10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2002 or __________
[ ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________

Commission file number 0-16533

ProAssurance Corporation

(Exact name of registrant as specified in its charter)

Delaware	63-1261433
(State or other jurisdiction of incorporation of 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)

Indicate by check mark whether the registrant (l) 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 x No o

As of August 12, 2002, there were 25,851,178 shares of the registrant’s common stock outstanding.

Page 1 of 28

TABLE OF CONTENTS

	Condensed Consolidated Balance Sheets (Unaudited)
	Condensed Consolidated Statements of Changes In Capital (Unaudited)
	Condensed Consolidated Statements of Income (Unaudited)
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)
	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Notes to Condensed Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
	PART II – OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
MEEMIC Holdings Agreement and Plan of Merger
Section 906 Certification of the CEO and CFO

Table of Contents

Part I — Financial Information
Item l. Condensed Consolidated Financial Statements (Unaudited) of ProAssurance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Changes in Capital	4
Condensed Consolidated Statements of Income	5
Condensed Consolidated Statements of Comprehensive Income	6
Condensed Consolidated Statements of Cash Flows	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures about Market Risk	27
Part II - Other Information
Item 1. Legal Proceedings	28
Item 4. Submission of Matters to a Vote of Security Holders	28
Item 6. Exhibits and Reports on Form 8-K	28
Signatures	28

2

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands)

			June 30			December 31
			2002			2001
Assets
Investments:
	Fixed maturities available for sale, at fair value		$	1,356,173		$	1,270,285
	Equity securities available for sale, at fair value			99,796			97,044
	Real estate, net			17,805			17,936
	Short-term investments			125,148			136,014
Total investments				1,598,922			1,521,279
Cash and cash equivalents				83,601			53,163
Premiums receivable				87,190			77,766
Receivable from reinsurers on unpaid losses and loss adjustment expenses				399,083			374,056
Prepaid reinsurance premiums				25,360			20,265
Deferred taxes				83,809			90,565
Other assets				93,920			101,231
			$	2,371,885		$	2,238,325
Liabilities and Stockholders’ Equity
Liabilities:
Policy liabilities and accruals:
	Reserve for losses and loss adjustment expenses		$	1,507,401		$	1,442,341
	Unearned premiums			224,285			188,630
	Reinsurance premiums payable			59,365			48,704
Total policy liabilities				1,791,051			1,679,675
Other liabilities				52,184			40,431
Long-term debt				77,500			82,500
Total liabilities				1,920,735			1,802,606
Minority interest				24,319			22,488
Commitments and contingencies				—			—
Stockholders’ Equity:
	Common stock, par value $0.01 per share 100,000,000 shares authorized; 25,972,943 and 25,911,234 shares issued, respectively			260			259
	Additional paid-in capital			261,628			260,788
	Accumulated other comprehensive gain (loss), net of deferred tax expense of $4,293 and $2,208, respectively			11,536			3,533
	Retained earnings			153,463			148,707
				426,887			413,287
		Less treasury stock, at cost, 121,765 shares		(56	)		(56	)
Total stockholders’ equity				426,831			413,231
			$	2,371,885		$	2,238,325

     See accompanying notes.

3

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
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, 2001	$	413,231		$	3,533	$	148,707	$	260,991
Net income		4,756			—		4,756		—
Change in fair value of securities available for sale, net of deferred taxes and minority interest		8,003			8,003		—		—
Change in minority interest		(139	)						(139	)
Common stock issued for compensation		969			—		—		969
Stock options exercised		11			—		—		11
Balance at June 30, 2002	$	426,831		$	11,536	$	153,463	$	261,832

						Accumulated
						Other					Other
						Comprehensive			Retained		Capital
			Total			Income (Loss)			Earnings		Accounts
Balance at December 31, 2000			$	345,167		$	(854	)	$	136,257	$	209,764
Net income				5,260			—			5,260		—
Change in fair value of securities available for sale, net of deferred taxes				1,248			1,248			—		—
Common stock issued for compensation				14			—			—		14
Equity issued in consolidation:
	Common stock issued to Professionals
		Group shareholders		49,546			—			—		49,546
	Fair value of options assumed			2,952			—			—		2,952
Purchase of treasury stock				(1,324	)		—			—		(1,324	)
Balance at June 30, 2001			$	402,863		$	394		$	141,517	$	260,952

     See accompany notes.

4

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except share data)

			Three Months Ended						Six Months Ended
			June 30						June 30
			2002			2001			2002			2001
Revenues:
	Direct and assumed premiums written		$	123,075		$	51,558		$	304,188		$	130,428
	Premiums earned		$	136,066		$	60,985		$	268,532		$	123,145
	Premiums ceded			22,472			14,308			44,449			26,923
	Net premiums earned			113,594			46,677			224,083			96,222
	Net investment income			17,093			10,923			35,176			21,132
	Other income			2,023			387			3,624			1,047
Total revenues				132,710			57,987			262,883			118,401
Expenses:
	Losses and loss adjustment expenses			127,943			57,024			258,240			115,428
	Reinsurance recoveries			20,879			13,221			43,977			24,639
	Net losses and loss adjustment expenses			107,064			43,803			214,263			90,789
	Underwriting, acquisition and insurance expenses			23,500			11,230			44,482			23,246
	Interest expense			745			84			1,514			84
Total expenses				131,309			55,117			260,259			114,119
Income before income taxes, minority interest and cumulative effect of accounting change				1,401			2,870			2,624			4,282
Provision for income taxes:
	Current expense (benefit)			634			(1,512	)		1,635			(1,385	)
	Deferred expense (benefit)			(1,341	)		1,395			(3,501	)		407
				(707	)		(117	)		(1,866	)		(978	)
Income before minority interest and cumulative effect of accounting change				2,108			2,987			4,490			5,260
Minority interest				1,024			—			1,428			—
Income before cumulative effect of accounting change				1,084			2,987			3,062			5,260
Cumulative effect of accounting change, net of tax				—			—			1,694			—
Net income			$	1,084		$	2,987		$	4,756		$	5,260
Earnings per share (basic and diluted):
	Income before cumulative effect of accounting change		$	0.04		$	0.13		$	0.12		$	0.23
	Cumulative effect of accounting change, net of tax			—			—			0.06			—
	Net income		$	0.04		$	0.13		$	0.18		$	0.23
Weighted average number of common shares outstanding
		Basic		25,849			22,716			25,842			22,705
		Diluted		25,879			22,716			25,864			22,706

     See accompanying notes.

5

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)

		Three Months Ended					Six Months Ended
		June 30					June 30
		2002		2001			2002		2001
Comprehensive income:
	Net income	$	1,084	$	2,987		$	4,756	$	5,260
	Change in fair value of securities available for sale, net of deferred taxes and minority interest		13,104		751			4,225		2,442
	Reclassification adjustment for realized (gains) losses included in income, net of deferred taxes		2,659		(1,163	)		3,778		(1,194	)
Comprehensive income		$	16,847	$	2,575		$	12,759	$	6,508

     See accompanying notes.

6

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

	Six Months Ended
	June 30
	2002			2001
Operating Activities
Net cash provided by operating activities	$	97,577		$	22,400
Investing Activities
Purchases of fixed maturities available for sale		(398,830	)		(238,364	)
Purchases of equity securities available for sale		(14,693	)		(3,770	)
Proceeds from sale or maturities of fixed maturities available for sale		338,408			268,354
Proceeds from sale of equity securities available for sale		5,780			2,614
Net decrease in short-term investments		10,866			38,470
Cash used in consolidation with Professionals Group		—			(196,304	)
Cash acquired in consolidation with Professionals Group		—			72,245
Other		(3,670	)		(6,334	)
Net cash used by investing activities		(62,139	)		(63,089	)
Financing Activities
Proceeds from long term debt		—			110,000
Repayment of debt		(5,000	)		—
Purchase of treasury stock		—			(1,319	)
Net cash used by financing activities		(5,000	)		108,681
Increase (decrease) in cash and cash equivalents		30,438			67,992
Cash and cash equivalents at beginning of period		53,163			8,550
Cash and cash equivalents at end of period	$	83,601		$	76,542

     See accompanying notes.

7

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements include the accounts of ProAssurance Corporation and its subsidiaries (collectively “ProAssurance”). ProAssurance is a holding company formed for the purpose of consolidating Medical Assurance, Inc. (“Medical Assurance”) and Professionals Group, Inc. (“Professionals Group”) as its wholly owned subsidiaries. Additional information about the consolidation is provided in Note 2. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

     Certain reclassifications have been made to conform the 2001 financial statements to the 2002 presentation. These changes had no effect on previously reported results of operations or shareholders’ equity.

2. Consolidation of Medical Assurance and Professionals Group

     ProAssurance Corporation began operations on June 27, 2001 in a transaction referred to hereafter as the consolidation (“consolidation”).

     The consolidation of Medical Assurance into ProAssurance was in the form of a corporate reorganization and was treated in a manner similar to a pooling of interests. Upon consummation of the consolidation, each outstanding share of Medical Assurance common stock, par value $1.00 per share, was converted into one share of ProAssurance common stock, par value $0.01 per share. Approximately 22.6 million ProAssurance shares were issued to Medical Assurance shareholders. The consolidation of Professionals Group into ProAssurance was treated as a purchase transaction. Each outstanding share of Professionals Group common stock was converted into the right to receive, at the holder’s election, either (a) 0.897 of a share of ProAssurance common stock plus $13.47 in cash, or (b) $27.47 in cash. Aggregate consideration paid to the Professionals Group shareholders consisted of approximately $196 million in cash and 3.2 million shares of ProAssurance common stock, valued at approximately $50 million. The fair value of ProAssurance shares issued was $15.59 per share based on the average Medical Assurance common stock price for a few days prior to June 27, 2001.

     ProAssurance funded the cash requirements of the consolidation with the proceeds of a $110 million term loan facility and with internal funds generated from dividends paid to ProAssurance by Medical Assurance and Professionals Group at the time of closing.

8

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)

2. Consolidation of Medical Assurance and Professionals Group (continued)

     The total cost of the purchase transaction of approximately $252 million has been allocated to the assets acquired and the liabilities assumed based on estimates of their respective fair values. The estimated fair value of identifiable assets acquired totaled $1,165 million and the estimated fair value of the liabilities assumed totaled $931 million. The estimated excess of the total cost of the acquisition over the fair value of net assets acquired of approximately $18.4 million was recorded as goodwill.

     ProAssurance was required to incorporate Professionals Group’s activity commencing upon the effective date of the acquisition. The unaudited pro forma information below presents combined results of operations as if the acquisition had occurred on January 1, 2001 after giving effect to certain adjustments, including increased interest expense on debt related to the acquisition and lower investment income due to cash used to fund a portion of the consolidation, and related tax effects. Professional Group’s nonrecurring and transaction related expenses were excluded from the pro forma financial information. No amortization of goodwill has been included in the pro forma calculation in order to present the pro forma information in a manner that is consistent with ProAssurance’s adoption of SFAS No. 142 on January 1, 2002. The unaudited pro forma information is not necessarily indicative of the results of operations of the combined company had the acquisition occurred at the beginning of the period presented, nor is it necessarily indicative of future results (in thousands, except per share data).

	Pro Forma Results
	Six Months Ended
	June 30, 2001
Revenues	$	266,709
Net loss	$	(15,231	)
Earnings per share
Basic and diluted	$	(0.59	)

3. Segment Information

     ProAssurance operates in the United States of America and, prior to the consolidation, operated in only one reportable industry segment, the professional liability insurance segment, which principally provides professional liability insurance and reinsurance for providers of health care services, and to a limited extent providers of legal services. The professional liability segment includes the operating results of three significant insurance companies: The Medical Assurance Company, Inc., Medical Assurance of West Virginia Inc., and ProNational Insurance Company.

     As a result of the consolidation, ProAssurance is now engaged in an additional segment, which is providing personal property and casualty insurance to individuals (the personal lines segment). At June 30, 2002, ProAssurance owns 84% of the stock of MEEMIC Holdings, Inc. (“MEEMIC Holdings”), a publicly traded insurance holding company that provides personal auto, homeowners, boat and umbrella coverages primarily to educational employees and their families through its wholly-owned subsidiary, MEEMIC Insurance Company (“MEEMIC”).

9

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)

3. Segment Information (continued)

     The accounting policies of each segment are consistent with those described in Note 1. Other than cash and marketable securities owned directly by the parent company, the identifiable assets of ProAssurance are allocated to the reportable operating segments. Except for investment income earned directly by the parent company and interest expense related to long-term debt held by the parent company, all revenues and expenses of ProAssurance are allocated to the operating segments for purposes of Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information. Revenue is primarily from unaffiliated customers and the effect of transactions between segments has been eliminated.

     The table below provides a reconciliation of segment information to total consolidated information (in millions).

			Three months ended					Six months ended
			June 30						June 30
			2002			2001		2002			2001
Revenues:
	Professional liability lines		$	92.8		$	58.0	$	185.4		$	118.4
	Personal lines			39.9			—		77.5			—
	Corporate and other			—			—		—			—
		Total revenues	$	132.7		$	58.0	$	262.9		$	118.4
Income (loss) before cumulative effect of accounting change:
	Professional liability lines		$	(3.8	)	$	3.0	$	(3.5	)	$	5.3
	Personal lines			5.3			—		7.5			—
	Corporate and other			(0.4	)		—		(0.9	)		—
	Total		$	1.1		$	3.0	$	3.1		$	5.3
Net Income:
	Professional liability lines		$	(3.8	)	$	3.0	$	(1.8	)	$	5.3
	Personal lines			5.3			—		7.5			—
	Corporate and other			(0.4	)		—		(0.9	)		—
	Total net income		$	1.1		$	3.0	$	4.8		$	5.3

		June 30		December 31
		2002		2001
Identifiable Assets:
	Professional liability lines	$	2,025.0	$	1,913.5
	Personal lines		346.8		324.7
	Corporate and other		0.1		0.1
	Total assets	$	2,371.9	$	2,238.3

10

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)

4. Investments

     The amortized cost of fixed maturities and equity securities available for sale was $1.437 billion and $1.361 billion at June 30, 2002 and December 31, 2001, respectively. Operating results for the six months ended June 30, 2002 and 2001 (in millions) included the following:

	Six months ended June 30
	2002			2001
Proceeds from sales excluding maturities and paydowns	$	237.8		$	238.1
Gross realized gains	$	6.0		$	2.3
Gross realized (losses)	$	( 9.8	)	$	(1.1	)

     Capital gains and losses are included as a component of investment income. Gross realized capital losses for 2002 includes a capital loss of $1.6 million that resulted from the recognition of an other than temporary decline in the market value of one security.

5. Reserves for Losses and Loss Adjustment Expenses

     ProAssurance establishes reserves for losses and loss adjustment expenses based on its estimates of the future amounts necessary to pay claims and expenses associated with investigation and settlement of claims. ProAssurance considers expected outcomes for 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. ProAssurance believes that the methods it uses to establish reserves are reasonable and appropriate. However, estimating reserves, especially professional liability reserves, is a complex process which is heavily dependent on judgment and involves many uncertainties. 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. Any adjustments necessary are reflected in current operations.

     ProAssurance’s management believes the unearned premiums under contracts together with the related anticipated investment income to be earned, are adequate to discharge the related contract liabilities.

6. Deferred Policy Acquisition Costs

     Costs that vary with and are directly related to the production of new and renewal premiums (primarily premium taxes, commissions and underwriting salaries) are deferred to the extent they are recoverable against unearned premiums and are amortized as related premiums are earned. Amortization of deferred acquisition costs, net of ceding commissions earned, amounted to approximately $20.0 million and $15.2 million for the six months ended June 30, 2002 and 2001, respectively.

11

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)

7. 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 because much of ProAssurance’s investment income is tax-exempt.

8. Long-term Debt

     On June 27, 2001, ProAssurance borrowed $110 million under a term loan facility in order to fund the consolidation. At June 30, 2002 the remaining outstanding balance under the loan was $77.5 million.

     The debt requires quarterly principal repayments of $2.5 million. Beginning in 2003, ProAssurance must also repay an additional annual installment equal to 50% of the adjusted parent-only annual cash flow, up to a maximum of $15 million. ProAssurance has made all required quarterly repayments on the loan and also made a $22.5 million optional prepayment on the loan in September 2001.

     Excluding any required annual cash flow repayments, the aggregate remaining amounts of maturities of long-term debt for the next five years are as follows: $5.0 million in 2002, $10 million each year in 2003 and 2004, and in 2005 the remaining balance becomes due on September 30.

     The debt bears interest at a variable rate based on the London Interbank Offered Rate (LIBOR) or the bank’s base rate as elected from time to time by ProAssurance. At June 30, 2002 the interest rate was 3.37%.

     The term loan is part of a credit facility provided to ProAssurance by a bank syndicate under the terms of a credit agreement that also provides for a revolving line of credit in the amount of $40 million. Borrowings under the line of credit are repayable in full in two years, subject to renewal. ProAssurance has not borrowed any funds under the revolving line of credit.

     The credit agreement, as is customary for credit agreements of this size and nature, requires that ProAssurance maintain certain financial standards, otherwise known as loan covenants, including:

• a consolidated debt coverage ratio of 3.75 to 1 through June 30, 2002 and 3.0 to 1 thereafter;

• minimum consolidated tangible net worth equal to the sum of (i) 90% of the consolidated net worth of ProAssurance as of June 30, 2001, and (ii) 75% of cumulative consolidated net income after June 30, 2001;

• a consolidated fixed charge coverage ratio of 1.5 to 1;

• a funded debt to adjusted statutory capital ratio of 0.35 to 1; and

• maintenance of statutory Risk-Based Capital ratios (as defined by the National Association of Insurance Commissioners and measured annually on December 31) of 3.5 to 1 by two of its insurance companies, The Medical Assurance Company, Inc. and ProNational Insurance Company, Inc.

     As of June 30, 2002, ProAssurance was in compliance with the aforementioned loan covenants.

12

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)

9. Stockholders’ Equity and Earnings Per Share

     At June 30, 2002 ProAssurance had 100 million shares of authorized common stock and 50 million shares of authorized preferred stock. The Board of Directors has the authorization to determine the provisions for the issuance of shares of the preferred stock, including the number of shares to be issued and the designations, powers, preferences and rights and the qualifications, limitations or restrictions of such shares. At June 30, 2002, the Board of Directors had not authorized the issuance of any preferred stock nor determined any provisions for the preferred stock.

10. Commitments and Contingencies

     On March 18, 2002, MEEMIC Holdings announced that it intends to acquire all of its outstanding shares of stock not currently owned by ProAssurance (a total of 1,193,518 fully diluted shares) and, on July 9, 2002, entered into a definitive agreement pursuant to which shareholders other than ProAssurance will have the opportunity to sell their shares to MEEMIC Holdings in a tender offer at a price per share of $29 net to the shareholders in cash. If certain conditions are satisfied, the agreement contemplates that MEEMIC Holdings will conduct the tender offer and that any remaining shares will be acquired through a merger at the same price. The proposed transaction and final terms of the definitive agreement have been unanimously approved by MEEMIC Holdings’ Board of Directors, including its independent directors not affiliated with ProAssurance. MEEMIC Holdings intends to use primarily its own existing cash and investment resources to fund the purchase of the shares.

