UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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 þ No o

     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 þ No o

     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 þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of July 26, 2011, there were 30,591,296 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;
	•		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 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 health care delivery system, including but not limited to the Patient Protection and Affordable Care Act;
	•		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;
	•		insurance market conditions may alter the effectiveness of our current business strategy and impact our revenues;
	•		the 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.

     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 Forms 10-Q and 10-K.

     We caution readers not to place undue reliance on any such forward-looking statements, which speak 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.

ProAssurance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)

		June 30				December 31
		2011				2010
Assets
Investments
Fixed maturities available for sale, at fair value		$	3,635,084			$	3,603,754
Equity securities, available for sale, at fair value			155				3,637
Equity securities, trading, at fair value			36,277				37,286
Short-term investments			128,901				168,438
Business owned life insurance			51,421				50,484
Investment in unconsolidated subsidiaries			116,885				88,754
Other investments			35,979				38,078
Total Investments			4,004,702				3,990,431
Cash and cash equivalents			101,226				50,851
Premiums receivable			119,731				120,950
Receivable from reinsurers on paid losses and loss adjustment expenses			3,519				4,582
Receivable from reinsurers on unpaid losses and loss adjustment expenses			278,777				277,436
Prepaid reinsurance premiums			15,738				11,023
Deferred policy acquisition costs			27,433				27,281
Deferred taxes			32,457				56,862
Real estate, net			43,256				43,951
Intangible assets			55,964				60,031
Goodwill			161,453				161,453
Other assets			82,351				70,205
Total Assets		$	4,926,607			$	4,875,056
Liabilities and Shareholders’ Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses		$	2,402,264			$	2,414,100
Unearned premiums			249,236				256,050
Reinsurance premiums payable			103,878				111,680
Total Policy Liabilities			2,755,378				2,781,830
Other liabilities			153,504				186,259
Long-term debt, $35,498 and $35,488, at amortized cost, respectively; $15,863 and $15,616 at fair value, respectively			51,361				51,104
Total Liabilities			2,960,243				3,019,193
Shareholders’ Equity
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 34,515,945 and 34,419,383 shares issued, respectively			345				344
Additional paid-in capital			535,427				532,213
Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $53,340 and $42,607, respectively			99,057				79,124
Retained earnings			1,530,816				1,428,026
			2,165,645				2,039,707
Treasury shares, at cost, 3,924,970 shares and 3,666,149 shares, respectively			(199,281	)			(183,844	)
Total Shareholders’ Equity			1,966,364				1,855,863
Total Liabilities and Shareholders’ Equity		$	4,926,607			$	4,875,056

ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Capital (Unaudited)
(In thousands)

						Accumulated
						Other								Other
						Comprehensive				Retained				Capital
		Total				Income (Loss)				Earnings				Accounts
Balance at December 31, 2010		$	1,855,863			$	79,124			$	1,428,026			$	348,713
Net income			102,790				—				102,790				—
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments			19,933				19,933				—				—
Common shares reacquired			(15,437	)			—				—				(15,437	)
Common shares issued for compensation and net effect of performance shares issued and stock options exercised			(499	)			—				—				(499	)
Share-based compensation			3,714				—				—				3,714
Balance at June 30, 2011		$	1,966,364			$	99,057			$	1,530,816			$	336,491

						Accumulated
						Other								Other
						Comprehensive				Retained				Capital
		Total				Income (Loss)				Earnings				Accounts
Balance at December 31, 2009		$	1,704,595			$	59,254			$	1,196,428			$	448,913
Net income			78,493				—				78,493				—
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments			45,385				45,385				—				—
Common shares reacquired			(39,168	)			—				—				(39,168	)
Common shares issued for compensation and net effect of performance shares issued and stock options exercised			732				—				—				732
Share-based compensation			2,941				—				—				2,941
Balance at June 30, 2010		$	1,792,978			$	104,639			$	1,274,921			$	413,418

ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30								June 30
		2011				2010				2011				2010
Revenues
Gross premiums written		$	115,302			$	98,522			$	276,115			$	255,699
Net premiums written		$	107,011			$	88,868			$	256,894			$	234,089
Premiums earned		$	142,409			$	135,933			$	283,783			$	270,204
Premiums ceded			(5,346	)			(10,535	)			(14,643	)			(21,379	)
Net premiums earned			137,063				125,398				269,140				248,825
Net investment income			36,297				37,081				72,457				74,709
Equity in earnings (loss) of unconsolidated subsidiaries			(2,416	)			839				(3,780	)			3,825
Net realized investment gains (losses):
Other-than-temporary impairment losses (OTTI)			(1,065	)			(4,912	)			(2,902	)			(12,379	)
Portion of OTTI losses recognized in (reclassified from) other comprehensive income before taxes			(113	)			(2,128	)			(681	)			6
Net impairment losses recognized in earnings			(1,178	)			(7,040	)			(3,583	)			(12,373	)
Other net realized investment gains (losses)			3,378				3,539				9,907				6,468
Total net realized investment gains (losses)			2,200				(3,501	)			6,324				(5,905	)
Other income			1,685				1,683				4,273				4,005
Total revenues			174,829				161,500				348,414				325,459
Expenses
Losses and loss adjustment expenses			69,394				77,170				146,493				165,078
Reinsurance recoveries			(5,041	)			(8,646	)			(11,717	)			(17,853	)
Net losses and loss adjustment expenses			64,353				68,524				134,776				147,225
Underwriting, policy acquisition and operating expenses			32,871				31,642				68,578				62,846
Interest expense			918				827				1,713				1,640
Total expenses			98,142				100,993				205,067				211,711
Income before income taxes			76,687				60,507				143,347				113,748
Provision for income taxes
Current expense (benefit)			21,769				23,106				26,829				31,925
Deferred expense (benefit)			(178	)			(2,980	)			13,728				3,330
Total income tax expense (benefit)			21,591				20,126				40,557				35,255
Net income		$	55,096			$	40,381			$	102,790			$	78,493
Earnings per share:
Basic		$	1.80			$	1.25			$	3.36			$	2.42
Diluted		$	1.79			$	1.23			$	3.33			$	2.40
Weighted average number of common shares outstanding:
Basic			30,583				32,322				30,600				32,385
Diluted			30,856				32,721				30,855				32,743

ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)

		Three Months Ended								Six Months Ended
		June 30								June 30
		2011				2010				2011				2010
Comprehensive income:
Net income		$	55,096			$	40,381			$	102,790			$	78,493
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments			24,224				32,141				19,933				45,385
Comprehensive income		$	79,320			$	72,522			$	122,723			$	123,878

ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

		Six Months Ended
		June 30
		2011				2010
Operating Activities
Net income		$	102,790			$	78,493
Depreciation and amortization			17,954				13,133
Net realized investment (gains) losses			(6,324	)			5,905
Share-based compensation			3,714				2,941
Deferred income taxes			13,728				3,330
Other			226				4,912
Changes in assets and liabilities, excluding the effects of business combinations:
Premiums receivable			1,219				11,962
Other assets			(1,549	)			(8,562	)
Reserve for losses and loss adjustment expenses			(11,836	)			(9,887	)
Unearned premiums			(6,814	)			(13,232	)
Reinsurance related assets and liabilities			(12,795	)			7,993
Other liabilities			(47,261	)			(21,069	)
Net cash provided by operating activities			53,052				75,919
Investing Activities
Purchases of:
Fixed maturities available for sale			(452,833	)			(458,291	)
Equity securities trading			(31,325	)			(8,419	)
Other investments			(429	)			(5,255	)
Cash invested in unconsolidated subsidiaries:
Tax credit limited partnerships			(17,232	)			(4,225	)
Other partnership investments			—				(5,237	)
Proceeds from sale or maturities of:
Fixed maturities available for sale			449,364				502,769
Equity securities available for sale			3,704				14
Equity securities trading			33,908				26,812
Other investments			432				1,242
Net sales or maturities (purchases) of short-term investments, excluding unsettled redemptions			39,537				(101,862	)
Unsettled security transactions, net			1,228				22,263
Cash received (paid) for other assets			(11,428	)			(2,209	)
Net cash provided (used) by investing activities			14,926				(32,398	)
Financing Activities
Repurchase of treasury shares			(14,993	)			(39,168	)
Other			(2,610	)			292
Net cash provided (used) by financing activities			(17,603	)			(38,876	)
Increase (decrease) in cash and cash equivalents			50,375				4,645
Cash and cash equivalents at beginning of period			50,851				40,642
Cash and cash equivalents at end of period		$	101,226			$	45,287

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

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-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2010 report on Form 10-K. In connection with its preparation of the Condensed Consolidated Financial Statements, ProAssurance evaluated events that occurred subsequent to June 30, 2011 for recognition or disclosure in its financial statements and notes to financial statements.

