10-Q

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

For the quarterly period ended September 30, 2010

or

o 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 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	Smaller reporting company o
		(Do not check if a 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 o No þ

     As of October 31, 2010, there were 30,721,566 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	ITEM 6. EXHIBITS
SIGNATURE
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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 new business, 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 malpractice 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;

— the effect that changes in laws or government regulations affecting the U.S. economy or financial institutions, including the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009 and the Dodd-Frank Act of 2010, may have on 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 (FASB), 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 recently passed 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;

2

— bad faith litigation 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 payments from our reinsurers;

— increases in guaranty fund assessments;

— 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;

— changes in competition among insurance providers and related pricing weaknesses in our markets;

— 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 and employees, increased operating costs or inability to achieve cost savings, and assumption of greater than expected liabilities, among other reasons;

— government approvals of proposed transactions may not be obtained, or adverse regulatory conditions may be imposed in connection with required government approvals;

— the board of directors of proposed acquisition companies may withdraw their recommendation and support a competing acquisition proposal; and

— the shareholders of proposed acquisition companies may fail to approve the proposed transactions.

     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 the factors listed above 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

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

	September 30			December 31
	2010			2009
	(Unaudited)			(Audited)
Assets
Investments
Fixed maturities available for sale, at fair value	$	3,452,106		$	3,442,995
Equity securities available for sale, at fair value		3,257			3,579
Equity securities, trading, at fair value		32,214			43,826
Short-term investments		338,001			187,059
Business owned life insurance		66,165			65,003
Investment in unconsolidated subsidiaries		69,844			48,502
Other investments		36,411			47,258
Total Investments		3,997,998			3,838,222
Cash and cash equivalents		48,264			40,642
Premiums receivable		117,615			116,403
Receivable from reinsurers on paid losses and loss adjustment expenses		6,384			16,778
Receivable from reinsurers on unpaid losses and loss adjustment expenses		269,871			262,659
Prepaid reinsurance premiums		12,138			11,836
Deferred policy acquisition costs		27,954			25,493
Deferred taxes		33,478			68,806
Real estate, net		44,259			44,496
Amortizable intangible assets		8,456			9,973
Goodwill		122,317			122,317
Other assets		82,705			89,789
Total Assets	$	4,771,439		$	4,647,414
Liabilities and Shareholders’ Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses	$	2,405,828		$	2,422,230
Unearned premiums		249,450			244,212
Reinsurance premiums payable		118,272			113,994
Total Policy Liabilities		2,773,550			2,780,436
Other liabilities		128,457			112,180
Long-term debt, $35,484 and $35,463, at amortized cost, respectively; $15,741 and $14,740 at fair value, respectively		51,225			50,203
Total Liabilities		2,953,232			2,942,819
Shareholders’ Equity
Common stock, par value $0.01 per share, 100,000,000 shares authorized, 34,328,214 and 34,223,346 shares issued, respectively		343			342
Additional paid-in capital		531,297			526,068
Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $71,357 and $31,908, respectively		132,517			59,254
Retained earnings		1,325,973			1,196,428
		1,990,130			1,782,092
Treasury stock, at cost, 3,460,374 shares and 1,811,356 shares, respectively		(171,923	)		(77,497	)
Total Shareholders’ Equity		1,818,207			1,704,595
Total Liabilities and Shareholders’ Equity	$	4,771,439		$	4,647,414

See accompanying notes.

4

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, 2009	$	1,704,595		$	59,254	$	1,196,428	$	448,913
Net income		129,545			—		129,545		—
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments		73,263			73,263		—		—
Repurchase of treasury shares		(94,426	)		—		—		(94,426	)
Common shares issued as compensation and net effect of performance shares issued and stock options exercised		721			—		—		721
Share-based compensation		4,509			—		—		4,509
Balance at September 30, 2010	$	1,818,207		$	132,517	$	1,325,973	$	359,717

				Accumulated
				Other					Other
				Comprehensive			Retained		Capital
	Total			Income (Loss)			Earnings		Accounts
Balance at December 31, 2008	$	1,423,585		$	(35,898	)	$	970,891	$	488,592
Cumulative effect adjustment for accounting change (see Note 1)		—			(3,511	)		3,511		—
Net income		137,449			—			137,449		—
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments		115,803			115,803			—		—
Repurchase of treasury shares		(38,144	)		—			—		(38,144	)
Treasury shares issued in acquisition (see Note 2)		5,161			—			—		5,161
Common shares issued as compensation and net effect of performance shares issued and stock options exercised		756			—			—		756
Share-based compensation		4,850			—			—		4,850
Balance at September 30, 2009	$	1,649,460		$	76,394		$	1,111,851	$	461,215

See accompanying notes.

5

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

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2010			2009			2010			2009
Revenues
Gross premiums written	$	158,998		$	168,559		$	414,697		$	434,714
Net premiums written	$	149,693		$	158,705		$	383,783		$	401,634
Premiums earned	$	140,802		$	143,477		$	411,006		$	398,212
Premiums ceded		(10,502	)		(11,521	)		(31,882	)		(34,621	)
Net premiums earned		130,300			131,956			379,124			363,591
Net investment income		35,639			38,573			110,348			112,839
Equity in earnings (loss) of unconsolidated subsidiaries		(1,281	)		1,637			2,544			328
Net realized investment gains (losses):
Other-than-temporary impairment losses (OTTI)		(698	)		(88	)		(13,077	)		(7,482	)
Portion of OTTI losses recognized in other comprehensive income, before taxes		113			—			119			172
Net impairment losses recognized in earnings		(585	)		(88	)		(12,958	)		(7,310	)
Other net realized investment gains (losses)		15,297			7,363			21,765			12,132
Total net realized investment gains (losses)		14,712			7,275			8,807			4,822
Other income		1,764			3,153			5,769			7,224
Total revenues		181,134			182,594			506,592			488,804
Expenses
Losses and loss adjustment expenses		86,866			78,674			251,944			231,309
Reinsurance recoveries		(7,055	)		(9,108	)		(24,908	)		(25,601	)
Net losses and loss adjustment expenses		79,811			69,566			227,036			205,708
Underwriting, acquisition and insurance expenses		32,095			29,905			94,940			83,896
Interest expense		832			808			2,472			2,638
Loss on extinguishment of debt		—			2,839			—			2,839
Total expenses		112,738			103,118			324,448			295,081
Income before income taxes		68,396			79,476			182,144			193,723
Provision for income taxes
Current expense (benefit)		24,155			21,595			56,080			31,257
Deferred expense (benefit)		(6,811	)		2,680			(3,481	)		25,017
		17,344			24,275			52,599			56,274
Net income	$	51,052		$	55,201		$	129,545		$	137,449
Earnings per share:
Basic	$	1.61		$	1.69		$	4.03		$	4.17
Diluted	$	1.59		$	1.67		$	3.99		$	4.13
Weighted average number of common shares outstanding:
Basic		31,642			32,701			32,135			32,988
Diluted		32,047			33,023			32,508			33,267

See accompanying notes.

6

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

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2010		2009		2010		2009
Comprehensive income:
Net income	$	51,052	$	55,201	$	129,545	$	137,449
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments		27,878		67,050		73,263		115,803
Comprehensive income	$	78,930	$	122,251	$	202,808	$	253,252

See accompanying notes.

7

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

	Nine Months Ended
	September 30
	2010			2009
Operating Activities
Net income	$	129,545		$	137,449
Loss on extinguishment of debt		—			2,839
Depreciation and amortization		19,571			14,346
Net realized investment (gains) losses		(8,807	)		(4,822	)
Share-based compensation		4,509			4,850
Deferred income taxes		(3,481	)		25,017
Changes in assets and liabilities due to operating activities:
Premiums receivable		(1,212	)		(20,844	)
Reserve for losses and loss adjustment expenses		(16,402	)		(70,768	)
Unearned premiums		5,238			36,780
Reinsurance related assets and liabilities		7,158			(15,663	)
Other liabilities		(25,302	)		(82,521	)
Other assets		(9,423	)		475
Other		7,232			(11,197	)
Net cash provided by operating activities		108,626			15,941
Investing Activities
Purchases of:
Fixed maturities available for sale		(663,341	)		(754,888	)
Equity securities available for sale		—			(140	)
Equity securities trading		(13,450	)		(23,278	)
Other investments		(5,383	)		(292	)
Cash invested in unconsolidated subsidiaries		(15,399	)		(2,542	)
Proceeds from sale or maturities of:
Fixed maturities available for sale		777,596			580,635
Equity securities available for sale		271			5,264
Equity securities trading		26,887			18,698
Other investments		1,242			1,740
Net sales or maturities (purchases) of short-term investments		(150,942	)		320,874
Cash paid for acquisitions, net of cash received		—			(124,208	)
Unsettled security transactions, net		40,561			15,624
Other		(2,752	)		(2,474	)
Net cash provided (used) by investing activities		(4,710	)		35,013
Financing Activities
Repurchase of treasury stock		(94,426	)		(38,143	)
Excess tax benefit from share-based payment arrangements		99			—
Book overdraft		—			9,661
Debt repayment		(227	)		(7,190	)
Other		(1,740	)		2,017
Net cash provided (used) by financing activities		(96,294	)		(33,655	)
Increase (decrease) in cash and cash equivalents		7,622			17,299
Cash and cash equivalents at beginning of period		40,642			3,459
Cash and cash equivalents at end of period	$	48,264		$	20,758
Significant Non-cash Transactions:
Common shares issued in acquisition	$	—		$	5,161

See accompanying notes.

8

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

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 nine-month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes contained in ProAssurance’s December 31, 2009 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, 2010, for recognition or disclosure in its financial statements and notes to financial statements.

Accounting Changes Not Yet Adopted

     Effective for fiscal years beginning after December 15, 2011, the Emerging Issues Task Force has reached a consensus that revised the definition of insurance contract acquisition costs as those costs “directly related” to the acquisition of new and renewal insurance contracts. The definition excludes the portion of internal selling agent and underwriter salaries and benefit costs allocated to unsuccessful contracts, as well as advertising costs. Adoption of this guidance is not expected to have a material effect on our results of operations or financial position.

Accounting Changes

Fair Value Measurements

     Effective for interim and annual reporting periods beginning after December 15, 2009 or December 15, 2010, as specified, the FASB revised GAAP guidance related to fair value measurement to require additional disclosures and to clarify certain existing disclosure requirements. The guidance is intended to improve disclosure and increase transparency in financial reporting. ProAssurance adopted the revised guidance on January 1, 2010 except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity of Level 3 fair value measurements which are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption had no effect on our results of operations or financial position.

Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance

     Effective for interim and annual reporting periods beginning on or after December 15, 2009 for outstanding arrangements and effective otherwise for reporting periods beginning on or after June 15, 2009, the FASB issued guidance related to share-lending arrangements for an entity’s own shares executed in contemplation of a convertible debt offering or other financing. ProAssurance adopted the guidance on January 1, 2010; adoption had no effect on ProAssurance’s results of operations or financial position.

Consolidation of Variable Interest Entities

     Effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, the FASB revised guidance which changes how a reporting entity determines whether or not to consolidate its interest in an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights. The determination of whether a reporting entity is required to consolidate another entity will now be based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities that most significantly impact the other entity’s economic performance. The revised guidance also requires the reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. ProAssurance adopted the revised

9

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

1. Basis of Presentation (continued)

guidance on January 1, 2010; adoption had no effect on ProAssurance’s results of operations or financial position.

Transfers and Servicing-Accounting for Transfers of Financial Assets

     Effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, the FASB revised guidance that requires additional disclosure regarding transfers of financial assets, including securitization transactions, where entities have continuing exposure to risks related to the transferred financial assets. ProAssurance adopted the revised guidance on January 1, 2010; adoption had no effect on ProAssurance’s results of operations or financial position.

Investment Disclosures; Other-than-temporary Impairments

     Effective for interim and annual reporting periods ending on or after June 15, 2009, the FASB revised GAAP to require expanded disclosures related to investments in debt and equity securities. Guidance regarding other-than-temporary impairments was also revised. Previous investment guidance required that an impairment of a debt security be considered as other-than-temporary unless management could assert both the intent and the ability to hold the impaired security until recovery of value. The revised impairment guidance specifies that an impairment be considered as other-than-temporary unless an entity can assert that it has no intent to sell the security and that it is not more likely than not that the entity will be required to sell the security before recovery of its anticipated amortized cost basis.

     The new guidance also establishes the concept of credit loss. Credit loss is defined as the difference between the present value of the cash flows expected to be collected from a debt security and the amortized cost basis of the security. The new guidance states that “...in instances in which a determination is made that a credit loss exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis” an impairment is to be separated into (a) the amount of the total impairment related to the credit loss and (b) the amount of total impairment related to all other factors. The credit loss component of the impairment is to be recognized in income of the current period. The non-credit component is to be recognized as a part of other comprehensive income (OCI). Transition provisions require a cumulative effect adjustment to reclassify the non-credit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income “...if an entity does not intend to sell and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis.” ProAssurance adopted the revised guidance as of the beginning of the quarter ended June 30, 2009. As of April 1, 2009, its debt securities included non-credit impairment losses previously recognized in earnings of approximately $5.4 million. In accordance with the transition provisions of the revised guidance, ProAssurance reclassified these non-credit losses, net of tax, from retained earnings to accumulated other comprehensive income as of April 1, 2009 (a $3.5 million increase to retained earnings; a $3.5 million decrease to accumulated other comprehensive income).

10

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

1. Basis of Presentation (continued)

Revenue Recognition-Multiple Deliverable Revenue Arrangements, Milestone Method

     Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, the FASB issued guidance addressing revenue recognition. New guidance regarding multiple-deliverable arrangements eliminates the residual method of allocation and requires that arrangement consideration be allocated at inception using the relative selling price method. The guidance also establishes a selling price hierarchy and expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. New guidance has also been issued defining a milestone and determining when use of the milestone method of revenue recognition is appropriate. ProAssurance adopted the guidance on July 1, 2010. Adoption had no effect on ProAssurance’s results of operations or financial position.

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.

     ProAssurance acquired 100% of the outstanding shares of Mid-Continent General Agency, Inc., now ProAssurance Mid-Continent Underwriters, Inc., (Mid-Continent), and Georgia Lawyers Insurance Company (Georgia Lawyers) during the first quarter of 2009 as a means of expanding its professional liability business. Assets acquired and liabilities assumed were recorded based on estimated fair values as of the date of acquisition. The excess of the purchase price over the fair values of the identifiable net assets acquired was recognized as goodwill totaling $13.4 million for the two acquisitions. Approximately $12 million of the goodwill is expected to be tax deductible. The consideration for these acquisitions included 100,533 ProAssurance common shares valued at fair value on the acquisition date ($5.2 million), which were reissued from treasury stock.

     On April 1, 2009 ProAssurance acquired Podiatry Insurance Company of America and subsidiaries (PICA) through a cash sponsored demutualization as a means of expanding its professional liability insurance operations. PICA provides professional liability insurance primarily to podiatric physicians, chiropractors and other healthcare providers throughout the United States. Total purchase consideration transferred had a fair value of $133.8 million on the acquisition date, April 1, 2009 and was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. Goodwill of $36.7 million was recognized equal to the excess of the purchase price over the net fair value of the identifiable assets acquired and liabilities assumed. None of the goodwill is expected to be tax deductible.

11

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

2. Acquisitions (continued)

     The following table discloses supplemental pro forma information reflecting the combined results of ProAssurance and PICA as if the acquisition had occurred at the beginning of the prior year annual reporting period (January 1, 2009), adjusted to exclude transaction costs, normalize amortization of deferred policy acquisition costs and include pro forma amortization of certain intangibles recognized in the purchase price allocation.

	Actual PICA Results Included in		Supplemental Pro forma
	ProAssurance Consolidated Results		Combined Results
	Nine Months Ended		Nine Months Ended
	September 30		September 30
(In thousands)	2009		2009
Revenue	$	58,329	$	514,118
Earnings	$	5,769	$	144,047

     For additional information regarding the acquisitions, see Note 3 of the Notes to the Consolidated Financial Statements in ProAssurance’s 2009 Form 10-K.

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, and adjustments to externally quoted prices that are based on management judgment or estimation.

12

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

3. Fair Value Measurement (continued)

     The following tables present information about ProAssurance’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, 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.

     Assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, including financial instruments for which ProAssurance has elected fair value accounting, are as follows:

	September 30, 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	$	—	$	194,543	$	—	$	194,543
U.S. Agency obligations		—		64,973		—		64,973
State and municipal bonds		—		1,259,223		8,220		1,267,443
Corporate bonds		—		1,201,936		24,302		1,226,238
Residential mortgage-backed securities		—		528,863		—		528,863
Commercial mortgage-backed securities		—		104,936		—		104,936
Other asset-backed securities		—		64,106		1,004		65,110
Equity securities, available for sale
Financial		267		—		—		267
Energy		192		—		—		192
Consumer cyclical		467		—		—		467
Consumer non-cyclical		645		—		—		645
Technology		685		—		—		685
Industrial		621		—		—		621
Communications		132		—		—		132
All Other		248		—		—		248
Equity securities, trading
Financial		12,515		—		—		12,515
Energy		5,585		—		—		5,585
Consumer cyclical		861		—		—		861
Consumer non-cyclical		3,480		—		—		3,480
Technology		1,729		—		—		1,729
Industrial		1,124		—		—		1,124
Communications		1,379		—		—		1,379
All Other		5,541		—		—		5,541
Short-term investments (1)		84,849		253,152		—		338,001
Investment in unconsolidated subsidiaries (2)		—		—		25,079		25,079
Total assets	$	120,320	$	3,671,732	$	58,605	$	3,850,657
Liabilities:
2019 Note Payable	$	—	$	—	$	15,741	$	15,741
Interest rate swap agreement		—		—		4,832		4,832
Total liabilities	$	—	$	—	$	20,573	$	20,573

13

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

3. Fair Value Measurement (continued)

	December 31, 2009
	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	$	—	$	153,544	$	—	$	153,544
U.S. Agency obligations		—		67,026		—		67,026
State and municipal bonds		—		1,439,154		9,495		1,448,649
Corporate bonds		—		1,049,677		24,335		1,074,012
Residential mortgage-backed securities		—		556,863		—		556,863
Commercial mortgage-backed securities		—		91,627		940		92,567
Other asset-backed securities		—		50,334		—		50,334
Equity securities, available for sale
Financial		488		—		—		488
Energy		182		—		—		182
Consumer cyclical		425		—		—		425
Consumer non-cyclical		638		—		—		638
Technology		780		—		—		780
Industrial		598		—		—		598
Communications		134		—		—		134
All Other		334		—		—		334
Equity securities, trading
Financial		8,831		—		—		8,831
Energy		7,781		—		—		7,781
Consumer cyclical		3,222		—		—		3,222
Consumer non-cyclical		8,889		—		—		8,889
Technology		4,085		—		—		4,085
Industrial		3,560		—		—		3,560
Communications		4,063		—		—		4,063
All Other		3,395		—		—		3,395
Short-term investments (1)		168,060		18,999		—		187,059
Investment in unconsolidated subsidiaries(2)		—		—		48,502		48,502
Other investments (3)		—		—		10,932		10,932
Total assets	$	215,465	$	3,427,224	$	94,204	$	3,736,893
Liabilities:
2019 Note Payable	$	—	$	—	$	14,740	$	14,740
Interest rate swap agreement		—		—		2,937		2,937
Total liabilities	$	—	$	—	$	17,677	$	17,677

(1)	Short-term investments are reported at amortized cost, which approximates fair value.
(2)	Includes interests in private investment funds that are valued at the net asset value provided by the fund , which approximates fair value. Other equity interests for which the carrying value of the interest does not approximate fair value are excluded.
(3)	Includes beneficially owned asset-backed securities held in a separate interest of a private investment fund, carried at fair value. Investments carried at cost are excluded.

     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 will be adjusted, if necessary. No such adjustments have been necessary in 2010 or 2009.

14

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

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. Both agency and non-agency collateralized mortgage obligations are 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.

15

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

3. Fair Value Measurement (continued)

     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.

          Private placement senior notes are valued internally using a model based on discounted cash flows using yields currently available on securities that are similar in term, payment features, and issuer credit rating. All are rated A+ or better and are unconditionally guaranteed by large regional banks.

          Asset-backed bonds held in a private investment fund and classified as a part of Other Investments that are valued using a broker dealer quote.

          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 September 30, 2010:

			Unfunded
(In thousands)	Fair Value		Commitments		Fund Description
Private fund primarily invested in long/short equities	$	18,908		None		(1	)
Private fund primarily invested in non-public equities, including other private funds		6,171	$	3,500		(2	)
	$	25,079

(1)

The fund 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 fund’s annual audit.

(2)

The fund is structured to provide capital appreciation through diversified investments in private equity, including investments in buyout, venture capital, mezzanine, distressed debt and other private equity-oriented funds. Redemptions are not allowed, except by special permission of the fund. Fund proceeds are to be periodically distributed at the discretion of the fund over an anticipated time frame that spans 3 to 5 years.

16

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

3. Fair Value Measurement (continued)

     There were no transfers between Level 1 and Level 2 for the three and nine months ended September 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. All transfers were to or from Level 2. Transfers are as of the end of the period, unless otherwise specified.

	September 30, 2010
	Level 3 Fair Value Measurements — Assets
	State and						Asset-					Investment in
	Municipal			Corporate			backed			Equity		Unconsolidated			Other
(In thousands)	Bonds			Bonds			Securities			Securities		Subsidiaries			Investments			Total
Assets
Balance June 30, 2010	$	9,401		$	25,660		$	—		$	—	$	57,488		$	930		$	93,479
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries		—			—			—			—		633			—			633
Realized investment gains (losses)		—			59			—			—		—			—			59
Included in other comprehensive income		(1,131	)		(130	)		—			—		—			74			(1,187	)
Purchases, sales or settlements		(50	)		(796	)		—			—		(33,042	)		—			(33,888	)
Transfers in		—			—			1,004			—		—			—			1,004
Transfers out		—			(491	)		—			—		—			(1,004	)		(1,495	)
Balance September 30, 2010	$	8,220		$	24,302		$	1,004		$	—	$	25,079		$	—		$	58,605
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	59		$	—		$	—	$	633		$	—		$	692
	September 30, 2010
	Level 3 Fair Value Measurements — Assets
	State and						Asset-					Investment in
	Municipal			Corporate			backed			Equity		Unconsolidated			Other
(In thousands)	Bonds			Bonds			Securities			Securities		Subsidiaries			Investments			Total
Assets
Balance January 1, 2010	$	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		—			—			—			—		4,618			—			4,618
Realized investment gains (losses)		—			59			—			—		—			(10,698	)		(10,639	)
Included in other comprehensive income		(1,049	)		(106	)		60			—		—			11,953			10,858
Purchases, sales or settlements		(226	)		515			—			—		(28,041	)		(511	)		(28,263	)
Transfers in		—			151			1,004			—		—			—			1,155
Transfers out		—			(652	)		(1,000	)		—		—			(11,676	)		(13,328	)
Balance September 30, 2010	$	8,220		$	24,302		$	1,004		$	—	$	25,079		$	—		$	58,605
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	59		$	—		$	—	$	4,618		$	(10,698	)	$	(6,021	)

17

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

3. Fair Value Measurement (continued)

     Transfers between Level 3 categories for the three and nine months ended September 30, 2010 include:

– Asset-backed securities valued at $1 million that were previously held in a private investment fund became directly held during the third quarter (see Note 4 of the Notes to the Condensed Consolidated Financial Statements) and were reclassified from Other Investments to Asset-backed Securities.

     Transfers into Level 3 for the three and nine months ended September 30, 2010 include:

– A corporate bond valued at $151,000. Multiple observable inputs have not been available for use in valuing the bond since March 31, 2010.

     Transfers from Level 3 for the three and nine months ended September 30, 2010 include:

– A corporate bond valued at $491,000. Multiple observable inputs were available for use in valuing the security at September 30, 2010. Such information was not available for valuing the bond at June 30, 2010.

– A corporate bond valued at $161,000. There was no active market for the bond or a nearly identical bond during 2009. Market activity increased during the first quarter of 2010, which provided multiple observable inputs that could be used to value the bond.

– A commercial mortgage-backed security valued at $1 million. Multiple observable inputs have been available for use in valuing the security since June 30, 2010.

– Beneficially owned asset-backed securities held in a private investment fund were previously 100% categorized as Level 3 because valuations were determined by the fund manager using various methodologies, not all of which were based on multiple observable inputs. During the second quarter of 2010 the fund manager provided additional information regarding the valuation methodologies followed, and assets (having a combined fair value of $10.7 million) valued using multiple observable inputs were transferred to the Level 2 category.

	September 30, 2009
	Level 3 Fair Value Measurements – Assets
	State and						Asset-					Investment in
	Municipal			Corporate			backed		Equity			Unconsolidated		Other
(In thousands)	Bonds			Bonds			Securities		Securities			Subsidiaries		Investments			Total
Assets
Balance June 30, 2009	$	8,954		$	23,050		$	759	$	72		$	45,755	$	14,082		$	92,672
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries		—			—			—		—			1,637		—			1,637
Realized investment gains (losses)		—			(16	)		—		(72	)		—		—			(88	)
Included in other comprehensive income		706			427			146		—			—		1,006			2,285
Purchases, sales or settlements		(75	)		(689	)		—		—			—		(278	)		(1,042	)
Transfers in		—			—			—		—			—		—			—
Transfers out		—			(2,087	)		—		—			—		—			(2,087	)
Balance September 30, 2009	$	9,585		$	20,685		$	905	$	—		$	47,392	$	14,810		$	93,377
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	(16	)	$	—	$	(72	)	$	1,637	$	—		$	1,549

18

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

3. Fair Value Measurement (continued)

	September 30, 2009
	Level 3 Fair Value Measurements – Assets
	State and						Asset-						Investment in
	Municipal			Corporate			backed			Equity			Unconsolidated		Other
(In thousands)	Bonds			Bonds			Securities			Securities			Subsidiaries		Investments			Total
Assets
Balance January 1, 2009	$	—		$	36,472		$	1,327		$	357		$	—	$	14,576		$	52,732
Total gains (losses), realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries		—			—			—			—			1,756		—			1,756
Realized investment gains (losses)		—			(342	)		—			(357	)		—		(536	)		(1,235	)
Included in other comprehensive income		(315	)		196			114			—			—		1,081			1,076
Purchases, sales or settlements		(125	)		(11,385	)		(21	)		—			407		(311	)		(11,435	)
Transfers in		10,025			2,000			—			—			45,229		—			57,254
Transfers out		—			(6,256	)		(515	)		—			—		—			(6,771	)
Balance September 30, 2009	$	9,585		$	20,685		$	905		$	—		$	47,392	$	14,810		$	93,377
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	(342	)	$	—		$	(357	)	$	1,756	$	(536	)	$	521

     Transfers into Level 3 for the three and nine months ended September 30, 2009 include:

– A corporate bond valued at $2 million. The bond was valued using multiple observable inputs at December 31, 2008. During 2009 such information was not available, and the bond was valued using a single broker dealer quote.

– Municipal bonds totaling $10 million. The bonds were valued using multiple observable inputs at December 31, 2008. Such inputs were unavailable in 2009 and the bonds were valued using a pricing model.

– Interests in private investment funds accounted for under the equity method valued using the net asset value provided by fund management. The interests were not included in the fair value table at December 31, 2008, but were included effective January 1, 2009 in compliance with GAAP guidance issued in 2009 specifying that such valuation constitutes valuation at fair value.

     Transfers from Level 3 for the three and nine months ended September 30, 2009 include:

– A private placement bond valued at $4 million that was a new issue during 2008. There was no active market for the security or nearly identical security during the latter portion of 2008. Market activity increased in 2009, which provided multiple observable inputs that could be used to value the security.

– Two corporate bonds, having a combined value of $2.2 million. The bonds were valued using a pricing model prior to June 30, 2009 due to the unavailability of multiple observable inputs. Multiple observable inputs were available at September 30, 2009 for use in valuing the bonds.

– Asset-backed securities having a value of $515,000. There was no active market for the securities during the latter portion of 2008. Market activity increased in 2009, which provided multiple observable inputs that could be used to value the securities.

19

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

3. Fair Value Measurement (continued)

	September 30, 2010
	Level 3 Fair Value Measurements — Liabilities
				Interest
				rate swap
(In thousands)	2019 Note Payable			agreement		Total
Liabilities
Balance June 30, 2010	$	15,107		$	4,284	$	19,391
Total (gains) losses realized and unrealized:
Included in earnings as a part of net realized investment (gains) losses		710			548		1,258
Included in other comprehensive income		—			—		—
Purchases, sales or settlements		(76	)		—		(76	)
Transfers in		—			—		—
Transfers out		—			—		—
Balance September 30, 2010	$	15,741		$	4,832	$	20,573
Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end	$	710		$	548	$	1,258

	September 30, 2010
	Level 3 Fair Value Measurements — Liabilities
				Interest
				rate swap
(In thousands)	2019 Note Payable			agreement		Total
Liabilities
Balance January 1, 2010	$	14,740		$	2,937	$	17,677
Total (gains) losses realized and unrealized:
Included in earnings as a part of net realized investment (gains) losses		1,229			1,895		3,124
Included in other comprehensive income		—			—		—
Purchases, sales or settlements		(228	)		—		(228	)
Transfers in		—			—		—
Transfers out		—			—		—
Balance September 30, 2010	$	15,741		$	4,832	$	20,573
Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end	$	1,229		$	1,895	$	3,124

20

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

3. Fair Value Measurement (continued)

	September 30, 2009
	Level 3 Fair Value Measurements — Liabilities
				Interest rate
				swap
(In thousands)	2019 Note Payable			agreement		Total
Liabilities
Balance June 30, 2009	$	13,903		$	3,301	$	17,204
Total (gains) losses realized and unrealized:
Included in earnings as a part of net realized investment (gains) losses		546			406		952
Included in other comprehensive income		—			—		—
Purchases, sales or settlements		(185	)		—		(185	)
Transfers in		—			—		—
Transfers out		—			—		—
Balance September 30, 2009	$	14,264		$	3,707	$	17,971
Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end	$	546		$	406	$	952

	September 30, 2009
	Level 3 Fair Value Measurements — Liabilities
			Interest rate
			swap
(In thousands)	2019 Note Payable		agreement			Total
Liabilities
Balance January 1, 2009	$	—	$	—		$	—
Total (gains) losses realized and unrealized:
Included in earnings as a part of net realized investment (gains) losses		1,843		(982	)		861
Included in other comprehensive income		—		—			—
Purchases, sales or settlements		12,421		4,689			17,110
Transfers in		—		—			—
Transfers out		—		—			—
Balance September 30, 2009	$	14,264	$	3,707		$	17,971
Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end	$	1,843	$	(982	)	$	861

Fair Value Option Elections

     ProAssurance has elected fair value treatment for the 2019 Note Payable. The 2019 Note Payable has a related interest rate swap intended to mitigate the market risk of future interest rate changes on the 2019 Note Payable. The interest rate swap is carried at fair value with changes in fair value recorded in net realized gains (losses). Electing the fair value option allows ProAssurance to account for the note payable at fair value, which is more consistent with management’s view of the underlying economics and reduces the inconsistency that would otherwise result from carrying the note payable on an amortized cost basis and the interest rate swap at fair value.

     As of September 30, 2010, the 2019 Note Payable had a fair value of $15.7 million recorded in Long-term Debt and an outstanding principal balance of $17.5 million. During the third quarter of 2010, the fair value of the 2019 Note Payable increased by $710,000 and the fair value of the interest rate swap liability increased by $548,000 resulting in a combined loss from changes in fair value of $1.3 million. Year-to-date in 2010, the fair value of the 2019 Note Payable increased by $1.2 million and the fair value of the interest rate swap liability increased by $1.9 million resulting in a combined loss from changes in fair value of $3.1 million.

21

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

3. Fair Value Measurement (continued)

     As of September 30, 2009, the 2019 Note Payable had a fair value of $14.3 million recorded in Long-term Debt and an outstanding principal balance of $17.8 million. During the third quarter of 2009, the fair value of the 2019 Note Payable increased by $546,000 and the fair value of the interest rate swap liability increased by $406,000 resulting in a combined loss from changes in fair value of $952,000. Year-to-date in 2009, the fair value of the 2019 Note Payable increased by $1.8 million and the fair value of the interest rate swap liability decreased by $1.0 million resulting in a net loss from changes in fair value of $861,000.

     Gains or losses from changes in the fair value of the 2019 Note Payable and related interest rate swap are included in net realized investments gains (losses) on the ProAssurance income statement.