     The transaction is subject to several conditions, including, without limitation, approval of the tender offer and merger by the independent shareholders of MEEMIC Holdings; the receipt of all required regulatory and bank approvals; the receipt of confirmation from insurance rating agencies that the repurchase would not impair the current A- rating of MEEMIC or any of the other insurance subsidiaries of ProAssurance; and a favorable vote by a majority of the MEEMIC Holdings shareholders other than ProAssurance and persons who are affiliated with ProAssurance. These statements are subject to a variety of risks and uncertainties, including, without limitation the fulfillment of the conditions to the transaction described above. There can be no assurance that the transaction will be completed.

     On March 18, 2002, a complaint was filed against MEEMIC Holdings, its directors and its parent company, ProAssurance Corporation, in the 6th Circuit Court in Oakland County, Michigan by a purported shareholder of MEEMIC Holdings seeking to enjoin the transaction described above. The suit, which purports to be a class action on behalf of the minority shareholders, alleges, among other things that the transaction has been timed to freeze out the minority shareholders, that the proposed transaction is unfair and that ProAssurance and the directors have violated their fiduciary duties. The complaint also seeks damages in an undetermined amount. The suit may delay or prevent progress towards the completion of the proposed transaction.

     ProAssurance believes that it has meritorious defenses to the claims made by the plaintiff, including without limitation, the fact that it has taken several steps to protect the rights of the minority shareholders in the proposed transaction and to ensure its fairness. These steps include permitting a committee of two independent directors who have no other affiliation with MEEMIC Holdings or ProAssurance Corporation to negotiate and approve the proposed transaction, and making the completion of the transaction subject to the approval of the holders of a majority of the shares not owned by ProAssurance or its affiliates and the receipt of fairness opinions from independent financial advisors. There can be no assurance, however, as to the outcome of this litigation and, if MEEMIC Holdings is not able to successfully defend against the claims made by the plaintiff, the outcome of this litigation could have a material adverse impact on the proposed transaction.

13

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)

10. Commitments and Contingencies (continued)

     ProAssurance is involved in various other legal actions arising primarily from claims related to insurance policies. At other times legal actions may arise from claims asserted by policyholders. The legal actions arising from these claims have been considered by ProAssurance in establishing its reserves. While the outcome of all legal actions is not presently determinable, ProAssurance’s management is of the opinion, based on consultation with legal counsel, that the settlement of these actions will not have a material adverse effect on ProAssurance’s financial position but could have an unfavorable impact on quarterly results of operations.

11. Cumulative Effect of Change in Accounting Principle and New Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 “Business Combinations.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations with a closing date after June 30, 2001. This statement eliminates the pooling-of-interest method of accounting for business combinations. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets in a business combination. The Financial Accounting Standards Board has also issued SFAS No. 142 “Goodwill and Other Intangible Assets” which supersedes Opinion 17 “Intangible Assets,” and is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 addresses how goodwill and other intangible assets should be accounted for in financial statements upon acquisition and how these items should be accounted for subsequent to acquisition. Contrary to Opinion 17, SFAS No. 142 does not presume that goodwill and all other intangible assets are wasting assets requiring amortization. Instead, goodwill and intangible assets that have indefinite useful lives will be tested at least annually for impairment. If goodwill and intangible assets are deemed to be impaired, the change will be charged through the Statement of Operations. ProAssurance adopted SFAS Nos. 141 and 142 effective January 1, 2002.

     In accordance with SFAS Nos. 141 and 142, ProAssurance discontinued amortizing its recorded goodwill and deferred credits and recognized the unamortized balance of deferred credits of $1.7 million that existed at December 31, 2001 related to business combinations completed prior to July 1, 2001. The write-off has been recognized as the cumulative effect of a change in accounting principle. There is no tax effect related to the write-off because the deferred credits were not amortizable for tax purposes.

14

ProAssurance Corporation and Subsidiaries
(formerly Medical Assurance, Inc.)
Notes to Condensed Consolidated Financial Statements
(Unaudited)

11. Cumulative Effect of Change in Accounting Principle and New Accounting Pronouncements (continued)

     The table below presents comparative income and income per share for the six months ended June 30, 2002 and 2001, reflecting the pro forma effects of SFAS Nos. 141 and 142 on 2001 data:

		Three Months Ended					Six Months Ended
		June 30					June 30
		2002		2001			2002		2001
Reported income before cumulative effect of accounting change		$	1,084	$	2,987		$	3,062	$	5,260
	Amortization of deferred credits, net of goodwill amortization		—		(19	)		—		(39	)
Adjusted income before cumulative effect of accounting change		$	1,084	$	2,968		$	3,062	$	5,221

     Adoption of SFAS Nos. 141 and 142 did not have a significant per share effect.

     At June 30, 2002 goodwill and intangible assets from business combinations, net of accumulated amortization, are approximately $22.9 million. ProAssurance does not believe that any of its recorded goodwill or intangible assets has suffered impairment.

     The Financial Accounting Standards Board also issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” which supercedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30 “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” and is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 establishes a single accounting model for the disposal of long-lived assets. The adoption of SFAS No. 144 did not affect the results of operations or financial position of ProAssurance.

     The Financial Accounting Standards Board also issued SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which is effective for financial statements issued after May 15, 2002. ProAssurance’s adoption of SFAS No. 145 did not affect the results of operations or financial position of ProAssurance.

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

     For purposes of this management discussion and analysis, “ProAssurance” refers to ProAssurance Corporation and its subsidiaries. Management’s discussion and analysis should be read in conjunction with ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2001. The following discussion of the financial condition and results of operations contains certain forward-looking statements relating to the anticipated future financial conditions and operating results of ProAssurance and its current business plans. In the future, the financial condition and operating results of ProAssurance could differ materially from those discussed herein and its current business plans could be altered in response to market conditions and other factors beyond ProAssurance’s control. Important factors that could cause or contribute to such differences or changes include those discussed in the ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2001.

Liquidity and Capital Resources

     The payment of losses and loss adjustment expenses (losses and LAE) and operating expenses in the ordinary course of business and debt service are currently ProAssurance’s principal need for liquid funds. During the first six months of 2002 cash provided by operating activities was sufficient to meet those needs, and ProAssurance believes those sources will be sufficient to meet its cash needs for at least the next twelve months. ProAssurance believes that its reserves for losses and LAE are adequate to discharge outstanding contractual liabilities.

     At June 30, 2002 ProAssurance has an outstanding term loan in the amount of $77.5 million that was obtained in order to finance the consolidation with Professionals Group on June 27, 2001. The term loan was obtained pursuant to a credit agreement with the lending banks, a copy of which was filed as an exhibit to the ProAssurance Form 8-K/A filed with the SEC on May 18, 2001. The credit agreement includes a $40 million revolving line of credit available for ProAssurance’s working capital and operating requirements, including debt service. See Notes 2 and 8 to ProAssurance’s condensed consolidated financial statements for more information regarding the consolidation transaction and the terms of the credit agreement, including the financial covenants. ProAssurance is, and anticipates it will be, in compliance with all loan covenants during the next 12 months.

     ProAssurance’s long-term debt is held and serviced by the parent company, ProAssurance Corporation, and it currently has sufficient funds in its direct non-insurance subsidiaries to meet its debt service requirements for the next twelve months. ProAssurance’s future cash requirements will be funded principally by dividends from its insurance subsidiaries, which may require regulatory approval.

     ProAssurance did not repurchase any of its shares during the six months ended June 30, 2002. At June 30, 2002 ProAssurance has available stock repurchase authorizations for approximately 1.02 million ProAssurance shares.

     MEEMIC Holdings, Inc. (“MEEMIC Holdings”) is a majority owned (84%) subsidiary of ProAssurance that is publicly traded on the NASDAQ stock market. On March 18, 2002, MEEMIC Holdings announced that it intends to acquire all of its outstanding shares of stock not currently owned by ProAssurance (a total of 1,193,518 fully diluted shares). On July 9, 2002, MEEMIC Holdings entered into a definitive agreement pursuant to which shareholders other than ProAssurance Corporation will have the opportunity to sell their shares to MEEMIC Holdings in a tender offer at a price per share of $29, net to the shareholders in cash, for a total possible purchase price of $35 million. If the transaction is successfully completed, MEEMIC Holdings intends to primarily use its own existing cash resources to fund the purchase of the shares. The transaction is subject to numerous contingencies, and a complaint that has been filed to enjoin the transaction. See Note 10 to the condensed consolidated financial statements for additional information regarding the proposed transaction and related contingencies.

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Results of Operations — Overview

     Segment Overview:

     ProAssurance operates in the United States of America in two reportable insurance industry segments: professional liability and personal lines.

     ProAssurance’s professional liability insurance segment principally provides professional liability insurance and reinsurance for providers of health care services, and, to a limited extent, providers of legal services, and insignificant amounts of general liability insurance offered to such providers as accommodation products (“Professional Coverages”). This segment is principally made up of its three operating insurance subsidiaries: The Medical Assurance Company, Inc., ProNational Insurance Company and Medical Assurance of West Virginia.

     The professional liability segment also includes accident and health, workers compensation and multi-line insurance (“Other Coverages”). ProAssurance has curtailed its participation in these lines of business and expects substantial reductions in premiums written and earned premiums over the next twelve months.

     ProAssurance’s personal lines insurance segment provides personal property and casualty insurance to individuals. ProAssurance’s personal lines segment includes the operations of a single insurance company, MEEMIC Insurance Company.

     Professionals Group activity has only been included in ProAssurance’s consolidated results since the date of the consolidation on June 27, 2001. Prior to the consolidation with Professionals Group, ProAssurance did not have a personal lines segment.

     All revenues and expenses of ProAssurance are allocated to the operating segments, other than investment income earned directly by the parent company and interest expense related to long-term debt held by the parent.

Overview of Operating Results:

     Consolidated income before cumulative effect is $1.1 million or $0.04 per share and $3.1 million or $0.12 per share, for the three and six month periods ended June 30, 2002, respectively. ProAssurance’s professional liability segment continues to operate in a challenging environment. ProAssurance’s personal lines segment performed favorably during the quarter and for the year. The operating results of each segment are discussed separately in the following sections.

     Interest expense during both 2002 and 2001 relates entirely to the credit agreement obtained in order to finance the consolidation with Professionals Group. The debt bears interest at a variable rate based on the London Interbank Offered Rate (LIBOR) or the bank’s base rate as elected from time to time by ProAssurance. At June 30, 2002 the interest rate was 3.37%.

     ProAssurance recognized a tax benefit of $707,000 and $1.9 million for the three and six months ended June 30, 2002, respectively, as compared to a tax benefit of $117,000 and $1.0 million for the three and six months ended June 30, 2001, respectively. Tax-exempt investment income is the primary reason that ProAssurance’s effective rates for both years are significantly lower than the expected statutory rate of 35%. ProAssurance derives a significant portion of its investment income from tax-exempt sources. After adjustment for tax-exempt income, ProAssurance experienced a taxable loss for both the three and six month periods ended June 30, 2002 and 2001.

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     ProAssurance has available approximately $40.3 million in Federal tax loss carryforwards. These carryforwards begin to expire in the year 2018. Approximately $28.7 million of the carryforwards relate to the consolidation with Professionals Group; because of this, approximately $10.1 million of the carryforwards are not available to ProAssurance until 2003 or after.

Critical Accounting Policies

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying condensed consolidated financial statements and related footnotes. These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. Item 7 of our Annual Report on Form 10-K discusses several critical accounting policies which we believe are most sensitive to estimates and judgments and involve a higher degree of judgment and complexity. There have been no material changes to that information during the first two quarters of 2002.

Professional Liability Insurance Segment

     Operating results for ProAssurance’s professional liability insurance segment for the three and six months ended June 30, 2002 and 2001 are summarized in the table below (in thousands).

			Three months ended								Six months ended
			June 30								June 30
								Increase								Increase
			2002			2001		(Decrease)			2002			2001		(Decrease)
Gross premiums written			$	78,500		$	51,558	$	26,942		$	220,341		$	130,428	$	89,913
Revenues:
		Premiums earned	$	95,886		$	60,985	$	34,901		$	191,567		$	123,145	$	68,422
		Premiums ceded		18,706			14,308		4,398			38,403			26,923		11,480
	Net premiums earned			77,180			46,677		30,503			153,164			96,222		56,942
	Net investment income			13,989			10,923		3,066			29,473			21,132		8,341
	Other income			1,579			387		1,192			2,714			1,047		1,667
Total revenues				92,748			57,987		34,761			185,351			118,401		66,950
Expenses:
	Net losses and loss adjustment expenses			85,024			43,803		41,221			165,674			90,789		74,885
	Underwriting, acquisition and insurance expenses			14,954			11,230		3,724			28,329			23,246		5,083
Total expenses				99,978			55,033		44,945			194,003			114,035		79,968
Income (loss) before income taxes			$	(7,230	)	$	2,954	$	(10,184	)	$	(8,652	)	$	4,366	$	(13,018	)

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Premiums

Premiums written:

     Premiums written for the three months ended June 30, 2002 increased by $26.9 million as compared to the same period of 2001. This increase is comprised of a $42.7 million increase related to Professional Coverages offset by a $15.8 million decrease related to Other Coverages.

     Premiums written for the six months ended June 30, 2002 increased by $89.9 million as compared to the same period of 2001. This increase is comprised of a $119.1 million increase related to Professional Coverages offset by a $29.2 million decrease related to Other Coverages.

     For both the three and six month periods, the Professional Coverages increase is primarily attributable to the consolidation with Professionals Group but also includes the effect of rate increases implemented during 2002 and 2001. ProAssurance has implemented and plans to continue to implement rate increases based on loss trends, subject to regulatory approval. Due to investment income, professional liability coverages can be profitable even if losses and expenses exceed premiums. However, ProAssurance’s goal is to achieve an underwriting profit within the next two to four years. To date, premiums renewed at the higher rates coupled with new business have more than offset the effect of premiums lost due to decreased retention of insureds. However, the higher rates may result in a greater loss of insureds in future periods.

     ProAssurance has historically written Other Coverages premiums as favorable opportunities arose to utilize capital. ProAssurance significantly decreased its commitment to these programs during the latter half of 2000 and has since allowed existing contractual relationships to expire, resulting in substantial declines in premium volumes related to this business during 2002 and the latter half of 2001. Gross written premiums for Other Coverages were $942,000 and $2.7 million for the three and six months ended June 30, 2002, respectively, as compared to $16.7 million and $31.9 million for the same periods in 2001.

Premiums earned:

     Premiums earned for the three months ended June 30, 2002 increased by $34.9 million as compared to the same period of 2001. As with written premiums, this increase is comprised of a $50.7 million increase related to Professional Coverages offset by a $15.8 million decrease related to Other Coverages.

     Premiums earned for the six months ended June 30, 2002 increased by $68.4 million as compared to the same period of 2001. Similar to written premiums, this increase is comprised of a $97.6 million increase related to Professional Coverages offset by a $29.2 million decrease related to Other Coverages.

     The increase in earned Professional Coverages premiums for both the three and the six month periods is primarily attributable to the consolidation and to a lesser degree, higher rates. Rate increases have no effect on the premiums of any given policy prior to the renewal date of that policy. Therefore, rate increases implemented after July 1, 2001 have not yet been fully reflected in earned premiums since premiums are earned over the entire policy period (usually one-year) after the policy is written. The decrease in Other Coverages earned premiums is primarily attributable to ProAssurance’s decreased commitment to these programs, as previously discussed.

     Reinsurance premiums ceded are estimated based on the terms of the respective reinsurance agreements. The estimated expense is continually reviewed and any adjustments that become necessary are included in current operations.

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     Reinsurance premiums ceded earned for the three months ended June 30, 2002 increased by $4.4 million as compared to the same period of 2001. This increase is comprised of a $9.0 million increase related to Professional Coverages offset by a $4.6 million decrease related to Other Coverages.

     Reinsurance premiums ceded earned for the six months ended June 30, 2002 increased by $11.5 million as compared to the same period of 2001. This increase is comprised of a $16.2 million increase related to Professional Coverages offset by a $4.7 million decrease related to Other Coverages.

     Reinsurance premiums ceded related to Professional Coverages increased for both the three and the six month periods due to several factors. The most significant factor during both the three and the six month period was the increase in the volume of earned premiums during those periods that resulted from the consolidation with Professionals Group. However, reinsurance premiums ceded related to Professional Coverages also increased during both the three and the six month periods of 2002 because more premiums were earned in markets where ProAssurance relies more heavily on reinsurance.

     Reinsurance premiums ceded related to Other Coverages decreased for both the three and the six month periods due to the previously discussed decline in earned premiums related to Other Coverages during those periods.

Losses and Loss Adjustment Expenses

     Professional liability net reserves for losses and loss adjustment expenses at June 30, 2002 approximated $1.044 billion as compared to $1.004 billion at December 31, 2001.

     Net losses and loss adjustment expenses (hereafter referred to as “net losses”) includes three components: a) actuarial evaluation of incurred loss levels for the current accident year; b) actuarial re-evaluation of incurred loss levels for prior accident years and c) actuarial re-evaluation of the reserve for the death, disability and retirement provision. These components take into consideration prior loss experience, loss trends, changes in the frequency and severity of claims, premium rate loads and the retention of insureds. Any changes to previously established estimates of net losses are included in current operations. ProAssurance increased its estimates of prior accident year net losses by $2.4 million during the second quarter of 2002. ProAssurance did not change its estimates of prior accident year net losses during the first quarter of 2002 nor during the first or second quarters of 2001.

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     The following table summarizes current accident year net losses and current accident year net loss ratios for 2002 and 2001 by type of coverage. The current accident year net loss ratios shown are calculated by dividing current accident year net losses by the related net premiums earned.

		Three months ended						Six months ended
		June 30						June 30
		2002			2001			2002			2001
Current accident year net losses and loss adjustment expenses:
	Professional Coverages	$	81,920		$	35,638		$	161,847		$	74,515
	Other Coverages		704			8,164			1,427			16,274
		$	82,624		$	43,802		$	163,274		$	90,789
Current accident year net loss ratio:
	Professional coverages		107	%		101	%		106	%		102	%
	Other Coverages		88	%		72	%		83	%		70	%
Current accident year net loss ratio, all coverages			107	%		94	%		106	%		94	%

Professional Coverages

     Current accident year net losses related to Professional Coverages increased by $46.3 million and $87.3 million for the three and six month periods ended June 30, 2002, respectively, as compared to the same periods of 2001. The consolidation transaction with Professionals Group and the resultant increase in the number of insureds is the primary reason for the increase in Professional coverage net losses.

     Current accident year net loss ratios for Professional Coverages also increased during 2002, primarily because ProAssurance expects higher net losses per unit of risk related to the business acquired in the consolidation with Professionals Group. ProAssurance has also experienced a small increase in the loss costs per unit of risk associated with the premiums written by Medical Assurance.

Other Coverages

     As discussed under premiums, ProAssurance has discontinued most of the underwriting arrangements that generated Other Coverages premiums. As a result of this decline in earned premiums, current accident year net losses related to Other Coverages decreased by $7.5 million and $14.8 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods of 2001. As ProAssurance has exited this business, the contractual arrangements associated with the remaining premiums are such that the average 2002 current accident year net loss ratio for Other Coverages increased as compared to the average 2001 ratio.

