Investments

Available-for-sale securities at March 31, 2017 and December 31, 2016 included the following:



	March 31, 2017
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities
U.S. Treasury obligations	$	147,826	$	1,203	$	818	$	148,211
U.S. Government-sponsored enterprise obligations	28,621		241		161		28,701
State and municipal bonds	755,639		19,139		4,717		770,061
Corporate debt	1,291,140		21,812		6,979		1,305,973
Residential mortgage-backed securities	206,455		3,407		1,956		207,906
Agency commercial mortgage-backed securities	12,727		63		102		12,688
Other commercial mortgage-backed securities	19,650		153		106		19,697
Other asset-backed securities	111,214		191		213		111,192
	$	2,573,272	$	46,209	$	15,052	$	2,604,429

	December 31, 2016
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities
U.S. Treasury obligations	$	146,186	$	1,264	$	911	$	146,539
U.S. Government-sponsored enterprise obligations	30,038		388		191		30,235
State and municipal bonds	790,154		17,261		6,952		800,463
Corporate debt	1,264,812		22,659		8,480		1,278,991
Residential mortgage-backed securities	216,285		3,667		2,046		217,906
Agency commercial mortgage-backed securities	12,837		89		143		12,783
Other commercial mortgage-backed securities	19,571		177		137		19,611
Other asset-backed securities	106,938		207		267		106,878
	$	2,586,821	$	45,712	$	19,127	$	2,613,406

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at March 31, 2017, 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	$	147,826	$	28,876	$	98,304	$	18,042	$	2,989	$	148,211
U.S. Government-sponsored enterprise obligations	28,621		12,863		7,781		7,918		139		28,701
State and municipal bonds	755,639		66,017		264,597		348,641		90,806		770,061
Corporate debt	1,291,140		122,549		764,626		388,119		30,679		1,305,973
Residential mortgage-backed securities	206,455										207,906
Agency commercial mortgage-backed securities	12,727										12,688
Other commercial mortgage-backed securities	19,650										19,697
Other asset-backed securities	111,214										111,192
	$	2,573,272									$	2,604,429

Excluding obligations of the U.S. Government or U.S. Government-sponsored enterprises, no investment in any entity or its affiliates exceeded 10% of Shareholders’ equity at March 31, 2017.

Cash and securities with a carrying value of $46.4 million at March 31, 2017 were on deposit with various state insurance departments to meet regulatory requirements. ProAssurance also held securities with a carrying value of $246.5 million at March 31, 2017 that are pledged as collateral security for advances under the Revolving Credit Agreement (see Note 8 of the Notes to Condensed Consolidated Financial Statements for additional detail on the Revolving Credit Agreement).

As a member of Lloyd's and a capital provider to Syndicate 1729, ProAssurance is required to maintain capital at Lloyd's, referred to as FAL. ProAssurance investments at March 31, 2017 included fixed maturities with a fair value of $96.7 million and short-term investments with a fair value of approximately $1.0 million on deposit with Lloyd's in order to satisfy these FAL requirements.

BOLI

ProAssurance holds BOLI policies that are carried at the current cash surrender value of the policies (original cost $33 million). All insured individuals were members of ProAssurance management at the time the policies were acquired. The primary purpose of the program is to offset future employee benefit expenses through earnings on the cash value of the policies. ProAssurance is the owner and beneficiary of these policies.

Investment in Unconsolidated Subsidiaries

ProAssurance holds investments in unconsolidated subsidiaries, accounted for under the equity method. The investments include the following:



	Carrying Value
(In thousands)	March 31, 2017		December 31, 2016
Investment in LPs/LLCs:
Qualified affordable housing tax credit partnerships	$	99,005	$	102,313
Other tax credit partnerships	11,041		11,459
All other LPs/LLCs	220,433		227,134
	$	330,479	$	340,906

Qualified affordable housing tax credit partnership interests held by ProAssurance generate investment returns by providing tax benefits to fund investors in the form of tax credits and project operating losses. The carrying value of these investments reflects ProAssurance's total commitments (both funded and unfunded) to the partnerships. ProAssurance's ownership percentage relative to two of the tax credit partnership interests is almost 100%; these interests had a carrying value of $38.3 million at March 31, 2017 and $40.2 million at December 31, 2016. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of $60.7 million at March 31, 2017 and $62.1 million at December 31, 2016. ProAssurance does not have the ability to exert control over the partnerships; all are accounted for using the equity method.