4. Investments

     The amortized cost and estimated fair value of available-for-sale fixed maturities and equity securities are as follows:

	September 30, 2010
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Fixed maturities
U.S. Treasury obligations	$	183,180	$	11,363	$	—		$	194,543
U.S. Agency obligations		59,291		5,682		—			64,973
State and municipal bonds		1,189,288		79,789		(1,634	)		1,267,443
Corporate bonds		1,147,926		81,063		(2,751	)		1,226,238
Residential mortgage-backed securities		506,466		28,721		(6,324	)*		528,863
Commercial mortgage-backed securities		100,152		4,891		(107	)		104,936
Other asset-backed securities		62,851		2,332		(73	)		65,110
		3,249,154		213,841		(10,889	)		3,452,106
Equity securities		2,330		1,046		(119	)		3,257
	$	3,251,484	$	214,887	$	(11,008	)	$	3,455,363

	December 31, 2009
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Fixed maturities
U.S. Treasury obligations	$	149,937	$	4,874	$	(1,267	)	$	153,544
U.S. Agency obligations		64,837		2,371		(182	)		67,026
State and municipal bonds		1,400,293		51,977		(3,621	)		1,448,649
Corporate bonds		1,040,896		38,871		(5,755	)		1,074,012
Residential mortgage-backed securities		545,687		22,183		(11,007	)*		556,863
Commercial mortgage-backed securities		93,941		1,074		(2,448	)		92,567
Other asset-backed securities		48,761		1,749		(176	)		50,334
		3,344,352		123,099		(24,456	)		3,442,995
Equity securities		2,572		1,028		(21	)		3,579
	$	3,346,924	$	124,127	$	(24,477	)	$	3,446,574

* Includes other-than-temporary impairments recognized in accumulated other comprehensive income of $5.7 million and $5.6 million at September 30, 2010 and December 31, 2009, respectively.

22

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

4. Investments (continued)

     The recorded cost basis and estimated fair value of available-for-sale fixed maturities at September 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. ProAssurance uses the call date as the contractual maturity for pre-refunded state and municipal bonds which are 100% backed by U.S. Treasury obligations.

					Due after		Due after
					one year		five years
	Amortized		Due in one		through		through ten		Due after		Total Fair
(In thousands)	Cost		year or less		five years		years		ten years		Value
Fixed maturities, available for sale
U.S. Treasury obligations	$	183,180	$	19,644	$	80,320	$	90,554	$	4,025	$	194,543
U.S. Agency obligations		59,291		1,552		43,173		19,219		1,029		64,973
State and municipal bonds		1,189,288		31,339		289,236		614,910		331,958		1,267,443
Corporate bonds		1,147,926		76,843		689,494		434,928		24,973		1,226,238
Residential mortgage-backed securities		506,466										528,863
Commercial mortgage-backed securities		100,152										104,936
Other asset-backed securities		62,851										65,110
	$	3,249,154									$	3,452,106

23

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

4. Investments (continued)

Business Owned Life Insurance (BOLI)

     ProAssurance holds BOLI policies on management employees that are carried at the current cash surrender value of the policies (original cost $51 million). The primary purpose of the program is to offset future employee benefit expenses through earnings on the cash value of the policies. ProAssurance is the owner and principal beneficiary of these policies.

Other Investments

     ProAssurance has Other Investments comprised of the following:

	September 30		December 31
(In millions)	2010		2009
Equity interests in private investment funds, at cost; estimated fair value of $34.3 and $27.0, respectively	$	30.7	$	29.1
Federal Home Loan Bank (FHLB) capital stock, at cost		5.2		5.2
High yield asset-backed securities, at fair value (amortized cost of $19.4 at December 31, 2009) see below		—		10.9
Other, at cost		0.5		2.1
Other Investments, total	$	36.4	$	47.3

     FHLB capital stock is not marketable, but may be liquidated by terminating membership in the FHLB. The liquidation process can take up to five years.

     At December 31, 2009 ProAssurance, through its ownership of a separate interest in a private investment fund, held a direct beneficial interest in certain high yield asset-backed securities. The investment fund liquidated in July 2010 and distributed the securities to ProAssurance.

     The following tables provide summarized information with respect to investments held in an unrealized loss position at September 30, 2010 and December 31, 2009, including the length of time the investment has been held in a continuous unrealized loss position.

	September 30, 2010
	Total					Less than 12 months					More than 12 months
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(In thousands)	Value		Loss			Value		Loss			Value		Loss
Fixed maturities, available for sale
U.S. Treasury obligations	$	—	$	—		$	—	$	—		$	—	$	—
U.S. Agency obligations		—		—			—		—			—		—
State and municipal bonds		21,659		(1,634	)		12,340		(1,391	)		9,319		(243	)
Corporate bonds		42,774		(2,751	)		24,130		(426	)		18,644		(2,325	)
Residential mortgage-backed securities		31,410		(6,324	)		9,589		(179	)		21,821		(6,145	)
Commercial mortgage-backed securities		11,015		(107	)		10,117		(5	)		898		(102	)
Other asset-backed securities		427		(73	)		—		—			427		(73	)
	$	107,285	$	(10,889	)	$	56,176	$	(2,001	)	$	51,109	$	(8,888	)
Equity securities, available for sale	$	737	$	(119	)	$	622	$	(107	)	$	115	$	(12	)
Other investments
Equity interests in private investment funds carried at cost of $19.7 million	$	17,290	$	(2,410	)	$	—	$	—		$	17,290	$	(2,410	)

24

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

4. Investments (continued)

	December 31, 2009
	Total					Less than 12 months					More than 12 months
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(In thousands)	Value		Loss			Value		Loss			Value		Loss
Fixed maturities, available for sale
U.S. Treasury obligations	$	40,042	$	(1,267	)	$	40,042	$	(1,267	)	$	—	$	—
U.S. Agency obligations		15,514		(182	)		15,514		(182	)		—		—
State and municipal bonds		177,643		(3,621	)		152,783		(2,399	)		24,860		(1,222	)
Corporate bonds		183,995		(5,755	)		140,344		(2,284	)		43,651		(3,471	)
Residential mortgage-backed securities		64,882		(11,007	)		44,086		(4,262	)		20,796		(6,745	)
Commercial mortgage-backed securities		53,155		(2,448	)		24,940		(92	)		28,215		(2,356	)
Other asset-backed securities		4,823		(176	)		1,903		(12	)		2,920		(164	)
	$	540,054	$	(24,456	)	$	419,612	$	(10,498	)	$	120,442	$	(13,958	)
Equity securities, available for sale	$	230	$	(21	)	$	121	$	(2	)	$	109	$	(19	)
Other investments
Equity interests in private investment funds carried at cost of $23.1 million	$	15,764	$	(7,308	)	$	—	$	—		$	15,764	$	(7,308	)

     As of September 30, 2010, there were 95 debt securities (4% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 80 issuers. The single greatest unrealized loss position is approximately $1.9 million; the second greatest unrealized loss position is approximately $1.0 million. The securities were evaluated for impairment as of September 30, 2010.

     As of December 31, 2009, there were 344 debt securities (14% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 287 issuers.

     Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds in an unrealized loss position have suffered an other-than-temporary impairment in value. A detailed discussion of the factors considered in the assessment is included in Note 1 of the Notes to the Consolidated Financial Statements included in ProAssurance’s December 31, 2009 Form 10-K.

     At September 30, 2010 fixed maturity securities held in an unrealized loss position, excluding asset-backed securities, have paid all scheduled contractual payments and are expected to continue doing so. Expected future cash flows of asset-backed securities were estimated using the most recently available six-month historical performance data for the collateral (loans) underlying the security or, if historical data was not available, sector based assumptions. Expected future cash flows from the equity interest carried in a loss position were also evaluated and are expected to equal or exceed the carrying value of the equity interest.

25

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

4. Investments (continued)

     The following table presents a roll forward of cumulative credit losses recorded in earnings related to impaired debt securities for which a portion of the other-than-temporary impairment has been recorded in Other Comprehensive Income.

	Three Months		Nine Months
	Ended		Ended
(In thousands)	September 30, 2010		September 30, 2010
Balance beginning of period	$	2,085	$	2,068
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized		52		69
OTTI has been previously recognized		—		3,410
Reductions due to:
Securities sold during the period (realized)		—		—
Securities which will be sold in coming periods		—		(3,410	)
Securities for which it is more likely than not that the security will be required to be sold prior to anticipated recovery of amortized cost basis		—		—
Accretion recognized during the period related to cash flows that are expected to exceed the amortized cost basis of the security		—		—
Balance September 30, 2010	$	2,137	$	2,137

     Net realized investment gains (losses) are comprised of the following:

	Three Months Ended						Nine Months Ended
	September 30						September 30
(In thousands)	2010			2009			2010			2009
Total other-than-temporary impairment losses (1):
Residential mortgage-backed securities	$	(166	)	$	—		$	(189	)	$	(2,703	)
Corporate bonds		—			(16	)		—			(3,749	)
Equities		—			(72	)		—			(494	)
Equity interest in a private investment fund		—			—			(3,373	)		—
High yield asset-backed securities, see discussion below		(532	)		—			(9,515	)		(536	)
Portion recognized in (reclassified from) Other Comprehensive Income:
Residential mortgage-backed securities		113			—			119			172
Net impairment losses recognized in earnings		(585	)		(88	)		(12,958	)		(7,310	)
Gross realized gains, available-for-sale securities (3)		13,213			5,896			23,310			12,453
Gross realized (losses), available-for-sale securities (3)		(244	)		(2,304	)		(445	)		(3,746	)
Net realized gains (losses), short-term		200			—			200			10
Reserve for loss on investment receivable (2)		—			—			—			(3,090	)
Net realized gains (losses), trading securities		26			(1,572	)		4,926			(1,590	)
Change in unrealized holding gains (losses), trading securities		3,360			6,295			(3,102	)		8,956
Increase in the fair value of liabilities carried at fair value		(1,258	)		(952	)		(3,124	)		(861	)
Net realized investment gains (losses)	$	14,712		$	7,275		$	8,807		$	4,822

(1)	In accordance with GAAP, all OTTI losses prior to April 1, 2009 were recognized in earnings.
(2)	Relates to amounts due from Reserve Primary Fund. Subsequent recoveries from the Reserve Primary Fund exceeded estimated amounts, and the loss was reversed in the fourth quarter of 2009.
(3)	Reclassified from OCI, net of tax at a 35% rate.

     Impairment losses were recognized in earnings during the three months ended September 30, 2010 of $532,000 due to a decline in the fair value of certain high-yield asset-backed securities that ProAssurance intends to sell. These securities are part of a larger group of similar securities that prior to July 2010 were held in a separate interest of a private investment fund. ProAssurance’s separate interest in the fund, commonly referred to as a silo interest, constituted a direct and beneficial interest in the securities. During the second quarter of 2010, ProAssurance was informed that the fund was liquidating and the securities in the silo would be distributed directly to the Company. ProAssurance determined that it would sell the securities and recognized an impairment loss related to the securities during the second quarter of $7.0 million, including non-credit impairments of $2.1 million that had been previously recognized in OCI.

26

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

4. Investments (continued)

     ProAssurance recognized an impairment of $3.4 million in the first nine months of 2010 related to an interest in a private investment fund, accounted for on a cost basis. The fund has reported realized losses on the sale of securities, and ProAssurance has reduced the carrying value of its interest in the fund in recognition of its pro rata share of those losses.

     Proceeds from the sales of available-for-sale securities during the nine months ended September 30, 2010 and 2009 are $625.5 million and $333.4 million, respectively. Purchases of available-for-sale securities were $673.3 million and $754.9 million during the nine months ended September 30, 2010 and 2009, respectively.

5. Income Taxes

     The provision for income taxes is different from that which would be obtained by applying the statutory Federal income tax rate to income before taxes primarily because a portion of ProAssurance’s investment income is tax-exempt.

     ProAssurance federal tax returns for the 2005 to 2008 tax years are currently being audited. ProAssurance has received notice that Illinois state tax returns for years 2006 to 2008 will be audited during the fourth quarter of 2010.

6. Deferred Policy Acquisition Costs

     Policy acquisition costs, most significantly commissions, premium taxes, and underwriting salaries, that are primarily and directly related to the production of new and renewal premiums are capitalized as policy acquisition costs and amortized to expense as the related premium revenues are earned.

     Amortization of deferred policy acquisition costs are $14.8 million and $43.9 million for the three and nine months ended September 30, 2010, respectively, and $13.2 million and $36.9 million for the three and nine months ended September 30, 2009, respectively.

7. Reserve for Losses and Loss Adjustment Expenses

     The reserve for losses is established based on estimates of individual claims and actuarially determined estimates of future losses based on ProAssurance’s past loss experience, available industry data and projections as to future claims frequency, severity, inflationary trends and settlement patterns. Estimating reserves, and particularly liability reserves, is a complex process. Claims may be resolved over an extended period of time, often five years or more, and may be subject to litigation. Estimating losses for liability claims requires ProAssurance to make and revise judgments and assessments regarding multiple uncertainties over an extended period of time. As a result, reserve estimates may vary significantly from the eventual outcome. The assumptions used in establishing ProAssurance’s reserves are regularly reviewed and updated by management as new data becomes available. Changes to estimates of previously established reserves are included in earnings in the period in which the estimate is changed.

     ProAssurance recognized favorable net loss development of $33.4 million and $95.9 million related to previously established reserves for the three and nine months ended September 30, 2010, respectively. The favorable net loss development reflects reductions in the Company’s estimates of claims severity, principally for the 2004 through 2008 accident years, offset by a $1.6 million loss on the commutation of a reinsurance agreement.

     For the three and nine months ended September 30, 2009, ProAssurance recognized favorable net loss development of $42.5 million and $98.0 million, respectively, to reflect reductions in estimated claim severity principally for accident years 2004 through 2007.

27

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

8. Commitments and Contingencies

     ProAssurance is involved in various legal actions related to insurance policies and claims handling, including but not limited to claims asserted by policyholders. ProAssurance has considered such legal actions in establishing its loss and loss adjustment expense reserves. The outcome of such legal actions is not presently determinable for a number of reasons. For example, in the event that ProAssurance or its insureds receive adverse verdicts, post-trial motions may result in unfavorable rulings; any appeals that may be undertaken may be unsuccessful; ProAssurance may be unsuccessful in legal efforts to limit the scope of coverage available to its insureds; and ProAssurance may become a party to bad faith litigation over the payment of any judgment above an insured’s policy limits. ProAssurance’s management is of the opinion, based on consultation with legal counsel, that the resolution of these actions will not have a material adverse effect on ProAssurance’s financial position. However, the ultimate cost of resolving these legal actions may differ from the reserves established, and the resulting difference could have a material effect on ProAssurance’s results of operations for the period in which any such action is resolved.

     On August 31, 2010 ProAssurance entered into a definitive agreement to acquire American Physicians Service Group, Inc. (NASDAQ: AMPH) (APS) for cash of $32.50 per outstanding common share. The total cost of the transaction, including expenses, is expected to approximate $250 million. APS primarily provides medical professional liability insurance in Texas and reported gross written premium of $65 million for the year ended December 31, 2009 and $33 million for the six months ended June 30, 2010. APS net assets totaled $167 million at June 30, 2010. The transaction is subject to customary conditions, including regulatory and APS shareholder approval. The transaction is expected to close around December 1, 2010.

9. Long-term Debt

     ProAssurance’s outstanding long-term debt consists of the following:

	(In thousands)
	September 30		December 31
	2010		2009
Trust Preferred Subordinated Debentures due 2034, unsecured. Bears interest at a variable rate of LIBOR plus 3.85%, adjusted quarterly (4.2% at September 30, 2010). Estimated fair value at September 30, 2010 is $22.8 million.	$	22,992	$	22,992
Surplus Notes due May 2034, unsecured. Bears interest at a variable rate of LIBOR plus 3.85%, adjusted quarterly (4.2% at September 30, 2010). Estimated fair value at September 30, 2010 is $11.9 million.		12,000		12,000
Note Payable due February 2019, carried at fair value, principal of $17.5 million. Secured by available-for-sale securities having a fair value at September 30, 2010 of approximately $27.6 million. Bears interest at a variable rate of LIBOR plus 0.7%. See information below regarding the associated interest rate swap.		15,741		14,740
Note Payable due February 2012, unsecured, principal of $517,000 net of an unamortized discount of $25,000 at September 30, 2010 and $46,000 at December 31, 2009. Bears interest at the U.S. prime rate, paid and adjusted quarterly (3.3% at September 30, 2010). Estimated fair value at September 30, 2010 is $517,000.		492		471
	$	51,225	$	50,203

Credit Facility

     At December 31, 2009, ProAssurance’s PICA subsidiary had a revolving credit facility which has since expired. No amounts were outstanding under the line in 2009 or during 2010.

