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  • 10-Q (Nov 6, 2017)
  • 10-Q (Aug 7, 2017)
  • 10-Q (May 4, 2017)
  • 10-Q (Nov 2, 2016)
  • 10-Q (Aug 3, 2016)
  • 10-Q (May 9, 2016)

 
8-K

 
Other

Pro-Assurance 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
PRA-2012.9.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012 or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to                          
Commission file number 0-16533
ProAssurance Corporation
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
63-1261433
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer Identification No.)
 
 
100 Brookwood Place, Birmingham, AL
35209
(Address of Principal Executive Offices)
(Zip Code)
 
 
(205) 877-4400
 
(Registrant’s Telephone Number,
Including Area Code)
(Former Name, Former Address, and Former
Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter), during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
ý
 
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 26, 2012, there were 30,735,123 shares of the registrant’s common stock outstanding.



FORWARD-LOOKING STATEMENTS
Any statements in this Form 10-Q that are not historical facts are specifically identified as forward-looking statements. These statements are based upon our estimates and anticipation of future events and are subject to certain risks and uncertainties that could cause actual results to vary materially from the expected results described in the forward-looking statements. Forward-looking statements are identified by words such as, but not limited to, “anticipate”, “believe”, “estimate”, “expect”, “hope”, “hopeful”, “intend”, “may”, “optimistic”, “preliminary”, “potential”, “project”, “should”, “will” and other analogous expressions. There are numerous factors that could cause our actual results to differ materially from those in the forward-looking statements. Thus, sentences and phrases that we use to convey our view of future events and trends are expressly designated as forward-looking statements as are sections of this Form 10-Q that are identified as giving our outlook on future business.
Forward-looking statements relating to our business include among other things: statements concerning liquidity and capital requirements, investment valuation and performance, return on equity, financial ratios, net income, premiums, losses and loss reserves, premium rates and retention of current business, competition and market conditions, the expansion of product lines, the development or acquisition of business in new geographical areas, the availability of acceptable reinsurance, actions by regulators and rating agencies, court actions, legislative actions, payment or performance of obligations under indebtedness, payment of dividends and other matters.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following factors that could affect the actual outcome of future events:
general economic conditions, either nationally or in our market areas, that are different than anticipated;
our ability to maintain our dividend payments;
regulatory, legislative and judicial actions or decisions that could affect our business plans or operations;
the enactment or repeal of tort reforms;
formation or dissolution of state-sponsored medical professional liability insurance entities that could remove or add sizable groups of physicians from or to the private insurance market;
the impact of deflation or inflation;
changes in the interest rate environment;
changes in U.S. laws or government regulations regarding financial markets or market activity that may affect the U.S. economy and our business;
changes in the ability of the U.S. government to meet its obligations that may affect the U.S. economy and our business;
performance of financial markets affecting the fair value of our investments or making it difficult to determine the value of our investments;
changes in accounting policies and practices that may be adopted by our regulatory agencies and the Financial Accounting Standards Board, the Securities and Exchange Commission, or the Public Company Accounting Oversight Board;
changes in laws or government regulations affecting medical professional liability insurance or the financial community;
the effects of changes in the healthcare delivery system, including but not limited to the Patient Protection and Affordable Care Act;
consolidation of healthcare providers and entities that are more likely to self insure and not purchase medical professional liability insurance;
uncertainties inherent in the estimate of loss and loss adjustment expense reserves and reinsurance, and changes in the availability, cost, quality, or collectability of insurance/reinsurance;
the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;
allegation of bad faith which may arise from our handling of any particular claim, including failure to settle;
loss of independent agents;
changes in our organization, compensation and benefit plans;
our ability to retain and recruit senior management;
our ability to purchase reinsurance and collect recoveries from our reinsurers;
assessments from guaranty funds;
our ability to achieve continued growth through expansion into other states or through acquisitions or business combinations;
changes to the ratings assigned by rating agencies to our insurance subsidiaries, individually or as a group;
provisions in our charter documents, Delaware law and state insurance law may impede attempts to replace or remove management or may impede a takeover;
state insurance restrictions may prohibit assets held by our insurance subsidiaries, including cash and investment

