| Investments |
Investments Available-for-sale securities at June 30, 2013 and December 31, 2012 included the following: | | | | | | | | | | | | | | | | | | June 30, 2013 | (In thousands) | Amortized
Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | Fixed maturities | | | | | | | | U.S. Treasury obligations | $ | 206,778 |
| | $ | 8,427 |
| | $ | (1,383 | ) | | $ | 213,822 |
| U.S. Government-sponsored enterprise obligations | 53,486 |
| | 3,732 |
| | (293 | ) | | 56,925 |
| State and municipal bonds | 1,204,739 |
| | 55,546 |
| | (7,113 | ) | | 1,253,172 |
| Corporate debt | 1,502,700 |
| | 60,506 |
| | (16,314 | ) | | 1,546,892 |
| Residential mortgage-backed securities | 263,844 |
| | 10,382 |
| | (1,993 | ) | * | 272,233 |
| Agency commercial mortgage-backed securities | 43,696 |
| | 822 |
| | (69 | ) | | 44,449 |
| Other commercial mortgage-backed securities | 67,861 |
| | 3,264 |
| | (260 | ) | | 70,865 |
| Other asset-backed securities | 75,843 |
| | 625 |
| | (393 | ) | | 76,075 |
| | $ | 3,418,947 |
| | $ | 143,304 |
| | $ | (27,818 | ) | | $ | 3,534,433 |
| | | | | | | | | | December 31, 2012 | (In thousands) | Amortized
Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | Fixed maturities | | | | | | | | U.S. Treasury obligations | $ | 191,642 |
| | $ | 14,266 |
| | $ | (51 | ) | | $ | 205,857 |
| U.S. Government-sponsored enterprise obligations | 52,110 |
| | 4,837 |
| | — |
| | 56,947 |
| State and municipal bonds | 1,134,744 |
| | 85,329 |
| | (94 | ) | | 1,219,979 |
| Corporate debt | 1,375,880 |
| | 96,187 |
| | (1,543 | ) | | 1,470,524 |
| Residential mortgage-backed securities | 272,990 |
| | 17,070 |
| | (210 | ) | * | 289,850 |
| Agency commercial mortgage-backed securities | 57,234 |
| | 2,255 |
| | (25 | ) | | 59,464 |
| Other commercial mortgage-backed securities | 69,062 |
| | 5,049 |
| | (5 | ) | | 74,106 |
| Other asset-backed securities | 70,670 |
| | 1,203 |
| | (601 | ) | | 71,272 |
| | $ | 3,224,332 |
| | $ | 226,196 |
| | $ | (2,529 | ) | | $ | 3,447,999 |
|
| | * | Includes other-than-temporary impairments recognized in accumulated other comprehensive income of $0.5 million and $0.9 million at June 30, 2013 and December 31, 2012, respectively. |
The recorded cost basis and estimated fair value of available-for-sale fixed maturities at June 30, 2013, 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 | $ | 206,778 |
| | $ | 24,239 |
| | $ | 135,973 |
| | $ | 49,745 |
| | $ | 3,865 |
| | $ | 213,822 |
| U.S. Government-sponsored enterprise obligations | 53,486 |
| | — |
| | 49,356 |
| | 7,340 |
| | 229 |
| | 56,925 |
| State and municipal bonds | 1,204,739 |
| | 52,665 |
| | 418,391 |
| | 493,559 |
| | 288,557 |
| | 1,253,172 |
| Corporate debt | 1,502,700 |
| | 104,583 |
| | 702,834 |
| | 685,649 |
| | 53,826 |
| | 1,546,892 |
| Residential mortgage-backed securities | 263,844 |
| |
| |
| |
| |
| | 272,233 |
| Agency commercial mortgage-backed securities | 43,696 |
| |
| |
| |
| |
| | 44,449 |
| Other commercial mortgage-backed securities | 67,861 |
| |
| |
| |
| |
| | 70,865 |
| Other asset-backed securities | 75,843 |
| |
| |
| |
| |
| | 76,075 |
| | $ | 3,418,947 |
| | | | | | | | | | $ | 3,534,433 |
|
