Derivatives

ProAssurance is exposed to certain risks relating to its ongoing business and investment activities. ProAssurance utilizes derivative instruments as part of its risk management strategy to reduce the market risk related to fluctuations in future interest rates associated with certain of its variable-rate debt. As of December 31, 2017, ProAssurance has not designated any derivative instruments as hedging instruments and does not use derivative instruments for trading purposes.

During the fourth quarter of 2017, ProAssurance entered into an interest rate cap agreement with the objective of reducing the Company's exposure to interest rate risk related to its variable-rate Mortgage Loans. Additional information regarding the Company's Mortgage Loans is provided in Note 9. 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 235 basis points. The Company's variable-rate Mortgage Loans bear an interest rate of three-month LIBOR plus 132.5 basis points. Therefore, this derivative instrument is effectively ensuring the interest rate related to the Mortgage Loans is capped at a maximum of 367.5 basis points until expiration of the interest rate cap agreement in October 2027. ProAssurance has designated the interest rate cap as an economic hedge (non-hedging instrument) of interest rate exposure and any change in fair value of the derivative is immediately recognized in earnings during the period of change.

The following table provides a summary of the volume and fair value position of the interest rate cap as well as the reporting location in the Consolidated Balance Sheets as of December 31, 2017 and 2016.



($ in thousands)		December 31, 2017					December 31, 2016
Derivatives Not Designated as Hedging Instruments	Location in the Consolidated Balance Sheets	Number of Instruments	Notional Amount ⁽¹⁾		Estimated Fair Value⁽²⁾		Number of Instruments	Notional Amount ⁽¹⁾		Estimated Fair Value ⁽²⁾
Interest Rate Cap	Other assets	1	$	35,000	$	1,731	—	$	—	$	—
⁽¹⁾Volume is represented by the derivative instrument's notional amount.
⁽²⁾ Additional information regarding the fair value of the Company's interest rate cap is provided in Note 2.

The following table presents the pre-tax impact of the change in the fair value of the interest rate cap and the reporting location in the Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2017, 2016 and 2015.



		Gains (Losses) Recognized in Income on Derivatives
(In thousands)		Year Ended December 31
Derivatives Not Designated as Hedging Instruments	Location in the Consolidated Statements of Income and Comprehensive Income	2017			2016		2015
Interest Rate Cap	Interest expense	$	(339	)	$	—	$	—

As a result of this derivative instrument, ProAssurance is exposed to risk that the counterparty will fail to meet their contractual obligations. To mitigate this counterparty credit risk, ProAssurance only enters into derivative contracts with carefully selected major financial institutions based upon their credit ratings and monitors their creditworthiness. As of December 31, 2017, the counterparty had an investment grade rating of BBB- and has performed in accordance with their contractual obligations.