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 debt or equity 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 June 30, 2018 and December 31, 2017 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.



	June 30, 2018
	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	$	—	$	146,457	$	—	$	146,457
U.S. Government-sponsored enterprise obligations	—		31,702		—		31,702
State and municipal bonds	—		331,100		—		331,100
Corporate debt, multiple observable inputs	2,262		1,184,985		—		1,187,247
Corporate debt, limited observable inputs	—		—		8,380		8,380
Residential mortgage-backed securities	—		204,236		—		204,236
Agency commercial mortgage-backed securities	—		13,812		—		13,812
Other commercial mortgage-backed securities	—		32,715		—		32,715
Other asset-backed securities	—		160,852		9,420		170,272
Fixed maturities, trading
Corporate debt	—		29,772		—		29,772
Equity investments
Financial	74,656		—		—		74,656
Utilities/Energy	57,936		—		—		57,936
Consumer oriented	55,459		—		—		55,459
Industrial	46,285		—		—		46,285
Bond funds	146,795		—		—		146,795
All other	94,638		—		—		94,638
Short-term investments	200,366		12,579		—		212,945
Other investments	—		33,015		5		33,020
Other assets	—		2,588		—		2,588
Total assets categorized within the fair value hierarchy	$	678,397	$	2,183,813	$	17,805	2,880,015
Assets carried at NAV, which approximates fair value and which are not categorized within the fair value hierarchy, reported as a part of:
Equity investments							20,257
Investment in unconsolidated subsidiaries							277,505
Total assets at fair value							$	3,177,777



	December 31, 2017
	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	$	—	$	133,627	$	—	$	133,627
U.S. Government-sponsored enterprise obligations	—		20,956		—		20,956
State and municipal bonds	—		632,243		—		632,243
Corporate debt, multiple observable inputs	2,371		1,151,084		—		1,153,455
Corporate debt, limited observable inputs	—		—		13,703		13,703
Residential mortgage-backed securities	—		196,789		1,055		197,844
Agency commercial mortgage-backed securities	—		10,742		—		10,742
Other commercial mortgage-backed securities	—		15,961		—		15,961
Other asset-backed securities	—		97,780		3,931		101,711
Equity investments
Financial	76,051		—		—		76,051
Utilities/Energy	54,388		—		—		54,388
Consumer oriented	54,529		—		—		54,529
Industrial	53,936		—		—		53,936
Bond funds	156,563		—		—		156,563
All other	75,142		—		—		75,142
Short-term investments	404,204		27,922		—		432,126
Other investments	607		31,155		409		32,171
Other assets	—		1,731		—		1,731
Total assets categorized within the fair value hierarchy	$	877,791	$	2,319,990	$	19,098	3,216,879
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							210,759
Other investments							20,130
Total assets at fair value							$	3,447,768

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 three and six months ended June 30, 2018 and 2017.

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, but also included a small number of bank loans. 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.

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.

Level 3 Valuations

Below is a summary description of the valuation processes and methodologies used as well as quantitative information regarding securities in the Level 3 category.

Level 3 Valuation Processes


•	Level 3 securities are priced by the Chief Investment Officer.


•	Level 3 valuations are computed quarterly. Prices are evaluated quarterly against prior period prices and the expected change in prices.


•	ProAssurance's Level 3 securities are primarily NRSRO rated debt instruments for which comparable market inputs are commonly available for evaluating the securities in question. Valuation of these debt instruments is not overly sensitive to changes in the unobservable inputs used.

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 subjectively determined by management if not available. At June 30, 2018, 76% of the securities were rated and the average rating was BBB+. At December 31, 2017, 84% 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 June 30, 2018, 70% of the securities were rated and the average rating was AAA. At December 31, 2017, 21% of the securities were rated and the average rating was AAA.

Other investments consisted of convertible securities for which limited observable inputs were available at June 30, 2018 and December 31, 2017. 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.

Quantitative Information Regarding Level 3 Valuations



	Fair Value at
(In thousands)	June 30, 2018	December 31, 2017	Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
Corporate debt, limited observable inputs	$8,380	$13,703	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Residential mortgage-backed and other asset-backed securities	$9,420	$4,986	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other investments	$5	$409	Discounted Cash Flows	Comparability Adjustment	0% - 10% (5%)

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

The following tables (the Level 3 Tables) present summary information regarding changes in the fair value of assets measured at fair value using Level 3 inputs.



