy designed to take advantage of event-driven market opportunities. Redemptions are allowed with a notice requirement of up to 45 days and are paid within 30 days of the redemption date, unless the redemption request is for 90% or more of the requestor’s capital balance. Redemptions at the 90% and above level will be paid at 90%, with the remainder paid after the LP’s annual audit.

(4)

Comprised of interests in two 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 other does not permit redemption. Income and capital are to be periodically distributed at the discretion of the LP over an anticipated time frame that spans from 4 to 7 years.

Summary of quantitative information about Level 3 fair value measurements

Quantitative Information Regarding Level 3 Valuations



Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at
(In millions)	September 30, 2013	December 31, 2012	Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
State and municipal bonds	$5.0	$7.2	Market Comparable Securities	Comparability Adjustment	0% - 10% (5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 10% (5%)
Corporate debt with limited observable inputs	$10.7	$15.2	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other asset-backed securities	$4.7	$4.0	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)

Summary of changes in the fair value of assets measured at fair value

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.



	September 30, 2013
	Level 3 Fair Value Measurements – Assets
(In thousands)	State and Municipal Bonds		Corporate Debt			Asset-backed Securities		Investment in Unconsolidated Subsidiaries			Other Investments		Total
Balance June 30, 2013	$	5,025	$	11,359		$	4,679	$	44,549		$	—	$	65,612
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	—		(1		)	—		—			—		(1		)
Equity in earnings of unconsolidated subsidiaries	—		—			—		1,301			—		1,301
Net realized investment gains (losses)	—		—			—		—			—		—
Included in other comprehensive income	—		(221		)	16		—			—		(205		)
Purchases	—		—			—		2,354			—		2,354
Sales	—		(503		)	—		(3,548		)	—		(4,051		)
Transfers in	—		100			—		—			—		100
Transfers out	—		—			—		—			—		—
Balance September 30, 2013	$	5,025	$	10,734		$	4,695	$	44,656		$	—	$	65,110
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—		$	—	$	1,301		$	—	$	1,301



	September 30, 2013
	Level 3 Fair Value Measurements – Assets
(In thousands)	State and Municipal Bonds			Corporate Debt			Asset-backed Securities			Investment in Unconsolidated Subsidiaries			Other Investments		Total
Balance December 31, 2012	$	7,175		$	15,191		$	4,035		$	33,739		$	—	$	60,140
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	—			(103		)	(17		)	—			—		(120		)
Equity in earnings of unconsolidated subsidiaries	—			—			—			3,582			—		3,582
Net realized investment gains (losses)	(44		)	(69		)	—			—			—		(113		)
Included in other comprehensive income	—			(514		)	(81		)	—			—		(595		)
Purchases	—			7,470			1,356			20,975			—		29,801
Sales	(2,106		)	(1,368		)	(18		)	(13,640		)	—		(17,132		)
Transfers in	—			100			1,701			—			—		1,801
Transfers out	—			(9,973		)	(2,281		)	—			—		(12,254		)
Balance September 30, 2013	$	5,025		$	10,734		$	4,695		$	44,656		$	—	$	65,110
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	3,582		$	—	$	3,582



	September 30, 2012
	Level 3 Fair Value Measurements – Assets
(In thousands)	State and Municipal Bonds		Corporate Debt			Asset-backed Securities			Investment in Unconsolidated Subsidiaries		Other Investments		Total
Balance June 30, 2012	$	7,175	$	10,510		$	1,795		$	24,028	$	—	$	43,508
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries	—		—			—			419		—		419
Net realized investment gains (losses)	—		14			—			—		—		14
Included in other comprehensive income	—		15			25			—		—		40
Purchases	—		6,978			4,939			7,032		—		18,949
Sales	—		(1,051		)	(1,118		)	—		—		(2,169		)
Transfers in	—		9,220			—			—		—		9,220
Transfers out	—		(1,920		)	(1,616		)	—		—		(3,536		)
Balance September 30, 2012	$	7,175	$	23,766		$	4,025		$	31,479	$	—	$	66,445
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—		$	—		$	419	$	—	$	419