2


securities, from being used for general corporate purposes;
taxing authorities can take exception to our tax positions and cause us to incur significant amounts of defense costs and, if our defense is not successful, additional tax costs, including interest and penalties;
insurance market conditions may alter the effectiveness of our current business strategy and impact our revenues; and
expected benefits from completed and proposed acquisitions may not be achieved or may be delayed longer than expected due to business disruption, loss of customers, employees and key agents, increased operating costs or inability to achieve cost savings, and assumption of greater than expected liabilities, among other reasons.
Additional risks that could adversely affect the proposed mergers of Medmarc Insurance Group (Medmarc) and Independent Nevada Doctors Insurance Exchange (IND) into ProAssurance, include but are not limited to, the following:
the businesses of ProAssurance and Medmarc or ProAssurance and IND may not be combined successfully, or such combination may take longer to accomplish than expected;
the cost savings from either transaction may not be fully realized or may take longer to realize than expected;
operating costs, customer loss and business disruption following either or both transactions, including adverse effects on relationships with employees, may be greater than expected;
governmental approvals of either or both transactions may not be obtained or adverse regulatory conditions may be imposed in connection with governmental approvals of either or both transactions;
there may be restrictions on our ability to achieve continued growth through expansion into other states or through acquisitions or business combinations;
the board of directors of Medmarc or the Subscriber Advisory Committee (SAC) of IND may withdraw their recommendation in favor of a competing acquisition proposal; and
those policyholders eligible to vote on the proposed Medmarc transaction may fail to approve it.
Our results may differ materially from those we expect and discuss in any forward-looking statements. The principal risk factors that may cause these differences are described in “Item 1A, Risk Factors” in our Form 10-K and other documents we file with the Securities and Exchange Commission, such as our current reports on Form 8-K, and our regular reports on Form 10-Q.
We caution readers not to place undue reliance on any such forward-looking statements, which are based upon conditions existing only as of the date made, and advise readers that these factors could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Except as required by law or regulations, we do not undertake and specifically decline any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

3



 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


4


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
 
September 30,
2012
 
December 31,
2011
Assets
 
 
 
Investments
 
 
 
Fixed maturities, available for sale, at fair value; amortized cost, $3,325,657 and $3,465,720, respectively
$
3,570,179

 
$
3,665,763

Equity securities, available for sale, at fair value; cost, $6 at December 31, 2011

 
25

Equity securities, trading, at fair value; cost, $169,144 and $101,078, respectively
183,978

 
103,133

Short-term investments
167,516

 
119,421

Business owned life insurance
52,070

 
52,651

Investment in unconsolidated subsidiaries
120,670

 
111,324

Other investments
31,221

 
38,224

Total Investments
4,125,634

 
4,090,541

 
 
 
 
Cash and cash equivalents
97,659

 
130,400

Premiums receivable
125,204

 
120,220

Receivable from reinsurers on paid losses and loss adjustment expenses
9,292

 
4,175

Receivable from reinsurers on unpaid losses and loss adjustment expenses
231,250

 
247,658

Prepaid reinsurance premiums
16,100

 
12,568

Deferred policy acquisition costs
25,042

 
26,626

Deferred taxes
7,962

 
30,989

Real estate, net
41,111

 
40,432

Intangible assets
50,209

 
53,703

Goodwill
159,625

 
159,625

Other assets
83,578

 
81,941

Total Assets
$
4,972,666

 
$
4,998,878

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Policy liabilities and accruals
 
 
 
Reserve for losses and loss adjustment expenses
$
2,153,548

 
$
2,247,772

Unearned premiums
257,661

 
251,155

Reinsurance premiums payable
86,047

 
82,039

Total Policy Liabilities
2,497,256

 
2,580,966

Other liabilities
126,012

 
203,772

Long-term debt, $35,507 at amortized cost and $14,180 at fair value at December 31, 2011

 
49,687

Total Liabilities
2,623,268

 
2,834,425

 
 
 
 
Shareholders’ Equity
 
 
 
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 34,721,820 and 34,551,494 shares issued, respectively
347

 
346

Additional paid-in capital
543,471

 
538,625

Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $85,583 and $70,022, respectively
158,936

 
130,037

Retained earnings
1,851,052

 
1,699,853

 
2,553,806

 
2,368,861

Treasury shares, at cost, 3,997,951 shares
(204,408
)
 
(204,408
)
Total Shareholders’ Equity
2,349,398

 
2,164,453

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
4,972,666

 
$
4,998,878

See accompanying notes.

