PROASSURANCE CORP (Form: 10-Q, Received: 05/06/2013 16:42:06)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 2013 or



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

For the transition period from to

Commission file number 0-16533

ProAssurance Corporation

(Exact Name of Registrant as Specified in Its Charter)



Delaware	63-1261433
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

100 Brookwood Place, Birmingham, AL	35209
(Address of Principal Executive Offices)	(Zip Code)

(205) 877-4400
(Registrant’s Telephone Number, Including Area Code)	(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

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

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

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



Large accelerated filer	ý		Accelerated filer	¨

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

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

As of April 25, 2013 , there were 61,816,938 shares of the registrant’s common stock outstanding.

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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”, “likely”, “may”, “optimistic”, “possible”, “potential”, “preliminary”, “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:


•	changes in general economic conditions;


•	our ability to maintain our dividend payments;


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


•	the enactment or repeal of tort reforms;


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


•	the impact of deflation or inflation;


•	changes in the interest rate environment;


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


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


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


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


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


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


•	consolidation of healthcare providers and entities that are more likely to self insure and not purchase medical professional liability insurance;


•	uncertainties inherent in the estimate of loss and loss adjustment expense reserves and reinsurance;


•	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;

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•	assessments from guaranty funds;


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


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


•	provisions in our charter documents, Delaware law and state insurance law may impede attempts to replace or remove management or may impede a takeover;


•	state insurance restrictions may prohibit assets held by our insurance subsidiaries, including cash and investment securities, from being used for general corporate purposes;


•	taxing authorities can take exception to our tax positions and cause us to incur significant amounts of legal and accounting costs and, if our defense is not successful, additional tax costs, including interest and penalties;


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


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

Additional risks that could adversely affect the merger of Independent Nevada Doctors Insurance Exchange, now Independent Nevada Doctors Insurance Company (IND), and Medmarc Mutual Insurance Company, now Medmarc Casualty Insurance Company (Medmarc), into ProAssurance, include but are not limited to the following:


•	the outcome of any potential claims from policyholders of Medmarc and IND relating to payments or other issues arising from their respective conversions to stock insurance companies and subsequent mergers into ProAssurance;


•	the businesses of ProAssurance and Medmarc or ProAssurance and IND may not be integrated successfully, or such integration may take longer to accomplish than expected;


•	cost savings from either transaction may not be fully realized or may take longer to realize than expected;


•	operating costs, customer loss and business disruption following either or both transactions, including adverse effects on relationships with employees, may be greater than expected.

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

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

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	TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - MARCH 31, 2013 AND DECEMBER 31, 2012	5
	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL (UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2013 AND 2012	6
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2013 AND 2012	7
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2013 AND 2012	8
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	9
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	55
ITEM 4.	CONTROLS AND PROCEDURES	57

PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	57
ITEM 1A.	RISK FACTORS	57
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	57
ITEM 6.	EXHIBITS	58
SIGNATURE		59

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)



	March 31, 2013			December 31, 2012
Assets
Investments
Fixed maturities, available for sale, at fair value; amortized cost, $3,415,342 and $3,224,332, respectively	$	3,627,080		$	3,447,999
Equity securities, trading, at fair value; cost, $222,167 and $187,891, respectively	257,745			202,618
Short-term investments	149,384			71,737
Business owned life insurance	52,850			52,414
Investment in unconsolidated subsidiaries	198,189			121,049
Other investments	33,104			31,085
Total Investments	4,318,352			3,926,902
Cash and cash equivalents	94,830			118,551
Premiums receivable	122,396			106,312
Receivable from reinsurers on paid losses and loss adjustment expenses	2,482			4,517
Receivable from reinsurers on unpaid losses and loss adjustment expenses	251,053			191,645
Prepaid reinsurance premiums	24,804			13,404
Deferred policy acquisition costs	26,342			23,179
Real estate, net	41,490			41,502
Intangible assets	55,577			53,225
Goodwill	161,123			163,055
Other assets	120,297			234,286
Total Assets	$	5,218,746		$	4,876,578
Liabilities and Shareholders’ Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses	$	2,216,874		$	2,054,994
Unearned premiums	278,019			233,861
Reinsurance premiums payable	45,160			45,591
Total Policy Liabilities	2,540,053			2,334,446
Deferred tax liability	27,422			14,585
Other liabilities	165,228			131,967
Long-term debt, at amortized cost	125,000			125,000
Total Liabilities	2,857,703			2,605,998
Shareholders’ Equity
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 62,060,426 and 61,867,034 shares issued, respectively	621			619
Additional paid-in capital	342,590			341,780
Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $74,108 and $78,284, respectively	137,626			145,380
Retained earnings	1,880,262			1,782,857
	2,361,099			2,270,636
Treasury shares, at cost, 243,530 shares	(56		)	(56		)
Total Shareholders’ Equity	2,361,043			2,270,580
Total Liabilities and Shareholders’ Equity	$	5,218,746		$	4,876,578

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Changes in Capital (Unaudited)

(In thousands)



	Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total
Balance at December 31, 2012	$	619	$	341,780		$	145,380		$	1,782,857		$	(56	)	$	2,270,580
Common shares issued for compensation	—		1,939			—			—			—			1,939
Share-based compensation	—		2,282			—			—			—			2,282
Net effect of restricted and performance shares issued and stock options exercised	2		(3,411		)	—			—			—			(3,409		)
Dividends to shareholders	—		—			—			(15,445		)	—			(15,445		)
Other comprehensive income (loss)	—		—			(7,754		)	—			—			(7,754		)
Net income	—		—			—			112,850			—			112,850
Balance at March 31, 2013	$	621	$	342,590		$	137,626		$	1,880,262		$	(56	)	$	2,361,043

	Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total
Balance at December 31, 2011	$	346	$	538,625		$	130,037		$	1,699,853		$	(204,408	)	$	2,164,453
Common shares issued for compensation	—		1,654			—			—			—			1,654
Share-based compensation	—		2,130			—			—			—			2,130
Net effect of restricted and performance shares issued and stock options exercised	—		(2,440		)	—			—			—			(2,440		)
Dividends to shareholders	—		—			—			(7,663		)	—			(7,663		)
Other comprehensive income (loss)	—		—			3,012			—			—			3,012
Net income	—		—			—			55,645			—			55,645
Balance at March 31, 2012	$	346	$	539,969		$	133,049		$	1,747,835		$	(204,408	)	$	2,216,791

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

(In thousands, except per share data)



	Three Months Ended March 31
	2013			2012
Revenues
Net premiums earned	$	134,578		$	136,659
Net investment income	32,126			33,492
Equity in earnings (loss) of unconsolidated subsidiaries	(223		)	(2,066		)
Net realized investment gains (losses):
Other-than-temporary impairment (OTTI) losses	—			(1,206		)
Portion of OTTI losses recognized in (reclassified from) other comprehensive income before taxes	—			—
Net impairment losses recognized in earnings	—			(1,206		)
Other net realized investment gains (losses)	26,680			11,883
Total net realized investment gains (losses)	26,680			10,677
Other income	1,813			1,809

Total revenues	194,974			180,571

Expenses
Losses and loss adjustment expenses	60,887			78,305
Reinsurance recoveries	(3,261		)	(8,106		)
Net losses and loss adjustment expenses	57,626			70,199
Underwriting, policy acquisition and operating expenses	37,285			34,398
Interest expense	371			825

Total expenses	95,282			105,422

Gain on acquisition	35,492			—

Income before income taxes	135,184			75,149

Provision for income taxes
Current expense (benefit)	7,775			16,981
Deferred expense (benefit)	14,559			2,523
Total income tax expense (benefit)	22,334			19,504

Net income	$	112,850		$	55,645

Other comprehensive income, after tax, net of reclassification adjustments (see Note 10)	(7,754		)	3,012

Comprehensive income	$	105,096		$	58,657

Earnings per share:
Basic	$	1.83		$	0.91
Diluted	$	1.82		$	0.90

Weighted average number of common shares outstanding:
Basic	61,708			61,177
Diluted	61,963			61,703

Cash dividends declared per common share	$	0.25		$	0.13

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)



	Three Months Ended March 31
	2013			2012
Operating Activities
Net income	$	112,850		$	55,645
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization	12,318			10,382
Gain on acquisition	(35,492		)	—
Net realized investment gains	(26,680		)	(10,677		)
Share-based compensation	2,282			2,130
Deferred income taxes	14,559			2,523
Policy acquisition costs, net amortization (net deferral)	(3,163		)	(922		)
Other	(6,304		)	(2,588		)
Other changes in assets and liabilities, excluding effect of business combinations:
Premiums receivable	(13,098		)	(10,090		)
Reinsurance related assets and liabilities	9,099			2,831
Other assets	(26,119		)	(1,998		)
Reserve for losses and loss adjustment expenses	(37,064		)	(13,014		)
Unearned premiums	20,025			22,689
Other liabilities	(36,320		)	(28,811		)
Net cash provided (used) by operating activities	(13,107		)	28,100
Investing Activities
Purchases of:
Fixed maturities, available for sale	(100,826		)	(247,622		)
Equity securities, trading	(26,983		)	(26,678		)
Other investments	(3,616		)	(158		)
Funding of tax credit limited partnerships	(30,167		)	(12,236		)
Investment in unconsolidated subsidiaries, net	(6,614		)	—
Proceeds from sales or maturities of:
Fixed maturities, available for sale	173,007			252,234
Equity securities, trading	26,509			16,039
Other investments	1,364			486
Net sales or maturities (purchases) of short-term investments	(76,697		)	(13,143		)
Cash received from acquisitions	22,780			—
Unsettled security transactions, net	18,478			4,403
Cash received (paid) for other assets	(1,047		)	(1,358		)
Net cash provided (used) by investing activities	(3,812		)	(28,033		)
Financing Activities
Dividends to shareholders	—			(7,622		)
Other	(6,802		)	(2,415		)
Net cash provided (used) by financing activities	(6,802		)	(10,037		)
Increase (decrease) in cash and cash equivalents	(23,721		)	(9,970		)
Cash and cash equivalents at beginning of period	118,551			130,400
Cash and cash equivalents at end of period	$	94,830		$	120,430

Significant non-cash transactions
Deposit transferred as consideration for acquisition	$	153,700		$	—

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

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 period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 . The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2012 report on Form 10-K. In connection with its preparation of the Condensed Consolidated Financial Statements, ProAssurance evaluated events that occurred subsequent to March 31, 2013 for recognition or disclosure in its financial statements and notes to financial statements.

Stock Split

The Board of Directors of ProAssurance Corporation (the Board) declared a two -for-one stock split effected December 27, 2012 in the form of a stock dividend. All share and per share information provided in this report reflects the effect of the split for all periods presented.

Accounting Changes Not Yet Adopted

Liabilities-Obligations Resulting from Joint and Several Liability Arrangements

Effective for fiscal years beginning after December 15, 2013, the Financial Accounting Standards Board (FASB) revised guidance related to obligations resulting from joint and several liability arrangements. The new guidance requires an entity to recognize, measure and disclose obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations already addressed within existing GAAP guidance. The new guidance requires retrospective application to all prior periods presented for any such arrangements that exist at the beginning of the fiscal year of adoption. ProAssurance plans to adopt the guidance beginning January 1, 2014. Adoption of this guidance is not expected to have a material effect on ProAssurance's results of operations or financial position.

Accounting Changes Adopted

Intangibles-Goodwill and Other

Effective for fiscal years beginning after September 15, 2012, the FASB revised guidance related to impairment testing of indefinite-lived intangible assets. The new guidance permits an entity to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. Quantitative impairment testing is required only if the assessment of qualitative factors indicates it is more likely than not that impairment exists. ProAssurance adopted the guidance on January 1, 2013. Adoption of this guidance had no material effect on ProAssurance's results of operations or financial position.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

Effective for interim and annual reporting periods beginning after December 15, 2012, the FASB revised guidance related to the disclosure of amounts reclassified out of accumulated other comprehensive income. The most significant provisions of the new guidance require entities to present additional disclosure, either on the face of the income statement or in the notes, regarding significant amounts reclassified, in their entirety, from accumulated other comprehensive income to net income. ProAssurance adopted the guidance on January 1, 2013. Adoption of this guidance had no material effect on ProAssurance’s results of operations or financial position as it impacts disclosures only.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

Disclosures About Offsetting Assets and Liabilities

Effective for fiscal years beginning on or after January 1, 2013, the FASB revised guidance related to disclosures about certain assets and liabilities in an entity’s financial statements. The guidance requires disclosures related to the net and gross positions of certain financial instruments and transactions that are either eligible for offset in accordance with existing GAAP guidance or subject to an agreement that requires such offset. The guidance must be applied retrospectively for all prior periods presented. ProAssurance adopted the guidance on January 1, 2013. Adoption of this guidance had no material effect on ProAssurance’s results of operations or financial position as it impacts disclosures only.

