PROASSURANCE CORP (Form: 10-Q, Received: 08/04/2011 06:02:29)

PROASSURANCE CORPORATION, as a Grantor

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2011


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

For the transition period from to

Commission file number 0-16533

ProAssurance Corporation

(Exact Name of Registrant as Specified in Its Charter)


Delaware		63-1261433

(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

100 Brookwood Place, Birmingham, AL		35209

(Address of Principal Executive Offices)		(Zip Code)

(205) 877-4400

(Registrant’s Telephone Number, Including Area Code)		(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter), during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


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

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

As of July 26, 2011, there were 30,591,296 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS


	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS
SIGNATURE
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING STATEMENTS

Any statements in this Form 10-Q that are not historical facts are specifically identified as forward-looking statements. These statements are based upon our estimates and anticipation of future events and are subject to certain risks and uncertainties that could cause actual results to vary materially from the expected results described in the forward-looking statements. Forward-looking statements are identified by words such as, but not limited to, “anticipate”, “believe”, “estimate”, “expect”, “hope”, “hopeful”, “intend”, “may”, “optimistic”, “preliminary”, “potential”, “project”, “should”, “will” and other analogous expressions. There are numerous factors that could cause our actual results to differ materially from those in the forward-looking statements. Thus, sentences and phrases that we use to convey our view of future events and trends are expressly designated as forward-looking statements as are sections of this Form 10-Q that are identified as giving our outlook on future business.

Forward-looking statements relating to our business include among other things: statements concerning liquidity and capital requirements, investment valuation and performance, return on equity, financial ratios, net income, premiums, losses and loss reserves, premium rates and retention of current business, competition and market conditions, the expansion of product lines, the development or acquisition of business in new geographical areas, the availability of acceptable reinsurance, actions by regulators and rating agencies, court actions, legislative actions, payment or performance of obligations under indebtedness, payment of dividends, and other matters.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following factors that could affect the actual outcome of future events:

	•		general economic conditions, either nationally or in our market areas, that are different than anticipated;

	•		regulatory, legislative and judicial actions or decisions that could affect our business plans or operations;

	•		the enactment or repeal of tort reforms;

	•		formation or dissolution of state-sponsored medical professional liability insurance entities that could remove or add sizable groups of physicians from the private insurance market;

	•		the impact of deflation or inflation;

	•		changes in the interest rate environment;

	•		changes in U.S. laws or government regulations regarding financial markets or market activity that may affect the U.S. economy and our business;

	•		changes in the ability of the U.S. government to meet its obligations that may affect the U.S. economy and our business;

	•		performance of financial markets affecting the fair value of our investments or making it difficult to determine the value of our investments;

	•		changes in accounting policies and practices that may be adopted by our regulatory agencies and the Financial Accounting Standards Board, the Securities and Exchange Commission, or the Public Company Accounting Oversight Board;

	•		changes in laws or government regulations affecting medical professional liability insurance or the financial community;

	•		the effects of changes in the health care delivery system, including but not limited to the Patient Protection and Affordable Care Act;

	•		uncertainties inherent in the estimate of loss and loss adjustment expense reserves and reinsurance, and changes in the availability, cost, quality, or collectability of insurance/reinsurance;

	•		the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;

	•		allegation of bad faith which may arise from our handling of any particular claim, including failure to settle;

	•		loss of independent agents;

	•		changes in our organization, compensation and benefit plans;

	•		our ability to retain and recruit senior management;

	•		our ability to purchase reinsurance and collect recoveries from our reinsurers;

	•		assessments from guaranty funds;

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

	•		changes to the ratings assigned by rating agencies to our insurance subsidiaries, individually or as a group;

	•		insurance market conditions may alter the effectiveness of our current business strategy and impact our revenues;

	•		the expected benefits from completed and proposed acquisitions may not be achieved or may be delayed longer than expected due to business disruption, loss of customers, employees and key agents, increased operating costs or inability to achieve cost savings, and assumption of greater than expected liabilities, among other reasons.

Our results may differ materially from those we expect and discuss in any forward-looking statements. The principal risk factors that may cause these differences are described in “Item 1A, Risk Factors” in our Form 10-K and other documents we file with the Securities and Exchange Commission, such as our current reports on Form 8-K, and our regular reports on Forms 10-Q and 10-K.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that these factors could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Except as required by law or regulations, we do not undertake and specifically decline any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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


	June 30			December 31
	2011			2010
Assets
Investments
Fixed maturities available for sale, at fair value	$	3,635,084		$	3,603,754
Equity securities, available for sale, at fair value		155			3,637
Equity securities, trading, at fair value		36,277			37,286
Short-term investments		128,901			168,438
Business owned life insurance		51,421			50,484
Investment in unconsolidated subsidiaries		116,885			88,754
Other investments		35,979			38,078

Total Investments		4,004,702			3,990,431

Cash and cash equivalents		101,226			50,851
Premiums receivable		119,731			120,950
Receivable from reinsurers on paid losses and loss adjustment expenses		3,519			4,582
Receivable from reinsurers on unpaid losses and loss adjustment expenses		278,777			277,436
Prepaid reinsurance premiums		15,738			11,023
Deferred policy acquisition costs		27,433			27,281
Deferred taxes		32,457			56,862
Real estate, net		43,256			43,951
Intangible assets		55,964			60,031
Goodwill		161,453			161,453
Other assets		82,351			70,205

Total Assets	$	4,926,607		$	4,875,056


Liabilities and Shareholders’ Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses	$	2,402,264		$	2,414,100
Unearned premiums		249,236			256,050
Reinsurance premiums payable		103,878			111,680

Total Policy Liabilities		2,755,378			2,781,830
Other liabilities		153,504			186,259
Long-term debt, $35,498 and $35,488, at amortized cost, respectively; $15,863 and $15,616 at fair value, respectively		51,361			51,104

Total Liabilities		2,960,243			3,019,193

Shareholders’ Equity
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 34,515,945 and 34,419,383 shares issued, respectively		345			344
Additional paid-in capital		535,427			532,213
Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $53,340 and $42,607, respectively		99,057			79,124
Retained earnings		1,530,816			1,428,026

		2,165,645			2,039,707
Treasury shares, at cost, 3,924,970 shares and 3,666,149 shares, respectively		(199,281	)		(183,844	)

Total Shareholders’ Equity		1,966,364			1,855,863

Total Liabilities and Shareholders’ Equity	$	4,926,607		$	4,875,056

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

Accumulated

Other

Comprehensive

Retained

Capital

Total

Income (Loss)

Earnings

Accounts

Balance at December 31, 2010

1,855,863

79,124

1,428,026

348,713

Net income

102,790

—

102,790

—

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

19,933

—

Common shares reacquired

(15,437

)

—

(15,437

)

Common shares issued for compensation and net effect of performance shares issued and stock options exercised

(499

)

—

(499

)

Share-based compensation

3,714

—

3,714

Balance at June 30, 2011

1,966,364

99,057

1,530,816

336,491


				Accumulated
				Other				Other
				Comprehensive		Retained		Capital
	Total			Income (Loss)		Earnings		Accounts

Balance at December 31, 2009	$	1,704,595		$	59,254	$	1,196,428	$	448,913
Net income		78,493			—		78,493		—
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments		45,385			45,385		—		—
Common shares reacquired		(39,168	)		—		—		(39,168	)
Common shares issued for compensation and net effect of performance shares issued and stock options exercised		732			—		—		732
Share-based compensation		2,941			—		—		2,941

Balance at June 30, 2010	$	1,792,978		$	104,639	$	1,274,921	$	413,418

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


	Three Months Ended						Six Months Ended
	June 30						June 30
	2011			2010			2011			2010

Revenues
Gross premiums written	$	115,302		$	98,522		$	276,115		$	255,699

Net premiums written	$	107,011		$	88,868		$	256,894		$	234,089


Premiums earned	$	142,409		$	135,933		$	283,783		$	270,204
Premiums ceded		(5,346	)		(10,535	)		(14,643	)		(21,379	)

Net premiums earned		137,063			125,398			269,140			248,825
Net investment income		36,297			37,081			72,457			74,709
Equity in earnings (loss) of unconsolidated subsidiaries		(2,416	)		839			(3,780	)		3,825
Net realized investment gains (losses):
Other-than-temporary impairment losses (OTTI)		(1,065	)		(4,912	)		(2,902	)		(12,379	)
Portion of OTTI losses recognized in (reclassified from) other comprehensive income before taxes		(113	)		(2,128	)		(681	)		6

Net impairment losses recognized in earnings		(1,178	)		(7,040	)		(3,583	)		(12,373	)
Other net realized investment gains (losses)		3,378			3,539			9,907			6,468

Total net realized investment gains (losses)		2,200			(3,501	)		6,324			(5,905	)
Other income		1,685			1,683			4,273			4,005

Total revenues		174,829			161,500			348,414			325,459

Expenses
Losses and loss adjustment expenses		69,394			77,170			146,493			165,078
Reinsurance recoveries		(5,041	)		(8,646	)		(11,717	)		(17,853	)

Net losses and loss adjustment expenses		64,353			68,524			134,776			147,225
Underwriting, policy acquisition and operating expenses		32,871			31,642			68,578			62,846
Interest expense		918			827			1,713			1,640

Total expenses		98,142			100,993			205,067			211,711


Income before income taxes		76,687			60,507			143,347			113,748

Provision for income taxes
Current expense (benefit)		21,769			23,106			26,829			31,925
Deferred expense (benefit)		(178	)		(2,980	)		13,728			3,330

Total income tax expense (benefit)		21,591			20,126			40,557			35,255


Net income	$	55,096		$	40,381		$	102,790		$	78,493


Earnings per share:
Basic	$	1.80		$	1.25		$	3.36		$	2.42

Diluted	$	1.79		$	1.23		$	3.33		$	2.40


Weighted average number of common shares outstanding:
Basic		30,583			32,322			30,600			32,385

Diluted		30,856			32,721			30,855			32,743

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


	Three Months Ended				Six Months Ended
	June 30				June 30
	2011		2010		2011		2010

Comprehensive income:
Net income	$	55,096	$	40,381	$	102,790	$	78,493
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments		24,224		32,141		19,933		45,385

Comprehensive income	$	79,320	$	72,522	$	122,723	$	123,878

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


	Six Months Ended
	June 30
	2011			2010

Operating Activities
Net income	$	102,790		$	78,493
Depreciation and amortization		17,954			13,133
Net realized investment (gains) losses		(6,324	)		5,905
Share-based compensation		3,714			2,941
Deferred income taxes		13,728			3,330
Other		226			4,912
Changes in assets and liabilities, excluding the effects of business combinations:
Premiums receivable		1,219			11,962
Other assets		(1,549	)		(8,562	)
Reserve for losses and loss adjustment expenses		(11,836	)		(9,887	)
Unearned premiums		(6,814	)		(13,232	)
Reinsurance related assets and liabilities		(12,795	)		7,993
Other liabilities		(47,261	)		(21,069	)


Net cash provided by operating activities		53,052			75,919

Investing Activities
Purchases of:
Fixed maturities available for sale		(452,833	)		(458,291	)
Equity securities trading		(31,325	)		(8,419	)
Other investments		(429	)		(5,255	)
Cash invested in unconsolidated subsidiaries:
Tax credit limited partnerships		(17,232	)		(4,225	)
Other partnership investments		—			(5,237	)
Proceeds from sale or maturities of:
Fixed maturities available for sale		449,364			502,769
Equity securities available for sale		3,704			14
Equity securities trading		33,908			26,812
Other investments		432			1,242
Net sales or maturities (purchases) of short-term investments, excluding unsettled redemptions		39,537			(101,862	)
Unsettled security transactions, net		1,228			22,263
Cash received (paid) for other assets		(11,428	)		(2,209	)


Net cash provided (used) by investing activities		14,926			(32,398	)

Financing Activities
Repurchase of treasury shares		(14,993	)		(39,168	)
Other		(2,610	)		292


Net cash provided (used) by financing activities		(17,603	)		(38,876	)


Increase (decrease) in cash and cash equivalents		50,375			4,645
Cash and cash equivalents at beginning of period		50,851			40,642


Cash and cash equivalents at end of period	$	101,226		$	45,287

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

1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation and its consolidated subsidiaries (ProAssurance or PRA). The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. ProAssurance’s results for the three-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2010 report on Form 10-K. In connection with its preparation of the Condensed Consolidated Financial Statements, ProAssurance evaluated events that occurred subsequent to June 30, 2011 for recognition or disclosure in its financial statements and notes to financial statements.

Reclassifications

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

Accounting Changes Not Yet Adopted

Presentation of Comprehensive Income

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

Fair Value Measurements

Effective for interim and annual reporting periods beginning after December 15, 2011, the FASB revised guidance related to fair value measurements and disclosures, all of which are to be applied prospectively. The new guidance increases disclosure requirements regarding valuation methods used to determine fair value measurements categorized as Level 3, as well as the sensitivity to change of those measurements, and requires additional disclosures regarding the consideration given to highest and best use in fair value measurements of nonfinancial assets. The guidance also requires that when fair value measurements of items not carried at fair value are disclosed, the fair value measurements are to be categorized by level of fair value hierarchy. Additionally, the guidance also clarifies or revises certain fair value measurement principles related to the valuation of financial instruments managed within a portfolio, the valuation of instruments classified as a part of shareholders’ equity, the appropriate application of the highest and best use valuation premise, and the consideration of premium and discounts in a fair value

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

1. Basis of Presentation (continued)

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

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

Effective for fiscal years beginning after December 15, 2011, the FASB revised guidance regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The guidance permits deferral of qualifying costs associated only with successful contract acquisitions. Internal selling agent and underwriter salary and benefit costs allocated to unsuccessful contracts, as well as advertising costs, are excluded. The guidance must be applied prospectively, but may be applied retrospectively for all prior periods. ProAssurance plans to adopt the guidance beginning January 1, 2012. Adoption of this guidance is not expected to have a material effect on our results of operations or financial position.

Accounting Changes

Intangibles, Goodwill and Other

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

Fair Value Measurements

Effective for interim and annual reporting periods beginning after December 15, 2010, the FASB revised guidance to require additional disclosure about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. ProAssurance adopted the guidance on January 1, 2011. Adoption had no effect on ProAssurance’s results of operations or financial position.

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

2. Acquisitions

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

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

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


	Three Months Ended		Six Months Ended
*(In thousands)*	June 30, 2011		June 30, 2011

Revenue	$	15,717	$	31,590
Earnings	$	5,118	$	9,779

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

Three Months Ended

Six Months Ended

June 30, 2011

ProAssurance Pro

ProAssurance Actual

ProAssurance Pro

ProAssurance Actual

Forma Consolidated

Consolidated

Forma Consolidated

Consolidated

(In thousands)

Results

Revenue

174,829

348,414

Earnings

55,356

55,096

103,367

102,790

Three Months Ended

Six Months Ended

June 30, 2010

ProAssurance Pro

ProAssurance Actual

ProAssurance Pro

ProAssurance Actual

Forma Consolidated

Consolidated

Forma Consolidated

Consolidated

(In thousands)

Results

Revenue

182,080

161,500

365,894

325,459

Earnings

46,321

40,381

88,373

78,493

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

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

3. Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy has been established for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs considered most observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy levels are defined as follows:

	Level 1:		quoted (unadjusted) market prices in active markets for identical assets and liabilities. For ProAssurance, Level 1 inputs are generally quotes for debt or equity securities actively traded in exchange or over-the-counter markets.

	Level 2:		market data obtained from sources independent of the reporting entity (observable inputs). For ProAssurance, Level 2 inputs generally include quoted prices in markets that are not active, quoted prices for similar assets/liabilities, and results from pricing models that use observable inputs such as interest rates and yield curves that are generally available at commonly quoted intervals.

	Level 3:		the reporting entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (non-observable inputs). For ProAssurance, Level 3 inputs are used in situations where little or no Level 1 or 2 inputs are available or are inappropriate given the particular circumstances. Level 3 inputs include results from pricing models for which some or all of the inputs are not observable, discounted cash flow methodologies, single non-binding broker quotes and adjustments to externally quoted prices that are based on management judgment or estimation.

The following tables present information about ProAssurance’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 and indicate the fair value hierarchy of the valuation techniques utilized to determine such value. For some assets, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair value measurement. ProAssurance’s assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the assets being valued.

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

3. Fair Value Measurement (continued)

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

June 30, 2011

Fair Value Measurements Using

Total

(In thousands)

Level 1

Level 2

Level 3

Fair Value

Assets:

Fixed maturities, available for sale

U.S. Treasury obligations

—

294,744

—

294,744

U.S. Agency obligations

—

72,877

—

72,877

State and municipal bonds

—

1,158,843

7,325

1,166,168

Corporate bonds, multiple observable inputs

—

1,350,575

—

1,350,575

Corporate bonds, limited observable inputs:

Private placement senior notes

—

857

Other corporate bonds, NRSRO ratings available

—

5,698

Other corporate bonds, NRSRO ratings not available

—

1,275

Residential mortgage-backed securities

—

575,698

—

575,698

Commercial mortgage-backed securities

—

90,039

—

90,039

Other asset-backed securities

—

75,469

1,684

77,153

Equity securities, available for sale

Financial

—

Industrial

133

—

133

Equity securities, trading

Financial

5,258

—

5,258

Energy

7,092

—

7,092

Consumer cyclical

1,698

—

1,698

Consumer non-cyclical

6,535

—

6,535

Technology

2,707

—

2,707

Industrial

3,338

—

3,338

Communications

2,849

—

2,849

Index funds

4,638

—

4,638

All other

2,162

—

2,162

Short-term investments (1)

125,214

3,687

—

128,901

Investment in unconsolidated subsidiaries (2)

—

25,127

Total assets

161,646

3,621,932

41,966

3,825,544

Liabilities:

2019 Note Payable

—

15,863

Interest rate swap agreement

—

3,852

Total liabilities

—

19,715

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

3. Fair Value Measurement (continued)


	December 31, 2010
	Fair Value Measurements Using						Total
(In thousands)	Level 1		Level 2		Level 3		Fair Value

Assets:
Fixed maturities, available for sale
U.S. Treasury obligations	$	—	$	225,908	$	—	$	225,908
U.S. Agency obligations		—		68,878		—		68,878
State and municipal bonds		—		1,236,374		7,550		1,243,924
Corporate bonds, multiple observable inputs		—		1,312,035		—		1,312,035
Corporate bonds, limited observable inputs:
Private placement senior notes		—		—		9,356		9,356
Other corporate bonds, NRSRO ratings available		—		—		10,414		10,414
Other corporate bonds, NRSRO ratings not available		—		—		1,459		1,459
Residential mortgage-backed securities		—		567,640		2,198		569,838
Commercial mortgage-backed securities		—		99,386		—		99,386
Other asset-backed securities		—		62,534		22		62,556
Equity securities, available for sale
Financial		392		—		—		392
Energy		257		—		—		257
Consumer cyclical		521		—		—		521
Consumer non-cyclical		656		—		—		656
Technology		768		—		—		768
Industrial		737		—		—		737
All Other		306		—		—		306
Equity securities, trading
Financial		4,317		—		—		4,317
Energy		7,149		—		—		7,149
Consumer cyclical		1,599		—		—		1,599
Consumer non-cyclical		4,534		—		—		4,534
Technology		3,400		—		—		3,400
Industrial		2,403		—		—		2,403
Communications		2,623		—		—		2,623
Index funds		3,568		—		—		3,568
All other		7,693		—		—		7,693
Short-term investments (1)		150,344		18,094		—		168,438
Investment in unconsolidated subsidiaries (2)		—		—		25,112		25,112

Total assets	$	191,267	$	3,590,849	$	56,111	$	3,838,227


Liabilities:
2019 Note Payable		—		—		15,616		15,616
Interest rate swap agreement		—		—		3,658		3,658

Total liabilities	$	—	$	—	$	19,274	$	19,274


(1)		Short-term investments are reported at amortized cost, which is either equivalent to fair value (Level 1 classification) or closely approximates fair value (Level 2 classification).

(2)		Includes interests in private investment funds that are valued at the net asset value provided by the fund, which approximates fair value. Other equity interests for which the carrying value of the interest does not approximate fair value are excluded.

The fair values for securities included in the Level 2 category, with the few exceptions described below, have been developed by third party, nationally recognized pricing services. These services use complex methodologies to determine values for securities and subject the values they develop to quality control reviews. The services collect and utilize multiple inputs, although not all inputs are used for every security type or given the same priority in every evaluation. Inputs used include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, and offers. The services also consider credit ratings, where appropriate, including ratings updates and information available in appropriate market research publications. Management reviews service-provided values for reasonableness by comparing market yields indicated by the supplied value to yields observed in the market place. If a value does not appear reasonable, the valuation is discussed with the service that provided the value and would be adjusted, if necessary. No such adjustments have been necessary in 2011 or 2010.

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

3. Fair Value Measurement (continued)

Below is a summary description of the valuation methodologies primarily used by the pricing services for securities in the Level 2 category, by security type:

U.S. Treasury obligations are valued based on quoted prices for identical assets, or, in markets that are not active, quotes for similar assets, taking into consideration adjustments for variations in contractual cash flows and yields to maturity.

U. S. government and agency obligations, and corporate bonds (exclusive of privately placed debt) are valued using pricing models that consider current and historical market data, normal trading conventions, credit ratings, and the particular structure and characteristics of the security being valued, such as yield to maturity, redemption options, and contractual cash flows. Adjustments to model inputs or model results are included in the valuation process when necessary to reflect recent events, such as regulatory, government or corporate actions or significant economic, industry or geographic events that would affect the security’s fair value .

Municipal securities are valued using a series of matrices that consider credit ratings, the structure of the security, the sector in which the security falls, yields, and contractual cash flows. Valuations are further adjusted, when necessary, to reflect recent events such as significant economic or geographic events or ratings changes that would affect the security’s fair value.

Mortgage backed securities . Agency pass through securities are valued by a matrix, considering the issuer type, coupon rate and longest cash flows outstanding. The matrix is developed daily based on available market information. Agency and non-agency collateralized mortgage obligations are both valued using models that consider the structure of the security, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data. Evaluations of Alt-A and subprime mortgages include a review of collateral performance data, which is generally updated monthly.

Asset-backed securities are valued using models that consider the structure of the security, monthly payment information, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data. Spreads and prepayment speeds consider collateral type.

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

Bank loans are also valued by an outside vendor. The valuation is based upon a widely distributed, loan-specific listing of average bid and ask prices published daily by an investment industry group. The publisher of the listing derives the averages from data received from multiple market-makers for bank loans .

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

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

Auction rate municipal bonds are valued internally using a model based on discounted cash flows using yields currently available on fixed rate securities with a similar term and collateral, adjusted to consider the effect of a floating rate and a premium for illiquidity. All are rated A or better.

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

3. Fair Value Measurement (continued)

Corporate debt instruments are valued internally using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities having like terms and payment features that are of comparable credit quality. Assessments of credit quality are based on NRSRO ratings, if available, or are subjectively determined by management if not available. At both June 30, 2011 and December 31, 2010 Level 3 corporate debt instruments include private placement senior notes which are unconditionally guaranteed by large regional banks; other corporate debt securities in the Level 3 category are not guaranteed or fully collateralized. At June 30, 2011, the average NRSRO rating of rated securities is BBB.

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

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

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

Unfunded

Fair Value

Commitments

June 30,

December 31,

June 30,

(In thousands)

2011

2010

2011

Private fund primarily invested in long/short equities (1)

18,152

18,801

None

Private fund primarily invested in non-public equities, including other private funds (2)

6,975

6,311

1,708

25,127

25,112


(1)		The fund holds both long and short U.S. and North American equities, and targets absolute returns using a strategy designed to take advantage of event-driven market opportunities. Redemptions are allowed with a notice requirement of up to 45 days and are paid within 30 days of the redemption date, unless the redemption request is for 90% or more of the requestor’s capital balance. Redemptions at the 90% and above level will be paid at 90%, with the remainder paid after the fund’s annual audit.

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

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

3. Fair Value Measurement (continued)

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

The following tables present summary information regarding changes in the fair value of assets and liabilities measured at fair value using Level 3 inputs, including financial instruments for which ProAssurance has elected fair value accounting. Transfers are as of the end of the period, unless otherwise specified.

June 30, 2011

Level 3 Fair Value Measurements — Assets

State and

Investment in

Municipal

Asset- backed

Unconsolidated

Other

(In thousands)

Bonds

Corporate Bonds

Securities

Equity Securities

Subsidiaries

Investments

Total

Balance March 31, 2011

7,450

16,880

—

25,662

—

49,992

Total gains (losses) realized and unrealized:

Included in earnings, as a part of:

Equity in earnings of unconsolidated subsidiaries

—

(535

)

—

(535

)

Net realized investment gains (losses)

—

Included in other comprehensive income

—

(534

)

—

(534

)

Purchases

—

1,684

—

1,684

Sales

(125

)

(3,311

)

—

(3,436

)

Transfers in

—

Transfers out

—

(5,205

)

—

(5,205

)

Balance June 30, 2011

7,325

7,830

1,684

—

25,127

—

41,966

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

—

(535

)

—

(535

)


	June 30, 2011
	Level 3 Fair Value Measurements — Assets
	State and											Investment in
	Municipal						Asset-backed					Unconsolidated		Other
*(In thousands)*	Bonds			Corporate Bonds			Securities			Equity Securities		Subsidiaries		Investments		Total

Balance December 31, 2010	$	7,550		$	21,229		$	2,220		$	—	$	25,112	$	—	$	56,111
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries		—			—			—			—		15		—		15
Net realized investment gains (losses)		—			—			314			—		—		—		314
Included in other comprehensive income		—			(714	)		(15	)		—		—		—		(729	)
Purchases		—			—			1,684			—		—		—		1,684
Sales		(225	)		(8,505	)		(1,921	)		—		—		—		(10,651	)
Transfers in		—			3,447			—			—		—		—		3,447
Transfers out		—			(7,627	)		(598	)		—		—		—		(8,225	)

Balance June 30, 2011	$	7,325		$	7,830		$	1,684		$	—	$	25,127	$	—	$	41,966


Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—	$	15	$	—	$	15

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

•

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

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

3. Fair Value Measurement (continued)

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

	•		Two asset-backed securities valued at $0.6 million. Multiple observable inputs were available for use in valuing the securities at both March 31, 2011 and June 30, 2011. Such information was not available for valuing the securities at December 31, 2010.

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

	•		Three corporate bonds having a combined value of $5.2 million. Multiple observable inputs were available for use in valuing the securities at June 30, 2011. Such information was not available for valuing the bonds at March 31, 2011.


	June 30, 2010
	Level 3 Fair Value Measurements — Assets
	State and											Investment in
	Municipal						Asset-backed					Unconsolidated		Other
(In thousands)	Bonds			Corporate Bonds			Securities			Equity Securities		Subsidiaries		Investments			Total

Balance March 31, 2010	$	9,590		$	25,173		$	1,000		$	—	$	51,488	$	11,134		$	98,385
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries		—			—			—			—		854		—			854
Net realized investment gains (losses)		—			—			—			—		—		(8,755	)		(8,755	)
Included in other comprehensive income		(114	)		14			—			—		—		9,494			9,394
Purchases		—			491			—			—		10,000		368			10,859
Sales		(75	)		(169	)		—			—		—		(639	)		(883	)
Transfers in		—			151			—			—		16,924		—			17,075
Transfers out		—			—			(1,000	)		—		—		(10,672	)		(11,672	)

Balance June 30, 2010	$	9,401		$	25,660		$	—		$	—	$	79,266	$	930		$	115,257


Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—	$	854	$	(8,755	)	$	(7,901	)


	June 30, 2010
	Level 3 Fair Value Measurements — Assets
	State and											Investment in
	Municipal						Asset-backed					Unconsolidated		Other
(In thousands)	Bonds			Corporate Bonds			Securities			Equity Securities		Subsidiaries		Investments			Total

Balance December 31, 2009	$	9,495		$	24,335		$	940		$	—	$	48,502	$	10,932		$	94,204
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries		—			—			—			—		3,840		—			3,840
Net realized investment gains (losses)		—			—			—			—		—		(10,698	)		(10,698	)
Included in other comprehensive income		81			24			60			—		—		11,879			12,044
Purchases		—			1,551			—			—		10,000		731			12,282
Sales		(175	)		(240	)		—			—		—		(1,242	)		(1,657	)
Transfers in		—			151			—			—		16,924		—			17,075
Transfers out		—			(161	)		(1,000	)		—		—		(10,672	)		(11,833	)

Balance June 30, 2010	$	9,401		$	25,660		$	—		$	—	$	79,266	$	930		$	115,257


Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—		$	—		$	—	$	3,840	$	(10,698	)	$	(6,858	)

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

3. Fair Value Measurement (continued)

Transfers into Level 3 from Level 2 for the three and six months ended June 30, 2010 include:

	•		A corporate bond valued at $151,000. Multiple observable inputs were not available for use in valuing the bond at June 30, 2010. Such information was available for valuing the bond at March 31, 2010.

	•		Tax credit limited partnerships valued at $16.9 million, previously accounted for on a cost basis, were reclassified to Investments in Unconsolidated Subsidiaries. Multiple observable inputs were not available for use in valuing these investments at June 30, 2010.

Transfers from Level 3 into Level 2 for the three and six months ended June 30, 2010 include:

	•		A commercial mortgage-backed security valued at $1 million. Multiple observable inputs were available for use in valuing the securities at June 30, 2010. Such information was not available for valuing the bonds at March 31, 2010.

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

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

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

3. Fair Value Measurement (continued)

June 30, 2011

Level 3 Fair Value Measurements — Liabilities

2019

Interest

Note

rate swap

(In thousands)

Payable

agreement

Total

Balance March 31, 2011

15,555

3,415

18,970

Total (gains) losses realized and unrealized:

Included in earnings as a part of net realized investment (gains) losses

389

437

826

Included in other comprehensive income

—

Settlements

(81

)

—

(81

)

Transfers in

—

Transfers out

—

Balance June 30, 2011

15,863

3,852

19,715

Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end

389

437

826

June 30, 2011

Level 3 Fair Value Measurements — Liabilities

2019

Interest

Note

rate swap

(In thousands)

Payable

agreement

Total

Balance December 31, 2010

15,616

3,658

19,274

Total (gains) losses realized and unrealized:

Included in earnings as a part of net realized investment (gains) losses

408

194

602

Included in other comprehensive income

—

Settlements

(161

)

—

(161

)

Transfers in

—

Transfers out

—

Balance June 30, 2011

15,863

3,852

19,715

Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end

408

194

602

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

3. Fair Value Measurement (continued)


	June 30, 2010
	Level 3 Fair Value Measurements — Liabilities
	2019			Interest
	Note			rate swap
(In thousands)	Payable			agreement		Total
Balance March 31, 2010	$	15,296		$	3,175	$	18,471
Total (gains) losses realized and unrealized:
Included in earnings as a part of net realized investment (gains) losses		(113	)		1,109		996
Included in other comprehensive income		—			—		—
Settlements		(76	)		—		(76	)
Transfers in		—			—		—
Transfers out		—			—		—

Balance June 30, 2010	$	15,107		$	4,284	$	19,391

Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end	$	(113	)	$	1,109	$	996


	June 30, 2010
	Level 3 Fair Value Measurements — Liabilities
	2019			Interest
	Note			rate swap
(In thousands)	Payable			agreement		Total
Balance December 31, 2009	$	14,740		$	2,937	$	17,677
Total (gains) losses realized and unrealized:
Included in earnings as a part of net realized investment (gains) losses		518			1,347		1,865
Included in other comprehensive income		—			—		—
Settlements		(151	)		—		(151	)
Transfers in		—			—		—
Transfers out		—			—		—

Balance June 30, 2010	$	15,107		$	4,284	$	19,391

Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end	$	518		$	1,347	$	1,865

Fair Value Option Elections

The 2019 Note Payable and a related interest rate swap agreement (the Swap) are measured at fair value on a recurring basis, with changes in the fair value of each liability recorded in net realized gains (losses). ProAssurance assumed both liabilities as part of a previous acquisition. The fair value option was elected for the 2019 Note Payable and the Swap because valuation at fair value better reflects the economics of the related liabilities and eliminates the inconsistency that would otherwise result from carrying the 2019 Note Payable on an amortized cost basis and the Swap at fair value.

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

3. Fair Value Measurement (continued)

Financial Instruments Not Measured At Fair Value

Financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:

June 30, 2011

December 31, 2010

Estimated

Estimated

Carrying

Fair

Carrying

Fair

(In thousands)

Value

Value

Financial assets:

Other investments

35,979

43,247

38,078

44,387

Investment in unconsolidated subsidiaries

91,758

101,087

63,642

66,862

BOLI

51,421

50,484

Other assets

10,028

7,743

Financial liabilities:

Trust Preferred Securities

22,992

22,992

Surplus Notes due May 2034

12,000

12,000

Note Payable due February 2012

506

522

496

521

Other liabilities

18,931

18,893

22,367

21,837

Other Investments listed in the table above primarily includes investments in limited liability partnerships, investments in Federal Home Loan Bank (FHLB) common stock, and an annuity investment. The fair value of the private investment fund is estimated as the net asset value provided by the underlying fund. The fair value of the FHLB common stock is estimated as the carrying value of the investment as it is the amount we would receive if we cancel our membership; the investment has been determined not to have suffered an OTTI and the membership cannot be sold. The fair value of the annuity is the present value of the expected future cash flows discounted using a rate available in active markets for similarly structured instruments.

Investment in Unconsolidated Subsidiaries consists primarily of investments in tax credit partnerships, and an investment in a development stage limited liability company. Fair values of investments in tax credit partnerships are based on the present value of the cash flows expected to be generated by the partnerships discounted at rates for investments with similar risk structures and repayment periods. The fair value of the interest in the development stage entity is estimated at our initial capital contribution which occurred less than one year ago and represented an arm’s length transaction between market participants.

The fair value of the BOLI is the cash surrender value associated with the policies on the valuation date.

Other Assets and Other Liabilities primarily consist of related investment assets and liabilities associated with funded deferred compensation agreements. Included in Other Liabilities are also certain contractual liabilities associated with business combinations completed in 2009 and 2010. Fair values of the funded deferred compensation assets/liabilities are based on the net asset value of the underlying securities. The fair values of the business combination liabilities are based on the present value of the expected cash flows, discounted at ProAssurance’s assumed incremental borrowing rate on the valuation date for unsecured liabilities with similar repayment structures.

The fair value of the long-term debt is the present value of expected underlying cash flows of the debt, discounted at rates available on the valuation date for similar debt issued by entities with a similar credit standing to ProAssurance or, if issued by an insurance subsidiary, the subsidiary issuing the debt.

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

4. Investments

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

June 30, 2011

Gross

Estimated

Amortized

Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

Fixed maturities

U.S. Treasury obligations

285,282

9,960

(498

)

294,744

U.S. Agency obligations

68,365

4,527

(15

)

72,877

State and municipal bonds

1,111,660

55,247

(739

)

1,166,168

Corporate bonds

1,304,584

57,932

(4,111

)

1,358,405

Residential mortgage-backed securities

550,437

27,450

(2,189)

575,698

Commercial mortgage-backed securities

86,127

3,953

(41

)

90,039

Other asset-backed securities

76,246

933

(26

)

77,153

3,482,701

160,002

(7,619

)

3,635,084

Equity securities

137

—

155

3,482,838

160,020

(7,619

)

3,635,239


	December 31, 2010
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value

Fixed maturities
U.S. Treasury obligations	$	219,631	$	7,519	$	(1,242	)	$	225,908
U.S. Agency obligations		64,804		4,113		(39	)		68,878
State and municipal bonds		1,204,327		44,047		(4,450	)		1,243,924
Corporate bonds		1,287,842		52,757		(7,335	)		1,333,264
Residential mortgage-backed securities		549,543		25,409		(5,114)	*		569,838
Commercial mortgage-backed securities		95,758		3,663		(35	)		99,386
Other asset-backed securities		61,314		1,373		(131	)		62,556

		3,483,219		138,881		(18,346	)		3,603,754
Equity securities		2,438		1,212		(13	)		3,637

	$	3,485,657	$	140,093	$	(18,359	)	$	3,607,391


*		Includes other-than-temporary impairments recognized in accumulated other comprehensive income of $3.4 million at June 30, 2011 and $4.1 million at December 31, 2010.

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at June 30, 2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. ProAssurance uses the call date as the contractual maturity for pre-refunded state and municipal bonds which are 100% backed by U.S. Treasury obligations.

June 30, 2011

Due after five

Due in one year or

Due after one year

years through ten

Due after

(In thousands)

Amortized Cost

less

through five years

years

ten years

Total Fair Value

Fixed maturities, available for sale

U.S. Treasury obligations

285,282

20,071

173,415

97,580

3,678

294,744

U.S. Agency obligations

68,365

3,063

40,050

29,491

273

72,877

State and municipal bonds

1,111,660

34,363

326,371

559,048

246,386

1,166,168

Corporate bonds

1,304,584

140,256

690,758

508,789

18,602

1,358,405

Residential mortgage-backed securities

550,437

575,698

Commercial mortgage-backed securities

86,127

90,039

Other asset-backed securities

76,246

77,153

3,482,701

3,635,084

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

4. Investments (continued)

Excluding investments in bonds and notes of the U.S. Government, a U.S. Government agency, or pre-refunded state and municipal bonds which are 100% backed by U.S. Treasury obligations, no investment in any entity or its affiliates exceeded 10% of shareholders’ equity at June 30, 2011.