5


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Capital (Unaudited)
(In thousands)
 
 
Total
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Other Capital Accounts
Balance at December 31, 2011
$
2,164,453

 
$
130,037

 
$
1,699,853

 
$
334,563

Net income
174,204

 

 
174,204

 

Dividends to shareholders
(23,005
)
 

 
(23,005
)
 

Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments
28,899

 
28,899

 

 

Common shares issued for compensation and net effect of restricted and performance shares issued and stock options exercised
(1,534
)
 

 

 
(1,534
)
Share-based compensation
6,381

 

 

 
6,381

Balance at September 30, 2012
$
2,349,398

 
$
158,936

 
$
1,851,052

 
$
339,410

 
 
 
 
 
 
 
 
 
Total
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Other Capital Accounts
Balance at December 31, 2010
$
1,855,863

 
$
79,124

 
$
1,428,026

 
$
348,713

Net income
146,494

 

 
146,494

 

Dividends to shareholders
(7,632
)
 

 
(7,632
)
 

Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments
43,224

 
43,224

 

 

Common shares reacquired
(21,013
)
 

 

 
(21,013
)
Common shares issued for compensation and net effect of performance shares issued and stock options exercised
(595
)
 

 

 
(595
)
Share-based compensation
5,422

 

 

 
5,422

Balance at September 30, 2011
$
2,021,763

 
$
122,348

 
$
1,566,888

 
$
332,527

See accompanying notes.


6


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
(In thousands, except per share data)
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
127,125

 
$
134,627

 
$
395,050

 
$
403,766

Net investment income
33,910

 
34,116

 
101,912

 
106,573

Equity in earnings (loss) of unconsolidated subsidiaries
211

 
(2,264
)
 
(4,082
)
 
(6,044
)
Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment (OTTI) losses
(142
)
 
(1,389
)
 
(1,566
)
 
(4,291
)
Portion of OTTI losses recognized in (reclassified from) other comprehensive income before taxes

 
(142
)
 
(201
)
 
(823
)
Net impairment losses recognized in earnings
(142
)
 
(1,531
)
 
(1,767
)
 
(5,114
)
Other net realized investment gains (losses)
13,361

 
(10,441
)
 
24,115

 
(534
)
Total net realized investment gains (losses)
13,219

 
(11,972
)
 
22,348

 
(5,648
)
Other income
1,529

 
7,471

 
5,207

 
11,745

 
 
 
 
 
 
 
 
Total revenues
175,994

 
161,978

 
520,435

 
510,392

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Losses and loss adjustment expenses
63,675

 
71,777

 
197,112

 
218,270

Reinsurance recoveries
(7,054
)
 
(8,601
)
 
(22,208
)
 
(20,319
)
Net losses and loss adjustment expenses
56,621

 
63,176

 
174,904

 
197,951

Underwriting, policy acquisition and operating expenses
33,280

 
34,954

 
103,083

 
103,534

Interest expense
350

 
932

 
2,002

 
2,645

Loss on extinguishment of debt
2,163

 

 
2,163

 

 
 
 
 
 
 
 
 
Total expenses
92,414

 
99,062

 
282,152

 
304,130

 
 
 
 
 
 
 
 
Income before income taxes
83,580

 
62,916

 
238,283

 
206,262

 
 
 
 
 
 
 
 
Provision for income taxes
 
 
 
 
 
 
 
Current expense (benefit)
19,017

 
19,220

 
56,612

 
46,049

Deferred expense (benefit)
4,457

 
(9
)
 
7,467

 
13,719

Total income tax expense (benefit)
23,474

 
19,211

 
64,079

 
59,768

 
 
 
 
 
 
 
 
Net income
$
60,106

 
$
43,705

 
$
174,204

 
$
146,494

 
 
 
 
 
 
 
 
Other comprehensive income, after tax, net of reclassification adjustments (see Note 9)
18,885

 
23,291

 
28,899

 
43,224

 
 
 
 
 
 
 
 
Comprehensive income
$
78,991

 
$
66,996

 
$
203,103

 
$
189,718

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.96

 
$
1.43

 
$
5.69

 
$
4.79

Diluted
$
1.94

 
$
1.42

 
$
5.64

 
$
4.75

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
30,674

 
30,557

 
30,641

 
30,577

Diluted
30,938

 
30,847

 
30,902

 
30,844

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.25

 
$
0.25

 
$
0.75

 
$
0.25

See accompanying notes.