2. Acquisitions

All entities acquired in 2013 and 2012 were accounted for in accordance with GAAP relating to business combinations.

On January 1, 2013, ProAssurance completed the acquisition of Medmarc Mutual Insurance Company, now Medmarc Casualty Insurance Company (Medmarc), through a sponsored demutualization. Medmarc is based in Chantilly, Virginia and provides products liability insurance for medical technology and life sciences companies and also provides legal professional liability insurance. ProAssurance acquired Medmarc for cash of $153.7 million , including the funding of future policy credits for eligible members of $7.5 million . ProAssurance transferred all of the cash required to complete the transaction to a third-party conversion agent for the benefit of Medmarc eligible members on December 27, 2012; the deposit was classified as a part of Other Assets at December 31, 2012 . ProAssurance incurred expenses related to the purchase of approximately $1.4 million during the first three months of 2013 and approximately $1.0 million during 2012. These expenses were included as a part of operating expenses in the periods incurred.

During 2012, ProAssurance completed an acquisition of a reciprocal exchange that converted to a stock insurance company upon acquisition. The acquisition was not material to ProAssurance.

The purchase consideration for Medmarc was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, as shown in the table below. A $35.5 million gain on the acquisition was recognized on the date of acquisition because the purchase consideration was less than the estimated fair value of the net assets acquired. ProAssurance believes it was able to acquire Medmarc for less than the fair value of its net assets due to Medmarc's declining premium base and its small capital position relative to other insurers in the medical technology and life sciences products liability insurance market.



(In thousands)
Fixed maturities, available for sale	$	269,529
Equity securities, trading	30,976
Cash and short-term investments	24,008
Other investments	5,340
Premiums receivable	2,986
Receivable from reinsurers on unpaid losses and LAE	73,107
Intangible assets	3,630
Other assets	14,614
Reserve for losses and loss adjustment expenses	(201,072		)
Unearned premiums	(16,937		)
Deferred tax liabilities	(2,453		)
Other liabilities	(14,536		)
Fair value of net assets acquired	$	189,192
Gain on Acquisition	(35,492		)
Total purchase consideration	$	153,700

Intangible assets acquired principally consist of non-compete agreements, which are amortizable over their useful life of two years, and insurance licenses, which have an indefinite useful life and are not amortized.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

ProAssurance believes that all contractual cash flows related to acquired receivables will be collected. The fair value of reserves for losses and loss adjustment expenses and related reinsurance recoverables were estimated based on the present value of the expected underlying net cash flows, including a 5% profit margin and a 5% risk premium, and were determined to be materially the same as the recorded cost basis acquired.

The following table provides Pro Forma Consolidated Results for the three months ended March 31, 2013 and 2012 as if the Medmarc transaction had occurred on January 1, 2012. ProAssurance Actual Consolidated Results have been adjusted by the following, net of related tax effects, to reflect the Pro Forma Consolidated Results below.


•	For the three months ended March 31, 2012 , the inclusion of Medmarc operating results as ProAssurance 2012 Actual Consolidated Results did not include Medmarc. ProAssurance Actual Consolidated Results for the three months ended March 31, 2013 included Medmarc operating results (Revenue of $12.9 million and Earnings of $3.2 million ).


•	Certain costs included in ProAssurance actual results for the three months ended March 31, 2013 have been reported in the Pro Forma Consolidated Results as if the costs had been incurred for three months ended March 31, 2012 . Such costs include direct transaction costs and certain compensation costs directly related to the integration of Medmarc operations.

•

Prior to the acquisition date, Medmarc reported on a statutory basis and expensed policy acquisition costs associated with successful contracts as incurred. After the acquisition date, in accordance with GAAP, Medmarc policy acquisition costs associated with successful contracts were capitalized and amortized to expense as the related premium revenues were earned, but no amortization was recognized for Medmarc policies written prior to the acquisition date. The Pro Forma Consolidated Results for both 2013 and 2012 have been adjusted to reflect policy acquisition costs as if Medmarc had followed GAAP guidance for these costs in pre-acquisition periods.


•	Earnings for the three months ended March 31, 2012 , were reduced to reflect amortization of intangible assets and debt security premiums and discounts recorded as a part of the Medmarc purchase price allocation.


•	The gain on the acquisition of $35.5 million that was included in ProAssurance Actual Consolidated Results for the three months ended March 31, 2013 has been reported in the Pro Forma Consolidated Results as being recognized during the three months ended March 31, 2012 .



	Three months ended March 31, 2013		Three months ended March 31, 2012
(In thousands)	ProAssurance Pro Forma Consolidated Results	ProAssurance Actual Consolidated Results	ProAssurance Pro Forma Consolidated Results	ProAssurance Actual Consolidated Results
Revenue	$194,974	$194,974	$190,678	$180,571
Earnings	$77,095	$112,850	$92,777	$55,645

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

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 or liabilities, and results from pricing models that use observable inputs such as interest rates and yield curves that are generally available at commonly quoted intervals.



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

Fair values of assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 , including financial instruments for which ProAssurance has elected fair value, are shown in the following tables. The tables also indicate the fair value hierarchy of the valuation techniques utilized to determine those fair values. For some assets, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair value measurement. Assessments of the significance of a particular input to the fair value measurement requires judgment and consideration of factors specific to the assets being valued.

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013



	March 31, 2013
	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	$	—	$	231,004	$	—	$	231,004
U.S. Government-sponsored enterprise obligations	—		59,553		—		59,553
State and municipal bonds	—		1,285,353		7,175		1,292,528
Corporate debt, multiple observable inputs	—		1,544,040		—		1,544,040
Corporate debt, limited observable inputs:
Private placement senior notes	—		—		342		342
Other corporate debt, NRSRO ratings available	—		—		8,406		8,406
Other corporate debt, NRSRO ratings not available	—		—		914		914
Residential mortgage-backed securities	—		295,347		—		295,347
Agency commercial mortgage-backed securities	—		47,436		—		47,436
Other commercial mortgage-backed securities	—		74,369		—		74,369
Other asset-backed securities	—		66,065		7,076		73,141
Equity securities
Financial	80,312		—		—		80,312
Utilities/Energy	39,315		—		—		39,315
Consumer oriented	64,467		—		—		64,467
Technology	14,611		—		—		14,611
Industrial	39,558		—		—		39,558
All other	15,452		4,030		—		19,482
Short-term investments	141,802		7,582		—		149,384
Financial instruments carried at fair value, classified as a part of:
Investment in unconsolidated subsidiaries	—		—		47,540		47,540
Total assets	$	395,517	$	3,614,779	$	71,453	$	4,081,749

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013



	December 31, 2012
	Fair Value Measurements Using						Total
(In thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Fixed maturities, available for sale
U.S. Treasury obligations	$	—	$	205,857	$	—	$	205,857
U.S. Government-sponsored enterprise obligations	—		56,947		—		56,947
State and municipal bonds	—		1,212,804		7,175		1,219,979
Corporate debt, multiple observable inputs	—		1,455,333		—		1,455,333
Corporate debt, limited observable inputs:
Private placement senior notes	—		—		346		346
Other corporate debt, NRSRO ratings available	—		—		13,835		13,835
Other corporate debt, NRSRO ratings not available	—		—		1,010		1,010
Residential mortgage-backed securities	—		289,850		—		289,850
Agency commercial mortgage-backed securities	—		59,464		—		59,464
Other commercial mortgage-backed securities	—		74,106		—		74,106
Other asset-backed securities	—		67,237		4,035		71,272
Equity securities
Financial	70,900		—		—		70,900
Utilities/Energy	31,383		—		—		31,383
Consumer oriented	51,100		—		—		51,100
Technology	11,495		—		—		11,495
Industrial	18,200		—		—		18,200
All other	19,540		—		—		19,540
Short-term investments	59,761		11,976		—		71,737
Financial instruments carried at fair value, classified as a part of:
Investment in unconsolidated subsidiaries	—		—		33,739		33,739
Total assets	$	262,379	$	3,433,574	$	60,140	$	3,756,093

The fair values for securities included in the Level 2 category, with the few exceptions described below, have been developed by one of several third party, nationally recognized pricing services, including services that price only certain types of securities. Each service uses complex methodologies to determine values for securities and subject the values they develop to quality control reviews. Management has selected a primary source for each type of security in the portfolio, and reviews the values provided for reasonableness by comparing data to alternate pricing services and to available market and trade data. Values that appear inconsistent are further reviewed for appropriateness. If a value does not appear reasonable, the valuation is discussed with the service that provided the value and would be adjusted, if necessary. No such adjustments have been necessary in 2013 or 2012 .

Level 2 Valuations

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

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

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

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

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

Corporate debt with multiple observable inputs consists primarily of corporate bonds, but also includes a small number of bank loans. The methodology used to value Level 2 corporate bonds is the same as the methodology previously described for U.S. Government-sponsored enterprise obligations. Bank loans are valued by an outside vendor based upon a widely distributed, loan-specific listing of average bid and ask prices published daily by an investment industry group. The publisher of the listing derives the averages from data received from multiple market-makers for bank loans .

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

Other asset-backed securities are valued using models that consider the structure of the security, monthly payment information, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data. Spreads and prepayment speeds consider collateral type. Evaluations of subprime home equity loans use the same evaluation methodology as previously described for Alt-A mortgages.

Short-term investments included in the Level 2 category are commercial paper and certificates of deposit maturing within one year, carried at cost which approximates the fair value of the security due to the short term to maturity.

Level 3 Valuations

Below is a summary description of the valuation processes and methodologies used as well as quantitative information regarding securities in the Level 3 category.

Level 3 Valuation Processes


•	Level 3 securities are priced by the Vice President of Investments for our subsidiaries, who reports to the Chief Financial Officer.


•	Level 3 valuations are computed quarterly. Prices are evaluated quarterly against prior period prices and the expected change in price.


•	Exclusive of Investments in unconsolidated subsidiaries, which are valued at NAV, the securities noted in the disclosure are primarily NRSRO rated corporate debt instruments for which comparable market inputs are commonly available for evaluating the securities in question. Valuation of these corporate debt instruments is not overly sensitive to changes in the unobservable inputs used.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

Level 3 Valuation Methodologies

State and municipal bonds consists of auction rate municipal bonds valued internally using either published quotes for similar securities or values produced by discounted cash flow models using yields currently available on fixed rate securities with a similar term and collateral, adjusted to consider the effect of a floating rate and a premium for illiquidity. At March 31, 2013 and December 31, 2012 all of these bonds were rated A- or better.

Corporate debt with limited observable inputs consists of private placement senior notes guaranteed by large regional banks and certain corporate bonds. Valuations are determined using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities having like terms and payment features that are of comparable credit quality. Assessments of credit quality are based on NRSRO ratings, if available, or are subjectively determined by management if not available. At March 31, 2013 , the average rating of rated securities was BBB+ .

Other asset-backed securities consists of securitizations of receivables valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities.

Investment in unconsolidated subsidiaries consist of limited partnership (LP) and limited liability company (LLC) interests valued using the net asset value (NAV) provided by the LP/LLC, which approximates the fair value of the interest.

Such interests include the following:



	Unfunded Commitments		Fair Value
(In thousands)	March 31, 2013		March 31, 2013		December 31, 2012
Investment in unconsolidated subsidiaries:
LP invested in senior secured debt (1)	$	32,400	$	7,600	$	—
LP invested in long equities (2)	None		5,569		—
LP primarily invested in long/short equities (3)	None		16,985		17,115
LPs primarily invested in non-public equities (4)	$	44,107	17,386		16,624
			$	47,540	$	33,739


(1)	The LP is structured to provide income and capital appreciation primarily through investments in senior secured debt. Redemptions are not allowed. Income and capital are to be periodically distributed at the discretion of the LP over an anticipated time frame that spans from 7 to 9 years.


(2)	The LP holds long equities of public international companies. Redemptions are allowed at the end of any calendar month with a prior notice requirement of 15 days and are paid within 10 days of the end of the calendar month of the redemption request.

(3)

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

(4)

Comprised of interests in two unrelated LP funds, each structured to provide capital appreciation through diversified investments in private equity, which can include investments in buyout, venture capital, mezzanine debt, distressed debt and other private equity-oriented LPs. One LP allows redemption by special consent; the other does not permit redemption. Income and capital are to be periodically distributed at the discretion of the LP over an anticipated time frame that spans from 4 to 7 years.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

Quantitative Information Regarding Level 3 Valuations



Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at
(In millions)	March 31, 2013	December 31, 2012	Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
State and municipal bonds	$7.2	$7.2	Market Comparable Securities	Comparability Adjustment	0% - 10% (5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 10% (5%)
Corporate debt with limited observable inputs	$9.7	$15.2	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other asset-backed securities	$7.1	$4.0	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)

The significant unobservable inputs used in the fair value measurement of the entity’s corporate bonds are the valuations of comparable securities with similar issuer, credit quality and maturity. Changes in the availability of comparable securities could result in changes in the fair value measurements.

