Fair Value Measurement

12 Months Ended

Dec. 31, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurement

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 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 December 31, 2022 and December 31, 2021 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.

	December 31, 2022
	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	$	—	$	221,608	$	—	$	221,608
U.S. Government-sponsored enterprise obligations	—		19,934		—		19,934
State and municipal bonds	—		439,450		—		439,450
Corporate debt, multiple observable inputs	—		1,717,479		—		1,717,479
Corporate debt, limited observable inputs	—		—		63,973		63,973
Residential mortgage-backed securities	—		389,291		249		389,540
Agency commercial mortgage-backed securities	—		9,704		—		9,704
Other commercial mortgage-backed securities	—		194,090		—		194,090
Other asset-backed securities	—		413,989		2,705		416,694
Fixed maturities, trading	—		43,434		—		43,434
Equity investments
Financial	9,850		2,219		303		12,372
Utilities/Energy	854		—		—		854
Industrial	—		—		2,500		2,500
Bond funds	112,136		—		—		112,136
All other	15,876		—		—		15,876
Short-term investments	181,937		63,376		—		245,313
Other investments	1,881		88,783		1,783		92,447
Total assets categorized within the fair value hierarchy	$	322,534	$	3,603,357	$	71,513	3,997,404
Assets carried at NAV, which approximates fair value and which are not categorized within the fair value hierarchy, reported as a part of:
Investment in unconsolidated subsidiaries							262,485
Total assets at fair value							$	4,259,889
Liabilities:
Other liabilities	$	—	$	—	$	15,000	$	15,000
Total liabilities categorized within the fair value hierarchy	$	—	$	—	$	15,000	$	15,000

	December 31, 2021
	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	$	—	$	238,507	$	—	$	238,507
U.S. Government-sponsored enterprise obligations	—		20,234		—		20,234
State and municipal bonds	—		519,196		—		519,196
Corporate debt, multiple observable inputs	—		1,851,427		—		1,851,427
Corporate debt, limited observable inputs	—		—		47,129		47,129
Residential mortgage-backed securities	—		453,644		297		453,941
Agency commercial mortgage-backed securities	—		14,141		—		14,141
Other commercial mortgage-backed securities	—		231,483		—		231,483
Other asset-backed securities	—		451,459		6,205		457,664
Fixed maturities, trading	—		43,670		—		43,670
Equity investments
Financial	6,615		855		—		7,470
Industrial	—		—		2,500		2,500
Bond funds	187,059		—		—		187,059
All other	17,778		—		—		17,778
Short-term investments	174,944		42,043		—		216,987
Other investments	1,889		95,288		1,434		98,611
Other assets	—		649		—		649
Total assets categorized within the fair value hierarchy	$	388,285	$	3,962,596	$	57,565	4,408,446
Assets carried at NAV, which approximates fair value and which are not categorized within the fair value hierarchy, reported as a part of:
Investment in unconsolidated subsidiaries							270,816
Total assets at fair value							$	4,679,262
Liabilities:
Other liabilities	$	—	$	—	$	24,000	$	24,000
Total liabilities categorized within the fair value hierarchy	$	—	$	—	$	24,000	$	24,000

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. There were no material changes to the values supplied by the pricing services during the years ended December 31, 2022 and 2021.

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. 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.

Fixed maturities, trading are held by the Lloyd's Syndicates segment and include U.S. Treasury obligations, corporate debt with multiple observable inputs and other asset-backed securities. These securities were valued using the respective valuation methodologies discussed above for each security type.

Equity investments 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 were securities maturing within one year, carried at fair value which approximated the cost of the securities due to their short-term nature.

 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.

Other assets consisted of an interest rate cap derivative instrument valued using a model which considers the volatilities from other instruments with similar maturities, strike prices, durations and forward yield curves. 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 exceeded 2.35%. In April 2022, ProAssurance terminated its interest rate cap agreement.

Level 3 Valuations

Below is a summary description of the valuation methodologies used as well as quantitative information regarding securities in the Level 3 category, by security type:

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 determined by management if not available. At December 31, 2022, 100% of the securities were rated and the average rating was BBB+. At December 31, 2021, 100% of the securities were rated and the average rating was BBB.

Residential mortgage-backed and 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. 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 December 31, 2022, 100% of the securities were rated and the average rating was BBB-. At December 31, 2021, 100% of the securities were rated and the average rating was BBB+.

Equity investments consisted of preferred stock for which limited observable inputs were available at December 31, 2022 and December 31, 2021. The equity securities were primarily priced using broker/dealer quotes and internal models with some inputs that are unobservable.

Other investments consisted of convertible securities for which limited observable inputs were available at December 31, 2022 and December 31, 2021. 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.

Other liabilities consisted of contingent consideration associated with the NORCAL acquisition and is recorded at fair value each reporting period. The ultimate payout under the contingent consideration is dependent on the after-tax development of NORCAL's ultimate net losses over a three-year period beginning December 31, 2021 and may total up to $84 million. See further discussion around the contingent consideration in Note 2 and Note 9.

