Investments

Available-for-sale securities at December 31, 2015 and December 31, 2014 included the following:



	December 31, 2015
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities
U.S. Treasury obligations	$	122,855	$	1,696	$	659	$	123,892
U.S. Government-sponsored enterprise obligations	25,456		927		49		26,334
State and municipal bonds	904,719		36,739		823		940,635
Corporate debt	1,296,128		24,720		29,162		1,291,686
Residential mortgage-backed securities	233,659		6,039		1,311		238,387
Agency commercial mortgage-backed securities	10,851		174		26		10,999
Other commercial mortgage-backed securities	29,983		354		203		30,134
Other asset-backed securities	98,412		54		246		98,220
	$	2,722,063	$	70,703	$	32,479	$	2,760,287

	December 31, 2014
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities
U.S. Treasury obligations	$	163,714	$	3,785	$	987	$	166,512
U.S. Government-sponsored enterprise obligations	38,022		1,641		100		39,563
State and municipal bonds	1,015,555		47,395		335		1,062,615
Corporate debt	1,389,970		44,234		17,103		1,417,101
Residential mortgage-backed securities	266,306		10,198		448		276,056
Agency commercial mortgage-backed securities	15,344		208		59		15,493
Other commercial mortgage-backed securities	50,025		1,137		99		51,063
Other asset-backed securities	116,541		288		205		116,624
	$	3,055,477	$	108,886	$	19,336	$	3,145,027

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at December 31, 2015, 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	$	122,855	$	10,703	$	94,067	$	15,923	$	3,199	$	123,892
U.S. Government-sponsored enterprise obligations	25,456		2,290		16,593		7,312		139		26,334
State and municipal bonds	904,719		48,752		332,489		428,872		130,522		940,635
Corporate debt	1,296,128		104,746		698,148		455,849		32,943		1,291,686
Residential mortgage-backed securities	233,659										238,387
Agency commercial mortgage-backed securities	10,851										10,999
Other commercial mortgage-backed securities	29,983										30,134
Other asset-backed securities	98,412										98,220
	$	2,722,063									$	2,760,287

Excluding obligations of the U.S. Government or U.S. Government-sponsored enterprises, no investment in any entity or its affiliates exceeded 10% of Shareholders’ equity at December 31, 2015.

Cash and securities with a carrying value of $48.8 million at December 31, 2015 were on deposit with various state insurance departments to meet regulatory requirements. ProAssurance also held securities with a carrying value of $125.6 million at December 31, 2015 that are pledged as collateral security for advances under the Revolving Credit Agreement (see Note 10 for additional detail on the Revolving Credit Agreement).

As a member of Lloyd's and a capital provider to Syndicate 1729, ProAssurance is required to maintain capital at Lloyd's, referred to as FAL. ProAssurance investments at December 31, 2015 included fixed maturities with a fair value of $95.4 million and short term investments with a fair value of approximately $0.4 million on deposit with Lloyd's in order to satisfy these FAL requirements.

BOLI

ProAssurance holds BOLI policies 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 December 31, 2015 and December 31, 2014 were comprised as follows:



(In thousands)	December 31, 2015		December 31, 2014
Investments in LPs/LLCs, at cost	$	44,958	$	53,258
Convertible securities, at fair value	30,611		28,958
Other, principally FHLB capital stock, at cost	3,564		3,841
	$	79,133	$	86,057

Investments in convertible securities are carried at fair value as permitted by the accounting guidance for hybrid financial instruments, with changes in fair value recognized in income as a component of Net realized investment gains or losses during the period of change.

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:



	December 31, 2015	Carrying Value
(In thousands)	Percentage Ownership	December 31, 2015		December 31, 2014
Investment in LPs/LLCs:
Qualified affordable housing tax credit partnerships	See below	$	121,550	$	133,143
Other tax credit partnerships	See below	8,362		—
All other LPs/LLCs	See below	181,996		143,358
		$	311,908	$	276,501

Qualified affordable housing 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. ProAssurance's ownership percentage relative to two of the tax credit partnership interests is almost 100%; these interests had a carrying value of $53.4 million at December 31, 2015. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of $68.1 million at December 31, 2015. ProAssurance does not have the ability to exert control over the partnerships; all are accounted for using the equity method.