Fair Value Measurements - Level 3 Assets

The following tables (the Level 3 Tables) present summary information regarding changes in the fair value of assets measured at fair value using Level 3 inputs.



	March 31, 2013
	Level 3 Fair Value Measurements – Assets
(In thousands)	State and Municipal Bonds		Corporate Debt			Asset-backed Securities			Investment in Unconsolidated Subsidiaries			Other Investments		Total
Balance December 31, 2012	$	7,175	$	15,191		$	4,035		$	33,739		$	—	$	60,140
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net Investment Income	—		(102		)	(16		)	—			—		(118		)
Equity in earnings of unconsolidated subsidiaries	—		—			—			1,848			—		1,848
Net realized investment gains (losses)	—		(69		)	—			—			—		(69		)
Included in other comprehensive income	—		—			—			—			—		—
Purchases	—		3,875			1,356			13,078			—		18,309
Sales	—		(616		)	—			(1,125		)	—		(1,741		)
Transfers in	—		—			1,701			—			—		1,701
Transfers out	—		(8,617		)	—			—			—		(8,617		)
Balance March 31, 2013	$	7,175	$	9,662		$	7,076		$	47,540		$	—	$	71,453
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—		$	—		$	1,848		$	—	$	1,848

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013



	March 31, 2012
	Level 3 Fair Value Measurements – Assets
(In thousands)	State and Municipal Bonds			Corporate Debt		Asset-backed Securities		Investment in Unconsolidated Subsidiaries		Other Investments			Total
Balance December 31, 2011	$	7,200		$	8,082	$	—	$	23,841	$	15,873		$	54,996
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Equity in earnings of unconsolidated subsidiaries	—			—		—		589		—			589
Net realized investment gains (losses)	—			—		—		—		(131		)	(131		)
Included in other comprehensive income	—			607		—		—		—			607
Purchases	—			—		—		—		—			—
Sales	(25		)	—		—		—		—			(25		)
Transfers in	—			—		—		—		—			—
Transfers out	—			—		—		—		—			—
Balance March 31, 2012	$	7,175		$	8,689	$	—	$	24,430	$	15,742		$	56,036
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—		$	—	$	—	$	589	$	(131	)	$	458

Transfers

There were no transfers between the Level 1 and Level 2 categories during the three months ended March 31, 2013 or 2012 .

Transfers shown in the preceding Level 3 Tables are as of the end of the period and were to or from Level 2, unless otherwise noted.

All transfers during the three months ended March 31, 2013 related to securities held for which there was little market activity for identical or nearly identical securities during the period. The securities were valued using multiple observable inputs when those inputs were available; otherwise the securities were valued using limited observable inputs.

Fair Value Measurements - Level 3 Liabilities

The following table presents information for the three months ended March 31, 2012 regarding liabilities for which ProAssurance had elected fair value treatment.



	March 31, 2012
	Level 3 Fair Value Measurements - Liabilities
(In thousands)	2019 Note Payable			Interest rate swap agreement			Total
Balance December 31, 2011	$	14,180		$	4,659		$	18,839
Total (gains) losses realized and unrealized:
Included in earnings as a part of:
Net realized investment (gains) losses	868			(244		)	624
Settlements	(86		)	—			(86		)
Balance March 31, 2012	$	14,962		$	4,415		$	19,377
Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end	$	868		$	(244	)	$	624

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

The 2019 Note Payable (the Note) and a related interest rate swap agreement (the Swap) were measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, 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 Note and the Swap because valuation at fair value better reflected the economics of the related liabilities and eliminated the inconsistency that would have otherwise resulted from carrying the Note on an amortized cost basis and the Swap at fair value. Both the Note and the Swap were repaid in July 2012. The fair values of these liabilities were determined using the present value of the expected underlying cash flows of each instrument, discounted at rates available on the valuation date for similar instruments issued by entities with a similar credit standing to ProAssurance.

Financial Instruments - Methodologies Other Than Fair Value

The following table provides the estimated fair value of our financial instruments that, in accordance with GAAP for the type of investment, are measured using a methodology other than fair value. All fair values provided fall within the Level 3 fair value category.



	March 31, 2013				December 31, 2012
(In thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Other Investments	$	33,104	$	42,666	$	31,085	$	38,656
Investment in Unconsolidated Subsidiaries	150,649		151,593		87,310		91,528
BOLI	52,850		52,850		52,414		52,414
Other Assets	11,964		11,964		11,400		11,385

Financial liabilities:
Revolving credit agreement	$	125,000	$	125,000	$	125,000	$	125,000
Other Liabilities	12,544		12,534		12,130		12,085

Other Investments listed in the table above include interests in certain investment fund LPs/LLCs accounted for using the cost method, investments in Federal Home Loan Bank (FHLB) common stock carried at cost, and an annuity investment carried at amortized cost. The estimated fair value of the LP/LLC interests was based on the NAV provided by the LP/LLC managers. The estimated fair value of the FHLB common stock was based on the amount ProAssurance would receive if its membership were canceled, as the membership cannot be sold. The fair value of the annuity was 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 consisted of investments in tax credit partnerships and a non-controlling interest in a limited liability company. Fair values of investments in tax credit partnerships were 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 LLC interest was estimated as the proceeds ProAssurance would receive upon liquidation of the LLC.

The fair value of the BOLI was equal to the cash surrender value associated with the policies on the valuation date.

Other Assets and Other Liabilities primarily consisted of related investment assets and liabilities associated with funded deferred compensation agreements. Other Liabilities also included certain contractual liabilities related to prior business combinations. Fair values of the funded deferred compensation assets and liabilities were based on the NAVs of the underlying securities. The fair values of the business combination liabilities were 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 revolving credit agreement was estimated based on the present value of expected future cash outflows under the agreement, discounted at rates available on the valuation date for similar debt issued by entities with a similar credit standing to ProAssurance.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

4. Investments

Available-for-sale securities at March 31, 2013 and December 31, 2012 included the following:



	March 31, 2013
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Estimated Fair Value
Fixed maturities
U.S. Treasury obligations	$	216,932	$	14,373	$	(301	)		$	231,004
U.S. Government-sponsored enterprise obligations	55,054		4,517		(18		)		59,553
State and municipal bonds	1,212,808		80,621		(901		)		1,292,528
Corporate debt	1,460,887		94,664		(1,849		)		1,553,702
Residential mortgage-backed securities	281,426		14,964		(1,043		)	*	295,347
Agency commercial mortgage-backed securities	45,700		1,749		(13		)		47,436
Other commercial mortgage-backed securities	70,047		4,343		(21		)		74,369
Other asset-backed securities	72,488		1,076		(423		)		73,141
	$	3,415,342	$	216,307	$	(4,569	)		$	3,627,080

	December 31, 2012
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Estimated Fair Value
Fixed maturities
U.S. Treasury obligations	$	191,642	$	14,266	$	(51	)		$	205,857
U.S. Government-sponsored enterprise obligations	52,110		4,837		—				56,947
State and municipal bonds	1,134,744		85,329		(94		)		1,219,979
Corporate debt	1,375,880		96,187		(1,543		)		1,470,524
Residential mortgage-backed securities	272,990		17,070		(210		)	*	289,850
Agency commercial mortgage-backed securities	57,234		2,255		(25		)		59,464
Other commercial mortgage-backed securities	69,062		5,049		(5		)		74,106
Other asset-backed securities	70,670		1,203		(601		)		71,272
	$	3,224,332	$	226,196	$	(2,529	)		$	3,447,999


*	Includes other-than-temporary impairments recognized in accumulated other comprehensive income of $0.9 million at both March 31, 2013 and December 31, 2012 .

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at March 31, 2013 , 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.



(In thousands)	Amortized Cost		Due in one year or less		Due after one year through five years		Due after five years through ten years		Due after ten years		Total Fair Value
Fixed maturities, available for sale
U.S. Treasury obligations	$	216,932	$	33,718	$	149,918	$	44,190	$	3,178	$	231,004
U.S. Government-sponsored enterprise obligations	55,054		—		51,631		7,684		238		59,553
State and municipal bonds	1,212,808		60,391		414,146		492,665		325,326		1,292,528
Corporate debt	1,460,887		89,847		704,590		706,162		53,103		1,553,702
Residential mortgage-backed securities	281,426										295,347
Agency commercial mortgage-backed securities	45,700										47,436
Other commercial mortgage-backed securities	70,047										74,369
Other asset-backed securities	72,488										73,141
	$	3,415,342									$	3,627,080

Excluding investments in bonds and notes of the U.S. Government, U.S. Government-sponsored enterprise obligations 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 March 31, 2013 .

Securities with a carrying value of $36.4 million at March 31, 2013 were on deposit with various state insurance departments to meet regulatory requirements. ProAssurance also held securities with a carrying value of $197.3 million at March 31, 2013 and $196.2 million at December 31, 2012 that are pledged as collateral security for advances under the Revolving Credit Agreement (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 $33 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

Other Investments at March 31, 2013 and December 31, 2012 was comprised as follows:



(In millions)	March 31, 2013		December 31, 2012
Investments in LPs/LLCs, at cost	$	28.2	$	25.1
FHLB capital stock, at cost	3.4		4.3
Other, principally an annuity, at amortized cost	1.5		1.7
	$	33.1	$	31.1

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 .

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

Unconsolidated Subsidiaries

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



	March 31, 2013				Carrying Value
(In millions)	Unfunded Commitments		Percentage Ownership		March 31, 2013		December 31, 2012
Investment LPs/LLCs:
Tax credit partnerships	$	55.8	See below		$	150.6	$	87.3
Secured debt fund	32.4		<	20%	7.6		—
Long equity fund	None		<	20%	5.6		—
Long/Short equity fund	None		<	20%	17.0		17.1
Non-public equity funds	44.1		<	20%	17.4		16.6
					$	198.2	$	121.0

Tax credit partnership interests held by ProAssurance 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. ProAssurance's ownership percentage relative to two of the tax credit partnership interests was almost 100%; these interests had a carrying value of $66.0 million at March 31, 2013 . ProAssurance's ownership percentage relative to the remaining tax credit partnership interests was less than 20% ; these interests had a carrying value of $84.6 million at March 31, 2013 . All are accounted for under the equity method as ProAssurance does not have the ability to exert control over the partnership.

The Secured debt fund is structured to provide interest distributions and capital appreciation primarily through investments in senior secured debt.

The Long equity fund targets long-term total returns through holdings in public international companies.

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

The Non-public equity funds hold diversified private equities and are structured to provide capital appreciation.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

Investments Held in a Loss Position

The following tables provide summarized information with respect to investments held in an unrealized loss position at March 31, 2013 and December 31, 2012 , including the length of time the investment had been held in a continuous unrealized loss position.



	March 31, 2013
	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	$	9,578	$	(301	)	$	9,578	$	(301	)	$	—	$	—
U.S. Government-sponsored enterprise obligations	2,746		(18		)	2,746		(18		)	—		—
State and municipal bonds	110,237		(901		)	107,956		(878		)	2,281		(23		)
Corporate debt	142,622		(1,849		)	139,865		(1,645		)	2,757		(204		)
Residential mortgage-backed securities	44,170		(1,043		)	43,860		(1,040		)	310		(3		)
Agency commercial mortgage-backed securities	667		(13		)	445		(5		)	222		(8		)
Other commercial mortgage-backed securities	4,145		(21		)	4,145		(21		)	—		—
Other asset-backed securities	9,450		(423		)	6,257		(21		)	3,193		(402		)
	$	323,615	$	(4,569	)	$	314,852	$	(3,929	)	$	8,763	$	(640	)
Other investments
Investments in LPs/LLCs carried at cost	$	4,730	$	(378	)	$	3,690	$	(320	)	$	1,040	$	(58	)



	December 31, 2012
	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	$	4,073	$	(51	)	$	4,073	$	(51	)	$	—	$	—
State and municipal bonds	11,234		(94		)	9,232		(65		)	2,002		(29		)
Corporate debt	90,154		(1,543		)	81,878		(1,377		)	8,276		(166		)
Residential mortgage-backed securities	10,721		(210		)	10,029		(205		)	692		(5		)
Agency commercial mortgage-backed securities	1,643		(25		)	498		(2		)	1,145		(23		)
Other commercial mortgage-backed securities	2,100		(5		)	1,103		(1		)	997		(4		)
Other asset-backed securities	10,746		(601		)	7,707		(20		)	3,039		(581		)
	$	130,671	$	(2,529	)	$	114,520	$	(1,721	)	$	16,151	$	(808	)
Other investments
Investments in LPs/LLCs carried at cost	$	9,474	$	(851	)	$	8,697	$	(688	)	$	777	$	(163	)

As of March 31, 2013 , there were 446 debt securities ( 15.4% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 242 issuers. The single greatest unrealized loss position was approximately $0.4 million ; the second greatest unrealized loss position was approximately $0.3 million . The securities were evaluated for impairment as of March 31, 2013 .