Quantitative Information Regarding Level 3 Valuations

	Fair Value at
($ in thousands)	December 31, 2022	December 31, 2021	Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
Corporate debt, limited observable inputs	$63,973	$47,129	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Residential mortgage-backed securities	$249	$297	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other asset-backed securities	$2,705	$6,205	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Equity investments	$2,803	$2,500	Discounted Cash Flows	Comparability Adjustment	0% - 10% (5%)
Other investments	$1,783	$1,434	Discounted Cash Flows	Comparability Adjustment	0% - 10% (5%)
Liabilities:
Other liabilities	$15,000	$24,000	Stochastic Model/Discounted Cash Flows	Weighted Average Cost of Capital	0% - 10% (9%)

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 & Liabilities

The following tables present summary information regarding changes in the fair value of assets and liabilities measured using Level 3 inputs.

	December 31, 2022
	Level 3 Fair Value Measurements
	Assets												Liabilities
(In thousands)	State and Municipal Bonds		Corporate Debt		Asset-backed Securities		Equity Investments		Other Investments		Total Assets		Other Liabilities		Total Liabilities
Balance, December 31, 2021	$	—	$	47,129	$	6,502	$	2,500	$	1,434	$	57,565	$	(24,000)	$	(24,000)
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income (loss)	—		(1)		8		—		—		7		—		—
Net investment gains (losses)	—		—		—		102		(553)		(451)		9,000		9,000
Included in other comprehensive income (loss)	(19)		(4,324)		(601)		—		—		(4,944)		—		—
Purchases	750		34,805		10,907		17		3,292		49,771		—		—
Sales	—		(5,153)		(287)		—		(1,167)		(6,607)		—		—
Transfers in	—		18,828		570		2,377		529		22,304		—		—
Transfers out	(731)		(27,311)		(14,145)		(2,193)		(1,752)		(46,132)		—		—
Balance, December 31, 2022	$	—	$	63,973	$	2,954	$	2,803	$	1,783	$	71,513	$	(15,000)	$	(15,000)
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets and liabilities held at period-end	$	—	$	—	$	—	$	101	$	(822)	$	(721)	$	—	$	—

	December 31, 2021
	Level 3 Fair Value Measurements
	Assets										Liabilities
(In thousands)	Corporate Debt		Asset-backed Securities		Equity Investments		Other Investments		Total Assets		Other Liabilities		Total Liabilities
Balance, December 31, 2020	$	3,265	$	8,693	$	—	$	—	$	11,958	$	—	$	—
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income (loss)	1		(3)		—		—		(2)		—		—
Net investment gains (losses)	(14)		(11)		15		(774)		(784)		—		—
Included in other comprehensive income (loss)	27		(403)		—		—		(376)		—		—
Purchases	57,586		31,204		9,083		205		98,078		—		—
Sales	(3,277)		(800)		(5,799)		—		(9,876)		—		—
Transfers in	858		—		69		3,586		4,513		—		—
Transfers out	(11,317)		(32,178)		(868)		(1,583)		(45,946)		—		—
Business Combination (See Note 2)	—		—		—		—		—		(24,000)		(24,000)
Balance, December 31, 2021	$	47,129	$	6,502	$	2,500	$	1,434	$	57,565	$	(24,000)	$	(24,000)
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets and liabilities held at period-end	$	—	$	—	$	10	$	(774)	$	(764)	$	—	$	—

Transfers

Transfers shown in the preceding Level 3 tables were as of the end of the period in which the transfer occurred. All transfers were to or from Level 2.

All transfers in and out of Level 3 during 2022 and 2021 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

At December 31, 2022 and 2021, certain LPs/LLCs and investment funds measure fund assets at fair value on a recurring basis and provide a NAV for ProAssurance's interest. The carrying value of these interests is based on the NAV provided and was considered to approximate the fair value of the interests. For investment in unconsolidated subsidiaries, ProAssurance recognizes any changes in the NAV of its interests in equity in earnings (loss) of unconsolidated subsidiaries during the period of change. In accordance with GAAP, the fair value of these investments was not classified within the fair value hierarchy. The amount of ProAssurance's unfunded commitments related to these investments as of December 31, 2022 and fair values of these investments as of December 31, 2022 and 2021 were as follows:

	Unfunded Commitments	Fair Value
(In thousands)	December 31, 2022	December 31, 2022		December 31, 2021
Investment in unconsolidated subsidiaries:
Private debt funds (1)	$2,125	$	19,620	$	18,465
Long/short equity funds (2)	None	5,089		655
Non-public equity funds (3)	$50,856	144,560		160,219
Credit funds (4)	$36,460	49,245		47,300
Strategy focused funds (5)	$14,500	43,971		44,177
Total investments carried at NAV		$	262,485	$	270,816

Below is additional information regarding each of the investments listed in the table above as of December 31, 2022.