At June 30, 2011, ProAssurance has available-for-sale securities with a fair value of $28.1 million on deposit with various state insurance departments to meet regulatory requirements. ProAssurance also has available-for-sale securities with a fair value of $27.4 million that are pledged as collateral security for the 2019 Note Payable (see Note 9).

Business Owned Life Insurance (BOLI)

ProAssurance holds BOLI policies on management employees that are carried at the current cash surrender value of the policies (original cost $35 million). The primary purpose of the program is to offset future employee benefit expenses through earnings on the cash value of the policies. ProAssurance is the owner and principal beneficiary of these policies.

Other Investments

ProAssurance has Other Investments comprised of the following:


	June 30		December 31
(In millions)	2011		2010

Equity interests in private investment funds, at cost; estimated fair value of $36.8 and $37.5, respectively	$	29.6	$	31.2
FHLB capital stock, at cost		4.7		5.2
Other, principally an annuity, at amortized cost		1.7		1.7

	$	36.0	$	38.1

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

Unconsolidated Subsidiaries

ProAssurance holds investments in unconsolidated subsidiaries, accounted for under the equity method. The investments include the following:


	Carrying Value
	June 30		December 31		Percentage Ownership
(In millions)	2011		2010		June 30, 2011
Investment in Unconsolidated Subsidiaries
Investment in tax credit partnerships	$	90.0	$	60.3		<20	%
Other business interest		1.8		3.4		<50	%
Private investment fund-primarily invested in long/short equities		18.1		18.8		<20	%
Private investment fund-primarily invested in non-public equities		7.0		6.3		<20	%

	$	116.9	$	88.8

Investments in tax credit partnerships are comprised of multiple separate limited partnership interests designed to generate investment returns by providing tax benefits to fund investors in the form of project operating losses and tax credits. The related properties are principally low income housing projects. The $90.0 million carrying value in the partnerships reflects the commitments to the partnerships (less amortization) of which approximately $61 million was not yet funded as of June 30, 2011.

The other business interest is a non-controlling interest in a development stage limited liability company. The start-up phase is expected to continue through 2011 and into 2012.

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

4. Investments (continued)

The long/short equity fund targets absolute returns using a strategy designed to take advantage of event-driven market opportunities.

The non-public equity fund holds diversified private equities and is structured to provide capital appreciation.

Investments Held in a Loss Position

The following tables provide summarized information with respect to investments held in an unrealized loss position at June 30, 2011 and December 31, 2010, including the length of time the investment has been held in a continuous unrealized loss position.


	June 30, 2011
	Total					Less than 12 months					More than 12 months
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
*(In thousands)*	Value		Loss			Value		Loss			Value		Loss

Fixed maturities, available for sale
U.S. Treasury obligations	$	47,652	$	(498	)	$	47,652	$	(498	)	$	—	$	—
U.S. Agency obligations		2,535		(15	)		2,535		(15	)		—		—
State and municipal bonds		49,072		(739	)		41,142		(394	)		7,930		(345	)
Corporate bonds		180,392		(4,111	)		177,534		(3,559	)		2,858		(552	)
Residential mortgage-backed securities		61,285		(2,189	)		52,857		(730	)		8,428		(1,459	)
Commercial mortgage-backed securities		8,267		(41	)		5,246		(3	)		3,021		(38	)
Other asset-backed securities		9,282		(26	)		8,874		(8	)		408		(18	)

	$	358,485	$	(7,619	)	$	335,840	$	(5,207	)	$	22,645	$	(2,412	)

Equity securities, available for sale	$	—	$	—		$	—	$	—		$	—	$	—

Other investments
Equity interests in private investment funds carried at cost of $0.9 million	$	737	$	(203	)	$	737	$	(203	)	$	—	$	—


	December 31, 2010
	Total					Less than 12 months					More than 12 months
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(In thousands)	Value		Loss			Value		Loss			Value		Loss

Fixed maturities, available for sale
U.S. Treasury obligations	$	61,127	$	(1,242	)	$	61,127	$	(1,242	)	$	—	$	—
U.S. Agency obligations		6,340		(39	)		6,340		(39	)		—		—
State and municipal bonds		199,079		(4,450	)		191,157		(3,893	)		7,922		(557	)
Corporate bonds		287,418		(7,335	)		275,808		(5,695	)		11,610		(1,640	)
Residential mortgage-backed securities		121,956		(5,114	)		105,193		(1,927	)		16,763		(3,187	)
Commercial mortgage-backed securities		7,507		(35	)		6,537		(5	)		970		(30	)
Other asset-backed securities		11,692		(131	)		11,246		(103	)		446		(28	)

	$	695,119	$	(18,346	)	$	657,408	$	(12,904	)	$	37,711	$	(5,442	)

Equity securities, available for sale	$	499	$	(13	)	$	335	$	(3	)	$	164	$	(10	)

Other investments
Equity interests in private investment funds carried at cost of $19.7 million	$	19,298	$	(401	)	$	—	$	—		$	19,298	$	(401	)

As of June 30, 2011, there were 228 debt securities (8.9% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 174 issuers. The single greatest unrealized loss position is approximately $0.8 million; the second greatest unrealized loss position is approximately $0.4 million. The securities were evaluated for impairment as of June 30, 2011.

As of December 31, 2010, there were 510 debt securities (19% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 309 issuers. The single greatest unrealized loss position approximated $0.8 million; the second greatest unrealized loss position approximated $0.6 million. The securities were evaluated for impairment as of December 31, 2010.

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

4. Investments (continued)

Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds in an unrealized loss position have suffered an other-than-temporary impairment in value. A detailed discussion of the factors considered in the assessment is included in Note 1 of the Notes to the Consolidated Financial Statements included in ProAssurance’s December 31, 2010 Form 10-K.

At June 30, 2011 fixed maturity securities held in an unrealized loss position, excluding asset-backed securities, have paid all scheduled contractual payments and are expected to continue doing so. Expected future cash flows of asset-backed securities were estimated using the most recently available six-month historical performance data for the collateral (loans) underlying the security or, if historical data was not available, sector based assumptions.

Net Investment Income

Net investment income by investment category is as follows:


	Three Months Ended						Six Months Ended
	June 30						June 30
(In thousands)	2011			2010			2011			2010

Fixed maturities	$	36,682		$	36,700		$	72,634		$	74,396
Equities		186			238			416			456
Short-term investments		17			61			73			164
Other invested assets		575			1,054			1,564			1,606
Business owned life insurance		472			413			936			821

		37,932			38,466			75,623			77,443
Investment expenses		(1,635	)		(1,385	)		(3,166	)		(2,734	)

Net investment income	$	36,297		$	37,081		$	72,457		$	74,709

Net Realized Investment Gains (Losses)

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


	Three Months Ended						Six Months Ended
	June 30						June 30
(In thousands)	2011			2010			2011			2010

Total other-than-temporary impairment losses:
Residential mortgage-backed securities	$	(319	)	$	—		$	(769	)	$	(23	)
Corporate bonds		—			—			—			—
Equities		—			—			—			—
Equity interest in a private investment fund		(746	)		—			(2,133	)		(3,373	)
High yield asset-backed securities		—			(4,912	)		—			(8,983	)
Portion recognized in (reclassified from) Other Comprehensive Income:
Residential mortgage-backed securities		(113	)		—			(681	)		6
High yield asset-backed securities		—			(2,128	)		—			—

Net impairment losses recognized in earnings		(1,178	)		(7,040	)		(3,583	)		(12,373	)
Gross realized gains, available-for-sale securities		5,664			7,981			10,292			10,097
Gross realized (losses), available-for-sale securities		(1,113	)		(141	)		(1,357	)		(201	)
Net realized gains (losses), short-term		—			—			—			—
Net realized gains (losses), trading securities		223			4,092			2,915			4,900
Change in unrealized holding gains (losses), trading securities		(570	)		(7,397	)		(1,341	)		(6,462	)
Increase in the fair value of liabilities carried at fair value		(826	)		(996	)		(602	)		(1,866	)

Net realized investment gains (losses)	$	2,200		$	(3,501	)	$	6,324		$	(5,905	)

ProAssurance recognized impairments of $2.1 million in 2011 related to an interest in a private investment fund, accounted for on a cost basis. The fund has notified ProAssurance of its intention to be sold publicly in the next few months, and the Company has reduced the carrying value of its interest in the fund to reflect the expected market value of the assets.

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

4. Investments (continued)

ProAssurance recognized credit-related impairments in earnings of $1.5 million in 2011, related to residential mortgage-backed securities. Expected future cash flows were less than ProAssurance’s carrying value for these securities; therefore, ProAssurance reduced the carrying value of its interest in these securities and recognized the loss in its 2011 net income.

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


			Six Months
	Three Months Ended		Ended
(In thousands)	June 30, 2011		June 30, 2011

Balance beginning of period	$	5,334	$	4,446
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized		—		—
OTTI has been previously recognized		394		1,282
Reductions due to:
Securities sold during the period (realized)		—		—
Securities which will be sold in coming periods		—		—
Securities for which it is more likely than not that the security will be required to be sold prior to anticipated recovery of amortized cost basis		—		—
Accretion recognized during the period related to cash flows that are expected to exceed the amortized cost basis of the security		—		—

Balance June 30, 2011	$	5,728	$	5,728

Proceeds from the sales of available-for-sale securities during the three and six months ended June 30, 2011 are $141.4 million and $310.9 million, respectively, as compared to $248.4 million and $393.3 million for the same respective periods of 2010. Purchases of available-for-sale securities are $200.7 million and $452.7 million during the three and six months ended June 30, 2011, respectively, as compared to $219.9 million and $458.3 million for the same respective periods of 2010.

5. Income Taxes

ProAssurance estimates its annual effective tax rate at the end of each quarterly reporting period which is used to record the provision for income taxes in the interim financial statements. The provision for income taxes is different from that which would be obtained by applying the statutory Federal income tax rate to income before taxes primarily because a portion of ProAssurance’s investment income is tax-exempt.

ProAssurance files income tax returns in the U.S. federal jurisdiction and various states. The Internal Revenue Service has completed an examination of the Company’s 2005 through 2008 returns (the 2005-2008 exam) and has begun an examination of the 2009 return. The 2005-2008 exam principally resulted in delaying the deductibility of certain bonus compensation which increased taxes due for the 2007 and 2008 tax years but decreased taxes due for the 2009 tax year by an offsetting amount, the effect of which had previously been recorded as an uncertain tax position. The 2005-2008 exam resulted in no adjustment to tax expense (exclusive of interest accruals) and no penalties or fines. Upon finalization of the 2005-2008 exam, uncertain tax positions totaling $8.3 million were deemed effectively settled and were reversed (along with approximately $324,000 of related accrued interest) in the first quarter of 2011. The Company’s Illinois state tax returns for the years 2006 through 2008 are currently under examination by the Illinois Department of Revenue.

ProAssurance’s liability for unrecognized tax benefits is $253,000 at June 30, 2011 and $8.3 million at December 31, 2010.

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

6. Deferred Policy Acquisition Costs

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

Amortization of deferred policy acquisition costs are $14.6 million and $29.0 million for the three and six months ended June 30, 2011, respectively, and $14.7 million and $29.0 million for the three and six months ended June 30, 2010, respectively.

7. Reserve for Losses and Loss Adjustment Expenses

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

ProAssurance recognized favorable net loss development of $50.2 million and $90.2 million related to previously established reserves for the three and six months ended June 30, 2011, respectively. The favorable net loss development reflects reductions in the Company’s estimates of claims severity, principally for the 2004 through 2009 accident years.

For the three and six months ended June 30, 2010, ProAssurance recognized favorable net loss development of $37.5 million and $62.5 million, respectively, to reflect reductions in estimated claim severity principally for accident years 2004 through 2008.

8. Commitments and Contingencies

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

As a result of its acquisition of APS, ProAssurance assumed risk of loss related to certain non-claims related legal actions previously asserted against APS subsidiaries. ProAssurance included a liability of $5.6 million related to these actions as a component of the fair value of assets acquired and liabilities assumed in the purchase price allocation. The value of the reserve was based on management’s assessment of the expected outcome of the actions and a reasonable estimate of losses expected to be incurred. In the best judgment of management the reserve amount continues to be adequate, and expected ultimate losses, net of estimated recoveries, are not expected to exceed the reserve amount.

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

8. Commitments and Contingencies (continued)

ProAssurance has commitments to fund $61 million in capital contributions to tax credit partnerships. Funding of the commitments is primarily expected to occur in 2011 and 2012; additional information regarding tax credit partnership investments is provided in Note 4. ProAssurance has also entered into agreements with several limited liability partnerships, totaling approximately $54 million at June 30, 2011, to be funded within the next five years as requested by the partnership.

9. Long-term Debt

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


	(In thousands)
	June 30		December 31
	2011			2010

Trust Preferred Securities due 2034, unsecured. Bears interest at a variable rate of LIBOR plus 3.85%, adjusted quarterly (4.1% at June 30, 2011).	$	22,992	$	22,992
Surplus Notes due May 2034, unsecured. Bears interest at a variable rate of LIBOR plus 3.85%, adjusted quarterly (4.1% at June 30, 2011).		12,000		12,000
Note Payable due February 2019, carried at fair value, principal of $17.3 million at June 30, 2011 and $17.4 million at December 31, 2010. Secured by available-for-sale securities having a fair value at June 30, 2011 of approximately $27.4 million. Bears interest at a variable rate of LIBOR plus 0.7%. See information below regarding the associated interest rate swap.		15,863		15,616
Note Payable due February 2012, unsecured, principal of $517,000 net of an unamortized discount of $11,000 at June 30, 2011 and $21,000 at December 31, 2010. Bears interest at the U.S. prime rate, paid and adjusted quarterly (3.3% at June 30, 2011).		506		496

	$	51,361	$	51,104

Interest Rate Swap

ProAssurance, through its PICA subsidiary, is party to an interest rate swap agreement (the Swap) with the issuing bank of the Note Payable due February 2019 (the 2019 Note Payable). The purpose of the Swap is to reduce the market risk from changes in future interest rates relative to the 2019 Note Payable. The Swap, which terminates February 1, 2019, effectively fixes the interest rate related to the 2019 Note Payable at 6.6%. The notional amount of the Swap corresponds directly to the unamortized portion of the debt being hedged each month. Under the Swap agreement, PICA agrees to exchange, at monthly intervals, the difference between the fixed-rate and LIBOR variable rate by reference to the notional principal amount. The liability associated with the Swap is measured at fair value on a recurring basis which approximates $3.9 million at June 30, 2011 and $3.7 million at December 31, 2010. The Swap liability is classified as a part of other liabilities.

Revolving Credit Agreement

On April 15, 2011 ProAssurance entered into a revolving credit agreement (the “Agreement”) with five participating lenders. The Agreement permits ProAssurance to borrow, repay and reborrow from the lenders during the term of the Agreement; aggregate outstanding borrowings are not permitted to exceed $150 million at any time. All borrowings are required to be repaid prior to the expiration date of the Agreement (April 15, 2014). ProAssurance will pay a commitment fee during the term of the agreement, initially set at 25 basis points, based on the average unused portion of the credit line and ProAssurance’s credit ratings. The interest rate applicable to borrowings under the Agreement will

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

9. Long-term Debt (continued)

depend upon ProAssurance’s credit ratings at the time funds are borrowed, and on whether the borrowing is secured or unsecured. The Agreement contains customary representations, covenants and events constituting default, and remedies for default. Additionally, the Agreement carries the following financial covenants:

	(1)		ProAssurance is not permitted to have a leverage ratio of Consolidated Funded Indebtedness (principally, obligations for borrowed money, obligations evidenced by instruments such as notes or acceptances, standby and commercial Letters of Credit, and contingent obligations) to Consolidated Total Capitalization (principally, total non-trade liabilities on a consolidated basis plus consolidated shareholders’ equity, exclusive of accumulated other comprehensive income) greater than 0.35 to 1.0, determined at the end of each fiscal quarter.

	(2)		ProAssurance is required to maintain a minimum net worth of not less than the sum of 75% of Consolidated Net Worth (consolidated shareholders’ equity, exclusive of accumulated other comprehensive income) at December 31, 2010, plus 50% of consolidated net income earned each fiscal quarter, if positive, beginning with the quarter ending March 31, 2011, plus 100% of net cash proceeds resulting from the issuance of ProAssurance capital stock.

Funds borrowed under the terms of the Revolving Credit Agreement will be used for general corporate purposes, including, but not limited to, use as short-term working capital, funding for share repurchases as authorized by the Board, and for support of other activities ProAssurance enters into in the normal course of business. To date, ProAssurance has not borrowed any funds under the Agreement.

Covenant Compliance

ProAssurance is currently in compliance with all covenants.

Additional Information

For additional information regarding the terms of ProAssurance’s outstanding long-term debt, see Note 10 of the Notes to the Consolidated Financial Statements included in ProAssurance’s December 31, 2010 Form 10-K.

10. Shareholders’ Equity

At June 30, 2011 and December 31, 2010, ProAssurance had 100 million shares of authorized common stock and 50 million shares of authorized preferred stock. The Board of Directors of ProAssurance Corporation (the Board) has the authority to determine provisions for the issuance of preferred shares, including the number of shares to be issued, the designations, powers, preferences and rights, and the qualifications, limitations or restrictions of such shares. To date, the Board has not approved the issuance of preferred stock.

At June 30, 2011 approximately $194.0 million in prior authorizations from the Board for the repurchase of common shares or the retirement of outstanding debt remains available for use. The timing and quantity of purchases depends upon market conditions and changes in ProAssurance’s capital requirements and is subject to limitations that may be imposed on such purchases by applicable securities laws and regulations, and the rules of the New York Stock Exchange.

ProAssurance reacquired approximately 259,000 common shares, having a total cost of $15.4 million, during the six months ended June 30, 2011, all in the first quarter, including 7,000 forfeited employer match shares (cost basis of $444,000) reacquired due to the termination of the ProAssurance Corporation Stock Ownership Plan. ProAssurance repurchased approximately 674,000 common shares, having a total cost of $39.2 million, during the six months ended June 30, 2010, all in the second quarter.

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

10. Shareholders’ Equity (continued)

Share-based compensation expense is $2.0 million and $3.7 million for the three and six months ended June 30, 2011, respectively, and $1.5 million and $2.9 million for the three and six months ended June 30, 2010, respectively. Related tax benefits are $0.7 million and $1.3 million for the three and six months ended June 30, 2011, respectively, and $0.5 million and $1.0 million for the three and six months ended June 30, 2010, respectively.

ProAssurance granted approximately 20,000 restricted share units to employees in February 2011. The awards 100% vest three years from the grant date, based on a continued service requirement. The fair value of each unit was estimated at $64.08, equal to the market value of a ProAssurance common share on the date of grant.

ProAssurance awarded approximately 93,000 (target) performance share units to employees in February 2011. The awards 100% vest at the end of a three-year period if the service requirements are met and minimum performance goals are achieved. If minimum performance goals are achieved, the payment of awards can vary from 75% to 125% of set targets depending upon the degree to which the performance goals are achieved. The fair value of each award was estimated at $64.08, equal to the market value of a ProAssurance common share on the date of grant. ProAssurance issued approximately 52,000 common shares to employees in February 2011 related to performance share awards granted in 2008. The awards were issued at the maximum level (125% of target) based on performance levels achieved. Cash was given in lieu of shares sufficient to satisfy required tax withholdings.

ProAssurance issued approximately 20,000 and 40,000 common shares to employees in February 2011 and February 2010, respectively, as bonus compensation, as approved by the Compensation Committee of the Board. The shares issued were valued at fair value (the market price of a ProAssurance common share on the date of award).

In late 2010 ProAssurance terminated the ProAssurance Corporation Stock Ownership Plan and established the ProAssurance Corporation 2011 Stock Ownership Plan (the Plan). Under the Plan, eligible employees and directors of ProAssurance and its subsidiaries are given the opportunity to annually contribute up to $5,000 to be used each October for the purchase of ProAssurance common shares. For each share so purchased, ProAssurance will award a matching restricted stock unit to the participant. The restricted stock units will vest at the end of a three-year period subject to a continuous service requirement and be ratably charged to expense over the vesting period.

11. Earnings Per Share

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

Stock options are not dilutive when the option exercise price exceeds the average price of a common share during the period or when the result from assuming an option is exercised is a net decrease to outstanding shares. All outstanding options were dilutive for the three- and six-month periods ended June 30, 2011, and for the three-month period ended June 30, 2010. Approximately 116,000 of ProAssurance’s outstanding options, on average, were not dilutive for the six-month period ended June 30, 2010.

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

12. Variable Interest Entities

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

The entities consist of 1) private investment funds formed for the purpose of achieving diversified equity and debt returns, 2) private investment funds formed to provide investment returns through the transfer of tax credits (principally federal or state tax credits related to federal low-income housing) and 3) a limited liability interest in a development stage business operation. In those instances where ProAssurance holds a minor interest in the entity, ProAssurance accounts for its interest on a cost basis. Cost basis investments are included in Other Investments and have a carrying value of $29.6 million and $31.2 million at June 30, 2011 and December 31, 2010, respectively. In those instances where ProAssurance holds a greater than minor interest, ProAssurance accounts for its interest using the equity method. Equity method investments are included in Investment in Unconsolidated Subsidiaries and have a carrying value of $116.9 million at June 30, 2011 and $88.8 million at December 31, 2010.


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

The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes to those statements which accompany this report as well as our 2010 Form 10-K. A glossary of insurance terms and phrases is available on the investor section of our website. Throughout the discussion, references to ProAssurance, “PRA,” “Company,” “we,” “us” and “our” refer to ProAssurance Corporation and its consolidated subsidiaries. The discussion contains certain forward-looking information that involves risks and uncertainties. As discussed under “Forward-Looking Statements,” our actual financial condition and operating results could differ significantly from these forward-looking statements.

Critical Accounting Estimates

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

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

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

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

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

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

Any adjustments resulting from our review process are reflected in the then-current operations. Due to the size of our reserve for losses, even a small percentage adjustment to these estimates could have a material effect on our results of operations for the period in which the adjustment is made, as was the case in 2010 and has been thus far in 2011.

Reinsurance

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

We evaluate each of our ceded reinsurance contracts at inception to confirm that there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting guidance. At June 30, 2011 all ceded contracts are accounted for as risk transferring contracts.

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

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

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

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

Investment Valuations

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


	Distribution by
	GAAP Fair Value Hierarchy									June 30, 2011
	Level 1			Level 2			Level 3			Total Investments

Fair Value		4	%		90	%		1	%		95	%
Cost or cash surrender value											5	%

Total Investments											100	%

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All of our fixed maturity and equity securities investments are carried at fair value. Our short-term securities are carried at amortized cost, which approximates fair value.

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

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

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

Level 1 Investments

As of June 30, 2011, fair values for our equity and a portion of our short-term securities have been determined using an exchange traded price. There is little judgment involved when fair value is determined using an exchange traded price. In accordance with GAAP, for disclosure purposes we classify securities valued using an exchange traded price as Level 1 securities.

Level 2 Investments

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

Level 3 Investments

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

We hold interests in private investment funds which hold debt and equity securities. We value these investments, which at June 30, 2011 total $25.1 million or less than 1% of total investments, based on quarterly net asset values provided to us by fund managers, which approximate fair value. In accordance with GAAP, for disclosure purposes we classify interests valued in this manner as Level 3 securities.

Other Investments

Our investments that are not valued at fair value include:

	•		Interests in private investment funds having a carrying value of $29.6 million at June 30, 2011; valued at cost.

	•		Business owned life insurance policies having a carrying value of $51.4 million at June 30, 2011, valued at cash surrender value.

	•		Interests in tax credit partnerships having a carrying value of approximately $90.0 million at June 30, 2011; valued under the equity method.

	•		An other business interest that has a carrying value of $1.8 million at June 30, 2011; valued under the equity method based on the latest financial statements of the entity.

	•		FHLB capital stock having a carrying value of $4.7 million at June 30, 2011; valued at cost.

	•		Other investments having a carrying value at $1.7 million at June 30, 2011; valued at cost.

Investment Impairments

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

For equity securities, we consider the following:

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

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

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

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

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

	•		third party research and credit rating reports;

	•		the current credit standing of the issuer, including credit rating downgrades;

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

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

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

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

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

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

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

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

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

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

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

Deferred Policy Acquisition Costs

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

Deferred Taxes

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

Goodwill

We make at least an annual assessment as to whether the value of our goodwill asset is impaired. Management evaluates the carrying value of goodwill annually during the fourth quarter and before the annual evaluation if events occur or circumstances change that would more likely than not reduce the fair value below the carrying value. We evaluate goodwill as one reporting unit because we operate in a single operating segment and our segment components are economically similar. We estimate the fair value of our reporting unit on the evaluation date based on market capitalization and an expected premium that would be paid to acquire control of our Company (a control premium). We then perform a sensitivity analysis using a range of historical stock prices and control premiums. We concluded as of our last evaluation date, October 1, 2010, that the fair value of our reporting unit exceeded the carrying value and no adjustment to impair goodwill was necessary.

Accounting Changes

We are not aware of any changes as of June 30, 2011 that would have a material impact on ProAssurance’s results of operations or financial position.

Liquidity and Capital Resources and Financial Condition

Overview

ProAssurance Corporation is a holding company and is a legal entity separate and distinct from its subsidiaries. Because it has no other business operations, dividends from its operating subsidiaries represent a significant source of funds for its obligations, including debt service. At June 30, 2011, we held cash and liquid investments of approximately $97.5 million outside of our insurance subsidiaries that are available for use without regulatory approval. Our insurance subsidiaries, in aggregate, are permitted to pay dividends of approximately $248 million over the course of 2011 without prior approval. However, the payment of any dividend requires prior notice to the insurance regulator in the state of domicile and the regulator may prevent the dividend if, in its judgment, payment of the dividend would have an adverse effect on the surplus of the insurance subsidiary. Through the six months ended June 30, 2011, none of the permitted dividends have been paid.

Acquisitions

On November 30, 2010, we acquired 100% of the outstanding shares of American Physicians Service Group, Inc. (APS), whose primary operating entity is American Physicians Insurance Company (API), in a transaction valued at $237 million including cash paid of $233 million and liabilities assumed of $4 million. API provides professional liability insurance primarily to physicians in Texas and reported gross written premium of $61 million for the year ended December 31, 2010, $5 million of which was included in ProAssurance consolidated premium for 2010.

See Note 2 of the Notes to the Consolidated Financial Statements in our 2010 Form 10-K for detailed information regarding our acquisition of APS, including a summarized listing of the assets acquired and liabilities assumed.

Cash Flows

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

Our operating activities provided positive cash flows of approximately $53.0 million and $75.9 million for the six months ended June 30, 2011 and 2010, respectively. Operating cash flows for 2011 and 2010 compare as follows:


	Cash Flow
( In millions)	Increase (Decrease)
Cash provided by operating activities six months ended June 30, 2010	$	76
Increase (decrease) in operating cash flows for the six months ended June 30, 2011:
Decrease in premium receipts (1)		(19	)
Increase in payments to reinsurers (2)		(9	)
Decrease in losses paid (3)		24
Decrease in reinsurance recoveries (4)		(12	)
Increase in Federal and state income tax payments (5)		(12	)
Cash flows attributable to our APS subsidiary		7
Other amounts not individually significant, net		(2	)

Cash provided by operating activities six months ended June 30, 2011	$	53


(1)		The decline in premium receipts primarily reflects the $10.0 million reduction in gross written premiums at our subsidiaries other than APS. Written premiums associated with two-year term policies increased by approximately $6.9 million for the six-month period ended 2011 as compared to 2010, while approximately half of the written amount is not scheduled to be collected until 2012. Additionally, in 2011 more of our insureds have elected to take advantage of payment plans offered to them.

(2)		Reinsurance contracts are generally for premiums written in a specific annual period, but can remain in effect until all claims under the contract have been resolved. Some contracts require annual settlements while others require settlement only after a number of years have elapsed, thus the amounts paid can vary widely from period to period.

(3)		The timing of our loss payments varies from period to period because the process for resolving claims is complex and occurs at an uneven pace depending upon the circumstances of the individual claim.

(4)		The timing of reinsurance recoveries varies from period to period and can depend upon the terms of the applicable reinsurance agreement, the nature of the underlying claim and the timing and amount of underlying loss payments.

(5)		The increase in tax payments primarily reflects:

	•		A $9.4 million increase in estimated tax payments during 2011 as compared to 2010.

	•		Payments of $5.9 million made in 2011 for the 2008 and 2007 tax years as a result of Federal tax return audits conducted by the Internal Revenue Service. For additional information regarding the Internal Revenue Service audits, see Note 5 of the Notes to the Condensed Consolidated Financial Statements.

	These increases in tax payments were offset by a $3.6 million increase in federal tax refunds from capital loss carry-backs received in 2011 as compared to 2010.

Investment Exposures

The following table provides summarized information regarding our investments as of June 30, 2011:


			Unrealized Gains (Losses)
			Included in Carrying Value
	Carrying							Average		% Total
(In thousands)	Value		Gains		Losses			Rating		Investments

Fixed Maturities
Government
U.S. Treasury	$	294,744	$	9,960	$	(498	)	AAA			7	%
U.S. Agency		72,877		4,527		(15	)	AAA			2	%

Total government		367,621		14,487		(513	)	AAA			9	%

State and Municipal Bonds		1,166,168		55,247		(739	)	AA			29	%

Corporate Bonds
Financial institutions		345,807		11,162		(1,479	)		A+		9	%
FDIC insured		61,754		670		—		AAA			2	%
Communications		55,111		2,322		(36	)	BBB+			1	%
Utilities		95,487		4,174		(885	)		A-		2	%
Energy		55,829		4,034		(30	)		A-		1	%
Industrial		649,336		32,165		(1,479	)		A-		16	%
Transportation		24,920		1,568		(15	)	BBB+			1	%
Other		70,161		1,837		(187	)	AA			2	%

Total corporate bonds		1,358,405		57,932		(4,111	)		A		34	%

Asset-backed Securities
Agency mortgage-backed securities		541,685		26,251		(596	)	AAA			14	%
Non-agency mortgage-backed securities		18,728		439		(127	)	BB+			<1	%
Subprime (1)		9,059		265		(1,232	)	BBB			<1	%
Alt-A (2)		6,226		495		(234	)		B+		<1	%
Commercial mortgage-backed securities		90,039		3,953		(41	)	AAA			2	%
Credit card		21,909		191		(3	)	AAA			1	%
Automobile		41,034		343		(5	)	AAA			1	%
Other		14,210		399		(18	)	AA+			<1	%

Total asset-backed securities		742,890		32,336		(2,256	)	AA+			19	%

Total fixed maturities		3,635,084		160,002		(7,619	)	AA-			91	%

Equities
Equity
Financial		5,414		16		—					<1	%
Energy		7,092		—		—					<1	%
Consumer cyclical		1,698		—		—					<1	%
Consumer non-cyclical		6,535		—		—					<1	%
Technology		2,707		—		—					<1	%
Industrial		3,337		2		—					<1	%
Communications		2,489		—		—					<1	%
Index funds		4,638		—		—					<1	%
All Other		2,522		—		—					<1	%

Total equities		36,432		18		—					1	%

Short-Term		128,901		—		—					3	%

Business-owned life insurance (BOLI)		51,421		—		—		AA-			1	%

Investment in Unconsolidated Subsidiaries
Investment in tax credit partnerships		89,960		—		—					2	%
Other business interest		1,798		—		—					<1	%
Private fund—primarily invested in long/short equities		18,152		—		—					<1	%
Private fund—primarily invested in non-public equities		6,975		—		—					<1	%

Total investment in unconsolidated subsidiaries		116,885		—		—					3	%

Other Investments
FHLB capital stock		4,721		—		—					<1	%
Private fund—primarily invested in distressed debt		17,567		—		—					<1	%
Private fund—primarily invested in long/short equities		11,010		—		—					<1	%
Other		1,741		—		—					<1	%
Private Equity Fund		940		—		—					<1	%

Total other investments		35,979		—		—					1	%


Total Investments	$	4,004,702	$	160,020	$	(7,619	)				100	%


(1)		$0.9 million are AA, $6.1 million are BBB, $2.1 million are B or below

(2)		$1.3 million are AA, $0.2 million are A, $0.3 million are BBB, $4.4 million are CCC or below

A detailed listing of our investment holdings as of June 30, 2011 is presented in an Investor Supplement we make available in the Investor Relations section of our website, www.proassurance.com or directly at www.proassurance.com/investorrelations/supplemental.aspx.

We manage our investments to ensure that we will have sufficient liquidity to meet our obligations, taking into consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as well as the expected cash flows to be generated by our operations. In addition to the interest and dividends we will receive we anticipate that between $40 million and $100 million of our investments will mature (or be paid down) each quarter of the next year and become available, if needed, to meet our cash flow requirements. The primary outflow of cash at our insurance subsidiaries is related to paid losses and operating costs, including income taxes. The payment of individual claims cannot be predicted with certainty; therefore, we rely upon the history of paid claims in estimating the timing of future claims payments. To the extent that we may have an unanticipated shortfall in cash we may either liquidate securities or borrow funds under existing borrowing arrangements through the Federal Home Loan Banking system and a $150 million credit facility, as discussed in Note 9 of the Notes to the Condensed Consolidated Financial Statements. However, given the relatively short duration of our investments, we do not foresee any such shortfall.

Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately 97% of our fixed maturities being investment grade securities as determined by national rating agencies. The weighted average effective duration of our fixed maturity securities at June 30, 2011 is 4.1 years; the weighted average effective duration of our fixed maturity securities combined with our short-term securities is 3.9 years.

We have increased our investment in tax credit limited partnerships by an additional $32 million during the first six months of 2011. These investments are comprised of multiple separate limited partner interests designed to generate investment returns by providing tax benefits to fund investors in the form of project operating losses and tax credits. The related properties are principally low income housing properties. The $90.0 million carrying value of the partnerships reflects the commitments to the partnerships (less amortization) of which approximately $61 million has not yet been funded as of June 30, 2011.

Reinsurance

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

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

Debt

Our long-term debt as of June 30, 2011 is comprised of the following:


						Carrying Value
($ in thousands)	Contractual Rate			Outstanding Principal		June 30, 2011

Trust Preferred Securities due 2034		4.1	%(1)	$	22,992	$	22,992
Surplus Notes due May 2034		4.1	%(1)		12,000		12,000
Note Payable due February 2019 (2)		6.6	%(3)		17,275		15,863
Note Payable due February 2012		3.3	%(4)		517		506

						$	51,361


(1)		Adjusted quarterly based on LIBOR.

(2)		The 2019 Note Payable is valued at fair value. See Note 9.

(3)		A related interest rate swap fixes rate at 6.6%. Swap is settled monthly. See Note 9.

(4)		Adjusted quarterly based on the U.S. prime rate.

All of our long-term debt is currently repayable or redeemable, with proper notice, at a date no later than the next quarterly or semi-annual interest payment date. Insurance department approval is required for redemption of surplus notes.

During the second quarter of 2011, we entered into a revolving credit agreement that expires April 15, 2014. The agreement allows us to borrow up to $150 million that would be used for general corporate purposes, including, but not limited to, short-term working capital, share repurchases as authorized by the Board, and support for other activities we enter into in the normal course of business. To date, we have not borrowed any funds under the agreement.

ProAssurance is currently in compliance with all covenants. Additional information regarding our debt is provided in Note 9 of the Notes to the Condensed Consolidated Financial Statements.

Treasury Shares

We reacquired approximately 259,000 common shares having a total cost of $15.4 million during the six-month period ended June 30, 2011, all in the first quarter, including approximately 7,000 forfeited employer match shares (cost basis of $444,000) reacquired due to the termination of the ProAssurance Corporation Stock Ownership Plan. Additional information regarding the termination of the ProAssurance Corporation Stock Ownership Plan is provided in Note 10 of the Notes to the Condensed Consolidated Financial Statements.

At June 30, 2011 we have approximately $194.0 million in prior authorizations from our Board of Directors available for use for the repurchase of common shares or the retirement of outstanding debt.

Litigation

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

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

There are risks, as outlined in our Risk Factors in Part 1 of our 2010 Form 10-K, that any of these actions could cost us more than our estimates. In particular, we or our insureds may receive adverse verdicts; post-trial motions may result in unfavorable rulings; any appeals that may be undertaken may be unsuccessful; and we may be unsuccessful in our legal efforts to limit the scope of coverage available to insureds.

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

To the extent that the cost of resolving legal actions exceeds our estimates, the excess could materially affect our results of operations in the period of resolution.

Overview of Results—Three and Six Months Ended June 30, 2011 and 2010

Net income is $55.1 million and $102.8 million for the three and six months ended June 30, 2011, respectively, as compared to $40.4 million and $78.5 million for the same respective periods in 2010. Net income per diluted share is $1.79 and $3.33 for the three and six months ended June 30, 2011, respectively, as compared to $1.23 and $2.40 for the same respective periods in 2010.

Results from the three and six months ended June 30, 2011 and 2010 compare as follows:

Premiums

Net premiums earned increased by $11.7 million or 9.3% and $20.3 million or 8.2% for the 2011 three-and six-month periods, respectively, including $14.5 million and $28.9 million, respectively, attributable to the acquisition of APS. Our results reflect the effects of a competitive market place and rate reductions that reflect improved loss trends.