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All Coverages

     The 2002 current accident year net loss ratio for all coverages is greater than the same ratio for 2001 primarily because of changes in the mix of premiums earned. Net losses related to Other Coverages premiums are historically lower than the net losses expected for Professional Coverages while other expenses are higher. In 2002, premiums related to Other Coverages decreased in significance as a component of total net premiums earned. As this portion of the business decreased, ProAssurance’s average net loss ratio has increased.

Investment Income

     For purposes of this discussion, the investment portfolio is comprised of fixed maturities, equity securities and short-term investments. At June 30, 2002 and December 31, 2001 the fair value of the professional lines investment portfolio was $1.387 billion and $1.313 billion, respectively; the amortized cost of the professional liability segment investment portfolio was $1.374 billion and $1.309 billion, respectively.

     Net investment income is comprised of earnings on the portfolio plus net capital gains/losses from the portfolio as follows:

		Three months ended					Six months ended
		June 30					June 30
		2002			2001		2002			2001
Earnings on the portfolio		$	17,292		$	9,760	$	33,895		$	19,938
Net capital gains/(losses)			(3,303	)		1,163		(4,422	)		1,194
	Net investment income	$	13,989		$	10,923	$	29,473		$	21,132

     Earnings on the portfolio increased by approximately $7.5 million and $14.0 million for the three and six month periods ended June 30, 2002 as compared to the same periods in 2001. The primary reason for this increase is the additional investment income earned as a result of the consolidation with Professionals Group.

     ProAssurance has experienced some decline in the overall yields on its portfolio as a result of lower market interest rates, both short and long-term. As securities have matured and additional cash has been generated from operations, available long-term investment opportunities have been at rates that are less favorable than the rates available in 2001. In addition, ProAssurance’s average investment in lower yielding short-term and overnight cash investments increased during 2002 due to a lack of available long-term investment opportunities. At June 30, 2002 approximately $122.2 million of the investment portfolio was invested in short-term securities. At June 30, 2002, the average yield of the professional liability segment fixed maturity investments was 6.07%.

     The principal investment objective of ProAssurance is to achieve a high level of after-tax income while minimizing risk. Although fixed maturity securities are purchased with the initial intent to hold such securities until their maturity, disposals of securities prior to their respective maturities may occur if management believes such disposals are consistent with ProAssurance’s overall investment objectives, including maximizing after-tax yields and disposals of securities that no longer meet ProAssurance’s risk management criteria.

22

     ProAssurance recognized net capital losses for both the three and six month periods ended June 30, 2002. ProAssurance sold all of its WorldCom securities during the second quarter of 2002 and realized capital losses of $5.1 million on the disposal. ProAssurance also recognized a loss of $1.6 million during the first quarter of 2002 related to equity securities that management considers to have an other-than temporary decline in fair value.

     Net capital gains for the three and six months ended June 30, 2001 includes a loss of $94,000 recognized during the second quarter related to one security that management considered to have an other-than temporary decline in fair value.

Other Income

     Other income is comprised primarily of fee and commission income. The consolidation with Professionals Group is the primary reason for the increase in other income for the three and six months ended June 30, 2002 as compared to the same periods in 2001.

Underwriting, Acquisition and Insurance Expenses

     Underwriting, acquisition and insurance expenses for the three months ended June 30, 2002 increased by $3.7 million as compared to the same period in 2001. The increase primarily reflects higher expenses incurred due to the consolidation with Professionals Group but also includes higher commission costs and guaranty fund assessments. Offsetting the increased expenses is a $3.8 million decrease, primarily lower acquisition expenses, that resulted from the decline in Other Coverages premiums earned.

     Underwriting, acquisition and insurance expenses for the six months ended June 30, 2002 increased by $5.1 million as compared to the same period in 2001. As with the three month period, the increase is comprised both of higher overall expenses related to the consolidation and higher commission costs and guaranty fund assessments. Offsetting this increase was an expense reduction of approximately $8.3 million that resulted from the decrease in Other Coverages premiums earned.

     The underwriting expense ratio (underwriting, acquisition and insurance expenses divided by net premiums earned) decreased for both the three and six month periods as compared to 2001. The ratio for the three months ended June 30, 2002 was 19.4% as compared to 24.1% for the same period in 2001. The ratio for the six months ended June 30, 2002 was 18.5% as compared to 24.2% for the same period in 2001.

     The primary reason for the lowered ratio in both the three and the six month periods was the decrease in Other Coverages acquisition costs discussed above. Excluding the effect of acquisition costs related to Other Coverages and guaranty fund assessments, the underwriting expense ratio related to Professional Coverage premiums has been reduced by approximately 2.8% and 2.5% for the three and six month periods ended June 30, 2002, respectively, as compared to the same periods in 2001.

     Guaranty fund assessments for the three and six months periods ended June 30, 2002 were approximately $1.2 million and $1.4 million, respectively. Guaranty fund assessments totaled $15,000 for the six months ended June 30, 2001; all were incurred during the second quarter. ProAssurance is required by most states to be a member of its insolvency or guaranty fund association and, as such, must make payments to the association when so assessed by the state. Such assessments can and do vary from year to year.

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Personal Lines Insurance Operations Segment

     ProAssurance’s personal lines segment is comprised of the operations of a single insurance company, MEEMIC Insurance Company, acquired on June 27, 2001. Operating results for ProAssurance’s personal lines insurance segment for the three and six months ended June 30, 2002 are summarized in the table below (in thousands).

		Three months		Six months
		ended		ended
		06/30/02		06/30/02
Gross premiums written		$	44,575	$	83,847
Revenues:
	Premiums earned	$	40,180	$	76,965
	Premiums ceded		3,766		6,046
	Net premiums earned		36,414		70,919
	Net investment income		3,104		5,703
	Other income		444		910
Total revenues			39,962		77,532
Expenses:
	Net losses and LAE		22,040		48,589
	Underwriting, acquisition and insurance expenses		8,546		16,153
Total expenses			30,586		64,742
Income before income taxes and minority interest		$	9,376	$	12,790

Premiums

     Gross premiums written included premiums for automobile coverages of $37.4 million and $72.3 million and premiums for homeowner coverages of $6.9 million and $11.2 million for the three and six month periods ended June 30, 2002, respectively. The personal lines segment was acquired on June 27, 2001. Since that date the number of vehicles insured by MEEMIC has increased by approximately 4.5% and the number of homeowner policies in force has increased by approximately 15.6%.

Losses

     Net loss reserves for the personal lines segment were $64.0 million at June 30, 2002 and $64.3 million at December 31, 2001. The net loss ratio (net losses and loss adjustment expenses divided by net earned premiums) was 60.5% and 68.5% during the three and six month periods ended June 30, 2002, respectively.

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Investment Income

     For purposes of this discussion, the investment portfolio is comprised of fixed maturities and equity securities at amortized cost and short-term investments. At June 30, 2002 and December 31, 2001 the fair value of the personal lines investment portfolio was $193.5 million and $190.4 million, respectively; the amortized cost of the personal lines investment portfolio was $188.4 million and $187.6 million, respectively. Most of the cash generated by operating and investing activities of the personal lines segment during the six months ended June 30, 2002 continues to be held as cash in order to provide funds for the repurchase of the minority interest in MEEMIC Holdings as discussed under liquidity and capital resources.

     The earnings on the portfolio plus net capital gains from the portfolio constitute the related net investment income. Earnings totaled $2.5 million and $5.1 million for the three and six month periods ended June 30, 2002. Capital gains of approximately $644,000 were recognized for the six months ended June 30, 2002; all of which were recognized during the second quarter.

     At June 30, 2002, the average yield of the personal lines segment fixed maturity investments was 5.2%.

Underwriting, Acquisition and Insurance Expenses

     Underwriting, acquisition and insurance expenses related to the personal lines segment were $8.5 million and $16.2 million for the three and six month periods ended June 30, 2002, respectively, consisting of normal, recurring expenses such as commissions, salaries and other expenses. The underwriting expense ratios (underwriting, acquisition and insurance expenses divided by net premiums earned) were 23.5% and 22.8% for the same periods. No guaranty fund assessments were included in underwriting, acquisition and insurance expenses in 2002.

Additional Information

     MEEMIC Insurance Company is a wholly owned subsidiary of MEEMIC Holdings, Inc. MEEMIC Holdings, Inc. is publicly traded on the NASDAQ National Market (symbol “MEMH”). For additional information about MEEMIC Holdings, Inc. and comparative analysis to periods prior to the consolidation, see the MEEMIC Holdings, Inc. June 30, 2002 quarterly report on Form 10-Q filed with the Securities and Exchange Commission.

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Forward-Looking Statements

     The U.S. securities laws, including the Private Securities Litigation Reform Act of 1995, provide a “safe harbor” for certain forward-looking statements. This report contains forward-looking statements (identified by words such as, but not limited to, “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” and other analogous expressions) including statements concerning: liquidity and capital requirements, losses and loss reserves, premium rates and retention of current business, competition, the expansion of product lines, the development or acquisition of business in new geographical areas, the availability of acceptable reinsurance, actions by regulators and rating agencies, the consolidation with Medical Assurance and Professionals Group, the repurchase of MEEMIC Holdings shares, compliance with the credit agreement, payment of dividends, and other matters.

     These forward-looking statements are based upon our estimates and anticipation of future events that 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. Due to such risks and uncertainties, you are urged not to place undue reliance on forward-looking statements. All forward-looking statements included in this document are based upon information available to us on the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

     Risks that could adversely affect our operations and/or cause actual results to differ materially from anticipated results include, but are not limited to, the following:

• underwriting losses on the risks we insure are higher or lower than expected;

• unexpected changes in loss trends which might require the reevaluation of the liability for loss and loss adjustment expenses, thus resulting in an increase or decrease in the liability and a corresponding adjustment to earnings;

• our ability to retain current business, acquire new business, expand product lines and a variety of other factors affecting daily operations such as, but not limited to, economic, legal, competitive and market conditions which may be beyond our control and are thus difficult or impossible to predict;

• changes in the interest rate environment and/or the securities markets that adversely impact the fair value of our investments or operations;

• inability on our part to achieve continued growth through expansion into other states or through acquisitions or business combinations;

• general economic conditions that are worse than anticipated;

• inability on our part to obtain regulatory approval of, or to implement, premium rate increases;

• changes in the legal system that affect the frequency and severity of claims;

• significantly increased competition among insurance providers and related pricing weaknesses in some markets;

• changes in the availability, cost, quality, or collectibility of reinsurance;

• changes to our rating by rating agencies;

• regulatory and legislative actions or decisions that adversely affect us; and

• our ability to utilize loss carryforwards and other deferred tax assets.

     For every forward-looking statement, we claim the protection of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995.

26

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     ProAssurance initially invests only in investment grade securities with the intent at the time of purchase that such securities will be held until maturity. ProAssurance is exposed to various market risks, including both interest rate risk and equity price risk. Interest rate risk represents the risk of changes in the value of a financial instrument caused by fluctuations in market interest rates. ProAssurance handles market risks in accordance with its established investment policies. The goal of these policies is to implement a strategic asset allocation that maximizes the long-term rate of return at a minimum level of risk given a set of asset classes and restrictions. Market risk control relates principally to ratings of issuers and length to maturity. ProAssurance does not enter into derivative transactions.

     At June 30, 2002 fixed maturity securities totaling $1,356 million, at fair value, comprised 85% of ProAssurance’s invested assets of $1,599 million. Thus, the most significant market risk to ProAssurance is interest rate risk related to the fixed maturity portfolio. ProAssurance believes it is in a position to keep these investments until final maturity and does not invest in fixed maturity securities for trading purposes. Nevertheless, fluctuations in market interest rates may significantly impact the fair value of this portfolio.

     ProAssurance estimates that the fair value of its fixed maturity portfolio and the weighted average modified duration would respond to fluctuations in market interest rates as follows:

		Portfolio		Change in			Modified
Interest		Value		Value			Duration
Rates		$ Millions		$ Millions			Years
	+2%	$	1,243	$	(113	)		4.37
	+1%	$	1,299	$	(57	)		4.31
Current rate*		$	1,356	$	—			4.08
	-1%	$	1,411	$	55			3.80
	-2%	$	1,455	$	99			3.70

* Current rates are as of June 30, 2002.

     At June 30, 2002 the fair value of ProAssurance’s investment in common stocks, excluding preferred stocks as discussed in the following paragraph, was $48.5 million, which included net unrealized losses of $10.4 million. These securities are subject to price risk. A hypothetical 10% increase in the market prices as of June 30, 2002 would increase the fair value of these securities to $53.4 million; a hypothetical 10% decrease would reduce the fair value to $43.7 million. The selected hypothetical change does not reflect what could be considered the best or worst scenarios.

     At June 30, 2002 fair value of ProAssurance’s investment in preferred stocks was $51.3 million, including net unrealized gains of $1.4 million. These securities carry fixed rates of return and thus, like fixed maturities, are primarily subject to interest rate risk. The fixed maturities table above does not include preferred stocks.

     ProAssurance’s cash and short-term investment portfolio at June 30, 2002 was on a cost basis which approximates its fair value. This portfolio lacks significant market rate sensitivity due to its short duration.

27

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 10 to the condensed consolidated financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

	The Annual Meeting of the Stockholders of ProAssurance was held on May 22, 2002. At the meeting the shareholders of ProAssurance considered and acted upon the following:
(a)	The stockholders elected the three nominated directors of ProAssurance with shares voted as follows:

	For		Against
A. Derrill Crowe, M.D.		21,451,650		79,223
Robert E. Flowers		21,451,650		79,223
Ann F. Putallaz		21,451,650		79,223

(b) The stockholders also voted in favor of a proposal that ProAssurance assume the MAIC Holdings (now Medical Assurance, Inc.) Incentive Compensation Stock Plan and to rename it the “ProAssurance Corporation Incentive Compensation Stock Plan”. A total of 15,942,166 shares voted in favor of the proposal; 1,011,970 shares voted against the proposal and 139,046 shares abstained from the vote.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibits.
	10    MEEMIC Holdings Agreement and Plan of Merger dated July 9, 2002.
	99    Certification of Chief Executive Officer and Chief Financial Officer
(b)	Reports on 8-K.
	None

SIGNATURES

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
August 13, 2002
	By:	/s/ Howard H. Friedman
		Howard H. Friedman, Chief Financial Officer (Duly authorized officer and principal financial officer)