Excluding investments in bonds and notes of the U.S. Government and U.S. Government-sponsored enterprise obligations, no investment in any entity or its affiliates exceeded 10% of shareholders’ equity at June 30, 2013. Cash and securities with a carrying value of $39.0 million at June 30, 2013 were on deposit with various state insurance departments to meet regulatory requirements. ProAssurance also held securities with a carrying value of $196.5 million at June 30, 2013 and $196.2 million at December 31, 2012 that are pledged as collateral security for advances under the Revolving Credit Agreement (see Note 9). Business Owned Life Insurance (BOLI) ProAssurance holds BOLI policies on management employees that are carried at the current cash surrender value of the policies (original cost $33 million). 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 principal beneficiary of these policies. Other Investments Other Investments at June 30, 2013 and December 31, 2012 was comprised as follows: | | | | | | | | | (In thousands) | June 30,
2013 | | December 31,
2012 | Investments in LPs/LLCs, at cost | $ | 28,362 |
| | $ | 25,092 |
| FHLB capital stock, at cost | 3,449 |
| | 4,278 |
| Other, principally an annuity, at amortized cost | 1,500 |
| | 1,715 |
| | $ | 33,311 |
| | $ | 31,085 |
|
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. Unconsolidated Subsidiaries ProAssurance holds investments in unconsolidated subsidiaries, accounted for under the equity method. The investments include the following: | | | | | | | | | | | | | | | | | June 30, 2013 | | Carrying Value | (In thousands) | Unfunded
Commitments | | Percentage
Ownership | | June 30,
2013 | | December 31,
2012 | Investment in LPs/LLCs: | | | | | | | | | Tax credit partnerships | $ | 53,555 |
| | See below | | $ | 147,200 |
| | $ | 87,310 |
| Secured debt fund | 28,400 |
| | < | 20% | | 11,637 |
| | — |
| Long equity fund | None |
| | < | 20% | | 5,657 |
| | — |
| Long/Short equity fund | None |
| | < | 20% | | 8,602 |
| | 17,115 |
| Non-public equity funds | 42,563 |
| | < | 20% | | 18,653 |
| | 16,624 |
| | | | | | | $ | 191,749 |
| | $ | 121,049 |
|
Tax credit partnership interests held by ProAssurance generate investment returns by providing tax benefits to fund investors in the form of project operating losses and tax credits. The related properties are principally low income housing projects. ProAssurance's ownership percentage relative to two of the tax credit partnership interests was almost 100%; these interests had a carrying value of $64.8 million at June 30, 2013. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests was less than 20%; these interests had a carrying value of $82.4 million at June 30, 2013. All are accounted for under the equity method as ProAssurance does not have the ability to exert control over the partnerships. The Secured debt fund is structured to provide interest distributions and capital appreciation primarily through investments in senior secured debt. The Long equity fund targets long-term total returns through holdings in public international companies. The Long/Short equity fund targets absolute returns using a strategy designed to take advantage of event-driven market opportunities. The Non-public equity funds hold diversified private equities and are structured to provide capital appreciation. Investments Held in a Loss Position The following tables provide summarized information with respect to investments held in an unrealized loss position at June 30, 2013 and December 31, 2012, including the length of time the investment had been held in a continuous unrealized loss position. | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2013 | | Total | | Less than 12 months | | More than 12 months | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | (In thousands) | Value | | Loss | | Value | | Loss | | Value | | Loss | Fixed maturities, available for sale | | | | | | | | | | | | U.S. Treasury obligations | $ | 54,610 |
| | $ | (1,383 | ) | | $ | 54,610 |
| | $ | (1,383 | ) | | $ | — |
| | $ | — |
| U.S. Government-sponsored enterprise obligations | 5,579 |