Net Investment Income; Net Realized Investment Gains (Losses)

Our 2011 net investment result (which includes both net investment income and earnings from unconsolidated subsidiaries) decreased by $4.0 million or 10.6% for the three-month period and decreased by $9.8 million or 12.5% for the six-month period.

Net realized investment gains in 2011 are $2.2 million and $6.3 million for the three-and six-month periods, respectively, as compared to net realized losses of $3.5 million and $5.9 million for the same respective periods in 2010.

Expenses

Current accident year net losses increased by $8.6 million or 8.1% for the 2011 three-month period and increased by $15.3 million or 7.3% for the 2011 six-month period. Approximately $10.7 million and $20.5 million of the increase for the three-and six-month periods, respectively, is attributable to the acquisition of APS. We reduced net losses by $50.2 million and $90.2 million for the 2011 three-and six-month periods, respectively, and by $37.5 million and $62.5 million for the same respective periods in 2010 as a result of our quarterly re-evaluation of net losses incurred for prior accident years.

Underwriting, policy acquisition and operating expenses increased in 2011 as compared to 2010 by $1.2 million or 3.9% and $5.7 million or 9.1% for the three-and six-month periods, respectively, reflecting the acquisition of APS, which added expenses of approximately $2.5 million and $6.4 million for the three-and six-month periods, respectively.

Ratios

Our net loss ratio decreased in 2011 by 7.6 points for the three-month period, and decreased 9.1 points for the six-month period, primarily because favorable development was higher in 2011 as compared to 2010. Approximately 1.0 point and 1.7 points of the decrease for the three-and six-month periods, respectively, relates to a lower loss ratio for the business acquired in the APS transaction.

Our 2011 underwriting expense ratio reflects a 0.5 point decrease for the three-month period and a 0.3 point increase for the six-month period. The three-and the six-month periods reflect reductions of 0.7 points and 0.3 points, respectively, attributable to the effect of the business acquired from APS.

Our operating ratio declined in 2011 by 5.0 points for the three-month period, reflecting the improved net loss ratio and expense ratio, offset by lower investment income. Our operating ratio

declined by 5.7 points for the six-month period, reflecting the improved net loss ratio, offset by a higher expense ratio and lower investment income.

Return on equity is 11.4% and 10.8% for the three- and six-month periods of 2011, respectively, on an annualized basis.

Book Value per Share

Our book value per share at June 30, 2011 is $64.28 compared to $60.35 at December 31, 2010. The change reflects our 2011 income, the increase in accumulated other comprehensive income and a benefit from share repurchases. Due to the size of our Shareholders’ Equity (approximately $2.0 billion at June 30, 2011), the growth rate of our book value per share may slow. The past growth rates of our book value per share do not necessarily predict similar future results.

Non-GAAP Financial Measure — Operating Income

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

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


	Three Months Ended						Six Months Ended
	June 30						June 30
(In thousands, except per share data)	2011			2010			2011			2010

Net income	$	55,096		$	40,381		$	102,790		$	78,493
Items excluded in the calculation of operating income:
Net realized investment (gains) losses		(2,200	)		3,501			(6,324	)		5,905
Guaranty fund assessments (recoupments)		(15	)		(616	)		(58	)		(750	)

Pre-tax effect of exclusions		(2,215	)		2,885			(6,382	)		5,155

Tax effect, at 35%		775			(1,010	)		2,234			(1,804	)


Operating income	$	53,656		$	42,256		$	98,642		$	81,844


Per diluted common share:
Net income	$	1.79		$	1.23		$	3.33		$	2.40
Effect of exclusions		(0.05	)		0.06			(0.13	)		0.10

Operating income per diluted common share	$	1.74		$	1.29		$	3.20		$	2.50

Results of Operations—Three and Six Months Ended June 30, 2011 Compared to Three and Six Months Ended June 30, 2010

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


	Three Months Ended									Six Months Ended
	June 30									June 30
($ in thousands, except share data)	2011			2010			Change			2011			2010			Change

Revenues:
Gross premiums written	$	115,302		$	98,522		$	16,780		$	276,115		$	255,699		$	20,416

Net premiums written	$	107,011		$	88,868		$	18,143		$	256,894		$	234,089		$	22,805


Premiums earned	$	142,409		$	135,933		$	6,476		$	283,783		$	270,204		$	13,579
Premiums ceded		(5,346	)		(10,535	)		5,189			(14,643	)		(21,379	)		6,736

Net premiums earned		137,063			125,398			11,665			269,140			248,825			20,315
Net investment income		36,297			37,081			(784	)		72,457			74,709			(2,252	)
Equity in earnings (loss) of unconsolidated subsidiaries		(2,416	)		839			(3,255	)		(3,780	)		3,825			(7,605	)
Net realized investment gains (losses)		2,200			(3,501	)		5,701			6,324			(5,905	)		12,229
Other income		1,685			1,683			2			4,273			4,005			268

Total revenues		174,829			161,500			13,329			348,414			325,459			22,955


Expenses:
Losses and loss adjustment expenses		69,394			77,170			(7,776	)		146,493			165,078			(18,585	)
Reinsurance recoveries		(5,041	)		(8,646	)		3,605			(11,717	)		(17,853	)		6,136

Net losses and loss adjustment expenses		64,353			68,524			(4,171	)		134,776			147,225			(12,449	)
Underwriting, policy acquisition and operating expenses		32,871			31,642			1,229			68,578			62,846			5,732
Interest expense		918			827			91			1,713			1,640			73

Total expenses		98,142			100,993			(2,851	)		205,067			211,711			(6,644	)


Income before income taxes		76,687			60,507			16,180			143,347			113,748			29,599

Income taxes		21,591			20,126			1,465			40,557			35,255			5,302


Net income	$	55,096		$	40,381		$	14,715		$	102,790		$	78,493		$	24,297


Earnings per share:
Basic	$	1.80		$	1.25		$	0.55		$	3.36		$	2.42		$	0.94

Diluted	$	1.79		$	1.23		$	0.56		$	3.33		$	2.40		$	0.93


Net loss ratio		47.0	%		54.6	%		(7.6	)		50.1	%		59.2	%		(9.1	)
Underwriting expense ratio		24.0	%		24.5	%		(0.5	)		24.9	%		24.6	%		0.3

Combined ratio		71.0	%		79.1	%		(8.1	)		75.0	%		83.8	%		(8.8	)

Operating ratio		44.5	%		49.5	%		(5.0	)		48.1	%		53.8	%		(5.7	)

Return on equity*		11.4	%		9.1	%		2.3			10.8	%		9.0	%		1.8


*		Annualized

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

As required by GAAP, our results include acquired entities only for the portion of the reporting period that is after the acquisition date. Our 2011 operating results include three and six months of APS activity for the three- and six-month periods, respectively, while our 2010 operating results do not include any APS activity. In many of the supporting tables that follow, the effect of the additional 2011 APS activity is separately disclosed.

Premiums Written

Changes in our premium volume are driven by three primary factors: (1) the amount of new business we are able to generate, including business that comes to PRA as a result of acquisitions, (2) our retention of existing business, and (3) the premium charged for business that is renewed, which is affected both by rates charged and by the amount and type of coverage an insured chooses to purchase. The professional liability market remains competitive with some competitors choosing to compete primarily on price.

Gross and net premiums written are as follows:


	Three Months Ended June 30										Six Months Ended June 30
($ in thousands)	2011		2010		Change						2011		2010		Change

Physician:
PRA all other	$	79,689	$	71,206	$	8,483			11.9	%	$	191,949	$	198,219	$	(6,270	)		(3.2	%)
APS Acquisition		9,750		—		9,750		nm				29,576		—		29,576		nm

		89,439		71,206		18,233			25.6	%		221,525		198,219		23,306			11.8	%
Non-physician:
Healthcare providers
PRA all other		10,300		8,276		2,024			24.5	%		22,438		19,055		3,383			17.8	%
APS Acquisition		115		—		115		nm				177		—		177		nm

		10,415		8,276		2,139			25.8	%		22,615		19,055		3,560			18.7	%

Hospital and facility (1)		7,336		8,395		(1,059	)		(12.6	%)		13,585		14,869		(1,284	)		(8.6	%)

Other (1)		4,379		3,798		581			15.3	%		9,685		8,503		1,182			13.9	%

Non continuing (1)		22		2,424		(2,402	)		(99.1	%)		199		5,586		(5,387	)		(96.4	%)


Non-physician total		22,152		22,893		(741	)		(3.2	%)		46,084		48,013		(1,929	)		(4.0	%)

Tail premiums (2):
PRA all other		3,355		4,423		(1,068	)		(24.1	%)		7,847		9,467		(1,620	)		(17.1	%)
APS Acquisition		356		—		356		nm				659		—		659		nm

		3,711		4,423		(712	)		(16.1	%)		8,506		9,467		(961	)		(10.2	%)
Total Gross Premiums Written	$	115,302	$	98,522	$	16,780			17.0	%	$	276,115	$	255,699	$	20,416			8.0	%

Total Net Premiums Written
PRA all other		97,129		88,868		8,261			9.3	%		227,024		234,089		(7,065	)		(3.0	%)
APS Acquisition		9,882		—		9,882		nm				29,870		—		29,870		nm

	$	107,011	$	88,868	$	18,143			20.4	%	$	256,894	$	234,089	$	22,805			9.7	%


(1)		APS did not contribute any premiums written to these lines of business during the three and six months ended June 30, 2011.

(2)		Includes all tail premiums.

Gross Premiums Written

Physician Premiums — PRA All Other

We wrote approximately $8 million and $11 million of new physician business during the three and six months ended June 30, 2011, respectively, as compared to $2 million and $7 million for the three and six months ended June 30, 2010. Approximately $5.0 million of the new business in 2011 is attributable to policies written for a group of physicians affiliated with Ascension Health facilities in Michigan. Our arrangements with this group provide that the initial policies will be heavily reinsured by an affiliate of Ascension Health, and the increase to net written premiums associated with these policies is $1.3 million.

Two-year term policies also contributed to the increase in gross written premium. Gross written premium associated with two-year term policies is $7.1 million and $12.6 million for the three and six months ended June 30, 2011, respectively, as compared to $1.6 million and $5.7 million for the same respective periods in 2010. We offer two-year term policies (as opposed to a one-year term) to our

physician insureds in one selected jurisdiction. The premium associated with both policy terms is included in written premium in the period the policy is written.

Retention rates for our physician business have improved as compared to 2010. Our retention rate, which we calculate as retained premium divided by all premium subject to renewal, is 90% for both the three and six months ended June 30, 2011, as compared to 89% for both the three and six months ended June 30, 2010. Retention rates are affected by a number of factors. We may lose insureds to competitors or to self-insurance mechanisms (often when physicians join hospital-based practice groups) due to pricing or other issues. We may choose not to renew an insured as a result of our underwriting evaluation. Insureds may also terminate coverage because they have left the practice of medicine for various reasons, principally for retirement but also due to disability or other personal reasons.

Charged rates for our physician business renewed during the three months ended June 30, 2011 have averaged 2% lower than the expiring premium, while charged rates for the three months ended June 30, 2010 showed no change. During the six months ended June 30, 2011 and 2010, charged rates decreased an average of 3% and 1%, respectively. In general, charged rates for our podiatric physicians have increased as compared to 2010, while rates for our other physician insureds have decreased. Our charged rates include the effects of filed rates, surcharges and discounts. Despite competitive pressures, we continue to base our rates on expected losses, as indicated by our historical loss data and available industry loss data. We are committed to a rate structure that will allow us to fulfill our obligations to our insureds, while generating competitive returns for our shareholders.

Physician Premiums — APS Acquisition

Of the gross premiums written contributed by APS during the three and six months ended June 30, 2011, $0.2 million and $0.7 million is attributable to new physician business. The retention rates on this book of business are 89% and 90% for the three and six months ended June 30, 2011, respectively. Charged rates for APS physician premiums renewed during the three and six months ended June 30, 2011 showed an average decrease of 2% and 3%, respectively, compared to the premiums that expired.

Non-physician Premiums

Our healthcare providers included in non-physician premiums are primarily dentists, chiropractors, optometrists, and allied health professionals. The 2011 increase is primarily related to allied health coverages.

Hospital and facility premiums decreased for the three- and six-month periods of 2011. The decline reflects the same competitive pressures in this area as we are seeing in our physician business.

Non-physician “other” premiums are primarily legal professional liability premiums. The increase in premium volume for the three- and six-month periods of 2011 principally relates to legal professional liability premiums.

Non-continuing in the above table separately identifies premium generated by certain types of miscellaneous liability coverages which we no longer provide.

Tail Premiums

We offer extended reporting endorsement or “tail” policies to insureds that are discontinuing their claims-made coverage with us. The amount of tail premium written and earned can vary widely from period to period.

Net Premiums Written

The 2011 increase in net premiums written reflects the previously discussed changes to gross premiums written and an additional increase of $5.6 million for both the three-and six-month periods related to a reinsurance commutation recorded during the second quarter (see separate discussion below in Premiums Ceded). APS increased net written premiums by $9.9 million and $29.9 million for the three- and six-month periods.

Premiums Earned/Premiums Ceded


	Three Months Ended June 30										Six Months Ended June 30
($ in thousands)	2011		2010		Change						2011		2010		Change

Premiums earned:
PRA all other	$	127,616	$	135,933	$	(8,317	)		(6.1	%)	$	254,352	$	270,204	$	(15,852	)		(5.9	%)
APS Acquisition		14,793		—		14,793		nm				29,431		—		29,431		nm

		142,409		135,933		6,476			4.8	%		283,783		270,204		13,579			5.0	%
Premiums ceded:
PRA all other		5,007		10,535		(5,528	)		(52.5	%)		14,101		21,379		(7,278	)		(34.0	%)
APS Acquisition		339		—		339		nm				542		—		542		nm

		5,346		10,535		(5,189	)		(49.3	%)		14,643		21,379		(6,736	)		(31.5	%)
Net premiums earned:
PRA all other		122,609		125,398		(2,789	)		(2.2	%)		240,251		248,825		(8,574	)		(3.4	%)
APS Acquisition		14,454		—		14,454		nm				28,889		—		28,889		nm

	$	137,063	$	125,398	$	11,665			9.3	%	$	269,140	$	248,825	$	20,315			8.2	%

Premiums Earned

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

Of the premiums earned contributed by APS during the three and six months ended June 30, 2011, approximately $7.0 million and $17.3 million, respectively, are attributable to premiums written prior to acquisition. Premiums written prior to our acquisition of APS that were unearned at June 30, 2011 are expected to affect premiums earned through the remainder of 2011 as follows: Quarter 3 - $2.7 million; Quarter 4 - $0.7 million.

Premiums Ceded

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

During 2011, ProAssurance commuted (terminated) certain of its reinsurance arrangements with Colisee Re (formerly AXA Reassurance S.A.) for approximately $4.3 million in cash. The effect of the commutation was to reduce Premiums Ceded by approximately $5.6 million and to reduce Reinsurance Recoveries by approximately $4.0 million.


	Three Months Ended June 30									Six Months Ended June 30
Reinsurance expense ratio:*	2011			2010			Change			2011			2010			Change

PRA all other:
Before commutation effect		8.3	%		7.8	%		0.5			7.7	%		7.9	%		(0.2	)
Commutation effect		(4.4	%)		—			(4.4	)		(2.2	%)		—			(2.2	)

PRA all other		3.9	%		7.8	%		(3.9	)		5.5	%		7.9	%		(2.4	)
APS Acquisition		2.3	%		—		nm				1.8	%		—		nm
Consolidated		3.8	%		7.8	%		(4.0	)		5.2	%		7.9	%		(2.7	)


*		Calculated as premiums ceded as a percentage of premiums earned

The decrease in our reinsurance expense ratio, exclusive of APS, is primarily due to the commutation recorded during the second quarter of 2011.

The reinsurance expense ratio associated with the business acquired from APS is lower than the ratio for our other business. In recent years, largely due to the advantageous legal climate within the state of Texas, only a small percentage of APS paid losses have met reinsurance coverage limits; consequently,

APS has been able to obtain reinsurance coverage for 2010 and 2011 at favorable rates. The APS reinsurance arrangements base the amounts due to reinsurers, in part, on expected losses and the change in the ratio between the 2011 first and second quarters reflects shifts in the actuarial estimate of losses that will reach reinsurance coverage limits.

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

Net Investment Income

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

Net investment income by investment category is as follows:


				Three Months Ended											Six Months Ended
	June 30											June 30
($ in thousands)	2011			2010			Change					2011			2010			Change

Fixed maturities	$	36,682		$	36,700		$	(18	)	<(1	%)	$	72,634		$	74,396		$	(1,762	)	(2.4	%)
Equities		186			238			(52	)	(21.8	%)		416			456			(40	)	(8.8	%)
Short-term investments		17			61			(44	)	(72.1	%)		73			164			(91	)	(55.5	%)
Other invested assets		575			1,054			(479	)	(45.4	%)		1,564			1,606			(42	)	(2.6	%)
Business owned life insurance		472			413			59		14.3	%		936			821			115		14.0	%
Investment expenses		(1,635	)		(1,385	)		(250	)	18.1	%		(3,166	)		(2,734	)		(432	)	15.8	%

Net investment income	$	36,297		$	37,081		$	(784	)	(2.1	%)	$	72,457		$	74,709		$	(2,252	)	(3.0	%)

Fixed Maturities

The decrease in income for both the three- and six-month periods primarily reflects lower yields partially offset by higher average investment balances. Further decreases in income were mitigated by higher earnings from our Treasury Inflation-Protected Securities (TIPS) of $1.1 million and $1.2 million for the 2011 three- and six-month periods, respectively. A component of TIPS yields is based on changes in the Consumer Price Index (CPI), lagged by approximately two months, and the additional TIPS earnings are attributable to an increase in the CPI during the first part of 2011. It is not generally projected that the CPI will continue to increase at the same pace for the remainder of 2011, and we do not expect our TIPS earnings to continue at the current escalated levels.

The overall yield on our portfolio declined for the three- and the six-month periods because we were not able to reinvest proceeds from maturities, pay-downs and sales at rates comparable to expiring rates while maintaining our asset quality and the duration of our portfolio. Additionally, the yields on fixed maturity securities acquired in the APS transaction, after adjustment as required by GAAP purchase accounting rules, approximated market yields on the acquisition date of November 30, 2010 and lowered our average consolidated yield by approximately 10 basis points and 12 basis points for the three- and six-month periods, respectively. Average yields for our available-for-sale fixed maturity securities during 2011 and 2010 are as follows:


	Three Months Ended						Six Month Ended
	June 30						June 30
	2011			2010			2011			2010

Average income yield		4.2	%		4.3	%		4.2	%		4.4	%
Average tax equivalent income yield		4.7	%		5.0	%		4.7	%		5.1	%

The level of our investment in fixed maturity securities varies depending upon a number of factors, including, among others, our operating cash needs, anticipated shifts in credit markets, the attractiveness of other investment alternatives, and cash needed for acquisitions or other capital purposes. In 2011 as compared to 2010, our average investment in fixed maturities increased by approximately 3% for both the three- and six-month periods, respectively.

Equity in Earnings (Loss) of Unconsolidated Subsidiaries

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


	Three Months Ended									Six Months Ended
	June 30									June 30
(In thousands)	2011			2010			Change			2011			2010			Change

Private investment funds, currently held	$	(535	)	$	(165	)	$	(370	)	$	15		$	874		$	(859	)
Private investment fund, liquidated in 2010		—			1,150			(1,150	)		—			3,097			(3,097	)
Other business interest		(593	)		—			(593	)		(1,409	)		—			(1,409	)
Tax credit partnerships		(1,288	)		(146	)		(1,142	)		(2,386	)		(146	)		(2,240	)

Equity in earnings (loss) of unconsolidated subsidiaries	$	(2,416	)	$	839		$	(3,255	)	$	(3,780	)	$	3,825		$	(7,605	)

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

Our other business interest is in a development stage limited liability company that will, in time, engage in active business operations. While we expect this investment to provide a positive return over time, operating losses are expected to continue through 2011 and into 2012 due to the start up nature of this entity. Our potential for loss is limited to the carrying amount of our investment, currently $1.8 million.

We began investing in tax credit limited partnerships in 2010. Our tax credit investments are designed to generate investment returns by providing tax benefits to fund investors in the form of project operating losses and tax credits. Our tax credit partnerships reduced our tax expenses by approximately $1.8 million and $3.2 million during the three and six months ended June 30, 2011, respectively, while we recognized $1.3 million and $2.4 million of amortization during the same respective periods on these investments noted in the table above.

Non-GAAP Financial Measure — Tax Equivalent Investment Result

We believe that to fully understand our investment returns it is important to consider the current tax benefits associated with certain investments; therefore, we impute a proforma tax-equivalent investment result by adjusting the current tax benefit into the amount of investment income a taxable investment would need to produce to fairly compare to an investment with preferential tax treatment. We believe this better reflects the economies of our decision to invest in certain asset classes that are either taxed at lower rates and/or result in reductions to our current federal income tax expense.


	Three Months Ended June 30					Six Months Ended June 30
(In thousands)	2011			2010		2011			2010

Investment results, as reported:
Net investment income	$	36,297		$	37,081	$	72,457		$	74,709
Equity in earnings of unconsolidated subsidiaries		(2,416	)		839		(3,780	)		3,825

		33,881			37,920		68,677			78,534
Taxable equivalent adjustments for (1):
State and municipal bonds		4,836			5,724		9,842			11,895
BOLI		254			223		504			442
Dividends received deduction		168			218		376			417
Tax credit partnerships		2,831			—		4,860			—

Proforma tax-equivalent investment results	$	41,970		$	44,085	$	84,259		$	91,288


(1)		All adjustments were calculated using the 35% federal statutory tax rate.

Net Realized Investment Gains (Losses)

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


	Three Months Ended June 30						Six Months Ended June 30
(In thousands)	2011			2010			2011			2010

Total other-than-temporary impairment losses:
Residential mortgage-backed securities	$	(319	)	$	—		$	(769	)	$	(23	)
Corporate bonds		—			—			—			—
Equities		—			—			—			—
Equity interest in a private investment fund		(746	)		—			(2,133	)		(3,373	)
High yield asset-backed securities		—			(4,912	)		—			(8,983	)
Portion recognized in (reclassified from) Other Comprehensive Income:
Residential mortgage-backed securities		(113	)		—			(681	)		6
High yield asset-backed securities		—			(2,128	)		—			—

Net impairment losses recognized in earnings		(1,178	)		(7,040	)		(3,583	)		(12,373	)
Net gains (losses) from sales		4,551			7,840			8,935			9,896
Trading portfolio gains (losses)		(347	)		(3,305	)		1,574			(1,562	)
Fair value adjustments, net		(826	)		(996	)		(602	)		(1,866	)

Net realized investment gains (losses)	$	2,200		$	(3,501	)	$	6,324		$	(5,905	)

We recognized impairments of $2.1 million during the six months ended June 30, 2011 and $3.4 million during the six months ended June 30, 2010 related to an interest in a private investment fund which we account for on a cost basis. The fund has notified us of its intention to be sold publicly in the next few months, and we have reduced the carrying value of our interest in the fund to reflect the expected market value of the assets.

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

Losses and Loss Adjustment Expenses

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

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

The following tables summarize calendar year net losses and net loss ratios for the three and six months ended June 30, 2011 and 2010 by separating losses between the current accident year and all prior accident years.


	Net Losses
	Three Months Ended									Six Months Ended
	June 30									June 30
($ in millions)	2011			2010			Change			2011			2010			Change

Current accident year:
PRA all other	$	103.9		$	106.0		$	(2.1	)	$	204.5		$	209.7		$	(5.2	)
APS Acquisition		10.7			—			10.7			20.5			—			20.5

Consolidated	$	114.6		$	106.0		$	8.6		$	225.0		$	209.7		$	15.3


Prior accident years:
PRA all other	$	(45.0	)	$	(37.5	)	$	(7.5	)	$	(80.0	)	$	(62.5	)	$	(17.5	)
APS Acquisition		(5.2	)		—			(5.2	)		(10.2	)		—			(10.2	)

Consolidated	$	(50.2	)	$	(37.5	)	$	(12.7	)	$	(90.2	)	$	(62.5	)	$	(27.7	)


Calendar year:
PRA all other	$	58.9		$	68.5		$	(9.6	)	$	124.5		$	147.2		$	(22.7	)
APS Acquisition		5.5			—			5.5			10.3			—			10.3

Consolidated	$	64.4		$	68.5		$	(4.1	)	$	134.8		$	147.2		$	(12.4	)


	Net Loss Ratios*
	Three Months Ended									Six Months Ended
	June 30									June 30
	2011			2010			Change			2011			2010			Change

Current accident year:
PRA all other		84.7	%		84.5	%		0.2			85.1	%		84.3	%		0.8
APS Acquisition		73.6	%		—		nm				70.8	%		—		nm
Consolidated		83.6	%		84.5	%		(0.9	)		83.6	%		84.3	%		(0.7	)

Prior accident years:
PRA all other		(36.7	%)		(29.9	%)		(6.8	)		(33.3	%)		(25.1	%)		(8.2	)
APS Acquisition		(35.8	%)		—		nm				(35.1	%)		—		nm
Consolidated		(36.6	%)		(29.9	%)		(6.7	)		(33.5	%)		(25.1	%)		(8.4	)

Calendar year:
PRA all other		48.0	%		54.6	%		(6.6	)		51.8	%		59.2	%		(7.4	)
APS Acquisition		37.8	%		—		nm				35.7	%		—		nm
Consolidated		47.0	%		54.6	%		(7.6	)		50.1	%		59.2	%		(9.1	)


*		Net losses as specified divided by net premiums earned

The increase in our current accident year net loss ratio, exclusive of APS, reflects an increase in our estimates of loss adjustment expenses incurred, based on results of recent actuarial evaluations. We expect lower losses related to the business acquired from APS. APS operates primarily in Texas, which is currently experiencing a favorable legal climate due to tort reform. The APS net loss ratio increased during the second quarter of 2011 as we applied a reserving approach similar to that utilized for our historical business.

During the three and six months ended June 30, 2011, we recognized favorable loss development of $50.2 million and $90.2 million, respectively, on a net basis, related to reserves previously established for prior accident years. Principally this is due to favorable net loss development within our retained layers of coverage ($1 million and below) for accident years 2004 to 2009. Approximately $10.2 million of the six months of favorable development relates to reserves assumed in the acquisition of APS, principally for the 2010 accident year, and is based on first and second quarter 2011 claims activity which indicated claims severity had declined below our December 31, 2010 estimates.

During the three and six months ended June 30, 2010, we recognized favorable loss development of $37.5 million and $62.5 million, respectively, on a net basis, related to our previously established (prior accident year) reserves, principally for the 2004 to 2008 accident years within our retained layers of coverage ($1 million and below).

Substantially all of the development recognized during the first six months of 2011 and 2010 relates to medical professional liability claims-made reserves. The favorable development for medical professional claims-made policies in both years is based upon observation of actual claims data that indicates that claims severity (i.e., the expected average cost of claims) is trending below our initial expectations. Given both the long tailed nature of our business and the past volatility of final claim settlement values, we are generally cautious in giving credence to the trends that lead to the recognition of favorable net loss development. As we conclude that sufficient credible data with respect to these trends exists we take appropriate actions. In the case of the claims severity trends, we believe it is appropriate to recognize the impact of these trends in our actuarial evaluation of prior period loss estimates while also remaining attentive to the past volatility of claims severity.

Assumptions used in establishing our reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are reflected in the current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions can have a material effect on our results of operations for the period in which the change is made, as was the case in 2010 and has been thus far in 2011.

Underwriting, Policy Acquisition and Operating Expenses

The table below provides a comparison of 2011 and 2010 underwriting, policy acquisition and operating expenses for the three- and six-month periods ended June 30:


	Three Months Ended June 30										Six Months Ended June 30
($ in thousands)	2011		2010		Change						2011		2010		Change

Insurance operation expenses:
PRA all other	$	30,310	$	30,730	$	(420	)		(1.4	%)	$	60,656	$	61,127	$	(471	)		(0.8	%)
APS Acquisition		2,519		—		2,519		nm				6,419		—		6,419		nm

		32,829		30,730		2,099			6.8	%		67,075		61,127		5,948			9.7	%
Agency expenses		42		912		(870	)		(95.4	%)		1,503		1,719		(216	)		(12.6	%)

	$	32,871	$	31,642	$	1,229			3.9	%	$	68,578	$	62,846	$	5,732			9.1	%

Insurance Operation Expenses

Exclusive of the effect of the APS acquisition, insurance operation expenses for the three and six months ended June 30, 2011, reflect lower policy acquisition and operating expenses of approximately $1.0 million and $1.2 million for the three- and the six-month periods of 2011 as compared to the same periods in 2010, offset by a reduced amount of Guaranty Fund recoupments of approximately $0.6 million and $0.7 million for the same respective periods.

Expenses associated with APS included salary and benefit expenses of approximately $0.3 million and $0.9 million for the three- and six-month periods, respectively, that are related to workforce reductions. APS policy acquisition expenses are approximately $0.5 million and $1.3 million lower for the three- and six-month periods, respectively, than would be considered normal due to the application of GAAP purchase accounting rules whereby the capitalized policy acquisition costs for policies written prior to the acquisition date were written off rather than being expensed ratably over the term of the associated insurance policy.

Underwriting Expense Ratio


	Underwriting Expense Ratio *
	Three Months Ended June 30									Six Months Ended June 30
	2011			2010			Change			2011			2010			Change

Underwriting expense ratio, consolidated		24.0	%		24.5	%		(0.5	)		24.9	%		24.6	%		0.3


*		Our expense ratio computations exclude agency expenses as discussed below.

Our underwriting expense ratio, excluding the effect of APS, increased by 0.2 points for the 2011 three-month period and by 0.6 points for the 2011 six-month period because expense reductions did not keep pace with earned premium declines. The effect of APS was to reduce our consolidated expense ratio by 0.7 points for the three-month period and 0.3 points for the six-month period. The effect of APS was less pronounced in the six-month period because APS insurance operation expenses were higher in the first quarter than in the second quarter.

Agency expenses

We have historically operated several non-insurance subsidiaries, principally insurance agencies that generated commission and service fee revenues. Expenses of our agency operations that are associated with the generation of premium revenues by our insurance subsidiaries are included in insurance operation expenses in the above table. Expenses of our agency operations that are directly associated with external commission and service fee revenues are included in agency expenses in the above table. In 2011 we discontinued most external agency operations. The declines in agency expenses of $870,000 and $216,000 for the three- and six-month periods, respectively, reflect the discontinuation of these operations. The decline is less pronounced for the six-month period because of costs incurred in the first quarter of 2011 related to workforce reductions.

Interest Expense

The increase in interest expense for the three and six months ended June 30, 2011 reflects commitment fees and amortization of the initial loan costs related to the credit agreement entered into during the second quarter of 2011. The credit agreement is discussed in Note 9 of the Notes to the Condensed Consolidated Financial Statements.

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


	Three Months Ended							Six Months Ended
	June 30							June 30
(In thousands)	2011		2010		Change			2011		2010		Change

Trust Preferred Securities due 2034	$	244	$	244	$	—		$	483	$	482	$	1
Surplus Notes due May 2034		126		126		—			253		249		4
Note Payable due February 2019		289		294		(5	)		576		588		(12	)
Revolving credit agreement		135		—		135			135		—		135
Other		124		163		(39	)		266		321		(55	)

	$	918	$	827	$	91		$	1,713	$	1,640	$	73

Taxes

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


	Three Months Ended						Six Months Ended
	June 30						June 30
	2011			2010			2011			2010

Statutory rate		35.0	%		35.0	%		35.0	%		35.0	%
Tax-exempt income		(4.4	%)		(6.3	%)		(4.7	%)		(7.0	%)
Tax credits		(2.4	%)		—			(2.2	%)		—
BOLI redemption		—			2.1	%		—			1.1	%
Other		—			2.5	%		0.2	%		1.9	%

Effective tax rate		28.2	%		33.3	%		28.3	%		31.0	%

The decrease in the effective tax rate for the three- and six-month periods is attributable to a reduced benefit from tax-exempt income, new tax credits, and, for the six-month period, the effects of BOLI redemptions in 2010. In 2011, the overall amount of tax exempt income decreased and tax exempt income represented a smaller percentage of total pretax income. Our tax credit investments generated estimated tax credits of $1.8 million and $3.2 million for the three and six months ended June 30, 2011, respectively, but no tax credits were generated by those investments for the same respective periods of 2010 (tax credits directly reduce our tax expense). We paid additional tax during 2010 related to a partial redemption of our BOLI; there were no BOLI redemptions during 2011.

Current tax expense decreased $1.3 million and $5.1 million for the three and six months ended June 30, 2011, respectively, as compared to the same respective periods in 2010. The decrease for the three-month period reflects tax credits available in 2011 but not 2010 and additional tax paid on the BOLI redemption in 2010. The decrease for the six-month period reflects tax credits available in 2011 but not in 2010, additional tax paid on the BOLI redemption in 2010, and tax provisions enacted for 2011 which allow the deduction of additional bonus depreciation. Current tax expense for the six-month period was also reduced because we effectively settled uncertain tax positions during 2011 due to the completion of our 2005 through 2008 IRS examination, which is discussed in Note 5 of the Notes to the Condensed Consolidated Financial Statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Interest Rate Risk

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

The following table summarizes estimated changes in the fair value of our available-for-sale fixed maturity securities for specific hypothetical changes in interest rates by asset class at June 30, 2011 and December 31, 2010. There are principally two factors that determine interest rates on a given security: market interest rates and credit spreads. As different asset classes can be affected in different ways by movements in those two factors, we have broken out our portfolio by asset class in the following table.

June 30, 2011

Interest Rate Shift in Basis Points

(200)

(100)

Current

100

200

Fair Value (in millions):

U.S. Treasury obligations

310

303

295

286

278

U.S. Agency obligations

State and municipal bonds

1,259

1,221

1,166

1,112

1,060

Corporate bonds

1,454

1,413

1,358

1,303

1,251

Asset-backed securities

768

761

743

717

687

All fixed maturity securities

3,867

3,773

3,635

3,488

3,344

Duration:

U.S. Treasury obligations

3.13

3.54

3.68

3.60

3.53

U.S. Agency obligations

1.89

2.87

3.24

3.74

3.92

State and municipal bonds

3.01

4.21

4.62

4.73

4.78

Corporate bonds

3.29

3.80

4.11

4.03

3.95

Asset-backed securities

1.01

1.70

3.27

3.85

4.07

All fixed maturity securities

3.28

3.47

4.05

4.18

4.20


	December 31, 2010

Fair Value (in millions):
U.S. Treasury obligations	$	237	$	232	$	226	$	220	$	215
U.S. Agency obligations		74		71		69		66		64
State and municipal bonds		1,367		1,308		1,244		1,181		1,122
Corporate bonds		1,428		1,383		1,333		1,281		1,232
Asset-backed securities		757		750		732		708		680

All fixed maturity securities	$	3,863	$	3,744	$	3,604	$	3,456	$	3,313

Duration:
U.S. Treasury obligations		3.53		3.64		3.78		3.70		3.62
U.S. Agency obligations		3.47		3.66		3.82		3.82		3.77
State and municipal bonds		3.88		4.91		5.02		5.08		5.09
Corporate bonds		3.35		3.83		4.01		3.92		3.82
Asset-backed securities		1.84		2.25		3.02		3.56		3.81
All fixed maturity securities		3.24		3.88		4.14		4.23		4.24

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

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

ProAssurance’s cash and short-term investment portfolio at June 30, 2011 is on a cost basis which approximates its fair value. This portfolio lacks significant interest rate sensitivity due to its short duration.

Credit Risk

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

As of June 30, 2011, 97% of our fixed maturity securities are rated investment grade as determined by Nationally Recognized Statistical Rating Organizations (NRSROs), such as A.M. Best, Fitch, Moody’s, and Standard & Poor’s. We believe that this concentration in investment grade securities reduces our exposure to credit risk on our fixed income investments to an acceptable level. However, investment grade securities, in spite of their rating, can rapidly deteriorate and result in significant losses. Ratings published by the NRSROs are one of the tools used to evaluate the credit worthiness of our securities. The ratings reflect the subjective opinion of the rating agencies as to the credit worthiness of the securities, and therefore, we may be subject to additional credit exposure should the rating prove to be unreliable.

We hold $1.2 billion of municipal bonds. We require the bonds that we purchase to meet our credit criteria on a stand-alone basis. As of June 30, 2011, on a stand-alone basis, our municipal bonds have a weighted average rating of AA.

We also have exposure to credit risk related to our receivables from reinsurers. Our receivables from reinsurers (on both paid and unpaid losses) approximate $282 million at June 30, 2011 and $282 million at December 31, 2010.

Equity Price Risk

At June 30, 2011 our equity holdings had an approximate fair value of $36.4 million, almost all of which is attributable to investments in common stocks. These securities are subject to equity price risk, which is defined as the potential for loss in fair value due to a decline in equity prices. The weighted average beta of this group of securities is 1.0. Beta measures the price sensitivity of an equity security or group of equity securities to a change in the broader equity market, in this case the S&P 500 Index. If the value of the S&P 500 Index increased by 10%, the fair value of these securities would be expected to increase by 10% to $40.0 million. Conversely, a 10% decrease in the S&P 500 Index would imply a decrease of 10% in the fair value of these securities to $32.6 million. The selected hypothetical changes of plus or minus 10% do not reflect what could be considered the best or worst case scenarios and are used for illustrative purposes only.