Reclassifications

     As of June 30, 2011, ProAssurance has reported intangible assets as a separate line item on the Balance Sheet. Prior period balances in this report have been reclassified to conform to the 2011 presentation. The reclassification had no effect on income from continuing operations, net income or total assets.

Accounting Changes Not Yet Adopted

Presentation of Comprehensive Income

     Effective for interim and annual reporting periods beginning after December 15, 2011, the FASB revised guidance related to the presentation of comprehensive income. The new guidance establishes two acceptable options for the presentation of comprehensive income: 1) separate consecutive statements of net income and comprehensive income or 2) a single continuous statement of comprehensive income that includes both the computation of net income and the computation of other comprehensive income. Regardless of the option chosen, reclassification adjustments between other comprehensive income and net income must be presented on the face of the financial statements; total comprehensive income must also be presented. The guidance is applicable to all periods presented. ProAssurance plans to adopt the guidance on January 1, 2012. Adoption of this guidance will have no 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 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

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

1. Basis of Presentation (continued)

measurement. ProAssurance plans to adopt the guidance beginning January 1, 2012. Adoption of this guidance is not expected to have a material effect on ProAssurance’s results of operations or financial position.

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 associated only 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 plans to adopt the guidance beginning January 1, 2012. Adoption of this guidance is not expected to have a material effect on our results of operations or financial position.

Accounting Changes

Intangibles, Goodwill and Other

     Effective for interim and annual reporting periods beginning after December 15, 2010, the FASB revised guidance related to goodwill impairment testing. The revised guidance clarifies that when evaluating goodwill associated with a reporting unit that has a zero or negative carrying value, an initial determination should be made as to whether it is more likely than not that the goodwill is impaired. When impairment is more likely than not, the goodwill is required to be tested for impairment. ProAssurance adopted the guidance on January 1, 2011. Adoption 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, 2010, the FASB revised guidance to require additional disclosure about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. ProAssurance adopted the guidance on January 1, 2011. Adoption had no effect on ProAssurance’s results of operations or financial position.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

2. Acquisitions

     All entities acquired have been accounted for in accordance with GAAP relating to business combinations and are considered to be a part of ProAssurance’s sole reporting segment, the professional liability segment.

     On November 30, 2010 ProAssurance acquired 100% of the outstanding shares of American Physicians Service Group, Inc. (APS) as a means of expanding its professional liability business. Total purchase consideration transferred had a fair value of $237 million on the acquisition date and included cash of $233 million and deferred compensation commitments of $4 million.

     APS operating results included in ProAssurance Consolidated results for 2011 are as follows:

		Three Months Ended				Six Months Ended
(In thousands)		June 30, 2011				June 30, 2011
Revenue		$	15,717			$	31,590
Earnings		$	5,118			$	9,779

     The following table provides ProAssurance Pro Forma Consolidated Results as if ProAssurance had acquired APS on January 1, 2010. Pro Forma results reflect ProAssurance Consolidated results, adjusted, net of related tax effects, as follows: 1) in 2010, to include the operating results of APS, 2) to reflect APS workforce reductions as if the reductions had occurred on January 1, 2010, 3) to exclude the direct costs of completing the APS transaction, 4) to include amortization of APS policy acquisition costs written off upon acquisition, and 5) to reflect amortization of certain purchase adjustments (valuation of investment assets at fair value; intangibles recorded as a part of the purchase price allocation) beginning January 1, 2010. ProAssurance Actual Consolidated Results are also presented for comparative purposes. The ProAssurance Actual Consolidated results for the three and six months ended June 30, 2010 do not include the operating results of APS because the APS acquisition did not occur until November 30, 2010.

