Investments

Available-for-sale fixed maturities at June 30, 2018 and December 31, 2017 included the following:



	June 30, 2018
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities, available for sale
U.S. Treasury obligations	$	148,588	$	249	$	2,380	$	146,457
U.S. Government-sponsored enterprise obligations	32,331		21		650		31,702
State and municipal bonds	326,705		5,488		1,093		331,100
Corporate debt	1,213,362		4,655		22,390		1,195,627
Residential mortgage-backed securities	208,052		1,150		4,966		204,236
Agency commercial mortgage-backed securities	14,080		—		268		13,812
Other commercial mortgage-backed securities	33,105		47		437		32,715
Other asset-backed securities	171,917		20		1,665		170,272
	$	2,148,140	$	11,630	$	33,849	$	2,125,921

	December 31, 2017
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities, available for sale
U.S. Treasury obligations	$	134,323	$	485	$	1,181	$	133,627
U.S. Government-sponsored enterprise obligations	21,089		73		206		20,956
State and municipal bonds	618,414		14,248		419		632,243
Corporate debt	1,157,660		15,205		5,707		1,167,158
Residential mortgage-backed securities	196,741		2,438		1,335		197,844
Agency commercial mortgage-backed securities	10,827		23		108		10,742
Other commercial mortgage-backed securities	16,004		91		134		15,961
Other asset-backed securities	102,130		47		466		101,711
	$	2,257,188	$	32,610	$	9,556	$	2,280,242

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at June 30, 2018, 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	$	148,588	$	37,731	$	84,483	$	21,407	$	2,836	$	146,457
U.S. Government-sponsored enterprise obligations	32,331		206		11,647		19,715		134		31,702
State and municipal bonds	326,705		25,562		126,115		140,281		39,142		331,100
Corporate debt	1,213,362		116,559		666,434		374,029		38,605		1,195,627
Residential mortgage-backed securities	208,052										204,236
Agency commercial mortgage-backed securities	14,080										13,812
Other commercial mortgage-backed securities	33,105										32,715
Other asset-backed securities	171,917										170,272
	$	2,148,140									$	2,125,921

Excluding obligations of the U.S. Government, U.S. Government-sponsored enterprises and a U.S. Government obligations money market fund, no investment in any entity or its affiliates exceeded 10% of shareholders’ equity at June 30, 2018.

Cash and securities with a carrying value of $45.7 million at June 30, 2018 were on deposit with various state insurance departments to meet regulatory requirements.

As a member of Lloyd's and a capital provider to Syndicate 1729 and Syndicate 6131, which began active operations on January 1, 2018, ProAssurance is required to maintain capital at Lloyd's, referred to as FAL. ProAssurance's FAL investments at June 30, 2018 included available-for-sale fixed maturities with a fair value of $123.6 million and short-term investments with a fair value of approximately $1.0 million on deposit with Lloyd's in order to satisfy these FAL requirements.

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, 2018 and December 31, 2017, including the length of time the investment had been held in a continuous unrealized loss position.



	June 30, 2018
	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	$	128,506	$	2,380	$	96,926	$	1,589	$	31,580	$	791
U.S. Government-sponsored enterprise obligations	30,769		650		23,960		397		6,809		253
State and municipal bonds	100,622		1,093		98,073		1,035		2,549		58
Corporate debt	919,141		22,390		801,410		17,525		117,731		4,865
Residential mortgage-backed securities	173,133		4,966		131,124		2,839		42,009		2,127
Agency commercial mortgage-backed securities	13,812		268		11,929		135		1,883		133
Other commercial mortgage-backed securities	26,251		437		24,311		390		1,940		47
Other asset-backed securities	155,165		1,665		141,632		1,474		13,533		191
	$	1,547,399	$	33,849	$	1,329,365	$	25,384	$	218,034	$	8,465



	December 31, 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	$	110,788	$	1,181	$	67,135	$	554	$	43,653	$	627
U.S. Government-sponsored enterprise obligations	17,032		206		10,182		64		6,850		142
State and municipal bonds	23,122		419		15,168		102		7,954		317
Corporate debt	487,578		5,707		365,541		2,730		122,037		2,977
Residential mortgage-backed securities	109,659		1,335		64,121		402		45,538		933
Agency commercial mortgage-backed securities	4,423		108		2,458		34		1,965		74
Other commercial mortgage-backed securities	12,878		134		7,939		82		4,939		52
Other asset-backed securities	85,358		466		70,924		346		14,434		120
	$	850,838	$	9,556	$	603,468	$	4,314	$	247,370	$	5,242

As of June 30, 2018, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 1,024 debt securities (50.0% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 548 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.6 million and $0.4 million, respectively. The securities were evaluated for OTTI as of June 30, 2018.

As of December 31, 2017, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 629 debt securities (26.5% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 375 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.4 million and $0.3 million, respectively. The securities were evaluated for OTTI as of December 31, 2017.

Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds in an unrealized loss position has suffered an OTTI. 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, 2017 Form 10-K.

Fixed maturity securities held in an unrealized loss position at June 30, 2018, 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, excluding those issued by GNMA, FNMA and FHLMC, held in an unrealized loss position were estimated as part of the June 30, 2018 OTTI 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.

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



	Three Months Ended June 30				Six Months Ended June 30
(In millions)	2018		2017		2018		2017
Proceeds from sales (exclusive of maturities and paydowns)	$	115.8	$	156.3	$	495.0	$	235.5
Purchases	$	184.6	$	198.7	$	552.5	$	359.1

Equity Investments

ProAssurance's equity investments are carried at fair value with changes in fair value recognized in income as a component of net realized investment gains (losses) during the period of change. Equity investments on the Condensed Consolidated Balance Sheet as of June 30, 2018 primarily included stocks, bonds and investment funds.