Interest Rate Swap

     ProAssurance, through its PICA subsidiary, is party to an interest rate swap agreement (the swap) with the issuing bank of the Note Payable due February 2019 (the 2019 Note Payable). The purpose of the

28

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

9. Long-term Debt (continued)

swap is to reduce the market risk from changes in future interest rates relative to the 2019 Note Payable. The swap fixes the interest rate related to the 2019 Note Payable at 6.6%. The swap will terminate February 1, 2019. The notional amount of the swap corresponds directly to the unamortized portion of the debt being hedged each month. Under the swap agreement, PICA agrees to exchange, at monthly intervals, the difference between the fixed-rate and LIBOR variable rate by reference to the notional principal amount. The fair value of the interest rate swap liability is $4.8 million at September 30, 2010 and $2.9 million at December 31, 2009, and is classified within Other Liabilities.

Fair Values

     The fair values stated in the schedule above are based on the present value of expected underlying cash flows of the debt, discounted at rates available at September 30, 2010 for similar debt issued by entities with a similar credit standing to ProAssurance or, if issued by an insurance subsidiary, the subsidiary issuing the debt.

Additional Information

     For additional information regarding the terms of ProAssurance’s outstanding long-term debt, see Note 10 of the Notes to the Consolidated Financial Statements included in ProAssurance’s December 31, 2009 Form 10-K.

10. Shareholders’ Equity

     At September 30, 2010 and December 31, 2009, ProAssurance had 100 million shares of authorized common stock and 50 million shares of authorized preferred stock. The Board of Directors of ProAssurance Corporation (the Board) has the authority to determine provisions for the issuance of preferred shares, including the number of shares to be issued, the designations, powers, preferences and rights, and the qualifications, limitations or restrictions of such shares. At September 30, 2010, the Board has not approved the issuance of preferred stock.

     At September 30, 2010 approximately $20.9 million in prior authorizations from the Board for the repurchase of common shares or the retirement of outstanding debt remains available for use. The timing and quantity of purchases depends upon market conditions and changes in ProAssurance’s capital requirements and is subject to limitations that may be imposed on such purchases by applicable securities laws and regulations, and the rules of the New York Stock Exchange.

     ProAssurance repurchased approximately 1.6 million common shares, having a total cost of $94.4 million, during the nine months ended September 30, 2010 (including approximately 975,000 shares at a total cost of $55.3 million during the three months ended September 30, 2010). ProAssurance repurchased approximately 881,000 common shares, having a total cost of $38.1 million during the nine months ended September 30, 2009 (including approximately 41,000 shares at a total cost of $2.1 million during the three months ended September 30, 2009). ProAssurance reissued 100,533 treasury shares, having a cost basis of approximately $5.0 million, during the first quarter of 2009 as part of the consideration for acquisitions in the quarter.

     Share-based compensation expense is $1.6 million and $4.5 million for the three and nine months ended September 30, 2010, respectively, and $1.7 million and $4.9 million for the three and nine months ended September 30, 2009, respectively. Related tax benefits are $559,000 and $1.6 million for the three and nine months ended September 30, 2010, respectively, and $592,000 and $1.7 million for the three and nine months ended September 30, 2009, respectively.

29

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

10. Shareholders’ Equity (continued)

     ProAssurance granted approximately 28,000 shares of restricted stock units to employees in February 2010. The awards 100% vest three years from the grant date, based on a service requirement. The fair value of each unit was estimated at $53.32, equal to the market value of a ProAssurance common share on the date of grant.

     ProAssurance granted approximately 95,000 (target) Performance Shares awards to employees in February 2010. The Performance Shares 100% vest at the end of a three-year period based upon requirements for continued service and achievement of specified performance goals. The number of shares ultimately awarded can vary from 75% to 125% of the target award depending upon the degree to which goals are achieved. The fair value of each Performance Share was estimated at $53.32, equal to the market value of a ProAssurance common share on the date of grant. ProAssurance issued approximately 52,000 common shares to employees in February 2010 related to performance share awards granted in 2007. The awards were issued at the maximum level (125% of target) based on performance levels achieved. Cash was given in lieu of shares sufficient to satisfy required tax withholdings.

     ProAssurance issued approximately 40,000 and 37,000 common shares to employees in February 2010 and 2009, respectively, as bonus compensation, as approved by the Compensation Committee of the Board. The shares issued were valued at fair value (the market price of a ProAssurance common share on the date of award).

11. Variable Interest Entities

     ProAssurance holds passive interests in a number of limited partnerships/limited liability companies that are considered to be Variable Interest Entities (VIEs) under GAAP guidance. ProAssurance has not consolidated these entities because it has either limited or no power to control the activities that most significantly affect the economic performance of these entities and is thus not the primary beneficiary of any of the entities. ProAssurance’s involvement with each entity is limited to its direct ownership interest in the entity. ProAssurance has no arrangements or agreements with any of the entities to provide other financial support to or on behalf of the entity. ProAssurance’s maximum loss exposure relative to these investments is limited to the carrying value of ProAssurance’s investment in the entity.

     The entities consist of 1) private investment funds formed for the purpose of achieving diversified equity and debt returns, 2) private investment funds formed to provide investment returns through the transfer of tax credits (principally federal or state tax credits related to federal low-income housing) and 3) a limited liability interest in a development stage business operation. In those instances where ProAssurance holds a minor interest in the entity, ProAssurance accounts for its interest on a cost basis. Cost basis investments are included in Other Investments and have a carrying value of $31.2 million and $31.1 million at September 30, 2010 and December 31, 2009. In those instances where ProAssurance holds a greater than minor interest, ProAssurance accounts for its interest using the equity method. Equity method investments are included in Investment in Unconsolidated Subsidiaries and have a carrying value of $69.8 million at September 30, 2010 and $48.5 million at December 31, 2009.

     At December 31, 2009 ProAssurance held a direct and beneficial interest in certain high yield asset-backed bonds contributed to an investment fund created for the purpose of managing such investments. Under GAAP, this interest was considered to represent an interest in a separate VIE (commonly referred to as a silo) of which ProAssurance was the primary beneficiary. ProAssurance therefore consolidated its interest in these securities. The securities were included in Other Investments at fair value ($10.9 million at December 31, 2009). The investment fund liquidated in July 2010 and distributed the securities to ProAssurance. See Note 4 of the Notes to the Condensed Consolidated Financial Statements.

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ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

12. Earnings Per Share

     Diluted weighted average shares is calculated as basic weighted average shares plus the effect, calculated using the treasury stock method, of assuming that dilutive stock options have been exercised and that performance share awards and restricted stock units have vested.

     Stock options are not dilutive when the option exercise price exceeds the average price of a common share during the period or when the result from assuming an option is exercised is a net decrease to outstanding shares. All outstanding options were considered to be dilutive during the three months ended September 30, 2010. During the three months ended September 30, 2009 approximately 486,000 outstanding options were not considered to be dilutive. Approximately 77,500 and 489,000 of ProAssurance’s outstanding options, on average, were not considered to be dilutive during the nine-month periods ended September 30, 2010 and 2009, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes to those statements which accompany this report as well as our 2009 Form 10-K. A glossary of insurance terms and phrases is available on the investor section of our website. Throughout the discussion, references to ProAssurance, “PRA,” “we,” “us” and “our” refer to ProAssurance Corporation and its consolidated subsidiaries. The discussion contains certain forward-looking information that involves risks and uncertainties. As discussed under “Forward-Looking Statements,” our actual financial condition and operating results could differ significantly from these forward-looking statements.

Critical Accounting Estimates

     Our Condensed Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP). Preparation of these financial statements requires us to make estimates and assumptions that affect the amounts we report on those statements. We evaluate these estimates and assumptions on an ongoing basis based on current and historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions; reported results of operations may be materially affected by changes in these estimates and assumptions.

     Management considers the following accounting estimates to be critical because they involve significant judgment by management and the effect of those judgments could result in a material effect on our financial statements.

Reserve for Losses and Loss Adjustment Expenses (reserve for losses or reserve)

     The largest component of our liabilities is our reserve for losses, and the largest component of expense for our operations is incurred losses. Incurred losses in any period reflect our estimate of losses incurred related to the premiums earned in that period as well as any changes to our estimates of the reserve established for losses of prior periods.

     The estimation of professional liability losses is inherently difficult. Loss costs, even for claims with similar characteristics, can vary significantly depending upon many factors, including but not limited to: the nature of the claim and the personal situation of the claimant or the claimant’s family, the outcome of jury trials, the legislative and judicial climate where the insured event occurred, general economic conditions and, for medical professional liability, the trend of health care costs. Professional liability claims are typically resolved over an extended period of time, often five years or more. The combination of changing conditions and the extended time required for claim resolution results in a loss cost estimation process that requires actuarial skill and the application of judgment, and such estimates require periodic revision. Our reserves are established by management after taking into consideration a variety of factors including premium rates, claims frequency, historical paid and incurred loss development trends, the effect of inflation, general economic trends, the legal and political environment, and the conclusions reached by our internal actuaries.

     We update and review the data underlying the estimation of our reserve for losses each reporting period and make adjustments to loss estimation assumptions that we believe best reflect emerging data. Our internal actuaries perform an in-depth review of our reserve for losses on at least a semi-annual basis using the loss and exposure data of our insurance subsidiaries. We also engage external actuaries to review our data semi-annually and provide us with their observations regarding our data and the adequacy of our established reserve, believing that the external actuaries provide an independent view of our loss data as well as a broader perspective on industry loss trends.

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     Any adjustments resulting from our review process are reflected in the then-current operations. Due to the size of our reserve for losses, even a small percentage adjustment to these estimates could have a material effect on our results of operations for the period in which the adjustment is made, as has been the case in 2010 and 2009.

Reinsurance

     We use insurance and reinsurance (collectively, “reinsurance”) to provide capacity to write larger limits of liability, to provide protection against losses in excess of policy limits, and to stabilize underwriting results in years in which higher losses occur. The purchase of reinsurance does not relieve us from the ultimate risk on our policies, but it does provide reimbursement for certain losses we pay.

     We evaluate each of our ceded reinsurance contracts at inception to confirm that there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting guidance. At September 30, 2010 all ceded contracts are accounted for as risk transferring contracts.

     Our receivable from reinsurers on unpaid losses and loss adjustment expenses represents our estimate of the amount of our reserve for losses that will be recoverable under our reinsurance programs. We base our estimate of funds recoverable upon our expectation of ultimate losses and the portion of those losses that we estimate to be allocable to reinsurers based upon the terms of our reinsurance agreements. Our assessment of the collectability of the recorded amounts receivable from reinsurers considers the payment history of the reinsurer, publicly available financial and rating agency data, our interpretation of the underlying contracts and policies, and responses by reinsurers. Appropriate reserves are established for any balances we believe may not be collected.

     Given the uncertainty of the ultimate amounts of our losses, our estimates of losses and related amounts recoverable may vary significantly from the eventual outcome. Also, we estimate premiums ceded under reinsurance agreements wherein the premium due to the reinsurer, subject to certain maximums and minimums, is based in part on losses reimbursed or to be reimbursed under the agreement. Any adjustments are reflected in then-current operations. Due to the size of our reinsurance balances, an adjustment to these estimates could have a material effect on our results of operations for the period in which the adjustment is made, as was the case in 2009.

Investment Valuations

     We record a substantial portion of our investments at fair value as shown in the table below. The distribution of our investments based on GAAP fair value hierarchies is as follows:

	Distribution by
	GAAP Fair Value Hierarchy									September 30, 2010
	Level 1			Level 2			Level 3			Total Investments
Fair Value		3	%		92	%		1	%		96	%
Cost or cash surrender value											4	%
Total Investments											100	%

     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. All of our fixed maturity, equity and short-term securities investments are carried at fair value.

     Because of the number of securities we own and the complexity and cost of developing accurate fair values internally, we utilize independent pricing services to assist us in establishing fair values. The pricing services provide fair values based on exchange traded prices, if available. If an exchange traded price is not available, the pricing services, if possible, provide a fair value that is based on multiple broker/dealer quotes or that has been developed using pricing models. Pricing models vary by asset class and utilize currently available market data for securities comparable to ours to estimate the fair value for our security. The pricing services scrutinize market data for consistency with other relevant market information before including the data in the pricing models. The pricing services disclose the types of pricing models used and the inputs used for each asset

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class. Determining fair values using these pricing models requires the use of judgment to identify appropriate comparable securities and to choose valuation methodology that is appropriate for the asset class and available data.

     The pricing services provide a single value per instrument quoted. We review the values provided for reasonableness each quarter by comparing market yields generated by the supplied price versus market yields observed in the market place. If a supplied value is deemed unreasonable, we discuss the valuation in question with the pricing service and will make adjustments if deemed necessary. To date, we have not adjusted any values supplied by the pricing services.

     The pricing services do not provide a fair value unless an exchange traded price or multiple observable inputs are available. As a result, the pricing services may provide a fair value for a security in some periods but not others, depending upon the level of recent market activity for the security or comparable securities.

     As of September 30, 2010, fair values for our equity and a portion of our short-term securities have been determined using an exchange traded price. There is little judgment involved when fair value is determined using an exchange traded price. In accordance with GAAP, for disclosure purposes we classify securities valued using an exchange traded price as Level 1 securities.

     With the exception of certain government bonds, most fixed income securities do not trade daily and thus exchange traded prices are generally not available for these securities. However, market information (often referred to as observable inputs or market data; including but not limited to, last reported trade, non-binding broker quotes, bids, benchmark yield curves, issuer spreads, two sided markets, benchmark securities, offers, and recent data regarding assumed prepayment speeds, cash flow and loan performance data) is available for most of our fixed income securities. A large portion of our fixed income securities are valued at fair value using available market information. In accordance with GAAP, for disclosure purposes we classify any securities that have been valued based on multiple market observable inputs as Level 2 securities.

     When a pricing service does not provide a value, management estimates fair value using either a single non-binding broker quote or pricing models that utilize market based assumptions which have limited observable inputs. The process involves significant judgment in selecting the appropriate data and modeling techniques to use in the valuation process. In accordance with GAAP, for disclosure purposes we classify securities that are valued using limited observable inputs as Level 3 securities.

     We hold interests in private investment funds which hold debt and equity securities. We value these investments,which at September 30, 2010 total $25.1 million or approximately 1% of total investments, based on quarterly net asset values provided to us by fund managers, which approximate fair value. In accordance with GAAP, for disclosure purposes we classify interests valued in this manner as Level 3 securities.

     Our investments that are not valued at fair value include:

— Interests in private investment funds having a carrying value of $31.2 million at September 30, 2010; valued at cost.

— Business owned life insurance policies having a carrying value of $66.2 million at September 30, 2010, valued at cash surrender value.

— Interests in tax credit partnerships having a carrying value of approximately $40.5 million at September 30, 2010; valued under the equity method. Tax credit partnerships are established for the purpose of transferring tax credits (principally federal or state tax credits related to federal low-income housing) to the partners. The carrying value of each partnership approximates the present value of the future cash flows expected to be generated from the tax credits transferred by the partnership.

— Other business interests having a carrying value of $4.2 million at September 30, 2010; valued under the equity method based on the latest financial statements of the entity.

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Investment Impairments

     We evaluate all our investments on at least a quarterly basis for declines in fair value that represent other-than-temporary impairments (OTTI). In all instances we consider an impairment to be an other-than-temporary impairment if we intend to sell the security or if we believe we will be required to sell the security before we fully recover the amortized cost basis of the security. Otherwise, we consider various factors in our evaluation, depending upon the type of security, as discussed below.

     For equity securities, we consider the following:

— the length of time for which the fair value of the investment has been less than its recorded basis;

— the financial condition and near-term prospects of the issuer underlying the investment, taking into consideration the economic prospects of the issuer’s industry and geographical region, to the extent that information is publicly available;

— the historical and implied volatility of the fair value of the security; and

— our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

     For debt securities, we consider whether we expect to fully recover the amortized cost basis of the security, based upon consideration of some or all of the following:

— third party research and credit rating reports;

— the current credit standing of the issuer, including credit rating downgrades

— extent to which the decline in fair value is attributable to credit risk specifically associated with an investment or its issuer;

— our internal assessments and those of our external portfolio managers regarding specific circumstances surrounding an investment, which can cause us to believe the investment is more or less likely to recover its value than other investments with a similar structure;

— for asset-backed securities, the origination date of the underlying loans, the remaining average life, the probability that credit performance of the underlying loans will deteriorate in the future, and our assessment of the quality of the collateral underlying the loan;

— failure of the issuer of the security to make scheduled interest or principal payments;

— any changes to the rating of the security by a rating agency;

— recoveries or additional declines in fair value subsequent to the balance sheet date; and

— our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

     In assessing whether we expect to recover the cost basis of debt securities, particularly asset-backed securities, we must make a number of assumptions regarding matters that will affect the cash flows that we expect to receive from the security in future periods. These judgments are subjective in nature and may subsequently be proved to be inaccurate.