		Three Months Ended								Six Months Ended
		June 30, 2011								June 30, 2011
		ProAssurance Pro				ProAssurance Actual				ProAssurance Pro				ProAssurance Actual
		Forma Consolidated				Consolidated				Forma Consolidated				Consolidated
(In thousands)		Results				Results				Results				Results
Revenue		$	174,829			$	174,829			$	348,414			$	348,414
Earnings		$	55,356			$	55,096			$	103,367			$	102,790

		Three Months Ended								Six Months Ended
		June 30, 2010								June 30, 2010
		ProAssurance Pro				ProAssurance Actual				ProAssurance Pro				ProAssurance Actual
		Forma Consolidated				Consolidated				Forma Consolidated				Consolidated
(In thousands)		Results				Results				Results				Results
Revenue		$	182,080			$	161,500			$	365,894			$	325,459
Earnings		$	46,321			$	40,381			$	88,373			$	78,493

     For additional information regarding the acquisition, see Note 2 of the Notes to the Consolidated Financial Statements in ProAssurance’s 2010 Form 10-K.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

3. 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/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.

     The following tables present information about ProAssurance’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 and indicate the fair value hierarchy of the valuation techniques utilized to determine such value. 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. ProAssurance’s assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the assets being valued.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

3. Fair Value Measurement (continued)

     Assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, including financial instruments for which ProAssurance has elected fair value accounting, are as follows:

		June 30, 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		$	—			$	294,744			$	—			$	294,744
U.S. Agency obligations			—				72,877				—				72,877
State and municipal bonds			—				1,158,843				7,325				1,166,168
Corporate bonds, multiple observable inputs			—				1,350,575				—				1,350,575
Corporate bonds, limited observable inputs:
Private placement senior notes			—				—				857				857
Other corporate bonds, NRSRO ratings available			—				—				5,698				5,698
Other corporate bonds, NRSRO ratings not available			—				—				1,275				1,275
Residential mortgage-backed securities			—				575,698				—				575,698
Commercial mortgage-backed securities			—				90,039				—				90,039
Other asset-backed securities			—				75,469				1,684				77,153
Equity securities, available for sale
Financial			22				—				—				22
Industrial			133				—				—				133
Equity securities, trading
Financial			5,258				—				—				5,258
Energy			7,092				—				—				7,092
Consumer cyclical			1,698				—				—				1,698
Consumer non-cyclical			6,535				—				—				6,535
Technology			2,707				—				—				2,707
Industrial			3,338				—				—				3,338
Communications			2,849				—				—				2,849
Index funds			4,638				—				—				4,638
All other			2,162				—				—				2,162
Short-term investments (1)			125,214				3,687				—				128,901
Investment in unconsolidated subsidiaries (2)			—				—				25,127				25,127
Total assets		$	161,646			$	3,621,932			$	41,966			$	3,825,544
Liabilities:
2019 Note Payable			—				—				15,863				15,863
Interest rate swap agreement			—				—				3,852				3,852
Total liabilities		$	—			$	—			$	19,715			$	19,715

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

3. Fair Value Measurement (continued)

		December 31, 2010
		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		$	—			$	225,908			$	—			$	225,908
U.S. Agency obligations			—				68,878				—				68,878
State and municipal bonds			—				1,236,374				7,550				1,243,924
Corporate bonds, multiple observable inputs			—				1,312,035				—				1,312,035
Corporate bonds, limited observable inputs:
Private placement senior notes			—				—				9,356				9,356
Other corporate bonds, NRSRO ratings available			—				—				10,414				10,414
Other corporate bonds, NRSRO ratings not available			—				—				1,459				1,459
Residential mortgage-backed securities			—				567,640				2,198				569,838
Commercial mortgage-backed securities			—				99,386				—				99,386
Other asset-backed securities			—				62,534				22				62,556
Equity securities, available for sale
Financial			392				—				—				392
Energy			257				—				—				257
Consumer cyclical			521				—				—				521
Consumer non-cyclical			656				—				—				656
Technology			768				—				—				768
Industrial			737				—				—				737
All Other			306				—				—				306
Equity securities, trading
Financial			4,317				—				—				4,317
Energy			7,149				—				—				7,149
Consumer cyclical			1,599				—				—				1,599
Consumer non-cyclical			4,534				—				—				4,534
Technology			3,400				—				—				3,400
Industrial			2,403				—				—				2,403
Communications			2,623				—				—				2,623
Index funds			3,568				—				—				3,568
All other			7,693				—				—				7,693
Short-term investments (1)			150,344				18,094				—				168,438
Investment in unconsolidated subsidiaries (2)			—				—				25,112				25,112
Total assets		$	191,267			$	3,590,849			$	56,111			$	3,838,227
Liabilities:
2019 Note Payable			—				—				15,616				15,616
Interest rate swap agreement			—				—				3,658				3,658
Total liabilities		$	—			$	—			$	19,274			$	19,274