Other tax credit partnerships are comprised entirely of historic tax credits. The historic tax credits generate investment returns by providing benefits to fund investors in the form of tax credits, tax deductible project operating losses and positive cash flows. ProAssurance's ownership percentage relative to the tax credit partnerships is almost 100%. ProAssurance does not have the ability to exert control over the partnerships; the interests are accounted for using the equity method.

As discussed in additional detail in Note 3, ProAssurance holds interests in certain LPs/LLCs that are investment funds which measure fund assets at fair value on a recurring basis and the fund managers provide a NAV for the interest. The carrying value of these interests is based on the NAV provided, and is considered to approximate the fair value of the interests; such interests totaled $162.6 million at December 31, 2015 and $133.3 million at December 31, 2014. ProAssurance also holds interests in other LPs/LLCs which are not considered to be investment funds; such interests totaled $19.4 million at December 31, 2015 and $10.1 million at December 31, 2014. ProAssurance's ownership percentage relative to two of the LPs/LLCs is greater than 25%, which is expected to be reduced as the funds mature and other investors participate in the fund; these investments had a carrying value of $8.3 million at December 31, 2015. ProAssurance's ownership percentage relative to the remaining LPs/LLCs is less than 25%; these interests had a carrying value of $173.7 million at December 31, 2015. ProAssurance does not have the ability to exert control over any of these funds.

Investments Held in a Loss Position

The following tables provide summarized information with respect to investments held in an unrealized loss position at December 31, 2015 and December 31, 2014, including the length of time the investment had been held in a continuous unrealized loss position.



	December 31, 2015
	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	$	66,685	$	658	$	61,869	$	591	$	4,816	$	67
U.S. Government-sponsored enterprise obligations	6,819		49		6,819		49		—		—
State and municipal bonds	46,193		823		36,822		703		9,371		120
Corporate debt	622,991		29,162		555,097		15,691		67,894		13,471
Residential mortgage-backed securities	87,567		1,311		78,961		1,095		8,606		216
Agency commercial mortgage-backed securities	409		26		—		—		409		26
Other commercial mortgage-backed securities	15,960		203		12,635		170		3,325		33
Other asset-backed securities	79,637		247		74,150		237		5,487		10
	$	926,261	$	32,479	$	826,353	$	18,536	$	99,908	$	13,943



	December 31, 2014
	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	$	61,209	$	987	$	46,869	$	617	$	14,340	$	370
U.S. Government-sponsored enterprise obligations	6,268		100		2,775		44		3,493		56
State and municipal bonds	39,831		335		18,910		84		20,921		251
Corporate debt	423,107		17,103		326,804		13,236		96,303		3,867
Residential mortgage-backed securities	45,006		448		14,406		31		30,600		417
Agency commercial mortgage-backed securities	4,783		59		70		—		4,713		59
Other commercial mortgage-backed securities	13,860		99		7,005		28		6,855		71
Other asset-backed securities	62,577		205		59,176		109		3,401		96
	$	656,641	$	19,336	$	476,015	$	14,149	$	180,626	$	5,187
Other investments
Investments in LPs/LLCs carried at cost	$	23,683	$	3,948	$	22,265	$	3,711	$	1,418	$	237

As of December 31, 2015, excluding U.S. Government backed securities, there were 773 debt securities (28.8% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 506 issuers. The greatest and second greatest unrealized loss position among those securities were approximately $1.4 million and $1.3 million, respectively. The securities were evaluated for impairment as of December 31, 2015.

As of December 31, 2014, excluding U.S. Government backed securities, there were 588 debt securities (20.5% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 434 issuers. The greatest and the second greatest unrealized loss position among those securities approximated $1.7 million and $0.7 million, respectively. The securities were evaluated for impairment as of December 31, 2014.

