Investments

Available-for-sale securities at June 30, 2017 and December 31, 2016 included the following:



	June 30, 2017
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities
U.S. Treasury obligations	$	143,088	$	1,092	$	727	$	143,453
U.S. Government-sponsored enterprise obligations	20,179		140		127		20,192
State and municipal bonds	702,688		21,217		2,069		721,836
Corporate debt	1,294,689		23,274		5,235		1,312,728
Residential mortgage-backed securities	204,179		3,369		1,133		206,415
Agency commercial mortgage-backed securities	11,945		77		62		11,960
Other commercial mortgage-backed securities	17,087		152		82		17,157
Other asset-backed securities	112,098		361		93		112,366
	$	2,505,953	$	49,682	$	9,528	$	2,546,107

	December 31, 2016
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities
U.S. Treasury obligations	$	146,186	$	1,264	$	911	$	146,539
U.S. Government-sponsored enterprise obligations	30,038		388		191		30,235
State and municipal bonds	790,154		17,261		6,952		800,463
Corporate debt	1,264,812		22,659		8,480		1,278,991
Residential mortgage-backed securities	216,285		3,667		2,046		217,906
Agency commercial mortgage-backed securities	12,837		89		143		12,783
Other commercial mortgage-backed securities	19,571		177		137		19,611
Other asset-backed securities	106,938		207		267		106,878
	$	2,586,821	$	45,712	$	19,127	$	2,613,406

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at June 30, 2017, 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	$	143,088	$	29,357	$	92,270	$	18,815	$	3,011	$	143,453
U.S. Government-sponsored enterprise obligations	20,179		499		7,873		11,678		142		20,192
State and municipal bonds	702,688		54,052		243,955		308,236		115,593		721,836
Corporate debt	1,294,689		138,176		733,558		418,955		22,039		1,312,728
Residential mortgage-backed securities	204,179										206,415
Agency commercial mortgage-backed securities	11,945										11,960
Other commercial mortgage-backed securities	17,087										17,157
Other asset-backed securities	112,098										112,366
	$	2,505,953									$	2,546,107

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 June 30, 2017.

Cash and securities with a carrying value of $46.4 million at June 30, 2017 were on deposit with various state insurance departments to meet regulatory requirements. ProAssurance also held securities with a carrying value of $239.8 million at June 30, 2017 that are pledged as collateral security for advances under the Revolving Credit Agreement (see Note 7 of the Notes to Condensed Consolidated Financial Statements 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 June 30, 2017 included fixed maturities with a fair value of $94.8 million and short-term investments with a fair value of approximately $3.4 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). 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.

Investment in Unconsolidated Subsidiaries

ProAssurance holds investments in unconsolidated subsidiaries, accounted for under the equity method. The investments include the following:



	Carrying Value
(In thousands)	June 30, 2017		December 31, 2016
Investment in LPs/LLCs:
Qualified affordable housing tax credit partnerships	$	95,041	$	102,313
Other tax credit partnerships	8,976		11,459
All other LPs/LLCs	226,312		227,134
	$	330,329	$	340,906

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, 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 $36.4 million at June 30, 2017 and $40.2 million at December 31, 2016. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of $58.6 million at June 30, 2017 and $62.1 million at December 31, 2016. 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. The carrying value of these investments reflects ProAssurance's total funded commitments less any amortization. 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 2 of the Notes to Condensed Consolidated Financial Statements, 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 $201.2 million at June 30, 2017 and $204.7 million at December 31, 2016. ProAssurance also holds interests in other LPs/LLCs which are not considered to be investment funds; such interests totaled $25.1 million at June 30, 2017 and $22.4 million at December 31, 2016. ProAssurance's ownership percentage relative to three 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 $20.9 million at June 30, 2017 and $18.5 million at December 31, 2016. ProAssurance's ownership percentage relative to the remaining LPs/LLCs is less than 25%; these interests had a carrying value of $205.4 million at June 30, 2017 and $208.6 million at December 31, 2016. ProAssurance does not have the ability to exert control over any of these funds.

Other Investments

Other investments at June 30, 2017 and December 31, 2016 were comprised as follows:



(In thousands)	June 30, 2017		December 31, 2016
Investments in LPs/LLCs, at cost	$	46,200	$	46,852
Convertible securities, at fair value	30,814		31,501
Other, principally FHLB capital stock, at cost	3,452		3,539
	$	80,466	$	81,892

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 (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.

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, 2017 and December 31, 2016, including the length of time the investment had been held in a continuous unrealized loss position.



	June 30, 2017
	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	$	83,416	$	727	$	78,080	$	664	$	5,336	$	63
U.S. Government-sponsored enterprise obligations	15,907		127		15,907		127		—		—
State and municipal bonds	111,522		2,069		103,371		1,441		8,151		628
Corporate debt	372,586		5,235		336,877		3,167		35,709		2,068
Residential mortgage-backed securities	89,610		1,133		87,491		1,086		2,119		47
Agency commercial mortgage-backed securities	4,568		62		4,188		34		380		28
Other commercial mortgage-backed securities	9,147		82		7,457		65		1,690		17
Other asset-backed securities	40,149		93		38,264		91		1,885		2
	$	726,905	$	9,528	$	671,635	$	6,675	$	55,270	$	2,853



	December 31, 2016
	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	$	79,833	$	911	$	79,833	$	911	$	—	$	—
U.S. Government-sponsored enterprise obligations	11,746		191		11,746		191		—		—
State and municipal bonds	224,884		6,952		219,276		6,444		5,608		508
Corporate debt	469,632		8,480		424,721		5,662		44,911		2,818
Residential mortgage-backed securities	103,680		2,046		100,542		1,982		3,138		64
Agency commercial mortgage-backed securities	4,579		143		4,192		114		387		29
Other commercial mortgage-backed securities	9,822		137		9,179		134		643		3
Other asset-backed securities	44,343		267		39,079		256		5,264		11
	$	948,519	$	19,127	$	888,568	$	15,694	$	59,951	$	3,433

As of June 30, 2017, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 534 debt securities (21.4% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 363 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.5 million and $0.3 million, respectively. The securities were evaluated for impairment as of June 30, 2017.