ITEM 4. CONTROLS AND PROCEDURES.

The Chief Executive Officer and Chief Financial Officer of the Company participated in management’s evaluation of our disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of June 30, 2011. ProAssurance’s disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

On November 30, 2010 we completed the acquisition of American Physicians Service Group, Inc. (APS). We have excluded APS’s systems and processes from Management’s Report on Internal Control over Financial Reporting as of December 31, 2010 and will include APS in Management’s Report on Internal Control over Financial Reporting as of December 31, 2011.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

With the exception of the risk factor listed below, there are no changes to the “Risk Factors” in Part 1, Item 1A of the 2010 Form 10-K.

U.S. Government debt ratings may be downgraded.

If the US is downgraded below AAA, rating agencies have indicated that the debt instruments of other issuers who are dependent upon federal support and distributions, including states and local municipalities, may also be downgraded. If this proves to be the case, the average credit rating of our investment portfolio will be reduced. Due to the unpredictable nature of this situation, we are unable to provide a reliable estimate regarding the extent to which our portfolio might be affected.

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

Not applicable.

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

	(a)		The Annual Meeting of the Shareholders of ProAssurance was held on May 18, 2011.

	(b)		Item 4(b) is not applicable

	(c)		At the meeting the shareholders of ProAssurance considered and acted upon the following:

(1)

Elected directors to serve until the 2014 Annual Meeting of Shareholders as follows:


Name	For		Withheld		Abstain

Lucian F. Bloodworth		22,522,885		464,154		N/A
Robert E. Flowers		21,607,007		1,380,032		N/A
Ann F. Putallaz		22,734,991		252,048		N/A
Drayton Nabers, Jr.		22,725,543		261,496		N/A


(2)		Ratified the appointment of Ernst & Young LLP as independent auditors as follows:

Broker Non-

For

Against

Abstain

votes

25,224,059

244,774

3,355

—


(3)		Approved, on an advisory basis, the 2010 compensation of ProAssurance’s named executive officers as follows:

For

Against

Abstain

Broker Non-
votes

22,296,276

665,776

24,987

2,485,149


(4)		Determined, on an advisory basis, how often shareholders will be asked to approve the compensation of ProAssurance’s named executive officers as follows:

One Year

Two-Year

Three-Year

Abstain

19,972,326

33,148

2,974,408

7,157


(d)		Item 4(d) is not applicable.

ITEM 6. EXHIBITS

	10.1		Revolving Credit Agreement between ProAssurance and U. S. Bank National Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First Tennessee Bank, N.A., and JP Morgan Chase Bank, N.A.

	10.2		Pledge and Security Agreement between ProAssurance and U.S. Bank National Association

	31.1		Certification of Principal Executive Officer of ProAssurance as required under SEC rule 13a-14(a).

	31.2		Certification of Principal Financial and Accounting Officer of ProAssurance as required under SEC rule 13a-14(a).

	32.1		Certification of Principal Executive Officer of ProAssurance as required under SEC Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as amended (18 U.S.C. 1350).

	32.2		Certification of Principal Financial and Accounting Officer of ProAssurance as required under SEC Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as amended (18 U.S.C. 1350).


101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURE

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


	PROASSURANCE CORPORATION

August 3, 2011


	/s/ Edward L. Rand, Jr.
	Edward L. Rand, Jr.
	Chief Financial and Accounting Officer (Duly authorized officer and principal financial and accounting officer)

Exhibit 10.01

EXECUTION COPY

CREDIT AGREEMENT

DATED AS OF APRIL 15, 2011

AMONG

PROASSURANCE CORPORATION,

THE LENDERS,

U.S. BANK NATIONAL ASSOCIATION
AS ADMINISTRATIVE AGENT

WELLS FARGO BANK, NATIONAL ASSOCIATION
AS SYNDICATION AGENT

AND

U.S. BANK NATIONAL ASSOCIATION
AS LEAD ARRANGER AND SOLE BOOK RUNNER

Table of Contents


		Page

ARTICLE I DEFINITIONS			1

ARTICLE II THE CREDITS			15

2.1.	Commitment; Unsecured Borrowing Option; Secured Borrowing Option		15
2.2.	Required Payments; Termination		18
2.3.	Ratable Loans; Types of Advances		18
2.4.	Increase Option		18
2.5.	Commitment Fee		19
2.6.	Minimum Amount of Each Advance		19
2.7.	Reductions in Aggregate Commitment; Optional Principal Payments		19
2.8.	Method of Selecting Types and Interest Periods for New Advances		20
2.9.	Conversion and Continuation of Outstanding Advances; Maximum Number of Interest Periods		20
2.10.	Interest Rates		21
2.11.	Rates Applicable After Event of Default		21
2.12.	Method of Payment		21
2.13.	Noteless Agreement; Evidence of Indebtedness		22
2.14.	Telephonic Notices		22
2.15.	Interest Payment Dates; Interest and Fee Basis		23
2.16.	Notification of Advances, Interest Rates, Prepayments and Commitment Reductions		23
2.17.	Lending Installations		23
2.18.	Non-Receipt of Funds by the Administrative Agent		23
2.19.	Replacement of Lender		24
2.20.	Limitation of Interest		24
2.21.	Defaulting Lenders		25
2.22.	Extensions of Commitments		26

ARTICLE III YIELD PROTECTION; TAXES			28

3.1.	Yield Protection		28
3.2.	Changes in Capital Adequacy Regulations		29
3.3.	Availability of Types of Advances; Adequacy of Interest Rate		30
3.4.	Funding Indemnification		30
3.5.	Taxes		30
3.6.	Selection of Lending Installation; Mitigation Obligations; Lender Statements; Survival of Indemnity		32

ARTICLE IV CONDITIONS PRECEDENT			33


		Page

4.1.	Initial Credit Extension		33
4.2.	Each Credit Extension		34

ARTICLE V REPRESENTATIONS AND WARRANTIES			35

5.1.	Existence and Standing		35
5.2.	Authorization and Validity		35
5.3.	No Conflict; Government Consent		35
5.4.	Financial Statements		36
5.5.	Material Adverse Change		36
5.6.	Taxes		36
5.7.	Litigation and Contingent Obligations		36
5.8.	Subsidiaries		37
5.9.	ERISA		37
5.10.	Accuracy of Information		37
5.11.	Regulation U		37
5.12.	Material Agreements		37
5.13.	Compliance With Laws		37
5.14.	Ownership of Properties		37
5.15.	Plan Assets; Prohibited Transactions		38
5.16.	Environmental Matters		38
5.17.	Investment Company Act		38
5.18.	Insurance		38
5.19.	No Default		38
5.20.	Insurance Licenses		38

ARTICLE VI COVENANTS			38

6.1.	Financial Reporting		39
6.2.	Use of Proceeds		40
6.3.	Notice of Material Events		41
6.4.	Conduct of Business		41
6.5.	Taxes		41
6.6.	Insurance		41
6.7.	Compliance with Laws and Material Contractual Obligations		42
6.8.	Maintenance of Properties		42
6.9.	Books and Records; Inspection		42
6.10.	Payment of Obligations		42
6.11.	Subsidiary Indebtedness		42
6.12.	Merger		42
6.13.	Sale of Assets		43
6.14.	Investments		43
6.15.	Acquisitions		43
6.16.	Liens		43
6.17.	Affiliates		45
6.18.	Restricted Payments		45
6.19.	Financial Covenants		45
6.20.	Other Agreements		45


		Page

6.21.	Ownership of Insurance Subsidiaries		45

ARTICLE VII DEFAULTS			45

ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES			47

8.1.	Acceleration; Remedies		47
8.2.	Application of Funds		48
8.3.	Amendments		48
8.4.	Preservation of Rights		49

ARTICLE IX GENERAL PROVISIONS			49

9.1.	Survival of Representations		49
9.2.	Governmental Regulation		49
9.3.	Headings		50
9.4.	Entire Agreement		50
9.5.	Several Obligations; Benefits of this Agreement		50
9.6.	Expenses; Indemnification		50
9.7.	Numbers of Documents		51
9.8.	Accounting		51
9.9.	Severability of Provisions		51
9.10.	Nonliability of Lenders		51
9.11.	Confidentiality		52
9.12.	Nonreliance		52
9.13.	Disclosure		52
9.14.	USA PATRIOT ACT NOTIFICATION		53

ARTICLE X THE ADMINISTRATIVE AGENT			53

10.1.	Appointment; Nature of Relationship		53
10.2.	Powers		53
10.3.	General Immunity		53
10.4.	No Responsibility for Loans, Recitals, etc.		54
10.5.	Action on Instructions of Lenders		54
10.6.	Employment of Administrative Agents and Counsel		54
10.7.	Reliance on Documents; Counsel		54
10.8.	Administrative Agent’s Reimbursement and Indemnification		55
10.9.	Notice of Event of Default		55
10.10.	Rights as a Lender		55
10.11.	Lender Credit Decision, Legal Representation		56
10.12.	Successor Administrative Agent		56
10.13.	Administrative Agent and Arranger Fees		57
10.14.	Delegation to Affiliates		57
10.15.	Co-Administrative Agents, Documentation Administrative Agent, Syndication Administrative Agent, etc.		57
10.16.	Secured Obligations		59

iii


		Page

ARTICLE XI SETOFF; RATABLE PAYMENTS			59

11.1.	Setoff		59
11.2.	Ratable Payments		59

ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS			60

12.1.	Successors and Assigns		60
12.2.	Participations		60
12.3.	Assignments		61
12.4.	Dissemination of Information		63
12.5.	Tax Treatment		63

ARTICLE XIII NOTICES			63

13.1.	Notices; Effectiveness; Electronic Communication		63

ARTICLE XIV COUNTERPARTS; INTEGRATION; EFFECTIVENESS; ELECTRONIC EXECUTION			64

14.1.	Counterparts; Effectiveness		64
14.2.	Electronic Execution of Assignments		65

ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL			65

15.1.	CHOICE OF LAW		65
15.2.	CONSENT TO JURISDICTION		65
15.3.	WAIVER OF JURY TRIAL		65

SCHEDULES

PRICING SCHEDULE

SCHEDULE 1 — Commitments

SCHEDULE 5.8 — Subsidiaries

SCHEDULE 5.14 — Properties

SCHEDULE 6.16 — Liens

EXHIBITS

EXHIBIT A — Form of Opinion

EXHIBIT B — Form of Compliance Certificate

EXHIBIT C — Form of Assignment and Assumption Agreement

EXHIBIT D — Form of Borrowing Notice

EXHIBIT E — Form of Note

EXHIBIT F — Form of Increasing Lender Supplement

EXHIBIT G — Form of Augmenting Lender Supplement

EXHIBIT H — List of Closing Documents

EXHIBIT I — Form of Borrowing Base Certificate

CREDIT AGREEMENT

This Credit Agreement (the “Agreement”), dated as of April 15, 2011, is among ProAssurance Corporation, the Lenders and U.S. Bank National Association, a national banking association, as Administrative Agent. The parties hereto agree as follows:

ARTICLE I

DEFINITIONS

As used in this Agreement:

“Acquisition” means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which the Borrower or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or limited liability company, or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding ownership interests of a partnership or limited liability company.

“Advance” means a borrowing hereunder, (i) made by some or all of the Lenders on the same Borrowing Date, or (ii) converted or continued by the Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Loans of the same Type and, in the case of Eurocurrency Loans, for the same Interest Period.

“Administrative Agent” means U.S. Bank in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article X.

“Affected Lender” is defined in Section 2.20.

“Affiliate” of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person, including, without limitation, such Person’s Subsidiaries. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person and possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise.

“Aggregate Commitment” means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof. As of the date of this Agreement, the Aggregate Commitment is $150,000,000.

“Aggregate Outstanding Credit Exposure” means, at any time, the aggregate of the Outstanding Credit Exposure of all the Lenders.

“Agreement” means this credit agreement, as it may be amended or modified and in effect from time to time.

“Alternate Base Rate” means, for any day, a rate of interest per annum equal to the highest of (i) the Prime Rate for such day, (ii) the sum of the Federal Funds Effective Rate for such day plus 0.5% per annum and (iii) the Eurocurrency Rate (without giving effect to the Applicable Margin) for a one month Interest Period on such day (or if such day is not a Business Day, the immediately preceding Business Day) for Dollars plus 1.00%, provided that, for the avoidance of doubt, the Eurocurrency Rate for any day shall be based on the rate reported by the applicable financial information service at approximately 11:00 a.m. London time on such day.

“Annual Audited Statement” shall mean, as to any insurance company, the annual audited statutory financial statement (including footnotes) of such insurance company as required to be filed with the applicable Department, together with all exhibits or schedules filed therewith, prepared in conformity with SAP.

“Applicable Fee Rate” means, at any time, the percentage rate per annum at which Commitment Fees are accruing on the unused portion of the Aggregate Commitment at such time as set forth in the Pricing Schedule.

“Applicable Insurance Codes” shall mean, as to any insurance company, the insurance code of any state where such insurance company is domiciled and any successor statute of similar import, together with the regulations thereunder, as amended or otherwise modified and in effect from time to time. References to sections of the Applicable Insurance Code shall be construed to also refer to successor sections.

“Applicable Margin” means, with respect to Advances of any Type at any time, the percentage rate per annum which is applicable at such time with respect to Advances of such Type as set forth in the Pricing Schedule.

“Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

“Arranger” means U.S. Bank, and its successors, in its capacity as Lead Arranger and Sole Book Runner.

“Article” means an article of this Agreement unless another document is specifically referenced.

“Authorized Officer” means any of the Chief Executive Officer or the Chief Financial Officer of the Borrower, acting singly.

“Available Aggregate Commitment” means, at any time, the Aggregate Commitment then in effect minus the Aggregate Outstanding Credit Exposure at such time.

“Base Rate” means, for any day, a rate per annum equal to (i) the Alternate Base Rate for such day plus (ii) the Applicable Margin, in each case changing when and as the Alternate Base Rate changes.

“Base Rate Advance” means an Advance which, except as otherwise provided in Section 2.11, bears interest at the Base Rate.

“Base Rate Loan” means a Loan which, except as otherwise provided in Section 2.11, bears interest at the Base Rate.

“Borrower” means ProAssurance Corporation, a Delaware corporation, and its successors and assigns.

“Borrowing Base” is defined in Section 2.1.2(b).

“Borrowing Base Certificate” is defined in Section 2.1.2(b).

“Borrowing Date” means a date on which an Advance is made hereunder.

“Borrowing Notice” is defined in Section 2.8.

“Business Day” means (i) with respect to any borrowing, payment or rate selection of Eurocurrency Advances, a day (other than a Saturday or Sunday) on which banks generally are open in New York City, New York and London, England for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in Dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in New York City, New York for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system.

“Cash Equivalent Investments” means (i) short-term obligations of, or fully guaranteed by, the United States of America, (ii) commercial paper rated A-1 or better by S&P or P-1 or better by Moody’s, (iii) demand deposit accounts or money market accounts maintained in the ordinary course of business, (iv) certificates of deposit issued by and time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $50,000,000 unless otherwise required by statutory requirements; provided in each case that the same provides for payment of both principal and interest (and not principal alone or interest alone) and is not subject to any contingency regarding the payment of principal or interest, (v) shares of money market mutual funds that are rated at least “AAAm” or “AAA-G” by S&P or “P-1” or better by Moody’s and (vi) discount notes of U.S. government sponsored enterprises, including Freddie Mac, Fannie Mae, the Federal Home Loan Banks and the Federal Farm Credit Banks.

“Change in Control” means (i) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of voting stock of the Borrower; or (ii) within any twelve-month period, occupation of a majority of the seats (other than vacant seats) on the board of directors of the

Borrower by Persons who were neither (x) nominated by the board of directors of the Borrower nor (y) appointed by directors so nominated.

“Code” means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time.

“Collateral” shall have the meaning set forth in the Security Agreement.

“Collateral Documents” means, collectively, the Security Agreement, the Securities Account Control Agreement, and any other security agreements, pledge agreements or similar instruments, each in form and substance reasonably acceptable to the Administrative Agent and delivered to the Administrative Agent from time to time in connection with election of the Secured Borrowing Option set forth in Section 2.1.2.

“Commitment” means, for each Lender, the obligation of such Lender to make Loans to the Borrower in an aggregate amount not exceeding the amount set forth on Schedule 1, as it may be modified as a result of any assignment that has become effective pursuant to Section 12.3.2 or as otherwise modified from time to time pursuant to the terms hereof.

“Consolidated Funded Indebtedness” means at any time the aggregate amount of the sum of Indebtedness as defined under clauses (i), (iv), (vii) and (viii) of the definition thereof and Contingent Obligations with respect to such Indebtedness, all calculated on a consolidated basis in accordance with GAAP.

“Consolidated Indebtedness” means at any time the Indebtedness of the Borrower and its Subsidiaries calculated on a consolidated basis as of such time.

“Consolidated Net Worth” means at any time the consolidated stockholders’ equity of the Borrower and its Subsidiaries calculated on a consolidated basis as of such time, all as defined according to GAAP, but excluding accumulated other comprehensive income.

“Consolidated Total Capitalization” means at any time the sum of Consolidated Indebtedness and Consolidated Net Worth, each calculated at such time.

“Contingent Obligation” of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or the obligations of any such Person as general partner of a partnership with respect to the liabilities of the partnership.

“Conversion/Continuation Notice” is defined in Section 2.9.

“Controlled Group” means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common

control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code.

“Credit Extension” means the making of an Advance.

“Current Extension Commitments” shall have the meaning set forth in Section 2.22(c).

“Default” means an event which but for the lapse of time or the giving of notice, or both, would constitute an Event of Default.

“Defaulting Lender” means, subject to Section 2.21(d), any Lender, as determined by the Administrative Agent, that has (a) failed to fund any portion of its Loans within two (2) Business Days of the date such portion is required in the determination of the Administrative Agent to be funded by it hereunder unless such Lender notifies the Administrative Agent and the Borrower in writing that such failure is the result of such Lender’s good faith determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, (b) notified the Borrower, the Administrative Agent or any Lender in writing that it does not intend to comply with its funding obligations, or has made a public statement to that effect (unless such writing or public statement relates to such Lender’s obligation to fund a Loan hereunder and states that such position is based on such Lender’s good faith determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) failed, within two (2) Business Days after request by the Administrative Agent, to confirm that it will comply with the terms of this Agreement relating to its obligations to fund prospective Loans, (d) otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within two (2) Business Days of the date when due, unless the subject of a good faith dispute, or (e) (i) become or is insolvent or has a parent company that has become or is insolvent or (ii) become the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or custodian, appointed for it, or has taken any action in furtherance of, or indicating its consent to, approval of or acquiescence in any such proceeding or appointment or has a parent company that has become the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or custodian appointed for it, or has taken any action in furtherance of, or indicating its consent to, approval of or acquiescence in any such proceeding or appointment; provided, that a Lender shall not become a Defaulting Lender solely as the result of (x) the acquisition or maintenance of an ownership interest in such Lender or a Person controlling such Lender or (y) the exercise of control over a Lender or a Person controlling such Lender, in each case, by a governmental authority or an instrumentality thereof. Any determination by the Administrative Agent that a Lender is a Defaulting Lender will be conclusive and binding absent manifest error, and such Lender will be deemed to be a Defaulting Lender (subject to Section 2.21(d)) upon notification of such determination by the Administrative Agent to the Borrower and the Lenders.

“Department” means, as applicable, the insurance regulatory authority in the State in which an Insurance Subsidiary is domiciled.

“Dollar” and “$” means the lawful currency of the United States of America.

“Eligible Assignee” means (i) a Lender; (ii) an Approved Fund; (iii) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $3,000,000,000, calculated in accordance with the accounting principles prescribed by the regulatory authority applicable to such bank in its jurisdiction of organization; (iv) a commercial bank organized under the laws of any other country that is a member of the OECD, or a political subdivision of any such country, and having total assets in excess of $3,000,000,000, calculated in accordance with the accounting principles prescribed by the regulatory authority applicable to such bank in its jurisdiction of organization, so long as such bank is acting through a branch or agency located in the country in which it is organized or another country that is described in this clause (iv); or (v) the central bank of any country that is a member of the OECD; provided, however, that neither the Borrower nor an Affiliate of the Borrower shall qualify as an Eligible Assignee.

“Environmental Laws” means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to (i) the protection of the environment, (ii) the effect of the environment on human health, (iii) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water or land, or (iv) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rule or regulation issued thereunder.

“ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

“ERISA Event” means (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal of the Borrower or any of its ERISA Affiliates from any Plan or

Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition upon the Borrower or any of its ERISA Affiliates of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

“Eurocurrency Advance” means an Advance which, except as otherwise provided in Section 2.11, bears interest at the applicable Eurocurrency Rate.

“Eurocurrency Base Rate” means, with respect to a Eurocurrency Advance for the relevant Interest Period, the applicable British Bankers’ Association Interest Settlement Rate for deposits in Dollar LIBOR appearing on Reuters Screen LIBOR 01 Page as of 11:00 a.m. (London time) on the Quotation Date for such Interest Period, and having a maturity equal to such Interest Period, provided that, (i) if the Reuters Screen is not available to the Administrative Agent for any reason, the applicable Eurocurrency Base Rate for the relevant Interest Period shall instead be the applicable British Bankers’ Association Interest Settlement Rate for deposits in Dollar LIBOR as reported by any other generally recognized financial information service selected by the Administrative Agent as of 11:00 a.m. (London time) on the Quotation Date for such Interest Period, and having a maturity equal to such Interest Period, provided that, if no such British Bankers’ Association Interest Settlement Rate is available to the Administrative Agent, the applicable Eurocurrency Base Rate for the relevant Interest Period shall instead be the rate determined by the Administrative Agent to be the rate at which U.S. Bank or one of its Affiliate banks offers to place deposits in U.S. dollars with first-class banks in the interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of U.S. Bank’s relevant Eurocurrency Loan and having a maturity equal to such Interest Period.

“Eurocurrency Loan” means a Loan which, except as otherwise provided in Section 2.11, bears interest at the applicable Eurocurrency Rate.

“Eurocurrency Rate” means, with respect to a Eurocurrency Advance for the relevant Interest Period, the sum of (i) the quotient of (a) the Eurocurrency Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable Margin.

“Event of Default” is defined in Article VII.

“Excluded Taxes” means, in the case of each Lender or applicable Lending Installation and the Administrative Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent is incorporated or organized or the jurisdiction in which the Administrative Agent’s or such Lender’s principal executive office or such Lender’s applicable Lending Installation is located.

“Exhibit” refers to an exhibit to this Agreement, unless another document is specifically referenced.

“Extended Termination Date” shall have the meaning set forth in Section 2.22 (a).

“Extension” shall have the meaning set forth in Section 2.22(a).

“Extension Amendments” shall have the meaning set forth in Section 2.22(e).

“Extension Offer” shall have the meaning set forth in Section 2.22(a).

“Facility Termination Date” means April 15, 2014 or any earlier date on which the Aggregate Commitment is reduced to zero or otherwise terminated pursuant to the terms hereof.

“Federal Funds Effective Rate” means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (TBD) on such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent in its sole discretion.

“Fund” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

“GAAP” means generally accepted accounting principles as in effect from time to time in the United States, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.4.

“Governmental Authority” shall mean the government of the United States or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).

“Highest Lawful Rate” shall mean, on any day, the maximum non-usurious rate of interest permitted for that day by applicable federal or state law stated as a rate per annum.

“Holders of Secured Obligations” shall have the meaning set forth in the Security Agreement.

“Indebtedness” of a Person means such Person’s (i) obligations for borrowed money (including the Obligations hereunder), (ii) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person’s business payable on terms customary in the trade), (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from Property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, acceptances, or other instruments, (v) obligations of such Person to purchase securities or other Property arising out of or in connection with the sale of the same or substantially similar securities or Property, (vi) capitalized lease obligations, (vii) obligations of such Person as an account party

with respect to standby and commercial Letters of Credit, (viii) Contingent Obligations of such Person and (ix) any other obligation for borrowed money or other financial accommodation which in accordance with GAAP would be shown as a liability on the consolidated balance sheet of such Person.

“Insurance Subsidiaries” means the Subsidiaries of the Borrower that are regulated insurance companies.

“Interest Period” means, with respect to a Eurocurrency Advance, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter, provided , however , that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided , however , that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day.

“Intermediary” shall have the meaning set forth in the Securities Account Control Agreement.

“Investment” of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade) or contribution of capital by such Person; stocks, bonds, mutual funds, partnership interests, notes, debentures or other securities (including warrants or options to purchase securities) owned by such Person; any deposit accounts and certificate of deposit owned by such Person; and structured notes, derivative financial instruments and other similar instruments or contracts owned by such Person.

“Investment Policy” means that certain Statement of Investment Policy and Guidelines dated as of September 5, 2007 as in effect on the date hereof and without giving effect to any amendments thereto.

“Lenders” means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns.

“Lending Installation” means, with respect to a Lender or the Administrative Agent, the office, branch, subsidiary or affiliate of such Lender or the Administrative Agent listed on the signature pages hereof (in the case of the Administrative Agent) or on its Administrative Questionnaire (in the case of a Lender) or otherwise selected by such Lender or the Administrative Agent pursuant to Section 2.17.

“Letter of Credit” of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable.

“License” is defined in Section 5.20.

“Lien” means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement).

“Loan” means, with respect to a Lender, such Lender’s loan made pursuant to its commitment to lend set forth in Section 2.1 (or any conversion or continuation thereof).

“Loan Documents” means this Agreement, any note or notes executed by the Borrower in connection with this Agreement and payable to a Lender, the Collateral Documents and any other document or agreement, now or in the future, executed by the Borrower for the benefit of the Administrative Agent or any Lender in connection with this Agreement.

“Material Adverse Effect” means a material adverse effect on (i) the business, Property, liabilities (actual and contingent), operations or condition (financial or otherwise), results of operations, or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents to which it is a party, or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Administrative Agent or the Lenders under the Loan Documents.

“Material Indebtedness” means Indebtedness in an outstanding principal amount of $25,000,000 or more in the aggregate (or the equivalent thereof in any currency other than U.S. dollars).

“Material Indebtedness Agreement” means any agreement under which any Material Indebtedness was created or is governed or which provides for the incurrence of Indebtedness in an amount which would constitute Material Indebtedness (whether or not an amount of Indebtedness constituting Material Indebtedness is outstanding thereunder).

“Minimum Extension Condition” shall have the meaning set forth in Section 2.22(d).

“Moody’s” means Moody’s Investors Service, Inc.

“Multiemployer Plan” means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions.

“NAIC” shall mean the National Association of Insurance Commissioners, or any successor organization.

“Non-U.S. Lender” is defined in Section 3.5(d).

“Note” is defined in Section 2.13.

“Obligations” means all unpaid principal of and accrued and unpaid interest on the Loans, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, the Administrative Agent or any indemnified party arising under the Loan Documents.

“Other Taxes” is defined in Section 3.5(b).

“Outstanding Credit Exposure” means, as to any Lender at any time, the aggregate principal amount of its Loans outstanding at such time.

“Participants” is defined in Section 12.2.1.

“Payment Date” means the last Business Day of each calendar quarter.

“PBGC” means the Pension Benefit Guaranty Corporation, or any successor thereto.

“Permitted Acquisition” means any Acquisition made by the Borrower or any of its Subsidiaries, provided that, (a) as of the date of the consummation of such Acquisition, no Default or Event of Default shall have occurred and be continuing or would result from such Acquisition, and the representation and warranty contained in Section 5.11 shall be true both before and after giving effect to such Acquisition, (b) if the Acquisition is financed in whole or in part with funds advanced pursuant to this Agreement, such Acquisition is consummated on a non-hostile basis pursuant to a negotiated acquisition agreement that has been (if required by the governing documents of the seller or entity to be acquired) approved by the board of directors or other applicable governing body of the seller or entity to be acquired, and no material challenge to such Acquisition (excluding the exercise of appraisal rights) shall be pending or threatened by any shareholder or director of the seller or entity to be acquired, (c) the business to be acquired in such Acquisition is in the same line of business as the Borrower’s or a line of business incidental or reasonably related thereto, (d) as of the date of the consummation of such Acquisition, all material approvals required in connection therewith shall have been obtained, and (e) the Borrower shall have furnished to the Administrative Agent a certificate demonstrating in reasonable detail pro forma compliance with the financial covenant contained in Section 6.19 for such period, in each case, calculated as if such Acquisition, including the consideration therefor, had been consummated on the first day of such period.

“Person” means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof.

“Plan” means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability.

“Pricing Schedule” means the Schedule attached hereto identified as such.

“Prime Rate” means a rate per annum equal to the prime rate of interest announced from time to time by U.S. Bank or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes.

“Prior Extension Commitments” shall have the meaning set forth in Section 2.22(c).

“Property” of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person.

“Pro Rata Share” means, with respect to a Lender, a portion equal to a fraction the numerator of which is such Lender’s Commitment and the denominator of which is the Aggregate Commitment, provided, however , if all of the Commitments are terminated pursuant to the terms of this Agreement, then “Pro Rata Share” means the percentage obtained by dividing (a) such Lender’s Outstanding Credit Exposure at such time by (b) the Aggregate Outstanding Credit Exposure at such time; and provided, further , that when a Defaulting Lender shall exist, “Pro Rata Share” shall mean the percentage of the Aggregate Commitment (disregarding any Defaulting Lender’s Commitment) represented by such Lender’s Commitment. If the Commitments have terminated or expired, the Pro Rata Shares shall be determined based upon the Commitments most recently in effect, giving effect to any assignments.

“Purchasers” is defined in Section 12.3.1.

“Quarterly Statement” shall mean, as to any insurance company, a quarterly statutory financial statement of such insurance company as required to be filed with the applicable Department, together with all exhibits or schedules filed therewith, prepared in conformity with SAP.

“Quotation Date” means, in relation to any Interest Period for which an interest rate is to be determined, two Business Days before the first day of that period.

“Rate Management Transaction” means any transaction (including an agreement with respect thereto) now existing or hereafter entered by the Borrower or any subsidiary which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures.

“Register” is defined in Section 12.3.4.

“Regulation D” means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.

“Regulation U” means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System.

“Reportable Event” means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided , however , that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code.

“Reports” is defined in Section 9.6.

“Required Lenders” means Lenders in the aggregate having greater than 50% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding greater than 50% of the Aggregate Outstanding Credit Exposure.

“Reserve Requirement” means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities.

“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) with respect to any equity interest in the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such equity interests in the Borrower or any Subsidiary thereof or any option, warrant or other right to acquire any such equity interest in the Borrower or any Subsidiary thereof.

“SAP” shall mean, as to any insurance company, the statutory accounting practices prescribed or permitted by the applicable Department.

“S&P” means Standard and Poor’s Ratings Services, a division of The McGraw Hill Companies, Inc.

“Schedule” refers to a specific schedule to this Agreement, unless another document is specifically referenced.

“Section” means a numbered section of this Agreement, unless another document is specifically referenced.

“Secured Borrowing Option” is defined in Section 2.1.2(a).

“Secured Obligations” shall have the meaning set forth in the Security Agreement.

“Securities Account Control Agreement” means that certain Notice to Securities Intermediary and Control Agreement entered into as of the date hereof among the Borrower, as Pledgor, the Administrative Agent, as Secured Party and the Intermediary, as amended, restated or otherwise modified from time to time.

“Security Agreement” means that certain Pledge and Security Agreement, dated as of the date hereof, between the Borrower and the Administrative Agent, for the benefit of the Administrative Agent and the Holders of Secured Obligations, as amended, restated or otherwise modified from time to time.

“Single Employer Plan” means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group.

“Stated Rate” is defined in Section 2.20.

“Statutory Financial Statements” is defined in Section 5.4(ii).

“Subsidiary” of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a “Subsidiary” shall mean a Subsidiary of the Borrower.

“Subsidiary Indebtedness” means (a) a Subsidiary’s obligations (other than to the Borrower or another Subsidiary) for borrowed money that are evidenced by bonds, debentures, notes or bank credit agreements, other than obligations in respect of advances from a Federal Home Loan Bank or funding agreement backed note programs and (b) guarantees by a Subsidiary of obligations for borrowed money so evidenced of another Person (other than the Borrower or a Subsidiary).

“Substantial Portion” means, with respect to the Property of the Borrower and its Subsidiaries, Property which represents more than 10% of the consolidated assets of the Borrower and its Subsidiaries taken as a whole or Property which is responsible for more than 10% of the Consolidated Net Income of the Borrower and its Subsidiaries taken as a whole, in each case, as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as at the beginning of the twelve-month period ending with the month in which such determination is made (or if financial statements have not been delivered hereunder for that month which begins the twelve-month period, then the financial statements delivered hereunder for the quarter ending immediately prior to that month).

“Syndication Agent” means Wells Fargo Bank, National Association.

“Taxes” means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes and Other Taxes.

“Transferee” is defined in Section 12.4.

“Type” means, with respect to any Advance, its nature as a Base Rate Advance or a Eurocurrency Advance and with respect to any Loan, its nature as a Base Rate Loan or a Eurocurrency Loan.

“Unfunded Liabilities” means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans using PBGC actuarial assumptions for single employer plan terminations.

“Unliquidated Obligations” shall have the meaning set forth in the Security Agreement.

“Unsecured Borrowing Option” is defined in Section 2.1.2(a).

“U.S. Bank” means U.S. Bank National Association, a national banking association, in its individual capacity, and its successors.

“Wholly-Owned Subsidiary” of a Person means (i) any Subsidiary of which 100% of the beneficial ownership interests shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, limited liability company, association, joint venture or similar business organization of which 100% of the beneficial ownership interests shall at the time be so owned or controlled.

The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms.

ARTICLE II

THE CREDITS

2.1. Commitment; Unsecured Borrowing Option; Secured Borrowing Option .

2.1.1. Commitment . From and including the date of this Agreement and prior to the Facility Termination Date, each Lender severally agrees, on the terms and conditions set forth in this Agreement, to make Loans to the Borrower in Dollars, provided that, after giving effect to the making of each such Loan, the amount of such Lender’s Outstanding Credit Exposure shall not exceed its Commitment. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Facility Termination Date. The Commitments to extend credit hereunder shall expire on the Facility Termination Date.

2.1.2. Unsecured Borrowing Option; Secured Borrowing Option .

(a) The Borrower may request Advances pursuant to either the secured borrowing option (“Secured Borrowing Option”) or the unsecured borrowing option (“Unsecured Borrowing Option”). If the Advance requested by the Borrower is made choosing the Unsecured Borrowing Option, the Applicable Margin applicable to the Loans made pursuant to such

Advance shall in the case of Eurocurrency Advances be the Unsecured Eurocurrency Rate as provided in the Pricing Schedule until the end of the applicable Interest Period, and in the case of a Base Rate Advance shall be the Unsecured Base Rate until the Loans made pursuant to such Advance have been repaid. Once an Advance is made pursuant to the Secured Borrowing Option or the Unsecured Borrowing Option, such Advance shall remain subject to such option until such time as such Advance is repaid in full. If the Borrower requests Advances pursuant to the Secured Borrowing Option, the Applicable Margins with respect to the Loans made pursuant to such Advance shall in the case of Eurocurrency Advances be the Secured Eurocurrency Rate as provided in the Pricing Schedule until the end of the applicable Interest Period and in the case of Base Rate Advances shall be the Secured Base Rate as provided in the Pricing Schedule.

(b) Before the Borrower may deliver a Borrowing Notice requesting a Borrowing pursuant to the Secured Borrowing Option, the Borrower shall have delivered Collateral to the account subject to the Securities Account Control Agreement in a manner satisfactory to the Administrative Agent, the Administrative Agent shall have a valid, perfected, first priority Lien with respect to such Collateral as contemplated by the Security Agreement and the Securities Account Control Agreement, and the Administrative Agent shall have received a satisfactory Borrowing Base Certificate, dated as of a recent date, with respect to such Collateral. Such Collateral shall be discounted by the applicable advance rate percentages prescribed below, and the aggregate value of such Collateral, as discounted by the below advance rate percentages, shall be the “Borrowing Base”. The Borrowing Base at any time shall be determined by reference to the most recent certificate, signed and certified as accurate and complete by an Authorized Officer of the borrower, in substantially the form of Exhibit I, or another form which is acceptable to the Administrative Agent (the “Borrowing Base Certificate”). The Borrower shall deliver the Borrowing Base Certificate to the Administrative Agent and each Lender within five (5) days of the end of each calendar month during the period in which Loans made pursuant to the Secured Borrowing Option remain outstanding.


Type of Collateral	Advance Rate
Cash		100	%
U.S. Bank certificates of deposit and money market mutual funds		100	%
Commercial Paper (A1 and P1 or better), excluding U.S. Bank Commercial Paper		80	%
U.S. government bills, notes and GSEs, including Agency MBS:
• Maturity < 5 years		80	%
• Maturity 5 — 10 years		70	%
High Grade Corporate or Municipal Bonds (Rated BBB and Baa2 or better)
• Maturity < 5 years		60	%
• Maturity 5 — 10 years		50	%
Ratings exclusive of any wrap

(c) For the avoidance of doubt, Borrowings pursuant to the Unsecured Borrowing Option and the Secured Borrowing Option shall be permitted to be outstanding simultaneously. Each Advance hereunder shall consist of Loans made from the several Lenders ratably according to their Pro Rata Shares, regardless of whether such Advance is made pursuant to the Unsecured Borrowing Option or the Secured Borrowing Option.