| | (293 | ) | | 5,579 |
| | (293 | ) | | — |
| | — |
| State and municipal bonds | 210,096 |
| | (7,113 | ) | | 208,105 |
| | (7,089 | ) | | 1,991 |
| | (24 | ) | Corporate debt | 423,388 |
| | (16,314 | ) | | 416,240 |
| | (15,961 | ) | | 7,148 |
| | (353 | ) | Residential mortgage-backed securities | 75,441 |
| | (1,993 | ) | | 74,789 |
| | (1,990 | ) | | 652 |
| | (3 | ) | Agency commercial mortgage-backed securities | 5,252 |
| | (69 | ) | | 4,765 |
| | (59 | ) | | 487 |
| | (10 | ) | Other commercial mortgage-backed securities | 13,309 |
| | (260 | ) | | 13,309 |
| | (260 | ) | | — |
| | — |
| Other asset-backed securities | 26,728 |
| | (393 | ) | | 23,397 |
| | (158 | ) | | 3,331 |
| | (235 | ) | | $ | 814,403 |
| | $ | (27,818 | ) | | $ | 800,794 |
| | $ | (27,193 | ) | | $ | 13,609 |
| | $ | (625 | ) | Other investments | | | | | | | | | | | | Investments in LPs/LLCs carried at cost | $ | 4,972 |
| | $ | (325 | ) | | $ | 3,906 |
| | $ | (294 | ) | | $ | 1,066 |
| | $ | (31 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2012 | | Total | | Less than 12 months | | More than 12 months | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | (In thousands) | Value | | Loss | | Value | | Loss | | Value | | Loss | Fixed maturities, available for sale | | | | | | | | | | | | U.S. Treasury obligations | $ | 4,073 |
| | $ | (51 | ) | | $ | 4,073 |
| | $ | (51 | ) | | $ | — |
| | $ | — |
| State and municipal bonds | 11,234 |
| | (94 | ) | | 9,232 |
| | (65 | ) | | 2,002 |
| | (29 | ) | Corporate debt | 90,154 |
| | (1,543 | ) | | 81,878 |
| | (1,377 | ) | | 8,276 |
| | (166 | ) | Residential mortgage-backed securities | 10,721 |
| | (210 | ) | | 10,029 |
| | (205 | ) | | 692 |
| | (5 | ) | Agency commercial mortgage-backed securities | 1,643 |
| | (25 | ) | | 498 |
| | (2 | ) | | 1,145 |
| | (23 | ) | Other commercial mortgage-backed securities | 2,100 |
| | (5 | ) | | 1,103 |
| | (1 | ) | | 997 |
| | (4 | ) | Other asset-backed securities | 10,746 |
| | (601 | ) | | 7,707 |
| | (20 | ) | | 3,039 |
| | (581 | ) | | $ | 130,671 |
| | $ | (2,529 | ) | | $ | 114,520 |
| | $ | (1,721 | ) | | $ | 16,151 |
| | $ | (808 | ) | Other investments | | | | | | | | | | | | Investments in LPs/LLCs carried at cost | $ | 9,474 |
| | $ | (851 | ) | | $ | 8,697 |
| | $ | (688 | ) | | $ | 777 |
| | $ | (163 | ) |
As of June 30, 2013, there were 939 debt securities (32.6% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 543 issuers. The single greatest unrealized loss position was approximately $0.6 million; the second greatest unrealized loss position was approximately $0.4 million. The securities were evaluated for impairment as of June 30, 2013. As of December 31, 2012, there were 142 debt securities (5.7% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 131 issuers. The single greatest unrealized loss position approximated $0.6 million; the second greatest unrealized loss position approximated $0.2 million. The securities were evaluated for impairment as of December 31, 2012. 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 other-than-temporary impairment 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, 2012 Form 10-K. Fixed maturity securities held in an unrealized loss position at June 30, 2013, 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 June 30, 2013 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 June 30 | | Six Months Ended June 30 | (In thousands) | 2013 | | 2012 | | 2013 | | 2012 | Fixed maturities | $ | 32,160 |
| | $ | 34,093 |
| | $ | 63,015 |
| | $ | 67,363 |
| Equities | 2,422 |
| | 1,608 |
| | 4,605 |
| | 2,649 |
| Short-term investments and Other invested assets | 66 |