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

As of December 31, 2012 , there were 142 debt securities ( 5.7% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 131 issuers. The single greatest unrealized loss position approximated $0.6 million ; the second greatest unrealized loss position approximated $0.2 million . The securities were evaluated for impairment as of December 31, 2012 .

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 Consolidated Financial Statements included in ProAssurance's December 31, 2012 Form 10-K.

Fixed maturity securities held in an unrealized loss position at March 31, 2013 , 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 held in an unrealized loss position were estimated as part of the March 31, 2013 impairment evaluation 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, and equaled or exceeded the current amortized cost basis of the security.

Net Investment Income

Net investment income by investment category was as follows:



	Three Months Ended March 31
(In thousands)	2013			2012
Fixed maturities	$	30,854		$	33,270
Equities	2,183			1,041
Short-term investments and Other invested assets	448			421
Business owned life insurance	436			457
Investment fees and expenses	(1,795		)	(1,697		)
Net investment income	$	32,126		$	33,492

Net Realized Investment Gains (Losses)

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



	Three Months Ended March 31
(In thousands)	2013			2012
Total other-than-temporary impairment losses:
Residential mortgage-backed securities	$	—		$	(245	)
Corporate debt	—			(830		)
Other investments	—			(131		)
Net impairment losses recognized in earnings	—			(1,206		)
Gross realized gains, available-for-sale securities	3,114			3,887
Gross realized (losses), available-for-sale securities	(75		)	(94		)
Net realized gains (losses), trading securities	2,789			777
Change in unrealized holding gains (losses), trading securities	20,852			7,937
Decrease (increase) in the fair value of liabilities carried at fair value	—			(624		)
Net realized investment gains (losses)	$	26,680		$	10,677

No impairment losses were recognized in the 2013 three-month period . Impairment losses recognized during the 2012 three-month period were as follows:


•	ProAssurance recognized impairment losses related to certain residential mortgage-backed securities during the 2012 three-month period because carrying values for those securities were greater than the future cash flows expected to be received from the securities.


•	ProAssurance recognized impairments related to corporate debt securities during the 2012 three-month period because the credit standing of the issuers had deteriorated.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

•

ProAssurance recognized impairments during the 2012 three-month period related to an interest in an LLC, accounted for using the cost method, that was classified as a part of Other Investments. In 2011, the LLC announced a plan to convert to a publicly traded investment fund, and OTTI was recognized in subsequent periods in order to carry the interest at the NAV reported by the fund. The conversion occurred in the second quarter of 2012.

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 was recorded in Other Comprehensive Income.



	Three Months Ended March 31
(In thousands)	2013		2012
Balance beginning of period	$	3,301	$	5,870
Additional credit losses recognized during the period, related to securities for which:
OTTI has been previously recognized	—		67
Balance March 31	$	3,301	$	5,937

Other information regarding sales and purchases of available-for-sale securities is as follows:



	Three Months Ended March 31
(In millions)	2013		2012
Proceeds from sales (exclusive of maturities and paydowns)	$	128.4	$	206.1
Purchases	$	100.8	$	247.6

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, because ProAssurance utilizes tax credit benefits transferred from tax credit partnership investments, and because, during the first three months of 2013, ProAssurance recognized a non-taxable gain related to an acquisition.

The IRS has concluded an examination of the 2009 and 2010 returns and has issued a Notice of Proposed Adjustment (NOPA) for these years which would increase our current tax liability by approximately $130 million . ProAssurance has begun the IRS appeals process and is unable to reliably predict the timing of the final resolution or the ultimate outcome. The contested issues affect only the timing of when certain expense items are deductible for tax purposes and resolution of the NOPA would have no effect on our recorded tax expense, exclusive of interest found to be due on past-due taxes, if any.

At March 31, 2013 , ProAssurance had a receivable for federal income taxes of $29 million , which was carried as a part of Other Assets. ProAssurance had a payable for federal income taxes of $19 million at December 31, 2012 , which was carried as a part of Other Liabilities.

Except for the 2006 tax year, the statutes of limitation are closed for all years prior to 2009. The statute for the 2006 tax year, as well as the 2009 and 2010 tax year, was extended until September 30, 2014.

6. Deferred Policy Acquisition Costs

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

Amortization of deferred policy acquisition costs was $13.4 million and $15.1 million for the three months ended March 31, 2013 and 2012 , respectively.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

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 $53.1 million related to previously established reserves for the three months ended March 31, 2013 . The favorable net loss development reflects reductions in the Company's estimates of claims severity, principally for the 2005 through 2010 accident years.

For the three months ended March 31, 2012 , ProAssurance recognized favorable net loss development of $47.5 million to reflect reductions in estimated claim severity principally for accident years 2004 through 2009 .

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. These types of legal actions arise in the Company’s ordinary course of business and, in accordance with GAAP for insurance entities, are considered as a part of the Company’s loss reserving process, which is described in detail under “Accounting Policies – Losses and Loss Adjustment Expenses” in Note 1 of the Notes to Consolidated Financial Statements in ProAssurance's 2012 Form 10-K.

ProAssurance has commitments primarily related to non-public investment entities totaling approximately $168.0 million , expected to be paid as follows: $78.3 million in 2013 , $68.5 million in 2014 and 2015 combined, and $21.2 million in 2016 and 2017 combined.

9. Long-term Debt

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



	(In thousands)
	March 31, 2013		December 31, 2012
Revolving Credit Agreement, expires in 2016. Outstanding borrowings are not permitted to exceed $150 million. The interest rate on a borrowing is set at the time the borrowing is initiated or renewed. The outstanding borrowing at March 31, 2013 was fully secured, see Note 4, and carried an interest rate of 0.78%. The current borrowing can be repaid or renewed on June 25, 2013. If renewed, the interest rate will reset.	$	125,000	$	125,000

Covenant Compliance

ProAssurance is currently in compliance with all covenants.

Additional Information

For additional information regarding ProAssurance's long-term debt, see Note 10 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2012 Form 10-K.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

10. Shareholders’ Equity

At March 31, 2013 and December 31, 2012 , ProAssurance had 100 million shares of authorized common stock and 50 million shares of authorized preferred stock. 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.

ProAssurance declared cash dividends of $0.25 per common share for the first quarter of 2013 , totaling $15.4 million , that were paid in April 2013 . ProAssurance declared cash dividends of $0.125 per common share for the first quarter of 2012 which totaled $7.7 million that were paid in April 2012 . The liability for unpaid dividends was included in Other liabilities. No dividends were paid in first quarter 2013 because payment of the regular fourth quarter 2012 dividend was accelerated into December, 2012.

At March 31, 2013 , prior Board authorizations of $135.1 million for the repurchase of common shares or the retirement of outstanding debt remained available for use. ProAssurance did not repurchase any common shares during the three months ended March 31, 2013 and 2012 .

Share-based compensation expense was $2.3 million and $2.1 million for the three months ended March 31, 2013 and 2012 , respectively. Related tax benefits were $0.8 million and $0.7 million for the three months ended March 31, 2013 and 2012 , respectively.

ProAssurance awarded approximately 39,000 restricted share units and 146,000 (target) performance share units to employees in February 2013 . The fair value of each unit awarded was estimated at $46.97 , equal to the market value of a ProAssurance common share on the date of grant. All awards are charged to expense as an increase to equity over the service period (generally the vesting period) associated with the award. Restricted share units and performance share units vest in their entirety at the end of a three -year period following the grant date based on a continuous service requirement and, for performance share units, achievement of a performance objective. Partial vesting is permitted for retirees. A ProAssurance common share is issued for each unit once vesting requirements are met, except that units sufficient to satisfy required tax withholdings are paid in cash. The number of common shares issued for performance share units varies from 75% to 125% of base awards depending upon the degree to which stated performance objectives are achieved. ProAssurance issued approximately 32,000 and 120,000 common shares to employees in February 2013 related to restricted share units and performance share units granted in 2010, respectively. Shares issued for performance share units were awarded at the maximum level ( 125% ).

ProAssurance issued approximately 41,000 and 19,000 common shares to employees in February 2013 and 2012 , 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).

Other Comprehensive Income

For all periods presented, other comprehensive income was comprised of unrealized gains and losses, including non-credit impairment losses, arising during the period related to available-for-sale securities less reclassification adjustments for gains (losses) from available-for-sale securities recognized in current period net income (net of tax). At March 31, 2013 and December 31, 2012 , accumulated other comprehensive income was comprised entirely of unrealized gains and losses from available-for-sale securities, including non-credit impairment losses, net of tax.

Amounts reclassified from accumulated other comprehensive income to net income during the three months ended March 31, 2013 and 2012 included the following:



	Three Months Ended March 31
(In thousands)	2013			2012
Reclassifications from accumulated other comprehensive income to net income:
Realized investment gains (losses), available-for-sale securities	$	3,039		$	2,718
Non-credit impairment losses reclassified to earnings, available for sale securities	—			—
Total amounts reclassified, before tax effect	3,039			2,718
Tax effect (at 35%)	(1,064		)	(951		)
Net reclassification adjustments	$	1,975		$	1,767

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2013

11. Variable Interest Entities

ProAssurance holds passive interests in a number of entities that are considered to be Variable Interest Entities (VIEs) under GAAP guidance. ProAssurance's VIE interests include 1) interests in LPs/LLCs formed for the purpose of achieving diversified equity and debt returns and 2) a limited liability interest in a development stage business operation. ProAssurance VIE interests carried as a part of Other Investments totaled $28.2 million at March 31, 2013 and $25.1 million at December 31, 2012 . ProAssurance VIE interests carried as a part of Investment in Unconsolidated Subsidiaries totaled $34.4 million at March 31, 2013 and $33.7 million at December 31, 2012 .

ProAssurance has not consolidated these VIE's 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 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 of significance with any of the entities to provide other financial support to or on behalf of the entity. At March 31, 2013 , ProAssurance’s maximum loss exposure relative to these investments was limited to the carrying value of ProAssurance’s investment in the VIE.

12. Earnings Per Share

Diluted weighted average shares is calculated as basic weighted average shares plus the effect, calculated using the treasury stock method, of assuming that dilutive stock options have been exercised and that performance and restricted share 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-month period s ended March 31, 2013 and 2012 .

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

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to those statements which accompany this report. 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

The largest component of our liabilities is our reserve for losses and loss adjustment expenses (reserve for losses or reserve), and the largest component of expense for our operations is incurred losses and loss adjustment expenses (also referred to as “loss and loss adjustment expenses”, “incurred losses”, “losses incurred”, and “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 and products liability losses is inherently difficult and is the subject of significant judgment on the part of management. 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, including whether or not the claim is an individual or a mass tort 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 claims involving bodily harm, the trend of healthcare costs. Products and 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 significant 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 and consulting 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. Both our internal and consulting 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, supplemented to the extent necessary by relevant industry loss and exposure data.

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Acquired Reserves

The acquisition of Medmarc increased our loss reserves by $201.1 million which represented the fair value of Medmarc's loss reserves at the time of the acquisition. The estimated fair value was calculated as the present value of the expected underlying net cash flows, including a 5% profit margin and a 5% risk premium. Expected net cash flows were derived from the expected loss payment patterns included in an actuarial analysis of Medmarc reserves performed as of December 31, 2012. Actuarial methods used to evaluate Medmarc reserves included the Bornhuetter-Ferguson (Paid and Reported) Method and the Development Method (Paid and Reported) described in Item 2 of ProAssurance 2012 Form 10K. The Adjusted Reported, Adjusted Paid, and the Expected Loss Methods, described below, were also used to evaluate Medmarc's reserves. We supplemented relevant industry data where sufficient Medmarc historical data was not available. Approximately 85% of the reserves assumed in the Medmarc acquisition are products liability reserves and 15% are professional liability reserves.

The Adjusted Reported and the Adjusted Paid Methods are based on the premise that the relative change in a given accident year's adjusted reported loss estimates (Adjusted Reported Method) or adjusted paid losses (Adjusted Paid Method) from one evaluation point to the next is similar to changes observed for earlier accident years at the same evaluation points. In the Adjusted Reported Method reported loss estimates are adjusted to reflect a common case reserve adequacy basis. In the Adjusted Paid Method, the historical paid loss experience is adjusted to a common claim settlement rate basis.

The Expected Loss Method estimates ultimate loss amounts based on an expected ratio of losses per exposure, with the exposure measure often being premium. The expected ratio is then applied to the exposure measure to project ultimate losses for each accident year under evaluation.