7


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
 
Nine Months Ended
September 30
 
2012
 
2011
Operating Activities
 
 
 
Net income
$
174,204

 
$
146,494

Depreciation and amortization
28,280

 
27,182

Loss (gain) on extinguishment of debt
2,163

 

Net realized investment (gains) losses
(22,348
)
 
5,648

Share-based compensation
6,381

 
5,422

Deferred income taxes
7,467

 
13,719

Other
(2,423
)
 
(328
)
Changes in assets and liabilities:
 
 
 
Premiums receivable
(4,984
)
 
(17,061
)
Other assets
(3,633
)
 
4,090

Reserve for losses and loss adjustment expenses
(94,224
)
 
(21,008
)
Unearned premiums
6,506

 
21,652

Reinsurance related assets and liabilities
11,767

 
(8,510
)
Other liabilities
(47,800
)
 
(70,882
)
 
 
 
 
Net cash provided by operating activities
61,356

 
106,418

 
 
 
 
Investing Activities
 
 
 
Purchases of:
 
 
 
Fixed maturities, available for sale
(533,780
)
 
(597,762
)
Equity securities, trading
(84,008
)
 
(87,787
)
Other investments
(9,539
)
 
(429
)
Funding of tax credit limited partnerships
(29,458
)
 
(21,542
)
(Investments in) distributions from unconsolidated subsidiaries, net
(6,451
)
 

Proceeds from sale or maturities of:
 
 
 
Fixed maturities, available for sale
666,054

 
586,455

Equity securities, available for sale

 
3,836

Equity securities, trading
33,343

 
40,648

Other investments
588

 
596

Net sales or maturities (purchases) of short-term investments
(48,230
)
 
71,614

Unsettled security transactions, net
3,399

 
4,897

Cash received (paid) for other assets
(5,651
)
 
(9,581
)
 
 
 
 
Net cash provided (used) by investing activities
(13,733
)
 
(9,055
)
 
 
 
 
Financing Activities
 
 
 
Repayment of long-term debt and related swap
(57,660
)
 

Repurchase of common stock

 
(21,013
)
Dividends to shareholders
(22,922
)
 

Other
218

 
(1,494
)
 
 
 
 
Net cash provided (used) by financing activities
(80,364
)
 
(22,507
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
(32,741
)
 
74,856

Cash and cash equivalents at beginning of period
130,400

 
50,851

 
 
 
 
Cash and cash equivalents at end of period
$
97,659

 
$
125,707

See accompanying notes.