     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. The services collect and utilize multiple inputs, although not all inputs are used for every security type or given the same priority in every evaluation. Inputs used include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, and offers. The services also consider credit ratings, where appropriate, including ratings updates and information available in appropriate market research publications. Management reviews service-provided values for reasonableness by comparing market yields indicated by the supplied value to yields observed in the market place. 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 2011 or 2010.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

3. Fair Value Measurement (continued)

     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 and agency obligations, and corporate bonds (exclusive of privately placed debt) 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.

     Municipal securities 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.

     Mortgage backed securities. Agency pass through securities are valued by 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 and subprime mortgages include a review of collateral performance data, which is generally updated monthly.

     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.

     Privately placed corporate debt is valued by an outside vendor rather than a third party pricing service. The valuation is prepared based on a widely available matrix that is produced daily by a leading seller of secondary private placements. The matrix considers the market sector, issuer credit ratings and the remaining loan term and is developed from market data such as interest rate yield curves, credit spreads, quoted market prices for comparable securities and other applicable market data.

     Bank loans are also valued by an outside vendor. The valuation is 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.

     Short term securities, primarily U. S. Treasury securities and commercial paper maturing within one year, are carried at cost which approximates the fair value of the security due to the short term to maturity.

     Below is a summary description of the valuation methodologies used to value securities in the Level 3 category by security type.

     Auction rate municipal bonds are valued internally 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. All are rated A or better.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

3. Fair Value Measurement (continued)

     Corporate debt instruments are valued internally 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 both June 30, 2011 and December 31, 2010 Level 3 corporate debt instruments include private placement senior notes which are unconditionally guaranteed by large regional banks; other corporate debt securities in the Level 3 category are not guaranteed or fully collateralized. At June 30, 2011, the average NRSRO rating of rated securities is BBB.

     Asset-backed securities are valued using multiple inputs including multiple broker dealer quotes.

     Interests in private investment funds are valued using the net asset value provided by the fund.

     The following table provides additional information regarding investments in private investment funds valued using the net asset value provided by the fund at June 30, 2011:

										Unfunded
		Fair Value								Commitments
		June 30,				December 31,				June 30,
(In thousands)		2011				2010				2011
Private fund primarily invested in long/short equities (1)		$	18,152			$	18,801			None
Private fund primarily invested in non-public equities, including other private funds (2)			6,975				6,311			$	1,708
		$	25,127			$	25,112

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

3. Fair Value Measurement (continued)

     There were no transfers between Level 1 and Level 2 for the three and six months ended June 30, 2011 or for the three and six months ended June 30, 2010.

     The following 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. Transfers are as of the end of the period, unless otherwise specified.

		June 30, 2011
		Level 3 Fair Value Measurements — Assets
		State and																Investment in
		Municipal								Asset- backed								Unconsolidated				Other
(In thousands)		Bonds				Corporate Bonds				Securities				Equity Securities				Subsidiaries				Investments				Total
Balance March 31, 2011		$	7,450			$	16,880			$	—			$	—			$	25,662			$	—			$	49,992
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries			—				—				—				—				(535	)			—				(535	)
Net realized investment gains (losses)			—				—				—				—				—				—				—
Included in other comprehensive income			—				(534	)			—				—				—				—				(534	)
Purchases			—				—				1,684				—				—				—				1,684
Sales			(125	)			(3,311	)			—				—				—				—				(3,436	)
Transfers in			—				—				—				—				—				—				—
Transfers out			—				(5,205	)			—				—				—				—				(5,205	)
Balance June 30, 2011		$	7,325			$	7,830			$	1,684			$	—			$	25,127			$	—			$	41,966
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end		$	—			$	—			$	—			$	—			$	(535	)		$	—			$	(535	)