28 EX-10 3 g77739exv10.txt MEEMIC HOLDINGS AGREEMENT AND PLAN OF MERGER EXHIBIT 10 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of July 9, 2002, by and among PRONATIONAL INSURANCE COMPANY, a Michigan insurance company ("Parent"), MEEMIC MERGER CORP., a Michigan corporation and a wholly owned subsidiary of Parent ("Sub"), and MEEMIC HOLDINGS, INC., a Michigan corporation (the "Company"). WHEREAS, upon the terms and subject to the conditions of this Agreement, including approval of this Agreement by the Company's shareholders, the Company proposes to make a tender offer to purchase all of the issued and outstanding shares of Common Stock of the Company other than those held by ProNational Insurance Company (the "Offer") at a price per share of $29.00, net to the shareholders in cash; WHEREAS, upon the terms and subject to the conditions of this Agreement, including completion of the Offer, the parties intend for Sub to merged with and into the Company and that the Company survive such merger as a wholly owned subsidiary of Parent; WHEREAS the Board of Directors and sole shareholder of Sub have approved this Agreement in accordance with the Michigan Business Corporation Act (the "MBCA") upon the terms and subject to the conditions set forth herein; WHEREAS the Board of Directors of Parent deems it advisable and in the best interests of its shareholder to consummate, and has approved, this Agreement; WHEREAS the Board of Directors of the Company, upon the recommendation of the Exploratory Committee of the Board, has unanimously (i) determined that this Agreement and the transactions contemplated hereby are advisable and in the best interests of its shareholders, (ii) determined that, based on the written opinion of the Exploratory Committee's financial advisor, the consideration to be paid to the Independent Shareholders of the Company in the transactions contemplated by this Agreement is fair to such Independent Shareholders, (ii) approved this Agreement and the transactions contemplated hereby and (iii) resolved, subject to Section 6.02(a) hereof, to recommend to such shareholders their approval of this Agreement and acceptance of the Offer; NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein the parties hereto agree as follows: ARTICLE I THE OFFER SECTION 1.01. The Offer. (a) Terms of the Offer. Provided that this Agreement shall not have been terminated in accordance with Article IX and none of the events set forth in Section 1.02 hereof (the "Tender Offer Conditions") shall have occurred and be continuing, as promptly as reasonably practicable following the receipt of the approval of shareholders of this Agreement described in Section 4.07, but in no event later than 10 business days after the public announcement of the receipt of such approval, the Company shall (i) commence (within the meaning of the applicable rules under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) the Offer at a price per share of $29.00, net to the shareholders in cash (the "Offer Price"), (ii) upon commencement of the Offer, file Schedule TO and all other necessary documents with the Securities and Exchange Commission (the "SEC") and make all deliveries, mailings and telephonic notices required by the applicable rules under the Exchange Act in connection with the Offer (the "Offer Documents") and (iii) use its commercially reasonable efforts to consummate the Offer, subject to the terms and conditions thereof. The obligation of the Company to accept for payment and pay for any Company Common Stock tendered pursuant to the Offer will be subject to the satisfaction, or waiver by the Company, of the Tender Offer Conditions. The Offer shall remain open until the close of business on the date that is 20 business days (as required by Rule 13e-4 under the Exchange Act) after the commencement of the Offer (the "Expiration Time"), unless the Company shall have extended the period of time for which the Offer is open pursuant to, and in accordance with, this Agreement or as may be required by applicable law, in which event the term "Expiration Time" shall mean the latest time and date as the Offer, as so extended, may expire. Subject to the terms of the Offer and this Agreement and the satisfaction of all of the Tender Offer Conditions as of any Expiration Time, the Company will accept for payment and pay for all Company Common Stock validly tendered and not validly withdrawn pursuant to the Offer as soon as practicable after such Expiration Time of the Offer. Notwithstanding the foregoing and subject to the applicable rules of the SEC and the terms and conditions of the Offer, the Company expressly reserves the right to delay payment for Company Common Stock in order to comply in whole or in part with applicable law. Any such delay shall be effected in compliance with Rule 13e-4(f)(5) under the Exchange Act. The Parent agrees that no Company Common Stock held by the Parent will be tendered in the Offer. If the payment for tendered Company Common Stock is to be made to a person other than the person in whose name the surrendered certificate formerly evidencing such Company Common Stock is registered on the stock transfer books of the Company, it shall be a condition of payment that the certificate so surrendered shall be endorsed properly or otherwise be in proper form for transfer and that the person requesting such payment shall have paid all transfer and other taxes required by reason of the payment of the purchase price therefore to a person other than the registered holder of the certificate surrendered, or shall have established to the satisfaction of the Company that such taxes either have been paid or are not applicable. (b) Revisions to Terms of the Offer. Without the prior approval of the Company's Board, the Exploratory Committee and the Parent, the Company shall not (i) reduce the number of shares of Company Common Stock subject to the Offer, (ii) amend the Offer Price, (iii) extend the Offer if all of the Tender Offer Conditions have been satisfied or waived, (iv) change the form of consideration payable in the Offer, (v) amend, modify or add to the Tender Offer Conditions or (vi) amend any other term of the Offer in a manner adverse to the Independent Shareholders. Notwithstanding the foregoing, the Company may, without the consent of the Parent, (A) extend the Offer, if at the scheduled Expiration Time of the Offer any of the Tender Offer Conditions shall have not been satisfied or waived, until such time as such conditions are satisfied or 2 waived, (B) extend the Offer for any period required by any statute, rule, regulation, interpretation or position of the SEC or any other governmental entity applicable to the Offer, (C) waive any Tender Offer Condition. (c) Offer Documents. The Company represents that the Offer Documents will comply in all material respects with the provisions of applicable federal securities laws and, on the date filed with the SEC and on the date first published, sent or given to the Company's shareholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by the Company with respect to information supplied by the Parent or Sub for inclusion in the Offer Documents. Each of Parent and Sub, on the one hand, and the Company, on the other hand, agrees promptly to correct any information provided by it for use in the Offer Documents if and to the extent that it shall have become false or misleading in any material respect prior to the Expiration Time, and the Company further agrees to take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to shareholders of the Company, in each case, as and to the extent required by applicable federal securities laws. SECTION 1.02. Tender Offer Conditions. Notwithstanding any other provisions of the Offer, the Company shall not be required to accept for payment or, subject to any applicable rules of the SEC, pay for any tendered shares and may, subject to Section 1.01 and Article IX, terminate or amend the Offer and/or delay the acceptance of shares for payment if any of the following events shall occur and be continuing at the Expiration Time: (a) Regulatory Approval. (i) The Company shall not have received from the Office of Financial and Insurance Services of the State of Michigan approval of the Company's request for exemption from the Form A filing requirement in connection with the Merger and such approval shall be in full force and effect; or (ii) the Company shall not have received or obtained all authorizations, consents, orders or approvals of any court, arbitral tribunal, administrative agency or commission or other governmental or other regulatory authority or agency (a "Governmental Entity"), the failure to obtain which would have a material adverse effect on Parent and its Subsidiaries or the Company and its Subsidiaries, in each case taken as a whole. (b) Bank Consent. ProAssurance shall have determined that the transactions contemplated by this Agreement will result in the breach of the terms of the Credit Agreement, dated May 10, 2001, among ProAssurance, SouthTrust Bank, Bank of America, N.A. and the lenders named therein (the "ProAssurance Credit Agreement") and it shall not have received the necessary consent, waiver or approval, or such consent, waiver or approval shall not be in full force and effect at the Expiration Time such that the consummation of the Offer would result in a default thereunder. (c) No Injunctions or Restraints. There shall be in effect any temporary restraining order, preliminary or permanent injunction or other order issued by 3 any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Offer or the Merger or holding that the Offer Price or the Merger Consideration is not adequate. (d) Confirmation of Rating. The Company and the other insurance Subsidiaries of ProAssurance shall be rated lower than "A-" by A.M. Best Company and Standard & Poors, or shall have received notice from A.M. Best Company or Standard & Poors of their intention to lower the rating of the Company or the other insurance Subsidiaries of ProAssurance below "A-" after giving effect to the Offer or the Merger. (e) Representations and Warranties. The representations and warranties of Parent and Sub set forth in this Agreement shall not be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations speak as of an earlier date) as of the Expiration Time as though made on and as of the Expiration Time, except as otherwise contemplated by this Agreement. (f) Termination of the Agreement. The Agreement shall have been terminated pursuant to clauses (b), (c), (d) or (f) of Section 9.01. ARTICLE II THE MERGER SECTION 2.01. Effective Time of the Merger. Subject to the provisions of this Agreement, a certificate of merger (the "Certificate of Merger") shall be duly prepared, executed and acknowledged by the Company and thereafter delivered to the Department of Consumer and Industry Services of the State of Michigan ("Bureau") for filing, as provided in the MBCA, as soon as practicable on or after the Closing Date (as defined below). The Merger shall become effective upon the filing of the Certificate of Merger with the Bureau or at such time thereafter as is agreed to between Parent and the Company and provided in the Certificate of Merger (the "Effective Time"). SECTION 2.02. Closing. The closing of the Merger (the "Closing") will take place at 9:00 a.m., Detroit time, as soon as practicable but no later than the third business day after all of the conditions set forth in Section 8.01 have been satisfied or waived (provided that the other closing conditions set forth in Article VIII have been met or waived as provided in Article VIII at or prior to the Closing); or such other date and time as shall be determined by the parties to be mutually satisfactory. The date of Closing determined pursuant to the above is referred to herein as the "Closing Date". The Closing shall take place at the offices of Dykema Gossett PLLC, 400 Renaissance Center, Detroit, Michigan, unless another place is agreed to by the parties hereto. SECTION 2.03. Effect of the Merger. Subject to the terms and conditions of this Agreement, at the Effective Time, Sub shall be merged with and into the Company (the "Merger") and Company shall continue as the surviving corporation (the Company is sometimes referred to herein as the "Surviving Corporation"). The Merger shall have the effects set forth in Section 724 of the MBCA. 4 SECTION 2.04. Articles of Incorporation and Bylaws. (a) The articles of incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the articles of incorporation of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. (b) The bylaws of the Company as in effect at the Effective Time shall be the bylaws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. SECTION 2.05. Directors. The directors of Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. SECTION 2.06. Officers. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. ARTICLE III CONVERSION OR CANCELLATION OF SECURITIES SECTION 3.01. Conversion or Cancellation of Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of Common Stock, no par value, of the Company (the "Company Common Stock") or capital stock of Sub: (a) Capital Stock of Sub. Each issued and outstanding share of the capital stock of Sub shall be converted into and become the same number of shares of fully paid and nonassessable shares of common stock of the Surviving Corporation. (b) Cancellation of Parent-Owned Stock. All shares of Company Common Stock that are owned by Parent shall be canceled and retired and shall cease to exist and no consideration shall be delivered in exchange therefor. (c) Conversion of Company Common Stock. Each share of Company Common Stock issued and outstanding (other than shares to be canceled in accordance with Section 3.01(b)) shall be converted into the right to receive $29.00 per share (the "Merger Consideration") in cash without interest. As of the Effective Time, all such shares shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration without interest. 5 (d) Options to Acquire Shares of Company Stock. At the Effective Time, each outstanding option to acquire shares of Company Common Stock (a "Company Option") shall become immediately exercisable in full, to the extent such option has not previously been exercised, and shall be converted into the right to receive in full settlement thereof, from the Company for each share of Company Common Stock for which such Company Option is exercisable, an amount in cash equal to the excess of the Merger Consideration over the per share exercise price of such option, without interest (such amount being hereinafter referred to as the "Option Consideration"). The surrender of a Company Option shall be deemed a release of any and all rights the holder had or may have had in respect of such option. SECTION 3.02. Exchange of Certificates. (a) Paying Agent. As soon as practicable following the approval by shareholders of this Agreement contemplated by Section 4.07, the Company shall designate a bank or trust company to act as paying agent in the Offer and the Merger (the "Paying Agent"), and the Company shall make available, or cause to made available, to the Paying Agent funds in amounts and at the times necessary for the payment of the consideration to be paid in the Offer pursuant to Section 1.01, and the Merger Consideration and Option Consideration pursuant to Sections 3.01(c) and 3.01(d), it being understood that any and all interest earned on funds made available to the Paying Agent pursuant to this Agreement shall be turned over to, or at the direction of, the Company. Such funds shall be invested by the Paying Agent as directed by the Company, provided that such investments shall be obligations of or guaranteed by the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody's Investors Service, Inc. or Standard & Poor's Rating Services, respectively, or in deposit accounts, certificates of deposit, bank repurchase or reverse repurchase agreements or banker's acceptances of, or Eurodollar time deposits purchased from, commercial banks with capital exceeding $250 million (based on the most recent financial statements of such bank which are then publicly available at the SEC or otherwise). (b) Exchange Procedure. As soon as reasonably practicable after the Effective Time, the Paying Agent shall mail to each holder of record (other than the Parent) of a certificate or certificates which immediately prior to the Effective Time represented shares of Company Common Stock (the "Certificates") and to each holder of Company Options at the Effective Time (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in a form and have such other provisions as the Company may specify) and (ii) instructions for use in effecting the surrender of the Certificates and Company Options in exchange for the Merger Consideration or Option Consideration, as applicable. Upon surrender of a Certificate or Company Option for cancellation to the Paying Agent or to such other agent or agents as may be appointed by the Company, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Paying Agent, the holder of such Certificate or Company Option, as the case may be, shall be entitled to receive in exchange therefor the amount of cash into which the shares 6 theretofore represented by such Certificate or Company Option, as the case may be, shall have been converted pursuant to Section 3.01, and the Certificate or Company Option, as the case may be, so surrendered shall forthwith be canceled. In the event of a transfer of ownership of shares that is not registered in the transfer records of the Company, payment may be made to a person other than the person in whose name the Certificate so surrendered is registered, if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of such Certificate or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 3.02, each Certificate and Company Option shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration or Option Consideration, respectively, without interest. No interest will be paid or will accrue on the Merger Consideration or Option Consideration. (c) Return of Funds. At any time following six months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest and other income received with respect thereto) which has been made available to the Paying Agent and which have not been disbursed to holders of Certificates or Company Options, as the case may be, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the Merger Consideration or the Option Consideration, as the case may be, payable upon due surrender of their Certificates or Company Options, as the case may be. (d) No Further Ownership Rights in Company Common Stock or Company Options. All cash paid upon the surrender of Certificates or Company Options in accordance with the terms of this Article III shall be deemed to have been paid in full satisfaction of all rights pertaining to (i) the shares of Company Common Stock theretofore represented by such Certificates or (ii) the Company Options, as the case may be. At the Effective Time, the stock transfer books of the Company shall be closed, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates or Company Options are presented to the Surviving Corporation or the Paying Agent for any reason, they shall be canceled and exchanged as provided in this Article III. (e) No Liability. None of Parent, Sub, the Company, the Surviving Corporation or the Paying Agent shall be liable to any person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Sub as follows: 7 SECTION 4.01. Organization. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and corporate authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and governmental approvals would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole. The Company and each of its Subsidiaries is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not in the aggregate have a material adverse effect on the Company and its Subsidiaries, taken as a whole. As used in this Agreement, "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which held by such party or any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries. SECTION 4.02. Capitalization. As of the close of business on the date immediately preceding the date hereof, the authorized capital stock of the Company consists of (i) 10,000,000 shares of Company Common Stock, of which 6,683,563 shares are issued and outstanding and (ii) 120,000 shares of Company Common Stock are reserved for issuance upon exercise of the Company Options, all of which were granted under the Company's Stock Compensation Plan (the "Company Stock Plan"). All of the outstanding shares of Company Common Stock are, and all shares which may be issued pursuant to the Company Options will be, when issued in accordance with the terms thereof, duly authorized, validly issued, fully paid and nonassessable and free of any preemptive rights in respect thereto. As of the date hereof, no bonds, debentures, notes or other indebtedness convertible into securities having the right to vote ("Convertible Debt") of the Company are issued or outstanding. Except as set forth above, as of the date hereof, there are no existing options, warrants, calls, subscriptions or other rights or other agreements or commitments of any character relating to the issued or unissued capital stock or Convertible Debt of the Company or any of its Subsidiaries or obligating the Company or any of its Subsidiaries to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Convertible Debt of, or other equity interests in, the Company or of any of its Subsidiaries or securities convertible into or exchangeable for such shares or equity interests or obligating the Company or any of its Subsidiaries to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement or commitment. As of the date hereof, there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem 8 or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries other than this Agreement. SECTION 4.03. Authority. The Company has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby (subject, with respect to the Merger, to the approval and adoption of this Agreement by the affirmative vote of not less than a majority of the outstanding shares of Company Common Stock and the affirmative vote of a majority of the outstanding shares of Company Common Stock owned by the Independent Shareholders. The "Independent Shareholders" are the shareholders of the Company Common Stock other than ProAssurance Corporation ("ProAssurance") and persons who are "affiliates" or "associates" of ProAssurance, as those terms are used in Article VIII of the Company's articles of incorporation). The execution, delivery and performance of this Agreement and the consummation of the Merger and of the other transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than as aforesaid). This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that (a) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (b) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. SECTION 4.04. Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act, state insurance laws and the MBCA, neither the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby nor compliance by the Company with any of the provisions hereof will (a) violate any provision of the articles of incorporation or bylaws of the Company or of any of its Subsidiaries, (b) require any filing with, or permit, authorization, consent or approval of, any Governmental Entity (except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings would not have a material adverse effect on the Company and its Subsidiaries taken as a whole or a material adverse effect on the ability of the Company to consummate the transactions contemplated by this Agreement), (c) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company, any of its Subsidiaries or any of their properties or assets, except in the case of (c) or (d) for violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect 9 on the Company and its Subsidiaries, taken as a whole or a material adverse effect on the ability of the Company to consummate the transactions contemplated by this Agreement. SECTION 4.05. SEC Reports and Financial Statements. Each of the Company and its Subsidiaries has filed with the SEC and has heretofore made available to Parent true and complete copies of, all forms, reports, schedules, statements and other documents required to be filed by it since July 1, 1999, under the Exchange Act or the Securities Act of 1933, as amended (the "Securities Act") (as such documents have been amended since the time of their filing, collectively, the "Company SEC Documents"). The Company SEC Documents, including without limitation any financial statements or schedules included therein, at the time filed, (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. The financial statements of the Company included in the Company SEC Documents comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of the unaudited statements, to normal, recurring audit adjustments) the consolidated financial position of the Company and its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended. SECTION 4.06. Opinion of Financial Advisor. The Exploratory Committee of the Company's Board of Directors has received the opinion of Raymond James & Associates, Inc., dated June 18, 2002, to the effect that, as of such date, the consideration to be received pursuant to the Offer and the Merger by the Independent Shareholders is fair to the Independent Shareholders from a financial point of view. SECTION 4.07. Vote Required. The affirmative vote of the holders of both (a) a majority of the outstanding shares of Company Common Stock entitled to vote thereon and (b) a majority of the outstanding shares of Company Common Stock held by the Independent Shareholders are the only votes of the holders of any class or series of the Company's capital stock necessary to approve this Agreement and the transactions contemplated hereby. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB Parent and Sub represent and warrant, jointly and severally, to the Company as follows: SECTION 5.01. Organization. Each of Parent and Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its 10 incorporation and has all requisite corporate power and corporate authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as now being conducted except where the failure to be so organized, existing and in good standing or to have such power, authority, and governmental approvals would not have a material adverse effect on the ability of Parent and Sub to consummate the transactions contemplated by this Agreement. Parent is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not in the aggregate have a material adverse effect on the ability of Parent and Sub to consummate the transactions contemplated by this Agreement. SECTION 5.02. Authority. Parent and Sub have all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the Merger and of the other transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Sub, and no other corporate proceedings on the part of Parent and Sub are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by Parent and Sub, as the case may be, and constitutes a valid and binding obligation of each of Parent and Sub, as the case may be, enforceable against Parent and Sub in accordance with its respective terms, except that (a) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (b) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of court before which any proceeding therefor may be brought. SECTION 5.03. Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act, state insurance laws and the MBCA, neither the execution, delivery or performance of this Agreement by Parent and Sub nor the consummation by Parent and Sub of the transactions contemplated hereby nor compliance by Parent and Sub with any of the provisions hereof will (a) violate any provision of the respective articles of incorporation or bylaws of Parent and Sub, (b) require any filing with, or permit, authorization, consent or approval of, any Governmental Entity (except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings would not have a material adverse effect on the ability of Parent and Sub to consummate the transactions contemplated by this Agreement), (c) except for the ProAssurance Credit Agreement, result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, lease, contract, agreement or other instrument or obligation to which Parent or any of its Affiliates is a party or by which any of them or any of their properties or assets may be bound or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Parent, any of its Affiliates or any of their properties or assets, except in the 11 case of (c) and (d) for violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on the ability of Parent and Sub to consummate the transactions contemplated by this Agreement. As used in this Agreement, an "Affiliate" of an entity is any person or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with the entity. SECTION 5.04. Information. None of the information supplied by Parent or Sub in writing specifically for inclusion or incorporation by reference in (i) the Company's Proxy Statement for the annual meeting of its shareholders at which the Merger will be considered (the "Proxy Statement"), (ii) the Schedule 13E-3 or (iii) the Other Filings will, at the respective dates filed with the SEC or such other Governmental Entity, and with respect to the Proxy Statement, on the date mailed to shareholders and at the time of the meeting of the Company's shareholders to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. SECTION 5.05. Ownership and Interim Operations of Sub. The only class of capital stock of Sub authorized for issuance is common stock. There are 100 shares of Sub common stock issued and outstanding, all of which is directly owned by Parent. Sub was formed solely for the purpose of engaging in the Merger, has no assets or liabilities and has engaged in no other business activities. SECTION 5.06. Ownership of Common Stock. Parent owns, beneficially and of record, 5,610,045 shares of Company Common Stock. No "affiliate" or "associate" (as those terms are used in Article VIII of the Company's articles of incorporation) of ProAssurance, other than Parent and persons who are directors and officers of the Company and its Subsidiaries, own, beneficially or of record, any Company Common Stock. ARTICLE VI COVENANTS SECTION 6.01. Operate in Ordinary Course. During the period from the date of this Agreement and continuing until the Effective Time, the Company agrees that (except as expressly contemplated or permitted by this Agreement, or to the extent that Parent shall otherwise consent in writing) (a) the Company and its Subsidiaries shall carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and use all commercially reasonable efforts to preserve intact their present business organizations, keep available the services of their present officers and employees and preserve their relationships with customers, suppliers and others having business dealings with them to the end that their goodwill and ongoing business shall not be impaired in any material respect at the Effective Time; and (b) the Company shall not, nor shall it permit any of its Subsidiaries to, issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock of 12 any class or any securities convertible into, or any rights, warrants, calls, subscriptions or options to acquire, any such shares or convertible securities, other than (i) the issuance of shares of Company Common Stock upon the exercise of Company Options outstanding on the date hereof and (ii) the issuance by a wholly owned Subsidiary of its capital stock to its parent. SECTION 6.02. Fiduciary Out. (a) Except as set forth in this Section 6.02(a), neither the Board of Directors of the Company nor any committee thereof shall (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Parent, the approval or recommendation by such Board of Directors or committee of this Agreement, (ii) approve or recommend, or propose to approve or recommend, any Takeover Proposal, or (iii) cause the Company to enter into any agreement with respect to any Takeover Proposal. Notwithstanding the foregoing, in the event that prior to the Effective Time the Board of Directors of the Company or a committee thereof determines in good faith, after consultation with counsel, that it is necessary to do so in order to comply with its fiduciary duties to the Company's shareholders, the Board of Directors or such committee may withdraw or modify its approval or recommendation of this Agreement, approve or recommend a Takeover Proposal or cause the Company to enter into an agreement with respect to a Takeover Proposal. In evaluating any unsolicited Takeover Proposal, the Company's Board of Directors or any committee thereof may consider any statement or indication from or on behalf of Parent that it will not agree to such Takeover Proposal, provided that such fact shall not prevent the Company's Board of Directors from taking any action permitted pursuant to this Section 6.02(a). For purposes of this Agreement, "Takeover Proposal" means any inquiry, proposal or offer from any person (other than Parent or any of its Affiliates) relating to any direct or indirect acquisition or purchase of a substantial amount of assets of the Company or any of its Subsidiaries or of 50% or more of the shares of Company Common Stock, any tender offer or exchange offer that if consummated would result in any person beneficially owning 50% or more of the shares of Company Common Stock, any merger, consolidation, business combination, sale of substantially all the assets, recapitalization, liquidation, dissolution or similar transaction involving the Company, other than the Merger, or any other transaction the consummation of which could reasonably be expected to impede, interfere with, prevent or materially delay the Merger or which would reasonably be expected to dilute materially the benefits to Parent of the transaction contemplated hereby. (b) The Company and Parent shall each immediately advise the other orally and in writing of any request for information or of any Takeover Proposal, or any inquiry with respect to or which could lead to any Takeover Proposal, received by them or any of their Affiliates and shall (i) describe the material terms and conditions of such request, Takeover Proposal or inquiry and the identity of the person making such request, Takeover Proposal or inquiry and (ii) immediately deliver to the other a copy of any such request, Takeover Proposal or inquiry made in writing. The Company and Parent will each keep the other fully informed of the status and details (including amendments or proposed amendments) of any such request, Takeover Proposal or inquiry. 13 (c) Nothing contained in this Section 6.02 shall prohibit the Company from taking and disclosing to its shareholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Company's shareholders if, in the opinion of the Board of Directors of the Company, after consultation with counsel, failure so to disclose would be inconsistent with its fiduciary duties to the Company's shareholders; provided, however, that neither the Company nor its Board of Directors nor any committee thereof shall, except as permitted by Section 6.02(a), withdraw or modify, or propose to withdraw or modify, its position with respect to the Merger or approve or recommend, or propose to approve or recommend, a Takeover Proposal. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.01. Preparation of the Proxy Statement and Schedule 13E-3. The Company shall promptly prepare and file with the SEC preliminary and final versions of the Proxy Statement and a Schedule 13E-3 relating to the Merger (the "Schedule 13E-3"). The Company shall use its commercially reasonable efforts to have the Proxy Statement cleared by the SEC and mailed to its shareholders at the earliest practicable date. The Company shall cooperate and consult with Parent with respect to the Proxy Statement and the Schedule 13E-3 and any related SEC comments. The Company covenants that (a) the Proxy Statement and the Schedule 13E-3 will comply in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder and (b) as of the date of mailing of the Proxy Statement and at the time of the meeting of the Company's shareholders to be held in connection with the Merger, the Proxy Statement and the Schedule 13E-3 will not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading; provided that no representation is made by the Company with respect to any information included in the Proxy Statement and the Schedule 13E-3 regarding Parent or its Subsidiaries supplied by Parent in writing specifically for inclusion in the Proxy Statement and the Schedule 13E-3. SECTION 7.02. Access to Information. The Company shall (and shall cause each of its Subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of Parent, access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, the Company shall (and shall cause each of its Subsidiaries to) furnish promptly to Parent (a) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws and (b) all other information concerning its business, properties and personnel as Parent may reasonably request. SECTION 7.03. Shareholders Meeting. The Company shall call a meeting of its shareholders for the purpose of voting upon this Agreement and the Merger. Subject to Section 6.02(a), the Company will, through its Board of Directors, recommend to its 14 shareholders approval of this Agreement and shall use its commercially reasonable efforts to hold such meeting as soon as reasonably practicable after the date hereof. SECTION 7.04. Legal Conditions to Merger. Each of the Company, Parent and Sub will take all commercially reasonable actions necessary to comply promptly with all legal requirements which may be imposed on itself with respect to the Merger (which actions shall include, without limitation, furnishing all information in connection with approvals of or filings with state insurance authorities and any other Governmental Entity) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their Subsidiaries in connection with the Merger. Each of the Company, Parent and Sub will, and will cause its Subsidiaries to, take, or cause to be taken, all commercially reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party, required to be obtained or made by Parent, the Company or any of their Subsidiaries in connection with the Merger or the taking of any action contemplated thereby or by this Agreement, including without limitation, any required waiver, consent or approval under the ProAssurance Credit Agreement. SECTION 7.05. Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. SECTION 7.06. Brokers or Finders. Each of Parent and the Company represents, as to itself and its Affiliates, that, as of the date of this Agreement, no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any brokers' or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement except Raymond James & Associates, Inc., whose fees and expenses will be paid by the Company in accordance with the Company's agreement with such firm (copies of which have been delivered by the Company to Parent prior to the date of this Agreement). Each of Parent and the Company agree to indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any other fees, commissions or expenses asserted by any person on the basis of any act or statement alleged to have been made by such party or its Affiliates. In the event that Parent or any of its Affiliates engages an agent, broker, investment banker, financial advisor or other firm or person entitled to any brokers' or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, Parent agrees to indemnify and hold harmless the Company from and against any and all claims, liabilities or obligations with respect to any such fees, commissions or other expenses. SECTION 7.07. Indemnification; Insurance. (a) For a period of three years from the Effective Time, the Surviving Corporation, shall maintain in its Bylaws the provisions with respect to indemnification set forth in the Company's Bylaws as in effect on the date hereof, which provisions shall not be amended, repealed or otherwise modified for such a period in any manner that 15 would adversely affect the rights thereunder of persons who at the Effective Time were directors, officers, employees or agents of the Company (such persons being third-party beneficiaries of this Section 7.07) with respect to actions and omissions occurring prior to the Effective Time, unless such modification is required by law. (b) For a period of three years from the Effective Time, the Surviving Corporation shall use its commercially reasonable efforts to maintain in effect directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy with respect to actions and omissions occurring prior to the Effective Time on terms no less favorable than the terms of such current insurance coverage. The Surviving Corporation may provide such coverage through ProAssurance's directors and officers' liability insurance policy, provided such policy provides substantially the same coverage as the terms of the Company's current insurance coverage. Notwithstanding the foregoing, if the directors' and officers' liability insurance referred to in this Section 7.07(b) is unavailable for the Maximum D&O Premium (as defined below), the Surviving Corporation shall obtain as much insurance as can be obtained for a premium not in excess (on an annualized basis) of the Maximum D&O Premium. The Company will give to any director and officer covered by this Section 7.07, 30 days prior written notice of any reduction on coverage or cancellation of the directors' and officers' liability insurance referred to in this Section 7.07(b). For purposes of this Section 7.07(b), the "Maximum D&O Premium" shall be an amount not greater than 150% of the premium paid by the Company (on an annualized basis) for directors' and officers' liability insurance during the period from May 24, 2002 to the Effective Time. SECTION 7.08. Additional Agreements. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use its commercially reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including cooperating fully with the other party, providing information, making all necessary filings under state laws, refraining from taking any action that would cause any of the representations and warranties not to be true and correct in all material respects at the Expiration Time and the Effective Time and using their commercially reasonable efforts to have any restraining order, injunction or other prohibition preventing the consummation of the Offer or the Merger vacated. In case at any time after the Expiration Time or the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement including without limitation, to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either the Company or Sub, the proper officers and directors of each party to this Agreement shall take all such necessary action. SECTION 7.09. Transfer Taxes. Parent or Surviving Corporation agrees, subject to consummation of the Merger, to pay, without deduction or withholding from any amount payable to the holders of Company Common Stock, any Michigan or local real property transfer taxes and any other similar taxes that become payable by the shareholders of the Company, the Company or the Surviving Corporation in connection 16 with the Merger. The Company and Parent shall cooperate in the preparation, execution and filing of any returns, questionnaires, applications and other documents related to such taxes required or permitted to be filed on or before the Effective Time. SECTION 7.10. Subsequent Sale of the Company. Parent hereby represents, as of the date of this Agreement and as of the Closing Date, that neither it nor ProAssurance have any present intention of selling or otherwise disposing of the Company Common Stock owned by Parent or selling or otherwise disposing of all or substantially all of the Company's assets. Parent agrees, for itself and ProAssurance, that if, prior to the one-year anniversary of the Expiration Time of the Offer, either of them, directly or indirectly, sells or otherwise disposes, or agrees to sell or otherwise dispose, of the shares of capital stock of the Surviving Corporation or any of the Surviving Corporation's Subsidiaries beneficially owned by them following the Offer or Merger, or all or substantially all of the assets of the Surviving Corporation and its Subsidiaries, other than to ProAssurance or a Subsidiary of ProAssurance, for consideration valued (in the reasonable discretion of Parent's board of directors) at more than the sum of (a) $29.00 multiplied by the number of shares outstanding immediately prior to the Expiration Time, plus (b) the aggregate Option Consideration paid or to be paid based on the number of shares subject to Company Options outstanding immediately after the Expiration Time, then they will pay, to the Paying Agent, or a substitute agent (which shall be a bank or trust company) mutually satisfactory to Parent and the Company, for distribution on a pro rata basis to the shareholders whose shares were acquired by the Company in the Offer and, if the Effective Time has occurred, (x) the shareholders of record of Company Common Stock other than Parent and ProAssurance (and its Subsidiaries) at the Effective Time and (y) the holders of Company Options at the Effective Time, an amount determined as follows: (A) If the Effective Time has not occurred, the amount payable shall be equal to (1) the amount by which the value of the consideration received by Parent and its Affiliates in such sale or disposition (as determined by Parent's board of directors in its reasonable discretion) exceeds the sum of clauses (a) and (b), multiplied by (2) the ratio of (i) the number of shares acquired by the Company pursuant to the Offer divided by (ii) the sum of the number of shares acquired by the Company pursuant to the Offer plus the number of shares outstanding immediately prior to the completion of such sale or disposition plus the number of shares subject to Company Options immediately prior to the completion of such sale or disposition. (B) If the Effective Time has occurred, the amount payable shall be equal to (1) the amount by which the value of the consideration received by Parent and its Affiliates in such sale or disposition (as determined by Parent's board of directors in its reasonable discretion) exceeds the sum of clauses (a) and (b), multiplied by (2) the ratio of (i) the sum of the number of shares acquired by the Company pursuant to the Offer plus the number of shares outstanding, other than those beneficially owned by Parent or ProAssurance, at the Effective Time plus the number of shares subject to Company Options at the Effective Time, divided by (ii) the sum of the 17 number of shares acquired by the Company pursuant to the Offer plus the number of shares outstanding at the Effective Time plus the number of shares subject to Company Options at the Effective Time. The shareholders and Company Option holders who are entitled to such payment pursuant to the foregoing provisions are expressly intended to be third-party beneficiaries of the provisions of this Section 7.10. SECTION 7.11. Rating Confirmation. The Company and Parent shall, and shall cause their Affiliates to, seek and to use their commercially reasonable efforts to obtain confirmation from A. M. Best Company and Standard & Poors that the consummation of the Offer and Merger will not impair the current A. M. Best Company and Standard & Poors ratings of the Company or any of the other insurance Subsidiaries of ProAssurance. SECTION 7.12. Other Filings. The Company, Parent and Sub, as the case may be, shall promptly file any other filings required under the Exchange Act or any other applicable law relating to the transactions contemplated herein (the "Other Filings"). Each of the parties hereto shall notify the other parties hereto promptly of the receipt by it of any comments from the SEC or its Staff and of any request of the SEC or any other governmental officials with respect to any Other Filings or for additional information and will supply the other parties hereto with copies of all correspondence between it and its representatives, on the one hand, and the SEC or the members of its Staff or any other governmental officials, on the other hand, and will provide the other parties and their counsel with the opportunity to participate, including by way of discussions with the SEC or its Staff, in the response of such party to such comments with respect to any Other Filings or the transactions contemplated herein. Each of the Company, on the other hand, and Parent and Sub, on the other, shall use its commercially reasonable efforts to obtain and furnish the information required to be included in any Other Filings or the Merger. ARTICLE VIII CONDITIONS SECTION 8.01. Conditions to Each Party's Obligation To Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions: (a) Shareholder Approval. This Agreement shall have been approved and adopted by the affirmative vote of (i) the holders of a majority of the outstanding shares of Company Common Stock as required by the MBCA and (ii) a majority of the outstanding shares owned by the Independent Shareholders as required by the Company's Articles of Incorporation. (b) Other Approvals. (i) The Office of Financial and Insurance Services of the State of Michigan shall have approved the Company's request for exemption from the Form A filing requirement in connection with the Merger and such approval shall be in full force and effect. (ii) The determination by ProAssurance that the transaction contemplated by this Agreement will not result in the breach of the terms of 18 the ProAssurance Credit Agreement or, if ProAssurance determines that such transactions will result in such a breach, the required consent, waiver or approval shall have been obtained in connection with the ProAssurance Credit Agreement and shall be in full force and effect such that the consummation of the Merger and the other transactions contemplated hereby will not result in a default thereunder. (iii) Other than the filing provided for by Section 2.01, all authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity the failure to obtain which would have a material adverse effect on Parent and its Subsidiaries or the Surviving Corporation and its Subsidiaries, in each case taken as a whole, shall have been filed, occurred or been obtained. (c) No Injunctions or Restraints. There shall not be pending or threatened any action or proceeding by or before any court or other Governmental Entity seeking to restrain, prohibit, invalidate or collect damages arising out of the Merger or other transactions hereunder, and there shall be in effect no temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or holding that the Merger Consideration is not adequate. (d) Confirmation of Rating. The Company and the other insurance Subsidiaries of ProAssurance shall not be rated lower than "A-" by A.M. Best Company and Standard & Poors, nor shall the Company or ProAssurance have received notice from A.M. Best Company or Standard & Poors of their intention to lower the rating of the Company or any of the other insurance Subsidiaries of ProAssurance below "A-" after giving effect to the Offer or the Merger. SECTION 8.02. Conditions of Obligations of Parent and Sub. The obligations of Parent and Sub to effect the Merger are subject to the satisfaction of the following conditions unless waived by Parent and Sub: (a) Representations and Warranties. The representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date or except, as to any failure to be true and correct, to the extent that Parent or Sub had knowledge of such failure to be true and correct as of the date hereof) as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement. (b) Performance of Obligations of the Company. The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date. (c) Officer's Certificate. Parent and Sub shall have received a certificate signed by an executive officer of the Company to the effect set forth in paragraphs (a) and (b) of this Section 8.02. 19 SECTION 8.03. Conditions of Obligations of the Company. The obligation of the Company to effect the Merger is subject to the satisfaction of the following conditions unless waived by the Company: (a) Representations and Warranties. The representations and warranties of Parent and Sub set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (except to the extent such representations speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement. (b) Performance of Obligations of Parent and Sub. Parent and Sub shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date. (c) Officer's Certificate. The Company shall have received a certificate signed by an executive officer of each of Parent and Sub to the effect set forth in paragraphs (a) and (b) of this Section 8.03. ARTICLE IX TERMINATION AND AMENDMENT SECTION 9.01. Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with this Agreement by the shareholders of the Company: (a) by mutual consent of Parent and the Company; (b) (i) by either Parent or the Company if there shall have been a material breach of any representation, warranty, covenant or agreement on the part of the other set forth in this Agreement which breach shall not have been cured within two business days following receipt by the breaching party of notice of such breach, or (ii) by either Parent or the Company if any permanent injunction or other order of a court or other competent authority preventing the consummation of the Merger shall have become final and non-appealable; (c) by either Parent or the Company if the Company's Board of Directors takes any of the actions permitted by Section 6.02(a); provided the Company may so terminate only if it has complied with all the provisions of Section 6.02(b); (d) by either Parent or the Company if the Offer or Merger shall not have been consummated on or before December 31, 2002; (e) by either Parent or the Company if the required approval of the shareholders of the Company shall not have been obtained by reason of the failure to obtain the required vote at a duly held meeting of shareholders or at any adjournment thereof; or 20 (f) by either Parent or the Company, if any of the conditions to such party's obligation to consummate the transactions contemplated in this Agreement shall have become impossible to satisfy if, but only if, such party has used its commercially reasonable efforts and acted in good faith in attempting to satisfy all such conditions and if such party is not then in breach or default in any material respect of this Agreement. SECTION 9.02. Effect of Termination. In the event of a termination of this Agreement by either the Company or Parent as provided in Section 9.01 prior to the purchase of the shares of Common Stock tendered in the Offer, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Sub or the Company or their respective officers or directors, except with respect to any breach of any provision of this Agreement prior to such termination and except that the last sentence of Section 7.02 and all of Sections 7.05 and 7.06 shall continue in effect. In the event of a termination of this Agreement after the purchase of the shares of Common Stock tendered in the Offer but before the Effective Time of the Merger, such purchase shall not be rescinded or otherwise affected, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Sub or the Company or their respective officers or directors, except with respect to any breach of any provision of this Agreement prior to such termination and except that Sections 7.02, 7.05, 7.06 and 7.10 shall continue in effect to the extent applicable. SECTION 9.03. Amendment. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the shareholders of the Company, but, after any such approval, no amendment shall be made which by law requires further approval by such shareholders without such further approval in accordance with Section 8.01(a). This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. SECTION 9.04. Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. ARTICLE X MISCELLANEOUS SECTION 10.01. Nonsurvival of Representations, Warranties and Agreements. None of the representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for the agreements contained in Sections 3.01, 3.02, 7.05, 7.06, 7.07, 7.08, 7.09, 7.10 and this Section 10.01. 21 SECTION 10.02. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or Sub, to ProNational Insurance Company 2600 Professionals Drive P.O. Box 150 Okemos, Michigan 48805-0150 Attention: President Telecopy No.: (517) 349-8977 with a copy to: Burr & Forman LLP 420 North 20th Street, Suite 3100 Birmingham, Alabama 35203 Attention: Jack P. Stephenson, Jr. Telecopy No.: (205) 458-5100 (b) if to the Company, to Meemic Holdings, Inc. 691 N. Squirrel Road Suite 100 Auburn Hills, Michigan 48326-2849 Attention: President Telecopy No.: (248) 373-5700 with a copy to Dykema Gossett PLLC 400 Renaissance Center Detroit, Michigan 48243-1668 Attention: Mark A. Metz, Esq. Telecopy No.: (313) 568-6915 SECTION 10.03. Entire Agreement; No Third Party Beneficiaries; Rights of Ownership. This Agreement (including the documents and the instruments referred to herein) (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (b) except as provided in Sections 7.07 and 7.10, are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. SECTION 10.04. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Michigan without regard to applicable conflicts of law principles. 22 SECTION 10.05. Publicity. Except as otherwise required by law or the rules of the Nasdaq Stock Market or the New York Stock Exchange, for so long as this Agreement is in effect, neither the Company nor Parent shall issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld. SECTION 10.06. Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Sub may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent or to any direct or indirect wholly owned Subsidiary of Parent. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. SECTION 10.07. Definitions. The following defined terms used in this Agreement are defined in the sections set forth below:

Definitions. Section No. - ----------- ----------- Affiliates ................................................. 5.03 Agreement .................................................. Preamble Bureau ..................................................... 2.01 Certificate of Merger ...................................... 2.01 Certificates ............................................... 3.02(b) Closing .................................................... 2.02 Closing Date ............................................... 2.02 Company .................................................... Preamble Company Common Stock ....................................... 3.01 Company's Financial Advisor ................................ 1.02(b) Company Option ............................................. 3.01(d) Company Stock Plan ......................................... 4.02 Company SEC Documents ...................................... 4.05 Convertible Debt ........................................... 4.02 Effective Time ............................................. 2.01 Exchange Act ............................................... 1.01(a) Expiration Time ............................................ 1.1 (a) Governmental Entity ........................................ 1.02(a) Independent Shareholders ................................... 4.03 Maximum D&O Premium ........................................ 7.07(b) MBCA ....................................................... Preamble Merger ..................................................... 2.03 Merger Consideration ....................................... 3.01(c) Minimum Condition .......................................... Annex 1 Offer ...................................................... Preamble Offer Documents ............................................ 1.01(a)

23 Offer Price ................................................ 1.01(a) Option Consideration ....................................... 3.01(d) Other Filings .............................................. 7.12 Parent ..................................................... Preamble Paying Agent ............................................... 3.02(a) ProAssurance ............................................... 4.03 ProAssurance Credit Agreement .............................. 4.03 Proxy Statement ............................................ 5.04 Schedule 13E-3 ............................................. 7.01 SEC ........................................................ 1.01(a) Securities Act ............................................. 4.05 Sub ........................................................ Preamble Subsidiary ................................................. 4.01 Surviving Corporation ...................................... 2.03 Takeover Proposal .......................................... 6.02(a) Tender Offer Conditions .................................... 1.01(a) 24 IN WITNESS WHEREOF Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. PRONATIONAL INSURANCE COMPANY By: /s/ Victor T. Adamo ----------------------- Name: Victor T. Adamo Title: President & CEO MEEMIC MERGER CORP. By: /s/ Victor T. Adamo ----------------------- Name: Victor T. Adamo Title: Incorporator MEEMIC HOLDINGS, INC. By: /s/ Lynn M. Kalinowski ----------------------- Name: Lynn M. Kalinowski Title: President 25 EX-99 4 g77739exv99.txt SECTION 906 CERTIFICATION OF THE CEO AND CFO Exhibit 99 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 period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, A. Derrill Crowe, M.D., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 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 Executive condition and result of operations of the Company. /s/ A. Derrill Crowe, M.D. - -------------------------- A. Derrill Crowe, M.D. Chief Executive Officer August 13, 2002 Exhibit 99 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 period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Howard H. Friedman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 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/Howard H. Friedman - --------------------- Howard H. Friedman Chief Financial Officer August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10

                                                                      EXHIBIT 10


                          AGREEMENT AND PLAN OF MERGER

         AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of July 9,
2002, by and among PRONATIONAL INSURANCE COMPANY, a Michigan insurance company
("Parent"), MEEMIC MERGER CORP., a Michigan corporation and a wholly owned
subsidiary of Parent ("Sub"), and MEEMIC HOLDINGS, INC., a Michigan corporation
(the "Company").

         WHEREAS, upon the terms and subject to the conditions of this
Agreement, including approval of this Agreement by the Company's shareholders,
the Company proposes to make a tender offer to purchase all of the issued and
outstanding shares of Common Stock of the Company other than those held by
ProNational Insurance Company (the "Offer") at a price per share of $29.00, net
to the shareholders in cash;

         WHEREAS, upon the terms and subject to the conditions of this
Agreement, including completion of the Offer, the parties intend for Sub to
merged with and into the Company and that the Company survive such merger as a
wholly owned subsidiary of Parent;

         WHEREAS the Board of Directors and sole shareholder of Sub have
approved this Agreement in accordance with the Michigan Business Corporation Act
(the "MBCA") upon the terms and subject to the conditions set forth herein;

         WHEREAS the Board of Directors of Parent deems it advisable and in the
best interests of its shareholder to consummate, and has approved, this
Agreement;

         WHEREAS the Board of Directors of the Company, upon the recommendation
of the Exploratory Committee of the Board, has unanimously (i) determined that
this Agreement and the transactions contemplated hereby are advisable and in the
best interests of its shareholders, (ii) determined that, based on the written
opinion of the Exploratory Committee's financial advisor, the consideration to
be paid to the Independent Shareholders of the Company in the transactions
contemplated by this Agreement is fair to such Independent Shareholders, (ii)
approved this Agreement and the transactions contemplated hereby and (iii)
resolved, subject to Section 6.02(a) hereof, to recommend to such shareholders
their approval of this Agreement and acceptance of the Offer;

         NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein the
parties hereto agree as follows:

                                   ARTICLE I

                                    THE OFFER

         SECTION 1.01.     The Offer.

                  (a)      Terms of the Offer. Provided that this Agreement
shall not have been terminated in accordance with Article IX and none of the
events set forth in Section 1.02 hereof (the "Tender Offer Conditions") shall
have occurred and be continuing, as promptly as reasonably practicable following
the receipt of the approval of shareholders




of this Agreement described in Section 4.07, but in no event later than 10
business days after the public announcement of the receipt of such approval, the
Company shall (i) commence (within the meaning of the applicable rules under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) the Offer at a
price per share of $29.00, net to the shareholders in cash (the "Offer Price"),
(ii) upon commencement of the Offer, file Schedule TO and all other necessary
documents with the Securities and Exchange Commission (the "SEC") and make all
deliveries, mailings and telephonic notices required by the applicable rules
under the Exchange Act in connection with the Offer (the "Offer Documents") and
(iii) use its commercially reasonable efforts to consummate the Offer, subject
to the terms and conditions thereof. The obligation of the Company to accept for
payment and pay for any Company Common Stock tendered pursuant to the Offer will
be subject to the satisfaction, or waiver by the Company, of the Tender Offer
Conditions. The Offer shall remain open until the close of business on the date
that is 20 business days (as required by Rule 13e-4 under the Exchange Act)
after the commencement of the Offer (the "Expiration Time"), unless the Company
shall have extended the period of time for which the Offer is open pursuant to,
and in accordance with, this Agreement or as may be required by applicable law,
in which event the term "Expiration Time" shall mean the latest time and date as
the Offer, as so extended, may expire. Subject to the terms of the Offer and
this Agreement and the satisfaction of all of the Tender Offer Conditions as of
any Expiration Time, the Company will accept for payment and pay for all Company
Common Stock validly tendered and not validly withdrawn pursuant to the Offer as
soon as practicable after such Expiration Time of the Offer. Notwithstanding the
foregoing and subject to the applicable rules of the SEC and the terms and
conditions of the Offer, the Company expressly reserves the right to delay
payment for Company Common Stock in order to comply in whole or in part with
applicable law. Any such delay shall be effected in compliance with Rule
13e-4(f)(5) under the Exchange Act. The Parent agrees that no Company Common
Stock held by the Parent will be tendered in the Offer. If the payment for
tendered Company Common Stock is to be made to a person other than the person in
whose name the surrendered certificate formerly evidencing such Company Common
Stock is registered on the stock transfer books of the Company, it shall be a
condition of payment that the certificate so surrendered shall be endorsed
properly or otherwise be in proper form for transfer and that the person
requesting such payment shall have paid all transfer and other taxes required by
reason of the payment of the purchase price therefore to a person other than the
registered holder of the certificate surrendered, or shall have established to
the satisfaction of the Company that such taxes either have been paid or are not
applicable.

                  (b)      Revisions to Terms of the Offer. Without the prior
approval of the Company's Board, the Exploratory Committee and the Parent, the
Company shall not (i) reduce the number of shares of Company Common Stock
subject to the Offer, (ii) amend the Offer Price, (iii) extend the Offer if all
of the Tender Offer Conditions have been satisfied or waived, (iv) change the
form of consideration payable in the Offer, (v) amend, modify or add to the
Tender Offer Conditions or (vi) amend any other term of the Offer in a manner
adverse to the Independent Shareholders. Notwithstanding the foregoing, the
Company may, without the consent of the Parent, (A) extend the Offer, if at the
scheduled Expiration Time of the Offer any of the Tender Offer Conditions shall
have not been satisfied or waived, until such time as such conditions are
satisfied or


                                        2

waived, (B) extend the Offer for any period required by any statute, rule,
regulation, interpretation or position of the SEC or any other governmental
entity applicable to the Offer, (C) waive any Tender Offer Condition.

                  (c)      Offer Documents. The Company represents that the
Offer Documents will comply in all material respects with the provisions of
applicable federal securities laws and, on the date filed with the SEC and on
the date first published, sent or given to the Company's shareholders, shall not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading, except that no representation is made by the Company with respect to
information supplied by the Parent or Sub for inclusion in the Offer Documents.
Each of Parent and Sub, on the one hand, and the Company, on the other hand,
agrees promptly to correct any information provided by it for use in the Offer
Documents if and to the extent that it shall have become false or misleading in
any material respect prior to the Expiration Time, and the Company further
agrees to take all steps necessary to cause the Offer Documents as so corrected
to be filed with the SEC and to be disseminated to shareholders of the Company,
in each case, as and to the extent required by applicable federal securities
laws.

         SECTION 1.02.     Tender Offer Conditions. Notwithstanding any other
provisions of the Offer, the Company shall not be required to accept for payment
or, subject to any applicable rules of the SEC, pay for any tendered shares and
may, subject to Section 1.01 and Article IX, terminate or amend the Offer and/or
delay the acceptance of shares for payment if any of the following events shall
occur and be continuing at the Expiration Time:

                  (a)      Regulatory Approval. (i) The Company shall not have
received from the Office of Financial and Insurance Services of the State of
Michigan approval of the Company's request for exemption from the Form A filing
requirement in connection with the Merger and such approval shall be in full
force and effect; or (ii) the Company shall not have received or obtained all
authorizations, consents, orders or approvals of any court, arbitral tribunal,
administrative agency or commission or other governmental or other regulatory
authority or agency (a "Governmental Entity"), the failure to obtain which would
have a material adverse effect on Parent and its Subsidiaries or the Company and
its Subsidiaries, in each case taken as a whole.

                  (b)      Bank Consent. ProAssurance shall have determined that
the transactions contemplated by this Agreement will result in the breach of the
terms of the Credit Agreement, dated May 10, 2001, among ProAssurance,
SouthTrust Bank, Bank of America, N.A. and the lenders named therein (the
"ProAssurance Credit Agreement") and it shall not have received the necessary
consent, waiver or approval, or such consent, waiver or approval shall not be in
full force and effect at the Expiration Time such that the consummation of the
Offer would result in a default thereunder.

                  (c)      No Injunctions or Restraints. There shall be in
effect any temporary restraining order, preliminary or permanent injunction or
other order issued by


                                        3


any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Offer or the Merger or holding that the Offer
Price or the Merger Consideration is not adequate.

                  (d)      Confirmation of Rating. The Company and the other
insurance Subsidiaries of ProAssurance shall be rated lower than "A-" by A.M.
Best Company and Standard & Poors, or shall have received notice from A.M. Best
Company or Standard & Poors of their intention to lower the rating of the
Company or the other insurance Subsidiaries of ProAssurance below "A-" after
giving effect to the Offer or the Merger.

                  (e)      Representations and Warranties. The representations
and warranties of Parent and Sub set forth in this Agreement shall not be true
and correct in all material respects as of the date of this Agreement and
(except to the extent such representations speak as of an earlier date) as of
the Expiration Time as though made on and as of the Expiration Time, except as
otherwise contemplated by this Agreement.

                  (f)      Termination of the Agreement. The Agreement shall
have been terminated pursuant to clauses (b), (c), (d) or (f) of Section 9.01.

                                   ARTICLE II

                                   THE MERGER

         SECTION 2.01.     Effective Time of the Merger. Subject to the
provisions of this Agreement, a certificate of merger (the "Certificate of
Merger") shall be duly prepared, executed and acknowledged by the Company and
thereafter delivered to the Department of Consumer and Industry Services of the
State of Michigan ("Bureau") for filing, as provided in the MBCA, as soon as
practicable on or after the Closing Date (as defined below). The Merger shall
become effective upon the filing of the Certificate of Merger with the Bureau or
at such time thereafter as is agreed to between Parent and the Company and
provided in the Certificate of Merger (the "Effective Time").

         SECTION 2.02.     Closing. The closing of the Merger (the "Closing")
will take place at 9:00 a.m., Detroit time, as soon as practicable but no later
than the third business day after all of the conditions set forth in Section
8.01 have been satisfied or waived (provided that the other closing conditions
set forth in Article VIII have been met or waived as provided in Article VIII at
or prior to the Closing); or such other date and time as shall be determined by
the parties to be mutually satisfactory. The date of Closing determined pursuant
to the above is referred to herein as the "Closing Date". The Closing shall take
place at the offices of Dykema Gossett PLLC, 400 Renaissance Center, Detroit,
Michigan, unless another place is agreed to by the parties hereto.

         SECTION 2.03.     Effect of the Merger. Subject to the terms and
conditions of this Agreement, at the Effective Time, Sub shall be merged with
and into the Company (the "Merger") and Company shall continue as the surviving
corporation (the Company is sometimes referred to herein as the "Surviving
Corporation"). The Merger shall have the effects set forth in Section 724 of the
MBCA.


                                        4


         SECTION 2.04.     Articles of Incorporation and Bylaws.

                  (a)      The articles of incorporation of the Company, as in
effect immediately prior to the Effective Time, shall be the articles of
incorporation of the Surviving Corporation until thereafter changed or amended
as provided therein or by applicable law.

                  (b)      The bylaws of the Company as in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.

         SECTION 2.05.     Directors. The directors of Sub immediately prior to
the Effective Time shall be the directors of the Surviving Corporation until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.

         SECTION 2.06.     Officers. The officers of the Company immediately
prior to the Effective Time shall be the officers of the Surviving Corporation
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.

                                  ARTICLE III

                    CONVERSION OR CANCELLATION OF SECURITIES

         SECTION 3.01.     Conversion or Cancellation of Capital Stock. At the
Effective Time, by virtue of the Merger and without any action on the part of
the holder of any shares of Common Stock, no par value, of the Company (the
"Company Common Stock") or capital stock of Sub:

                  (a)      Capital Stock of Sub. Each issued and outstanding
share of the capital stock of Sub shall be converted into and become the same
number of shares of fully paid and nonassessable shares of common stock of the
Surviving Corporation.

                  (b)      Cancellation of Parent-Owned Stock. All shares of
Company Common Stock that are owned by Parent shall be canceled and retired and
shall cease to exist and no consideration shall be delivered in exchange
therefor.

                  (c)      Conversion of Company Common Stock. Each share of
Company Common Stock issued and outstanding (other than shares to be canceled in
accordance with Section 3.01(b)) shall be converted into the right to receive
$29.00 per share (the "Merger Consideration") in cash without interest. As of
the Effective Time, all such shares shall no longer be outstanding and shall
automatically be canceled and shall cease to exist, and each holder of a
certificate representing any such shares shall cease to have any rights with
respect thereto, except the right to receive the Merger Consideration without
interest.


                                        5


                  (d)      Options to Acquire Shares of Company Stock. At the
Effective Time, each outstanding option to acquire shares of Company Common
Stock (a "Company Option") shall become immediately exercisable in full, to the
extent such option has not previously been exercised, and shall be converted
into the right to receive in full settlement thereof, from the Company for each
share of Company Common Stock for which such Company Option is exercisable, an
amount in cash equal to the excess of the Merger Consideration over the per
share exercise price of such option, without interest (such amount being
hereinafter referred to as the "Option Consideration"). The surrender of a
Company Option shall be deemed a release of any and all rights the holder had or
may have had in respect of such option.

         SECTION 3.02.     Exchange of Certificates.

                  (a)      Paying Agent. As soon as practicable following the
approval by shareholders of this Agreement contemplated by Section 4.07, the
Company shall designate a bank or trust company to act as paying agent in the
Offer and the Merger (the "Paying Agent"), and the Company shall make available,
or cause to made available, to the Paying Agent funds in amounts and at the
times necessary for the payment of the consideration to be paid in the Offer
pursuant to Section 1.01, and the Merger Consideration and Option Consideration
pursuant to Sections 3.01(c) and 3.01(d), it being understood that any and all
interest earned on funds made available to the Paying Agent pursuant to this
Agreement shall be turned over to, or at the direction of, the Company. Such
funds shall be invested by the Paying Agent as directed by the Company, provided
that such investments shall be obligations of or guaranteed by the United States
of America, in commercial paper obligations rated A-1 or P-1 or better by
Moody's Investors Service, Inc. or Standard & Poor's Rating Services,
respectively, or in deposit accounts, certificates of deposit, bank repurchase
or reverse repurchase agreements or banker's acceptances of, or Eurodollar time
deposits purchased from, commercial banks with capital exceeding $250 million
(based on the most recent financial statements of such bank which are then
publicly available at the SEC or otherwise).

                  (b)      Exchange Procedure. As soon as reasonably practicable
after the Effective Time, the Paying Agent shall mail to each holder of record
(other than the Parent) of a certificate or certificates which immediately prior
to the Effective Time represented shares of Company Common Stock (the
"Certificates") and to each holder of Company Options at the Effective Time (i)
a letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon delivery of
the Certificates to the Paying Agent and shall be in a form and have such other
provisions as the Company may specify) and (ii) instructions for use in
effecting the surrender of the Certificates and Company Options in exchange for
the Merger Consideration or Option Consideration, as applicable. Upon surrender
of a Certificate or Company Option for cancellation to the Paying Agent or to
such other agent or agents as may be appointed by the Company, together with
such letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Paying Agent, the holder of such Certificate or
Company Option, as the case may be, shall be entitled to receive in exchange
therefor the amount of cash into which the shares


                                        6


theretofore represented by such Certificate or Company Option, as the case may
be, shall have been converted pursuant to Section 3.01, and the Certificate or
Company Option, as the case may be, so surrendered shall forthwith be canceled.
In the event of a transfer of ownership of shares that is not registered in the
transfer records of the Company, payment may be made to a person other than the
person in whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a person other than the registered
holder of such Certificate or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Until surrendered
as contemplated by this Section 3.02, each Certificate and Company Option shall
be deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration or Option Consideration,
respectively, without interest. No interest will be paid or will accrue on the
Merger Consideration or Option Consideration.

                  (c)      Return of Funds. At any time following six months
after the Effective Time, the Surviving Corporation shall be entitled to require
the Paying Agent to deliver to it any funds (including any interest and other
income received with respect thereto) which has been made available to the
Paying Agent and which have not been disbursed to holders of Certificates or
Company Options, as the case may be, and thereafter such holders shall be
entitled to look to the Surviving Corporation (subject to abandoned property,
escheat or other similar laws) only as general creditors thereof with respect to
the Merger Consideration or the Option Consideration, as the case may be,
payable upon due surrender of their Certificates or Company Options, as the case
may be.

