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Investments
 9 Months Ended
Sep. 30, 2020
Investments, Debt and Equity Securities [Abstract]  
Investments Investments
Available-for-sale fixed maturities at September 30, 2020 and December 31, 2019 included the following:
 
September 30, 2020
(In thousands)
Amortized
Cost
 
Allowance for Expected Credit Losses
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Fixed maturities, available-for-sale
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$
113,155

 
$
—

 
$
4,215

 
$
6

 
$
117,364

U.S. Government-sponsored enterprise obligations
10,888

 
—

 
168

 
1

 
11,055

State and municipal bonds
301,542

 
—

 
17,664

 
114

 
319,092

Corporate debt
1,255,139

 
552

 
58,359

 
5,765

 
1,307,181

Residential mortgage-backed securities
240,239

 
—

 
7,518

 
439

 
247,318

Agency commercial mortgage-backed securities
13,461

 
—

 
711

 
1

 
14,171

Other commercial mortgage-backed securities
96,414

 
—

 
4,055

 
1,393

 
99,076

Other asset-backed securities
268,075

 
—

 
4,048

 
1,295

 
270,828

 
$
2,298,913

 
$
552

 
$
96,738

 
$
9,014

 
$
2,386,085


 
December 31, 2019
(In thousands)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Fixed maturities, available-for-sale
 
 
 
 
 
 
 
U.S. Treasury obligations
$
109,060

 
$
1,533

 
$
126

 
$
110,467

U.S. Government-sponsored enterprise obligations
17,215

 
125

 
—

 
17,340

State and municipal bonds
287,658

 
9,110

 
675

 
296,093

Corporate debt
1,308,889

 
33,050

 
1,575

 
1,340,364

Residential mortgage-backed securities
205,588

 
3,139

 
319

 
208,408

Agency commercial mortgage-backed securities
8,054

 
182

 
15

 
8,221

Other commercial mortgage-backed securities
70,621

 
1,468

 
221

 
71,868

Other asset-backed securities
234,219

 
1,958

 
153

 
236,024

 
$
2,241,304


$
50,565


$
3,084

 
$
2,288,785



The recorded cost basis and estimated fair value of available-for-sale fixed maturities at September 30, 2020, 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
$
113,155

 
$
27,797

 
$
73,917

 
$
15,650

 
$
—

 
$
117,364

U.S. Government-sponsored enterprise obligations
10,888

 
—

 
7,895

 
3,004

 
156

 
11,055

State and municipal bonds
301,542

 
21,703

 
120,512

 
147,827

 
29,050

 
319,092

Corporate debt
1,255,139

 
135,080

 
715,768

 
408,824

 
47,509

 
1,307,181

Residential mortgage-backed securities
240,239

 

 

 

 

 
247,318

Agency commercial mortgage-backed securities
13,461

 

 

 

 

 
14,171

Other commercial mortgage-backed securities
96,414

 

 

 

 

 
99,076

Other asset-backed securities
268,075

 

 

 

 

 
270,828

 
$
2,298,913

 
 
 
 
 
 
 
 
 
$
2,386,085


Excluding obligations of the U.S. Government, U.S. Government-sponsored enterprises and a U.S. Government obligations money market fund, no investment in any entity or its affiliates exceeded 10% of shareholders’ equity at September 30, 2020.
Cash and securities with a carrying value of $42.6 million at September 30, 2020 were on deposit with various state insurance departments to meet regulatory requirements.
As a member of Lloyd's, ProAssurance is required to maintain capital at Lloyd's, referred to as FAL, to support underwriting by Syndicate 1729 and Syndicate 6131. At September 30, 2020, ProAssurance's FAL investments were comprised of available-for-sale fixed maturities with a fair value of $98.3 million and cash and cash equivalents of $7.5 million on deposit with Lloyd's in order to satisfy these FAL requirements. During the third quarter of 2020, ProAssurance received a return of approximately $32.3 million of cash and cash equivalents from its FAL balances given the Company's reduced participation in the results of Syndicate 1729 for the 2020 underwriting year to 29% from 61%.
Investments Held in a Loss Position
The following tables provide summarized information with respect to investments held in an unrealized loss position at September 30, 2020 and December 31, 2019, including the length of time the investment had been held in a continuous unrealized loss position.
 