(d) The amount of any Advance requested pursuant to the Secured Borrowing Option cannot exceed the value of the Borrowing Base available with respect to such Advance at such time, and at no time during the period that a Borrowing pursuant to the Secured Borrowing Option is outstanding shall the amount of such Borrowing exceed the value of the Borrowing Base. In the event and on such occasion that any portion of the Aggregate Outstanding Credit Exposure attributable to Advances made pursuant to the Secured Borrowing Option exceeds the value of the Borrowing Base, the Borrower shall, within three (3) days, either prepay the Loans in an aggregate amount equal to such excess or post additional Collateral of a value equal to the amount of such excess to the account subject to the Securities Account Control Agreement. In the event the Borrower permanently reduces the Aggregate Commitment in whole or in part pursuant to Section 2.7, any portion of such Aggregate Commitment attributable to Advances made pursuant to the Secured Borrowing Option may not be reduced below the value of the Borrowing Base for such Advances.

(e) Any payments made hereunder prior to an Event of Default shall be applied to Loans made pursuant to the Unsecured Borrowing Option or the Secured Borrowing

Option in the Borrower’s discretion. After the exercise of remedies provided for in Section 8.1 (or after the Obligations have automatically become immediately due and payable as set forth in the first sentence of Section 8.1(i)), any proceeds of the Collateral received by the Administrative Agent shall be applied first to payment of accrued and unpaid principal and interest on the Loans made pursuant to the Secured Borrowing Option ratably among the Lenders, and any remaining proceeds of the Collateral after repayment of such Loans in full shall be applied pursuant to Section 8.2. All other amounts received by the Administrative Agent on account of the Obligations shall be applied by the Administrative Agent pursuant to Section 8.2, with the understanding that with respect to principal and interest on Loans, such amounts shall be applied first to Loans made pursuant to the Unsecured Borrowing Option.

2.2. Required Payments; Termination . If at any time the amount of the Aggregate Outstanding Credit Exposure exceeds the Aggregate Commitment, the Borrower shall immediately make a payment on the Obligations sufficient to eliminate such excess. The Aggregate Outstanding Credit Exposure and all other unpaid Obligations shall be paid in full by the Borrower on the Facility Termination Date.

2.3. Ratable Loans; Types of Advances . Each Advance hereunder shall consist of Loans made from the several Lenders ratably according to their Pro Rata Shares. The Advances may be Base Rate Advances or Eurocurrency Advances, or a combination thereof, selected by the Borrower in accordance with Sections 2.8 and 2.9.

2.4. Increase Option . The Borrower may from time to time elect to increase the Commitments in minimum increments of $5,000,000 (or such lower amount as the Borrower and the Administrative Agent agree upon), no more than two (2) times during the term of this Agreement, so long as, after giving effect thereto, the aggregate amount of such increases does not exceed $25,000,000. The Borrower may arrange for any such increase to be provided by one or more Lenders (each Lender so agreeing to an increase in its Commitment, an “Increasing Lender”), or by one or more new banks, financial institutions or other entities (each such new bank, financial institution or other entity, an “Augmenting Lender”), to increase their existing Commitments or extend Commitments, as the case may be; provided that (i) each Augmenting Lender and each Increasing Lender shall be subject to the reasonable approval of the Borrower and the Administrative Agent and (ii) (x) in the case of an Increasing Lender, the Borrower and such Increasing Lender execute an agreement substantially in the form of Exhibit F hereto, and (y) in the case of an Augmenting Lender, the Borrower and such Augmenting Lender execute an agreement substantially in the form of Exhibit G hereto. No consent of any Lender (other than the Lenders participating in the increase) shall be required for any increase in Commitments pursuant to this Section 2.4. Increases and new Commitments created pursuant to this Section 2.4 shall become effective on the date agreed by the Borrower, the Administrative Agent and the relevant Increasing Lenders or Augmenting Lenders, and the Administrative Agent shall notify each Lender thereof. Notwithstanding the foregoing, no increase in the Commitments (or in the Commitment of any Lender) shall become effective under this paragraph unless, (i) on the proposed date of the effectiveness of such increase, (A) the conditions set forth in paragraphs (i) and (ii) of Section 4.2 shall be satisfied or waived by the Required Lenders and the Administrative Agent shall have received a certificate to that effect for the Borrower dated such date and executed by an Authorized Officer of the Borrower and (B) the Borrower shall be in compliance (on a pro forma basis reasonably acceptable to the Administrative Agent) with the

covenants contained in Section 6.19 and (ii) the Administrative Agent shall have received documents consistent with those delivered on the date hereof as to the corporate power and authority of the Borrower to borrow hereunder after giving effect to such increase. On the effective date of any increase in the Commitments, (i) each relevant Increasing Lender and Augmenting Lender shall make available to the Administrative Agent such amounts in immediately available funds as the Administrative Agent shall determine, for the benefit of the other Lenders, as being required in order to cause, after giving effect to such increase and the use of such amounts to make payments to such other Lenders, each Lender’s portion of the outstanding Loans of all the Lenders to equal its Pro Rata Share of such outstanding Loans, and (ii) the Borrower shall be deemed to have repaid and reborrowed all outstanding Loans as of the date of any increase in the Commitments (with such reborrowing to consist of the Types of Loans, with related Interest Periods if applicable, specified in a notice signed by an Authorized Officer and delivered by the Borrower, in accordance with the requirements of Section 2.8). The deemed payments made pursuant to clause (ii) of the immediately preceding sentence shall be accompanied by payment of all accrued interest on the amount prepaid and, in respect of each Eurocurrency Loan, shall be subject to indemnification by the Borrower pursuant to the provisions of Section 3.4 if the deemed payment occurs other than on the last day of the related Interest Periods.

2.5. Commitment Fee . The Borrower agrees to pay to the Administrative Agent for the account of each Lender according to its Pro Rata Share a commitment fee at a per annum rate equal to the Applicable Fee Rate on the average daily Available Aggregate Commitment from the date hereof to and including the Facility Termination Date, payable in arrears on each Payment Date hereafter and on the Facility Termination Date.

2.6. Minimum Amount of Each Advance . Each Eurocurrency Advance shall be in the minimum amount of $10,000,000 and incremental amounts in integral multiples of $1,000,000, and each Base Rate Advance shall be in the minimum amount of $5,000,000 and incremental amounts in integral multiples of $1,000,000, provided, however , that any Base Rate Advance may be in the amount of the Available Aggregate Commitment.

2.7. Reductions in Aggregate Commitment; Optional Principal Payments . The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in integral multiples of $10,000,000, upon at least three Business Days’ written notice to the Administrative Agent, which notice shall specify the amount of any such reduction, provided, however , that the amount of the Aggregate Commitment may not be reduced below the Aggregate Outstanding Credit Exposure. All accrued commitment fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Credit Extensions hereunder. The Borrower may from time to time pay, without penalty or premium, all outstanding Base Rate Advances, or, in a minimum aggregate amount of $5,000,000, any portion of the outstanding Base Rate Advances upon same day notice to the Administrative Agent. The Borrower may from time to time pay, subject to the payment of any funding indemnification amounts required by Section 3.4 but without penalty or premium, all outstanding Eurocurrency Advances, or, in a minimum aggregate amount of $10,000,000, any portion of the outstanding Eurocurrency Advances upon three Business Days’ prior written notice to the Administrative Agent.

2.8. Method of Selecting Types and Interest Periods for New Advances . The Borrower shall select the Type of Advance and, in the case of each Eurocurrency Advance, the Interest Period applicable thereto from time to time. Subject to Section 2.1.2(b), the Borrower shall give the Administrative Agent irrevocable notice in the form of Exhibit D (a “Borrowing Notice”) not later than 10:00 a.m. (Eastern Standard Time) on the Borrowing Date of each Base Rate Advance, three Business Days before the Borrowing Date for each Eurocurrency Advance in Dollars, specifying:

	(i)		the Borrowing Date, which shall be a Business Day, of such Advance,

	(ii)		the aggregate amount of such Advance,

	(iii)		the Type of Advance selected,

	(iv)		whether such Advance shall be made pursuant to the Unsecured Borrowing Option or the Secured Borrowing Option, and

	(v)		in the case of each Eurocurrency Advance and the Interest Period applicable thereto.

Not later than noon (Eastern Standard Time) on each Borrowing Date, each Lender shall make available its Loan or Loans in funds immediately available to the Administrative Agent at its address specified pursuant to Article XIII. The Administrative Agent will make the funds so received from the Lenders available to the Borrower at the Administrative Agent’s aforesaid address.

2.9. Conversion and Continuation of Outstanding Advances; Maximum Number of Interest Periods . Base Rate Advances shall continue as Base Rate Advances unless and until such Base Rate Advances are converted into Eurocurrency Advances pursuant to this Section 2.9 or are repaid in accordance with Section 2.7. Each Eurocurrency Advance shall continue as a Eurocurrency Advance until the end of the then applicable Interest Period therefor, at which time such Eurocurrency Advance shall be automatically converted into a Base Rate Advance unless (x) such Eurocurrency Advance is or was repaid in accordance with Section 2.7 or (y) the Borrower shall have given the Administrative Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such Eurocurrency Advance continue as a Eurocurrency Advance for the same or another Interest Period. Subject to the terms of Section 2.6, the Borrower may elect from time to time to convert all or any part of a Base Rate Advance into a Eurocurrency Advance. The Borrower shall give the Administrative Agent irrevocable notice (a “Conversion/Continuation Notice”) of each conversion of a Base Rate Advance into a Eurocurrency Advance, conversion of a Eurocurrency Advance to a Base Rate Advance, or continuation of a Eurocurrency Advance not later than 10:00 a.m. (Eastern Standard Time) at least three Business Days prior to the date of the requested conversion or continuation, specifying:

	(i)		the requested date, which shall be a Business Day, of such conversion or continuation,

	(ii)		the amount and Type of the Advance which is to be converted or continued, and

(iii)

the amount of such Advance which is to be converted into or continued as a Eurocurrency Advance and the duration of the Interest Period applicable thereto.

After giving effect to all Advances, all conversions of Advances from one Type to another and all continuations of Advances of the same type, there shall be no more than ten Interest Periods in effect hereunder.

2.10. Interest Rates . Each Base Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is automatically converted from a Eurocurrency Advance into a Base Rate Advance pursuant to Section 2.9, to but excluding the date it becomes due or is converted into a Eurocurrency Advance pursuant to Section 2.9 hereof, at a rate per annum equal to the Base Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Base Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each Eurocurrency Advance shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined by the Administrative Agent as applicable to such Eurocurrency Advance based upon the Borrower’s selections under Sections 2.8 and 2.9 and the Pricing Schedule. No Interest Period may end after the Facility Termination Date.

2.11. Rates Applicable After Event of Default . Notwithstanding anything to the contrary contained in Section 2.8, 2.9 or 2.10, during the continuance of a Default or Event of Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that no Advance may be made as, converted into or continued as a Eurocurrency Advance. During the continuance of an Event of Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each Eurocurrency Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Base Rate Advance shall bear interest at a rate per annum equal to the Base Rate in effect from time to time plus 2% per annum, provided that, during the continuance of an Event of Default under Section 7.6 or 7.7, the interest rates set forth in clauses (i) and (ii) above shall be applicable to all Credit Extensions without any election or action on the part of the Administrative Agent or any Lender. After an Event of Default has been cured or waived, the interest rate applicable to Advances shall revert to the rates applicable prior to the occurrence of an Event of Default.

2.12. Method of Payment . Each Advance shall be repaid and each payment of interest thereon shall be paid in the currency in which such Advance was made. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Administrative Agent at the Administrative Agent’s address specified pursuant to Article XIII, or at any other Lending Installation of the Administrative Agent specified in writing by the Administrative Agent to the Borrower, by noon (Eastern Standard Time) on the date when due and shall (except as otherwise specifically required hereunder) be applied ratably by the Administrative Agent among the Lenders. Each payment delivered to the

Administrative Agent for the account of any Lender shall be delivered promptly by the Administrative Agent to such Lender in the same type of funds that the Administrative Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Administrative Agent from such Lender. The Administrative Agent is hereby authorized to charge the account of the Borrower maintained with U.S. Bank for each payment of principal, interest and fees as it becomes due hereunder.

2.13. Noteless Agreement; Evidence of Indebtedness . (a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

(b) The Administrative Agent shall also maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period with respect thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender’s share thereof.

(c) The entries maintained in the accounts maintained pursuant to paragraphs (i) and (ii) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however , that the failure of the Administrative Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms.

(d) Any Lender may request that its Loans be evidenced by a promissory note representing its Loans substantially in the form of Exhibit E (each a “Note”). In such event, the Borrower shall prepare, execute and deliver to such Lender such Note payable to the order of such Lender in a form supplied by the Administrative Agent. The Loans evidenced by such Note and interest thereon shall at all times (prior to any assignment pursuant to Section 12.3) be represented by one or more Notes payable to the order of the payee named therein, except to the extent that any such Lender subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in clauses (b) (i) and (ii) above.

2.14. Telephonic Notices . The Borrower hereby authorizes the Lenders and the Administrative Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons the Administrative Agent or any Lender in good faith believes to be acting on behalf of the Borrower, it being understood that the foregoing authorization is specifically intended to allow Borrowing Notices and Conversion/Continuation Notices to be given telephonically. The Borrower agrees to deliver promptly to the Administrative Agent a written confirmation (which may include e-mail) of each telephonic notice authenticated by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Administrative Agent and the Lenders, the records of the Administrative Agent and the Lenders shall govern absent manifest error. The parties agree to prepare appropriate documentation to correct any such error within 10 days after discovery by any party to this Agreement.

2.15. Interest Payment Dates; Interest and Fee Basis . Interest accrued on each Base Rate Advance shall be payable on each Payment Date, commencing with the first such Payment Date to occur after the date hereof and at maturity. Interest accrued on each Eurocurrency Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurocurrency Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurocurrency Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on all Advances and fees shall be calculated for actual days elapsed on the basis of a 360-day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to noon (local time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day.

2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions . Promptly after receipt thereof, the Administrative Agent will notify each Lender of the contents of each Aggregate Commitment reduction notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. The Administrative Agent will notify each Lender of the interest rate applicable to each Eurocurrency Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate.

2.17. Lending Installations . Each Lender may book its Advances at any Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans and any Notes issued hereunder shall be deemed held by each Lender for the benefit of any such Lending Installation. Each Lender may, by written notice to the Administrative Agent and the Borrower in accordance with Article XIII, designate replacement or additional Lending Installations through which Loans will be made by it and for whose account Loan payments are to be made.

2.18. Non-Receipt of Funds by the Administrative Agent . Unless the Borrower or a Lender, as the case may be, notifies the Administrative Agent prior to the date on which it is scheduled to make payment to the Administrative Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Administrative Agent for the account of the Lenders, that it does not intend to make such payment, the Administrative Agent may assume that such payment has been made. The Administrative Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Administrative Agent, the recipient of such payment shall, on demand by the Administrative Agent, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to (x) in the case of payment by a Lender, the Federal Funds Effective Rate for such day for the first three days and, thereafter, the interest rate applicable to the relevant Loan or (y) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan.

2.19. Replacement of Lender . If the Borrower is required pursuant to Section 3.1, 3.2 or 3.5 to make any additional payment to any Lender or if any Lender’s obligation to make or continue, or to convert Base Rate Advances into Eurocurrency Advances shall be suspended pursuant to Section 3.3 or if any Lender defaults in its obligation to make a Loan or declines to approve an amendment or waiver recommended by the Administrative Agent or otherwise becomes a Defaulting Lender (any Lender so affected an “Affected Lender”), the Borrower may elect, if such amounts continue to be charged or such suspension is still effective, to replace such Affected Lender as a Lender party to this Agreement, provided that no Default or Event of Default shall have occurred and be continuing at the time of such replacement, and provided further that, concurrently with such replacement, (i) another bank or other entity which is reasonably satisfactory to the Borrower and the Administrative Agent shall agree, as of such date, to purchase for cash the Advances and other Obligations due to the Affected Lender pursuant to an assignment substantially in the form of Exhibit C and to become a Lender for all purposes under this Agreement and to assume all obligations of the Affected Lender to be terminated as of such date and to comply with the requirements of Section 12.3 applicable to assignments, and (ii) the Borrower shall pay to such Affected Lender in same day funds on the day of such replacement (A) all interest, fees and other amounts then accrued but unpaid to such Affected Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Affected Lender under Sections 3.1, 3.2 and 3.5, and (B) an amount, if any, equal to the payment which would have been due to such Lender on the day of such replacement under Section 3.4 had the Loans of such Affected Lender been prepaid on such date rather than sold to the replacement Lender.

2.20. Limitation of Interest . The Borrower, the Administrative Agent and the Lenders intend to strictly comply with all applicable laws, including applicable usury laws. Accordingly, the provisions of this Section 2.20 shall govern and control over every other provision of this Agreement or any other Loan Document which conflicts or is inconsistent with this Section 2.20, even if such provision declares that it controls. As used in this Section 2.20, the term “interest” includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law, provided that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money and not as interest, and (b) all interest at any time contracted for, reserved, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of the Obligations. In no event shall the Borrower or any other Person be obligated to pay, or any Lender have any right or privilege to reserve, receive or retain, (a) any interest in excess of the maximum amount of nonusurious interest permitted under the applicable laws (if any) of the United States or of any applicable state, or (b) total interest in excess of the amount which such Lender could lawfully have contracted for, reserved, received, retained or charged had the interest been calculated for the full term of the Obligations at the Highest Lawful Rate. On each day, if any, that the interest rate (the “Stated Rate”) called for under this Agreement or any other Loan Document exceeds the Highest Lawful Rate, the rate at which interest shall accrue shall automatically be fixed by operation of this sentence at the Highest Lawful Rate for that day, and shall remain fixed at the Highest Lawful Rate for each day thereafter until the total amount of interest accrued equals the total amount of interest which would have accrued if there were no such ceiling rate as is imposed by this sentence. Thereafter, interest shall accrue at the Stated Rate unless and until the Stated Rate again exceeds the Highest Lawful Rate when the provisions of the immediately

preceding sentence shall again automatically operate to limit the interest accrual rate. The daily interest rates to be used in calculating interest at the Highest Lawful Rate shall be determined by dividing the applicable Highest Lawful Rate per annum by the number of days in the calendar year for which such calculation is being made. None of the terms and provisions contained in this Agreement or in any other Loan Document which directly or indirectly relate to interest shall ever be construed without reference to this Section 2.20, or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the Highest Lawful Rate. If the term of any Obligation is shortened by reason of acceleration of maturity as a result of any Event of Default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason any Lender at any time, including but not limited to, the stated maturity, is owed or receives (and/or has received) interest in excess of interest calculated at the Highest Lawful Rate, then and in any such event all of any such excess interest shall be canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to such Lender, it shall be credited pro tanto against the then-outstanding principal balance of the Borrower’s obligations to such Lender, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor.

2.21. Defaulting Lenders . Notwithstanding any provision of this Agreement to the contrary, if any Lender becomes a Defaulting Lender, then the following provisions shall apply for so long as such Lender is a Defaulting Lender:

(a) fees shall cease to accrue on the unfunded portion of the Commitment of such Defaulting Lender pursuant to Section 2.5;

(b) the Commitment and Outstanding Credit Exposure of such Defaulting Lender shall not be included in determining whether all Lenders or the Required Lenders have taken or may take any action hereunder; and

(c) any amount payable to such Defaulting Lender hereunder (whether on account of principal, interest, fees or otherwise and including any amount that would otherwise be payable to such Defaulting Lender pursuant to Section 11.2 but excluding Section 2.19) shall, in lieu of being distributed to such Defaulting Lender, be retained by the Administrative Agent in a segregated account and, subject to any applicable requirements of law, be applied at such time or times as may be determined by the Administrative Agent (i) first, to the payment of any amounts owing by such Defaulting Lender to the Administrative Agent hereunder, (ii) second, to the funding of any Loan in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Administrative Agent, (iii) third, if so determined by the Administrative Agent and the Borrower, held in such account as cash collateral for future funding obligations of the Defaulting Lender under this Agreement, (iv) fourth, to the payment of any amounts owing to the Borrower or the Lenders as a result of any judgment of a court of competent jurisdiction obtained by the Borrower or any Lender against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement, and (v) fifth, if so determined by the Administrative Agent, distributed to the Lenders other than the Defaulting Lender until the ratio of the Outstanding Credit Exposure of

such Lenders to the Aggregate Outstanding Exposure equals such ratio immediately prior to the Defaulting Lender’s failure to fund any portion of any Loans and (vi) sixth, to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided, that if such payment is a prepayment of the principal amount of any Loans, such payment shall be applied solely to prepay the Loans of all Lenders that are not Defaulting Lenders pro rata prior to being applied to the prepayment of any Loans owed to, any Defaulting Lender.

(d) In the event that the Administrative Agent and the Borrower each agrees that a Defaulting Lender has adequately remedied all matters that caused such Lender to be a Defaulting Lender, then such Lender shall purchase at par such of the Loans of the other Lenders as the Administrative Agent shall determine may be necessary in order for such Lender to hold the Loans in accordance with its Pro Rata Share.

Nothing contained in the foregoing shall be deemed to constitute a waiver by the Borrower of any of its rights or remedies (whether in equity or law) against any Lender which fails to fund any of its Loans hereunder at the time or in the amount required to be funded under the terms of this Agreement.

2.22. Extensions of Commitments .

(a) The Borrower may from time to time, pursuant to the provisions of this Section 2.22, agree with one or more Lenders holding Commitments to extend the termination date, and otherwise modify the terms of such Commitments or any portion thereof (including, without limitation, by increasing the interest rate or fees payable in respect of such Commitments or any portion thereof) (each such modification, an “Extension”) pursuant to one or more written offers (each, an “Extension Offer”) made from time to time by the Borrower to all Lenders, in each case on a pro rata basis (based on their respective Pro Rata Shares) and on the same terms to each such Lender. In connection with each Extension, the Borrower will provide notification to the Administrative Agent (for distribution to the Banks), no later than 30 days prior to the Facility Termination Date of the requested new termination date for the extended Commitments (each an “Extended Termination Date”) and the due date for Lender responses. In connection with any Extension, each Lender wishing to participate in such Extension shall, prior to such due date, provide the Administrative Agent with a written notice thereof in a form reasonably satisfactory to the Administrative Agent. Any Lender that does not respond to an Extension Offer by the applicable due date shall be deemed to have rejected such Extension. For the avoidance of doubt, the Commitments of any Lender so rejecting such Extension shall be terminated as of the Facility Termination Date, and all Obligations owing thereto shall be due and payable on the Facility Termination Date.

(b) Each Extension shall be subject to the following:

	(i)		no Default or Event of Default shall have occurred and be continuing at the time any Extension Offer is delivered to the Lenders or at the time of such Extension;

	(ii)		except as to interest rates, fees and termination date, the Commitment of any Lender extended pursuant to any Extension shall have the same terms as the Commitments of the Banks that did not agree to the Extension Offer;

	(iii)		the final termination date of the Commitments to be extended pursuant to an Extension shall be later than the final termination date of the Commitments of the Banks that did not agree to the Extension Offer;

	(iv)		if the aggregate amount of Commitments in respect of which Lenders shall have accepted an Extension Offer exceeds the maximum aggregate amount of Commitments offered to be extended by the Borrower pursuant to the relevant Extension Offer, then such Commitments shall be extended ratably up to such maximum amount based on the relative Commitments of the Lenders that accepted such Extension Offer;

	(v)		all documentation in respect of such Extension shall be consistent with the foregoing, and all written communications by the Borrower generally directed to the applicable Lenders in connection therewith shall be in form and substance consistent with the foregoing and otherwise reasonably satisfactory to the Administrative Agent;

	(vi)		any applicable Minimum Extension Condition shall be satisfied; and

	(vii)		no Extension shall become effective unless, on the proposed effective date of such Extension, the conditions set forth in Section 4.2 shall be satisfied (with all references in such Section to a request for a Loan being deemed to be references to the Extension on the applicable date of such Extension), and the Administrative Agent shall have received a certificate to that effect dated the applicable date of such Extension and executed by an Authorized Officer of the Borrower.

(c) If at the time any Extension of Commitments (as so extended, “Current Extension Commitments”) becomes effective, there will be Commitments or Loans attributable to a prior Extension that will remain outstanding (collectively, the “Prior Extension Commitments”), then, if the interest rate spread applicable to any such Current Extension Commitments exceeds the interest rate spread applicable to such Prior Extension Commitments by more than 0.25%, then the interest rate spread applicable to such Prior Extension Commitments shall be increased so that it equals the interest rate spread applicable to the Current Extension Commitments (calculated as provided above).

(d) The consummation and effectiveness of any Extension will be subject to a condition set forth in the relevant Extension Offer (a “Minimum Extension Condition”) that a minimum amount be agreed to by the Lenders subject to such Extension (to be determined in the Borrower’s discretion and specified in the relevant Extension Offer, but in no event less than $25,000,000, unless another amount is agreed to by the Administrative Agent). For the avoidance of doubt, it is understood and agreed that the provisions of Section 11.2 will not apply to Extensions of Commitments pursuant to Extension Offers made pursuant to and in accordance with the provisions of this Section 2.22, including to any payment of interest or fees in respect of any Commitments or Loans that have been extended or made pursuant to an Extension at a rate or rates different from those paid or payable in respect of Commitments or Loans of Lenders that did not extend their Commitments, in each case as is set forth in the relevant Extension Offer.

(e) The Lenders hereby irrevocably authorize the Administrative Agent to enter into amendments (collectively, “Extension Amendments”) to this Agreement and the other Loan Documents as may be necessary in order to establish new classes of Commitments and Loans created pursuant to an Extension, in each case on terms consistent with this Section 2.22. Notwithstanding the foregoing, the Administrative Agent shall have the right (but not the obligation) to seek the advice or concurrence of the Required Lenders with respect to any matter contemplated by this Section 2.22 and, if the Administrative Agent seeks such advice or concurrence, the Administrative Agent shall be permitted to enter into such amendments with the Borrower in accordance with any instructions received from such Required Lenders and shall also be entitled to refrain from entering into such amendments with the Borrower unless and until it shall have received such advice or concurrence; provided, however, that whether or not there has been a request by the Administrative Agent for any such advice or concurrence, all such Extension Amendments entered into with the Borrower by the Administrative Agent hereunder shall be binding on the Lenders. Without limiting the foregoing, in connection with any Extension, the Borrower and any Subsidiary shall execute such agreements, confirmations or other documentation as the Administrative Agent shall reasonably request to accomplish the purposes of this Section 2.22.

(f) In connection with any Extension, the Borrower shall provide the Administrative Agent at least ten Business Days’ (or such shorter period as may be agreed by the Administrative Agent) prior written notice thereof, and shall agree to such procedures, if any, as may be reasonably established by, or acceptable to, the Administrative Agent to accomplish the purposes of this Section 2.22.

ARTICLE III

YIELD PROTECTION; TAXES

3.1. Yield Protection . If, on or after the date of this Agreement, any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) is adopted, or any change is made in the interpretation, promulgation, implementation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, including, notwithstanding the foregoing, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives in connection therewith, regardless of the date enacted, adopted or issued, or compliance by any Lender or applicable Lending Installation with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency:

(a) subjects any Lender or any applicable Lending Installation to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender in respect of its Eurocurrency Loans, or

(b) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending

Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurocurrency Advances), or

(c) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining its Eurocurrency Loans or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with its Eurocurrency Loans or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of Eurocurrency Loans held or interest received by it, by an amount deemed material by such Lender,

and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Installation, as the case may be, of making or maintaining its Eurocurrency Loans or Commitment or to reduce the return received by such Lender or applicable Lending Installation, as the case may be, in connection with such Eurocurrency Loans or Commitment, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction in amount received.

Failure or delay on the part of any Lender to demand compensation pursuant to this section shall not constitute a waiver of such Lender’s right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this section for any increased costs or reductions incurred more than 180 days prior to the date that such Lender notifies the Borrower of the change in law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefor; provided further that, if the change in law giving rise to such increased costs or reductions is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof.

3.2. Changes in Capital Adequacy Regulations . If a Lender determines the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender, or any corporation controlling such Lender is increased as a result of a Change, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Outstanding Credit Exposure or its Commitment to make Loans, as the case may be, hereunder (after taking into account such Lender’s policies as to capital adequacy). “Change” means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) or in the interpretation, promulgation, implementation or administration thereof after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. Notwithstanding the foregoing, for purposes of this Agreement, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives in connection therewith shall be deemed to be a Change regardless of the date enacted, adopted or issued and all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Regulations and Supervisory Practices (or any successor or similar authority) or the

United States financial regulatory authorities shall be deemed to be a Change regardless of the date adopted, issued, promulgated or implemented. “Risk-Based Capital Guidelines” means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement.

Failure or delay on the part of any Lender to demand compensation pursuant to this section shall not constitute a waiver of such Lender’s right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this section for any increased capital requirements incurred more than 180 days prior to the date that such Lender notifies the Borrower of the Change giving rise to such increased capital requirements and of such Lender’s intention to claim compensation therefor; provided further that, if the Change giving rise to such increased capital requirements is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof

3.3. Availability of Types of Advances; Adequacy of Interest Rate . If the Administrative Agent or the Required Lenders determine that deposits of a type and maturity appropriate to match fund Eurocurrency Advances are not available to such Lenders in the relevant market or the Administrative Agent, in consultation with the Lenders, determines that the interest rate applicable to Eurocurrency Advances is not ascertainable or does not adequately and fairly reflect the cost of making or maintaining Eurocurrency Advances, then the Administrative Agent shall suspend the availability of Eurocurrency Advances and require any affected Eurocurrency Advances to be repaid or converted to Base Rate Advances, subject to the payment of any funding indemnification amounts required by Section 3.4.

3.4. Funding Indemnification . If any payment of a Eurocurrency Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurocurrency Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for such Lender’s costs, expenses and Interest Differential (as determined by such Lender) incurred as a result of such prepayment. The term “Interest Differential” shall mean that sum equal to the greater of zero or the financial loss incurred by the Lender resulting from prepayment, calculated as the difference between the amount of interest such Lender would have earned (from the investments in money markets as of the Borrowing Date of such Advance) had prepayment not occurred and the interest such Lender will actually earn (from like investments in money markets as of the date of prepayment) as a result of the redeployment of funds from the prepayment. Because of the short-term nature of this facility, Borrower agrees that Interest Differential shall not be discounted to its present value.

3.5. Taxes .

(a) All payments by the Borrower to or for the account of any Lender or the Administrative Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or the Administrative Agent, (a) the sum payable shall be increased as necessary so that after

making all required deductions (including deductions applicable to additional sums payable under this Section 3.5) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (b) the Borrower shall make such deductions, (c) the Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) the Borrower shall furnish to the Administrative Agent the original copy of a receipt evidencing payment thereof within 30 days after such payment is made.

(b) In addition, the Borrower hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note (“Other Taxes”).

(c) The Borrower hereby agrees to indemnify the Administrative Agent and each Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by the Administrative Agent or such Lender as a result of its Commitment, any Loans made by it hereunder, or otherwise in connection with its participation in this Agreement and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within 30 days of the date the Administrative Agent or such Lender makes demand therefor pursuant to Section 3.6.

(d) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a “Non-U.S. Lender”) agrees that it will, not more than ten Business Days after the date of this Agreement, (i) deliver to the Administrative Agent two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to the Administrative Agent a United States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Administrative Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Borrower or the Administrative Agent. All forms or amendments described in the preceding sentence shall provide evidence that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax.

(e) For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to clause (iv), above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this Section 3.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv), above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes.

(f) Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate.

(g) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Administrative Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Administrative Agent under this subsection, together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Administrative Agent, which attorneys may be employees of the Administrative Agent). The obligations of the Lenders under this Section 3.5(g) shall survive the payment of the Obligations and termination of this Agreement.

3.6. Selection of Lending Installation; Mitigation Obligations; Lender Statements; Survival of Indemnity . To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurocurrency Loans to reduce any liability of the Borrower to such Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of Eurocurrency Advances under Section 3.3, so long as such designation is not, in the judgment of such Lender, disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Administrative Agent) as to the amount due, if any, under Section 3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurocurrency Loan shall be calculated as though each Lender funded its Eurocurrency Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurocurrency

Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of such written statement. The obligations of the Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement.

ARTICLE IV

CONDITIONS PRECEDENT

4.1. Initial Credit Extension . The Lenders shall not be required to make the initial Credit Extension hereunder unless each of the following conditions is satisfied:

	(i)		The Administrative Agent shall have received executed counterparts of each of this Agreement, the Security Agreement and the Securities Account Control Agreement.

	(ii)		The Administrative Agent shall have received a certificate, signed by the chief financial officer of the Borrower, stating that on the date of the initial Credit Extension (1) no Default or Event of Default has occurred and is continuing and (2) the representations and warranties contained in Article V are (x) with respect to any representations or warranties that contain a materiality qualifier, true and correct in all respects and (y) with respect to any representations or warranties that do not contain a materiality qualifier, true and correct in all material respects as of such date, except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date.

	(iii)		The Administrative Agent shall have received a written opinion of the Borrower’s counsel (which may include local counsel and in-house counsel), addressed to the Lenders substantially covering the opinions set forth in Exhibit A.

	(iv)		The Administrative Agent shall have received any Notes requested by a Lender pursuant to Section 2.13 payable to the order of each such requesting Lender.

	(v)		The Administrative Agent shall have received such documents and certificates relating to the organization, existence and good standing of the Borrower, the authorization of the transactions contemplated hereby and any other legal matters relating to the Borrower, the Loan Documents or the transactions contemplated hereby, all in form and substance satisfactory to the Administrative Agent and its counsel and as further described in the list of closing documents attached as Exhibit H.

	(vi)		The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the date hereof, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder.

	(vii)		There shall not have occurred a material adverse change (x) in the business, Property, liabilities (actual and contingent), operations or condition (financial or otherwise), results of operations, or prospects of the Borrower and its Subsidiaries taken as a whole, since December 31, 2010 or (y) in the facts and information regarding such entities as represented by such entities to date.

	(viii)		The Administrative Agent shall have received all governmental, equity holder and third party consents and approvals necessary in connection with the contemplated financing and all applicable waiting periods shall have expired without any action being taken by any authority that would be reasonably likely to restrain, prevent or impose any material adverse conditions on the Borrower and its Subsidiaries, taken as a whole, and no law or regulation shall be applicable which in the reasonable judgment of the Administrative Agent could have such effect.

	(ix)		No action, suit, investigation or proceeding is pending or, to the knowledge of the Borrower, threatened in any court or before any arbitrator or governmental authority that would reasonably be expected to result in a Material Adverse Effect.

	(x)		The Administrative Agent shall have received: (i) such information as the Administrative Agent may reasonably request to confirm the tax, legal, and business assumptions made in such pro forma financial statements, (ii) unaudited consolidated financial statements of the Borrower and its Subsidiaries for the fiscal quarter ended December 31, 2010, and (iii) audited consolidated financial statements of the Borrower and its Subsidiaries for the fiscal years ended December 31, 2008, December 31, 2009 and December 31, 2010.

	(xi)		The Administrative Agent shall have received the results of a recent lien search in the jurisdiction in which the Borrower is organized, and such search shall reveal no liens on any of the assets of the Borrower except for liens permitted by Section 6.16 or discharged on or prior to the date hereof pursuant to a payoff letter or other documentation satisfactory to the Administrative Agent.

4.2. Each Credit Extension . The Lenders shall not be required to make any Credit Extension unless on the applicable Borrowing Date:

	(i)		There exists no Default or Event of Default, nor would a Default or Event of Default result from such Credit Extension.

	(ii)		The representations and warranties contained in Article V are (x) with respect to any representations or warranties that contain a materiality qualifier, true and correct in all respects and (y) with respect to any representations or warranties that do not contain a materiality qualifier, true and correct in all material respects as of such Borrowing Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date.

Each Borrowing Notice with respect to each such Credit Extension shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.2(i) and (ii) have been satisfied.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to the Lenders that:

5.1. Existence and Standing . Each of the Borrower and its Subsidiaries is a corporation, partnership (in the case of Subsidiaries only) or limited liability company duly and properly incorporated or formed, as the case may be, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction of incorporation or organization and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. Each of the Insurance Subsidiaries of the Borrower is duly licensed as an insurer under the insurance laws and regulations of its state of domicile; and each of such Insurance Subsidiaries has filed with the appropriate insurance regulatory authorities all reports, documents and other information required to be filed under the applicable state insurance laws, respectively, except as to filings the failure of which to make would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

5.2. Authorization and Validity . The Borrower has the power and authority and legal right to execute and deliver the Loan Documents to which it is a party and to perform its obligations thereunder. The execution and delivery by the Borrower of the Loan Documents to which it is a party and the performance of its obligations thereunder have been duly authorized by proper corporate proceedings, and the Loan Documents to which the Borrower is a party constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

5.3. No Conflict; Government Consent . Neither the execution and delivery by the Borrower of the Loan Documents to which it is a party, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries or (ii) the Borrower’s or any Subsidiary’s articles or certificate of incorporation, by-laws, or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the Property of the Borrower or a Subsidiary pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the Borrower or any of its Subsidiaries, is required to be obtained by the Borrower or any of its Subsidiaries in connection with the execution and delivery of the Loan Documents, the borrowings under this Agreement, the payment and performance by the Borrower of the

Obligations or the legality, validity, binding effect or enforceability of any of the Loan Documents.