                  (d)      No Further Ownership Rights in Company Common Stock
or Company Options. All cash paid upon the surrender of Certificates or Company
Options in accordance with the terms of this Article III shall be deemed to have
been paid in full satisfaction of all rights pertaining to (i) the shares of
Company Common Stock theretofore represented by such Certificates or (ii) the
Company Options, as the case may be. At the Effective Time, the stock transfer
books of the Company shall be closed, and there shall be no further registration
of transfers on the stock transfer books of the Surviving Corporation of the
shares that were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates or Company Options are presented to the
Surviving Corporation or the Paying Agent for any reason, they shall be canceled
and exchanged as provided in this Article III.

                  (e)      No Liability. None of Parent, Sub, the Company, the
Surviving Corporation or the Paying Agent shall be liable to any person in
respect of any cash delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.

                                   ARTICLE IV

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company represents and warrants to Parent and Sub as follows:


                                        7


         SECTION 4.01.     Organization. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and corporate authority and all necessary governmental
approvals to own, lease and operate its properties and to carry on its business
as now being conducted, except where the failure to be so organized, existing
and in good standing or to have such power, authority and governmental approvals
would not have a material adverse effect on the Company and its Subsidiaries,
taken as a whole. The Company and each of its Subsidiaries is duly qualified or
licensed to do business and in good standing in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary, except where the failure
to be so duly qualified or licensed and in good standing would not in the
aggregate have a material adverse effect on the Company and its Subsidiaries,
taken as a whole. As used in this Agreement, "Subsidiary" means, with respect to
any party, any corporation or other organization, whether incorporated or
unincorporated, of which (i) such party or any other Subsidiary of such party is
a general partner (excluding partnerships, the general partnership interests of
which held by such party or any Subsidiary of such party do not have a majority
of the voting interest in such partnership) or (ii) at least a majority of the
securities or other interests having by their terms ordinary voting power to
elect a majority of the Board of Directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such party or by any one or more of its
Subsidiaries, or by such party and one or more of its Subsidiaries.

         SECTION 4.02.     Capitalization. As of the close of business on the
date immediately preceding the date hereof, the authorized capital stock of the
Company consists of (i) 10,000,000 shares of Company Common Stock, of which
6,683,563 shares are issued and outstanding and (ii) 120,000 shares of Company
Common Stock are reserved for issuance upon exercise of the Company Options, all
of which were granted under the Company's Stock Compensation Plan (the "Company
Stock Plan"). All of the outstanding shares of Company Common Stock are, and all
shares which may be issued pursuant to the Company Options will be, when issued
in accordance with the terms thereof, duly authorized, validly issued, fully
paid and nonassessable and free of any preemptive rights in respect thereto. As
of the date hereof, no bonds, debentures, notes or other indebtedness
convertible into securities having the right to vote ("Convertible Debt") of the
Company are issued or outstanding. Except as set forth above, as of the date
hereof, there are no existing options, warrants, calls, subscriptions or other
rights or other agreements or commitments of any character relating to the
issued or unissued capital stock or Convertible Debt of the Company or any of
its Subsidiaries or obligating the Company or any of its Subsidiaries to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Convertible Debt of, or other equity interests in, the Company
or of any of its Subsidiaries or securities convertible into or exchangeable for
such shares or equity interests or obligating the Company or any of its
Subsidiaries to grant, extend or enter into any such option, warrant, call,
subscription or other right, agreement or commitment. As of the date hereof,
there are no outstanding contractual obligations of the Company or any of its
Subsidiaries to repurchase, redeem


                                        8


or otherwise acquire any shares of capital stock of the Company or any of its
Subsidiaries other than this Agreement.

         SECTION 4.03.     Authority. The Company has the requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby (subject, with respect to the Merger, to the
approval and adoption of this Agreement by the affirmative vote of not less than
a majority of the outstanding shares of Company Common Stock and the affirmative
vote of a majority of the outstanding shares of Company Common Stock owned by
the Independent Shareholders. The "Independent Shareholders" are the
shareholders of the Company Common Stock other than ProAssurance Corporation
("ProAssurance") and persons who are "affiliates" or "associates" of
ProAssurance, as those terms are used in Article VIII of the Company's articles
of incorporation). The execution, delivery and performance of this Agreement and
the consummation of the Merger and of the other transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of the
Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions so
contemplated (other than as aforesaid). This Agreement has been duly executed
and delivered by the Company and constitutes a valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except that (a) such enforcement may be subject to applicable bankruptcy,
insolvency or other similar laws, now or hereafter in effect, affecting
creditors' rights generally, and (b) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.

         SECTION 4.04.     Consents and Approvals; No Violations. Except for
filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Exchange Act, state insurance
laws and the MBCA, neither the execution, delivery or performance of this
Agreement by the Company nor the consummation by the Company of the transactions
contemplated hereby nor compliance by the Company with any of the provisions
hereof will (a) violate any provision of the articles of incorporation or bylaws
of the Company or of any of its Subsidiaries, (b) require any filing with, or
permit, authorization, consent or approval of, any Governmental Entity (except
where the failure to obtain such permits, authorizations, consents or approvals
or to make such filings would not have a material adverse effect on the Company
and its Subsidiaries taken as a whole or a material adverse effect on the
ability of the Company to consummate the transactions contemplated by this
Agreement), (c) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument or obligation to which the
Company or any of its Subsidiaries is a party or by which any of them or any of
their properties or assets may be bound or (d) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company, any
of its Subsidiaries or any of their properties or assets, except in the case of
(c) or (d) for violations, breaches or defaults which would not, individually or
in the aggregate, have a material adverse effect


                                        9


on the Company and its Subsidiaries, taken as a whole or a material adverse
effect on the ability of the Company to consummate the transactions contemplated
by this Agreement.

         SECTION 4.05.     SEC Reports and Financial Statements. Each of the
Company and its Subsidiaries has filed with the SEC and has heretofore made
available to Parent true and complete copies of, all forms, reports, schedules,
statements and other documents required to be filed by it since July 1, 1999,
under the Exchange Act or the Securities Act of 1933, as amended (the
"Securities Act") (as such documents have been amended since the time of their
filing, collectively, the "Company SEC Documents"). The Company SEC Documents,
including without limitation any financial statements or schedules included
therein, at the time filed, (a) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading and (b) complied in all material
respects with the applicable requirements of the Exchange Act and the Securities
Act, as the case may be, and the applicable rules and regulations of the SEC
thereunder. The financial statements of the Company included in the Company SEC
Documents comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present
(subject, in the case of the unaudited statements, to normal, recurring audit
adjustments) the consolidated financial position of the Company and its
consolidated Subsidiaries as at the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended.

         SECTION 4.06.     Opinion of Financial Advisor. The Exploratory
Committee of the Company's Board of Directors has received the opinion of
Raymond James & Associates, Inc., dated June 18, 2002, to the effect that, as of
such date, the consideration to be received pursuant to the Offer and the Merger
by the Independent Shareholders is fair to the Independent Shareholders from a
financial point of view.

         SECTION 4.07.     Vote Required. The affirmative vote of the holders of
both (a) a majority of the outstanding shares of Company Common Stock entitled
to vote thereon and (b) a majority of the outstanding shares of Company Common
Stock held by the Independent Shareholders are the only votes of the holders of
any class or series of the Company's capital stock necessary to approve this
Agreement and the transactions contemplated hereby.

                                   ARTICLE V

                REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB

         Parent and Sub represent and warrant, jointly and severally, to the
Company as follows:

         SECTION 5.01.     Organization. Each of Parent and Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its


                                       10


incorporation and has all requisite corporate power and corporate authority and
all necessary governmental approvals to own, lease and operate its properties
and to carry on its business as now being conducted except where the failure to
be so organized, existing and in good standing or to have such power, authority,
and governmental approvals would not have a material adverse effect on the
ability of Parent and Sub to consummate the transactions contemplated by this
Agreement. Parent is duly qualified or licensed to do business and in good
standing in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing would not in the aggregate have a material adverse
effect on the ability of Parent and Sub to consummate the transactions
contemplated by this Agreement.

         SECTION 5.02.     Authority. Parent and Sub have all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement and the consummation of the Merger and of the
other transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Parent and Sub, and no other corporate
proceedings on the part of Parent and Sub are necessary to authorize this
Agreement or to consummate the transactions so contemplated. This Agreement has
been duly executed and delivered by Parent and Sub, as the case may be, and
constitutes a valid and binding obligation of each of Parent and Sub, as the
case may be, enforceable against Parent and Sub in accordance with its
respective terms, except that (a) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (b) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of court before which any proceeding
therefor may be brought.

         SECTION 5.03.     Consents and Approvals; No Violations. Except for
filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Exchange Act, state insurance
laws and the MBCA, neither the execution, delivery or performance of this
Agreement by Parent and Sub nor the consummation by Parent and Sub of the
transactions contemplated hereby nor compliance by Parent and Sub with any of
the provisions hereof will (a) violate any provision of the respective articles
of incorporation or bylaws of Parent and Sub, (b) require any filing with, or
permit, authorization, consent or approval of, any Governmental Entity (except
where the failure to obtain such permits, authorizations, consents or approvals
or to make such filings would not have a material adverse effect on the ability
of Parent and Sub to consummate the transactions contemplated by this
Agreement), (c) except for the ProAssurance Credit Agreement, result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation,
or acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, lease, contract, agreement or other
instrument or obligation to which Parent or any of its Affiliates is a party or
by which any of them or any of their properties or assets may be bound or (d)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Parent, any of its Affiliates or any of their properties or
assets, except in the


                                       11


case of (c) and (d) for violations, breaches or defaults which would not,
individually or in the aggregate, have a material adverse effect on the ability
of Parent and Sub to consummate the transactions contemplated by this Agreement.
As used in this Agreement, an "Affiliate" of an entity is any person or entity
that directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with the entity.

         SECTION 5.04.     Information. None of the information supplied by
Parent or Sub in writing specifically for inclusion or incorporation by
reference in (i) the Company's Proxy Statement for the annual meeting of its
shareholders at which the Merger will be considered (the "Proxy Statement"),
(ii) the Schedule 13E-3 or (iii) the Other Filings will, at the respective dates
filed with the SEC or such other Governmental Entity, and with respect to the
Proxy Statement, on the date mailed to shareholders and at the time of the
meeting of the Company's shareholders to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.

         SECTION 5.05.     Ownership and Interim Operations of Sub. The only
class of capital stock of Sub authorized for issuance is common stock. There are
100 shares of Sub common stock issued and outstanding, all of which is directly
owned by Parent. Sub was formed solely for the purpose of engaging in the
Merger, has no assets or liabilities and has engaged in no other business
activities.

         SECTION 5.06.     Ownership of Common Stock. Parent owns, beneficially
and of record, 5,610,045 shares of Company Common Stock. No "affiliate" or
"associate" (as those terms are used in Article VIII of the Company's articles
of incorporation) of ProAssurance, other than Parent and persons who are
directors and officers of the Company and its Subsidiaries, own, beneficially or
of record, any Company Common Stock.

                                   ARTICLE VI

                                    COVENANTS

         SECTION 6.01.     Operate in Ordinary Course. During the period from
the date of this Agreement and continuing until the Effective Time, the Company
agrees that (except as expressly contemplated or permitted by this Agreement, or
to the extent that Parent shall otherwise consent in writing) (a) the Company
and its Subsidiaries shall carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted and use all commercially reasonable efforts to preserve intact their
present business organizations, keep available the services of their present
officers and employees and preserve their relationships with customers,
suppliers and others having business dealings with them to the end that their
goodwill and ongoing business shall not be impaired in any material respect at
the Effective Time; and (b) the Company shall not, nor shall it permit any of
its Subsidiaries to, issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock of


                                       12


any class or any securities convertible into, or any rights, warrants, calls,
subscriptions or options to acquire, any such shares or convertible securities,
other than (i) the issuance of shares of Company Common Stock upon the exercise
of Company Options outstanding on the date hereof and (ii) the issuance by a
wholly owned Subsidiary of its capital stock to its parent.

         SECTION 6.02.     Fiduciary Out.

                  (a)      Except as set forth in this Section 6.02(a), neither
the Board of Directors of the Company nor any committee thereof shall (i)
withdraw or modify, or propose to withdraw or modify, in a manner adverse to
Parent, the approval or recommendation by such Board of Directors or committee
of this Agreement, (ii) approve or recommend, or propose to approve or
recommend, any Takeover Proposal, or (iii) cause the Company to enter into any
agreement with respect to any Takeover Proposal. Notwithstanding the foregoing,
in the event that prior to the Effective Time the Board of Directors of the
Company or a committee thereof determines in good faith, after consultation with
counsel, that it is necessary to do so in order to comply with its fiduciary
duties to the Company's shareholders, the Board of Directors or such committee
may withdraw or modify its approval or recommendation of this Agreement, approve
or recommend a Takeover Proposal or cause the Company to enter into an agreement
with respect to a Takeover Proposal. In evaluating any unsolicited Takeover
Proposal, the Company's Board of Directors or any committee thereof may consider
any statement or indication from or on behalf of Parent that it will not agree
to such Takeover Proposal, provided that such fact shall not prevent the
Company's Board of Directors from taking any action permitted pursuant to this
Section 6.02(a). For purposes of this Agreement, "Takeover Proposal" means any
inquiry, proposal or offer from any person (other than Parent or any of its
Affiliates) relating to any direct or indirect acquisition or purchase of a
substantial amount of assets of the Company or any of its Subsidiaries or of 50%
or more of the shares of Company Common Stock, any tender offer or exchange
offer that if consummated would result in any person beneficially owning 50% or
more of the shares of Company Common Stock, any merger, consolidation, business
combination, sale of substantially all the assets, recapitalization,
liquidation, dissolution or similar transaction involving the Company, other
than the Merger, or any other transaction the consummation of which could
reasonably be expected to impede, interfere with, prevent or materially delay
the Merger or which would reasonably be expected to dilute materially the
benefits to Parent of the transaction contemplated hereby.

                  (b)      The Company and Parent shall each immediately advise
the other orally and in writing of any request for information or of any
Takeover Proposal, or any inquiry with respect to or which could lead to any
Takeover Proposal, received by them or any of their Affiliates and shall (i)
describe the material terms and conditions of such request, Takeover Proposal or
inquiry and the identity of the person making such request, Takeover Proposal or
inquiry and (ii) immediately deliver to the other a copy of any such request,
Takeover Proposal or inquiry made in writing. The Company and Parent will each
keep the other fully informed of the status and details (including amendments or
proposed amendments) of any such request, Takeover Proposal or inquiry.


                                       13




                  (c)      Nothing contained in this Section 6.02 shall prohibit
the Company from taking and disclosing to its shareholders a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from making
any disclosure to the Company's shareholders if, in the opinion of the Board of
Directors of the Company, after consultation with counsel, failure so to
disclose would be inconsistent with its fiduciary duties to the Company's
shareholders; provided, however, that neither the Company nor its Board of
Directors nor any committee thereof shall, except as permitted by Section
6.02(a), withdraw or modify, or propose to withdraw or modify, its position with
respect to the Merger or approve or recommend, or propose to approve or
recommend, a Takeover Proposal.

                                  ARTICLE VII

                              ADDITIONAL AGREEMENTS

         SECTION 7.01.     Preparation of the Proxy Statement and Schedule
13E-3. The Company shall promptly prepare and file with the SEC preliminary and
final versions of the Proxy Statement and a Schedule 13E-3 relating to the
Merger (the "Schedule 13E-3"). The Company shall use its commercially reasonable
efforts to have the Proxy Statement cleared by the SEC and mailed to its
shareholders at the earliest practicable date. The Company shall cooperate and
consult with Parent with respect to the Proxy Statement and the Schedule 13E-3
and any related SEC comments. The Company covenants that (a) the Proxy Statement
and the Schedule 13E-3 will comply in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder and
(b) as of the date of mailing of the Proxy Statement and at the time of the
meeting of the Company's shareholders to be held in connection with the Merger,
the Proxy Statement and the Schedule 13E-3 will not contain any untrue statement
of material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading; provided that no
representation is made by the Company with respect to any information included
in the Proxy Statement and the Schedule 13E-3 regarding Parent or its
Subsidiaries supplied by Parent in writing specifically for inclusion in the
Proxy Statement and the Schedule 13E-3.

         SECTION 7.02.     Access to Information. The Company shall (and shall
cause each of its Subsidiaries to) afford to the officers, employees,
accountants, counsel and other representatives of Parent, access, during normal
business hours during the period prior to the Effective Time, to all its
properties, books, contracts, commitments and records and, during such period,
the Company shall (and shall cause each of its Subsidiaries to) furnish promptly
to Parent (a) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of federal securities laws and (b) all other information concerning its
business, properties and personnel as Parent may reasonably request.

         SECTION 7.03.     Shareholders Meeting. The Company shall call a
meeting of its shareholders for the purpose of voting upon this Agreement and
the Merger. Subject to Section 6.02(a), the Company will, through its Board of
Directors, recommend to its


                                       14


shareholders approval of this Agreement and shall use its commercially
reasonable efforts to hold such meeting as soon as reasonably practicable after
the date hereof.

         SECTION 7.04.     Legal Conditions to Merger. Each of the Company,
Parent and Sub will take all commercially reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on itself with respect
to the Merger (which actions shall include, without limitation, furnishing all
information in connection with approvals of or filings with state insurance
authorities and any other Governmental Entity) and will promptly cooperate with
and furnish information to each other in connection with any such requirements
imposed upon any of them or any of their Subsidiaries in connection with the
Merger. Each of the Company, Parent and Sub will, and will cause its
Subsidiaries to, take, or cause to be taken, all commercially reasonable actions
necessary to obtain (and will cooperate with each other in obtaining) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity or other public or private third party, required to be
obtained or made by Parent, the Company or any of their Subsidiaries in
connection with the Merger or the taking of any action contemplated thereby or
by this Agreement, including without limitation, any required waiver, consent or
approval under the ProAssurance Credit Agreement.

         SECTION 7.05.     Expenses. Whether or not the Merger is consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expense.

         SECTION 7.06.     Brokers or Finders. Each of Parent and the Company
represents, as to itself and its Affiliates, that, as of the date of this
Agreement, no agent, broker, investment banker, financial advisor or other firm
or person is or will be entitled to any brokers' or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement except Raymond James & Associates, Inc., whose
fees and expenses will be paid by the Company in accordance with the Company's
agreement with such firm (copies of which have been delivered by the Company to
Parent prior to the date of this Agreement). Each of Parent and the Company
agree to indemnify and hold the other harmless from and against any and all
claims, liabilities or obligations with respect to any other fees, commissions
or expenses asserted by any person on the basis of any act or statement alleged
to have been made by such party or its Affiliates. In the event that Parent or
any of its Affiliates engages an agent, broker, investment banker, financial
advisor or other firm or person entitled to any brokers' or finder's fee or any
other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, Parent agrees to indemnify and hold harmless the
Company from and against any and all claims, liabilities or obligations with
respect to any such fees, commissions or other expenses.

         SECTION 7.07.     Indemnification; Insurance.