September 30, 2020
 
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
$
11,069

 
$
6

 
$
11,069

 
$
6

 
$
—

 
$
—

U.S. Government-sponsored enterprise obligations
1,420

 
1

 
1,420

 
1

 
—

 
—

State and municipal bonds
13,021

 
114

 
13,021

 
114

 
—

 
—

Corporate debt
171,059

 
5,765

 
152,089

 
4,737

 
18,970

 
1,028

Residential mortgage-backed securities
28,926

 
439

 
28,475

 
435

 
451

 
4

Agency commercial mortgage-backed securities
834

 
1

 
834

 
1

 
—

 
—

Other commercial mortgage-backed securities
23,189

 
1,393

 
22,825

 
1,386

 
364

 
7

Other asset-backed securities
80,142

 
1,295

 
74,277

 
1,231

 
5,865

 
64

 
$
329,660

 
$
9,014

 
$
304,010

 
$
7,911

 
$
25,650

 
$
1,103


 
December 31, 2019
 
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
$
25,959

 
$
126

 
$
15,305

 
$
103

 
$
10,654

 
$
23

State and municipal bonds
36,565

 
675

 
35,621

 
674

 
944

 
1

Corporate debt
128,254

 
1,575

 
88,582

 
932

 
39,672

 
643

Residential mortgage-backed securities
59,291

 
319

 
28,048

 
63

 
31,243

 
256

Agency commercial mortgage-backed securities
459

 
15

 
158

 
—

 
301

 
15

Other commercial mortgage-backed securities
18,339

 
221

 
16,924

 
206

 
1,415

 
15

Other asset-backed securities
48,912

 
153

 
37,322

 
145

 
11,590

 
8

 
$
317,779

 
$
3,084

 
$
221,960

 
$
2,123

 
$
95,819

 
$
961


As of September 30, 2020, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 490 debt securities (19.2% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 358 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.7 million and $0.5 million, respectively. The securities were evaluated for impairment as of September 30, 2020.
As of December 31, 2019, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 263 debt securities (12.1% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 204 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.2 million and $0.1 million, respectively. The securities were evaluated for impairment as of December 31, 2019.
Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds in an unrealized loss position has suffered an impairment due to credit or non-credit factors. A detailed discussion of the factors considered in the assessment is included in Note 1.
Fixed maturity securities held in an unrealized loss position at September 30, 2020, 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, excluding those issued by GNMA, FNMA and FHLMC, held in an unrealized loss position were estimated as part of the September 30, 2020 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.
The following tables present a roll forward of the allowance for expected credit losses on available-for-sale fixed maturities for the three and nine months ended September 30, 2020.
 
Three Months Ended September 30, 2020
(In thousands)
Corporate Debt
Total
Balance July 1, 2020
$
1,408

$
1,408

Reductions related to:
 
 
Securities sold during the period
(856
)
(856
)
Balance September 30, 2020
$
552

$
552

 
Nine Months Ended September 30, 2020
(In thousands)
Corporate Debt
Total
Balance December 31, 2019
$
—

$
—

Additional credit losses related to securities for which:
 


No allowance for credit losses has been previously recognized
1,508

1,508

Reductions related to:
 


Securities sold during the period
(956
)
(956
)
Balance September 30, 2020
$
552

$
552


Other information regarding sales and purchases of fixed maturity available-for-sale securities is as follows:
 
Three Months Ended September 30
 
Nine Months Ended September 30
(In millions)
2020
 
2019
 
2020
 
2019
Proceeds from sales (exclusive of maturities and paydowns)
$
86.9

 
$
21.9

 
$
304.6

 
$
115.2

Purchases
$
317.5

 
$
202.3

 
$
689.4

 
$
553.2


Equity Investments
ProAssurance's equity investments are carried at fair value with changes in fair value recognized in income as a component of net realized investment gains (losses) during the period of change. Equity investments on the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 primarily included stocks, bond funds and investment funds.
Short-term Investments
ProAssurance's short-term investments, which have a maturity at purchase of one year or less, are primarily comprised of investments in U.S. treasury obligations, commercial paper and money market funds. Short-term investments are carried at fair value which approximates the cost of the securities due to their short-term nature.
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.
Net Investment Income
Net investment income by investment category was as follows:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(In thousands)
2020
 