     We evaluate our investments in private investment funds for OTTI by considering whether there has been a decline in fair value below the recorded value. We receive reports from the funds at least quarterly which provide us a net asset value (NAV) for our interest in the fund. The NAV is based on the fair values of securities held by the fund as determined by the fund manager. Determining whether there has been a decline in fair value involves assumptions and estimates. We consider the most recent NAV provided, the performance of the fund relative to the market, the stated objectives of the fund, and cash flows expected from the fund and audit results in considering whether an OTTI exists.

     Our investments in tax credit partnerships are evaluated for OTTI by comparing cash flow projections of future operating results of the underlying projects generating the tax credits to our recorded basis, and considering our ability to utilize the tax credits from the investments.

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     We also evaluate our holdings of Federal Home Loan Bank (FHLB) securities for impairment. We consider the current capital status of the FHLB, whether the FHLB is in compliance with regulatory minimum capital requirements, and the reported operating results of the current period.

Deferred Policy Acquisition Costs

     Policy acquisition costs (primarily commissions, premium taxes and underwriting salaries) which are directly related to the acquisition of new and renewal premiums are capitalized as deferred policy acquisition costs and charged to expense as the related premium revenue is recognized. We evaluate the recoverability of our deferred policy acquisition costs each reporting period, and any amounts estimated to be unrecoverable are charged to expense in the current period.

Deferred Taxes

     Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Our temporary differences principally relate to loss reserves, unearned premiums, deferred policy acquisition costs, unrealized investment gains (losses) and investment impairments. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when such benefits are realized. We review our deferred tax assets quarterly for impairment. If we determine that it is more likely than not that some or all of a deferred tax asset will not be realized, a valuation allowance is recorded to reduce the carrying value of the asset. In assessing the need for a valuation allowance, management is required to make certain judgments and assumptions about our future operations based on historical experience and information as of the measurement period regarding reversal of existing temporary differences, carryback capacity, future taxable income (including its capital and operating characteristics) and tax planning strategies.

Goodwill

     We make at least an annual assessment as to whether the value of our goodwill asset is impaired. Management evaluates the carrying value of goodwill annually during the fourth quarter and before the annual evaluation if events occur or circumstances change that would more likely than not reduce the fair value below the carrying value. We consider ProAssurance to be one reporting unit for the purposes of evaluating goodwill because we operate in a single operating segment and our segment components are economically similar. We estimate the fair value of our reporting unit on the evaluation date based on ProAssurance’s market capitalization and an expected premium that would be paid to acquire control of the company (a control premium). We then perform a sensitivity analysis using a range of historical stock prices and control premiums. We did not record any impairment of goodwill as of our last evaluation date, October 1, 2009, and do not believe there has been any event or change of circumstances that would indicate that a re-evaluation of goodwill is required as of September 30, 2010.

Accounting Changes

Investment Disclosures; Other-than-temporary Impairments

     Effective for interim and annual reporting periods ending on or after June 15, 2009, the FASB revised GAAP to require expanded disclosures related to investments in debt and equity securities. Guidance regarding other-than-temporary impairments was also revised. Previous investment guidance required that an impairment of a debt security be considered as other-than-temporary unless management could assert both the intent and the ability to hold the impaired security until recovery of value. The revised impairment guidance specifies that an impairment be considered as other-than-temporary unless an entity can assert that it has no intent to sell the security and that it is not more likely than not that the entity will be required to sell the security before recovery of its anticipated amortized cost basis.

     The new guidance also establishes the concept of credit loss. Credit loss is defined as the difference between the present value of the cash flows expected to be collected from a debt security and the amortized cost basis of the security. The new guidance states that “. . . in instances in which a determination is made that a credit

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loss exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis” an impairment is to be separated into (a) the amount of the total impairment related to the credit loss and (b) the amount of total impairment related to all other factors. The credit loss component of the impairment is to be recognized in income of the current period. The non-credit component is to be recognized as a part of other comprehensive income (OCI). Transition provisions require a cumulative effect adjustment to reclassify the non-credit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income “...if an entity does not intend to sell and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis”. We adopted the revised guidance as of the beginning of the quarter ended June 30, 2009. As of April 1, 2009, our debt securities included non-credit impairment losses previously recognized in earnings of approximately $5.4 million. In accordance with the transition provisions of the revised guidance, we reclassified these non-credit losses, net of tax, from retained earnings to accumulated other comprehensive income as of April 1, 2009 (a $3.5 million increase to retained earnings; a $3.5 million decrease to accumulated other comprehensive income).

Liquidity and Capital Resources and Financial Condition

Overview

     ProAssurance Corporation is a holding company and is a legal entity separate and distinct from its subsidiaries. Because it has no other business operations, dividends from its operating subsidiaries represent a significant source of funds for its obligations, including debt service. Our insurance subsidiaries, in aggregate, are permitted to pay dividends of approximately $228 million during 2010 without prior approval. However, the payment of any dividend requires prior notice to the insurance regulator in the state of domicile and the regulator may prevent the dividend if, in its judgment, payment of the dividend would have an adverse effect on the surplus of the insurance subsidiary. Through the nine months ended September 30, 2010, $214 million of the permitted dividends have been paid, and one of our insurance subsidiaries after receiving the necessary regulatory approvals, has paid an additional dividend of $17 million. At September 30, 2010, we held cash and investments of approximately $351.1 million outside of our insurance subsidiaries that are available for use without regulatory approval, the majority of which we intend to use to finance the acquisition of American Physicians Service Group, Inc., as more fully discussed below.

Acquisitions

     In the first quarter of 2009 we acquired 100% of the outstanding shares of Mid-Continent General Agency, Inc., now ProAssurance Mid-Continent Underwriters, Inc., (Mid-Continent), and Georgia Lawyers Insurance Company (Georgia Lawyers), since merged with our subsidiary ProAssurance Casualty Company, as a means of expanding our professional liability business. These acquisitions were not material to ProAssurance individually or in the aggregate.

     On April 1, 2009 we acquired Podiatry Insurance Company of America and subsidiaries (PICA) through a cash sponsored demutualization as a means of expanding our professional liability insurance operations. PICA provides professional liability insurance primarily to podiatric physicians, chiropractors and other healthcare providers throughout the United States. We purchased all of PICA’s outstanding stock created in the demutualization for $135 million in cash, of which $15 million was a surplus contribution to be used to provide renewal premium credits to eligible policyholders over a three year period beginning in 2010.

     See Note 3 of the Notes to the Consolidated Financial Statements in our 2009 Form 10-K for detailed information regarding the PICA transaction, including a summarized listing of the assets acquired and liabilities assumed.

     On August 31, 2010, we entered into a definitive agreement with American Physicians Service Group, Inc. (NASDAQ: AMPH) (APS), whereby ProAssurance will acquire all outstanding shares of APS for $32.50 per share. The transaction is expected to close in the fourth quarter of 2010 and to require cash outlays of approximately $250 million. APS primarily provides medical professional liability insurance in Texas and reported gross written premium of $65 million for the year ended December 31, 2009 and $33 million for the six months ended June 30, 2010. APS net assets totaled $167 million at June 30, 2010. The transaction is subject to customary conditions, including regulatory and APS shareholder approval. The APS shareholder vote is scheduled for November 29, 2010.

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Cash Flows

     The principal components of our operating cash flows are the excess of net investment income and premiums collected over net losses paid and operating costs, including income taxes. Timing delays exist between the collection of premiums and the payment of losses associated with the premiums. Premiums are generally collected within the twelve-month period after the policy is written while our claim payments are generally paid over a more extended period of time. Likewise, timing delays exist between the payment of claims and the collection of any associated reinsurance recoveries.

     Our operating activities provided positive cash flows of approximately $108.6 million and $15.9 million for the nine months ended September 30, 2010 and 2009, respectively. Operating cash flows for 2010 and 2009 compare as follows:

	Cash Flow
	Increase
(In millions)	(Decrease)
Cash provided by operating activities nine months ended September 30, 2009	$	16
Increase (decrease) in operating cash flows during 2010:
Decrease in premium receipts (1)		(7	)
Decrease in payments to reinsurers (2)		23
Decrease in losses paid (3)		35
Increase in reinsurance recoveries (4)		4
Decrease in Federal and state income tax payments (5)		5
Increase due to prior year CHW payment (6)		21
Other amounts not individually significant, net		12
Cash provided by operating activities nine months ended September 30, 2010	$	109

(1)	The decrease in premium receipts reflects the decline in gross written premium, exclusive of the premium decline that is attributable to policies written on a two-year term. The two-year term affects the volume of premiums written but has no effect on collections.
(2)	Reinsurance contracts are generally for premiums written in a specific annual period, but can remain in effect until all claims under the contract have been resolved. Some contracts require annual settlements while others require settlement only after a number of years have elapsed, thus the amounts paid can vary widely from period to period.
(3)	The decrease in losses reflects lower paid losses at our subsidiaries other than PICA of approximately $54 million offset by an increase in PICA losses paid of $19 million that is principally due to an additional three months of PICA activity in 2010. The timing of our loss payments varies from period to period because the process for resolving claims is complex and occurs at an uneven pace depending upon the circumstances of the individual claim.
(4)	The timing of reinsurance recoveries varies from period to period and can depend upon the terms of the applicable reinsurance agreement, the nature of the underlying claim and the timing and amount of underlying loss payments.
(5)	The decrease in tax payments primarily reflects:

— A final estimated payment for the 2009 tax year (paid in 2010) that was lower than the final estimated tax payment for the 2008 tax year (paid in 2009). In 2008 a large portion of taxable income for the year was earned in the fourth quarter; in 2009 taxable income was earned more ratably throughout the year.

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— Estimated payments for the 2010 tax year that are higher than those paid for the 2009 tax year. Our 2009 tax liability was significantly reduced by tax deductions (the CHW judgment and losses on the sale of impaired securities) that did not reduce 2009 GAAP income.

(6) In 2009 we paid a judgment in favor of Columbia Hospital for Women Medical Center, Inc. (CHW) that was entered against our subsidiary, ProAssurance National Capital Insurance Company (PRA National), prior to our acquisition of PRA National. We established a liability related to the judgment and accrued post trial interest at the time PRA National was acquired in 2005. See Note 9 of the Notes to the Consolidated Financial Statements in our 2009 Form 10-K for additional information.

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Investment Exposures

     The following table provides summarized information regarding our investments as of September 30, 2010:

			Unrealized Gains (Losses)
	Carrying		Included in Carrying Value					Average		% Total
(In thousands)	Value		Gains		Losses			Rating		Investments
Fixed Maturities Government
U.S. Treasury	$	194,543	$	11,363	$	—		AAA			5	%
U.S. Agency		64,973		5,682		—		AAA			2	%
Total government		259,516		17,045		—		AAA			6	%
State and Municipal Bonds		1,267,443		79,789		(1,634	)	AA			32	%
Corporate Bonds
Financial institutions		316,694		15,921		(1,139	)		A+		8	%
FDIC insured		58,999		1,303		—		AAA			1	%
Communications		49,132		3,443		—			A-		1	%
Utilities		94,310		6,816		(467	)		A		2	%
Energy		40,879		4,177		(30	)		A-		1	%
Industrial		632,347		46,491		(1,115	)		A-		16	%
Transportation		21,976		2,027		—		BBB+			1	%
Other		11,901		885		—		AA			0	%
Total corporate bonds		1,226,238		81,063		(2,751	)		A		31	%
Asset-backed Securities
Agency mortgage-backed securities		483,778		26,318		(93	)	AAA			12	%
Non-agency mortgage-backed securities		26,232		1,227		(1,133	)	BBB			1	%
Subprime (1)		12,349		1,170		(1,996	)	BBB			0	%
Alt-A (2)		6,504		6		(3,102	)		B+		0	%
Commercial mortgage-backed securities		104,936		4,891		(107	)	AAA			3	%
Credit card		28,229		762		—		AAA			1	%
Automobile		17,984		348		—		AAA			0	%
Other		18,897		1,222		(73	)	AA-			0	%
Total asset-backed securities		698,909		35,944		(6,504	)	AA+			17	%
Total fixed maturities		3,452,106		213,841		(10,889	)	AA-			86	%
Equities
Equity-common only
Financial		12,782		137		—					0	%
Energy		5,777		61		—					0	%
Consumer cyclical		1,328		129		(9	)				0	%
Consumer non-cyclical		4,125		214		(3	)				0	%
Technology		2,414		127		(44	)				0	%
Industrial		1,745		335		—					0	%
Communications		1,511		23		—					0	%
All Other		5,789		20		(63	)				0	%
Total equities		35,471		1,046		(119	)				1	%
Short-Term		338,001		—		—					8	%
BOLI		66,165		n/a		n/a		AA-			2	%
Investment in Unconsolidated Subsidiaries
Investment in tax credit partnerships		40,527		n/a		n/a					1	%
Other business interests		4,238		—		—					0	%
Private fund–primarily invested in long/short equities		18,908		—		—					0	%
Private fund–primarily invested in non-public equities		6,171		—		—					0	%
Total investment in unconsolidated subsidiaries		69,844		—		—					2	%
Other Investments
Federal Home Loan Bank capital stock		5,190		n/a		n/a					0	%
Private fund–primarily invested in distressed debt		19,700		n/a		n/a					0	%
Private fund–primarily invested in long/short equities		11,010		n/a		n/a					0	%
Other		511		n/a		n/a					0	%
Total other investments		36,411		n/a		n/a					1	%
Total Investments	$	3,997,998	$	214,887	$	(11,008	)				100	%

(1)	$0.2 million are AAA, $3.0 million are AA, $2.0 million are A, $7.1 million are BBB or below
(2)	$1.6 million are AAA, $0.1 million are AA, $0.7 million are A, $4.1 million are CCC or below

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     A detailed listing of our investment holdings as of September 30, 2010 is presented in an Investor Supplement we make available in the Investor Relations section of our website, www.proassurance.com or directly at www.proassurance.com/investorrelations/supplemental.aspx.

     We manage our investments to ensure that we will have sufficient liquidity to meet our obligations, taking into consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as well as the expected cash flows to be generated by our operations. We anticipate that between $50 million and $80 million of our investments will mature (or be paid down) each quarter of the next year and become available, if needed, to meet our cash flow requirements. The primary outflow of cash at our insurance subsidiaries is related to paid losses and operating costs, including income taxes. The payment of individual claims cannot be predicted with certainty; therefore, we rely upon the history of paid claims in estimating the timing of future claims payments. To the extent that we have an unanticipated shortfall in cash we may either liquidate securities or borrow funds under previously established borrowing arrangements. However, given the relatively short duration of our investments, we do not foresee any such shortfall.

     We hold cash and short-term securities of $386.3 million at September 30, 2010 as compared to $227.7 million at December 31, 2009. We have elected to increase our liquidity in order to have more flexibility in allocating capital among our insurance and holding company subsidiaries, and we are also holding funds needed for our planned acquisition of APS.

     During the second quarter of 2010, we sold approximately $20 million of our trading portfolio equity securities, principally those acquired in the PICA transaction, and increased our investment in certain private investment funds by $10 million in order to take advantage of specific investment strategies that have been successful in the past.

     We have invested $41 million in tax credit limited partnerships during 2010 ($31 million of which is unfunded at September 30, 2010). These partnerships are designed to provide returns via the transfer of tax operating losses and tax credits to their partners. All of the interests will be accounted for using the equity method. Our pro rata share of partnership operating losses will be included in earnings each period as a part of equity in unconsolidated subsidiaries; our pro rata share of tax credits and the tax benefits associated with the operating loss will be recognized as a reduction of tax expense. We plan to increase our investment in tax credit partnerships over the next year by an additional $60 million subject to identifying opportunities that meet our investment criteria.

     Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately 96.5% of our fixed maturities being investment grade securities as determined by national rating agencies. The weighted average effective duration of our fixed maturity securities at September 30, 2010 is 4.1 years; the weighted average effective duration of our fixed maturity securities combined with our short-term securities is 3.7 years.

     At September 30, 2010 we directly hold asset-backed securities with a fair value of $698.9 million (recorded cost basis of $669.5 million). In performing our OTTI assessment of asset-backed securities, management projects expected cash flows, making assumptions regarding expected default rates and the value of collateral available to recover losses. If estimated cash flows project a loss, an OTTI is realized for the difference between the book value and present value of the anticipated cash flows in accordance with generally accepted accounting principles. Our judgments about future default rates, the timing of expected cash flows, and the estimated value of collateral may not prove over time to be accurate, and we may experience losses on asset-backed securities that are greater or less than what we are currently projecting.

     We hold four positions in financial institution fixed maturity securities that have a fair value that exceeds $20 million. The aggregate fair value of these positions totals $106.6 million ($103.1 million recorded cost basis), of which $43.7 million is FDIC backed.