| | 77 |
| | 514 |
| | 498 |
| Business owned life insurance | 439 |
| | 461 |
| | 875 |
| | 918 |
| Investment fees and expenses | (1,820 | ) | | (1,729 | ) | | (3,616 | ) | | (3,425 | ) | Net investment income | $ | 33,267 |
| | $ | 34,510 |
| | $ | 65,393 |
| | $ | 68,003 |
|
Net Realized Investment Gains (Losses) Realized investment gains and losses are recognized on the specific identification basis. The following table provides detailed information regarding net realized investment gains (losses): | | | | | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | (In thousands) | 2013 | | 2012 | | 2013 | | 2012 | Total other-than-temporary impairment losses: | | | | | | | | State and municipal bonds | $ | (71 | ) | | $ | — |
| | $ | (71 | ) | | $ | — |
| Residential mortgage-backed securities | — |
| | (218 | ) | | — |
| | (463 | ) | Corporate debt | — |
| | — |
| | — |
| | (830 | ) | Other investments | — |
| | — |
| | — |
| | (131 | ) | Portion recognized in (reclassified from) Other Comprehensive Income: | | | | | | | | Residential mortgage-backed securities | — |
| | (201 | ) | | — |
| | (201 | ) | Net impairment losses recognized in earnings | (71 | ) | | (419 | ) | | (71 | ) | | (1,625 | ) | Gross realized gains, available-for-sale securities | 3,809 |
| | 2,262 |
| | 6,923 |
| | 6,150 |
| Gross realized (losses), available-for-sale securities | (890 | ) | | (89 | ) | | (965 | ) | | (183 | ) | Net realized gains (losses), trading securities | 6,043 |
| | (50 | ) | | 8,832 |
| | 727 |
| Change in unrealized holding gains (losses), trading securities | (420 | ) | | (3,032 | ) | | 20,432 |
| | 4,905 |
| Decrease (increase) in the fair value of liabilities carried at fair value | — |
| | (220 | ) | | — |
| | (844 | ) | Net realized investment gains (losses) | $ | 8,471 |
| | $ | (1,548 | ) | | $ | 35,151 |
| | $ | 9,130 |
|
No significant impairment losses were recognized in the 2013 three- and six-month periods. Significant impairment losses recognized during the 2012 three- and six-month periods were as follows: | | • | ProAssurance recognized impairment losses related to certain residential mortgage-backed securities during the 2012 three- and six-month periods because carrying values for those securities were greater than the future cash flows expected to be received from the securities. |
| | • | ProAssurance recognized impairments related to corporate debt securities during the first quarter of 2012 because the credit standing of the issuers had deteriorated. |
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 other-than-temporary impairment was recorded in Other Comprehensive Income. | | | | | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | (In thousands) | 2013 | | 2012 | | 2013 | | 2012 | Balance beginning of period | $ | 3,301 |
| | $ | 5,937 |
| | $ | 3,301 |
| | $ | 5,870 |
| Additional credit losses recognized during the period, related to securities for which: | | | | | | | | OTTI has been previously recognized | — |
| | 201 |
| | — |
| | 268 |
| Reductions due to: | | | | | | | | Securities sold during the period (realized) | (2,888 | ) | | — |
| | (2,888 | ) | | — |
| Balance June 30 | $ | 413 |
| | $ | 6,138 |
| | $ | 413 |
| | $ | 6,138 |
|
Other information regarding sales and purchases of available-for-sale securities is as follows: | | | | | | | | | | | | | | | | | | Three Months Ended June 30 | | Six Months Ended June 30 | (In millions) | 2013 | | 2012 | | 2013 | | 2012 | Proceeds from sales (exclusive of maturities and paydowns) | $ | 128.7 |
| | $ | 99.8 |
| | $ | 257.1 |
| | $ | 305.9 |
| Purchases | $ | 206.6 |
| | $ | 99.5 |
| | $ | 307.4 |
| | $ | 347.1 |
|
|