As of December 31, 2016, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 703 debt securities (27.2% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 456 issuers. The greatest and second greatest unrealized loss positions among those securities were each approximately $0.5 million. The securities were evaluated for impairment as of December 31, 2016.

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 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, 2016 Form 10-K.

Fixed maturity securities held in an unrealized loss position at June 30, 2017, 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, 2017 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)	2017			2016			2017			2016
Fixed maturities	$	18,841		$	21,208		$	38,962		$	43,784
Equities	4,298			3,561			7,942			7,204
Short-term and Other investments	978			678			1,778			1,082
BOLI	442			439			897			899
Investment fees and expenses	(1,882		)	(1,303		)	(3,716		)	(2,946		)
Net investment income	$	22,677		$	24,583		$	45,863		$	50,023

Equity in Earnings (Loss) of Unconsolidated Subsidiaries

Equity in earnings (loss) of unconsolidated subsidiaries included losses from qualified affordable housing project tax credit investments and historic tax credit investments. The losses recorded reflect ProAssurance's allocable portion of partnership operating losses. Losses from qualified affordable housing project tax credit investments were $4.0 million and $7.3 million for the three and six months ended June 30, 2017, respectively, and $3.0 million and $8.3 million for the same respective periods of 2016. Tax credits recognized related to these investments totaled $4.6 million and $9.2 million for the three and six months ended June 30, 2017, respectively, and $4.6 million and $9.3 million for the same respective periods of 2016. Losses from historic tax credit investments were $2.4 million and $2.8 million for the three and six months ended June 30, 2017, respectively, and $0.1 million and $0.3 million for the same respective periods of 2016. Tax credits recognized related to these investments totaled $0.8 million and $2.6 million for the three and six months ended June 30, 2017, respectively, and $1.7 million and $4.2 million for the same respective periods of 2016. Tax credits recognized reduced income tax expense in the respective 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 June 30						Six Months Ended June 30
(In thousands)	2017			2016			2017			2016
Total OTTI losses:
Corporate debt	$	—		$	—		$	(419	)	$	(7,604	)
Other investments	—			—			—			(3,130		)
Portion of OTTI losses recognized in other comprehensive income before taxes:
Corporate debt	—			—			248			1,068
Net impairment losses recognized in earnings	—			—			(171		)	(9,666		)
Gross realized gains, available-for-sale securities	746			1,885			2,599			5,070
Gross realized (losses), available-for-sale securities	(1,401		)	(612		)	(1,468		)	(5,259		)
Net realized gains (losses), Short-term investments	—			18			—			18
Net realized gains (losses), trading securities	794			1,913			7,356			3,968
Net realized gains (losses), Other investments	546			447			1,719			498
Change in unrealized holding gains (losses), trading securities	(3,191		)	7,115			424			7,851
Change in unrealized holding gains (losses), convertible securities, carried at fair value	285			162			598			95
Other	2			1			4			3
Net realized investment gains (losses)	$	(2,219	)	$	10,929		$	11,061		$	2,578

ProAssurance did not recognize OTTI during the second quarter of 2017. During the 2017 six-month period, ProAssurance recognized OTTI in earnings of $0.2 million and $0.2 million in non-credit OTTI in OCI, both of which related to corporate bonds.

ProAssurance did not recognize OTTI during the second quarter of 2016. ProAssurance recognized OTTI in earnings during the 2016 six-month period of $6.5 million related to corporate bonds, including credit-related OTTI of $5.5 million related to debt instruments from ten issuers in the energy sector. The fair value of the bonds and the credit quality of the issuers had declined 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 OTTI in OCI during the 2016 six-month period of $0.9 million related to certain of these same bonds, 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 a $3.1 million OTTI in earnings during the 2016 six-month period related to an investment fund that is accounted for using the cost method (classified as Other investments). The fund is focused on the energy sector and securities held by the fund declined in value during the first quarter of 2016. An OTTI was recognized to reduce ProAssurance's carrying value of the investment to the NAV reported by the fund.

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.



	Three Months Ended June 30						Six Months Ended June 30
(In thousands)	2017			2016			2017			2016
Balance beginning of period	$	1,329		$	6,559		$	1,158		$	5,751
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized	—			—			171			2,398
OTTI has been previously recognized	—			—			—			2,154
Reductions due to:
Securities sold during the period (realized)	(16		)	(3,240		)	(16		)	(6,984		)
Balance June 30	$	1,313		$	3,319		$	1,313		$	3,319

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)	2017		2016		2017		2016
Proceeds from sales (exclusive of maturities and paydowns)	$	156.3	$	82.0	$	235.5	$	191.9
Purchases	$	198.7	$	173.6	$	359.1	$	373.2