2019
 
2020
 
2019
Fixed maturities
$
16,902

 
$
18,362

 
$
52,863

 
$
54,154

Equities
706

 
3,942

 
3,598

 
13,755

Short-term investments, including Other
405

 
2,012

 
2,386

 
5,466

BOLI
655

 
645

 
1,568

 
1,557

Investment fees and expenses
(1,744
)
 
(1,280
)
 
(4,538
)
 
(4,894
)
Net investment income
$
16,924

 
$
23,681

 
$
55,877

 
$
70,038


Investment in Unconsolidated Subsidiaries
ProAssurance's investment in unconsolidated subsidiaries were as follows:
 
September 30, 2020
 
Carrying Value
(In thousands)
Percentage
Ownership
 
September 30,
2020
 
December 31,
2019
Qualified affordable housing project tax credit partnerships
See below
 
$
32,263

 
$
46,421

Other tax credit partnerships
See below
 
—

 
2,085

All other investments, primarily investment fund LPs/LLCs
See below
 
280,585

 
310,314

 
 
 
$
312,848

 
$
358,820


Qualified affordable housing project 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, less any amortization. ProAssurance's ownership percentage relative to two of the tax credit partnership interests is almost 100%; these interests had a carrying value of $11.4 million at September 30, 2020 and $17.2 million at December 31, 2019. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of $20.9 million at September 30, 2020 and $29.2 million at December 31, 2019. Since ProAssurance has the ability to exert influence over the partnerships but does not control them, all are accounted for using the equity method. See further discussion of the entities in which ProAssurance holds passive interests in Note 11.
ProAssurance's other tax credit partnership is an investment in a historic tax credit partnership that generates investment returns by providing benefits to fund investors in the form of tax credits, tax deductible project operating losses and positive cash flows. The carrying value of this investment reflects ProAssurance's total funded commitment less any amortization. During the second quarter of 2020, this investment was fully amortized up to the total current funded commitment. However, during the third quarter of 2020, ProAssurance received a distribution associated with this investment and, as such, amortization of this distribution resulted in ProAssurance recognizing a project operating gain during the current period. ProAssurance's ownership percentage relative to the historic tax credit partnership is almost 100%. Since ProAssurance has the ability to exert influence over the partnership but does not control it, it is accounted for using the equity method. See further discussion of the entities in which ProAssurance holds passive interests in Note 11.
ProAssurance holds interests in investment fund LPs/LLCs and other equity method investments and LPs/LLCs which are not considered to be investment funds. ProAssurance's ownership percentage relative to four 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 $48.2 million at September 30, 2020 and $41.0 million at December 31, 2019. ProAssurance's ownership percentage relative to the remaining investments and LPs/LLCs is less than 25%; these interests had a carrying value of $232.4 million at September 30, 2020 and $269.3 million at December 31, 2019. ProAssurance does not have the ability to exert control over any of these funds.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries included losses from qualified affordable housing project tax credit partnerships and a historic tax credit partnership. Investment results recorded reflect ProAssurance's allocable portion of partnership operating results. Tax credits reduce income tax expense in the period they are recognized. The results recorded and tax credits recognized related to ProAssurance's tax credit partnership investments were as follows:
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(In thousands)
2020
 
2019
 
2020
 
2019
Qualified affordable housing project tax credit partnerships
 
 
 
 
 
 
 
Losses recorded
$
4,798

 
$
5,077

 
$
14,152

 
$
14,674

Tax credits recognized
$
4,369

 
$
4,531

 
$
13,106

 
$
13,594

 
 
 
 
 
 
 
 
Historic tax credit partnership
 
 
 
 
 
 
 
Losses (gains) recorded
$
(264
)
 
$
695

 
$
1,820

 
$
1,187

Tax credits recognized
$
103

 
$
103

 
$
309

 
$
309


Due to the consolidated loss before income taxes recognized during the three and nine months ended September 30, 2020, the tax credits generated in 2020 from tax credit partnership investments of $4.5 million and $13.4 million, respectively, were deferred and are expected to be utilized in future 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
September 30
 
Nine Months Ended
September 30
(In thousands)
2020
 
2019
 
2020
 
2019
Total impairment losses:
 
 
 