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     At September 30, 2010 we held fixed maturity securities with pretax net unrealized gains of approximately $203 million as compared to pretax net unrealized gains of $99 million as of December 31, 2009. The improvement is primarily due to lower market interest rates, as well as a reduction in credit spreads.

     Investment in Unconsolidated Subsidiaries reflects the liquidation of our interest in a private investment fund during the third quarter of 2010. Distributions from the fund (cash of $29.8 million and securities having a fair value of $2.9 million) approximated the carrying value of our interest at June 30, 2010 of $33.0 million.

     Other Investments reflects a reduction of $10.9 million as compared to December 31, 2009 that is attributable to the liquidation of our separate interest in a private investment fund. The securities that formerly comprised our separate interest were distributed to us in July, 2010, and most of the securities were sold during the third quarter. During the first and second quarters of 2010 we recognized other-than-temporary impairments of $9.0 million related to the securities.

     We have requested redemption of approximately $16 million of our BOLI investment, which will be paid to us in November 2010. Our intention to redeem the BOLI changes the tax characteristic of this investment; previously we had treated increases in the cash surrender value as tax-exempt. The planned redemption resulted in a tax liability of approximately $1.3 million, which we recognized during the second quarter of 2010.

Reinsurance

     We use reinsurance to provide capacity to write larger limits of liability, to provide protection against losses in excess of policy limits, and to stabilize underwriting results in years in which higher losses occur. The purchase of reinsurance does not relieve us from the ultimate risk on our policies, but it does provide reimbursement from the reinsurer for certain losses we pay.

     Our risk retention level is dependent upon numerous factors including our risk tolerance and the capital we have to support it, the price and availability of reinsurance, volume of business, level of experience with a particular set of claims and our analysis of the potential underwriting results within each state. We purchase reinsurance from a number of companies to mitigate concentrations of credit risk. We utilize a reinsurance broker to assist us in the analysis of the credit quality of our reinsurers. We base our reinsurance buying decisions on an evaluation of the then-current financial strength, rating and stability of prospective reinsurers. However, the financial strength of our reinsurers, and their corresponding ability to pay us, may change in the future due to circumstances or events we cannot control or anticipate.

     We have not experienced significant collection difficulties due to the financial condition of any reinsurer; however, periodically, reinsurers may dispute our claim for reimbursement from them. We have established appropriate reserves for any balances that we believe may not be ultimately collected. Should future events lead us to believe that any reinsurer will not meet its obligations to us, adjustments to the amounts recoverable would be reflected in the results of current operations. Such an adjustment has the potential to be significant to the results of operations in the period in which it is recorded; however, we would not expect such an adjustment to have a material effect on our capital position or our liquidity.

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Debt

     Our long-term debt as of September 30, 2010 is comprised of the following:

						Carrying Value
(In thousands, except %)	Contractual Rate			Outstanding Principal		September 30, 2010
Trust Preferred Debentures due 2034		4.2%	(1)	$	22,992	$	22,992
Surplus Notes due May 2034		4.2%	(1)		12,000		12,000
Note Payable due February 2019 (2)		6.6%	(3)		17,512		15,741
Note Payable due February 2012		3.3%	(4)		517		492
						$	51,225

(1)	Adjusted quarterly based on LIBOR
(2)	Both the 2019 Note Payable and the related interest rate swap are valued at fair value. See Note 9 of the Notes to the Condensed Consolidated Financial Statements
(3)	The related interest rate swap fixes rate at 6.6%. Swap is settled monthly. See Note 9 of the Notes to the Condensed Consolidated Financial Statements
(4)	Adjusted quarterly based on the U.S. prime rate

     All of our long-term debt is currently repayable or redeemable, with proper notice, at a date no later than the next quarterly or semi-annual interest payment date. Insurance department approval is required for redemption of surplus notes. ProAssurance is currently in compliance with all covenants. Additional information regarding our debt is provided in Note 9 to the Condensed Consolidated Financial Statements and Note 10 of the Consolidated Financial Statements in our 2009 Form 10-K.

Treasury Stock

     We repurchased approximately 1.6 million common shares having a total cost of $94.4 million during the nine-month period ended September 30, 2010 (including 975,000 shares at a total cost of $55.3 million during the three months ended September 30, 2010). At September 30, 2010 approximately $20.9 million in prior authorizations from our Board of Directors for the repurchase of common shares or the retirement of outstanding debt remains available for use.

Litigation

     We are involved in various legal actions related to our insurance activities which we consider in our evaluation of our reserve for losses. We also have other direct actions against the company which we evaluate and account for as a part of our other liabilities.

     In accordance with GAAP for insurance entities, claim-related actions are considered as a part of our loss reserving process. We evaluate the likely outcomes from these actions giving consideration to the facts and laws applicable to each case, appellate issues, coverage issues, potential recoveries from our insurance and reinsurance programs, and settlement discussions as well as our historical claims resolution practices. This data is then considered in the overall evaluation of our reserve for losses.

     There are risks, as outlined in our Risk Factors in Part 1 of our 2009 Form 10-K, that any of these actions could cost us more than our estimates. In particular, we or our insureds may receive adverse verdicts; post-trial motions may result in unfavorable rulings; any appeals that may be undertaken may be unsuccessful; we may be unsuccessful in our legal efforts to limit the scope of coverage available to insureds; and we may become a party to bad faith litigation over the resolution of a claim. To the extent that the cost of resolving these actions exceeds our estimates, the legal actions could have a material effect on our results of operations in the period in which any such action is resolved.

     For non-claim related actions, we evaluate each case separately and establish what we believe is an appropriate reserve based on GAAP guidance related to contingent liabilities.

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The Patient Protection and Affordable Care Act of 2010; The Dodd-Frank Wall Street Reform and Consumer Protection Act

     The Patient Protection and Affordable Care Act of 2010, generally known as the Healthcare Reform Act was passed and signed into law in March 2010. While the general provisions of the Healthcare Reform Act are known, specific regulations to implement the reforms are just now being written, so we cannot predict with any certainty the effect that Healthcare Reform will have on our business. However, as changes in the healthcare system are phased in between now and 2013, we believe we could see a range of changes that affect our business.

     Also, the Healthcare Reform Act is a complex document that contains numerous administrative provisions that deal with non-healthcare matters. Regulations to implement these provisions are being developed and may impose additional administrative burdens that will increase our operating costs.

     The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in July 2010. Many provisions of the Act do not appear to directly affect our business. However, the Act establishes new regulatory oversight of financial institutions. As detailed regulations are developed to implement the provisions of the Act, there may be changes in the regulatory environment that affect the way we conduct our operations or the cost of compliance, or both.

Overview of Results–Three and Nine Months Ended September 30, 2010 and 2009

     Net income is $51.1 million and $129.5 million for the three and nine months ended September 30, 2010, respectively, as compared to $55.2 million and $137.4 million for the same respective periods in 2009. Net income per diluted share is $1.59 and $3.99 for the three and nine months ended September 30, 2010, respectively, as compared to $1.67 and $4.13 for the same respective periods in 2009.

     Results from the three and nine months ended September 30, 2010 and 2009 compare as follows:

Premiums

     Net premiums earned decreased during the 2010 three-month period by approximately $1.7 million or 1.3% due to the effects of a competitive market place and rate reductions that reflect improved loss trends. The 2010 nine-month period increased by $15.5 million or 4.3% which reflects $23.9 million of additional premium from PICA, primarily attributable to three additional months of activity in 2010, partially offset by declines of $8.4 million at our other subsidiaries, attributable to competitive pressures and rate reductions.

Net Investment Income; Net Realized Investment Gains (Losses)

     Our 2010 net investment result (which includes both net investment income and earnings from unconsolidated subsidiaries) decreased by $5.9 million or 14.6% for the three-month period, due to lower earnings from fixed income securities and a decrease in earnings from unconsolidated subsidiaries. Results for the 2010 nine-month period decreased by $275,000 or 0.2% due to a decrease in earnings from fixed income securities, partially offset by an increase in earnings from unconsolidated subsidiaries. Average yields decreased during the 2010 nine-month period, but the effect was offset by higher average invested balances.

     Net realized investment gains increased earnings in 2010 by $14.7 million for the three-month period and by $8.8 million for the nine-month period. In 2009, net realized investment gains increased earnings by $7.3 million for the three-month period and by $4.8 million for the nine-month period.

Expenses

     Net losses increased by $10.2 million or 14.7% in the 2010 three-month period due to higher current accident year losses of $1.1 million and lower favorable loss development of $9.1 million. Net losses increased by $21.3 million or 10.4% in the 2010 nine-month period due to higher current accident

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year losses of $19.2 million and lower favorable loss development of $2.1 million. The increase in current accident year losses in the nine-month period is primarily attributable to an additional three months of PICA activity in 2010.

     Underwriting, acquisition and insurance expenses increased in 2010 by $2.2 million or 7.3% for the three-month period and $11.0 million or 13.2% for the nine-month period. Expenses were higher in 2010 because of higher policy acquisition costs partially offset by operating cost reductions. The 2010 nine-month period also includes three additional months of PICA expenses.

Ratios

     Our net loss ratio increased in 2010 by 8.6 points for the three-month period, and increased by 3.3 points for the nine-month period. Lower favorable development increased the three-month ratio by 6.6 points and increased the nine-month ratio by 1.6 points.

     Our expense ratio increased in 2010 by 2.1 points for the three-month period and by 1.9 points for the nine-month period. The increase primarily reflects higher average policy acquisition costs.

     Our operating ratio increased in 2010 by 12.5 points and 7.1 points for the three- and nine-month periods, respectively, reflecting the increases to the net loss and expense ratios and declines in the investment ratio of approximately 1.8 points and 1.9 points for the three- and nine-month periods, respectively.

     Return on equity is 11.3% for the 2010 three-month period and 9.8% for the nine-month period on an annualized basis.

Book Value per Share

     Our book value per share at September 30, 2010 is $58.90 compared to $52.59 at December 31, 2009. The change reflects our 2010 income, the increase in accumulated other comprehensive income and a benefit from treasury share purchases. Due to the size of our Shareholders’ Equity (approximately $1.8 billion at September 30, 2010), the growth rate of our book value per share may slow. The past growth rates of our book value per share do not necessarily predict similar future results.

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Non-GAAP Financial Measures

     Operating income is a non-GAAP financial measure that is widely used to evaluate the performance of insurance entities. Operating income excludes the after-tax effects of realized gains or losses, guaranty fund assessments and debt retirement loss. We believe operating income presents a useful view of the performance of our insurance operations, but should be considered in conjunction with net income computed in accordance with GAAP.

     The following table is a reconciliation of Net income to Operating income:

	Three Months Ended						Nine Months Ended
	September 30						September 30
(In thousands, except per share data)	2010			2009			2010			2009
Net income	$	51,052		$	55,201		$	129,545		$	137,449
Items excluded in the calculation of operating income:
Loss on the extinguishment of debt		—			2,839			—			2,839
Net realized investment (gains) losses		(14,712	)		(7,275	)		(8,807	)		(4,822	)
Guaranty fund assessments (recoupments)		91			(152	)		(659	)		(630	)
Pre-tax effect of exclusions		(14,621	)		(4,588	)		(9,466	)		(2,613	)
Tax effect, at 35%		5,117			1,606			3,313			915
Operating income	$	41,548		$	52,219		$	123,392		$	135,751
Per diluted common share:
Net income	$	1.59		$	1.67		$	3.99		$	4.13
Effect of exclusions		(0.29	)		(0.09	)		(0.19	)		(0.05	)
Operating income per diluted common share	$	1.30		$	1.58		$	3.80		$	4.08

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Results of Operations—Three and Nine Months Ended September 30, 2010 Compared to Three and Nine Months Ended September 30, 2009

     Selected consolidated financial data for each period is summarized in the table below.

	Three Months Ended									Nine Months Ended
	September 30									September 30
($ in thousands, except share data)	2010			2009			Change			2010			2009			Change
Revenues:
Gross premiums written	$	158,998		$	168,559		$	(9,561	)	$	414,697		$	434,714		$	(20,017	)
Net premiums written	$	149,693		$	158,705		$	(9,012	)	$	383,783		$	401,634		$	(17,851	)
Premiums earned	$	140,802		$	143,477		$	(2,675	)	$	411,006		$	398,212		$	12,794
Premiums ceded		(10,502	)		(11,521	)		1,019			(31,882	)		(34,621	)		2,739
Net premiums earned		130,300			131,956			(1,656	)		379,124			363,591			15,533
Net investment income		35,639			38,573			(2,934	)		110,348			112,839			(2,491	)
Equity in earnings (loss) of unconsolidated subsidiaries		(1,281	)		1,637			(2,918	)		2,544			328			2,216
Net realized investment gains (losses)		14,712			7,275			7,437			8,807			4,822			3,985
Other income		1,764			3,153			(1,389	)		5,769			7,224			(1,455	)
Total revenues		181,134			182,594			(1,460	)		506,592			488,804			17,788
Expenses:
Losses and loss adjustment expenses		86,866			78,674			8,192			251,944			231,309			20,635
Reinsurance recoveries		(7,055	)		(9,108	)		2,053			(24,908	)		(25,601	)		693
Net losses and loss adjustment expenses		79,811			69,566			10,245			227,036			205,708			21,328
Underwriting, acquisition and insurance expenses		32,095			29,905			2,190			94,940			83,896			11,044
Interest expense		832			808			24			2,472			2,638			(166	)
Loss on extinguishment of debt		—			2,839			(2,839	)		—			2,839			(2,839	)
Total expenses		112,738			103,118			9,620			324,448			295,081			29,367
Income before income taxes		68,396			79,476			(11,080	)		182,144			193,723			(11,579	)
Income taxes		17,344			24,275			(6,931	)		52,599			56,274			(3,675	)
Net income	$	51,052		$	55,201		$	(4,149	)	$	129,545		$	137,449		$	(7,904	)
Earnings per share:
Basic	$	1.61		$	1.69		$	(0.08	)	$	4.03		$	4.17		$	(0.14	)
Diluted	$	1.59		$	1.67		$	(0.08	)	$	3.99		$	4.13		$	(0.14	)
Net loss ratio		61.3	%		52.7	%		8.6			59.9	%		56.6	%		3.3
Underwriting expense ratio		24.0	%		21.9	%		2.1			24.4	%		22.5	%		1.9
Combined ratio		85.3	%		74.6	%		10.7			84.3	%		79.1	%		5.2
Operating ratio		57.9	%		45.4	%		12.5			55.2	%		48.1	%		7.1
Return on equity*		11.3	%		13.9	%		(2.6	)		9.8	%		11.9	%		(2.1	)

* Annualized

     In all the tables that follow, the abbreviation “nm” indicates that the percentage change is not meaningful.

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Premiums

	Three Months Ended									Nine Months Ended
	September 30									September 30
($ in thousands)	2010		2009		Change					2010		2009		Change
Gross premiums written	$	158,998	$	168,559	$	(9,561	)	(5.7	%)	$	414,697	$	434,714	$	(20,017	)	(4.6	%)
Net premiums written	$	149,693	$	158,705	$	(9,012	)	(5.7	%)	$	383,783	$	401,634	$	(17,851	)	(4.4	%)
Premiums earned	$	140,802	$	143,477	$	(2,675	)	(1.9	%)	$	411,006	$	398,212	$	12,794		3.2	%
Premiums ceded		10,502		11,521		(1,019	)	(8.8	%)		31,882		34,621		(2,739	)	(7.9	%)
Net premiums earned	$	130,300	$	131,956	$	(1,656	)	(1.3	%)	$	379,124	$	363,591	$	15,533		4.3	%

Gross Premiums Written

     Changes in our premium volume are driven by three primary factors: our retention of existing business, the amount of new business we are able to generate (including business that comes to PRA as a result of acquisitions), and the premium charged for business that is renewed, which is affected both by rates charged and by the amount and type of coverage an insured chooses to purchase. The professional liability market remains competitive with some competitors choosing to compete primarily on price.

     Gross premiums written by component are shown in the table that follows. The nine-month period of 2010 includes three additional months of PICA activity as compared to the same period in 2009.