8

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2012


1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation and its consolidated subsidiaries (ProAssurance or PRA). The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. ProAssurance’s results for the three- and nine-month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2011 report on Form 10-K. In connection with its preparation of the Condensed Consolidated Financial Statements, ProAssurance evaluated events that occurred subsequent to September 30, 2012 for recognition or disclosure in its financial statements and notes to financial statements.
Accounting Changes Not Yet Adopted
Intangibles-Goodwill and Other
Effective for fiscal years beginning after September 15, 2012, the FASB revised guidance related to impairment testing of indefinite-lived intangible assets. The new guidance permits an entity to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. Quantitative impairment testing is required only if the assessment of qualitative factors indicates it is more likely than not that impairment exists. ProAssurance plans to adopt the guidance beginning January 1, 2013. Adoption of this guidance is expected to have no effect on ProAssurance's results of operations or financial position.
Disclosures About Offsetting Assets and Liabilities
Effective for fiscal years beginning on or after January 1, 2013, the Financial Accounting Standards Board (FASB) revised guidance related to disclosures about certain assets and liabilities in an entity’s financial statements. The guidance requires disclosures related to the net and gross positions of certain financial instruments and transactions that are either eligible for offset in accordance with existing GAAP guidance or subject to an agreement that requires such offset. The guidance must be applied retrospectively for all prior periods presented. ProAssurance plans to adopt the guidance beginning January 1, 2013. Adoption of this guidance is expected to have no effect on ProAssurance’s results of operations or financial position as it impacts disclosures only.
Accounting Changes
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
Effective for fiscal years beginning after December 15, 2011, the FASB revised guidance regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The guidance permits deferral of qualifying costs only when associated with successful contract acquisitions. Internal selling agent and underwriter salary and benefit costs allocated to unsuccessful contracts, as well as advertising costs, are excluded. The guidance must be applied prospectively, but may be applied retrospectively for all prior periods. ProAssurance prospectively adopted the guidance on January 1, 2012. Adoption of this guidance had no material effect on ProAssurance’s results of operations or financial position.
Fair Value Measurements
Effective for interim and annual reporting periods beginning after December 15, 2011, the FASB revised guidance related to fair value measurements and disclosures, all of which are to be applied prospectively. The new guidance increases disclosure requirements regarding valuation methods used to determine fair value measurements categorized as Level 3, as well as the sensitivity to change of those measurements, and requires additional disclosures regarding the consideration given to highest and best use in fair value measurements of nonfinancial assets. The guidance also requires that when fair value measurements of items not carried at fair value are disclosed, the fair value measurements are to be categorized by level of the fair value hierarchy. Additionally, the guidance also clarifies or revises certain fair value measurement principles related to the valuation of financial instruments managed within a portfolio, the valuation of instruments classified as a part of shareholders’ equity, the appropriate application of the highest and best use valuation premise, and the consideration of premium and discounts in a fair value measurement. ProAssurance adopted the guidance on January 1, 2012. Adoption of this guidance had no material effect on ProAssurance’s results of operations or financial position.

9

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2012

2. 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 and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, including financial instruments for which ProAssurance has elected fair value, are shown in the following tables. 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 requires judgment and consideration of factors specific to the assets being valued.

10

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2012

2. Fair Value Measurement (continued)

 
September 30, 2012
 
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
$

 
$
218,542

 
$

 
$
218,542

U.S. Government-sponsored enterprise obligations

 
62,691

 

 
62,691

State and municipal bonds

 
1,206,113

 
7,175

 
1,213,288

Corporate debt, multiple observable inputs

 
1,453,004

 

 
1,453,004

Corporate debt, limited observable inputs:
 
 
 
 
 
 

Private placement senior notes

 

 
349

 
349

Other corporate debt, NRSRO ratings available

 

 
16,570

 
16,570

Other corporate debt, NRSRO ratings not available

 

 
6,847

 
6,847

Residential mortgage-backed securities

 
375,673

 

 
375,673

Agency commercial mortgage-backed securities

 
71,462

 

 
71,462

Other commercial mortgage-backed securities

 
76,742

 

 
76,742

Other asset-backed securities

 
70,986

 
4,025

 
75,011

Equity securities
 
 
 
 
 
 

Financial
66,885

 

 

 
66,885

Utilities/Energy
29,207

 

 

 
29,207

Consumer oriented
46,394

 

 

 
46,394

Technology
10,543

 

 

 
10,543

Industrial
16,374

 

 

 
16,374

All other
14,575

 

 

 
14,575

Short-term investments
72,632

 
94,884

 

 
167,516

Financial instruments carried at fair value, classified as a part of:
 
 
 
 
 
 
 
Investment in unconsolidated subsidiaries

 

 
31,479

 
31,479

Total assets
$
256,610

 
$
3,630,097

 
$
66,445

 
$
3,953,152

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
2019 Note payable

 

 

 

Interest rate swap agreement

 

 

 

Total liabilities
$

 
$

 
$

 
$



11

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2012

2. Fair Value Measurement (continued)
 
December 31, 2011
 
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
$

 
$
283,865

 
$

 
$
283,865

U.S. Government-sponsored enterprise obligations

 
68,104

 