Initial Reserve Estimates-Current Accident Year

Considerable judgment is required in both the pricing of our business and in establishing our initial reserves for any current accident year period. The targeted loss ratio in our pricing varies to some extent by jurisdiction, type of coverage and policy limits. For our largest line of business, physician professional liability, we are on average targeting a 75% loss ratio. Due to the lack of available open or closed claims data for the current accident year period, we heavily rely on the loss assumptions used in pricing our business in making our initial estimate of physician professional losses for the current accident year period. For our physician business, we presently and have historically utilized loss ratios that are approximately 8 to 10 percentage points above the ratios we have targeted in our pricing for the current accident year. We believe this appropriately considers inherent risks associated with our physician professional rate development process and the historic volatility of MPL losses and produces a reasonable best estimate of the reserves required to cover actual ultimate losses. We follow the same practice in establishing initial loss reserves for our other professional liability lines. In the current environment this equates to an overall average initial loss ratio of approximately 85% for our professional liability business.

Severity is defined as the average cost of resolving claims and the severity trend is the increase, or decrease, in severity from period to period. Although we remain uncertain regarding the ultimate severity trend to project into the future for our medical professional liability (MPL) business, as discussed in following paragraphs, we have given consideration to observed lower loss costs for this business and reduced rates in recent years. For example, on average, excluding our podiatry business acquired in 2009, we have gradually reduced the premium rates we charge on our standard physician renewal business (our largest MPL line) by approximately 17% from the beginning of 2006 to March 31, 2013 .

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Consideration of Severity

The severity trend assumption is a key assumption for both pricing models and the actuarial estimation of reserves. The severity trend is an explicit component of our pricing models, whereas in our reserving process the severity trend's impact is implicit. Our estimate of this trend and our expectations about changes in this trend impact a variety of factors, from the selection of expected loss ratios to the ultimate point estimates established by management.

Because of the implicit and wide-ranging nature of severity trend assumptions on the loss reserving process it is not practical to specifically isolate the impact of changing severity trends. However, because severity is an explicit component of our pricing process we can better isolate the impact that changing severity can have on our loss costs and loss ratios as regards our pricing models. For our MPL business, which comprises 90% of our first quarter 2013 gross earned premium, our current pricing models assume a severity trend of 2% to 3% in most states and lines of business. If the severity trend were to be higher by 1 percentage point, the impact would be an increase in our expected loss ratio of this business of 3.2 percentage points, based on current claim disposition patterns. An increase in the severity trend of 3 percentage points would result in a 10.1 percentage point increase in our expected loss ratio. Due to the long tailed nature of MPL claims and the previously discussed historical volatility of loss costs, selection of a severity trend assumption is a subjective process that is inherently likely to prove inaccurate over time. Given the long-tail and volatility, we are generally cautious in making changes to the severity assumptions within our pricing model. Also of note is that all open claims and accident years are generally impacted by a change in the severity trend, which compounds the effect of such a change.

For the 2004 to 2009 accident years both our internal and consulting actuaries have observed an unprecedented reduction in the frequency of MPL claims (or number of claims per exposure unit) that cannot be attributed to any single factor, which has complicated the selection of an appropriate severity trend for our pricing models for this business. It has also made it more challenging to factor severity into the various actuarial methodologies we use to evaluate our reserves. We believe that much of the reduction in claim frequency is the result of a decline in the filing of frivolous lawsuits that have historically been dismissed or otherwise result in no payment of indemnity on the part of our insureds. With fewer frivolous claims being filed we expect that the claims that are filed have the potential for greater average losses, or greater severity. As a result, we cannot be certain as to the impact this decline will ultimately have on the average cost of claims. Based on a weighted average of payments, only 85% of our MPL claims are resolved after eight years for a given accident year. Due to this long tail, it can take several years before we are able to determine what impact, if any, has resulted from the decline in frequency and whether there is a related increase in severity.

Development of Prior Accident Year Reserves

We re-evaluate our previously established reserves each period based on our most recently available claims data and currently available industry trend information. Changes to previously established reserve estimates are recognized in the current period if management’s best estimate of ultimate losses differs from the estimate previously established. While management considers a variety of variables in determining its best estimate, in general, as claims age, our methodologies for estimating reserves give more weight to actual loss costs which, as a whole, continue to indicate that ultimate loss costs will be lower than our previous estimates. The development recognized in the first three months of both 2013 and 2012 was primarily attributable to the favorable resolution of MPL claims during the period and an evaluation of established case reserves and paid claims data that indicated that the actual severity associated with the remaining MPL claims will be lower than we had previously estimated. The Critical Accounting Estimates discussion in our 2012 Form 10K and our discussion of acquired reserves, above, include additional information regarding the methodologies used to evaluate our reserves.

Any change in our estimate of net ultimate losses for prior years is reflected in net income in the period in which such changes are made. Over the past several years such changes have been to reduce our estimate of net ultimate losses, resulting in a reduction of reported losses for the period and a corresponding increase in pre-tax income.

Due to the size of our reserve for losses and the large number of claims outstanding at any point in time, even a small percentage adjustment to our total reserve estimate could have a material effect on our results of operations for the period in which the adjustment is made.

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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 make a determination of the amount of insurance risk we choose to retain based 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. We purchase reinsurance from a number of companies to mitigate concentrations of credit risk. We utilize a reinsurance broker to assist us in the placement of our reinsurance program and in the analysis of the credit quality of our reinsurers. The determination of which reinsurers we choose to do business with is based upon an evaluation of their then-current financial strength, rating and stability.

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 March 31, 2013 , all ceded contracts were 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 and conditions 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.

Given the uncertainty inherent in our estimates of losses and related amounts recoverable from reinsurers, these estimates may vary significantly from the ultimate outcome.

Under the terms of certain of our reinsurance agreements, the amount of premium that we cede to our reinsurers is based in part on the losses we recover under the agreements. Therefore we make an estimate of premiums ceded under these reinsurance agreements subject to certain maximums and minimums. Any adjustments to our estimates of losses recoverable under our reinsurance agreements or the premiums owed under our agreements 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.

The financial strength of our reinsurers and their 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 as of March 31, 2013 ; however, reinsurers may periodically dispute our demand for reimbursement from them based upon their interpretation of the terms of our agreements. 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 the majority of our investments at fair value as shown in the table below. At March 31, 2013 the distribution of our investments based on GAAP fair value hierarchies (levels) was as follows:



	Distribution by GAAP Fair Value Hierarchy			March 31, 2013
	Level 1	Level 2	Level 3	Total Investments
Investments recorded at:
Fair value	9%	84%	2%	95%
Other valuations				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 security 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, we utilize multiple independent pricing services to assist us in establishing the fair value of individual securities. The pricing services provide fair values based on exchange traded prices, if available. If an exchange traded price is not available, the pricing

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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 a 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 value versus market yields observed in the market place. We also compare yields indicated by the provided values to appropriate benchmark yields and review for values that are unchanged or that reflect an unanticipated variation as compared to prior period values. In addition, we compare provided information for consistency with our other pricing services, known market data and information from our own trades, considering both values and valuation trends. We also review weekly trades versus the prices supplied by the services. If a supplied value appears unreasonable, we discuss the valuation in question with the pricing service and make adjustments if deemed necessary. To date, our review has not resulted in any changes to the 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

Fair values for our equity and a portion of our short-term securities are determined using exchange traded prices. 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

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 securities valued based on multiple market observable inputs as Level 2 securities.

Level 3 Investments

When a pricing service does not provide a value for one of our fixed maturity securities, 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. For disclosure purposes we classify fixed maturity securities valued using limited observable inputs as Level 3 securities.

We also classify as Level 3 our investment interests that are carried at fair value based on a fund-provided net asset value (NAV) for our interest. All investments valued in this manner are LP or LLC interests that hold debt and equity securities. At March 31, 2013 interests valued using a fund-provided NAV totaled $47.5 million , or 1% of total investments, and were classified as part of our Investment in Unconsolidated Subsidiaries.

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Investments - Other Valuation Methodologies

Certain of our investments, in accordance with GAAP for the type of investment, are measured using methodologies other than fair value. At March 31, 2013 these investments had a carrying value of approximately $236.6 million , which represented 5% of total investments, as shown in the following table. Additional information about these investments is provided in Notes 3 and 4 of the Notes to Condensed Consolidated Financial Statements.



(In millions)	Carrying Value		GAAP Measurement Method
Other investments:
Investments in LP/LLCs, at cost	$	28.2	Cost
Federal Home Loan Bank (FHLB) capital stock	3.4		Cost
Other	1.5		Amortized cost
Total other investments	33.1

Investment in unconsolidated subsidiaries:
Investments in tax credit partnerships	150.6		Equity

Business owned life insurance	52.9		Cash surrender value

Total investments - Other valuation methodologies	$	236.6

Investment Impairments

We evaluate our investments on at least a quarterly basis for declines in fair value that represent other than temporary impairment (OTTI). We consider an impairment to be an OTTI 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, as discussed below.

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;


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


•	our internal assessments and those of our external portfolio managers regarding specific circumstances surrounding a security, which can cause us to believe the security is more or less likely to recover its value than other securities 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 intent to sell and whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost basis.

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 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 cost method interests in LPs/LLCs for OTTI by considering whether there has been a decline in fair value below the recorded value, which involves assumptions and estimates. We receive a report from each of the LPs/LLCs at least quarterly which provides us a NAV for our interest. The NAV is based on the fair values of securities held by the LP/LLC as determined by the LP/LLC manager. We consider the most recent NAV provided, the performance of the LP/LLC relative to the market, the stated objectives of the LP/LLC, the cash flows expected from the LP/LLC and audited financial statements of the entity, if available, in considering whether an OTTI exists.

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Our investments in tax credit partnerships are evaluated for OTTI by comparing cash flow projections of the underlying projects generating the tax credits to our recorded basis, and by considering our ability to utilize the tax credits generated by 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 FHLB’s most recently reported operating results.

Deferred Policy Acquisition Costs

Policy acquisition costs (primarily commissions, premium taxes and underwriting salaries) which are directly related to the successful 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 bases of assets and liabilities determined for financial reporting purposes and the bases determined for income tax purposes. Our temporary differences principally relate to loss reserves, unearned premiums, deferred policy acquisition costs, and unrealized investment gains (losses). 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.

Unrecognized Tax Benefits

We evaluate tax positions taken on tax returns and recognize positions in our financial statements when it is more likely than not that we will sustain the position upon resolution with a taxing authority. If recognized, the benefit is measured as the largest amount of benefit that has a greater than fifty percent probability of being realized. We review uncertain tax positions each period, considering changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law, and make adjustments as we consider necessary. Adjustments to our unrecognized tax benefits may affect our income tax expense, and settlement of uncertain tax positions may require the use of cash. At March 31, 2013 , our liability for unrecognized tax benefits approximated $4.8 million , and related accrued interest approximated $1.3 million .

Goodwill

Management evaluates the carrying value of goodwill annually during the fourth quarter. If, at any time during the year, events occur or circumstances change that would more likely than not reduce the fair value below the carrying value, we also evaluate goodwill at that time. We evaluate goodwill as one reporting unit because we operate as 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, 2012 , that the fair value of our reporting unit exceeded the carrying value and no adjustment to impair goodwill was necessary.

Goodwill is recognized in conjunction with acquisitions as the excess of the purchase consideration for the acquisition over the fair value of identifiable assets acquired and liabilities assumed. The fair value of identifiable assets and liabilities, and thus goodwill, is subject to redetermination within a measurement period of up to one year following completion of an acquisition. During the first quarter of 2013 goodwill was reduced by $1.9 million related to the re-determination of the fair value of assets and liabilities associated with an acquisition completed in 2012, and no additional goodwill was recognized related to acquisitions completed in 2013.

Accounting Changes

We are not aware of any accounting changes not yet adopted as of March 31, 2013 that would have a material effect on our results of operations or financial position. Note 1 of the Notes to Condensed Consolidated Financial Statements provides additional detail regarding accounting changes.

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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 the holding company has no other business operations, dividends from its operating subsidiaries represent a significant source of funds for its obligations, including debt service and shareholder dividends. At March 31, 2013 , we held cash and liquid investments of approximately $320.4 million outside our insurance subsidiaries that were available for use without regulatory approval, $197.3 million of which was pledged as collateral for advances under our credit facility. Our insurance subsidiaries, in aggregate, are permitted to pay dividends of approximately $311 million over the course of 2013 without the prior approval of state insurance regulators. 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. Our insurance subsidiaries paid no dividends during the first three months of 2013 .

Operating Activities and Related 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 claim payments for those policies 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 used cash flows of approximately $13.1 million and provided cash flows of approximately $28.1 million for the three months ended March 31, 2013 and 2012 , respectively.

