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