		June 30, 2011
		Level 3 Fair Value Measurements — Assets
		State and																Investment in
		Municipal								Asset-backed								Unconsolidated				Other
(In thousands)		Bonds				Corporate Bonds				Securities				Equity Securities				Subsidiaries				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			—				—				—				—				15				—				15
Net realized investment gains (losses)			—				—				314				—				—				—				314
Included in other comprehensive income			—				(714	)			(15	)			—				—				—				(729	)
Purchases			—				—				1,684				—				—				—				1,684
Sales			(225	)			(8,505	)			(1,921	)			—				—				—				(10,651	)
Transfers in			—				3,447				—				—				—				—				3,447
Transfers out			—				(7,627	)			(598	)			—				—				—				(8,225	)
Balance June 30, 2011		$	7,325			$	7,830			$	1,684			$	—			$	25,127			$	—			$	41,966
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end		$	—			$	—			$	—			$	—			$	15			$	—			$	15

     Transfers from Level 2 to Level 3 for the three and six months ended June 30, 2011 include:

•

Two corporate bonds having a combined value of $3.4 million. Multiple observable inputs were available for use in valuing the securities at December 31, 2010. Such information was not available for valuing the bonds at either March 31, 2011 or June 30, 2011.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011

3. Fair Value Measurement (continued)

     Transfers from Level 3 to Level 2 for the three and six months ended June 30, 2011 include:

	•		Two asset-backed securities valued at $0.6 million. Multiple observable inputs were available for use in valuing the securities at both March 31, 2011 and June 30, 2011. Such information was not available for valuing the securities at December 31, 2010.
	•		Five corporate bonds having a combined value of $2.4 million. Multiple observable inputs were not available for use in valuing the securities at December 31, 2010. Such information was available for valuing the bonds at both March 31, 2011 and June 30, 2011.
	•		Three corporate bonds having a combined value of $5.2 million. Multiple observable inputs were available for use in valuing the securities at June 30, 2011. Such information was not available for valuing the bonds at March 31, 2011.

		June 30, 2010
		Level 3 Fair Value Measurements — Assets
		State and																Investment in
		Municipal								Asset-backed								Unconsolidated				Other
(In thousands)		Bonds				Corporate Bonds				Securities				Equity Securities				Subsidiaries				Investments				Total
Balance March 31, 2010		$	9,590			$	25,173			$	1,000			$	—			$	51,488			$	11,134			$	98,385
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries			—				—				—				—				854				—				854
Net realized investment gains (losses)			—				—				—				—				—				(8,755	)			(8,755	)
Included in other comprehensive income			(114	)			14				—				—				—				9,494				9,394
Purchases			—				491				—				—				10,000				368				10,859
Sales			(75	)			(169	)			—				—				—				(639	)			(883	)
Transfers in			—				151				—				—				16,924				—				17,075
Transfers out			—				—				(1,000	)			—				—				(10,672	)			(11,672	)
Balance June 30, 2010		$	9,401			$	25,660			$	—			$	—			$	79,266			$	930			$	115,257
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end		$	—			$	—			$	—			$	—			$	854			$	(8,755	)		$	(7,901	)

		June 30, 2010
		Level 3 Fair Value Measurements — Assets
		State and																Investment in
		Municipal								Asset-backed								Unconsolidated				Other
(In thousands)		Bonds				Corporate Bonds				Securities				Equity Securities				Subsidiaries				Investments				Total
Balance December 31, 2009		$	9,495			$	24,335			$	940			$	—			$	48,502			$	10,932			$	94,204
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries			—				—				—				—				3,840				—				3,840
Net realized investment gains (losses)			—				—				—				—				—				(10,698	)			(10,698	)
Included in other comprehensive income			81				24				60				—				—				11,879				12,044
Purchases			—				1,551				—				—				10,000				731				12,282
Sales			(175	)			(240	)			—				—				—				(1,242	)			(1,657	)
Transfers in			—				151				—				—				16,924				—				17,075
Transfers out			—				(161	)			(1,000	)			—				—				(10,672	)			(11,833	)
Balance June 30, 2010		$	9,401			$	25,660			$	—			$	—			$	79,266			$	930			$	115,257
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end		$	—			$	—			$	—			$	—			$	3,840			$	(10,698	)		$	(6,858	)