	Three Months Ended									Nine Months Ended
	September 30									September 30
($ in thousands)	2010		2009		Change					2010		2009		Change
Physician (1)	$	127,220	$	139,423	$	(12,203	)	(8.8	%)	$	325,439	$	353,910	$	(28,471	) (2)	(8.0	%)
Non-physician (1):
Healthcare providers		12,537		10,255		2,282		22.3	%		31,593		27,017		4,576	(3)	16.9	%
Hospital and facility		5,481		5,435		46		0.8	%		20,351		21,716		(1,365	)	(6.3	%)
Other		3,603		3,258		345		10.6	%		12,104		9,880		2,224		22.5	%
Non continuing		1,007		4,161		(3,154	)	(75.8	%)		6,593		7,152		(559	)	(7.8	%)
		22,628		23,109		(481	)	(2.1	%)		70,641		65,765		4,876		7.4	%
Tail Premiums		9,150		6,027		3,123		51.8	%		18,617		15,039		3,578		23.8	%
Total Gross Premiums Written	$	158,998	$	168,559	$	(9,561	)	(5.7	%)	$	414,697	$	434,714	$	(20,017	)	(4.6	%)

(1)	Excludes tail premiums
(2)	Change shown is net of a $14.8 million increase that is attributable to an additional three months of PICA activity in 2010
(3)	Change shown includes an increase of $3.1 million that is due to an additional three months of PICA activity in 2010

Physician Premiums

     Physician premiums continue to be our primary revenue source and comprise 80% and 78% of our gross premiums written for the quarter and year-to-date periods ended September 30, 2010, respectively, as compared to 83% and 81% for the same respective periods in 2009.

     A portion of the decrease in the volume of our physician premiums is attributable to shifts in our renewal patterns. We began offering policy renewals for a two-year term (as opposed to a one-year term) to our physician insureds in one selected jurisdiction during late 2008. The premium associated with both policy terms is included in written premium in the period the policy is written, which increases gross written premium in the year the policy is written but reduces gross written premium in the following year. Earned premiums are not affected because premiums are earned pro rata over the policy term, whether that is a one- or two-year term. Gross written premium associated with two-year term policies is $3.2 million and $8.8 million for the three and nine months ended September 30, 2010, respectively, as

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compared to $8.9 million and $21.4 million written for the 2009 respective periods. Approximately $6.9 million and $16.6 million of the gross written premium decline during the 2010 three- and nine-month periods, respectively, is attributable to the policies written on a two-year term. Also, during 2009, in order to more evenly distribute renewals throughout the year, we offered early renewal to a number of insureds who otherwise would have had a first quarter 2010 renewal date. Approximately $6.5 million of the 2010 year-to-date decrease in physician premiums is attributable to the shift in renewal dates.

     Our retention rates for our physician business have remained comparable to our 2009 rates. Our retention rate, which we calculate as retained premium divided by premium subject to renewal, is 90% and 89% , for the 2010 three- and nine-month periods, respectively, as compared to 88% and 90%, respectively, for the same periods in 2009. Retention rates are affected by a number of factors. We may choose not to renew an insured as a result of our underwriting evaluation. Insureds terminate coverage because they have left the practice of medicine for various reasons, principally for retirement but also due to disability or other personal reasons. We may also lose insureds to competitors or to self-insurance mechanisms (often when physicians join hospital-based practice groups) due to pricing or other issues.

     Charged rates for our physician business renewed in 2010 have averaged 2% higher than the expiring premium for the three-month period, compared to an average 1% decrease for the same 2009 period. For the nine-month period, charged rates have showed no change in 2010, compared to an average decrease of 2% in 2009. In general, charged rates at our PICA subsidiary have increased as compared to 2009, while rates at our other insurance subsidiaries have decreased. Our charged rates include the effects of filed rates, surcharges and discounts. Despite competitive pressures, we continue to base our rates on expected losses, as indicated by our historical loss data and available industry loss data. We are committed to a rate structure that will allow us to fulfill our obligations to our insureds, while generating competitive returns for our shareholders.

     We wrote approximately $6 million and $12 million of new physician business during the three and nine months ended September 30, 2010, respectively.

Non-physician Premiums

     Our non-physician healthcare providers are primarily dentists, chiropractors, optometrists, and allied health professionals. We began a targeted marketing campaign to optometrists in 2010 which produced approximately $800,000 of additional premium in the third quarter. The remainder of the third quarter increase is primarily attributable to allied health coverages. The increase for the nine-month period reflects the third quarter increase as well as three additional months of PICA activity in 2010.

     Hospital and facility premiums remained flat for the three-month period and decreased for the nine-month period. The decline reflects the same competitive pressures in this area as we are seeing in our physician business.

     Non-physician “other” premiums are primarily legal professional liability premiums, but also includes other types of general liability premiums. The increase in premium volume for the nine-month period principally relates to our legal professional liability premiums.

     Non-continuing in the above table separately identifies premium generated by certain types of miscellaneous liability coverages which we no longer provide. We do expect minimal premiums from these coverages in future periods.

Tail Premiums

     We separately report tail premiums because we offer extended reporting endorsement or “tail” policies to insureds that are discontinuing their claims-made coverage with us, but we do not market such coverages separately. The amount of tail premium written and earned can vary widely from period to period.

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Premiums Earned

	Three Months Ended									Nine Months Ended
	September 30									September 30
($ in thousands)	2010		2009		Change					2010		2009		Change
Premiums earned	$	140,802	$	143,477	$	(2,675	)	(1.9	%)	$	411,006	$	398,212	$	12,794	3.2	%

     Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Generally, our policies carry a term of one year, but as discussed above, we renew certain policies with a two-year term. Tail premiums are generally 100% earned in the period written because the policies insure only incidents that occurred in prior periods and are not cancellable.

     Earned premiums for the 2010 nine-month period includes an additional $23.7 million due to three additional months of PICA activity. This increase was offset by declines in earned premium at our other insurance subsidiaries due to the effects of a competitive market place and rate reductions resulting from improved loss trends.

Premiums Ceded

	Three Months Ended											Nine Months Ended
	September 30											September 30
($ in thousands)	2010			2009			Change					2010			2009			Change
Premiums ceded	$	10,502		$	11,521		$	(1,019	)	(8.8	%)	$	31,882		$	34,621		$	(2,739	)	(7.9	%)
							Points											Points
Reinsurance expense ratio:*		7.5	%		8.0	%		(0.5	)				7.8	%		8.7	%		(0.9	)

* Calculated as premiums ceded as a percentage of premiums earned

     Premiums ceded represent the portion of earned premiums that we pay our reinsurers for their assumption of a portion of our losses. The premium that we cede to our reinsurers is determined, in part, by the loss experience (subject to minimums and maximums) of the business ceded to them. It takes a number of years before all losses are known, and in the intervening period, premiums due to the reinsurers are estimated.

     The 2010 decrease in the reinsurance expense ratio is largely due to a change in the structure of the reinsurance arrangements at our PICA subsidiary. Prior to 2010, certain miscellaneous liability coverages offered by PICA were heavily reinsured. In 2010, we discontinued offering the coverages and canceled the related reinsurance arrangements, which has reduced reinsurance costs in 2010 as compared to 2009. Also, we restructured our primary reinsurance arrangements effective October 1, 2009 to reduce minimum payments and exclude certain indirect loss costs from our reinsurance coverage. The change in terms has favorably affected our ratio.

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Net Investment Income, Equity in Earnings (Loss) of Unconsolidated Subsidiaries, Net Realized Investment Gains (Losses)

Net Investment Income

     Net investment income is primarily derived from the income earned by our fixed maturity securities and also includes income from our short-term, cash equivalent investments, dividend income from equity securities, earnings from other investments and increases in the cash surrender value of business owned life insurance contracts. Investment fees and expenses are deducted from investment income.

     Net investment income by investment category is as follows:

	Three Months Ended											Nine Months Ended
	September 30											September 30
(In thousands)	2010			2009			Change					2010			2009			Change
Fixed maturities	$	35,952		$	38,780		$	(2,828	)	(7.3	%)	$	110,349		$	112,007		$	(1,658	)	(1.5	%)
Equities		142			235			(93	)	(39.6	%)		597			792			(195	)	(24.6	%)
Short-term investments		115			193			(78	)	(40.4	%)		279			1,125			(846	)	(75.2	%)
Other invested assets		548			632			(84	)	(13.3	%)		2,153			2,096			57		2.7	%
Business owned life insurance		340			336			4		1.2	%		1,161			1,157			4		0.3	%
Investment expenses		(1,458	)		(1,603	)		145		(9.0	%)		(4,191	)		(4,338	)		147		(3.4	%)
Net investment income	$	35,639		$	38,573		$	(2,934	)	(7.6	%)	$	110,348		$	112,839		$	(2,491	)	(2.2	%)

     Fixed Maturities. The three-month period reflects lower yields and lower average investment balances for the quarter, with the decline in yields having the greater effect. The nine-month period reflects lower yields in 2010, partially offset by higher average investment balances.

     Yields have decreased because market rates are lower in 2010 than in 2009 and proceeds from sales or maturities are being reinvested at lower rates. Average yields for our available-for-sale fixed maturity securities during 2010 and 2009 are as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2010			2009			2010			2009
Average income yield		4.4	%		4.6	%		4.4	%		4.6	%
Average tax equivalent income yield		5.0	%		5.3	%		5.0	%		5.3	%

     The level of our investment in fixed maturity securities varies depending upon a number of factors, including, among others, our operating cash needs, anticipated shifts in credit markets, the attractiveness of other investments alternatives, and cash needed for acquisitions or other capital purposes. In 2010 as compared to 2009, our average investment in fixed maturities decreased by approximately 2% for the three-month period but increased by approximately 4% for the nine-month period.

     Short-term Investments. The decrease in earnings for the three-month period reflects a decline in rates, offset by higher average balances in 2010. The decrease in earnings for the nine-month period reflects a decline in rates and lower average invested balances in 2010.

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Equity in Earnings (Loss) of Unconsolidated Subsidiaries

     Equity in earnings (loss) of unconsolidated subsidiaries is derived from our investment interests accounted for under the equity method, as follows:

	Three Months Ended								Nine Months Ended
	September 30								September 30
(In thousands)	2010			2009		Change			2010			2009			Change
Private investment funds, currently held	$	633		$	702	$	(69	)	$	1,507		$	835		$	672
Private investment fund, liquidated in 2010		—			935		(935	)		3,097			(507	)		3,604
Other business interests		(663	)		—		(663	)		(663	)		—			(663	)
Tax credit partnerships		(1,251	)		—		(1,251	)		(1,397	)		—			(1,397	)
Equity in earnings (loss) of unconsolidated subsidiaries	$	(1,281	)	$	1,637	$	(2,918	)	$	2,544		$	328		$	2,216

     We hold interests in certain private investment funds that derive earnings from trading portfolios. The performance of the funds is affected by the volatility of equity and credit markets. One fund, shown separately in the table, was liquidated in July 2010.

     We have acquired an interest in a development stage limited liability company that will, in time, engage in active business operations. While we expect this investment to provide a positive return over time, we anticipate operating losses during the start up phase, expected to last at least eighteen months. Our potential for loss is limited to the carrying amount of our investment, currently $4.2 million.

     We began investing in tax credit limited partnerships in 2010. As discussed under Capital and Liquidity — Investment Exposures, the tax credit funds are designed to generate investment returns by providing tax benefits to fund investors in the form of net operating losses and tax credits. During the three- and nine-month periods ended September 30, 2010 our tax credit partnerships generated a tax benefit of approximately $750,000, all recognized in the three-month period.

Net Realized Investment Gains (Losses)

     The following table provides detailed information regarding our net realized investment gains (losses).

	Three Months Ended						Nine Months Ended
	September 30						September 30
(In thousands)	2010			2009			2010			2009
Total other-than-temporary impairment losses (1):
Residential mortgage-backed securities	$	(166	)	$	—		$	(189	)	$	(2,703	)
Corporate bonds		—			(16	)		—			(3,749	)
Equities		—			(72	)		—			(494	)
Equity interest in a private investment fund		—			—			(3,373	)		—
High yield asset-backed securities, see discussion below		(532	)		—			(9,515	)		(536	)
Portion recognized in Other Comprehensive Income:
Residential mortgage-backed securities		113			—			119			172
Net impairment losses recognized in earnings		(585	)		(88	)		(12,958	)		(7,310	)
Net gains (losses) from sales		13,169			3,592			23,065			8,717
Reserve for loss on investment receivable (2)		—			—			—			(3,090	)
Trading portfolio gains		3,386			4,723			1,824			7,366
Fair value adjustments, net		(1,258	)		(952	)		(3,124	)		(861	)
Net realized investment gains (losses)	$	14,712		$	7,275		$	8,807		$	4,822

(1)	In accordance with GAAP, all OTTI losses prior to April 1, 2009 were recognized in earnings.
(2)	Relates to amounts due from Reserve Primary Fund. Subsequent recoveries from the Reserve Primary Fund exceeded estimated amounts, and the loss was reversed in the fourth quarter of 2009.

     We have recognized impairment losses in earnings during the three months ended September 30, 2010 of $532,000 due to a decline in the fair value of certain high-yield asset-backed securities. These securities are part of a larger group of similar securities that were held prior to July 2010 in a private investment fund; our interest in the fund, commonly referred to as a silo interest, constituted a direct and beneficial interest in the securities. During the second quarter of 2010, we were informed that the fund

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was liquidating and the securities in the silo would be distributed directly to us. We determined that we would sell the securities and accordingly recognized an impairment loss related to the securities during the second quarter of $7.0 million, including losses of $2.1 million that had been previously recognized in OCI.

     We recognized an impairment of $3.4 million in the first nine months of 2010 related to an interest in a private investment fund which we account for on a cost basis. The fund has reported realized losses on the sale of securities, and we have reduced the carrying value of our interest in the fund in recognition of our pro rata share of those losses.

     Fair value adjustments are attributable to our election of fair value treatment for both the 2019 Note Payable and related interest rate swap, as discussed in Notes 3 and 9 to the Condensed Consolidated Financial Statements.

Losses and Loss Adjustment Expenses

     The determination of calendar year losses involves the actuarial evaluation of incurred losses for the current accident year and the actuarial re-evaluation of incurred losses for prior accident years, including an evaluation of the reserve amounts required for losses in excess of policy limits.

     Accident year refers to the accounting period in which the insured event becomes a liability of the insurer. For claims-made policies, which represent over 90% of the Company’s business, the insured event generally becomes a liability when the event is first reported to the insurer; for occurrence policies the insured event becomes a liability when the event takes place. We believe that measuring losses on an accident year basis is the most indicative measure of the underlying profitability of the premiums earned in that period since it associates policy premiums earned with the estimate of the losses incurred related to those policy premiums.

     The following tables summarize calendar year net losses and net loss ratios for the three and nine months ended September 30, 2010 and 2009 by separating losses between the current accident year and all prior accident years.

	Net Losses
	Three Months Ended								Nine Months Ended
	September 30								September 30
(In millions)	2010			2009			Change		2010			2009			Change
Current accident year	$	113.2		$	112.1		$	1.1	$	322.9		$	303.7		$	19.2
Prior accident years		(33.4	)		(42.5	)		9.1		(95.9	)		(98.0	)		2.1
Calendar year	$	79.8		$	69.6		$	10.2	$	227.0		$	205.7		$	21.3

	Net Loss Ratios*
	Three Months Ended								Nine Months Ended
	September 30								September 30
	2010			2009			Change		2010			2009			Change
Current accident year		86.9	%		84.9	%		2.0		85.2	%		83.5	%		1.7
Prior accident years		(25.6	%)		(32.2	%)		6.6		(25.3	%)		(26.9	%)		1.6
Calendar year		61.3	%		52.7	%		8.6		59.9	%		56.6	%		3.3

* Net losses as specified divided by net premiums earned.

     The increase in current accident year losses for the 2010 nine-month period is primarily attributable to three additional months of PICA activity.

     Our estimate of loss per risk varies based upon the type of coverage provided and the legal jurisdiction of the insured. Shifts in the geographic mix of our physician business and, particularly for the three-month period, an increase in tail coverages caused our current accident year net loss ratio to be higher in 2010 than in 2009.

     During the three and nine months ended September 30, 2010, we recognized favorable loss development of $33.4 million and $95.9 million, respectively, on a net basis, related to reserves

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established in prior years. Principally this is due to favorable net loss development within our retained layers of coverages ($1 million and below) for accident years 2004-2008 but also included unfavorable development of $1.6 million related to the commutation of a captive reinsurance arrangement.

     During the three and nine months ended September 30, 2009, we recognized favorable loss development of $42.5 million and $98.0 million, respectively, on a net basis, related to our previously established (prior accident year) reserves, principally for the 2004 to 2007 accident years within our retained layers of coverage ($1 million and below).