	September 30, 2012
	Level 3 Fair Value Measurements – Assets
(In thousands)	State and Municipal Bonds			Corporate Debt			Asset-backed Securities			Investment in Unconsolidated Subsidiaries			Other Investments			Total
Balance December 31, 2011	$	7,200		$	8,082		$	—		$	23,841		$	15,873		$	54,996
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries	—			—			—			1,189			—			1,189
Net realized investment gains (losses)	—			14			—			—			(131		)	(117		)
Included in other comprehensive income	—			593			25			—			—			618
Purchases	—			8,915			6,734			7,032			—			22,681
Sales	(25		)	(1,138		)	(1,118		)	(583		)	—			(2,864		)
Transfers in	—			9,220			—			—			—			9,220
Transfers out	—			(1,920		)	(1,616		)	—			(15,742		)	(19,278		)
Balance September 30, 2012	$	7,175		$	23,766		$	4,025		$	31,479		$	—		$	66,445
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	1,189		$	—		$	1,189

Summary of changes in the fair value of liabilities measured at fair value

The following tables present information for the three and nine months ended September 30, 2012 regarding liabilities for which ProAssurance had elected fair value treatment.



	September 30, 2012
	Level 3 Fair Value Measurements - Liabilities
(In thousands)	2019 Note Payable			Interest rate swap agreement			Total
Balance June 30, 2012	$	14,777		$	4,734		$	19,511
Total (gains) losses realized and unrealized:
Included in earnings as a part of:
Net realized investment (gains) losses	—			401			401
Loss on extinguishment of debt	2,163			—			2,163
Settlements	(16,940		)	(5,135		)	(22,075		)
Balance September 30, 2012	$	—		$	—		$	—
Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end	$	—		$	—		$	—



	September 30, 2012
	Level 3 Fair Value Measurements - Liabilities
(In thousands)	2019 Note Payable			Interest rate swap agreement			Total
Balance December 31, 2011	$	14,180		$	4,659		$	18,839
Total (gains) losses realized and unrealized:
Included in earnings as a part of:
Net realized investment (gains) losses	769			476			1,245
Loss on extinguishment of debt	2,163			—			2,163
Settlements	(17,112		)	(5,135		)	(22,247		)
Balance September 30, 2012	$	—		$	—		$	—
Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end	$	—		$	—		$	—

Financial instruments not measured at 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.



	September 30, 2013				December 31, 2012
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
BOLI	$	53,922	$	53,922	$	52,414	$	52,414
Investment in unconsolidated subsidiaries	144,934		142,460		87,310		91,528
Other investments	36,459		47,900		31,085		38,656
Other assets	15,396		15,396		11,400		11,385
Financial liabilities:
Revolving credit agreement	$	—	$	—	$	125,000	$	125,000
Other liabilities	12,623		12,570		12,130		12,085

- Definition

Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset.

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- Definition

Tabular disclosure of the fair value of financial instruments, including financial assets and financial liabilities, and the measurements of those instruments, assets, and liabilities.

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- Definition

Tabular disclosure of the fair value of investees that calculate net asset value per share (including by unit, membership interest, or other equity (ownership interest) unit measure) (alternative investments), whether measured at fair value on a recurring or nonrecurring basis, by major category of assets and liabilities (as defined), including, for example, (i) fair value measurements at the reporting date, (ii) the level within the fair value hierarchy in which the fair value measurements fall, (iii) a reconciliation of beginning and ending balances for those alternative investments that are measured at fair value using unobservable inputs (Level 3 - fair value hierarchy fair value measurement inputs), (iv) the inputs and valuation techniques used to measure fair value, (v) a discussion of changes to valuation techniques and inputs, if any, during the period, (vi) a description of the nature and risk associated with the alternative investments, and (vii) a discussion of the probability that any of the alternative investments are to be sold.

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- Definition

Tabular disclosure of the fair value measurement of liabilities using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and gains or losses recognized in other comprehensive income (loss) and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs) by class of liability.

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