Operating cash flows for the three months ended March 31, 2013 and 2012 compare as follows:



(In millions)	Operating Cash Flow
Cash provided (used) by operating activities for the three months ended March 31, 2012	$	28
Increase (decrease) in operating cash flows:
Decrease in premium receipts (1)	(20		)
Increase in payments to reinsurers (2)	(7		)
Decrease in losses paid, net of reinsurance recoveries (3)	18
Decrease in deposit contracts (4)	(7		)
Increase in cash paid for other expenses (5)	(3		)
Increase in Federal and state income tax payments (6)	(14		)
Net cash flow provided (used) by acquisitions (7)	(9		)
Other amounts not individually significant, net	1
Cash provided (used) by operating activities for the three months ended March 31, 2013	$	(13	)


(1)	The reduction in premium receipts reflected lower premium volume written during the preceding twelve months.


(2)	Reinsurance contracts are generally for premiums written in a specific annual period, but, absent a commutation agreement, 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 net 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. The decrease in loss payments for the first three months of 2013 primarily reflected a smaller number of claims resolved with large indemnity payments. Loss payments were not isolated to any one state or to any specific risk groups. We have not seen evidence in our loss data that suggests the decrease in loss payments for the three-month period represents a change in loss trends and as such have not changed our loss assumptions for the current period.


(4)	We are party to certain contracts that involve claims handling but do not transfer insurance risk. As required by GAAP, receipts and disbursements for these contracts are not considered as receipts of premium or payments of losses, but rather are considered as deposits received or returned. These contracts do not constitute a significant business activity for us.


(5)	The increase in cash paid for other expenses was principally attributable to timing differences related to the settlement of certain operating liabilities and various operating expense payments.

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(6)	The net increase in tax payments during 2013 primarily reflects a $20.6 million protective tax payment made related to a dispute with the Internal Revenue Service (IRS), partially offset by a $6.5 million decrease in the final tax payments for the prior fiscal year. The protective tax payment is discussed in further detail in this section under the heading "Taxes."


(7)	The net cash payments made by our acquired entities during 2013 primarily reflect tax payments made for the prior fiscal year, payments made for acquisition related expenses, and a concentration of operating expenses normally paid in the first quarter.

Operating cash flows for the three months ended March 31, 2012 and 2011 compare as follows:



(In millions)	Operating Cash Flow
Cash provided by operating activities three months ended March 31, 2011	$	25
Increase (decrease) in operating cash flows for the three months ended March 31, 2012:
Increase in premium receipts (1)	5
Decrease in payments to reinsurers (2)	11
Increase in losses paid, net of reinsurance recoveries (3)	(11		)
Increase in Federal and state income tax payments (4)	(6		)
Other amounts not individually significant, net	4
Cash provided by operating activities three months ended March 31, 2012	$	28


(1)	The increase in premium receipts was primarily attributable to increased premium volume during the first three months of 2012.


(2)	Reinsurance contracts are generally for premiums written in a specific annual period, but, absent a commutation agreement, 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 net 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. The increase in paid losses for the first three months of 2012 reflected an increase in claims closed during 2012.


(4)	The net increase in tax payments primarily reflected the following:


•	Estimated tax payments in 2012 were higher as compared to 2011 by $4.8 million.


•	Federal tax refunds received in 2011 of $7.1 million


•	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 IRS. The payments reduced tax liabilities recognized in prior fiscal years and did not increase or decrease 2011 tax expense.

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.

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. We purchase reinsurance from a number of companies to mitigate concentrations of credit risk. We utilize reinsurance brokers to assist us in the placement of our reinsurance coverage and 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.

Taxes

In December 2012 we received a Notice of Proposed Adjustment (NOPA) from the IRS which disallows a substantial portion of the loss and loss adjustment expense deductions taken for the 2009 and 2010 fiscal years and would thereby increase our current tax liability by approximately $130 million . We believe that our loss and loss adjustment expense deduction was computed in a manner consistent with tax law, our past practices, and the practices of other liability insurers, and we have

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begun the IRS appeals process. The proposed adjustment represents a temporary timing difference and impacts the timing of deductions, rather than their allowance, and would shift tax from deferred to current tax expense but would not increase total tax expense. Additional tax payments that might be made as a result of the NOPA would come out of our cash and investments and could impact future investment earnings, but, except for interest on past-due taxes, if any, will not change recorded tax expense. We have considered this matter in establishing our liability for uncertain tax matters. We do not know when a final resolution will be reached with the IRS, or the extent, if any, to which we might be required to accelerate our tax payments or the amount of interest, if any, we might be required to pay. In January 2013 we made a $20.6 million protective tax payment to the IRS in order to reduce interest assessments should the IRS position be fully or partially sustained.

Litigation

We are involved in various legal actions related to insurance policies and claims handling including, but not limited to, claims asserted against us by policyholders. These types of legal actions arise in the ordinary course of business and, in accordance with GAAP for insurance entities, are generally considered as a part of our loss reserving process, which is described in detail under “Critical Accounting Estimates – Reserve for Losses and Loss Adjustment Expenses (reserve for losses or reserve).” We also have other direct actions against the company which we evaluate and account for as a part of our other liabilities. For these corporate legal actions, we evaluate each case separately and establish what we believe is an appropriate reserve based on GAAP guidance related to contingent liabilities.

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Investing Activities and Related Cash Flows

Investment Exposures

The following table provides summarized information regarding our investments as of March 31, 2013 :



			Included in Carrying Value:
($ in thousands)	Carrying Value		Unrealized Gains		Unrealized Losses			Average Rating	(1)	% Total Investments
Fixed Maturities
Government
U.S. Treasury	$	231,004	$	14,373	$	(301	)	AA+	(2)	5	%
U.S. Government-sponsored enterprise	59,553		4,517		(18		)	AA+	(2)	1	%
Total government	290,557		18,890		(319		)	AA+	(2)	7	%
State and Municipal Bonds
Pre-refunded	188,944		10,637		—			AA		4	%
General obligation	349,502		24,288		(203		)	AA+		8	%
Special revenue	754,082		45,696		(698		)	AA		17	%
Total state and municipal bonds	1,292,528		80,621		(901		)	AA		30	%
Corporate Debt
Financial institutions	449,930		24,724		(183		)	A		10	%
Communications	117,979		5,725		(140		)	BBB		3	%
Utilities/Energy	295,761		21,024		(348		)	BBB+		7	%
Industrial	678,789		42,848		(1,174		)	BBB+		16	%
Other	11,243		343		(4		)	A		<1%
Total corporate debt	1,553,702		94,664		(1,849		)	A-		36	%
Securities backed by:
Agency mortgages	282,241		14,363		(600		)	AA+	(2)	7	%
Non-agency mortgages	6,271		201		(1		)	A		<1%
Subprime home equity loans	7,174		95		(402		)	BBB+		<1%
Alt -A mortgages	6,835		400		(442		)	CCC+		<1%
Agency commercial mortgages	47,436		1,749		(13		)	AA+	(2)	1	%
Other commercial mortgages	74,369		4,343		(21		)	AAA		2	%
Credit card loans	17,273		513		(10		)	AAA		<1%
Automobile loans	36,142		242		(4		)	AAA		1	%
Other asset loans	12,552		226		(7		)	AA		<1%
Total asset-backed securities	490,293		22,132		(1,500		)	AA+		11	%
Total fixed maturities	3,627,080		216,307		(4,569		)	A+		84	%
Equities
Financial	80,312		—		—					2	%
Utilities/Energy	39,315		—		—					1	%
Consumer oriented	64,467		—		—					1	%
Technology	14,611		—		—					<1%
Industrial	39,558		—		—					1	%
All Other	19,482		—		—					<1%
Total equities	257,745		—		—					6	%
Short-Term	149,384		—		—					3	%
Business-owned life insurance (BOLI)	52,850		—		—					1	%
Investment in Unconsolidated Subsidiaries
Investment in tax credit partnerships	150,649		—		—					3	%
Investment in LPs, carried at NAV	47,540		—		—					1	%
Total investment in unconsolidated subsidiaries	198,189		—		—					5	%
Other Investments
FHLB capital stock	3,449		—		—					<1%
Investments in LP/LLCs, carried at cost	28,173		—		—					1	%
Other	1,482		—		—					<1%
Total other investments	33,104		—		—					1	%
Total Investments	$	4,318,352	$	216,307	$	(4,569	)			100	%


(1)	A weighted average rating is calculated using available ratings from Standard & Poor’s, Moody’s and Fitch. The table presents the Standard & Poor’s rating that is equivalent to the computed average.


(2)	The rating presented is the Standard & Poor’s rating rather than the average. The Moody’s rating is Aaa and the Fitch rating is AAA .

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A detailed listing of our investment holdings as of March 31, 2013 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 $50 million and $70 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 our credit facility and the FHLB system. In December 2012 we elected to partially fund our acquisition of Medmarc by borrowing $125 million from our existing credit facility on a fully secured basis as this allowed us to continue to hold rather than liquidate certain higher yielding securities. At March 31, 2013 , $25 million of the credit facility remains available for use. Given the duration of our investments, we do not foresee a shortfall that would require us to meet operating cash needs through additional borrowings. Additional information regarding the credit facility is detailed in Note 9 of the Notes to Condensed Consolidated Financial Statements.

Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately 93% 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 March 31, 2013 was 3.9 years; the weighted average effective duration of our fixed maturity securities combined with our short-term securities and cash was 3.7 years.

The carrying value of our equities portfolio increased $55.1 million during the three months ended March 31, 2013 . The increase is primarily attributable to the equity portfolio obtained from the acquisition of Medmarc and market appreciation.

The carrying value of our tax credit partnerships was approximately $150.6 million at March 31, 2013 and $87.3 million at December 31, 2012 . The carrying value reflected our total commitments (both funded and unfunded) to the partnerships, less amortization, since our initial investment. These investments are comprised of separate limited partner interests designed to generate investment returns by providing tax benefits to investors in the form of project operating losses and tax credits. The related properties are principally low income housing properties. We fund these investments based on funding schedules maintained by the partnerships. We funded approximately $30.2 million during the three months ended March 31, 2013 , and $12.2 million during the three months ended March 31, 2012 . Approximately $55.8 million and $20.5 million of our total commitments to the tax credit partnerships had not yet been funded as of March 31, 2013 and December 31, 2012 , respectively.

During the three months ended March 31, 2013 , we increased our investments in investment fund LPs/LLCs by approximately $15.0 million . As of March 31, 2013 , we had unfunded commitments to investment fund LPs/LLCs of $112.2 million . The remaining commitments will be paid over a period of approximately 5 years as requested by the fund managers.

European Debt Exposure

We have no direct European sovereign debt exposure. We have indirect exposure through our investments in debt securities and through our reinsurance receivables. Issuers of our debt or equity securities and our reinsurers may hold European sovereign debt or have counterparty exposure to European banks or European corporations or may have a reliance on Eurocurrency denominated business. Should Europe suffer a severe recession or the Euro-zone or Eurocurrency fail, issuers may suffer credit or profitability losses or may experience a credit downgrade by rating agencies.

Our debt securities at March 31, 2013 included $197.9 million ( 5% of our total investments) where the issuer is domiciled in Europe or the underlying revenue stream supporting the security is European.

Our investments outside of Europe, and particularly our financial sector investments, could also be negatively affected by a significant European economic crisis. At March 31, 2013 we held non-European financial sector debt securities of approximately $375.3 million .

Our reinsurers typically operate globally and have large investment portfolios which may be linked directly or indirectly to the European economy. As of December 31, 2012 , two of our largest reinsurers were domiciled in Europe; our net receivables with these reinsurers totaled approximately $53 million . Net amounts due from reinsurers approximated $233.2 million at March 31, 2013 .

We do not currently write insurance policies in Europe and do not have any notes or accounts receivable from European issuers, exclusive of our reinsurance receivables.

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Acquisitions

We acquired a Nevada reciprocal exchange (IND) on November 30, 2012 through a conversion from a reciprocal to a stock insurance company. IND, which had net earned premium for the 2012 calendar year of approximately $9.4 million , primarily provides medical professional liability insurance to physicians. We acquired Medmarc Mutual Insurance Company, now Medmarc Casualty Insurance Company, and its subsidiaries (Medmarc) effective January 1, 2013 through a sponsored demutualization, as discussed in more detail in Note 2 of the Notes to Condensed Consolidated Financial Statements. Medmarc is an underwriter of products liability insurance for medical technology and life sciences companies and also underwrites a book of legal professional liability insurance. Medmarc had net earned premium for the 2012 calendar year of $30.0 million , of which $20.9 million related to medical and life sciences corporate liability coverages, and $9.1 million related to legal professional liability coverages. A gain was recognized on the acquisition of Medmarc of $35.5 million as the estimated fair value of net assets acquired exceeded the purchase consideration given. Note 2 of the Notes to Condensed Consolidated Financial Statements provides additional information regarding acquisitions.