(1)This 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, while 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)This investment is comprised of interests in two unrelated LP funds. One LP fund holds primarily long and short North American equities and targets absolute returns using strategies designed to take advantage of market opportunities. The other LP holds long and short publicly traded securities that will passively generate income. Redemptions are permitted; one with 30 days written notice if outside of a lock-up period and the other above specified thresholds (lowest threshold is 90%) which may be only partially payable until after a fund audit is completed and are then payable within 30 days.

(3)This 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, debt including senior, second lien and mezzanine, distressed debt, collateralized loan obligations 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 ten years.

(4)This investment is comprised of multiple unrelated LP funds. Two funds seek to obtain superior risk-adjusted absolute returns through a diversified portfolio of debt securities, including bonds, loans and other asset-backed instruments. The remaining funds focus on private middle market company mezzanine and senior secured loans, opportunities across the credit spectrum, mortgage backed-loans, as well as various types of loan-backed investments. One fund allows redemptions at any quarter-end with prior notice requirements of 180 days, while two other funds allow for redemptions with consent of the General Partner. The remaining funds do not allow redemptions. For the funds that do not allow redemptions, income and capital are to be periodically distributed at the discretion of the LP over time frames throughout the remaining life of the funds.

(5)This investment is comprised of multiple unrelated LPs/LLCs funds. One fund is an LLC focused on investing in North American consumer products companies, comprised of equity and equity-related securities, as well as debt instruments. A second fund is focused on aircraft investments, along with components and assets related to aircrafts. For both funds, redemptions are not permitted. Another fund is an LP focused on North American energy infrastructure assets that allows redemption with consent of the General Partner. The remaining funds are real estate focused LPs, one of which allows for redemption with prior notice.

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

Nonrecurring Fair Value Measurement

ProAssurance did not have any assets or liabilities that were measured at fair value on a nonrecurring basis at December 31, 2022 or 2021.

Financial Instruments - Methodologies Other Than Fair Value

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

	December 31, 2022				December 31, 2021
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
BOLI	$	81,746	$	81,746	$	81,767	$	81,767
Other investments	$	3,322	$	3,322	$	3,183	$	3,183
Other assets	$	28,819	$	28,790	$	40,581	$	40,583
Financial liabilities:
Senior notes due 2023*	$	250,000	$	248,153	$	250,000	$	264,000
Contribution Certificates	$	177,525	$	134,479	$	175,900	$	179,892
Other liabilities	$	27,905	$	27,905	$	52,332	$	52,332
* Carrying value excludes unamortized debt issuance costs.

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 FHLB common stock carried at cost and an annuity investment carried at amortized cost. Three of ProAssurance's insurance subsidiaries are members of an FHLB. The estimated fair value of the FHLB common stock was based on the amount the subsidiaries would receive if their memberships were canceled, as the memberships 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. The fair value of the funded deferred compensation assets was based upon quoted market prices, which is categorized as a Level 1 valuation, and had a fair value of $27.9 million and $39.5 million at December 31, 2022 and 2021, respectively. The fair value of the funded deferred compensation assets at December 31, 2021 included assets from a rabbi trust acquired in the NORCAL acquisition that was terminated during the first quarter of 2022. The rabbi trust assets consisted entirely of cash equivalents and mutual funds and had a total fair value of $5.2 million as of December 31, 2021 (see Note 2 for additional information on the NORCAL acquisition). Other assets also included an unsecured note receivable. The fair value of the note receivable was based on the present value of expected cash flows from the note receivable, discounted at market rates on the valuation date for receivables with similar credit standings and similar payment structures. Other liabilities primarily consisted of liabilities associated with funded deferred compensation agreements. The reported balance is determined based on the amount of elective deferrals and employer contributions adjusted for periodic changes in the fair value of the participant balances based on the performance of the funds selected by the participants and had a fair value of $27.9 million and $52.3 million at December 31, 2022 and December 31, 2021, respectively. The fair value of the funded deferred compensation liabilities at December 31, 2021 included liabilities from deferred compensation arrangements assumed in the NORCAL acquisition that were terminated during the first quarter of 2022 using the associated rabbi trust assets and cash; the termination of these deferred compensation arrangements did not result in a gain or loss during the year ended December 31, 2022. The NORCAL funded deferred compensation liabilities had a total fair value of $18.4 million as of December 31, 2021 (see Note 2 for additional information on the NORCAL acquisition).

The fair value of the debt, excluding the Contribution Certificates, 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.

The fair value of the Contribution Certificates was estimated based on a binomial option pricing model. The Contribution Certificates were a portion of the purchase consideration for the NORCAL acquisition and were issued to certain NORCAL policyholders in the conversion, and those instruments are an obligation of NORCAL Insurance Company, the successor of NORCAL Mutual Insurance Company (see Note 2 and 9 for further discussion of the terms of the Contribution Certificates).