 
68,104

State and municipal bonds

 
1,221,187

 
7,200

 
1,228,387

Corporate debt, multiple observable inputs

 
1,359,866

 

 
1,359,866

Corporate debt, limited observable inputs:
 
 
 
 
 
 

Private placement senior notes

 

 
612

 
612

Other corporate debt, NRSRO ratings available

 

 
6,310

 
6,310

Other corporate debt, NRSRO ratings not available

 

 
1,160

 
1,160

Residential mortgage-backed securities

 
452,932

 

 
452,932

Agency commercial mortgage-backed securities

 
81,530

 

 
81,530

Other commercial mortgage-backed securities

 
81,188

 

 
81,188

Other asset-backed securities

 
101,809

 

 
101,809

Equity securities
 
 
 
 
 
 

Financial
25,281

 

 

 
25,281

Utilities/Energy
18,748

 

 

 
18,748

Consumer oriented
29,711

 

 

 
29,711

Technology
7,556

 

 

 
7,556

Industrial
9,185

 

 

 
9,185

All other
12,677

 

 

 
12,677

Short-term investments
111,359

 
8,062

 

 
119,421

Financial instruments carried at fair value, classified as a part of:
 
 
 
 
 
 

Investment in unconsolidated subsidiaries

 

 
23,841

 
23,841

Other investments

 

 
15,873

 
15,873

Total assets
$
214,517

 
$
3,658,543

 
$
54,996

 
$
3,928,056

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
2019 Note payable

 

 
14,180

 
14,180

Interest rate swap agreement

 

 
4,659

 
4,659

Total liabilities
$

 
$

 
$
18,839

 
$
18,839

The fair values for securities included in the Level 2 category, with the few exceptions described below, have been developed by third party, nationally recognized pricing services. These services use complex methodologies to determine values for securities and subject the values they develop to quality control reviews. Management reviews service-provided values for reasonableness by comparing data among pricing services and to available market and trade data. Values that appear inconsistent are further reviewed for appropriateness. If a value does not appear reasonable, the valuation is discussed with the service that provided the value and would be adjusted, if necessary. No such adjustments have been necessary in 2012 or 2011.
 

12

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2012

2. Fair Value Measurement (continued)
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 are 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 are 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 are included in the valuation process when necessary to reflect recent events, such as regulatory, government or corporate actions or significant economic, industry or geographic events that would affect the security’s fair value.
State and municipal bonds are valued using a series of matrices that consider credit ratings, the structure of the security, the sector in which the security falls, yields, and contractual cash flows. Valuations are further adjusted, when necessary, to reflect recent events such as significant economic or geographic events or ratings changes that would affect the security’s fair value.
Corporate debt with multiple observable inputs consists primarily of corporate bonds, but also includes a small number of bank loans. The methodology used to value Level 2 corporate bonds is the same as the methodology previously described for U.S. Government-sponsored enterprise obligations. Bank loans are valued by an outside vendor based upon a widely distributed, loan-specific listing of average bid and ask prices published daily by an investment industry group. The publisher of the listing derives the averages from data received from multiple market-makers for bank loans.
Residential and commercial mortgage backed securities. Agency pass-through securities are valued using a matrix, considering the issuer type, coupon rate and longest cash flows outstanding. The matrix is developed daily based on available market information. Agency and non-agency collateralized mortgage obligations are 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. Evaluations of Alt-A mortgages include a review of collateral performance data, which is generally updated monthly.
Other asset-backed securities are 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. Evaluations of subprime home equity loans use the same evaluation methodology as previously described for Alt-A mortgages.
Short-term investments included in the Level 2 category are commercial paper and certificates of deposit maturing within one year, carried at cost which approximates the fair value of the security due to the short term to maturity.
 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 Company’s Vice President of Investments, who reports to the Chief Financial Officer.
Level 3 valuations are computed quarterly. Prices are evaluated quarterly against prior period prices and the expected change in price.
The Company’s Level 3 valuations are not overly sensitive to changes in the unobservable inputs used. The securities noted in the disclosure are primarily investment grade debt where comparable market inputs are commonly available for evaluating the securities in question.