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 OTTI impairment in value. 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 December 31, 2015, 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 December 31, 2015 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:



	Year Ended December 31
(In thousands)	2015			2014			2013
Fixed maturities	$	97,348		$	111,895		$	122,065
Equities	13,317			10,817			9,454
Short-term and Other investments	2,049			8,833			2,584
BOLI	2,053			2,006			1,960
Investment fees and expenses	(6,107		)	(7,994		)	(6,798		)
Net investment income	$	108,660		$	125,557		$	129,265

Equity in Earnings (Loss) from Unconsolidated Subsidiaries

Equity in earnings (loss) from unconsolidated subsidiaries included losses from qualified affordable housing project tax credit investments of $10.1 million, $10.7 million and $10.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. The losses recorded reflect ProAssurance's allocable portion of partnership operating losses. ProAssurance recognized tax credits related to these qualified affordable housing investments that totaled $18.4 million, $17.9 million and $17.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. Tax credits recognized reduced income tax expense in the respective periods.

During 2013, ProAssurance's interest in one of its LPs increased and ProAssurance therefore determined it appropriate to begin applying the equity method of accounting instead of the previously applied cost method. Under GAAP such a change from the cost to the equity method should be made on a retroactive basis with restatement of prior periods. ProAssurance did not restate prior periods related to this method change as the amounts were not material to 2013 or any of the prior periods affected. Accordingly, Equity in earnings (loss) of unconsolidated subsidiaries for 2013 included ProAssurance's portion of the LP’s accumulated earnings from the date of initial investment, which totaled $10.5 million, of which $8.4 million was related to prior periods.

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):



	Year Ended December 31
(In thousands)	2015			2014			2013
Total OTTI losses:
State and municipal bonds	$	—		$	(50	)	$	(71	)
Corporate debt	(11,781		)	(1,425		)	—
Other investments	(8,136		)	—			—
Portion recognized in OCI:
Corporate debt	4,572			268			—
Net impairments recognized in earnings	(15,345		)	(1,207		)	(71		)
Gross realized gains, available-for-sale securities	11,936			5,627			18,130
Gross realized (losses), available-for-sale securities	(11,481		)	(1,103		)	(7,031		)
Net realized gains (losses), trading securities	1,080			28,018			20,444
Net realized gains (losses), Other investments	464			326			—
Change in unrealized holding gains (losses), trading securities	(28,343		)	(18,883		)	35,507
Change in unrealized holding gains (losses), convertible securities, carried at fair value	(896		)	1,876			—
Other	946			—			925
Net realized investment gains (losses)	$	(41,639	)	$	14,654		$	67,904

During 2015, ProAssurance recognized impairments through earnings of $7.2 million related to corporate bonds, including credit-related OTTI of $4.9 million related to debt instruments from six issuers in the energy sector. The fair value of these bonds declined in 2015 as did the credit quality of the issuers and ProAssurance recognized credit-related OTTI to reduce the amortized cost basis of the bonds to the present value of future cash flows expected to be received from the bonds. ProAssurance also recognized non-credit impairments of $3.7 million in OCI relative to the bonds of these issuers, as the fair value of the bonds was less than the present value of the expected future cash flows from the securities. ProAssurance also recognized an OTTI in earnings during 2015 related to a bond intended to be sold.

Also during 2015, ProAssurance recognized an $8.1 million OTTI in earnings related to an investment fund that is accounted for using the cost method. The fund is focused on the energy sector and securities held by the fund have declined in value. An OTTI was recognized to reduce the carrying value of the investment to the NAV reported by the fund.

During 2014 credit-related impairments were recognized related to two corporate debt instruments, both in retail/services industries. A non-credit impairment was recognized in OCI related to one of the instruments as the fair value of the instrument was less than the expected future cash flows from the security.

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 OTTI was recorded in OCI.



(In thousands)	2015			2014		2013
Balance January 1	$	232		$	83	$	3,301
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized	3,648			149		—
OTTI has been previously recognized	2,645			—		—
Reductions due to:
Securities sold during the period (realized)	(774		)	—		(3,218		)
Balance December 31	$	5,751		$	232	$	83

Other information regarding sales and purchases of available-for-sale securities is as follows:



	Year Ended December 31
(In millions)	2015		2014		2013
Proceeds from sales (exclusive of maturities and paydowns)	$	481.8	$	244.9	$	593.3
Purchases	$	580.6	$	645.1	$	519.2