	June 30, 2018
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities			Other investments			Total
Balance March 31, 2018	$	15,097		$	17,323		$	365		$	32,785
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	(36		)	1			—			(35		)
Net realized investment gains (losses)	(8		)	—			6			(2		)
Included in other comprehensive income	(90		)	(111		)	—			(201		)
Purchases	—			3,225			—			3,225
Sales	(1,644		)	(158		)	(366		)	(2,168		)
Transfers in	558			—			—			558
Transfers out	(5,497		)	(10,860		)	—			(16,357		)
Balance June 30, 2018	$	8,380		$	9,420		$	5		$	17,805
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—



	June 30, 2018
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities			Other investments			Total
Balance December 31, 2017	$	13,703		$	4,986		$	409		$	19,098
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	(74		)	1			—			(73		)
Net realized investment gains (losses)	(8		)	—			(38		)	(46		)
Included in other comprehensive income	(128		)	(141		)	—			(269		)
Purchases	6,005			16,678			—			22,683
Sales	(4,549		)	(185		)	(366		)	(5,100		)
Transfers in	2,627			—			—			2,627
Transfers out	(9,196		)	(11,919		)	—			(21,115		)
Balance June 30, 2018	$	8,380		$	9,420		$	5		$	17,805
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—



	June 30, 2017
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities		Other investments			Total
Balance March 31, 2017	$	18,914		$	3,002	$	903		$	22,819
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	(34		)	—		—			(34		)
Net realized investment gains (losses)	—			—		(124		)	(124		)
Included in other comprehensive income	(70		)	3		138			71
Purchases	4,841			—		—			4,841
Sales	(1,848		)	—		(912		)	(2,760		)
Transfers in	10			—		—			10
Transfers out	(3,964		)	—		—			(3,964		)
Balance June 30, 2017	$	17,849		$	3,005	$	5		$	20,859
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—	$	—		$	—



	June 30, 2017
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt			Asset-backed Securities			Other investments			Total
Balance December 31, 2016	$	14,810		$	3,007		$	3		$	17,820
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	(73		)	—			—			(73		)
Net realized investment gains (losses)	13			—			(124		)	(111		)
Included in other comprehensive income	(278		)	(2		)	140			(140		)
Purchases	11,889			—			—			11,889
Sales	(3,560		)	—			(912		)	(4,472		)
Transfers in	10			—			898			908
Transfers out	(4,962		)	—			—			(4,962		)
Balance June 30, 2017	$	17,849		$	3,005		$	5		$	20,859
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—

Transfers

There were no transfers between the Level 1 and Level 2 categories during the three and six months ended June 30, 2018 or the three months ended June 30, 2017. During the six months ended June 30, 2017, equity securities of approximately $35.4 million were transferred from Level 2 to Level 1.

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

All transfers during the three and six months ended June 30, 2018 and 2017 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 June 30, 2018 and December 31, 2017, 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 June 30, 2018 and fair values of these investments as of June 30, 2018 and December 31, 2017 was as follows:



	Unfunded Commitments	Fair Value
(In thousands)	June 30, 2018	June 30, 2018		December 31, 2017
Equity investments:
Mortgage fund ^(1)*	None	$	20,257	$	—
Investment in unconsolidated subsidiaries:
Private debt funds ⁽²⁾	$4,945	26,174		42,206
Long equity fund ⁽³⁾	None	7,712		7,847
Long/short equity funds ⁽⁴⁾	None	32,134		31,352
Non-public equity funds ⁽⁵⁾	$78,693	109,337		100,062
Multi-strategy fund of funds ⁽⁶⁾	None	9,357		9,100
Credit funds ⁽⁷⁾	None	18,075		6,561
Long/short commodities fund ⁽⁸⁾	None	13,380		13,025
Strategy focused funds ⁽⁹⁾	$19,247	61,336		606
		277,505		210,759
Other investments:
Mortgage fund ^(1)*	See above	—		20,130

Total investments carried at NAV		$	297,762	$	230,889
* In the first quarter of 2018, ProAssurance began presenting this investment previously reported as a part of other investments as a part of equity investments on the Condensed Consolidated Balance Sheet. Prior year amounts have not been reclassified.