13

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2012

2. Fair Value Measurement (continued)
Level 3 Valuation Methodologies
State and municipal bonds consists of auction rate municipal bonds valued internally using published quotes for similar securities or by using a model based on discounted cash flows using yields currently available on fixed rate securities with a similar term and collateral, adjusted to consider the effect of a floating rate and a premium for illiquidity. At September 30, 2012 and December 31, 2011 all of these bonds were rated A- or better.
Corporate debt with limited observable inputs consists of private placement senior notes guaranteed by large regional banks and contain corporate bonds. Valuations are determined using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities having like terms and payment features that are of comparable credit quality. Assessments of credit quality are based on NRSRO ratings, if available, or are subjectively determined by management if not available. At September 30, 2012, the average rating of rated securities, primarily NRSRO ratings, was BBB+.
Other asset-backed securities consists of securitizations of receivables valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities.
Investment in unconsolidated subsidiaries and Other investments consist of limited partnership (LP) and limited liability company (LLC) interests valued using the net asset value (NAV) provided by the LP/LLC, which approximates the fair value of the interest.
Such interests included the following:
 
Unfunded
Commitments
Fair Value
(In thousands)
September 30,
2012
September 30,
2012
 
December 31,
2011
Investment in unconsolidated subsidiaries:
 
 
 
 
LP primarily invested in long/short equities (1)
None
$
17,740

 
$
17,123

LPs primarily invested in non-public equities (2)
$46,712
13,739

 
6,718

 
 
31,479

 
23,841

Other investments:
 
 
 
 
LLC primarily invested in private equity and debt (3)
None

 
15,873

 
 
$
31,479

 
$
39,714

(1)
The LP holds both long and short U.S. and North American equities, and targets absolute returns using a strategy designed to take advantage of event-driven market opportunities. Redemptions are allowed with a notice requirement of up to 45 days and are paid within 30 days of the redemption date, unless the redemption request is for 90% or more of the requestor’s capital balance. Redemptions at the 90% and above level will be paid at 90%, with the remainder paid after the LP’s annual audit.
(2)
The LPs are structured to provide capital appreciation through diversified investments in private equity, which can include investments in buyout, venture capital, mezzanine debt, distressed debt and other private equity-oriented LPs. Redemptions are not allowed for one of the LPs, except by special permission of the LP. Income and capital are to be periodically distributed at the discretion of the LP over an anticipated time frame that spans from 4 to 7 years.
(3)
The LLC converted into a publicly traded investment fund during the second quarter of 2012. Prior to conversion, the LLC was structured to provide income through diversified investments in private equity, including mezzanine debt, distressed debt, syndicated bank loans and other private equity-oriented investments.
Liabilities are valued using the present value of expected underlying cash flows of the instrument, discounted at rates available on the valuation date for similar instruments issued by entities with a similar credit standing to ProAssurance.

14

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2012

2. Fair Value Measurement (continued)
Quantitative Information Regarding Level 3 Valuations
Quantitative Information about Level 3 Fair Value Measurements
 
 
Fair Value at
 
 
 
 
 
 
(In millions)
 
September 30, 2012
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
Assets:
 
 
 
 
 
 
 
 
State and municipal bonds
 
$7.2
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 10% (5%)
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 10% (5%)
Corporate debt with limited observable inputs
 
$23.8
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 5% (2.5%)
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 5% (2.5%)
Other asset-backed securities
 
$4.0
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 5% (2.5%)
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 5% (2.5%)
The significant unobservable inputs used in the fair value measurement of the entity’s corporate bonds are the valuations of comparable securities with similar issuer, credit quality and maturity. Changes in the availability of comparable securities could result in changes in the fair value measurements.

15

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2012

 2. Fair Value Measurement (continued)
The following tables (the Level 3 Tables) present summary information regarding changes in the fair value of assets and liabilities measured at fair value using Level 3 inputs, including financial instruments for which ProAssurance has elected fair value accounting.
 