5.4. Financial Statements . (i) The most recent audited consolidated financial statements of the Borrower and its Subsidiaries, and their unaudited quarterly consolidated financial statements delivered to the Lenders were prepared in accordance with GAAP in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of the Borrower and its Subsidiaries at such date and the consolidated results of their operations for the period then ended.

(ii) The most recent Annual Statements, Annual Audited Statements and each of the Quarterly Statements since the most recent Annual Statement, as the case may be, of each of the Insurance Subsidiaries of the Borrower including, without limitation, the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and statutory liabilities, in each case as filed with the appropriate Department and delivered to each Lender (collectively, the “ Statutory Financial Statements ”), have been prepared in accordance with SAP applied on a consistent basis. Each such Statutory Financial Statement was in compliance in all material respects with applicable law when filed. The Statutory Financial Statements fairly present the financial condition, the results of operations, changes in equity and changes in financial position of each of the Insurance Subsidiaries as of and for the respective dates and periods indicated therein in accordance with SAP applied on a consistent basis. Except for liabilities and obligations, including, without limitation, reserves, policy and contract claims and statutory liabilities (all of which have been computed in accordance with SAP), disclosed or provided for in the Statutory Financial Statements, each of the Insurance Subsidiaries did not have, as of the respective dates of each of such financial statements any liabilities or obligations (whether absolute or contingent and whether due or to become due) which, in conformity with SAP, applied on a consistent basis, would have been required to be or should be disclosed or provided for in such financial statements.

5.5. Material Adverse Change . Since the date of the most recent audited financial statements delivered to the Administrative Agent there has been no change in the business, Property, prospects, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries which could reasonably be expected to have a Material Adverse Effect.

5.6. Taxes . The Borrower and its Subsidiaries have filed all United States federal tax returns and all other tax returns which are required to be filed by them and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with GAAP and as to which no Lien exists. No tax liens have been filed and no claims are being asserted with respect to any such taxes. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate.

5.7. Litigation and Contingent Obligations . There is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect or which seeks to prevent, enjoin or

delay the making of any Credit Extensions. Other than any liability incident to any litigation, arbitration or proceeding which could not reasonably be expected to have a Material Adverse Effect, the Borrower has no material Contingent Obligations not provided for or disclosed in the financial statements referred to in Section 5.4.

5.8. Subsidiaries . Schedule 5.8 contains an accurate list of all Subsidiaries of the Borrower as of the date of this Agreement, setting forth their respective jurisdictions of organization and the percentage of their respective capital stock or other ownership interests owned by the Borrower or other Subsidiaries. Schedule 5.8 also contains an accurate list of all Subsidiaries of the Borrower which are Insurance Subsidiaries as of the date of this Agreement. All of the issued and outstanding shares of capital stock or other ownership interests of such Subsidiaries have been (to the extent such concepts are relevant with respect to such ownership interests) duly authorized and issued and are fully paid and non-assessable.

5.9. ERISA . No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect.

5.10. Accuracy of Information . No information, exhibit or report furnished by the Borrower or any of its Subsidiaries to the Administrative Agent or to any Lender in connection with the negotiation of, or compliance with, the Loan Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not misleading.

5.11. Regulation U . Margin stock (as defined in Regulation U) constitutes less than 25% of the value of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder.

5.12. Material Agreements . Neither the Borrower nor any Subsidiary is a party to any agreement or instrument or subject to any charter or other corporate restriction which could reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in (i) any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect or (ii) any agreement or instrument evidencing or governing Indebtedness.

5.13. Compliance With Laws . The Borrower and its Subsidiaries are in compliance in all material respects with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property.

5.14. Ownership of Properties . Except as set forth on Schedule 5.14, on the date of this Agreement, the Borrower and its Subsidiaries will have good title, free of all Liens other than those permitted by Section 6.16, to all of the Property and assets reflected in the Borrower’s most recent consolidated financial statements provided to the Administrative Agent as owned by the Borrower and its Subsidiaries.

5.15. Plan Assets; Prohibited Transactions . The Borrower is not an entity deemed to hold “plan assets” within the meaning of 29 C.F.R. § 2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA or any plan (within the meaning of Section 4975 of the Code), and neither the execution of this Agreement nor the making of Credit Extensions hereunder gives rise to a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code.

5.16. Environmental Matters . In the ordinary course of its business, the officers of the Borrower consider the effect of Environmental Laws on the business of the Borrower and its Subsidiaries, in the course of which they identify and evaluate potential risks and liabilities accruing to the Borrower due to Environmental Laws. On the basis of this consideration, the Borrower has concluded that Environmental Laws cannot reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect.

5.17. Investment Company Act . Neither the Borrower nor any Subsidiary is an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.

5.18. Insurance . The Borrower maintains, and has caused each Subsidiary to maintain, with financially sound and reputable insurance companies insurance on all their Property, liability insurance and environmental insurance in such amounts, subject to such deductibles and self-insurance retentions and covering such properties and risks as is consistent with sound business practice.

5.19. No Default . No Default or Event of Default has occurred and is continuing.

5.20. Insurance Licenses . No license (including, without limitation, a license or certificate of authority from an insurance department), permit or authorization to transact insurance and reinsurance business (a “License”) held by any of the Insurance Subsidiaries, the loss of which could reasonably be expected to have a Material Adverse Effect, is the subject of a proceeding for suspension or revocation or any similar proceedings and, to the best knowledge of the Borrower, there is no sustainable basis for such a suspension or revocation and no such suspension or revocation is threatened by any state insurance department.

ARTICLE VI

COVENANTS

During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing:

6.1. Financial Reporting . The Borrower will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with GAAP, and furnish to the Administrative Agent and the Lenders:

	(i)		Within 90 days after the close of each of its fiscal years, an unqualified (except for qualifications relating to changes in accounting principles or practices reflecting changes in GAAP) audit report, with no going concern modifier, certified by independent certified public accountants acceptable to the Required Lenders in the exercise of their commercially reasonable judgment, prepared in accordance with GAAP on a consolidated for itself and its Subsidiaries, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows, accompanied by any management letter prepared by said accountants.

	(ii)		Within 45 days after the close of the first three quarterly periods of each of its fiscal years, for itself and its Subsidiaries, consolidated unaudited balance sheets as at the close of each such period and consolidated profit and loss and reconciliation of surplus statements (including sufficient detail for independent calculation of the financial covenants set forth in Section 6.19) and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter.

	(iii)		As soon as available, but in any event within sixty (60) days after the beginning of each fiscal year of the Borrower, a copy of the plan and forecast (including a projected consolidated balance sheet, income statement and funds flow statement) of the Borrower for such fiscal year

	(iv)		Together with the financial statements required under Sections 6.1(i) and (ii), a compliance certificate in substantially the form of Exhibit B signed by its chief financial officer showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Event of Default exists, or if any Default or Event of Default exists, stating the nature and status thereof.

	(v)		As soon as possible, but in any event within sixty (60) days after the end of each calendar year a copy of the Annual Statement of each Insurance Subsidiary for such year prepared in accordance with SAP.

	(vi)		As soon as possible, but in any event within one hundred and eighty (180) days after the end of each calendar year a copy of the Annual Audited Statement of each Insurance Subsidiary for such year prepared in accordance with SAP.

	(vii)		As soon as possible, but in any event within forty-five (45) days after the end of each calendar quarter, a copy of the Quarterly Statement of each Insurance Subsidiary for such quarter prepared in accordance with SAP.

	(viii)		Promptly upon the furnishing thereof to the shareholders of the Borrower, copies of all financial statements, reports and proxy statements so furnished.

	(ix)		Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission.

	(x)		Within ten (10) Business Days of such notice, notice of actual suspension, termination or revocation of any License or material restriction thereon of any Insurance Subsidiary by any Department or other Governmental Authority that can reasonable be expected to have a Material Adverse Effect.

	(xi)		Within ten (10) Business Days of such notice, notice of any pending or threatened investigation or regulatory proceeding (other than routine periodic investigations or reviews) by any Department or other Governmental Authority concerning the business, practices or operations of any Insurance Subsidiary including any agent or managing general agent thereof, which could reasonably be expected to have a Material Adverse Effect.

	(xii)		Promptly, upon knowledge of the Borrower, notice of any actual material changes in any Applicable Insurance Code which could reasonably be expected to cause a Material Adverse Change.

	(xiii)		Promptly, and in any event within ten (10) days of receipt, any revenue agent’s reports or statutory notices of deficiency related to the Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect.

	(xiv)		Such other information (including non-financial information and environmental reports) as the Administrative Agent or any Lender may from time to time reasonably request.

If any information which is required to be furnished to the Lenders under this Section 6.1 is required by law or regulation to be filed by the Borrower with a government body on an earlier date, then the information required hereunder shall be furnished to the Lenders within two (2) Business Days of such earlier date.

Any financial statement, report or proxy required to be furnished pursuant to Section 6.1(i), Section 6.1(ii), Section 6.1(viii) or Section 6.1(ix) shall be deemed to have been furnished on the date on which the Lenders receive notice that the Borrower has filed such financial statement with the Securities and Exchange Commission and is available on the EDGAR website on the Internet at www.sec.gov or any successor government website that is freely and readily available to the Administrative Agent and the Lenders without charge; provided that the Borrower shall give notice of any such filing to the Administrative Agent (who shall then give notice of any such filing to the Lenders). Notwithstanding the foregoing, the Borrower shall deliver paper copies of any such financial statement to the Administrative Agent if the Administrative Agent requests the Borrower to furnish such paper copies until written notice to cease delivering such paper copies is given by the Administrative Agent.

6.2. Use of Proceeds . The Borrower will, and will cause each Subsidiary to, use the proceeds of the Credit Extensions for working capital, capital expenditures, share repurchases

and other lawful corporate purposes. The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Advances to purchase or carry any “margin stock” (as defined in Regulation U).

6.3. Notice of Material Events . The Borrower will, and will cause each Subsidiary to, give notice in writing to the Administrative Agent and each Lender, promptly and in any event within three (3) days after an officer of the Borrower obtains knowledge thereof, of the occurrence of any of the following:

	(i)		any Default or Event of Default;

	(ii)		the filing or commencement of any action, suit or proceeding by or before any arbitrator or governmental authority (including pursuant to any applicable Environmental Laws) against or affecting the Borrower or any Affiliate thereof that, if adversely determined, would reasonably be expected to result in a Material Adverse Effect;

	(iii)		the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, would reasonably be expected to result in a Material Adverse Effect;

	(iv)		any material change in accounting policies of, or financial reporting practices by, the Borrower or any Subsidiary; and

	(v)		any other development, financial or otherwise, which would reasonably be expected to have a Material Adverse Effect.

Each notice delivered under this Section shall be accompanied by a statement of an officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

6.4. Conduct of Business . The Borrower will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and do all things necessary to remain duly incorporated or organized, validly existing and (to the extent such concept applies to such entity) in good standing as a domestic corporation, partnership or limited liability company in its jurisdiction of incorporation or organization, as the case may be, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted.

6.5. Taxes . The Borrower will, and will cause each Subsidiary to, timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law and pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings, with respect to which adequate reserves have been set aside in accordance with GAAP.

6.6. Insurance . The Borrower will, and will cause each Subsidiary to, maintain with financially sound and reputable insurance companies insurance on all their Property in such

amounts and covering such risks as is consistent with sound business practice, and the Borrower will furnish to any Lender upon request full information as to the insurance carried.

6.7. Compliance with Laws and Material Contractual Obligations . The Borrower will, and will cause each Subsidiary to, (i) comply in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject including, without limitation, all Environmental Laws and (ii) perform in all material respects its obligations under material agreements to which it is a party.

6.8. Maintenance of Properties . The Borrower will, and will cause each Subsidiary to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times.

6.9. Books and Records; Inspection . The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each Subsidiary to, permit the Administrative Agent and the Lenders, by their respective representatives and agents, to inspect any of the Property, books and financial records of the Borrower and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Borrower and each Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Administrative Agent or any Lender may designate.

6.10. Payment of Obligations . The Borrower will, and will cause each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, would reasonably be expected to result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, and (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP.

6.11. Subsidiary Indebtedness . The Borrower will not permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except Subsidiary Indebtedness, provided that the aggregate amount of such Subsidiary Indebtedness does not exceed $30,000,000 at any time outstanding.

6.12. Merger . The Borrower will not, nor will it permit any Subsidiary to, merge or consolidate with or into any other Person, except that a Subsidiary may merge into the Borrower or a Wholly-Owned Subsidiary and so long as no Default has occurred and is continuing or would occur after giving effect thereto and so long as after giving effect thereto, the Borrower shall be in pro forma compliance with the requirements of this Agreement, the Borrower and its Subsidiaries may make an Acquisition, through merger, consolidation, or purchase of all or substantially all of the assets or capital stock of a Person provided in the case of any such merger or consolidation of the Borrower, the Borrower shall be the surviving entity.

6.13. Sale of Assets . The Borrower will not, nor will it permit any Subsidiary to, lease, sell or otherwise dispose of its Property to any other Person, except:

	(i)		Sales of inventory, or used, worn-out or surplus equipment, all in the ordinary course of business.

	(ii)		The sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are applied with reasonable promptness to the purchase price of such replacement equipment; and

	(iii)		Leases, sales or other dispositions of its Property that, together with all other Property of the Borrower and its Subsidiaries previously leased, sold or disposed of (other than inventory in the ordinary course of business) as permitted by this Section during the twelve-month period ending with the month in which any such lease, sale or other disposition occurs, do not constitute a Substantial Portion of the Property of the Borrower and its Subsidiaries.

6.14. Investments . The Borrower will not, nor will it permit any Subsidiary to, make or suffer to exist any Investments, except:

	(i)		Cash Equivalent Investments.

	(ii)		Investments constituting Permitted Acquisitions.

	(iii)		Travel advances to management personnel and employees in the ordinary course of business.

	(iv)		With respect to the Borrower or each Insurance Subsidiary, investments in compliance with the Borrower’s Investment Policy and the applicable insurance regulations of the state of domicile of such Insurance Subsidiary or with the approval of the applicable Department.

	(v)		Other Investments, provided that the aggregate amount of such other Investments does not exceed $50,000,000 at any time outstanding (provided that nothing herein shall prohibit or limit any investment made in compliance with the Borrower’s Investment Policy).

6.15. Acquisitions . The Borrower will not, nor will it permit any Subsidiary, to make any Acquisition other than a Permitted Acquisition.

6.16. Liens . The Borrower will not, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of the Borrower or any of its Subsidiaries, except:

(i)

Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and

			for which adequate reserves in accordance with GAAP shall have been set aside on its books.

	(ii)		Liens imposed by law, such as carriers’, warehousemen’s and mechanics’ liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books.

	(iii)		Liens arising out of pledges or deposits under worker’s compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation.

	(iv)		Utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or its Subsidiaries.

	(v)		Liens arising solely by virtue of any statutory or common law provision relating to bankers’ liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restriction against access by Borrower or a Subsidiary in excess of those set forth by regulations promulgated by the Board of Governors of the Federal Reserve, and (ii) such deposit account is not intended by the Borrower or any Subsidiary to provide collateral to the depository institution.

	(vi)		Liens existing on the date hereof and described in Schedule 6.16.

	(vii)		Liens on Property acquired in a Permitted Acquisition, provided that such Liens extend only to the Property so acquired and were not created in contemplation of such acquisition.

	(viii)		Liens consisting of deposits made by any Subsidiary of the borrower (other than a non-insurance Subsidiary) with the insurance regulatory authority in its jurisdiction of domicile or other statutory Liens or Liens or claims imposed or required by applicable insurance law or regulation against the assets of such Subsidiary, in each case in favor of all policyholders of such Subsidiary and in the ordinary course of such Subsidiary’s business.

	(ix)		Liens securing advances from a Federal Home Loan Bank.

	(x)		other Liens securing Indebtedness, provided that the aggregate amount of Indebtedness secured by Liens described in this clause (x) at any time does not exceed $25,000,000 at any time outstanding.

6.17. Affiliates . The Borrower will not, and will not permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower’s or such Subsidiary’s business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arms-length transaction.

6.18. Restricted Payments . The Borrower will not, nor will it permit any Subsidiary to, make any Restricted Payment, except that (i) any Subsidiary may declare and pay dividends or make distributions to the Borrower or to a Wholly-Owned Subsidiary, and (ii) the Borrower may declare and pay dividends on its capital stock provided that no Default or Event of Default shall exist before or after giving effect to such dividends or be created as a result thereof.

6.19. Financial Covenants .

6.19.1. Leverage Ratio . The Borrower will not permit the ratio, determined as of the end of each of its fiscal quarters, of (i) Consolidated Funded Indebtedness to (ii) Consolidated Total Capitalization to be greater than 0.35 to 1.0.

6.19.2. Minimum Net Worth . The Borrower will at all times maintain Consolidated Net Worth of not less than he sum of (i) 75% of Consolidated Net Worth at December 31, 2010 plus (ii) 50% of Consolidated Net Income earned in each fiscal quarter if positive beginning with the quarter ending March 31, 2011 plus (iii) 100% of the net cash proceeds resulting from the issuance of capital stock of the Borrower.

6.20. Other Agreements . The Borrower will not, and will not permit any of its Subsidiaries to, enter into any agreement containing any provision which (a) would be violated or breached by the performance of its obligations hereunder or under any instrument or document delivered or to be delivered by it hereunder or in connection herewith, (b) prohibits or restricts the creation or assumption of any Lien (other than Liens permitted by Section 6.16) upon its properties, revenues or assets (whether now owned or hereafter acquired) as security for the Obligations hereunder, (c) prohibits or restricts the ability of any of its Subsidiaries to make dividends or advances or payments to the Borrower, or (d) constitutes an agreement to a limitation or restriction of the type described in clauses (a) through (c) with respect to any other Indebtedness.

6.21. Ownership of Insurance Subsidiaries . The Borrower will not cease to own, directly or indirectly, free and clear of all Liens, 100% of the outstanding shares of voting stock of the Insurance Subsidiaries owned, directly or indirectly, by the Borrower as of the date of this Agreement.

ARTICLE VII

DEFAULTS

The occurrence of any one or more of the following events shall constitute an Event of Default:

7.1. Any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries to the Lenders or the Administrative Agent under or in connection with this Agreement, any Credit Extension, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be materially false on the date as of which made or confirmed.

7.2. Nonpayment of (i) principal of any Loan when due or (ii) interest upon any Loan or of any commitment fee or other obligations under any of the Loan Documents within five days after the same becomes due.

7.3. The breach by the Borrower of any of the terms or provisions of Section 6.3, 6.11, 6.12, 6.13, 6.15, 6.16, 6.17, 6.18, 6.19 or 6.21.

7.4. The breach by the Borrower (other than a breach which constitutes an Event of Default under another Section of this Article VII) of any of the terms or provisions of this Agreement which is not remedied within 30 days after the Borrower becomes aware of any such breach.

7.5. Failure of the Borrower or any of its Subsidiaries to pay when due any Material Indebtedness; or the default by the Borrower or any of its Subsidiaries in the performance (beyond the applicable grace period with respect thereto, if any) of any term, provision or condition contained in any Material Indebtedness Agreement, or any other event shall occur or condition exist, the effect of which default, event or condition is to cause, or to permit the holder(s) of such Material Indebtedness or the lender(s) under any Material Indebtedness Agreement to cause, such Material Indebtedness to become due prior to its stated maturity or any commitment to lend under any Material Indebtedness Agreement to be terminated prior to its stated expiration date; or any Material Indebtedness of the Borrower or any of its Subsidiaries shall be declared to be due and payable or required to be prepaid or repurchased (other than by a regularly scheduled payment) prior to the stated maturity thereof; or the Borrower or any of its Subsidiaries shall not pay, or admit in writing its inability to pay, its debts generally as they become due.

7.6. The Borrower or any of its Subsidiaries shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate or partnership action to authorize or effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7.

7.7. Without the application, approval or consent of the Borrower or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for the

Borrower or any of its Subsidiaries or any Substantial Portion of its Property, or a proceeding described in Section 7.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 30 consecutive days.

7.8. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of, all or any portion of the Property of the Borrower and its Subsidiaries which, when taken together with all other Property of the Borrower and its Subsidiaries so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such action occurs, constitutes a Substantial Portion.

7.9. The Borrower or any of its Subsidiaries shall fail within 30 days to pay, bond or otherwise discharge one or more (i) judgments or orders for the payment of money in excess of $25,000,000 (or the equivalent thereof in currencies other than U.S. Dollars) in the aggregate, or (ii) nonmonetary judgments or orders which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, which judgment(s), in any such case, is/are not stayed on appeal or otherwise being appropriately contested in good faith.

7.10. An ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect.

7.11. Nonpayment by the Borrower or any Subsidiary of any obligation under a Rate Management Transaction when due or the breach by the Borrower or any Subsidiary of any term, provision or condition contained in any Rate Management Transaction or any transaction of the type described in the definition of “Rate Management Transactions,” whether or not any Lender or Affiliate of a Lender is a party thereto.

7.12. Any Change in Control shall occur.

7.13. The occurrence of any “default”, as defined in any Loan Document (other than this Agreement) or the breach of any of the terms or provisions of any Loan Document (other than this Agreement), which default or breach continues beyond any period of grace therein provided.

7.14. Any Collateral Document shall for any reason fail to create a valid and perfected first priority security interest in any collateral purported to be covered thereby, except as permitted by the terms of any Collateral Document, or any Collateral Document shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of any Collateral Document, or the Borrower shall fail to comply with any of the terms or provisions of any Collateral Document to which it is a party.

ARTICLE VIII

ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES

8.1. Acceleration; Remedies . (i) If any Event of Default described in Section 7.6 or 7.7 occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder

shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Administrative Agent or any Lender. If any other Event of Default occurs, the Required Lenders (or the Administrative Agent with the consent of the Required Lenders) may terminate or suspend the obligations of the Lenders to make Loans hereunder or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives.

(ii) Upon the occurrence and during the continuation of any other Event of Default, the Administrative Agent may, subject to the direction of the Required Lenders, exercise all rights and remedies under the Loan Documents and enforce all other rights and remedies under applicable law.

8.2. Application of Funds . Subject to Section 2.1.2, after the exercise of remedies provided for in Section 8.1 (or after the Obligations have automatically become immediately due and payable as set forth in the first sentence of Section 8.1(i)), any amounts received by the Administrative Agent on account of the Obligations shall be applied by the Administrative Agent in the following order:

8.2.1. First, to payment of fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative Agent and amounts payable under Article III) payable to the Administrative Agent in its capacity as such;

8.2.2. Second, to payment of fees, indemnities and other amounts (other than principal, interest and Commitment Fees) payable to the Lenders (including fees, charges and disbursements of counsel to the respective Lenders as required by Section 9.6 and amounts payable under Article III);

8.2.3 Third, to payment of accrued and unpaid Commitment Fees and interest on the Loans ratably among the Lenders in proportion to the respective amounts described in this Section 8.2.3 payable to them;

8.2.4. Fourth, to payment of the unpaid principal of the Loans ratably among the Lenders in proportion to their Pro Rata Shares;

8.2.5. Fifth, to payment of all other Obligations ratably among the Lenders; and

8.2.6. Last, the balance, if any, to the Borrower or as otherwise required by Law.

8.3. Amendments . Subject to the provisions of this Section 8.3, the Required Lenders (or the Administrative Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Event of Default hereunder; provided , however , that no such supplemental agreement shall:

	(i)		without the consent of each Lender directly affected thereby, extend the final maturity of any Loan to a date after the Facility Termination Date or postpone any regularly scheduled payment of principal of any Loan or forgive all or any portion of the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon or increase the amount of the Commitment of any Lender hereunder.

	(ii)		without the consent of all of the Lenders, reduce the percentage specified in the definition of Required Lenders.

	(iii)		without the consent of all of the Lenders, amend Section 8.2, this Section 8.3 or Section 11.2.

	(iv)		without the consent of all of the Lenders, except as provided in the Collateral Documents, release all or substantially all of the Collateral.

No amendment of any provision of this Agreement relating to the Administrative Agent shall be effective without the written consent of the Administrative Agent. The Administrative Agent may waive payment of the fee required under Section 12.3.2 without obtaining the consent of any other party to this Agreement.

8.4. Preservation of Rights . No delay or omission of the Lenders or the Administrative Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Event of Default or an acquiescence therein, and the making of a Credit Extension notwithstanding the existence of an Event of Default or the inability of the Borrower to satisfy the conditions precedent to such Credit Extension shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Administrative Agent and the Lenders until the Obligations have been paid in full.

ARTICLE IX

GENERAL PROVISIONS

9.1. Survival of Representations . All representations and warranties of the Borrower contained in this Agreement shall survive the making of the Credit Extensions herein contemplated.

9.2. Governmental Regulation . Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation.

9.3. Headings . Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents.

9.4. Entire Agreement . The Loan Documents embody the entire agreement and understanding among the Borrower, the Administrative Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Administrative Agent and the Lenders relating to the subject matter thereof other than those contained in the fee letter described in Section 10.13 which shall survive and remain in full force and effect during the term of this Agreement.

9.5. Several Obligations; Benefits of this Agreement . The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Administrative Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, provided , however , that the parties hereto expressly agree that the Arranger shall enjoy the benefits of the provisions of Sections 9.6, 9.10 and 10.11 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement.

9.6. Expenses; Indemnification . (i) The Borrower shall reimburse the Administrative Agent and the Arranger upon demand for all reasonable out-of-pocket expenses paid or incurred by the Administrative Agent or the Arranger, including, without limitation, filing and recording costs and fees, costs of any environmental review, and consultants’ fees, travel expenses and reasonable fees, charges and disbursements of outside counsel to the Administrative Agent and the Arranger in connection with the due diligence, preparation, administration, negotiation, execution, delivery, syndication, distribution (including, without limitation, via DebtX and any other internet service selected by the Administrative Agent), review, amendment, modification, and administration of the Loan Documents. The Borrower also agrees to reimburse the Administrative Agent, the Arranger and the Lenders for any costs, internal charges and out-of-pocket expenses, including, without limitation, filing and recording costs and fees, costs of any environmental review, and consultants’ fees, travel expenses and reasonable fees, charges and disbursements of outside counsel to the Administrative Agent, the Arranger and the Lenders, paid or incurred by the Administrative Agent, the Arranger or any Lender in connection with the collection and enforcement of the Loan Documents. Expenses being reimbursed by the Borrower under this Section include, without limitation, costs and expenses incurred in connection with the Reports described in the following sentence. The Borrower acknowledges that from time to time U.S. Bank may prepare and may distribute to the Lenders (but shall have no obligation or duty to prepare or to distribute to the Lenders) certain audit reports (the “Reports”) pertaining to the Borrower’s assets for internal use by U.S. Bank from information furnished to it by or on behalf of the Borrower, after U.S. Bank has exercised its rights of inspection pursuant to this Agreement.

(ii) The Borrower hereby further agrees to indemnify and hold harmless the Administrative Agent, the Arranger, each Lender, their respective affiliates, and each of their

directors, officers and employees, agents and advisors against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor (including reasonable fees, charges and disbursements of outside counsel) whether or not the Administrative Agent, the Arranger, any Lender or any affiliate is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Credit Extension hereunder except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the party seeking indemnification, including, without limitation, reasonable attorneys’ fees and settlement costs. The obligations of the Borrower under this Section 9.6 shall survive the termination of this Agreement.

9.7. Numbers of Documents . All statements, notices, closing documents, and requests hereunder shall be furnished to the Administrative Agent with sufficient counterparts so that the Administrative Agent may furnish one to each of the Lenders.

9.8. Accounting . Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP in a manner consistent with that used in preparing the financial statements referred to in Section 5.4; provided, however that, notwithstanding any other provision contained herein, all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to herein shall be made, without giving effect to any election under Accounting Standards Codification 825-10-25 (previously referred to as Statement of Financial Accounting Standards 159) (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect) to value any Indebtedness or other liabilities of the Borrower or any of its Subsidiaries at “fair value”, as defined therein. If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and the Borrower, the Administrative Agent or the Required Lenders shall so request, the Administrative Agent, the Lenders and the Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Required Lenders), provided that , until so amended, such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and the Borrower shall provide to the Administrative Agent and the Lenders reconciliation statements showing the difference in such calculation, together with the delivery of monthly, quarterly and annual financial statements required hereunder.

9.9. Severability of Provisions . Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable.

9.10. Nonliability of Lenders. The relationship between the Borrower on the one hand and the Lenders and the Administrative Agent on the other hand shall be solely that of borrower and lender. Neither the Administrative Agent, the Arranger nor any Lender shall have any

fiduciary responsibilities to the Borrower. Neither the Administrative Agent, the Arranger nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower’s business or operations. The Borrower agrees that neither the Administrative Agent, the Arranger nor any Lender shall have liability to the Borrower (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. Neither the Administrative Agent, the Arranger nor any Lender shall have any liability with respect to, and the Borrower hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by the Borrower in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby. It is agreed that the Arranger shall, in its capacity as such, have no duties or responsibilities under the Agreement or any other Loan Document. Each Lender acknowledges that it has not relied and will not rely on the Arranger in deciding to enter into the Agreement or any other Loan Document or in taking or not taking any action.

9.11. Confidentiality . The Administrative Agent and each Lender agrees to hold any confidential information which it may receive from the Borrower in connection with this Agreement in confidence, except for disclosure (i) to its Affiliates and to the Administrative Agent and any other Lender and their respective Affiliates, (ii) to legal counsel, accountants, and other professional advisors to the Administrative Agent or such Lender or to a Transferee provided such parties agree to be bound by this Section 9.11 or comparable confidentiality provisions, (iii) to regulatory officials, (iv) to any Person as requested pursuant to or as required by law, regulation, or legal process, (v) to any Person in connection with any legal proceeding to which it is a party, (vi) to its direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties provided such parties agree to be bound by this Section 9.11 or comparable confidentiality provisions, (vii) permitted by Section 12.4, and (viii) to rating agencies if requested or required by such agencies in connection with a rating relating to the Advances hereunder. Without limiting Section 9.4, the Borrower agrees that the terms of this Section 9.11 shall set forth the entire agreement between the Borrower and the Administrative Agent and each Lender with respect to any confidential information previously or hereafter received by the Administrative Agent or such Lender in connection with this Agreement, and this Section 9.11 shall supersede any and all prior confidentiality agreements entered into by the Administrative Agent or any Lender with respect to such confidential information.

9.12. Nonreliance . Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) for the repayment of the Credit Extensions provided for herein.

9.13. Disclosure . The Borrower and each Lender hereby acknowledge and agree that U.S. Bank and/or its Affiliates from time to time may hold investments in, make other loans to or have other relationships with the Borrower and its Affiliates.

9.14. USA PATRIOT ACT NOTIFICATION . The following notification is provided to Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318:

Each Lender that is subject to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”) hereby notifies the Borrower that pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the Act.

ARTICLE X

THE ADMINISTRATIVE AGENT

10.1. Appointment; Nature of Relationship . U.S. Bank National Association is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the “Administrative Agent”) hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Administrative Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. The Administrative Agent agrees to act as such contractual representative upon the express conditions contained in this Article X. Notwithstanding the use of the defined term “Administrative Agent,” it is expressly understood and agreed that the Administrative Agent shall not have any fiduciary responsibilities to any Lender by reason of this Agreement or any other Loan Document and that the Administrative Agent is merely acting as the contractual representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders’ contractual representative, the Administrative Agent (i) does not hereby assume any fiduciary duties to any of the Lenders, (ii) is a “representative” of the Lenders within the meaning of the term “secured party” as defined in the Delaware Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders hereby agrees to assert no claim against the Administrative Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender hereby waives.

10.2. Powers . The Administrative Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Administrative Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Administrative Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Administrative Agent.

10.3. General Immunity . Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person.

10.4. No Responsibility for Loans, Recitals, etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered solely to the Administrative Agent; (d) the existence or possible existence of any Default or Event of Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of the Borrower or any guarantor of any of the Obligations or of any of the Borrower’s or any such guarantor’s respective Subsidiaries.

10.5. Action on Instructions of Lenders . The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders. The Administrative Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action.

10.6. Employment of Administrative Agents and Counsel . The Administrative Agent may execute any of its duties as Administrative Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Administrative Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Administrative Agent and the Lenders and all matters pertaining to the Administrative Agent’s duties hereunder and under any other Loan Document.

10.7. Reliance on Documents; Counsel . The Administrative Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex, electronic mail message, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Administrative Agent, which counsel may be employees of the Administrative Agent. For purposes of determining compliance with the conditions specified in Sections 4.1 and 4.2, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the applicable date specifying its objection thereto.

10.8. Administrative Agent’s Reimbursement and Indemnification . The Lenders agree to reimburse and indemnify the Administrative Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (i) for any amounts not reimbursed by the Borrower for which the Administrative Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Administrative Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by the Administrative Agent in connection with any dispute between the Administrative Agent and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against the Administrative Agent in connection with any dispute between the Administrative Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Administrative Agent and (ii) any indemnification required pursuant to Section 3.5(g) shall, notwithstanding the provisions of this Section 10.8, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement.

10.9. Notice of Event of Default . The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders; provided that, except as expressly set forth in the Loan Documents, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity.

10.10. Rights as a Lender. In the event the Administrative Agent is a Lender, the Administrative Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Loans as any Lender and may exercise the same as though it were not the Administrative Agent, and the term “Lender” or “Lenders” shall, at any time when the Administrative Agent is a Lender, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. The Administrative Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person.

10.11. Lender Credit Decision, Legal Representation.

(a) Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Arranger or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Arranger or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. Except for any notice, report, document or other information expressly required to be furnished to the Lenders by the Administrative Agent or Arranger hereunder, neither the Administrative Agent nor the Arranger shall have any duty or responsibility (either initially or on a continuing basis) to provide any Lender with any notice, report, document, credit information or other information concerning the affairs, financial condition or business of the Borrower or any of its Affiliates that may come into the possession of the Administrative Agent or Arranger (whether or not in their respective capacity as Administrative Agent or Arranger) or any of their Affiliates.

(b) Each Lender further acknowledges that it has had the opportunity to be represented by legal counsel in connection with its execution of this Agreement and the other Loan Documents, that it has made its own evaluation of all applicable laws and regulations relating to the transactions contemplated hereby, and that the counsel to the Administrative Agent represents only the Administrative Agent and not the Lenders in connection with this Agreement and the transactions contemplated hereby.

10.12. Successor Administrative Agent . The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Administrative Agent or, if no successor Administrative Agent has been appointed, forty-five days after the retiring Administrative Agent gives notice of its intention to resign. Upon any such resignation, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Administrative Agent’s giving notice of its intention to resign, then the resigning Administrative Agent may appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent. Notwithstanding the previous sentence, the Administrative Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Administrative Agent hereunder. If the Administrative Agent has resigned and no successor Administrative Agent has been appointed, the Lenders may perform all the duties of the Administrative Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Administrative Agent shall be deemed to be appointed hereunder until such successor Administrative Agent has accepted the appointment. Any such successor Administrative Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor

Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Administrative Agent. Upon the effectiveness of the resignation of the Administrative Agent, the resigning or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Administrative Agent, the provisions of this Article X shall continue in effect for the benefit of such Administrative Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Administrative Agent by merger, or the Administrative Agent assigns its duties and obligations to an Affiliate pursuant to this Section 10.12, then the term “Prime Rate” as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Administrative Agent.

10.13. Administrative Agent and Arranger Fees . The Borrower agrees to pay to the Administrative Agent and the Arranger, for their respective accounts, the fees agreed to by the Borrower, the Administrative Agent and the Arranger pursuant to that certain letter agreement dated January 11, 2011 or as otherwise agreed from time to time.

10.14. Delegation to Affiliates . The Borrower and the Lenders agree that the Administrative Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate’s directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Administrative Agent is entitled under Articles IX and X.

10.15. Co-Administrative Agents, Documentation Administrative Agent, Syndication Administrative Agent, etc . Neither any of the Lenders identified in this Agreement as a “co-agent” nor the Syndication Agent shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of such Lenders shall have or be deemed to have a fiduciary relationship with any Lender. Each Lender hereby makes the same acknowledgments with respect to such Lenders as it makes with respect to the Administrative Agent in Section 10.11.