Below is additional information regarding each of the investments listed in the table above as of June 30, 2018.


⁽¹⁾	This investment fund is focused on the structured mortgage market. The fund will primarily invest in U.S. Agency mortgage-backed securities. Redemptions are allowed at the end of any calendar quarter with a prior notice requirement of 65 days and are paid within 45 days at the end of the redemption dealing day.

⁽²⁾

The 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; 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.


⁽³⁾	The fund is a LP that holds long equities of public international companies. Redemptions are allowed at the end of any calendar month with a prior notice requirement of 15 days and are paid within 10 days of the end of the calendar month of the redemption request.

⁽⁴⁾

The investment is comprised of interests in multiple unrelated LP funds. The funds hold primarily long and short North American equities and target absolute returns using strategies designed to take advantage of market opportunities. The funds generally permit quarterly or semi-annual capital redemptions subject to notice requirements of 30 to 90 days. For some funds, redemptions above specified thresholds (lowest threshold is 90%) may be only partially payable until after a fund audit is completed and are then payable within 30 days.

⁽⁵⁾

The 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 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 nine years.


⁽⁶⁾	This fund is a LLC structured to build and manage low volatility, multi-manager portfolios that have little or no correlation to the broader fixed income and equity security markets. Redemptions are not permitted but offers to repurchase units of the LLC may be extended periodically.

⁽⁷⁾

The investment is comprised of two unrelated LP funds. One fund seeks to obtain superior risk-adjusted absolute returns through a diversified portfolio of debt securities, including bonds, loans and other asset-backed instruments. The second fund seeks event driven opportunities across the corporate credit spectrum. For both funds, redemptions are allowed at any quarter-end with a prior notice requirement of 90 days.


⁽⁸⁾	This fund is a LLC invested across a broad range of commodities and focuses primarily on market neutral, relative value strategies, seeking to generate absolute returns with low correlation to broad commodity, equity and fixed income markets. Following an initial one-year lock-up period, redemptions are allowed with a prior notice requirement of 30 days and are payable within 30 days.

⁽⁹⁾ The investment is comprised of multiple unrelated LPs/LLCs funds. One fund is a LLC focused on investing in North American consumer products companies, comprised of equity and equity-related securities, as well as debt instruments. Redemptions are not permitted. Another fund is a 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

At June 30, 2018, ProAssurance did not have any assets or liabilities that were measured at fair value on a nonrecurring basis. At December 31, 2017, ProAssurance held an equity method early stage business investment measured at fair value on a nonrecurring basis due to a recognized OTTI of $8.5 million. The investment was valued using significant unobservable inputs (Level 3) and had a fair value of $1.2 million at December 31, 2017. The fair value of the investment was measured as ProAssurance's ownership percentage in the projected earnings and cash flows expected to be generated by the investment.

Financial Instruments - Methodologies Other Than Fair Value

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



	June 30, 2018				December 31, 2017
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
BOLI	$	63,017	$	63,017	$	62,113	$	62,113
Other investments	$	2,889	$	2,889	$	58,546	$	69,095
Other assets	$	37,745	$	37,411	$	34,020	$	33,742
Financial liabilities:
Senior notes due 2023*	$	250,000	$	263,943	$	250,000	$	273,153
Revolving Credit Agreement*	$	—	$	—	$	123,000	$	123,000
Mortgage loans*	$	39,762	$	39,762	$	40,460	$	40,460
Other liabilities	$	22,303	$	22,303	$	21,154	$	21,154
* Carrying value excludes 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. Two 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 $22.3 million and $20.2 million at June 30, 2018 and December 31, 2017, respectively. The deferred compensation liabilities are adjusted to match the fair value of the deferred compensation assets. Other assets also included a secured note receivable and unsecured note receivable under two separate line of credit agreements. Fair value of these notes receivable was based on the present value of expected cash flows from the notes receivable, discounted at market rates on the valuation date for receivables with similar credit standings and similar payment structures.

The fair value of the debt 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.