September 30, 2012
 
Level 3 Fair Value Measurements – Assets
(In thousands)
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Investment in Unconsolidated Subsidiaries
 
Other Investments
 
Total
Balance June 30, 2012
$
7,175

 
$
10,510

 
$
1,795

 
$
24,028

 
$

 
$
43,508

Total gains (losses) realized and unrealized:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, as a part of:
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated subsidiaries

 

 

 
419

 

 
419

Net realized investment gains (losses)

 
14

 

 

 

 
14

Included in other comprehensive income

 
15

 
25

 

 

 
40

Purchases

 
6,978

 
4,939

 
7,032

 

 
18,949

Sales

 
(1,051
)
 
(1,118
)
 

 

 
(2,169
)
Transfers in

 
9,220

 

 

 

 
9,220

Transfers out

 
(1,920
)
 
(1,616
)
 

 

 
(3,536
)
Balance September 30, 2012
$
7,175

 
$
23,766

 
$
4,025

 
$
31,479

 
$

 
$
66,445

Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end
$

 
$

 
$

 
$
419

 
$

 
$
419

 
 
September 30, 2012
 
Level 3 Fair Value Measurements – Assets
(In thousands)
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Investment in Unconsolidated Subsidiaries
 
Other Investments
 
Total
Balance December 31, 2011
$
7,200

 
$
8,082

 
$

 
$
23,841

 
$
15,873

 
$
54,996

Total gains (losses) realized and unrealized:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, as a part of:
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated subsidiaries

 

 

 
1,189

 

 
1,189

Net realized investment gains (losses)

 
14

 

 

 
(131
)
 
(117
)
Included in other comprehensive income

 
593

 
25

 

 

 
618

Purchases

 
8,915

 
6,734

 
7,032

 

 
22,681

Sales
(25
)
 
(1,138
)
 
(1,118
)
 
(583
)
 

 
(2,864
)
Transfers in

 
9,220

 

 

 

 
9,220

Transfers out

 
(1,920
)
 
(1,616
)
 

 
(15,742
)
 
(19,278
)
Balance September 30, 2012
$
7,175

 
$
23,766

 
$
4,025

 
$
31,479

 
$

 
$
66,445

Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end
$

 
$

 
$

 
$
1,189

 
$

 
$
1,189


16

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2012

2. Fair Value Measurement (continued)
 
September 30, 2011
 
Level 3 Fair Value Measurements – Assets
(In thousands)
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Investment in Unconsolidated Subsidiaries
 
Other Investments
 
Total
Balance June 30, 2011
$
7,325

 
$
7,830

 
$
1,684

 
$
25,127

 
$

 
$
41,966

Total gains (losses) realized and unrealized:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, as a part of:
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated subsidiaries

 

 

 
(297
)
 

 
(297
)
Net realized investment gains (losses)

 

 

 

 

 

Included in other comprehensive income

 
(638
)
 

 

 

 
(638
)
Purchases

 

 

 

 

 

Sales
(75
)
 

 

 

 

 
(75
)
Transfers in

 
2,904

 

 

 
16,191

 
19,095

Transfers out

 

 
(1,684
)
 

 

 
(1,684
)
Balance September 30, 2011
$
7,250

 
$
10,096

 
$

 
$
24,830

 
$
16,191

 
$
58,367

Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end
$

 
$

 
$

 
$
(297
)
 
$

 
$
(297
)

 
September 30, 2011
 
Level 3 Fair Value Measurements – Assets
(In thousands)
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Investment in Unconsolidated Subsidiaries
 
Other Investments
 
Total
Balance December 31, 2010
$
7,550

 
$
21,229

 
$
2,220

 
$
25,112

 
$

 
$
56,111

Total gains (losses) realized and unrealized:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, as a part of:
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated subsidiaries

 

 

 
(282
)
 

 
(282
)
Net realized investment gains (losses)

 

 
314

 

 

 
314

Included in other comprehensive income

 
(1,352
)
 
(15
)
 

 

 
(1,367
)
Purchases

 

 
1,684

 

 

 
1,684

Sales
(300
)
 
(8,504
)
 
(1,921
)
 

 

 
(10,725
)
Transfers in

 
6,350

 

 

 
16,191

 
22,541

Transfers out

 
(7,627
)
 
(2,282
)
 

 

 
(9,909
)
Balance September 30, 2011
$
7,250

 
$
10,096

 
$

 
$
24,830

 
$
16,191

 
$
58,367