Short-term Investments

ProAssurance's short-term investments, which have a maturity at purchase of one year or less, are primarily comprised of investments in U.S. treasury obligations, commercial paper and money market funds. Short-term investments are carried at fair value which approximates the cost of the securities due to their short-term nature.

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.

Net Investment Income

Net investment income by investment category was as follows:



	Three Months Ended June 30						Six Months Ended June 30
(In thousands)	2018			2017			2018			2017
Fixed maturities	$	17,506		$	18,841		$	34,586		$	38,962
Equities	4,998			4,298			9,865			7,942
Short-term investments, including Other	1,332			978			2,639			1,778
BOLI	455			442			904			897
Investment fees and expenses	(1,907		)	(1,882		)	(3,583		)	(3,716		)
Net investment income	$	22,384		$	22,677		$	44,411		$	45,863

Investment in Unconsolidated Subsidiaries

ProAssurance's investment in unconsolidated subsidiaries were as follows:



	June 30, 2018	Carrying Value
(In thousands)	Percentage Ownership	June 30, 2018		December 31, 2017
Qualified affordable housing project tax credit partnerships	See below	$	74,895	$	84,607
Other tax credit partnerships	See below	4,980		6,118
All other investments, primarily investment fund LPs/LLCs	See below	310,339		239,866
		$	390,214	$	330,591

Qualified affordable housing project 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 $28.5 million at June 30, 2018 and $32.5 million at December 31, 2017. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of $46.4 million at June 30, 2018 and $52.1 million at December 31, 2017. Since ProAssurance has the ability to exert influence over the partnerships but does not control them, all are accounted for using the equity method. See further discussion of the entities in which ProAssurance holds passive interests in Note 11.

Other tax credit partnerships are comprised entirely of investments in historic tax credit partnerships. The historic tax credit partnerships 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 historic tax credit partnerships is almost 100%. Since ProAssurance has the ability to exert influence over the partnerships but does not control them, all are accounted for using the equity method. See further discussion of the entities in which ProAssurance holds passive interests in Note 11.

ProAssurance holds interests in investment fund LPs/LLCs and other equity method investments and LPs/LLCs which are not considered to be investment funds. 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 $28.4 million at June 30, 2018 and $30.8 million at December 31, 2017. ProAssurance's ownership percentage relative to the remaining investments and LPs/LLCs is less than 25%; these interests had a carrying value of $281.9 million at June 30, 2018 and $209.1 million at December 31, 2017. ProAssurance does not have the ability to exert control over any of these funds.

Equity in Earnings (Loss) of Unconsolidated Subsidiaries

Equity in earnings (loss) of unconsolidated subsidiaries included losses from qualified affordable housing project tax credit partnerships and historic tax credit partnerships. Losses recorded reflect ProAssurance's allocable portion of partnership operating losses. Tax credits reduce income tax expense in the period they are recognized. Losses recorded and tax credits recognized related to ProAssurance's tax credit partnership investments were as follows:



	Three Months Ended June 30				Six Months Ended June 30
(In thousands)	2018		2017		2018		2017
Qualified affordable housing project tax credit partnerships
Losses recorded	$	5,612	$	3,964	$	9,712	$	7,272
Tax credits recognized	$	4,624	$	4,612	$	9,237	$	9,225

Historic tax credit partnerships
Losses recorded	$	1,506	$	2,350	$	3,382	$	2,766
Tax credits recognized	$	693	$	820	$	1,355	$	2,624

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)	2018			2017			2018			2017
Total OTTI losses:
Corporate debt	$	(404	)	$	—		$	(404	)	$	(419	)
Portion of OTTI losses recognized in other comprehensive income before taxes:
Corporate debt	—			—			—			248
Net impairment losses recognized in earnings	(404		)	—			(404		)	(171		)
Gross realized gains, available-for-sale fixed maturities	438			746			4,902			2,599
Gross realized (losses), available-for-sale fixed maturities	(1,725		)	(1,401		)	(3,772		)	(1,468		)
Net realized gains (losses), trading fixed maturities	(73		)	—			(73		)	—
Net realized gains (losses), equity investments	3,488			794			12,706			7,356
Net realized gains (losses), other investments	402			546			1,090			1,719
Change in unrealized holding gains (losses), trading fixed maturities	(170		)	—			(219		)	—
Change in unrealized holding gains (losses), equity investments	745			(3,191		)	(23,099		)	424
Change in unrealized holding gains (losses), convertible securities, carried at fair value	90			285			(864		)	598
Other	4			2			11			4
Net realized investment gains (losses)	$	2,795		$	(2,219	)	$	(9,722	)	$	11,061

ProAssurance recognized OTTI in earnings of $0.4 million during the three and six months ended June 30, 2018 related to debt instruments from one issuer in the energy sector.

ProAssurance did not recognize any OTTI during the three months ended June 30, 2017. During the six months ended June 30, 2017, ProAssurance recognized OTTI in earnings of $0.2 million and $0.2 million of non-credit OTTI in OCI, both of which related to corporate bonds.

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)	2018		2017			2018		2017
Balance beginning of period	$	1,313	$	1,329		$	1,313	$	1,158
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized	—		—			—		171
Reductions due to:
Securities sold during the period (realized)	—		(16		)	—		(16		)
Balance June 30	$	1,313	$	1,313		$	1,313	$	1,313