10.16. Secured Obligations . The Administrative Agent is a “representative” of the Holders of Secured Obligations within the meaning of the term “secured party” as defined in the Delaware Uniform Commercial Code. Each Lender authorizes the Administrative Agent to enter into the Security Agreement and each other Loan Document pursuant to which the Borrower or any Subsidiary grants, perfects or further assures the enforceability of a Lien in favor of the Administrative Agent and to take all action contemplated thereby. Subject to Section 11.1, each Lender agrees that no Holder of Secured Obligations (other than the Administrative Agent) shall have the right individually to seek to realize upon the security granted by the Security Agreement or any other Loan Document, it being understood and agreed that such rights and remedies may be exercised solely by the Administrative Agent for the benefit of the Holders of Secured Obligations upon the terms of the Security Agreement and each other Loan Document which grants, perfects or further assures the enforceability of a Lien from the Borrower or any Subsidiary in favor of the Administrative Agent. In the event that any Collateral is hereafter pledged by any Person as collateral security for the Secured Obligations, the Administrative

Agent is hereby authorized, and hereby granted a power of attorney, to execute and deliver on behalf of the Holders of Secured Obligations any Loan Documents necessary or appropriate to grant and perfect a Lien on such Collateral in favor of the Administrative Agent on behalf of the Holders of Secured Obligations. The Lenders hereby authorize the Administrative Agent, at its option and in its discretion, to release any Lien granted to or held by the Administrative Agent upon any Collateral (i) as permitted by, but only in accordance with, the terms of the applicable Loan Document; or (ii) if approved, authorized or ratified in writing by the Required Lenders; provided, however, that any release of all or substantially all of the Collateral shall require the prior written consent of all of the Lenders. With respect to any sale permitted under Section 6.13, the Lien held by the Administrative Agent on the assets subject to such sale shall be automatically released upon the consummation thereof; provided, however, that such automatic release shall not occur during the continuance of a Default or Event of Default. Upon request by the Administrative Agent at any time, the Lenders will confirm in writing the Administrative Agent’s authority to release particular types or items of Collateral pursuant hereto. Upon any sale or transfer of assets constituting Collateral which is permitted pursuant to the terms of any Loan Document (including a permitted transfer to a Subsidiary other than the Borrower or another Subsidiary), or consented to in writing by the Required Lenders (or if required under Section 8.3(iv), all Lenders), and upon at least five (5) Business Days’ prior written request by the Borrower to the Administrative Agent, the Administrative Agent shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be necessary to evidence the release of the Liens granted to the Administrative Agent for the benefit of the Holders of Secured Obligations herein or pursuant hereto upon the Collateral that was sold or transferred; provided, however, that (i) the Administrative Agent shall not be required to execute any such document on terms which, in the Administrative Agent’s opinion, would expose the Administrative Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty (other than the absence of Liens granted by the Administrative Agent), and (ii) such release shall not in any manner discharge, affect or impair the Secured Obligations or any Liens upon (or obligations of the Borrower or any Subsidiary thereof in respect of) all interests retained by the Borrower or any Subsidiary thereof, including (without limitation) the proceeds of the sale, all of which shall continue to constitute part of the Collateral.

The Borrower, on its behalf and on behalf of its Subsidiaries, and each Lender, on its behalf and on behalf of its affiliated Holders of Secured Obligations, agrees that the Administrative Agent may determine, in its sole discretion, to not perfect a Lien in an asset of the Borrower or any Subsidiary if the cost and expense associated with perfecting such Lien would be excessive in light of the value of such asset, or if such asset would not provide material credit support for the benefit of the Holders of Secured Obligations.

Each Lender hereby irrevocably authorizes the Administrative Agent, at its option and in its sole discretion (without impairing any automatic or required release under any Loan Document), to (1) release any Liens granted to the Administrative Agent by the Borrower or any Subsidiary on any Collateral (i) upon the payment and satisfaction in full in cash of a Loan made pursuant to the Secured Borrowing Option so long as the Borrower remains in Borrowing Base compliance with respect to any other Loans made pursuant to the Secured Borrowing Option that remain outstanding, (ii) upon the termination of all Commitments, payment and satisfaction in full in cash of all Secured Obligations (other than Unliquidated Obligations), and the cash

collateralization of all Unliquidated Obligations in a manner reasonably satisfactory to the Administrative Agent, (iii) constituting property being sold or disposed of if the Borrower certifies to the Administrative Agent that the sale or disposition is made in compliance with the terms of this Agreement (and the Administrative Agent may rely conclusively on any such certificate, without further inquiry), or (iv) as required to effect any sale or other disposition of such Collateral in connection with any exercise of remedies of the Administrative Agent and the Lenders pursuant to Article VII of this Agreement, and (2) take any actions deemed appropriate by it in connection with the grant by the Borrower or any Subsidiary of Liens of the type described in Section 6.16 (including without limitation, by executing appropriate lien releases or lien subordination agreements in favor of the holder or holders of such Liens, in either case solely with respect to the assets subject to such Liens). Any such release shall not in any manner discharge, affect, or impair the Secured Obligations or any Liens (other than those expressly being released) upon (or obligations of the Borrower or any Subsidiary in respect of) all interests retained by the Borrower or any Subsidiary, including the proceeds of any sale, all of which shall continue to constitute part of the Collateral.

Each Lender hereby appoints each other Lender as its agent for the purpose of perfecting Liens, for the benefit of the Administrative Agent and the Holders of Secured Obligations, in assets which, in accordance with Article 9 of the Delaware Uniform Commercial Code or any other applicable law, can be perfected only by possession. Should any Lender (other than the Administrative Agent) lawfully obtain possession of any such Collateral, such Lender shall notify the Administrative Agent thereof, and, promptly upon the Administrative Agent’s request therefor shall deliver such Collateral to the Administrative Agent or otherwise deal with such Collateral in accordance with the Administrative Agent’s instructions.

ARTICLE XI

SETOFF; RATABLE PAYMENTS

11.1. Setoff . The Borrower hereby grants each Lender a security interest in all deposits, credits and deposit accounts (including all account balances, whether provisional or final and whether or not collected or available) of the Borrower with such Lender or any Affiliate of such Lender (the “Deposits”). In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any Event of Default occurs, Borrower authorizes each Lender to offset and apply all such Deposits toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part thereof, shall then be due and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to such Lender or the Lenders.

11.2. Ratable Payments . If any Lender, whether by setoff or otherwise, has payment made to it upon its Outstanding Credit Exposure (other than payments received pursuant to Section 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of the Aggregate Outstanding Credit Exposure held by the other Lenders so that after such purchase each Lender will hold its Pro Rata Share of the Aggregate Outstanding Credit Exposure. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff,

such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their respective Pro Rata Shares of the Aggregate Outstanding Credit Exposure. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made.

ARTICLE XII

BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS

12.1. Successors and Assigns . The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns permitted hereby, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents without the prior written consent of each Lender, (ii) any assignment by any Lender must be made in compliance with Section 12.3, and (iii) any transfer by Participation must be made in compliance with Section 12.2. Any attempted assignment or transfer by any party not made in compliance with this Section 12.1 shall be null and void, unless such attempted assignment or transfer is treated as a participation in accordance with the terms of this Agreement. The parties to this Agreement acknowledge that clause (ii) of this Section 12.1 relates only to absolute assignments and this Section 12.1 does not prohibit assignments creating security interests, including, without limitation, (x) any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank or (y) in the case of a Lender which is a Fund, any pledge or assignment of all or any portion of its rights under this Agreement and any Note to its trustee in support of its obligations to its trustee; provided , however , that no such pledge or assignment creating a security interest shall release the transferor Lender from its obligations hereunder unless and until the parties thereto have complied with the provisions of Section 12.3. The Administrative Agent may treat the Person which made any Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 12.3; provided, however , that the Administrative Agent may in its discretion (but shall not be required to) follow instructions from the Person which made any Loan or which holds any Note to direct payments relating to such Loan or Note to another Person. Any assignee of the rights to any Loan or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Loan (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Loan.

12.2. Participations .

12.2.1. Permitted Participants; Effect . Any Lender may at any time sell to one or more banks or other entities (“Participants”) participating interests in any Outstanding Credit Exposure owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender’s obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Outstanding Credit Exposure and

the holder of any Note issued to it in evidence thereof for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under the Loan Documents.

12.2.2. Voting Rights . Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents provided that each such Lender may agree in its participation agreement with its Participant that such Lender will not vote to approve any amendment, modification or waiver with respect to any Outstanding Credit Exposure or Commitment in which such Participant has an interest which would require consent of all of the Lenders pursuant to the terms of Section 8.3 or of any other Loan Document.

12.2.3. Benefit of Certain Provisions . The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.1, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender. The Borrower further agrees that each Participant shall be entitled to the benefits of Sections 3.1, 3.2, 3.4, 3.5, 9.6 and 9.10 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 12.3, provided that (i) a Participant shall not be entitled to receive any greater payment under Section 3.1, 3.2 or 3.5 than the Lender who sold the participating interest to such Participant would have received had it retained such interest for its own account, unless the sale of such interest to such Participant is made with the prior written consent of the Borrower, and (ii) any Participant not incorporated under the laws of the United States of America or any State thereof agrees to comply with the provisions of Section 3.5 to the same extent as if it were a Lender.

12.3. Assignments .

12.3.1. Permitted Assignments . Any Lender may at any time assign to one or more Eligible Assignees (“Purchasers”) all or any part of its rights and obligations under the Loan Documents. Such assignment shall be substantially in the form of Exhibit C or in such other form reasonably acceptable to the Administrative Agent as may be agreed to by the parties thereto. Each such assignment with respect to a Purchaser which is not a Lender or an Affiliate of a Lender or an Approved Fund shall either be in an amount equal to the entire applicable Commitment and Outstanding Credit Exposure of the assigning Lender or (unless each of the Borrower and the Administrative Agent otherwise consents) be in an aggregate amount not less than $5,000,000. The amount of the assignment shall be based on the Commitment or Outstanding Credit Exposure (if the Commitment has been terminated) subject to the assignment, determined as of the date of

such assignment or as of the “Trade Date,” if the “Trade Date” is specified in the assignment.

12.3.2. Consents . The consent of the Borrower shall be required prior to an assignment becoming effective unless the Purchaser is a Lender, an Affiliate of a Lender or an Approved Fund, provided that the consent of the Borrower shall not be required if an Event of Default has occurred and is continuing; provided further that the Borrower shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Administrative Agent within five (5) Business Days after having received notice thereof. The consent of the Administrative Agent shall be required prior to an assignment becoming effective unless the Purchaser is a Lender, an Affiliate of a Lender or an Approved Fund. Any consent required under this Section 12.3.2 shall not be unreasonably withheld or delayed.

12.3.3. Effect; Effective Date . Upon (i) delivery to the Administrative Agent of an assignment, together with any consents required by Sections 12.3.1 and 12.3.2, and (ii) payment of a $3,500 fee to the Administrative Agent for processing such assignment (unless such fee is waived by the Administrative Agent), such assignment shall become effective on the effective date specified in such assignment. The assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Outstanding Credit Exposure under the applicable assignment agreement constitutes “plan assets” as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be “plan assets” under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party thereto, and the transferor Lender shall be released with respect to the Commitment and Outstanding Credit Exposure assigned to such Purchaser without any further consent or action by the Borrower, the Lenders or the Administrative Agent. In the case of an assignment covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a Lender hereunder but shall continue to be entitled to the benefits of, and subject to, those provisions of this Agreement and the other Loan Documents which survive payment of the Obligations and termination of the applicable agreement. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 12.3 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 12.2. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.3, the transferor Lender, the Administrative Agent and the Borrower shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment.

12.3.4. Register . The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one of its offices in the United States of America, a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender, pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower at any reasonable time and from time to time upon reasonable prior notice.

12.4. Dissemination of Information . The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a “Transferee”) and any prospective Transferee any and all information in such Lender’s possession concerning the creditworthiness of the Borrower and its Subsidiaries, including without limitation any information contained in any Reports; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.11 of this Agreement.

12.5. Tax Treatment . If any interest in any Loan Document is transferred to any Transferee which is not incorporated under the laws of the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 3.5(d).

ARTICLE XIII

NOTICES

13.1. Notices; Effectiveness; Electronic Communication .

(a) Notices Generally . Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile as follows:

(i) if to the Borrower, at its address or facsimile number set forth on the signature page hereof;

(ii) if to the Administrative Agent, at its address or facsimile number set forth on the signature page hereof;

(iii) if to a Lender, to it at its address (or facsimile number) set forth in its Administrative Questionnaire.

Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by facsimile shall be deemed to have

been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications to the extent provided in paragraph (b) below, shall be effective as provided in said paragraph (b).

(b) Electronic Communications . Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and internet or intranet websites) pursuant to procedures approved by the Administrative Agent or as otherwise determined by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its respective discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it or as it otherwise determines, provided that such determination or approval may be limited to particular notices or communications.

Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not given during the normal business hours of the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

(c) Change of Address, Etc . Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto given in the manner set forth in this Section 13.1.

ARTICLE XIV

COUNTERPARTS; INTEGRATION; EFFECTIVENESS; ELECTRONIC EXECUTION

14.1. Counterparts; Effectiveness . This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Except as provided in Article IV, this Agreement shall become effective when it shall have been executed by the Administrative Agent, and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

14.2. Electronic Execution of Assignments . The words “execution,” “signed,” “signature,” and words of like import in any assignment and assumption agreement shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, or any other state laws based on the Uniform Electronic Transactions Act.

ARTICLE XV

CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL

15.1. CHOICE OF LAW . THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF DELAWARE, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

15.2. CONSENT TO JURISDICTION . THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR STATE COURT SITTING IN DELAWARE IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE ADMINISTRATIVE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN DELAWARE.

15.3. WAIVER OF JURY TRIAL . THE BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.

[Signature Pages Follow]

IN WITNESS WHEREOF, the Borrower, the Lenders and the Administrative Agent have executed this Agreement as of the date first above written.


	PROASSURANCE CORPORATION
	By:
		Title:
		(address)


	Attention:
		Telephone: ( )
		FAX: ( )


	U.S. BANK NATIONAL ASSOCIATION, as a Lender and as Administrative Agent
	By:
		Title:
		[Address] [Address]


	Attention:
		Telephone: ( )
		FAX: ( )




	By:
		Title:


	Attention:
		Telephone: ( )
		FAX: ( )

PRICING SCHEDULE

Level I

Level II

Level III

Level IV

Level V

Applicable Margin

Status

Unsecured Eurocurrency Rate

1.25

1.50

1.75

2.00

2.25

Secured Eurocurrency Rate

0.65

0.70

0.75

0.80

0.85

Unsecured Base Rate

0.25

0.50

0.75

1.00

1.25

Secured Base Rate

0.00

Level I

Level II

Level III

Level IV

Level V

Applicable Fee Rate

Status

Commitment Fee

0.20

0.225

0.25

0.30

0.40

For the purposes of this Schedule, the following terms have the following meanings, subject to the final paragraph of this Schedule:

“Level I Status” exists at any date if, on such date, the Borrower’s Moody’s Rating is A3 or better and the Borrower’s S&P Rating is A- or better.

“Level II Status” exists at any date if, on such date, (i) the Borrower has not qualified for Level I Status and (ii) the Borrower’s Moody’s Rating is Baa1 or better and the Borrower’s S&P Rating is BBB+ or better.

“Level III Status” exists at any date if, on such date, (i) the Borrower has not qualified for Level I Status or Level II Status and (ii) the Borrower’s Moody’s Rating is Baa2 or better and the Borrower’s S&P Rating is BBB or better.

“Level IV Status” exists at any date if, on such date, (i) the Borrower has not qualified for Level I Status or Level II Status or Level III Status and (ii) the Borrower’s Moody’s Rating is Baa3 or better and the Borrower’s S&P Rating is BBB- or better.

“Level V Status” exists at any date if, on such date, the Borrower has not qualified for Level I Status, Level II Status, Level III Status or Level IV Status.

“Moody’s Rating” means, at any time, the rating issued by Moody’s and then in effect with respect to the Borrower’s senior unsecured long-term debt securities without third-party credit enhancement.

“S&P Rating” means, at any time, the rating issued by S&P and then in effect with respect to the Borrower’s senior unsecured long-term debt securities without third-party credit enhancement.

“Status” means either Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status.

The Applicable Margin and Applicable Fee Rate shall be determined in accordance with the foregoing table based on the Borrower’s Status as determined from its then-current Moody’s and S&P Ratings. The credit rating in effect on any date for the purposes of this Schedule is that in effect at the close of business on such date. In order to qualify for a particular Status for the Applicable Margin or Applicable Fee Rate either (i) each of the Moody’s Rating and the S&P Rating required for that Status must be attained or (ii) if there is a split rating, the higher rating shall apply, except that in the event of a split rating of more than one level, the applicable rating shall be one level above the lower rating. If only one rating agency is supplying a rating, then the rating supplied by that rating agency shall be used. If an Event of Default shall have occurred and be continuing, Level V Status shall be applicable for as long as the same shall continue. If at any time the Borrower has no Moody’s Rating or no S&P Rating, Level V Status shall exist.

SCHEDULE 1
Commitments


	COMMITMENT
LENDER	PERCENTAGE			COMMITMENT
U.S. BANK NATIONAL ASSOCIATION		26.66667	%	$	40,000,000
WELLS FARGO BANK, NATIONAL ASSOCIATION		23.33333	%	$	35,000,000
BRANCH BANKING AND TRUST COMPANY		16.66667	%	$	25,000,000
FIRST TENNESSEE BANK, NA		16.66667	%	$	25,000,000
JPMORGAN CHASE BANK, N.A.		16.66667	%	$	25,000,000
TOTAL COMMITMENTS		100	%	$	150,000,000

SCHEDULE 5.8
Subsidiaries

SCHEDULE 5.14
Properties

SCHEDULE 6.16
Liens

EXHIBIT A

FORM OF OPINION

___________,

The Administrative Agent and the Lenders who are parties to the
Credit Agreement described below.

Gentlemen/Ladies:

I am counsel for ProAssurance Corporation (the “Borrower”), and have represented the Borrower in connection with its execution and delivery of a Credit Agreement dated as of __________ (the “Agreement”) among the Borrower, the Lenders named therein, and U.S. Bank National Association, as Administrative Agent, and providing for Credit Extensions in an aggregate principal amount not exceeding $150,000,000 at any one time outstanding. All capitalized terms used in this opinion and not otherwise defined herein shall have the meanings attributed to them in the Agreement or in the Security Agreement (as defined in the Agreement).

I have examined the Borrower’s Certificate of Incorporation under the General Corporation Law of the State of Delaware, the Third Restatement of the By-Laws of the Borrower, applicable resolutions of the Borrower’s Board of Directors, the Loan Documents and such other matters of fact and law which I deem necessary in order to render this opinion. Based upon the foregoing, it is our opinion that:

l. Each of the Borrower and its Subsidiaries is a corporation, partnership or limited liability company duly and properly incorporated or organized, as the case may be, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction of incorporation or organization and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted and to execute, deliver and perform its obligations under the Loan Documents.

2. The execution and delivery by the Borrower of the Loan Documents and the performance by the Borrower of its obligations thereunder have been duly authorized by proper corporate proceedings on the part of the Borrower and will not:

(a) require any consent of the Borrower’s shareholders or members (other than any such consent as has already been given and remains in full force and effect);

(b) violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries or (ii) the Borrower’s or any Subsidiary’s articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is

EXH. A-1

subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder; or

(c) result in, or require, the creation or imposition of any Lien in, of or on the Property of the Borrower or a Subsidiary pursuant to the terms of any indenture, instrument or agreement binding upon the Borrower or any of its Subsidiaries.

3. The Loan Documents have been duly executed and delivered by the Borrower and constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms except to the extent the enforcement thereof may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally and subject also to the availability of equitable remedies if equitable remedies are sought.

4. There is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the best of our knowledge after due inquiry, threatened against the Borrower or any of its Subsidiaries which, if adversely determined, could reasonably be expected to have a Material Adverse Effect.

5. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the Borrower or any of its Subsidiaries, is required to be obtained by the Borrower or any of its Subsidiaries in connection with the execution and delivery of the Loan Documents, the borrowings under the Agreement, the payment and performance by the Borrower of the Obligations, or the legality, validity, binding effect or enforceability of any of the Loan Documents.

6. The Borrower is not required to be registered as an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

7. The provisions of the Security Agreement are effective to create in favor of the Administrative Agent, for the benefit of the Holders of Secured Obligations, a valid security interest in the Borrower’s rights in the Collateral which is of a type in which a security interest can be created pursuant to Article 9 of the Delaware UCC (the “Article 9 Collateral”) as security for the Secured Obligations.

8. The provisions of the Securities Account Control Agreement are effective to give the Administrative Agent “control” (as defined in Section 8-106 of the Delaware UCC) over each [Securities Account] (as defined in the Securities Account Control Agreement) and each “security entitlement” (as defined in Section 8-102(a)(17) of the Delaware UCC) credited thereto, and no other action need be taken in order to perfect the Administrative Agent’s security interest in such [Securities Accounts] or security entitlements, which perfected security interest will be prior to any security interest in any such [Securities Account] or security entitlement that is created by the Borrower in favor of any other secured party under the Delaware UCC.

The opinions expressed herein are based upon and are given with respect to the laws of the State of Delaware and the Federal laws of the United States of America. I am licensed to practice law in the State of Delaware.

EXH. A-2

This opinion may be relied upon by the Administrative Agent, the Lenders and their participants, assignees and other transferees.


	Very truly yours,

[________________]

EXH. A-3

EXHIBIT B

FORM OF COMPLIANCE CERTIFICATE

To:

The Lenders parties to the
Credit Agreement Described Below

This Compliance Certificate is furnished pursuant to that certain Credit Agreement dated as of April 15, 2011 (as amended, modified, renewed or extended from time to time, the “Agreement”) among ProAssurance Corporation (the “Borrower”), the lenders party thereto and U.S. Bank National Association, as Administrative Agent for the Lenders. Unless otherwise defined herein, capitalized terms used in this Compliance Certificate have the meanings ascribed thereto in the Agreement.

THE UNDERSIGNED HEREBY CERTIFIES THAT:

1. I am the duly elected __________ of the Borrower;

2. I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower and its Subsidiaries during the accounting period covered by the attached financial statements;

3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes a Default or Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; and

4. Schedule I attached hereto sets forth financial data and computations evidencing the Borrower’s compliance with the financial covenants set forth in Section 6.19 of the Agreement, all of which data and computations are true, complete and correct.

5. Schedule II attached hereto sets forth the determination of the interest rates to be paid for Advances and the commitment fee rates commencing on the fifth day following the delivery hereof pursuant to the Pricing Schedule to the Agreement.

6. Schedule III attached hereto sets forth the various reports and deliveries which are required at this time under the Credit Agreement, the Security Agreement and the other Loan Documents and the status of compliance.

Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event:

EXH. B-1

The foregoing certifications, together with the computations set forth in Schedule I and Schedule II hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this __ day of _______, __.

_________________________

EXH. B-2

SCHEDULE I TO COMPLIANCE CERTIFICATE

Compliance as of _________, ____ with
Provisions of ___ and ____ of
the Agreement

[insert relevant calculations]

SCHEDULE II TO COMPLIANCE CERTIFICATE

Borrower’s Applicable Margin Calculation

SCHEDULE III TO COMPLIANCE CERTIFICATE

Reports and Deliveries Currently Due

EXHIBIT C

ASSIGNMENT AND ASSUMPTION AGREEMENT

This Assignment and Assumption (the “ Assignment and Assumption ”) is dated as of the Effective Date set forth below and is entered into by and between [ Insert name of Assignor ] (the “ Assignor ”) and [ Insert name of Assignee ] (the “ Assignee ”). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the “ Credit Agreement ”), receipt of a copy of which is hereby acknowledged by the Assignee. The Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below, the interest in and to all of the Assignor’s rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto that represents the amount and percentage interest identified below of all of the Assignor’s outstanding rights and obligations under the respective facilities identified below (including without limitation any letters of credit, guaranties and swing line loans included in such facilities and, to the extent permitted to be assigned under applicable law, all claims (including without limitation contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity), suits, causes of action and any other right of the Assignor against any Person whether known or unknown arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby) (the “ Assigned Interest ”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.


1.	Assignor:

2.	Assignee:
		[and is an Affiliate/ Approved Fund of [ identify Lender ] ¹

3.	Borrower(s):


¹		Select as applicable.

EXH. C-1


4.	Administrative Agent:	_________________________, as the agent under the Credit Agreement.

5.	Credit Agreement:	The $150,000,000 Credit Agreement dated as of April 15, 2011 among ProAssurance Corporation, the Lenders party thereto, U.S. Bank National Association, as Administrative Agent, and the other agents party thereto.

6.	Assigned Interest:

Aggregate Amount of

Commitment/Loans

Amount of

Percentage Assigned

for all

Commitment/Loans

Facility Assigned

Lenders ²

Assigned ³

Commitment/Loans ⁴

________________ ⁵

________________


7.		Trade Date:			⁶

Effective Date: ____________________, 20__ [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER BY THE ADMINISTRATIVE AGENT.]

The terms set forth in this Assignment and Assumption are hereby agreed to:


	ASSIGNOR [NAME OF ASSIGNOR]
	By:
		Title:

	ASSIGNEE [NAME OF ASSIGNEE]

	By:


²		Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.

³		Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.

⁴		Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder.

⁵		Fill in the appropriate terminology for the types of facilities under the Credit Agreement that are being assigned under this Assignment.

⁶		Insert if satisfaction of minimum amounts is to be determined as of the Trade Date.

EXH. C-2

Title:


[Consented to and] ⁷ Accepted: U.S. BANK NATIONAL ASSOCIATION, as Administrative Agent
By:
	Title:
	[Consented to:] ⁸

[NAME OF RELEVANT PARTY]
By:
	Title:


⁷		To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement.

⁸		To be added only if the consent of the Borrower and/or other parties is required by the terms of the Credit Agreement.

EXH. C-3

ANNEX 1
TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION

1. Representations and Warranties .

1.1 Assignor . The Assignor represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency, perfection, priority, collectibility, or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document, (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Documents, (v) inspecting any of the property, books or records of the Borrower, or any guarantor, or (vi) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loans or the Loan Documents.

1.2. Assignee . The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iii) agrees that its payment instructions and notice instructions are as set forth in Schedule 1 to this Assignment and Assumption, (iv) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are “plan assets” as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be “plan assets” under ERISA, (v) agrees to indemnify and hold the Assignor harmless against all losses, costs and expenses (including, without limitation, reasonable attorneys’ fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee’s non-performance of the obligations assumed under this Assignment and Assumption, (vi) it has received a copy of the Credit Agreement, together with copies of financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (vii) attached as Schedule 1 to this Assignment and Assumption is any documentation required to be delivered by the Assignee with respect to its tax status pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with

their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

2. Payments . The Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the Assignor and the Assignee. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

3. General Provisions . This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of Delaware.

EXHIBIT D

FORM OF BORROWING NOTICE

TO: U.S. Bank National Association, as administrative agent (the “ Administrative Agent ”) under that certain Credit Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), dated as of April 15, 2011 among ProAssurance Corporation (the “ Borrower ”), the financial institutions party thereto, as lenders (the “ Lenders ”), and the Administrative Agent.

Capitalized terms used herein shall have the meanings ascribed to such terms in the Credit Agreement.

The undersigned Borrower hereby gives to the Administrative Agent a Borrowing Request pursuant to Section 2.8 of the Credit Agreement, and the Borrower hereby requests to borrow on _______________, 20__ (the “ Borrowing Date ”) from the Lenders, on a pro rata basis, an aggregate principal Dollar Amount of $___________ in Loans as:

1. o a Base Rate Advance

2. o a Eurocurrency Advance with the following characteristics:

Interest Period of _______ month(s)

Such Advance is being requested pursuant to:

1. o the Unsecured Borrowing Option

2. o the Secured Borrowing Option

The undersigned hereby certifies to the Administrative Agent and the Lenders that (i) all of the representations and warranties of the Borrower set forth in the Credit Agreement (a) that contain a materiality qualifier are true and correct in all respects and (b) that do not contain a materiality qualifier are true and correct in all material respects (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date) on and as of the date of the Advance requested herein; (ii) at the time of and immediately after giving effect to such Advance, no Default shall have occurred and be continuing; and (iii) all other relevant conditions set forth in Section 4.2 of the Credit Agreement have been satisfied.

******

EXH. D-1

IN WITNESS WHEREOF, the undersigned has caused this Borrowing Notice to be executed by its authorized officer as of the date set forth below.

Dated: _______________, 20__




	By:
		Name:
		Title:

EXH. D-2

EXHIBIT E

FORM OF NOTE

[Date]

ProAssurance Corporation, a Delaware corporation (the “Borrower”), promises to pay to the order of __________________________ (the “Lender”) the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to Article II of the Agreement (as hereinafter defined), in immediately available funds at the applicable office of U.S. Bank National Association, as Administrative Agent, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Borrower shall pay the principal of and accrued and unpaid interest on the Loans in full on the Facility Termination Date.

The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment hereunder.

This Note is one of the Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement dated as of April 15, 2011 (which, as it may be amended or modified and in effect from time to time, is herein called the “Agreement”), among the Borrower, the lenders party thereto, including the Lender and U.S. Bank National Association, as Administrative Agent, to which Agreement reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. This Note may be secured pursuant to the Collateral Documents, as more specifically described in the Agreement, and reference is made thereto for a statement of the terms and provisions thereof. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement.

In the event of default hereunder, the undersigned agree to pay all costs and expenses of collection, including reasonable attorneys’ fees. The undersigned waive demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor.

THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS.



	By:
		Print Name:
		Title:

EXH. E-1

SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL
TO
NOTE OF _________________,
DATED __________,


	Principal	Maturity	Principal
	Amount of	of Interest	Amount	Unpaid
Date	Loan	Period	Paid	Balance

EXH. E-2

EXHIBIT F

FORM OF INCREASING LENDER SUPPLEMENT

INCREASING LENDER SUPPLEMENT, dated [__________], 20[__] (this “ Supplement ”), by and among each of the signatories hereto, to the Credit Agreement, dated as of April 15, 2011 (as amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), among ProAssurance Corporation (the “ Borrower ”), the Lenders party thereto and U.S. Bank National Association, as administrative agent (in such capacity, the “ Administrative Agent ”).

WITNESSETH

WHEREAS, pursuant to Section 2.4 of the Credit Agreement, the Borrower has the right, subject to the terms and conditions thereof, to effectuate from time to time an increase in the Aggregate Commitment under the Credit Agreement by requesting one or more Lenders to increase the amount of its Commitment;

WHEREAS, the Borrower has given notice to the Administrative Agent of its intention to increase the Aggregate Commitment pursuant to such Section 2.4 of the Credit Agreement; and

WHEREAS, pursuant to Section 2.4 of the Credit Agreement, the undersigned Increasing Lender now desires to increase the amount of its Commitment under the Credit Agreement by executing and delivering to the Borrower and the Administrative Agent this Supplement;

NOW, THEREFORE, each of the parties hereto hereby agrees as follows:

1. The undersigned Increasing Lender agrees, subject to the terms and conditions of the Credit Agreement, that on the date of this Supplement it shall have its Commitment increased by $[__________], thereby making the aggregate amount of its total Commitments equal to $[__________].

2. The Borrower hereby represents and warrants that no Default or Event of Default has occurred and is continuing on and as of the date hereof.

3. Terms defined in the Credit Agreement shall have their defined meanings when used herein.

4. This Supplement shall be governed by, and construed in accordance with, the laws of the State of Delaware.

5. This Supplement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same document.

EXH. F-1

IN WITNESS WHEREOF, each of the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer on the date first above written.


	[INSERT NAME OF INCREASING LENDER]
	By:
		Name:
		Title:

Accepted and agreed to as of the date first written above:


[__________________________]
By:
	Name:
	Title:

Acknowledged as of the date first written above:


U.S. BANK NATIONAL ASSOCIATION as Administrative Agent
By:
	Name:
	Title:

EXH. F-2

EXHIBIT G

FORM OF AUGMENTING LENDER SUPPLEMENT

AUGMENTING LENDER SUPPLEMENT, dated [__________], 20[__] (this “ Supplement ”), to the Credit Agreement, dated as of April 15, 2011 (as amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), among ProAssurance Corporation (the “ Borrower ”), the Lenders party thereto and U.S. Bank National Association, as administrative agent (in such capacity, the “ Administrative Agent ”).

WITNESSETH

WHEREAS, the Credit Agreement provides in Section 2.4 thereof that any bank, financial institution or other entity may extend Commitments under the Credit Agreement subject to the approval of the Borrower and the Administrative Agent, by executing and delivering to the Borrower and the Administrative Agent a supplement to the Credit Agreement in substantially the form of this Supplement; and

WHEREAS, the undersigned Augmenting Lender was not an original party to the Credit Agreement but now desires to become a party thereto;

NOW, THEREFORE, each of the parties hereto hereby agrees as follows:

1. The undersigned Augmenting Lender agrees to be bound by the provisions of the Credit Agreement and agrees that it shall, on the date of this Supplement, become a Lender for all purposes of the Credit Agreement to the same extent as if originally a party thereto, with a Commitment of $[______], thereby making the aggregate amount of its total Commitments equal to $[__________].

2. The undersigned Augmenting Lender (a) represents and warrants that it is legally authorized to enter into this Supplement; (b) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.1 thereof, as applicable, and has reviewed such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Supplement; (c) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; (d) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereof, together with such powers as are incidental thereto; and (e) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender.

EXH. G-1

3. The undersigned’s address for notices for the purposes of the Credit Agreement is as follows:

[___________]

4. The Borrower hereby represents and warrants that no Default or Event of Default has occurred and is continuing on and as of the date hereof.

5. Terms defined in the Credit Agreement shall have their defined meanings when used herein.

6. This Supplement shall be governed by, and construed in accordance with, the laws of the State of Delaware.

7. This Supplement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same document.

[signature page follows]

EXH. G-2

IN WITNESS WHEREOF, each of the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer on the date first above written.


	[INSERT NAME OF AUGMENTING LENDER]
	By:
		Name:
		Title:

Accepted and agreed to as of the date first written above:


[___________________________]
By:
	Name:
	Title:

Acknowledged as of the date first written above:


U.S. BANK NATIONAL ASSOCIATION as Administrative Agent
By:
	Name:
	Title:

EXH. G-3

EXHIBIT H

PROASSURANCE CORPORATION

CREDIT FACILITY

April 15, 2011

LIST OF CLOSING DOCUMENTS ⁹

A. LOAN DOCUMENTS

Credit Agreement dated as of April 15, 2011 among ProAssurance Corporation, a Delaware corporation (the “Borrower”), the Lenders party thereto and U.S. Bank National Association, as administrative agent (in such capacity, the “Administrative Agent”), evidencing a revolving credit facility to the Borrower from the Lenders in an initial aggregate principal amount of up to $150,000,000.

EXHIBITS


Exhibit A		Form of Opinion
Exhibit B		Form of Compliance Certificate
Exhibit C		Form of Assignment and Assumption Agreement
Exhibit D		Form of Borrowing Notice
Exhibit E		Form of Note
Exhibit F		Form of Increasing Lender Supplement
Exhibit G		Form of Augmenting Lender Supplement
Exhibit H		List of Closing Documents
Exhibit I		Form of Borrowing Base Certificate

SCHEDULES


Pricing Schedule
Schedule 1		Commitments
*Schedule 5.8*		*Subsidiaries*
*Schedule 5.14*		*Properties*
*Schedule 6.16*		*Liens*

2.		Notes executed by the Borrower in favor of each of the Lenders, if any, which has requested a note pursuant to Section 2.13(d) of the Credit Agreement.

3.		Pledge and Security Agreement executed by the Borrower, together with *pledged instruments.*


⁹		Each capitalized term used herein and not defined herein shall have the meaning assigned to such term in the above-defined Credit Agreement. Items appearing in bold and italics shall be prepared and/or provided by the Borrower and/or Borrower’s counsel.

EXH. H-1

Securities Account Control Agreement executed by the Borrower, the Administrative Agent and U.S. Bank National Association.

B. CORPORATE DOCUMENTS

Certificate of the Secretary or an Assistant Secretary of the Borrower certifying (i) that there have been no changes in the charter document of the Borrower, as attached thereto and as certified as of a recent date by the Secretary of State (or analogous governmental entity) of the State of Delaware, since the date of the certification thereof by such governmental entity, (ii) the By Laws or other organizational document, as attached thereto, of the Borrower as in effect on the date of such certification, (iii) resolutions of the Board of Directors or other governing body of the Borrower authorizing the execution, delivery and performance of each Loan Document to which it is a party, (iv) the Good Standing Certificate (or analogous documentation if applicable) for the Borrower from the Secretary of State (or analogous governmental entity) of the jurisdiction of its organization, to the extent generally available in such jurisdiction and (v) the names and true signatures of the incumbent officers of the Borrower authorized to sign the Loan Documents to which it is a party, and authorized to request an Advance under the Credit Agreement.

C. OPINIONS

6.		*Opinion of Young Conaway Stargatt & Taylor, LLP, counsel for the Borrower.*

7.		*Opinion of Jeffrey Lisenby, counsel for the Borrower.*

D. CLOSING CERTIFICATES AND MISCELLANEOUS

A Certificate signed by an Authorized Officer of the Borrower certifying the following: on the date of the initial Credit Extension (1) no Default or Event of Default has occurred and is continuing and (2) the representations and warranties contained in Article V are (x) with respect to any representations or warranties that contain a materiality qualifier, true and correct in all respects and (y) with respect to any representations or warranties that do not contain a materiality qualifier, true and correct in all material respects as of such date, except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date.

EXH. H-2

EXHIBIT I

FORM OF BORROWING BASE CERTIFICATE


To:		The Lenders parties to the
		Credit Agreement Described Below

This Borrowing Base Certificate is furnished pursuant to that certain Credit Agreement dated as of April 15, 2011 (as amended, modified, renewed or extended from time to time, the “Agreement”) among ProAssurance Corporation (the “Borrower”), the lenders party thereto and U.S. Bank National Association, as Administrative Agent for the Lenders. Unless otherwise defined herein, capitalized terms used in this Borrowing Base Certificate have the meanings ascribed thereto in the Agreement.

