Fair Value Measurement (Tables)

9 Months Ended

Sep. 30, 2014

Assets and liabilities measured at fair value

Fair values of assets measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, 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 require judgment and consideration of factors specific to the assets being valued.



	September 30, 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	$	—	$	176,813	$	—	$	176,813
U.S. Government-sponsored enterprise obligations	—		43,966		—		43,966
State and municipal bonds	—		1,082,040		5,594		1,087,634
Corporate debt, multiple observable inputs	—		1,459,550		—		1,459,550
Corporate debt, limited observable inputs:
Other corporate debt, NRSRO ratings available	—		—		10,793		10,793
Other corporate debt, NRSRO ratings not available	—		—		2,642		2,642
Residential mortgage-backed securities	—		290,314		—		290,314
Agency commercial mortgage-backed securities	—		16,893		—		16,893
Other commercial mortgage-backed securities	—		57,323		—		57,323
Other asset-backed securities	—		96,119		4,773		100,892
Equity securities
Financial	75,141		—		—		75,141
Utilities/Energy	26,551		—		—		26,551
Consumer oriented	64,912		—		—		64,912
Industrial	54,912		—		—		54,912
Bond funds	53,178		—		—		53,178
All other	31,937		—		—		31,937
Short-term investments	94,323		650		—		94,973
Financial instruments carried at fair value, classified as a part of:
Investment in unconsolidated subsidiaries	—		—		110,793		110,793
Other investments	4,830		25,228		—		30,058
Total assets	$	405,784	$	3,248,896	$	134,595	$	3,789,275



	December 31, 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	$	—	$	170,714	$	—	$	170,714
U.S. Government-sponsored enterprise obligations	—		32,768		—		32,768
State and municipal bonds	—		1,147,328		7,338		1,154,666
Corporate debt, multiple observable inputs	—		1,346,977		—		1,346,977
Corporate debt, limited observable inputs:
Other corporate debt, NRSRO ratings available	—		—		11,449		11,449
Other corporate debt, NRSRO ratings not available	—		—		2,727		2,727
Residential mortgage-backed securities	—		235,614		—		235,614
Agency commercial mortgage-backed securities	—		27,475		—		27,475
Other commercial mortgage-backed securities	—		61,390		—		61,390
Other asset-backed securities	—		67,455		6,814		74,269
Equity securities
Financial	81,536		—		—		81,536
Utilities/Energy	32,350		—		—		32,350
Consumer oriented	66,461		—		—		66,461
Industrial	57,262		—		—		57,262
All other	15,932		—		—		15,932
Short-term investments	248,605						248,605
Financial instruments carried at fair value, classified as a part of:
Investment in unconsolidated subsidiaries	—		—		72,062		72,062
Total assets	$	502,146	$	3,089,721	$	100,390	$	3,692,257

Investments in Limited liability companies and limited partnerships

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

Such interests include the following:



	Unfunded Commitments	Fair Value
(In thousands)	September 30, 2014	September 30, 2014		December 31, 2013
Investments in LPs/LLCs:
Secured debt fund (1)	$16,200	$	23,896	$	13,233
Long equity fund (2)	None	7,034		6,574
Long/Short equity funds (3)	None	25,016		28,385
Non-public equity funds (4)	$71,518	42,818		23,870
Multi-strategy fund of funds (5)	None	8,263		—
Structured credit fund (6)	None	3,766		—
		$	110,793	$	72,062


(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)

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 redemptions of the investors’ existing capital balance with 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 from 4 to 12 years.


(5)	The LLC is 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)	The LP seeks 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.

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, 2014	December 31, 2013	Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
State and municipal bonds	$5.6	$7.3	Market Comparable Securities	Comparability Adjustment	0% - 10% (5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 10% (5%)
Corporate debt with limited observable inputs	$13.4	$14.2	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other asset-backed securities	$4.8	$6.8	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, 2014
	Level 3 Fair Value Measurements – Assets
(In thousands)	U.S. Government-sponsored Enterprise Obligations		State and Municipal Bonds			Corporate Debt			Asset-backed Securities			Investment in Unconsolidated Subsidiaries			Total
Balance June 30, 2014	$	—	$	7,148		$	14,544		$	5,960		$	101,342		$	128,994
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	—		(4		)	16			—			—			12
Equity in earnings of unconsolidated subsidiaries	—		—			—			—			(683		)	(683		)
Net realized investment gains (losses)	—		—			—			—			—			—
Included in other comprehensive income	—		(76		)	35			(6		)	—			(47		)
Purchases	—		—			(499		)	—			12,055			11,556
Sales	—		(1,474		)	(661		)	—			(1,921		)	(4,056		)
Transfers in	—		—			—			—			—			—
Transfers out	—		—			—			(1,181		)	—			(1,181		)
Balance September 30, 2014	$	—	$	5,594		$	13,435		$	4,773		$	110,793		$	134,595
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—		$	—		$	—		$	(683	)	$	(683	)



	September 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			Investment in Unconsolidated Subsidiaries			Total
Balance December 31, 2013	$	—		$	7,338		$	14,176		$	6,814		$	72,062		$	100,390
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	—			(10		)	48			—			—			38
Equity in earnings of unconsolidated subsidiaries	—			—			—			—			5,413			5,413
Net realized investment gains (losses)	—			(95		)	3			—			—			(92		)
Included in other comprehensive income	1			(34		)	702			63			—			732
Purchases	1,000			1,861			2,000			3,340			37,430			45,631
Sales	—			(1,731		)	(1,469		)	(61		)	(4,112		)	(7,373		)
Transfers in	—			2,119			—			305			—			2,424
Transfers out	(1,001		)	(3,854		)	(2,025		)	(5,688		)	—			(12,568		)
Balance September 30, 2014	$	—		$	5,594		$	13,435		$	4,773		$	110,793		$	134,595
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—		$	5,413		$	5,413



	September 30, 2013
	Level 3 Fair Value Measurements – Assets
(In thousands)	U.S. Government-sponsored Enterprise Obligations		State and Municipal Bonds		Corporate Debt			Asset-backed Securities		Investment in Unconsolidated Subsidiaries			Total
Balance 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)	U.S. Government-sponsored Enterprise Obligations		State and Municipal Bonds			Corporate Debt			Asset-backed Securities			Investment in Unconsolidated Subsidiaries			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

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, 2014				December 31, 2013
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
BOLI	$	55,918	$	55,918	$	54,374	$	54,374
Other investments	61,952		63,247		52,240		51,833
Other assets	21,298		21,248		17,940		17,940
Financial liabilities:
Senior notes due 2023	$	250,000	$	273,750	$	250,000	$	262,500
Other liabilities	14,022		14,139		13,303		13,303

- 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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