                  (a)      For a period of three years from the Effective Time,
the Surviving Corporation, shall maintain in its Bylaws the provisions with
respect to indemnification set forth in the Company's Bylaws as in effect on the
date hereof, which provisions shall not be amended, repealed or otherwise
modified for such a period in any manner that


                                       15


would adversely affect the rights thereunder of persons who at the Effective
Time were directors, officers, employees or agents of the Company (such persons
being third-party beneficiaries of this Section 7.07) with respect to actions
and omissions occurring prior to the Effective Time, unless such modification is
required by law.

                  (b)      For a period of three years from the Effective Time,
the Surviving Corporation shall use its commercially reasonable efforts to
maintain in effect directors' and officers' liability insurance covering those
persons who are currently covered by the Company's directors' and officers'
liability insurance policy with respect to actions and omissions occurring prior
to the Effective Time on terms no less favorable than the terms of such current
insurance coverage. The Surviving Corporation may provide such coverage through
ProAssurance's directors and officers' liability insurance policy, provided such
policy provides substantially the same coverage as the terms of the Company's
current insurance coverage. Notwithstanding the foregoing, if the directors' and
officers' liability insurance referred to in this Section 7.07(b) is unavailable
for the Maximum D&O Premium (as defined below), the Surviving Corporation shall
obtain as much insurance as can be obtained for a premium not in excess (on an
annualized basis) of the Maximum D&O Premium. The Company will give to any
director and officer covered by this Section 7.07, 30 days prior written notice
of any reduction on coverage or cancellation of the directors' and officers'
liability insurance referred to in this Section 7.07(b). For purposes of this
Section 7.07(b), the "Maximum D&O Premium" shall be an amount not greater than
150% of the premium paid by the Company (on an annualized basis) for directors'
and officers' liability insurance during the period from May 24, 2002 to the
Effective Time.

         SECTION 7.08.     Additional Agreements. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use its
commercially reasonable efforts to take, or cause to be taken, all action and to
do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including cooperating fully with
the other party, providing information, making all necessary filings under state
laws, refraining from taking any action that would cause any of the
representations and warranties not to be true and correct in all material
respects at the Expiration Time and the Effective Time and using their
commercially reasonable efforts to have any restraining order, injunction or
other prohibition preventing the consummation of the Offer or the Merger
vacated. In case at any time after the Expiration Time or the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement including without limitation, to vest the Surviving Corporation with
full title to all properties, assets, rights, approvals, immunities and
franchises of either the Company or Sub, the proper officers and directors of
each party to this Agreement shall take all such necessary action.

         SECTION 7.09.     Transfer Taxes. Parent or Surviving Corporation
agrees, subject to consummation of the Merger, to pay, without deduction or
withholding from any amount payable to the holders of Company Common Stock, any
Michigan or local real property transfer taxes and any other similar taxes that
become payable by the shareholders of the Company, the Company or the Surviving
Corporation in connection


                                       16


with the Merger. The Company and Parent shall cooperate in the preparation,
execution and filing of any returns, questionnaires, applications and other
documents related to such taxes required or permitted to be filed on or before
the Effective Time.

         SECTION 7.10.     Subsequent Sale of the Company. Parent hereby
represents, as of the date of this Agreement and as of the Closing Date, that
neither it nor ProAssurance have any present intention of selling or otherwise
disposing of the Company Common Stock owned by Parent or selling or otherwise
disposing of all or substantially all of the Company's assets. Parent agrees,
for itself and ProAssurance, that if, prior to the one-year anniversary of the
Expiration Time of the Offer, either of them, directly or indirectly, sells or
otherwise disposes, or agrees to sell or otherwise dispose, of the shares of
capital stock of the Surviving Corporation or any of the Surviving Corporation's
Subsidiaries beneficially owned by them following the Offer or Merger, or all or
substantially all of the assets of the Surviving Corporation and its
Subsidiaries, other than to ProAssurance or a Subsidiary of ProAssurance, for
consideration valued (in the reasonable discretion of Parent's board of
directors) at more than the sum of (a) $29.00 multiplied by the number of shares
outstanding immediately prior to the Expiration Time, plus (b) the aggregate
Option Consideration paid or to be paid based on the number of shares subject to
Company Options outstanding immediately after the Expiration Time, then they
will pay, to the Paying Agent, or a substitute agent (which shall be a bank or
trust company) mutually satisfactory to Parent and the Company, for distribution
on a pro rata basis to the shareholders whose shares were acquired by the
Company in the Offer and, if the Effective Time has occurred, (x) the
shareholders of record of Company Common Stock other than Parent and
ProAssurance (and its Subsidiaries) at the Effective Time and (y) the holders of
Company Options at the Effective Time, an amount determined as follows:

                  (A)      If the Effective Time has not occurred, the amount
                  payable shall be equal to (1) the amount by which the value of
                  the consideration received by Parent and its Affiliates in
                  such sale or disposition (as determined by Parent's board of
                  directors in its reasonable discretion) exceeds the sum of
                  clauses (a) and (b), multiplied by (2) the ratio of (i) the
                  number of shares acquired by the Company pursuant to the Offer
                  divided by (ii) the sum of the number of shares acquired by
                  the Company pursuant to the Offer plus the number of shares
                  outstanding immediately prior to the completion of such sale
                  or disposition plus the number of shares subject to Company
                  Options immediately prior to the completion of such sale or
                  disposition.

                  (B)      If the Effective Time has occurred, the amount
                  payable shall be equal to (1) the amount by which the value of
                  the consideration received by Parent and its Affiliates in
                  such sale or disposition (as determined by Parent's board of
                  directors in its reasonable discretion) exceeds the sum of
                  clauses (a) and (b), multiplied by (2) the ratio of (i) the
                  sum of the number of shares acquired by the Company pursuant
                  to the Offer plus the number of shares outstanding, other than
                  those beneficially owned by Parent or ProAssurance, at the
                  Effective Time plus the number of shares subject to Company
                  Options at the Effective Time, divided by (ii) the sum of the


                                       17


                  number of shares acquired by the Company pursuant to the Offer
                  plus the number of shares outstanding at the Effective Time
                  plus the number of shares subject to Company Options at the
                  Effective Time.

         The shareholders and Company Option holders who are entitled to such
payment pursuant to the foregoing provisions are expressly intended to be
third-party beneficiaries of the provisions of this Section 7.10.

         SECTION 7.11.     Rating Confirmation. The Company and Parent shall,
and shall cause their Affiliates to, seek and to use their commercially
reasonable efforts to obtain confirmation from A. M. Best Company and Standard &
Poors that the consummation of the Offer and Merger will not impair the current
A. M. Best Company and Standard & Poors ratings of the Company or any of the
other insurance Subsidiaries of ProAssurance.

         SECTION 7.12.     Other Filings. The Company, Parent and Sub, as the
case may be, shall promptly file any other filings required under the Exchange
Act or any other applicable law relating to the transactions contemplated herein
(the "Other Filings"). Each of the parties hereto shall notify the other parties
hereto promptly of the receipt by it of any comments from the SEC or its Staff
and of any request of the SEC or any other governmental officials with respect
to any Other Filings or for additional information and will supply the other
parties hereto with copies of all correspondence between it and its
representatives, on the one hand, and the SEC or the members of its Staff or any
other governmental officials, on the other hand, and will provide the other
parties and their counsel with the opportunity to participate, including by way
of discussions with the SEC or its Staff, in the response of such party to such
comments with respect to any Other Filings or the transactions contemplated
herein. Each of the Company, on the other hand, and Parent and Sub, on the
other, shall use its commercially reasonable efforts to obtain and furnish the
information required to be included in any Other Filings or the Merger.

                                  ARTICLE VIII

                                   CONDITIONS

         SECTION 8.01.     Conditions to Each Party's Obligation To Effect the
Merger. The respective obligation of each party to effect the Merger shall be
subject to the satisfaction prior to the Closing Date of the following
conditions:

                  (a)      Shareholder Approval. This Agreement shall have been
approved and adopted by the affirmative vote of (i) the holders of a majority of
the outstanding shares of Company Common Stock as required by the MBCA and (ii)
a majority of the outstanding shares owned by the Independent Shareholders as
required by the Company's Articles of Incorporation.

                  (b)      Other Approvals. (i) The Office of Financial and
Insurance Services of the State of Michigan shall have approved the Company's
request for exemption from the Form A filing requirement in connection with the
Merger and such approval shall be in full force and effect. (ii) The
determination by ProAssurance that the transaction contemplated by this
Agreement will not result in the breach of the terms of


                                       18


the ProAssurance Credit Agreement or, if ProAssurance determines that such
transactions will result in such a breach, the required consent, waiver or
approval shall have been obtained in connection with the ProAssurance Credit
Agreement and shall be in full force and effect such that the consummation of
the Merger and the other transactions contemplated hereby will not result in a
default thereunder. (iii) Other than the filing provided for by Section 2.01,
all authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any Governmental Entity the
failure to obtain which would have a material adverse effect on Parent and its
Subsidiaries or the Surviving Corporation and its Subsidiaries, in each case
taken as a whole, shall have been filed, occurred or been obtained.

                  (c)      No Injunctions or Restraints. There shall not be
pending or threatened any action or proceeding by or before any court or other
Governmental Entity seeking to restrain, prohibit, invalidate or collect damages
arising out of the Merger or other transactions hereunder, and there shall be in
effect no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Merger or holding
that the Merger Consideration is not adequate.

                  (d)      Confirmation of Rating. The Company and the other
insurance Subsidiaries of ProAssurance shall not be rated lower than "A-" by
A.M. Best Company and Standard & Poors, nor shall the Company or ProAssurance
have received notice from A.M. Best Company or Standard & Poors of their
intention to lower the rating of the Company or any of the other insurance
Subsidiaries of ProAssurance below "A-" after giving effect to the Offer or the
Merger.

         SECTION 8.02.     Conditions of Obligations of Parent and Sub. The
obligations of Parent and Sub to effect the Merger are subject to the
satisfaction of the following conditions unless waived by Parent and Sub:

                  (a)      Representations and Warranties. The representations
and warranties of the Company set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and (except to
the extent such representations and warranties speak as of an earlier date or
except, as to any failure to be true and correct, to the extent that Parent or
Sub had knowledge of such failure to be true and correct as of the date hereof)
as of the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement.

                  (b)      Performance of Obligations of the Company. The
Company shall have performed in all material respects all obligations required
to be performed by it under this Agreement at or prior to the Closing Date.

                  (c)      Officer's Certificate. Parent and Sub shall have
received a certificate signed by an executive officer of the Company to the
effect set forth in paragraphs (a) and (b) of this Section 8.02.


                                       19


         SECTION 8.03.     Conditions of Obligations of the Company. The
obligation of the Company to effect the Merger is subject to the satisfaction of
the following conditions unless waived by the Company:

                  (a)      Representations and Warranties. The representations
and warranties of Parent and Sub set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and (except to
the extent such representations speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement.

                  (b)      Performance of Obligations of Parent and Sub. Parent
and Sub shall have performed in all material respects all obligations required
to be performed by them under this Agreement at or prior to the Closing Date.

                  (c)      Officer's Certificate. The Company shall have
received a certificate signed by an executive officer of each of Parent and Sub
to the effect set forth in paragraphs (a) and (b) of this Section 8.03.

                                   ARTICLE IX

                            TERMINATION AND AMENDMENT

         SECTION 9.01.     Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after approval of the
matters presented in connection with this Agreement by the shareholders of the
Company:

                  (a)      by mutual consent of Parent and the Company;

                  (b)      (i) by either Parent or the Company if there shall
have been a material breach of any representation, warranty, covenant or
agreement on the part of the other set forth in this Agreement which breach
shall not have been cured within two business days following receipt by the
breaching party of notice of such breach, or (ii) by either Parent or the
Company if any permanent injunction or other order of a court or other competent
authority preventing the consummation of the Merger shall have become final and
non-appealable;

                  (c)      by either Parent or the Company if the Company's
Board of Directors takes any of the actions permitted by Section 6.02(a);
provided the Company may so terminate only if it has complied with all the
provisions of Section 6.02(b);

                  (d)      by either Parent or the Company if the Offer or
Merger shall not have been consummated on or before December 31, 2002;

                  (e)      by either Parent or the Company if the required
approval of the shareholders of the Company shall not have been obtained by
reason of the failure to obtain the required vote at a duly held meeting of
shareholders or at any adjournment thereof; or


                                       20


                  (f)      by either Parent or the Company, if any of the
conditions to such party's obligation to consummate the transactions
contemplated in this Agreement shall have become impossible to satisfy if, but
only if, such party has used its commercially reasonable efforts and acted in
good faith in attempting to satisfy all such conditions and if such party is not
then in breach or default in any material respect of this Agreement.

         SECTION 9.02.     Effect of Termination. In the event of a termination
of this Agreement by either the Company or Parent as provided in Section 9.01
prior to the purchase of the shares of Common Stock tendered in the Offer, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Parent, Sub or the Company or their respective
officers or directors, except with respect to any breach of any provision of
this Agreement prior to such termination and except that the last sentence of
Section 7.02 and all of Sections 7.05 and 7.06 shall continue in effect. In the
event of a termination of this Agreement after the purchase of the shares of
Common Stock tendered in the Offer but before the Effective Time of the Merger,
such purchase shall not be rescinded or otherwise affected, this Agreement shall
forthwith become void and there shall be no liability or obligation on the part
of Parent, Sub or the Company or their respective officers or directors, except
with respect to any breach of any provision of this Agreement prior to such
termination and except that Sections 7.02, 7.05, 7.06 and 7.10 shall continue in
effect to the extent applicable.

         SECTION 9.03.     Amendment. This Agreement may be amended by the
parties hereto, by action taken or authorized by their respective Boards of
Directors, at any time before or after approval of the matters presented in
connection with the Merger by the shareholders of the Company, but, after any
such approval, no amendment shall be made which by law requires further approval
by such shareholders without such further approval in accordance with Section
8.01(a). This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.

         SECTION 9.04.     Extension; Waiver. At any time prior to the Effective
Time, the parties hereto, by action taken or authorized by their respective
Boards of Directors, may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (c) waive
compliance with any of the agreements or conditions contained herein.

                                   ARTICLE X

                                  MISCELLANEOUS

         SECTION 10.01.    Nonsurvival of Representations, Warranties and
Agreements. None of the representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for the agreements contained in Sections
3.01, 3.02, 7.05, 7.06, 7.07, 7.08, 7.09, 7.10 and this Section 10.01.


                                       21


         SECTION 10.02.    Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):

         (a) if to Parent or Sub, to

         ProNational Insurance Company
         2600 Professionals Drive
         P.O. Box 150
         Okemos, Michigan 48805-0150
         Attention: President
         Telecopy No.: (517) 349-8977

         with a copy to:

         Burr & Forman LLP
         420 North 20th Street, Suite 3100
         Birmingham, Alabama 35203
         Attention: Jack P. Stephenson, Jr.
         Telecopy No.: (205) 458-5100

         (b) if to the Company, to

         Meemic Holdings, Inc.
         691 N. Squirrel Road
         Suite 100
         Auburn Hills, Michigan 48326-2849
         Attention: President
         Telecopy No.: (248) 373-5700

         with a copy to

         Dykema Gossett PLLC
         400 Renaissance Center
         Detroit, Michigan 48243-1668
         Attention: Mark A. Metz, Esq.
         Telecopy No.: (313) 568-6915

         SECTION 10.03.    Entire Agreement; No Third Party Beneficiaries;
Rights of Ownership. This Agreement (including the documents and the instruments
referred to herein) (a) constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and (b) except as provided in Sections 7.07
and 7.10, are not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.

         SECTION 10.04.    Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Michigan without regard to
applicable conflicts of law principles.


                                       22


         SECTION 10.05.    Publicity. Except as otherwise required by law or the
rules of the Nasdaq Stock Market or the New York Stock Exchange, for so long as
this Agreement is in effect, neither the Company nor Parent shall issue or cause
the publication of any press release or other public announcement with respect
to the transactions contemplated by this Agreement without the consent of the
other party, which consent shall not be unreasonably withheld.

         SECTION 10.06.    Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, except that Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder to
Parent or to any direct or indirect wholly owned Subsidiary of Parent. Subject
to the preceding sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors and
assigns.

         SECTION 10.07.    Definitions. The following defined terms used in this
Agreement are defined in the sections set forth below:



Definitions.                                                       Section No.
- -----------                                                        -----------
                                                                 
Affiliates .................................................        5.03
Agreement ..................................................        Preamble
Bureau .....................................................        2.01
Certificate of Merger ......................................        2.01
Certificates ...............................................        3.02(b)
Closing ....................................................        2.02
Closing Date ...............................................        2.02
Company ....................................................        Preamble
Company Common Stock .......................................        3.01
Company's Financial Advisor ................................        1.02(b)
Company Option .............................................        3.01(d)
Company Stock Plan .........................................        4.02
Company SEC Documents ......................................        4.05
Convertible Debt ...........................................        4.02
Effective Time .............................................        2.01
Exchange Act ...............................................        1.01(a)
Expiration Time ............................................        1.1 (a)
Governmental Entity ........................................        1.02(a)
Independent Shareholders ...................................        4.03
Maximum D&O Premium ........................................        7.07(b)
MBCA .......................................................        Preamble
Merger .....................................................        2.03
Merger Consideration .......................................        3.01(c)
Minimum Condition ..........................................        Annex 1
Offer ......................................................        Preamble
Offer Documents ............................................        1.01(a)



                                       23


                                                                 
Offer Price ................................................        1.01(a)
Option Consideration .......................................        3.01(d)
Other Filings ..............................................        7.12
Parent .....................................................        Preamble
Paying Agent ...............................................        3.02(a)
ProAssurance ...............................................        4.03
ProAssurance Credit Agreement ..............................        4.03
Proxy Statement ............................................        5.04
Schedule 13E-3 .............................................        7.01
SEC ........................................................        1.01(a)
Securities Act .............................................        4.05
Sub ........................................................        Preamble
Subsidiary .................................................        4.01
Surviving Corporation ......................................        2.03
Takeover Proposal ..........................................        6.02(a)
Tender Offer Conditions ....................................        1.01(a)




                                       24


         IN WITNESS WHEREOF Parent, Sub and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized as
of the date first written above.

                                    PRONATIONAL INSURANCE COMPANY



                                    By: /s/  Victor T. Adamo
                                        -----------------------
                                    Name:  Victor T. Adamo
                                    Title: President & CEO


                                    MEEMIC MERGER CORP.



                                    By: /s/  Victor T. Adamo
                                        -----------------------
                                    Name: Victor T. Adamo
                                    Title: Incorporator


                                    MEEMIC HOLDINGS, INC.



                                    By: /s/  Lynn M. Kalinowski
                                        -----------------------
                                    Name: Lynn M. Kalinowski
                                    Title:  President


                                       25

EX-99

                                                                      Exhibit 99


                            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 period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, A.
Derrill Crowe, M.D., Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 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 Executive condition and result of operations of the
Company.



/s/ A. Derrill Crowe, M.D.
- --------------------------
A. Derrill Crowe, M.D.
Chief Executive Officer

August 13, 2002

                                                                      Exhibit 99


                            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 period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Howard
H. Friedman, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 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/Howard H. Friedman
- ---------------------
Howard H. Friedman
Chief Financial Officer

August 13, 2002