Other tax credit partnerships are comprised entirely of historic tax credits. The historic tax credits generate investment returns by providing benefits to fund investors in the form of tax credits, tax deductible project operating losses and positive cash flows. ProAssurance's ownership percentage relative to the tax credit partnerships is almost 100%. ProAssurance does not have the ability to exert control over the partnerships; the interests are accounted for using the equity method.

As discussed in additional detail in Note 2 of the Notes to Condensed Consolidated Financial Statements, ProAssurance holds interests in certain LPs/LLCs that are investment funds which measure fund assets at fair value on a recurring basis and the fund managers provide a NAV for the interest. The carrying value of these interests is based on the NAV provided, and is considered to approximate the fair value of the interests; such interests totaled $199.7 million at March 31, 2017 and $204.7 million at December 31, 2016. ProAssurance also holds interests in other LPs/LLCs which are not considered to be investment funds; such interests totaled $20.7 million at March 31, 2017 and $22.4 million at December 31, 2016. ProAssurance's ownership percentage relative to three of the LPs/LLCs is greater than 25%, which is expected to be reduced as the funds mature and other investors participate in the funds; these investments had a carrying value of $20.8 million at March 31, 2017 and $18.5 million at December 31, 2016. ProAssurance's ownership percentage relative to the remaining LPs/LLCs is less than 25%; these interests had a carrying value of $199.6 million at March 31, 2017 and $208.6 million at December 31, 2016. ProAssurance does not have the ability to exert control over any of these funds.

Other Investments

Other investments at March 31, 2017 and December 31, 2016 were comprised as follows:



(In thousands)	March 31, 2017		December 31, 2016
Investments in LPs/LLCs, at cost	$	47,164	$	46,852
Convertible securities, at fair value	29,978		31,501
Other, principally FHLB capital stock, at cost	3,434		3,539
	$	80,576	$	81,892

Investments in convertible securities are carried at fair value as permitted by the accounting guidance for hybrid financial instruments, with changes in fair value recognized in income as a component of Net realized investment gains (losses) during the period of change.

FHLB capital stock is not marketable, but may be liquidated by terminating membership in the FHLB. The liquidation process can take up to five years.

Investments Held in a Loss Position

The following tables provide summarized information with respect to investments held in an unrealized loss position at March 31, 2017 and December 31, 2016, including the length of time the investment had been held in a continuous unrealized loss position.



	March 31, 2017
	Total				Less than 12 months				12 months or longer
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Loss		Value		Loss		Value		Loss
Fixed maturities, available for sale
U.S. Treasury obligations	$	82,630	$	818	$	82,630	$	818	$	—	$	—
U.S. Government-sponsored enterprise obligations	10,507		161		10,507		161		—		—
State and municipal bonds	167,434		4,717		160,343		4,132		7,091		585
Corporate debt	416,640		6,979		382,246		4,361		34,394		2,618
Residential mortgage-backed securities	97,495		1,956		95,381		1,922		2,114		34
Agency commercial mortgage-backed securities	4,571		102		4,191		72		380		30
Other commercial mortgage-backed securities	10,890		106		9,075		85		1,815		21
Other asset-backed securities	46,008		213		42,018		207		3,990		6
	$	836,175	$	15,052	$	786,391	$	11,758	$	49,784	$	3,294



	December 31, 2016
	Total				Less than 12 months				12 months or longer
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Loss		Value		Loss		Value		Loss
Fixed maturities, available for sale
U.S. Treasury obligations	$	79,833	$	911	$	79,833	$	911	$	—	$	—
U.S. Government-sponsored enterprise obligations	11,746		191		11,746		191		—		—
State and municipal bonds	224,884		6,952		219,276		6,444		5,608		508
Corporate debt	469,632		8,480		424,721		5,662		44,911		2,818
Residential mortgage-backed securities	103,680		2,046		100,542		1,982		3,138		64
Agency commercial mortgage-backed securities	4,579		143		4,192		114		387		29
Other commercial mortgage-backed securities	9,822		137		9,179		134		643		3
Other asset-backed securities	44,343		267		39,079		256		5,264		11
	$	948,519	$	19,127	$	888,568	$	15,694	$	59,951	$	3,433

As of March 31, 2017, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 587 debt securities (23.2% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 397 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.5 million and $0.4 million, respectively. The securities were evaluated for impairment as of March 31, 2017.

As of December 31, 2016, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 703 debt securities (27.2% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 456 issuers. The greatest and second greatest unrealized loss positions among those securities were each approximately $0.5 million. The securities were evaluated for impairment as of December 31, 2016.

Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds in an unrealized loss position have suffered an OTTI in value. A detailed discussion of the factors considered in the assessment is included in Note 1 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2016 Form 10-K.

Fixed maturity securities held in an unrealized loss position at March 31, 2017, excluding asset-backed securities, have paid all scheduled contractual payments and are expected to continue doing so. Expected future cash flows of asset-backed securities held in an unrealized loss position were estimated as part of the March 31, 2017 impairment evaluation using the most recently available six-month historical performance data for the collateral (loans) underlying the security or, if historical data was not available, sector based assumptions, and equaled or exceeded the current amortized cost basis of the security.

Net Investment Income

Net investment income by investment category was as follows:



	Three Months Ended March 31
(In thousands)	2017			2016
Fixed maturities	$	20,121		$	22,575
Equities	3,644			3,643
Short-term and Other investments	801			405
BOLI	455			460
Investment fees and expenses	(1,835		)	(1,643		)
Net investment income	$	23,186		$	25,440

Equity in Earnings (Loss) of Unconsolidated Subsidiaries

Equity in earnings (loss) of unconsolidated subsidiaries included losses from qualified affordable housing project tax credit investments and historic tax credit investments. The losses recorded reflect ProAssurance's allocable portion of partnership operating losses. Losses from qualified affordable housing project tax credit investments were $3.3 million and $5.2 million for the 2017 and 2016 three-month periods, respectively, and tax credits recognized related to these investments totaled $4.6 million for both 2017 and 2016 three-month periods. Losses from historic tax credit investments were $0.4 million and $0.2 million and tax credits recognized related to these investments totaled $1.8 million and $2.6 million for the 2017 and 2016 three-month periods, respectively. Tax credits recognized reduced income tax expense in the respective periods.

Net Realized Investment Gains (Losses)

Realized investment gains and losses are recognized on the first-in, first-out basis. The following table provides detailed information regarding Net realized investment gains (losses):



	Three Months Ended March 31
(In thousands)	2017			2016
Total OTTI losses:
Corporate debt	$	(419	)	$	(7,604	)
Other investments	—			(3,130		)
Portion of OTTI losses recognized in other comprehensive income before taxes:
Corporate debt	248			1,068
Net impairment losses recognized in earnings	(171		)	(9,666		)
Gross realized gains, available-for-sale securities	1,853			3,185
Gross realized (losses), available-for-sale securities	(67		)	(4,647		)
Net realized gains (losses), trading securities	6,562			2,055
Net realized gains (losses), Other investments	1,172			52
Change in unrealized holding gains (losses), trading securities	3,616			733
Change in unrealized holding gains (losses), convertible securities, carried at fair value	313			(66		)
Other	2			2
Net realized investment gains (losses)	$	13,280		$	(8,352	)

During the first quarter of 2017, ProAssurance recognized OTTI in earnings of $0.2 million and $0.2 million of non-credit OTTI in OCI both of which related to corporate bonds.

During the first quarter of 2016, ProAssurance recognized OTTI in earnings of $6.5 million related to corporate bonds, including credit-related OTTI of $5.5 million related to debt instruments from ten issuers in the energy sector. The fair value of the bonds and the credit quality of the issuers had declined and ProAssurance recognized credit-related OTTI to reduce the amortized cost basis of the bonds to the present value of future cash flows expected to be received from the bonds. ProAssurance also recognized non-credit OTTI in OCI of $0.9 million related to certain of these same bonds, as the fair value of the bonds was less than the present value of the expected future cash flows from the securities.

ProAssurance also recognized a $3.1 million OTTI in earnings for the 2016 three-month period related to an investment fund that is accounted for using the cost method (classified as Other investments). The fund is focused on the energy sector and securities held by the fund declined in value during 2016. An OTTI was recognized to reduce ProAssurance's carrying value of the investment to the NAV reported by the fund.

The following table presents a roll forward of cumulative credit losses recorded in earnings related to impaired debt securities for which a portion of the OTTI was recorded in OCI.



	Three Months Ended March 31
(In thousands)	2017		2016
Balance beginning of period	$	1,158	$	5,751
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized	171		2,398
OTTI has been previously recognized	—		2,154
Reductions due to:
Securities sold during the period (realized)	—		(3,744		)
Balance March 31	$	1,329	$	6,559

Other information regarding sales and purchases of available-for-sale securities is as follows:



	Three Months Ended March 31
(In millions)	2017		2016
Proceeds from sales (exclusive of maturities and paydowns)	$	79.2	$	109.9
Purchases	$	160.4	$	199.6