     Substantially all of the development recognized during 2010 and 2009 relates to medical professional liability claims-made reserves. The favorable development for medical professional claims-made policies in both years is based upon observation of actual claims data that indicates that claims severity (i.e., the expected average cost of claims) is trending below our initial expectations. Given both the long tailed nature of our business and the past volatility of final claim settlement values, we are generally cautious in giving credence to the trends that lead to the recognition of favorable net loss development. As we conclude that sufficient credible data with respect to these trends exists we take appropriate actions. In the case of the claims severity trends, we believe it is appropriate to recognize the impact of these trends in our actuarial evaluation of prior period loss estimates while also remaining attentive to the past volatility of claims severity.

     Assumptions used in establishing our reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are reflected in the current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions can have a material effect on our results of operations for the period in which the change is made, as has been the case in 2010 and 2009.

Underwriting, Acquisition and Insurance Expenses

	Three Months Ended											Nine Months Ended
	September 30											September 30
($ in thousands)	2010			2009			Change					2010			2009			Change
Insurance related expenses	$	31,225		$	28,873		$	2,352		8.1	%	$	92,345		$	81,749		$	10,596	13.0	%
Non-insurance related expenses		870			1,032			(162	)	(15.7	%)		2,595			2,147			448	20.9	%
	$	32,095		$	29,905		$	2,190		7.3	%	$	94,940		$	83,896		$	11,044	13.2	%
	Points											Points
Underwriting expense ratio (1)		24.0	%		21.9	%		2.1					24.4	%		22.5	%		1.9

(1) Our expense ratio computations exclude non-insurance related expenses.

Insurance Related Expenses

     The 2010 increase in expenses for the three-month period is primarily due to higher acquisition costs.

     The 2010 nine-month period includes three additional months of PICA activity, which increased expenses as compared to 2009 by $5.7 million. The remainder of the increase for the nine-month period is due to higher acquisition expenses of approximately $5.8 million partially offset by lower operating expenses of approximately $900,000.

     The increase in acquisition expenses reflects both the effect of purchase accounting and higher costs due to shifts in our premium mix. Under GAAP purchase accounting rules there is no recognition of policy acquisition costs for policies written prior to the acquisition date but earned after the acquisition date; consequently, PICA amortization expense was below normal levels in the second and third quarters of 2009. We have earned more premium in 2010 from allied healthcare, legal and miscellaneous professional liability coverages. Commission and underwriting expenses associated with these premiums are higher than those associated with physician premiums.

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     Our 2010 expenses include transaction expenses related to the proposed merger of APS of approximately $250,000 for the three-month period and $875,000 for the nine-month period. We anticipate incurring additional expenses related to the APS transaction of approximately $13.4 million, approximately $10 million of which is expected to be incurred during the fourth quarter of 2010 and the remainder incurred fairly ratably through 2011.

     Our 2009 expenses for the nine-month period included PICA transaction costs of approximately $2.5 million. Our 2009 nine-month expenses also reflect a $1.8 million expense reduction related to our payment of all but a small portion of the Columbia Hospital for Women Judgment (the CHW Judgment). Costs associated with payment were less than we had previously estimated. For additional information regarding the CHW Judgment, see Note 10 of the Notes to the Consolidated Financial Statements in our 2009 Form 10-K.

Other Expense Information

     Non-insurance related expenses. We operate several insurance agencies and provide benefit management services on a limited basis through a separate PICA subsidiary. These activities generate commission and service fee revenues, which are reported as a part of other income. We have excluded the direct expenses of these activities from our underwriting expense ratio computations because the activities are not associated with the generation of premium revenues. The increase in expenses for 2010 nine-month period is primarily due to three additional months of PICA activity.

     Guaranty fund assessments. Insurance related expenses in the table above are reduced by net recoupments from guaranty fund assessments of approximately $659,000 during the nine months ended September 30, 2010 and by approximately $152,000 and $630,000 during the three and nine months ended September 30, 2009, respectively. Guaranty fund assessments increased insurance related expenses by $91,000 during the three-month period ended September 30, 2010.

Underwriting Expense Ratio

     The 2010 increase in our underwriting expense ratio for both the three- and the nine-month periods is primarily attributable to higher policy acquisition costs in 2010.

Interest Expense

     Interest expense for the 2010 three-month period is flat as compared to 2009, because interest rates and outstanding debt were the same levels in each period. Average outstanding debt was approximately $2 million higher during the 2010 nine-month period as compared to 2009 while average rates on our variable debt were approximately 75 basis points lower during the nine-month period of 2010 as compared to 2009.

     Interest expense by debt obligation is provided in the following table:

	Three Months Ended							Nine Months Ended
	September 30							September 30
(In thousands)	2010		2009		Change			2010		2009		Change
Trust Preferred Debentures due 2034	$	250	$	270	$	(20	)	$	733	$	910	$	(177	)
Surplus Notes due May 2034 (1)		131		132		(1	)		380		643		(263	)
Note Payable due February 2012		9		8		1			33		20		13
Note Payable due February 2019 (2)		297		301		(4	)		884		600		284
Surplus Notes due May 2033 (3)		—		48		(48	)		—		140		(140	)
Other		145		49		96			442		325		117
	$	832	$	808	$	24		$	2,472	$	2,638	$	(166	)

(1)	Converted from a fixed to a variable rate in May 2009
(2)	Debt acquired in the PICA transaction
(3)	Debt acquired in the PICA transaction; redeemed August 2009

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Taxes

     Our effective tax rate for each period is lower than the 35% statutory rate because a considerable portion of our net investment income is tax-exempt. Other factors affecting our effective tax rate include the following:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2010			2009			2010			2009
Statutory rate		35.0	%		35.0	%		35.0	%		35.0	%
Tax-exempt income		(5.1	%)		(5.1	%)		(6.3	%)		(6.4	%)
Tax credits (1)		(1.1	%)		—			(0.4	%)		—
Valuation Allowance (2)		(1.3	%)		—			(0.5	%)		—
BOLI Redemption (3)		—			—			0.7	%		—
Other		(2.1	%)		0.6	%		0.4	%		0.4	%
Effective tax rate		25.4	%		30.5	%		28.9	%		29.0	%

(1)	We have invested in tax credit partnerships during 2010 (see Capital and Liquidity -Investment Exposures and Equity in Earnings (Loss) of Unconsolidated Subsidiaries). To-date in 2010, all in the third quarter, we have recognized an expected tax benefit of approximately $750,000 related to the credits to be transferred to us by the partnerships.
(2)	During 2010 we reversed a valuation allowance previously established against deferred tax assets that were capital in character. We determined that it has become more likely than not that sufficient sources of taxable capital income will be available in future periods to allow us to fully utilize the deferred tax assets.
(3)	We expect to pay and have thus recognized additional tax on the planned redemption of a portion of our BOLI investment as discussed in Capital and Liquidity -Investment Exposures.

     Although our effective tax rate is consistent between the nine-month periods of 2010 and 2009, current tax expense increased by approximately $25 million in 2010. Current tax expense in 2009 reflects several large deductions for which the tax benefit had been previously recognized as a deferred tax asset, including a tax benefit of approximately $7.9 million associated with the CHW judgment and tax benefits of approximately $7.4 million associated with securities sold in 2009 for which OTTI had been recognized in prior periods.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          We believe that we are principally exposed to three types of market risk related to our investment operations. These risks are interest rate risk, credit risk and equity price risk.

Interest Rate Risk

          Our fixed maturities portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. As interest rates rise, market values of fixed income portfolios fall and vice versa. Certain of the securities are held in an unrealized loss position; we do not intend to sell and believe we will not be required to sell any of the debt securities held in an unrealized loss position before its anticipated recovery.

          The following table summarizes estimated changes in the fair value of our available-for-sale fixed maturity securities for specific hypothetical changes in interest rates by asset class at September 30, 2010. There are principally two factors that determine interest rates on a given security: market interest rates and credit spreads. As different asset classes can be affected in different ways by movements in those two factors, we have broken out our portfolio by asset class in the following table.

	Interest Rate Shift in Basis Points
	(200)		(100)		Current		100		200
September 30, 2010
Fair Value (in millions):
U.S. Treasury obligations	$	206	$	201	$	195	$	187	$	181
U.S. Agency obligations		69		68		65		62		60
State and municipal bonds		1,376		1,332		1,267		1,204		1,142
Corporate bonds		1,300		1,273		1,226		1,179		1,135
Asset-backed securities		714		710		699		680		656
All fixed maturity securities	$	3,665	$	3,584	$	3,452	$	3,312	$	3,174
Duration:
U.S. Treasury obligations		3.05		3.24		3.43		3.34		3.25
U.S. Agency obligations		2.35		3.76		4.31		4.26		4.21
State and municipal bonds		3.24		4.58		5.02		5.11		5.15
Corporate bonds		2.86		3.51		4.15		4.06		3.98
Asset-backed securities		1.74		1.97		2.31		3.10		3.61
All fixed maturity securities		2.78		3.60		4.05		4.21		4.29
December 31, 2009
Fair Value (in millions):
U.S. Treasury obligations	$	160	$	156	$	154	$	150	$	147
U.S. Agency obligations		70		69		67		66		64
State and municipal bonds		1,601		1,528		1,449		1,373		1,301
Corporate bonds		1,152		1,114		1,074		1,035		999
Asset-backed securities		725		717		699		673		645
All fixed maturity securities	$	3,708	$	3,584	$	3,443	$	3,297	$	3,156
Duration:
U.S. Treasury obligations		3.22		3.27		3.29		3.23		3.14
U.S. Agency obligations		2.70		3.10		3.10		3.04		3.04
State and municipal bonds		4.38		5.20		5.29		5.31		5.27
Corporate bonds		3.45		3.69		3.71		3.62		3.54
Asset-backed securities		1.65		1.64		3.03		3.91		4.21
All fixed maturity securities		3.44		3.84		4.15		4.30		4.31

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          Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the maintenance of the existing level and composition of fixed income security assets, and should not be relied on as indicative of future results.

          Certain shortcomings are inherent in the method of analysis presented in the computation of the fair value of fixed rate instruments. Actual values may differ from those projections presented should market conditions vary from assumptions used in the calculation of the fair value of individual securities, including non-parallel shifts in the term structure of interest rates and changing individual issuer credit spreads.

          ProAssurance’s cash and short-term investment portfolio at September 30, 2010 is on a cost basis which approximates its fair value. This portfolio lacks significant interest rate sensitivity due to its short duration.

Credit Risk

          We have exposure to credit risk primarily as a holder of fixed income securities. We control this exposure by emphasizing investment grade credit quality in the fixed income securities we purchase.

          As of September 30, 2010, 96.5% of our fixed maturity securities are rated investment grade as determined by Nationally Recognized Statistical Rating Organizations (NRSROs), such as A.M. Best, Fitch, Moody’s, and Standard & Poor’s. We believe that this concentration in investment grade securities reduces our exposure to credit risk on our fixed income investments to an acceptable level. However, investment grade securities, in spite of their rating, can rapidly deteriorate and result in significant losses. Ratings published by the NRSROs are one of the tools used to evaluate the credit worthiness of our securities. The ratings reflect the subjective opinion of the rating agencies as to the credit worthiness of the securities, and therefore, we may be subject to additional credit exposure should the rating prove to be unreliable.

          We hold $1.3 billion of municipal bonds. These bonds may have enhanced credit ratings as a result of guarantees by an insurer, but we require the bonds that we purchase to meet our credit criteria on a stand-alone basis. As of September 30, 2010, on a stand-alone basis, our municipal bonds have a weighted average rating of AA.

Equity Price Risk

          At September 30, 2010 the fair value of our investment in common stocks was $35.5 million. These securities are subject to equity price risk, which is defined as the potential for loss in fair value due to a decline in equity prices. The weighted average beta of this group of securities is 0.91. Beta measures the price sensitivity of an equity security or group of equity securities to a change in the broader equity market, in this case the S&P 500 Index. If the value of the S&P 500 Index increased by 10%, the fair value of these securities would be expected to increase by 9.1% to $38.7 million. Conversely, a 10% decrease in the S&P 500 Index would imply a decrease of 9.1% in the fair value of these securities to $32.2 million. The selected hypothetical changes of plus or minus 10% do not reflect what could be considered the best or worst case scenarios and are used for illustrative purposes only.

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ITEM 4. CONTROLS AND PROCEDURES

          The Chief Executive Officer and Chief Financial Officer of the Company participated in management’s evaluation of our disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of September 30, 2010. ProAssurance’s disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

          On April 1, 2009 we completed the acquisition of Podiatry Insurance Company of America (PICA). We have excluded PICA’s systems and processes from Management’s report on Internal Control over Financial Reporting as of December 31, 2009 and will include PICA in Management’s Report on Internal Control over Financial Reporting as of December 31, 2010.

          There have been no significant changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls during the quarter.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

          See Note 8 of the Notes to the Condensed Consolidated Financial Statements.

ITEM 1A. RISK FACTORS

          With the exception of the risk factors listed below, there are no changes to the “Risk Factors” in Part 1, Item 1A of the 2009 Form 10-K.

Changes in healthcare policy could have a material effect on our operations.

          The Patient Protection and Affordable Care Act of 2010, otherwise known as the Healthcare Reform Act was passed and signed into law in March 2010. While the general provisions of the Healthcare Reform Act are known, specific regulations to implement the reforms are just now being written, so we cannot predict with any certainty the effect that Healthcare Reform will have on our business. However, as changes in the healthcare system are phased in between now and 2013, we believe we could see a range of changes that affect our business.

          Additionally, the Healthcare Reform Act is a complex document that contains numerous administrative provisions that deal with non-healthcare matters. Regulations to implement these provisions are being developed and may impose additional administrative burdens that will increase our operating costs.

Changes due to recent financial reform legislation could have a material effect on our operations.

          The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed and signed into law in July 2010. The provisions of the Act do not appear to directly affect our operations. However, the Act establishes new regulatory oversight of financial institutions. As detailed regulations are developed to implement the provisions of the Act, there may be changes in the regulatory environment that affect the way we conduct our operations or the cost of regulatory compliance, or both.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

          (a) Not applicable.

          (b) Not applicable.

          (c) Information required by Item 703 of Regulation S-K.

					Total Number		Approximate Dollar
					of Shares		Value of Shares
					Purchased as Part		that May Yet Be
	Total Number of		Average		of Publicly		Purchased Under
	Shares		Price Paid		Announced Plans or		the Plans or
Period	Purchased		per Share		Programs		Programs
July 1 – 31, 2010		36,739	$	58.64		36,739	$	74,041,641
August 1 – 31, 2010		—	$	—		—	$	74,041,641
September 1 – 30, 2010		938,721	$	56.62		938,721	$	20,893,128
Total		975,460	$	56.69		975,460

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ITEM 6. EXHIBITS

2.1	Agreement and Plan of Merger by and among ProAssurance and its subsidiary, CA Bridge Corporation and American Physicians Service Group, Inc. dated August 31, 2010, filed as an Exhibit to ProAssurance’s Current Report on Form 8-K filed on September 1, 2010 and incorporated by this reference.
31.1	Certification of Principal Executive Officer of ProAssurance as required under SEC rule 13a-14(a).
31.2	Certification of Principal Financial Officer of ProAssurance as required under SEC rule 13a-14(a).
32.1	Certification of Principal Executive Officer of ProAssurance as required under SEC Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as amended (18 U.S.C. 1350).
32.2	Certification of Principal Financial Officer of ProAssurance as required under SEC Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as amended (18 U.S.C. 1350).
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

62

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PROASSURANCE CORPORATION
November 3, 2010
	/s/ Edward L. Rand, Jr. Edward L. Rand, Jr.
	Chief Financial Officer
	(Duly authorized officer and principal financial officer)

63

EX-31.1

Exhibit 31.1

CERTIFICATION

I, W. Stancil Starnes, certify that:

1. I have reviewed this report on Form 10-Q of ProAssurance Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2010

/s/ W. Stancil Starnes  

W. Stancil Starnes 

Chief Executive Officer 

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Edward L. Rand, Jr., certify that:

1. I have reviewed this report on Form 10-Q of ProAssurance Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2010

/s/ Edward L. Rand, Jr.  

Edward L. Rand, Jr. 

Chief Financial Officer 

EX-32.1

Exhibit 32.1

A signed original of this written statement required by Section 906 has been provided to ProAssurance Corporation and will be retained by ProAssurance Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ProAssurance Corporation (the “Company”) on Form 10-Q for the quarter ending September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W. Stancil Starnes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ W. Stancil Starnes  

W. Stancil Starnes 

Chief Executive Officer 

November 3, 2010

EX-32.2

Exhibit 32.2

A signed original of this written statement required by Section 906 has been provided to ProAssurance Corporation and will be retained by ProAssurance Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ProAssurance Corporation (the “Company”) on Form 10-Q for the quarter ending September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward L. Rand, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Edward L. Rand, Jr.  

Edward L. Rand, Jr. 

Chief Financial Officer 

November 3, 2010