Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy has been established for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs considered most observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy levels are defined as follows:



	Level 1:	quoted (unadjusted) market prices in active markets for identical assets and liabilities. For ProAssurance, Level 1 inputs are generally quotes for debt or equity securities actively traded in exchange or over-the-counter markets.



	Level 2:	market data obtained from sources independent of the reporting entity (observable inputs). For ProAssurance, Level 2 inputs generally include quoted prices in markets that are not active, quoted prices for similar assets or liabilities, and results from pricing models that use observable inputs such as interest rates and yield curves that are generally available at commonly quoted intervals.



	Level 3:	the reporting entity's own assumptions about market participant assumptions based on the best information available in the circumstances (non-observable inputs). For ProAssurance, Level 3 inputs are used in situations where little or no Level 1 or 2 inputs are available or are inappropriate given the particular circumstances. Level 3 inputs include results from pricing models for which some or all of the inputs are not observable, discounted cash flow methodologies, single non-binding broker quotes and adjustments to externally quoted prices that are based on management judgment or estimation.

Fair values of assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 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, 2017
	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	$	—	$	148,211	$	—	$	148,211
U.S. Government-sponsored enterprise obligations	—		28,701		—		28,701
State and municipal bonds	—		770,061		—		770,061
Corporate debt, multiple observable inputs	2,395		1,284,664		—		1,287,059
Corporate debt, limited observable inputs	—		—		18,914		18,914
Residential mortgage-backed securities	—		207,906		—		207,906
Agency commercial mortgage-backed securities	—		12,688		—		12,688
Other commercial mortgage-backed securities	—		19,697		—		19,697
Other asset-backed securities	—		108,190		3,002		111,192
Equity securities
Financial	84,052		—		—		84,052
Utilities/Energy	51,304		—		—		51,304
Consumer oriented	60,686		—		—		60,686
Industrial	52,497		—		—		52,497
Bond funds	92,753		—		—		92,753
All other	49,914		—		—		49,914
Short-term investments	277,494		2,847		—		280,341
Other investments	1,270		27,805		903		29,978
Total assets categorized within the fair value hierarchy	$	672,365	$	2,610,770	$	22,819	3,305,954
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.							199,696
Total assets at fair value							$	3,505,650



	December 31, 2016
	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	$	—	$	146,539	$	—	$	146,539
U.S. Government-sponsored enterprise obligations	—		30,235		—		30,235
State and municipal bonds	—		800,463		—		800,463
Corporate debt, multiple observable inputs	2,339		1,261,842		—		1,264,181
Corporate debt, limited observable inputs	—		—		14,810		14,810
Residential mortgage-backed securities	—		217,906		—		217,906
Agency commercial mortgage-backed securities	—		12,783		—		12,783
Other commercial mortgage-backed securities	—		19,611		—		19,611
Other asset-backed securities	—		103,871		3,007		106,878
Equity securities
Financial	81,749		—		—		81,749
Utilities/Energy	52,869		—		—		52,869
Consumer oriented	61,284		—		—		61,284
Industrial	54,265		—		—		54,265
Bond funds	79,843		10,159		—		90,002
All other	27,181		19,924		—		47,105
Short-term investments	437,580		4,504		—		442,084
Other investments	1,956		29,542		3		31,501
Total assets categorized within the fair value hierarchy	$	799,066	$	2,657,379	$	17,820	3,474,265
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.							204,719
Total assets at fair value							$	3,678,984

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. No such adjustments were made during 2017. One nominal adjustment was made during 2016 and related to an investment in an unrealized loss position that was subsequently sold during 2016.

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.

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 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.

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 prices.


•	ProAssurance Level 3 securities 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

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 subjectively determined by management if not available. At March 31, 2017, 88% of the securities were rated; the average rating was BBB. At December 31, 2016, 84% of the securities were rated; the average rating was BBB+.

Other asset-backed securities consisted of securitizations of receivables valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities.

Other investments consisted of convertible securities for which limited observable inputs were available at March 31, 2017 and at December 31, 2016. 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, 2017	December 31, 2016	Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
Corporate debt, limited observable inputs	$18,914	$14,810	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other asset-backed securities	$3,002	$3,007	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other investments	$903	$3	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, 2017
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities			All other investments		Total
Balance December 31, 2016	$	14,810		$	3,007		$	3	$	17,820
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	(39		)	—			—		(39		)
Net realized investment gains (losses)	13			—			—		13
Included in other comprehensive income	(208		)	(5		)	2		(211		)
Purchases	7,048			—			—		7,048
Sales	(1,712		)	—			—		(1,712		)
Transfers in	—			—			898		898
Transfers out	(998		)	—			—		(998		)
Balance March 31, 2017	$	18,914		$	3,002		$	903	$	22,819
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—	$	—



	March 31, 2016
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities			All other investments			Total
Balance December 31, 2015	$	14,500		$	757		$	—		$	15,257
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	(14		)	—			(1		)	(15		)
Net realized investment gains (losses)	(75		)	—			—			(75		)
Included in other comprehensive income	(75		)	(2		)	(1		)	(78		)
Purchases	—			3,500			1,560			5,060
Sales	(681		)	(167		)	—			(848		)
Transfers in	—			—			—			—
Transfers out	(6		)	—			—			(6		)
Balance March 31, 2016	$	13,649		$	4,088		$	1,558		$	19,295
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—

Transfers

Equity securities of approximately $35.4 million were transferred from Level 2 to Level 1 during the three months ended March 31, 2017. There were no transfers between the Level 1 and Level 2 categories during the same period of 2016.

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 during the three months ended March 31, 2017 and 2016 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

Investments in unconsolidated subsidiaries at both March 31, 2017 and December 31, 2016 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)	March 31, 2017	March 31, 2017		December 31, 2016
Investments in LPs/LLCs:
Private debt funds ⁽¹⁾	$11,972	$	51,307	$	55,637
Long equity fund ⁽²⁾	None	6,770		6,268
Long/short equity funds ⁽³⁾	None	29,944		28,926
Non-public equity funds ⁽⁴⁾	$55,334	86,506		89,691
Multi-strategy fund of funds ⁽⁵⁾	None	8,668		8,448
Structured credit fund ⁽⁶⁾	None	4,466		4,273
Long/short commodities fund ⁽⁷⁾	None	12,035		11,476
		$	199,696	$	204,719

⁽¹⁾

The investment is 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 three to eight years.


⁽²⁾	The 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.

⁽³⁾

The 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.

⁽⁴⁾

The 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, mezzanine debt, distressed debt, 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 nine years.


⁽⁵⁾	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.


⁽⁶⁾	This fund is a 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.


⁽⁷⁾	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.

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

Financial Instruments - Methodologies Other Than Fair Value

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



	March 31, 2017				December 31, 2016
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
BOLI	$	60,589	$	60,589	$	60,134	$	60,134
Other investments	$	50,598	$	62,061	$	50,391	$	58,757
Other assets	$	29,196	$	29,072	$	29,111	$	28,960
Financial liabilities:
Senior notes due 2023	$	250,000	$	274,315	$	250,000	$	270,898
Revolving Credit Agreement	$	200,000	$	200,000	$	200,000	$	200,000
Other liabilities	$	17,855	$	17,855	$	17,033	$	17,011

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 unsecured note receivables under two separate line of credit agreements. 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.

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.