The undersigned hereby certifies that the report attached hereto as Schedule I is true and correct and sets forth an accurate and complete calculation of the Borrowing Base based on information contained in the Borrower’s own financial accounting records. Borrower, by the execution of this Borrowing Base Certificate, hereby ratifies, confirms and affirms all of the terms, conditions and provisions of the Agreement, and further certifies that it is in compliance with the Agreement.

The foregoing certifications, together with the computations set forth in Schedule I hereto and any documentation delivered with this Certificate in support hereof, are made and delivered this __ day of _______, __.

_________________________

EXH. I-1

SCHEDULE I TO BORROWING BASE CERTIFICATE

Borrowing Base Report

Exhibit 10.2

PLEDGE AND SECURITY AGREEMENT

THIS PLEDGE AND SECURITY AGREEMENT (as the same may be amended, restated, supplemented or otherwise modified from time to time, this “ Security Agreement ”) is entered into as of April 15, 2011 by and among PROASSURANCE CORPORATION (the “ Borrower ”), any additional Persons which become parties to this Security Agreement by executing a Supplement hereto in substantially the form of Annex I (together with the Borrower, the “ Grantors ”), and U.S. BANK NATIONAL ASSOCIATION in its capacity as administrative agent (the “ Administrative Agent ”) for the lenders party to the below-defined Credit Agreement (collectively, the “ Lenders ”).

PRELIMINARY STATEMENT

The Borrower, the Administrative Agent and the Lenders are party to a Credit Agreement dated as of April 15, 2011 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”). The Grantors are entering into this Security Agreement in order to secure their obligations under and in connection with Loans made pursuant to the Secured Borrowing Option under, and as defined in, Section 2.1.2 of the Credit Agreement and to induce the Lenders to continue extending credit to the Borrower pursuant to the Secured Borrowing Option under the Credit Agreement.

ACCORDINGLY, the Grantors and the Administrative Agent, on behalf of the Holders of Secured Obligations, hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1. Terms Defined in the Credit Agreement . All capitalized definitional terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement.

1.2. Terms Defined in Delaware UCC . Terms defined in the Delaware UCC which are not otherwise defined in this Security Agreement are used herein as defined in the Delaware UCC.

1.3. Definitions of Certain Terms Used Herein . As used in this Security Agreement, in addition to the terms defined in the Preliminary Statement, the following terms shall have the following meanings:

“ Article ” means a numbered article of this Security Agreement, unless another document or the Delaware UCC is specifically referenced.

“ Collateral ” means account number 001050975707 maintained with U.S. Bank National Association and all amounts and items on deposit in or credited thereto, including, without limitation, all (i) cash, (ii) certificates of deposit and money market mutual funds of the Borrower or the applicable Grantor, in each case maintained with or issued by U.S. Bank National Association, (iii) commercial paper (other than commercial paper issued by U.S. Bank National Association), (iv) collateralized mortgage obligations or real estate mortgage investment conduit pass through securities, in any case issued by the Federal National Mortgage Association, the Government National Mortgage Association or the Federal Home Loan Mortgage Corporation, (v) Instruments, issued by the Federal National Mortgage Association, the Government National Mortgage Association or the Federal Home Loan Mortgage Corporation, that entitles the holder of, or beneficial owner under, the Instrument to the whole or any part of the rights or entitlements of a mortgagee and any other rights or entitlements in respect of a pool of mortgages or any money payable by mortgagors under those mortgages in relation to real estate mortgages, and the money payable to the holder of, or beneficiary owner under, the Instrument is based on actual or scheduled payments on the underlying mortgages, (vi) short-term obligations of, or fully guaranteed by, the United States of America, (vii) discount notes of U.S. government sponsored enterprises, including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, the Federal Home Loan Banks and the Federal Farm Credit Banks and (viii) corporate or municipal bonds or similar long term Indebtedness, in each case whether constituting Deposit Accounts, Securities Accounts, Instruments, General Intangibles or Investment Property, and in each case together with all proceeds thereof.

“ Control ” shall have the meaning set forth in Article 8 or, if applicable, in Section 9-104, 9-105, 9-106 or 9-107 of Article 9 of the Delaware UCC.

“ Default ” means an event described in Section 5.1 hereof.

“ Delaware UCC ” means the Delaware Uniform Commercial Code as in effect from time to time .

“ Deposit Accounts ” shall have the meaning set forth in Article 9 of the Delaware UCC.

“ Exhibit ” refers to a specific exhibit to this Security Agreement, unless another document is specifically referenced.

“ General Intangibles ” shall have the meaning set forth in Article 9 of the Delaware UCC.

“ Holders of Secured Obligations ” means the holders of the Secured Obligations from time to time and shall include, without limitation, each Lender, the Administrative Agent, and each of their Affiliates, together with their respective successors and transferees and assigns.

“ Instruments ” shall have the meaning set forth in Article 9 of the Delaware UCC.

“ Section ” means a numbered section of this Security Agreement, unless another document is specifically referenced.

“ Secured Obligations ” means all Obligations corresponding with the Loans made pursuant to the Secured Borrowing Option, including, without limitation, all unpaid principal of and accrued and unpaid interest on such Loans, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations in respect thereof, in each case owing to one or more Lenders or their respective Affiliates.

“ Securities Accounts ” shall have the meaning set forth in Article 8 of the Delaware UCC.

“ Unliquidated Obligations ” means, at any time, any Secured Obligations (or portion thereof) that are contingent in nature or unliquidated at such time, including any Secured Obligation that is: (i) an obligation to reimburse a bank for drawings not yet made under a letter of credit issued by it; (ii) any other obligation (including any guarantee) that is contingent in nature at such time; or (iii) an obligation to provide collateral to secure any of the foregoing types of obligations.

The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms.

ARTICLE II

GRANT OF SECURITY INTEREST

Each of the Grantors hereby pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Holders of Secured Obligations, a security interest in all of such Grantor’s right, title and interest, whether now owned or hereafter acquired, in and to the Collateral to secure the prompt and complete payment and performance of the Secured Obligations.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants on the date of this Agreement and on any date on which representations or warranties are made or re-made under the Credit Agreement to the Administrative Agent and the Holders of Secured Obligations, and each Grantor that becomes a party to this Security Agreement pursuant to the execution of a Supplement in substantially the form of Annex I represents and warrants on the date of such supplement (after giving effect to supplements to each of the Exhibits hereto with respect to such subsequent Grantor as attached to such Supplement), that:

3.1. Title, Authorization, Validity and Enforceability . Such Grantor has good and valid rights in or the power to transfer the Collateral owned by it and title to such owned Collateral with respect to which it has purported to grant a security interest hereunder, free of all Liens except for Liens permitted under Section 4.1.6 hereof, and has full corporate, limited liability company, partnership or other entity, power and authority to grant to the Administrative Agent the security interest in such Collateral pursuant hereto. The execution and delivery by such Grantor of this Security Agreement have been duly authorized by proper corporate, limited liability company, partnership or, as applicable, other proceedings, and this Security Agreement

constitutes a legal, valid and binding obligation of such Grantor and creates a security interest which is enforceable against such Grantor in all Collateral it now owns or hereafter acquires, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

3.2. Conflicting Laws and Contracts . Neither the execution and delivery by such Grantor of this Security Agreement, the creation and perfection of the security interest in the Collateral granted hereunder, nor compliance with the terms and provisions hereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on such Grantor, or (ii) such Grantor’s charter, articles, partnership agreement or by-laws (or similar constitutive documents), or (iii) the provisions of any indenture, instrument or agreement to which such Grantor is a party or is subject, or by which it, or its Property is bound, or conflict with or constitute a default thereunder, or result in or require the creation or imposition of any Lien in, of or on the property of such Grantor pursuant to the terms of any such indenture, instrument or agreement (other than any Lien of the Administrative Agent on behalf of the Holders of Secured Obligations).

3.3. Principal Location . Such Grantor’s mailing address and the location of its place of business (if it has only one) or its chief executive office (if it has more than one place of business), is disclosed in Exhibit “A” ; such Grantor has no other places of business except those set forth in Exhibit “A” .

3.4. No Other Names; Etc. Within the last five (5) years, such Grantor has not conducted business under any legal name, changed its jurisdiction of formation, merged with or into or consolidated with any other corporation, except as disclosed in Exhibit “A” . The name in which such Grantor has executed this Security Agreement is the exact name as it appears in such Grantor’s organizational documents as filed with such Grantor’s jurisdiction of organization as of the date hereof.

3.5. No Default . No Default or Event of Default exists.

3.6. Filing Requirements . None of the Collateral owned by such Grantor is of a type for which security interests or liens may be perfected by filing under any federal statute.

3.7. No Financing Statements . No valid financing statement describing all or any portion of the Collateral which has not lapsed or been terminated naming such Grantor as debtor has been filed in any proper jurisdiction except financing statements (i) naming the Administrative Agent on behalf of the Holders of Secured Obligations as the secured party and (ii) in respect of Liens permitted by Section 6.16 of the Credit Agreement; provided , that nothing herein shall be deemed to constitute an agreement to subordinate any of the Liens of the Administrative Agent under the Loan Documents to any Liens otherwise permitted under Section 6.16 of the Credit Agreement.

3.8. Federal Employer Identification Number; State Organization Number; Jurisdiction of Organization . Such Grantor’s federal employer identification number is, and if such Grantor is a registered organization, such Grantor’s State of organization, type of

organization and State of organization identification number is, as follows:


	Federal Employer		State of	State
	Identification	Type of	Organization or	Organization
Grantor	Number	Organization	Incorporation	Number
ProAssurance Corporation	[ ]	corporation	Delaware	[ ]

ARTICLE IV

COVENANTS

From the date of this Security Agreement and thereafter until this Security Agreement is terminated, the Borrower agrees, and from and after the effective date of any Supplement hereto substantially in the form of Annex I applicable to any Grantor (and after giving effect to supplements to each of the Exhibits hereto with respect to such subsequent Grantor as attached to such Supplement) and thereafter until this Security Agreement is terminated, each such subsequent Grantor agrees:

4.1. General .

4.1.1 Inspection . Each Grantor will permit the Administrative Agent or any Holder of Secured Obligations, by its representatives and agents (i) to inspect the Collateral, (ii) to examine and make copies of the books of accounts and other financial records of such Grantor relating to the Collateral and (iii) to discuss the Collateral and the related records of such Grantor with, and to be advised as to the same by, such Grantor’s officers, at such reasonable times and intervals as the Administrative Agent or such Holder of Secured Obligations may designate.

4.1.2 Taxes . Each Grantor will timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law and pay when due all taxes, assessments and governmental charges and levies upon the Collateral owned by such Grantor, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with GAAP.

4.1.3 Records and Reports; Notification of Default . Each Grantor shall keep proper books of record and account in which full, true and correct entries are made with respect to the Collateral owned by such Grantor, and furnish to the Administrative Agent, with sufficient copies for each of the Holders of Secured Obligations, such reports relating to the Collateral as the Administrative Agent shall from time to time reasonably request. Each Grantor will give prompt notice in writing to the Administrative Agent and the Lenders of the occurrence of any Default.

4.1.4 Financing Statements and Other Actions; Defense of Title . Each Grantor hereby authorizes the Administrative Agent to file, and if requested will execute and deliver to the Administrative Agent, all financing statements describing the Collateral owned by such Grantor and other documents and take such other actions as may from time to time reasonably be requested by the Administrative Agent in order to grant or maintain a first perfected security interest in and, if applicable, Control of, the Collateral owned by such Grantor, subject to Liens permitted under Section 6.16 of the Credit Agreement, provided that nothing herein shall be deemed to constitute an agreement to subordinate any of the Liens of the Administrative Agent under the Loan Documents to any Liens otherwise permitted under Section 6.16 of the Credit Agreement. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of collateral that describes such property in any other manner as the Administrative Agent may determine, in its reasonable discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the Collateral granted to the Administrative Agent herein. Each Grantor will take any and all actions necessary to defend title to the Collateral owned by such Grantor against all persons and to defend the security interest of the Administrative Agent in such Collateral and the priority thereof against any Lien not expressly permitted hereunder.

4.1.5 Disposition of Collateral . No Grantor will sell, lease or otherwise dispose of the Collateral owned by such Grantor except such Grantor may make sales, leases, transfers and dispositions that are permitted under the Credit Agreement until such time as a Default has occurred and is continuing.

4.1.6 Liens . No Grantor will create, incur, or suffer to exist any Lien on the Collateral owned by such Grantor except Liens permitted pursuant to Section 6.16 of the Credit Agreement; provided , that nothing herein shall be deemed to constitute an agreement to subordinate any of the Liens of the Administrative Agent under the Loan Documents to any Liens otherwise permitted under Section 6.16 of the Credit Agreement.

4.1.7 Change in Corporate Existence, Type or Jurisdiction of Organization, Location, Name . Each Grantor will (except as otherwise permitted hereunder or under the Credit Agreement):

	(i)		preserve its existence in effect on the date hereof or such other date on which such Grantor becomes a party to this Security Agreement;

	(ii)		not change its jurisdiction of organization;

	(iii)		not maintain its place of business (if it has only one) or its chief executive office (if it has more than one place of business) at a location other than a location specified on Exhibit “A ;” and

	(iv)		not (i) change its name or taxpayer identification number or (ii) change its mailing address,

unless, in each such case, such Grantor shall have given the Administrative Agent not less than 30 days’ prior written notice of such event or occurrence and the Administrative Agent shall have either (x) reasonably determined that such event or occurrence will not adversely affect the validity, perfection or priority of the Administrative Agent’s security interest in the Collateral, or (y) taken such steps (with the cooperation of such Grantor to the extent necessary or advisable) as are necessary or advisable to properly maintain the validity, perfection and priority of the Administrative Agent’s security interest in the Collateral owned by such Grantor.

4.1.8 Other Financing Statements . No Grantor will suffer to exist or authorize the filing of any valid financing statement naming it as debtor covering all or any portion of the Collateral owned by such Grantor, except any financing statement authorized under Section 4.1.4 hereof.

4.2. Instruments . Upon the Administrative Agent’s request, after the occurrence and during the continuance of an Event of Default, each Grantor will deliver to the Administrative Agent (and thereafter hold in trust for the Administrative Agent upon receipt and immediately deliver to the Administrative Agent) the originals of all Instruments constituting Collateral, marked with such legends and assigned as the Administrative Agent shall specify. The rights of the Administrative Agent under any allonge delivered in connection with any Instrument constituting Collateral shall be exercised only upon the occurrence and during the continuance of an Event of Default.

4.3. Updating of Exhibits to Security Agreement . Each Grantor will provide to the Administrative Agent, concurrently with the delivery of the certificate of a financial officer of the Borrower as required by Section 6.1(ii) of the Credit Agreement, updated versions, as necessary, of the Exhibits to this Security Agreement. Each Grantor, in its discretion, may also from time to time provide additional updates to the Exhibits to this Security Agreement. Updated versions of Exhibits shall replace the prior versions thereof being updated. For the avoidance of doubt, the receipt of such updated Exhibits by the Administrative Agent shall not be understood to permit any action prohibited hereunder or constitute a waiver of any provision contained herein.

ARTICLE V

DEFAULT

5.1. The occurrence of any one or more of the following events shall constitute a Default:

5.1.1 Any representation or warranty made or deemed made by a Grantor herein or which is contained in any certificate, document or financial or other statement furnished by such Grantor at any time under or in connection with this Security Agreement shall prove to have been incorrect, false or misleading in any material respect on or as of the date made or deemed made.

5.1.2 The breach by any Grantor of any of the terms or provisions of Sections 4.1.5 or 4.1.6 or Article VII .

5.1.3 The breach by any Grantor (other than a breach which constitutes a Default under Section 5.1.1 or 5.1.2 hereof) of any of the terms or provisions of this Security Agreement which is not remedied within 30 days after the giving of written notice to such Grantor by the Administrative Agent.

5.1.4 Any material portion of the Collateral shall be transferred or otherwise disposed of, in any manner not permitted by Section 4.1.5 or 8.6 hereof.

5.1.5 The occurrence of any “Event of Default” under, and as defined in, the Credit Agreement.

5.2. Acceleration and Remedies . Upon the acceleration of payment of any principal, interest or other obligations owing under or in connection with the Loan Documents, pursuant to Article VIII of the Credit Agreement, all principal, interest, fees and other amounts owing or outstanding under the Credit Agreement, and, to the extent provided for under any other Loan Documents, such obligations owing or outstanding under such Loan Documents, shall immediately become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and the Administrative Agent may, with the concurrence or at the direction of the Required Lenders, exercise any or all of the following rights and remedies:

5.2.1 Those rights and remedies provided in this Security Agreement, the Credit Agreement, or any other Loan Document, provided that this Section 5.2.1 shall not be understood to limit any rights or remedies available to the Administrative Agent and the Holders of Secured Obligations prior to a Default.

5.2.2 Those rights and remedies available to a secured party under the Delaware UCC (whether or not the Delaware UCC applies to the affected Collateral) or under any other applicable law (including, without limitation, any law governing the exercise of a bank’s right of setoff or bankers’ lien) when a debtor is in default under a security agreement.

5.2.3 Without notice except as specifically provided in Section 8.1 hereof or elsewhere herein, sell, lease, assign, grant an option or options to purchase or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, for cash, on credit or for future delivery, and upon such other terms as the Administrative Agent may deem commercially reasonable.

The Administrative Agent, on behalf of the Holders of Secured Obligations, may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral, and such compliance will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.

Notwithstanding the foregoing, the Administrative Agent and Lenders will be subject to those limitations on rights and remedies set forth in Article VIII of the Credit Agreement.

5.3. Grantors’ Obligations Upon Default . Upon the request of the Administrative Agent after the occurrence and during the continuance of a Default, each Grantor will:

5.3.1 Assembly of Collateral . Assemble and make available to the Administrative Agent the Collateral and all records relating thereto at any place or places specified by the Administrative Agent.

5.3.2 Secured Party Access . Permit the Administrative Agent, by the Administrative Agent’s representatives and agents, to enter any premises where all or any part of the Collateral, or the books and records relating thereto, or both, are located, to take possession of all or any part of the Collateral and to remove all or any part of the Collateral.

ARTICLE VI

WAIVERS, AMENDMENTS AND REMEDIES

No delay or omission of the Administrative Agent or any Holder of Secured Obligations to exercise any right or remedy granted under this Security Agreement shall impair such right or remedy or be construed to be a waiver of any Default or an acquiescence therein, and any single or partial exercise of any such right or remedy shall not preclude any other or further exercise thereof or the exercise of any other right or remedy. No waiver, amendment or other variation of the terms, conditions or provisions of this Security Agreement whatsoever shall be valid unless in writing signed by the Administrative Agent with the concurrence or at the direction of the (a) Required Lenders (or, if required under Section 8.3 of the Credit Agreement, all Lenders) and (b) each Grantor, and then only to the extent in such writing specifically set forth, provided that the addition of any Subsidiary as a Grantor hereunder by execution of a Supplement hereto in the form of Annex I (with such modifications as shall be acceptable to the Administrative Agent) shall not require receipt of any consent from or execution of any documentation by the Required Lenders or any other Grantor party hereto. All rights and remedies contained in this Security Agreement or by law afforded shall be cumulative and all shall be available to the Administrative Agent and the Holders of Secured Obligations until the Secured Obligations (excluding Unliquidated Obligations not then due) have been paid in full.

ARTICLE VII

PROCEEDS; COLLECTION OF RECEIVABLES

7.1. Special Collateral Account . At any time after the occurrence and during the continuance of a Default, the Administrative Agent may require all cash proceeds of the Collateral to be deposited in a special non-interest bearing cash collateral account with the Administrative Agent and held there as security for the Secured Obligations. No Grantor shall have any control whatsoever over said cash collateral account. The Administrative Agent shall apply the collected balances in said cash collateral account promptly to the payment of the Secured Obligations whether or not the Secured Obligations shall then be due.

7.2. Application of Proceeds . Any proceeds of Collateral received by the Administrative Agent shall be applied pursuant to Section 2.1.2 of the Credit Agreement.

ARTICLE VIII

GENERAL PROVISIONS

8.1. Notice of Disposition of Collateral; Condition of Collateral . Each Grantor hereby waives notice of the time and place of any public sale occurring during the continuance of a Default or the time after which any private sale or other disposition of all or any part of the Collateral may be made during the continuance of a Default. To the extent such notice may not be waived under applicable law, any notice made shall be deemed reasonable if sent to the Borrower, addressed as set forth in Article IX hereof, at least ten days prior to (i) the date of any such public sale or (ii) the time after which any such private sale or other disposition may be made. The Administrative Agent shall have no obligation to clean-up or otherwise prepare the Collateral for sale.

8.2. Secured Party Performance of Grantor’s Obligations . Without having any obligation to do so, the Administrative Agent may perform or pay any obligation which any Grantor has agreed to (and failed to) perform or pay in this Security Agreement and such Grantor shall reimburse the Administrative Agent for any reasonable amounts paid by the Administrative Agent pursuant to this Section 8.2 . Each Grantor’s obligation to reimburse the Administrative Agent pursuant to the preceding sentence shall be a Secured Obligation payable on demand.

8.3. Authorization for Secured Party to Take Certain Action . Each Grantor irrevocably authorizes the Administrative Agent at any time and from time to time in the sole discretion of the Administrative Agent and appoints the Administrative Agent as its attorney-in-fact (i) to execute on behalf of such Grantor as debtor and to file financing statements necessary or desirable in the Administrative Agent’s sole discretion to perfect and to maintain the perfection and priority of the Administrative Agent’s security interest in the Collateral, (ii) to indorse and collect any cash proceeds of the Collateral, (iii) to file a carbon, photographic or other reproduction of this Security Agreement or any financing statement with respect to the Collateral as a financing statement and to file any other financing statement or amendment of a financing statement (which does not add new collateral or add a debtor) in such offices as the Administrative Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the Administrative Agent’s security interest in the Collateral, (iv) subject to the terms of Section 4.1.5 hereof, to enforce payment of the Instruments in the name of the Administrative Agent or such Grantor, (v) to apply the proceeds of any Collateral received by the Administrative Agent to the Secured Obligations as provided in Article VII and (vi) to discharge past due taxes, assessments, charges, fees or Liens on the Collateral (except for such Liens as are specifically permitted hereunder or under any other Loan Document or which are being contested in good faith pursuant to any other Loan Document), and each Grantor agrees to reimburse the Administrative Agent on demand for any reasonable payment made or any reasonable expense incurred by the Administrative Agent in connection therewith, provided that this authorization shall not relieve any Grantor of any of its obligations under this Security Agreement or under the Credit Agreement.

8.4. Specific Performance of Certain Covenants . Each Grantor acknowledges and agrees that a breach of any of the covenants contained in Sections 4.1.5 , 4.1.6 , 4.2 , 5.3 , or 8.6 or in Article VII hereof will cause irreparable injury to the Administrative Agent and the Holders of Secured Obligations, that the Administrative Agent and Holders of Secured Obligations have no adequate remedy at law in respect of such breaches and therefore agrees, without limiting the right of the Administrative Agent or the Holders of Secured Obligations to seek and obtain specific performance of other obligations of the Grantors contained in this Security Agreement, that the covenants of the Grantors contained in the Sections referred to in this Section 8.4 shall be specifically enforceable against the Grantors.

8.5. Entry onto Certain Premises . Upon the occurrence and during the continuance of a Default, the Administrative Agent shall be entitled, in its reasonable discretion, to enter any premises owned or leased by the Grantors where any of the Collateral or any records relating to the Collateral are located until the Secured Obligations are paid or the Collateral or records relating thereto are removed therefrom, whichever first occurs, without any obligation to pay any Grantor for such entry.

8.6. Dispositions Not Authorized . No Grantor is authorized to sell or otherwise dispose of the Collateral except as set forth in Section 4.1.5 hereof and notwithstanding any course of dealing between any Grantor and the Administrative Agent or other conduct of the Administrative Agent, no authorization to sell or otherwise dispose of the Collateral (except as set forth in Section 4.1.5 hereof) shall be binding upon the Administrative Agent or the Holders of Secured Obligations unless such authorization is in writing signed by the Administrative Agent with the consent or at the direction of the Required Lenders.

8.7. Benefit of Agreement . The terms and provisions of this Security Agreement shall be binding upon and inure to the benefit of the Grantors, the Administrative Agent and the Holders of Secured Obligations and their respective successors and permitted assigns (including all persons who become bound as a debtor to this Security Agreement), except that the Grantors shall not have the right to assign their rights or delegate their obligations under this Security Agreement or any interest herein, without the prior written consent of the Administrative Agent.

8.8. Survival of Representations . All representations and warranties of the Grantors contained in this Security Agreement shall survive the execution and delivery of this Security Agreement.

8.9. Taxes and Expenses . Taxes, costs, fees and expenses in respect of this Security Agreement shall be paid by the Grantors as required by Section 9.6 of the Credit Agreement (with the understanding and agreement of each Grantor that, for purposes hereof, each Grantor shall have the same payment and reimbursement obligations as the Borrower under Section 9.6 even though such Grantor is not specifically referenced in Section 9.6). Any and all costs and expenses incurred by the Grantors in the performance of actions required pursuant to the terms hereof shall be borne solely by the Grantors.

8.10. Headings . The title of and section headings in this Security Agreement are for convenience of reference only, and shall not govern the interpretation of any of the terms and provisions of this Security Agreement.

8.11. Termination . This Security Agreement shall continue in effect (notwithstanding the fact that from time to time there may be no Secured Obligations outstanding) until (i) the Credit Agreement has terminated (subject to the survival of those terms that survive termination) pursuant to its express terms and (ii) all of the Secured Obligations have been paid in full in cash and performed in full and no commitments of the Administrative Agent or the Holders of Secured Obligations which would give rise to any Secured Obligations are outstanding.

8.12. Entire Agreement . This Security Agreement embodies the entire agreement and understanding between the Grantors and the Administrative Agent relating to the Collateral and supersedes all prior agreements and understandings between the Grantors and the Administrative Agent relating to the Collateral.

8.13. Choice of Law; Consent to Jurisdiction; Waiver of Jury Trial .

8.13.1 CHOICE OF LAW . THIS SECURITY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF DELAWARE, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

8.13.2 CONSENT TO JURISDICTION . EACH GRANTOR HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR STATE COURT SITTING IN DELAWARE IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT AND EACH GRANTOR HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY HOLDER OF SECURED OBLIGATIONS TO BRING PROCEEDINGS AGAINST ANY GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY ANY GRANTOR AGAINST THE ADMINISTRATIVE AGENT OR ANY HOLDER OF SECURED OBLIGATIONS OR ANY AFFILIATE OF THE ADMINISTRATIVE AGENT OR ANY HOLDER OF SECURED OBLIGATIONS INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS SECURITY AGREEMENT SHALL BE BROUGHT ONLY IN A COURT IN DELAWARE.

8.13.3 WAIVER OF JURY TRIAL . EACH GRANTOR, THE ADMINISTRATIVE AGENT AND EACH HOLDER OF SECURED OBLIGATIONS HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS SECURITY AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER.

8.14. Indemnity . Each Grantor hereby agrees, jointly with the other Grantors and severally, to indemnify the Administrative Agent and the Holders of Secured Obligations, and their respective successors, assigns, agents and employees (the “ Indemnified Parties ”), from and against any and all liabilities, damages, penalties, suits, costs, and reasonable expenses of any kind and nature (including, without limitation, all reasonable expenses of litigation or preparation therefor whether or not an Indemnified Party is a party thereto) imposed on, incurred by or asserted against an Indemnified Party arising out of this Security Agreement, or arising out of or relating to the manufacture, purchase, acceptance, rejection, ownership, delivery, lease, possession, use, operation, condition, sale, return or other disposition of any Collateral (including, without limitation, latent and other defects, whether or not discoverable by an Indemnified Party or any Grantor), provided that such indemnity shall not, as to any indemnitee, be available to the extent that such losses, claims, damages, penalties, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence, bad faith or willful misconduct of such indemnitee; provided , that with respect to fees and expenses in respect of counsel for the Indemnified Parties in connection with any of the foregoing, the Grantors shall only be required to pay (on a joint and several basis) for the reasonable fees and expenses of one outside counsel (and up to one local counsel in each applicable local jurisdiction and any applicable regulatory counsel) for the Indemnified Parties, unless the Administrative Agent or a Holder of Secured Obligations (or its counsel) determines that it would create actual or potential conflicts of interest to not have individual counsel, in which case the Administrative Agent and such Holder of Secured Obligations may have its own counsel which may be reimbursed in connection with the foregoing.

8.15. Subordination of Intercompany Indebtedness . Each Grantor agrees that any and all claims of such Grantor against any other Grantor (each an “ Obligor ”) with respect to any “Intercompany Indebtedness” (as hereinafter defined), any endorser, obligor or any other guarantor of all or any part of the Secured Obligations, or against any of its properties shall be subordinate and subject in right of payment to the prior payment, in full and in cash, of all Secured Obligations; provided that, and not in contravention of the foregoing, so long as no Default has occurred and is continuing, such Grantor may make loans to and receive payments with respect to Intercompany Indebtedness from each such Obligor to the extent not prohibited by the terms of this Security Agreement and the other Loan Documents. Notwithstanding any right of any Grantor to ask, demand, sue for, take or receive any payment from any Obligor, all rights, liens and security interests of such Grantor, whether now or hereafter arising and howsoever existing, in any assets of any other Obligor shall be and are subordinated to the rights of the Holders of Secured Obligations and the Administrative Agent in those assets. No Grantor shall have any right to foreclose upon any such asset, whether by judicial action or otherwise, unless and until all of the Secured Obligations (other than Unliquidated Obligations) shall have been fully paid and satisfied (in cash) and all Commitments of the Lenders under the Credit Agreement have terminated or expired. If all or any part of the assets of any Obligor, or the proceeds thereof, are subject to any distribution, division or application to the creditors of such Obligor, whether partial or complete, voluntary or involuntary, and whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors or any other similar action or proceeding, or if the business of any such Obligor is dissolved or if substantially all of the assets of any such Obligor are sold (except to the extent not prohibited by the Loan Documents), then, and in any such event (such event being herein referred to as an

“ Insolvency Event ”), any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon or with respect to any Indebtedness of such Obligor to any Grantor (“ Intercompany Indebtedness ”) shall be paid or delivered directly to the Administrative Agent for application on any of the Secured Obligations, due or to become due, until such Secured Obligations (other than Unliquidated Obligations) shall have first been fully paid and satisfied (in cash). Should any payment, distribution, security or instrument or proceeds thereof be received by the applicable Grantor upon or with respect to the Intercompany Indebtedness after any Insolvency Event and prior to the satisfaction of all of the Secured Obligations (other than Unliquidated Obligations) and the termination or expiration of all Commitments of the Lenders have been terminated or expired, such Grantor shall receive and hold the same in trust, as trustee, for the benefit of the Holders of Secured Obligations and shall forthwith deliver the same to the Administrative Agent, for the benefit of the Holders of Secured Obligations, in precisely the form received (except for the endorsement or assignment of the Grantor where necessary), for application to any of the Secured Obligations, due or not due, and, until so delivered, the same shall be held in trust by the Grantor as the property of the Holders of Secured Obligations. If any such Grantor fails to make any such endorsement or assignment to the Administrative Agent, the Administrative Agent or any of its officers or employees is irrevocably authorized to make the same. Each Grantor agrees that until the Secured Obligations (other than Unliquidated Obligations) have been paid in full (in cash) and satisfied and all Commitments of the Lenders have terminated or expired, no Grantor will assign or transfer to any Person (other than the Administrative Agent or the Borrower or another Grantor) any claim any such Grantor has or may have against any Obligor.

8.16. Severability . Any provision in this Security Agreement that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of this Security Agreement are declared to be severable.

8.17. Counterparts . This Security Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Security Agreement by telecopy or electronic mail (PDF) shall be effective as delivery of a manually executed counterpart of this Security Agreement.

8.18. Release of Collateral . Notwithstanding Article VI hereof or anything to the contrary set forth herein, if Collateral is permitted to be sold, transferred or assigned by a Grantor pursuant to or in connection with a transaction permitted hereunder or under the Credit Agreement (such as, but not limited to, a permitted asset sale or a permitted sale of a Subsidiary), then the Administrative Agent shall release such Collateral from its Lien thereon; provided , that the Borrower shall deliver a written certificate to the Administrative Agent (upon which the Administrative Agent shall be entitled to conclusively rely) certifying that such transaction is permitted under the Credit Agreement, and providing evidence that reasonably supports such certification, prior to any such release. The Administrative Agent, at the Grantors’ sole cost and expense, shall deliver such documents and make such filings reasonably requested of it to further evidence such release. The security interest in the Collateral granted hereunder shall be released as provided under and in accordance with the terms of the Credit Agreement.

ARTICLE IX

NOTICES

9.1. Sending Notices . Any notice required or permitted to be given under this Security Agreement shall be sent (and deemed received) in the manner and to the addresses set forth in Section 13.1 of the Credit Agreement. Any notice delivered to the Borrower shall be deemed to have been delivered to all of the Grantors.

9.2. Change in Address for Notices . Each of the Grantors, the Administrative Agent and the Lenders may change the address for service of notice upon it by a notice in writing to the other parties in accordance with Section 9.1.

ARTICLE X

THE ADMINISTRATIVE AGENT

U.S. Bank National Association has been appointed Administrative Agent for the Holders of Secured Obligations hereunder pursuant to Article X of the Credit Agreement. It is expressly understood and agreed by the parties to this Security Agreement that any authority conferred upon the Administrative Agent hereunder is subject to the terms of the delegation of authority made by the Holders of Secured Obligations to the Administrative Agent pursuant to the Credit Agreement, and that the Administrative Agent has agreed to act (and any successor Administrative Agent shall act) as such hereunder only on the express conditions contained in such Article X. Any successor Administrative Agent appointed pursuant to Article X of the Credit Agreement shall be entitled to all the rights, interests and benefits of the Administrative Agent hereunder.

[SIGNATURE PAGES TO FOLLOW]

IN WITNESS WHEREOF, each of the Grantors and the Administrative Agent have executed this Security Agreement as of the date first above written.

Signature Page to Pledge and Security Agreement

U.S. BANK NATIONAL
ASSOCIATION, as Administrative Agent


By: Name:
Title:

Signature Page to Pledge and Security Agreement

EXHIBIT “A”
(See Sections 3.3 and 3.4 of Security Agreement)

Prior names, jurisdiction of formation, place of business (if Grantor has only one place of business), chief executive office (if Grantor has more than one place of business), mergers and mailing address:

[________]
[_________]
[_________]
[_________]
[_________]

ANNEX I
to

SUBSIDIARY

SECURITY AGREEMENT

Reference is hereby made to the Pledge and Security Agreement (the “Agreement”), dated as of April 15, 2011 made by PROASSURANCE CORPORATION (the “Borrower”, and together with any additional Persons, including the undersigned, which become parties thereto by executing a Supplement in substantially the form hereof and after giving effect to any Persons released from the Agreement as permitted by the Agreement, the “Grantors”), in favor of the Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings given to them in the Agreement. By its execution below, the undersigned, [NAME OF NEW GRANTOR], a [__________________________] [corporation/limited liability company/other] agrees to become, and does hereby become, a Grantor under the Agreement and agrees to be bound by such Agreement as if originally a party thereto. By its execution below, the undersigned hereby pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Holders of Secured Obligations and (to the extent specifically provided the Agreement) their Affiliates, a security interest in all of its right, title and interest, whether now owned or hereafter acquired, in and to the Collateral to secure the prompt and complete payment and performance of the Secured Obligations. The undersigned hereby represents and warrants as to itself that all of the representations and warranties contained in the Agreement are true and correct in all respects as of the date hereof. Except as modified pursuant to Schedule A hereto (to the extent such modifications are permitted under the Agreement), [NAME OF NEW GRANTOR] represents and warrants that the supplements to the Exhibits to the Agreement attached hereto are true and correct in all respects and such supplements set forth all information required to be scheduled under the Agreement. To the extent required under the Agreement, [NAME OF NEW GRANTOR] shall take all steps necessary to perfect, in favor of the Administrative Agent, a security interest in and lien against [NAME OF NEW GRANTOR]’s Collateral, including to the extent so required delivering all certificated Securities to the Administrative Agent, and taking all steps necessary to properly perfect the Administrative Agent’s interest in any uncertificated equity or membership interests.

IN WITNESS WHEREOF, [NAME OF NEW GRANTOR], a [__________________] [corporation/limited liability company/other] has executed and delivered this Annex I counterpart to the Agreement as of this ___________ day of ____________, ___.

Exhibit 31.1

CERTIFICATION

I, W. Stancil Starnes, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: August 3, 2011



	/s/ W. Stancil Starnes
	W. Stancil Starnes
	Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS

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

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

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

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

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

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

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

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

Date: August 3, 2011



	/s/ Edward L. Rand, Jr.
	Edward L. Rand, Jr.
	Chief Financial and Accounting Officer

Exhibit 32.1

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

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

In connection with the Quarterly Report of ProAssurance Corporation (the “Company”) on Form 10-Q for the quarter ending June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W. Stancil Starnes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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



	/s/ W. Stancil Starnes
	W. Stancil Starnes
	Chief Executive Officer

August 3, 2011

Exhibit 32.2

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

In connection with the Quarterly Report of ProAssurance Corporation (the “Company”) on Form 10-Q for the quarter ending June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward L. Rand, Jr., Chief Financial and Accounting Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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



	/s/ Edward L. Rand, Jr.
	Edward L. Rand, Jr.
	Chief Financial and Accounting Officer

August 3, 2011