Financing Activities and Related Cash Flows

Treasury Shares

We did not repurchase any common shares during the three months ended March 31, 2013 or 2012 . At March 31, 2013 , approximately $135.1 million of Board authorizations for the repayment of debt or repurchase of common shares remained available for use.

Shareholder Dividends

The Board of Directors of ProAssurance declared regular quarterly cash dividends totaling $15.4 million and $7.7 million during the first quarters of 2013 and 2012 , respectively. The dividends were paid in April 2013 and 2012 , respectively. No dividends were paid during the first quarter of 2013, because we accelerated the payment of dividends declared during the fourth quarter of 2012 that would normally have been paid in January 2013. Dividends of $7.6 million declared in the fourth quarter of 2011 were paid during the first quarter of 2012. Any decision to pay future cash dividends is subject to the Board’s final determination after a comprehensive review of financial performance, future expectations and other factors deemed relevant by the Board. The liability for unpaid dividends is included in Other Liabilities.

Debt

We have a revolving credit agreement that allows us to borrow up to $150 million 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. The agreement expires April 15, 2016. At March 31, 2013 and December 31, 2012 we had borrowed $125 million under the agreement, on a fully secured basis. The borrowing at March 31, 2013 is repayable in June 2013, but repayment can be deferred until expiration of the credit agreement.

We are a member of a number of FHLBs. Through membership, we have access to secured cash advances which can be used for liquidity purposes or other operational needs. To date, we have not established a FHLB line of credit or materially utilized our membership.

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

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Overview of Results– Three Months Ended March 31, 2013 and 2012

Net income and Operating income (a non-GAAP financial measure, see reconciliation on the following page) are presented in the table below. The $57 million improvement in net income in 2013 as compared to 2012 is primarily attributable to a $35.5 million gain on an acquisition and a $16.0 million increase in net realized investment gains.



	Three Months Ended March 31
(In millions, except per share data)	2013		2012
Net income	$	112.9	$	55.6
Operating income	$	60.0	$	48.2
Net income per diluted share	$	1.82	$	0.90
Operating income per diluted share	$	0.97	$	0.78

Results for the three months ended March 31, 2013 and 2012 compare as follows:

Revenues

Net premiums earned decreased during the 2013 three-month period by approximately $2.1 million or 1.5% . Our acquisitions of Medmarc and IND contributed an additional $10.2 million of net premiums earned during the 2013 three-month period. In addition, the favorable emergence of losses ceded to our reinsurers resulted in a $4.8 million reduction to ceded premium under the variable component of our reinsurance arrangements. These positive factors were offset by a competitive marketplace and a $6.9 million reduction in tail premium.

Our net investment result (which includes both net investment income and earnings from unconsolidated subsidiaries) increase d $0.5 million or 1.5% for the 2013 three-month period . Net investment income decreased during the 2013 three-month period primarily due to lower yields on our fixed income portfolio, while earnings from unconsolidated subsidiaries increased due to stronger earnings from investment LPs.

Net realized investment gains in the 2013 three-month period were approximately $16.0 million higher than in 2012 . The change was principally attributable to an increase in our average equity trading portfolio investment and improved stock market yields.

Expenses

Current accident year net losses decrease d by $7.0 million or 5.9% in the 2013 three-month period . The decline was principally attributable to lower risk exposures and changes to our mix of risks. Favorable development of prior accident year reserves reduced calendar year net losses by $53.1 million and $47.5 million for the 2013 and 2012 three-month period s, respectively.

Underwriting, policy acquisition and operating expenses increase d by $2.9 million or 8.4% in the 2013 three-month period , which primarily reflected the inclusion of the operating costs of newly acquired entities, Medmarc and IND, a portion of which were non-recurring. Additionally, the amortization of deferred policy acquisition costs decreased in 2013 , partially offsetting the expense increases associated with the new entities.

Ratios

Our current accident year net loss ratio decreased 3.8 percentage points in the 2013 three-month period , primarily reflecting a favorable effect from changes to our estimate of ceded premium and a reduced number of tail risks insured. Our calendar year net loss ratio was 42.8% for the 2013 three-month period as compared to 51.4% for the 2012 three-month period , with the decrease reflecting the improved current accident year net loss ratio and the emergence of a higher amount of favorable development in 2013 .

Our underwriting expense ratio increased 2.5 percentage points in the 2013 three-month period , principally reflecting the effect of lower net premiums earned in 2013 and the effect of larger non-recurring expenses in 2013 as compared to 2012 .

Our operating ratio (calculated as our combined ratio, less our investment income ratio) decreased by 5.4 percentage points in the 2013 three-month period , reflecting an improved net loss ratio, partially offset by a higher expense ratio and a lower investment ratio in 2013 .

Return on equity was 13.4% in the 2013 three-month period and 10.2% in the 2012 three-month period . The calculation of return on equity for the 2013 three-month period excluded the effect of the $35.5 million gain on acquisition.

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Book Value per Share

Our book value per share at March 31, 2013 as compared to December 31, 2012 is shown in the following table. Due to the size of our Shareholders’ Equity (approximately $2.4 billion at March 31, 2013 ), 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.



	Book Value Per Share
Book Value Per Share at December 31, 2012	$	36.85
Increase (decrease) to book value per share during the three months ended March 31, 2013 attributable to:
Dividends declared	(0.25		)
Net income	1.83
Decline in accumulated other comprehensive income	(0.13		)
Other	(0.11		)
Book Value Per Share at March 31, 2013	$	38.19

Non-GAAP Financial Measures

Operating income is a non-GAAP financial measure that is widely used to evaluate the performance of insurance entities. In calculating operating income, we have excluded the after-tax effects of net realized investment gains or losses, guaranty fund assessments, a gain recognized as the result of an acquisition and the effect of confidential settlements that do not reflect normal operating results. 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 March 31
(In thousands, except per share data)	2013			2012
Net income	$	112,850		$	55,645
Items excluded in the calculation of operating income:
Net realized investment (gains) losses	(26,680		)	(10,677		)
Guaranty fund assessments (recoupments)	(1		)	(23		)
Gain on Acquisition	(35,492		)	—
Effect of confidential settlements, net	—			(714		)
Pre-tax effect of exclusions	(62,173		)	(11,414		)

Tax effect, at 35%, exclusive of non-taxable gain on acquisition	9,338			3,995

Operating income	$	60,015		$	48,226
Per diluted common share:
Net income	$	1.82		$	0.90
Effect of exclusions	(0.85		)	(0.12		)
Operating income per diluted common share	$	0.97		$	0.78

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Results of Operations– Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

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



	Three Months Ended March 31
($ in thousands, except per share data)	2013			2012			Change
Revenues:
Net premiums earned	$	134,578		$	136,659		$	(2,081	)
Net investment income	32,126			33,492			(1,366		)
Equity in earnings (loss) of unconsolidated subsidiaries	(223		)	(2,066		)	1,843
Net investment result	31,903			31,426			477
Net realized investment gains (losses)	26,680			10,677			16,003
Other income	1,813			1,809			4
Total revenues	194,974			180,571			14,403

Expenses:
Losses and loss adjustment expenses	60,887			78,305			(17,418		)
Reinsurance recoveries	(3,261		)	(8,106		)	4,845
Net losses and loss adjustment expenses	57,626			70,199			(12,573		)
Underwriting, policy acquisition and operating expenses	37,285			34,398			2,887
Interest expense	371			825			(454		)
Total expenses	95,282			105,422			(10,140		)

Gain on acquisition	35,492			—			35,492

Income before income taxes	135,184			75,149			60,035

Income taxes	22,334			19,504			2,830

Net income	$	112,850		$	55,645		$	57,205

Earnings per share:
Basic	$	1.83		$	0.91		$	0.92
Diluted	$	1.82		$	0.90		$	0.92

Net loss ratio	42.8		%	51.4		%	(8.6		)
Underwriting expense ratio	27.7		%	25.2		%	2.5
Combined ratio	70.5		%	76.6		%	(6.1		)
Operating ratio	46.6		%	52.0		%	(5.4		)
Tax ratio	16.5		%	26.0		%	(9.5		)
Return on equity*	13.4		%	10.2		%	3.2

* Annualized. Gain on acquisition is excluded from this calculation.

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

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Premiums Written

Changes in our premium volume are driven by four primary factors: (1) our retention of existing business, (2) the premium charged for business that is renewed, which is affected by rates charged and by the amount and type of coverage an insured chooses to purchase, (3) the timing of premium written through multi-period policies, and (4) the amount of new business we generate, including the business generated as a result of acquisitions. The professional liability market remains competitive with some competitors choosing to compete primarily on price.

Gross, ceded and net premiums written were as follows:



	Three Months Ended March 31
($ in thousands)	2013			2012			Change
Gross premiums written	$	163,210		$	170,448		$	(7,238	)	(4.2	%)
Ceded premiums written	(13,157		)	(12,450		)	(707		)	5.7	%
Net premiums written	$	150,053		$	157,998		$	(7,945	)	(5.0	%)

Gross Premiums Written

Gross premiums written by component were as follows:



	Three Months Ended March 31
(In thousands)	2013		2012		Change
Gross premiums written:
Professional liability
Physicians, twelve month term	$	116,915	$	125,973	$	(9,058	)	(7.2	%)
Physicians, twenty-four month term	6,433		6,050		383			6.3	%
Total Physicians	123,348		132,023		(8,675		)	(6.6	%)
Other healthcare providers	11,483		12,007		(524		)	(4.4	%)
Facilities, including hospitals	7,585		7,076		509			7.2	%
Legal professionals	8,072		5,699		2,373			41.6	%
Tail coverages, all policy types	6,319		13,197		(6,878		)	(52.1	%)
Total professional liability	156,807		170,002		(13,195		)	(7.8	%)
Medical and life science products liability	5,885		—		5,885			nm
Other	518		446		72			16.1	%
Total	$	163,210	$	170,448	$	(7,238	)	(4.2	%)

Our gross written premium in the above table for the three months ended March 31, 2013 includes premium contributed by entities acquired subsequent to March 31, 2012 as follows:



	Three Months Ended March 31
(In thousands)	2013
Gross premiums written:
Professional liability
Physicians, twelve month term	$	3,476
Legal professionals	2,737
Total professional liability	6,213
Medical and life science products liability	5,885
Total	$	12,098

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Physician policies were our greatest source of premium revenues in both 2013 and in 2012 . Exclusive of the $3.5 million increase attributable to acquisitions, gross written premiums for physician policies with a twelve month term decreased by approximately $12.5 million as compared to the first quarter of 2012 , reflecting the impact of an 87% retention rate and largely flat pricing on renewal business, partially offset by approximately $5 million of new physician business.

We offer twenty-four month term policies to our physician insureds in one selected jurisdiction. The premium associated with both years is included in written premium in the period the policy is written; comparison of gross written premium between successive years reflects volume differences that have no effect on earned premium.

Our retention rate for our standard physician business was approximately 87% and 92% for the three months ended March 31, 2013 and 2012 , respectively. We calculate our retention rate as retained premium divided by all premium subject to renewal. Retention rates are affected by a number of factors. We may lose insureds to competitors or to alternative insurance mechanisms such as risk retention groups or self-insurance entities (often when physicians join hospitals or large group practices) or 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 for personal reasons or due to disability or death. The decline in 2013 as compared to 2012 was primarily attributable to business lost to competitors, principally over pricing that did not meet our profit objectives.

The pricing of our renewed physician business averaged 1% lower than the expiring premiums during 2013 . The pricing of our business includes the effects of filed rates, surcharges and discounts. We continue to base our pricing 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.

Our other healthcare providers are primarily dentists, chiropractors and allied health professionals. The 2013 decline in premium volume for these coverages was primarily attributable to the discontinuation of a program that offered coverage to optometrists.

Our facilities premium which includes hospitals, surgery centers and other facilities remained relatively flat in 2013 .

The increase in legal professionals premium for 2013 is principally attributable to our acquisition of Medmarc. Our legal professionals premiums are sold throughout the United States, principally through agent and brokerage arrangements.

We offer extended reporting endorsement or “tail” coverage to insureds that are discontinuing their claims-made coverage with us, and we also periodically offer “tail” coverage through custom policies. The amount of tail coverage premium written can vary widely from period to period. The decrease in tail premium in 2013 was principally due to a large single custom policy issued in 2012 for which there was no counterpart in 2013 .

All medical and life science products liability premium is attributable to our acquisition of Medmarc. Our medical and life science products liability (products liability) business is marketed throughout the United States; coverage is offered on a primary basis, within specified limits, to manufacturers and distributors of medical technology and life sciences products.