 
 
 
 
Corporate debt
$
—

 
$
(66
)
 
$
(1,745
)
 
$
(202
)
Portion of impairment losses recognized in other comprehensive income before taxes:
 
 
 
 
 
 
 
Corporate debt
—

 
36

 
237

 
124

Net impairment losses recognized in earnings
—

 
(30
)
 
(1,508
)
 
(78
)
Gross realized gains, available-for-sale fixed maturities
3,996

 
654

 
10,941

 
2,028

Gross realized (losses), available-for-sale fixed maturities
(396
)
 
(124
)
 
(2,266
)
 
(493
)
Net realized gains (losses), trading fixed maturities
116

 
8

 
268

 
(18
)
Net realized gains (losses), equity investments
31

 
2,451

 
10,589

 
13,459

Net realized gains (losses), other investments
530

 
397

 
2,442

 
974

Change in unrealized holding gains (losses), trading fixed maturities
373

 
278

 
637

 
753

Change in unrealized holding gains (losses), equity investments
2,766

 
(2,157
)
 
(21,012
)
 
27,775

Change in unrealized holding gains (losses), convertible securities, carried at fair value
1,170

 
(408
)
 
(190
)
 
2,597

Other
252

 
65

 
249

 
67

Net realized investment gains (losses)
$
8,838

 
$
1,134

 
$
150

 
$
47,064


ProAssurance did not recognize any credit-related impairment losses in earnings or non-credit impairment losses in OCI for the three months ended September 30, 2020. For the nine months ended September 30, 2020, ProAssurance recognized credit-related impairment losses in earnings of approximately $1.5 million and a nominal amount of non-credit impairment losses in OCI. The credit-related impairment losses recognized during the 2020 nine-month period related to corporate bonds in the energy and consumer sectors. Additionally, the 2020 nine-month period included credit-related impairment losses related to four corporate bonds in various sectors, which were sold during 2020. The non-credit impairment losses recognized during the 2020 nine-month period related to three corporate bonds in the energy and consumer sectors. For the three and nine months
ended September 30, 2019, ProAssurance recognized a nominal amount of both credit-related impairment losses in earnings and non-credit impairment losses in OCI, both of which related to a corporate bond.
ProAssurance recognized $8.8 million and $0.2 million of net realized investment gains during the three and nine months ended September 30, 2020, respectively. Net realized investment gains during the 2020 three-month period were driven by gains in the Company's available-for-sale fixed maturities due to the sale of corporate bonds and, to a lesser extent, unrealized holding gains resulting from an increase in fair value on the Company's equity portfolio and convertible securities. Net realized investment gains for the 2020 nine-month period were driven by realized gains on the sale of available-for-sale fixed maturities and equity investments and, to a lesser extent, unrealized holding gains on trading securities, which were almost entirely offset by unrealized holding losses resulting from decreases in the fair value on the Company's equity portfolio due to the volatility in the global financial markets related to COVID-19. ProAssurance recognized $1.1 million and $47.1 million of net realized investment gains during the three and nine months ended September 30, 2019, respectively. Net realized investment gains for the three months ended September 30, 2019 were driven by realized gains from the sale of equity investments, partially offset by unrealized holding losses on the Company's equity portfolio during the period. For the nine months ended September 30, 2019, net realized investment gains were driven by unrealized holding gains on the Company's equity portfolio and realized gains from the sale of equity investments during the period. The primary driver of the unrealized holding gains during the nine months ended September 30, 2019 was the improvement in the market since December 31, 2018, which caused the Company's equity securities to increase in value. The most significant sectors that benefited were the financial and energy sectors.
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 impairment was recorded in OCI.
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(In thousands)
2020
 
2019
 
2020
 
2019
Balance beginning of period
$
1,322

 
$
142

 
$
470

 
$
93

Additional credit losses recognized during the period, related to securities for which:
 
 
 
 
 
 
 
No impairment has been previously recognized
—

 
—

 
1,064

 
49

Impairment has been previously recognized
—

 
30

 
258

 
30

Reductions due to:
 
 
 
 
 
 
 
Securities sold during the period (realized)
(770
)
 
—

 
(1,240
)
 
—

Balance September 30
$
552

 
$
172

 
$
552

 
$
172