Ceded Premiums Written

Ceded premiums written compared as follows:



	Three Months Ended March 31
($ in thousands)	2013			2012		Change
Ceded premiums written, exclusive of separately listed items below (1)	$	10,320		$	12,076	$	(1,756	)	(14.5	%)
Ascension Health Certitude program (2)	2,817			374		2,443			>100%
Fully reinsured clinic program begun in 2013 (3)	2,404			—		2,404			nm
Premiums ceded associated with acquired entities (4)	2,446			—		2,446			nm
Reduction in premiums owed under reinsurance agreements, prior accident years (5)	(4,830		)	—		(4,830		)	nm
Total ceded premiums written	$	13,157		$	12,450	$	707		5.7	%

Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. In general we retain the first $1 million in risk insured by us and cede any coverages in excess of this amount. We pay our reinsurers a ceding premium in exchange for their accepting the risk, the ultimate amount of which is determined by the loss experience of the business ceded, subject to certain minimum and maximum amounts.

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Ceded premiums for the three months ended March 31, 2013 and 2012 compare as follows:


(1)	As discussed previously the premium that we cede under our reinsurance arrangements is determined, in part, by the losses ceded under these arrangements. In the first quarter of 2013 we are projecting (estimating) fewer losses ceded under our reinsurance arrangements and thus lower ceded premiums.


(2)	We share the risk of loss for policies written or renewed under the Ascension Health (Ascension) Certitude program with an Ascension affiliate under a quota share agreement. Growth in the program increased ceded premium in 2013 as compared to 2012 .


(3)	During 2013 , we began a program with a large clinic to provide coverage for the clinic and its related physicians through policies that are fully reinsured outside of our primary reinsurance agreements. This program does not produce any net written premium but generates ceding commissions over the term of the policies, which reduces our expenses.


(4)	The business written by Medmarc and IND is currently reinsured under separate reinsurance arrangements that existed at the time of those acquisitions.

(5)

Given the length of time that it takes to resolve our claims, many years may elapse before all losses recoverable under a reinsurance agreement are known. As a part of the process of estimating our loss reserves we also make estimates regarding the amounts recoverable under our reinsurance agreements. As previously discussed, the amounts ultimately owed under our reinsurance agreements are subject to the losses ceded under the agreements. In the current period we have decreased the expected losses and associated recoveries for prior year ceded losses, and this has in turn resulted in a decrease to our estimate of premiums ceded under these treaties. Decreases to estimates of premiums ceded related to prior accident years are fully earned in the period the change in estimates occur.

Ceded Premiums Ratio

The principal components of the change in our ceded premiums ratio (ceded premiums written as a percentage of gross premiums written) are shown in the following table:



	Three Months Ended March 31
	2013		2012		Change
Ceded premiums ratio, excluding other listed factors	7.2	%	7.1	%	0.1
Effect on ceded premiums ratio from:
Ascension Certitude program	1.6	%	0.2	%	1.4
Clinic fully reinsured outside primary reinsurance agreements	1.4	%	—	%	1.4
Premiums ceded associated with acquired entities	1.0	%	—	%	1.0
Reduction in premiums owed under reinsurance agreements, prior accident years	(3.1	%)	—	%	(3.1	)
Ceded premiums ratio, as reported	8.1	%	7.3	%	0.8

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Net Premiums Earned

Net premiums earned were as follows:



	Three Months Ended March 31
($ in thousands)	2013			2012			Change
Premiums earned	$	143,532		$	147,602		$	(4,070	)	(2.8	%)
Premiums ceded	(8,954		)	(10,943		)	1,989			(18.2	%)
Net premiums earned	$	134,578		$	136,659		$	(2,081	)	(1.5	%)

Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers for their assumption of a portion of our losses. 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 twenty-four month term. Tail coverage premiums are generally 100% earned in the period written because the policies insure only incidents that occurred in prior periods and are not cancellable. Additionally, ceded premium changes due to changes to estimates of premiums owed under reinsurance agreements are fully earned in the period of change.

Gross premiums earned were lower in 2013 as compared to 2012 reflecting the pro-rata effect of lower physician premiums written during the preceding twelve months, including a $6.9 million decline in tail premium for the 2013 three-month period, offset by additional earned premium of $13.2 million contributed by Medmarc and IND. Our 2013 gross earned premium includes approximately $11.2 million of earned premium associated with Medmarc and IND policies written prior to our acquisition of these operations. We expect Medmarc and IND policies written pre-acquisition to contribute gross earned premium of approximately $8.8 million , $4.0 million and $1.2 million in the second, third and fourth quarters of 2013, respectively.

The decline in premiums ceded during 2013 reflected the previously discussed $4.8 million reduction related to prior accident years, partially offset by increases attributable to our Ascension business and the acquisitions of Medmarc and IND.

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

Net Investment Income

Net investment income is primarily derived from the income earned by our fixed maturity securities and also includes income from our short-term 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 was as follows:



	Three Months Ended March 31
($ in thousands)	2013			2012			Change
Fixed maturities	$	30,854		$	33,270		$	(2,416	)	(7.3	%)
Equities	2,183			1,041			1,142			>100%
Short-term investments and other invested assets	448			421			27			6.4	%
Business owned life insurance	436			457			(21		)	(4.6	%)
Investment fees and expenses	(1,795		)	(1,697		)	(98		)	5.8	%
Net investment income	$	32,126		$	33,492		$	(1,366	)	(4.1	%)

Fixed Maturities

Our average investment in fixed maturities was flat for the three months ended March 31, 2013 as compared to the same period in 2012. In 2012 we repaid debt, paid a special dividend, and increased our allocations to other asset classes, all of which reduced the funds available for investment in our fixed portfolio. Yields for our fixed maturity portfolio were generally lower in 2013 . In order to maintain the quality and duration of our portfolio, we must reinvest maturities, paydowns and proceeds from sales in our fixed income portfolio at yields that are lower than the average yield on our portfolio. The result is that while the size of our fixed income portfolio remains largely the same, it is, in the aggregate, generating lower income. Additionally, the yields on fixed maturity securities acquired in the Medmarc and IND transactions, after adjustment as required by GAAP purchase accounting rules, approximated market yields on the acquisition dates which lowered our 2013 average consolidated tax equivalent yield by approximately 21 basis points. Yields for 2013 also reflected lower income from Treasury Inflation-Protected Securities of $0.5 million . Average yields for our fixed maturity securities during the three months ended March 31, 2013 and 2012 were as follows:



	Three Months Ended March 31
	2013	2012
Average income yield	3.6%	3.8%
Average tax equivalent income yield	4.2%	4.4%

Equities

Income from our equity portfolio increase d in the 2013 three-month period as compared to the 2012 three-month period primarily reflecting an increase in average investment balances of approximately 104% in 2013 . Given the challenge in finding compelling returns in the fixed income portfolio and the sensitivity of the value of the fixed income portfolio to rising interest rates, we have increased our allocation to dividend yielding equities and other non-fixed income investments.

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Equity in Earnings (Loss) of Unconsolidated Subsidiaries

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



	Three Months Ended March 31
(In thousands)	2013			2012			Change
Investment LPs	$	1,848		$	590		$	1,258
Business LLC interest	—			(546		)	546
Tax credit partnerships	(2,071		)	(2,110		)	39
Equity in earnings (loss) of unconsolidated subsidiaries	$	(223	)	$	(2,066	)	$	1,843

We hold interests in certain LPs that generate earnings from trading portfolios and secured debt. The performance of the LPs is affected by the volatility of equity and credit markets.

Our business LLC interest is a non-controlling interest in an entity that began active business in 2011. We recognize quarterly our allocable portion of the operating results reported by the LLC. During 2012, operating losses reduced the carrying amount of our interest to zero and we no longer believe that the entity will be able to produce operating profits.

Our tax credit investments are designed to generate returns by providing tax benefits in the form of project operating losses and tax credits. Our tax credit partnerships reduced our tax expenses by approximately $4.5 million and $2.6 million during the three months ended March 31, 2013 and 2012 , respectively, while we recognized $2.1 million of pre-tax amortization for both periods (approximately $1.3 million after tax) on these investments as 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 as the tax benefit received represents a portion of the return provided by our tax-exempt bonds, BOLI, common and preferred stocks, and tax credit partnership investments (our tax-exempt investments). We impute a pro-forma tax-equivalent result by estimating the amount of fully-taxable income needed to achieve the same after-tax result as is currently provided by our tax exempt investments. We believe this better reflects the economics behind 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 March 31
(In thousands)	2013			2012
Net investment income, as reported for GAAP	$	32,126		$	33,492
Taxable equivalent adjustments, calculated using the 35% federal statutory tax rate:
State and municipal bonds	4,922			4,684
BOLI	235			246
Dividends received	243			267
Pro forma tax-equivalent net investment income	37,526			38,689

Equity in earnings (loss) of unconsolidated subsidiaries, as reported for GAAP	(223		)	(2,066		)
Taxable equivalent adjustment, calculated using the 35% federal statutory tax rate:
Tax credit partnerships	6,874			4,043
Pro forma tax-equivalent equity in earnings (loss) of unconsolidated subsidiaries	6,651			1,977
Pro forma tax-equivalent investment results	$	44,177		$	40,666

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Net Realized Investment Gains (Losses)

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



	Three Months Ended March 31
(In thousands)	2013			2012
Other-than-temporary impairment losses, total:
Residential mortgage-backed securities	$	—		$	(245	)
Corporate debt	—			(830		)
Other investments	—			(131		)
Net impairment losses recognized in earnings	—			(1,206		)
Gross realized gains, available-for-sale securities	3,114			3,887
Gross realized (losses), available-for-sale securities	(75		)	(94		)
Net realized gains (losses), trading securities	2,789			777
Change in unrealized holding gains (losses), trading securities	20,852			7,937
Decrease (increase) in the fair value of liabilities carried at fair value	—			(624		)
Net realized investment gains (losses)	$	26,680		$	10,677

No impairments were recognized in the three months ended March 31, 2013 . All impairments of debt securities recognized during 2012 were credit-related.

The impairment recognized as part of Other investments during the three months ended March 31, 2012 related to an interest in an LLC which we accounted for using the cost method. The LLC announced in 2011 that it planned to convert to a publicly traded investment fund and we impaired the investment to the NAV reported by the fund during the first quarter of 2012. The conversion occurred during the second quarter of 2012.

We substantially increased the size of our equity trading portfolio during the first quarter of 2013 and last three quarters of 2012. Unrealized trading portfolio gains in 2013 reflect both higher average balances and improved stock market yields in the first quarter 2013 as compared to first quarter 2012.

Gains (losses) from changes in the fair value of liabilities in 2012 were entirely attributable to our 2019 Note Payable and related interest rate swap, both of which we repaid in July 2012.

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 best 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.

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The following table summarizes calendar year net losses and net loss ratios for the three months ended March 31, 2013 and 2012 by separating losses between the current accident year and all prior accident years.



	Net Losses
	Three Months Ended March 31
($ In millions)	2013			2012			Change
Current accident year:
PRA all other	$	102.6		$	117.7		$	(15.1	)
Acquisitions	8.1			—			8.1
Consolidated	$	110.7		$	117.7		$	(7.0	)

Prior accident years:
PRA all other	$	(53.1	)	$	(47.5	)	$	(5.6	)
Acquisitions	—			—			—
Consolidated	$	(53.1	)	$	(47.5	)	$	(5.6	)

Calendar year:
PRA all other	$	49.5		$	70.2		$	(20.7	)
Acquisitions	8.1			—			8.1
Consolidated	$	57.6		$	70.2		$	(12.6	)

Our current accident year net loss ratios for the three months ended March 31, 2013 and 2012 compare as follows:



	Net Loss Ratios*
	Three Months Ended March 31
	2013		2012		Change
Current accident year net loss ratio, excluding other listed factors	84.4	%	84.0	%	0.4
Effect attributable to:
Reduction in premiums owed under reinsurance agreements, prior accident years	(3.4	%)	—	%	(3.4	)
Tail coverages	1.8	%	2.1	%	(0.3	)
Net losses, acquisitions	(0.5	%)	—	%	(0.5	)
Current accident year net loss ratio, as reported	82.3	%	86.1	%	(3.8	)
Prior accident year net loss ratio	(39.5	%)	(34.7	%)	(4.8	)
Calendar year net loss ratio	42.8	%	51.4	%	(8.6	)

* Net losses as specified divided by net premiums earned.

The decrease in our current accident year net loss ratio during the first three months of 2013 principally reflected the net effect of the following:


•	Net earned premium in 2013 was increased by approximately $4.8 million due to a reduction to premiums owed under reinsurance agreements for prior accident years. This increase to net earned premium reduced the 2013 current accident year ratio. There was no such reduction in 2012 .


•	Our average net loss ratio was increased in both 2013 and 2012 due to tail coverages because we expected higher losses for these coverages than for our other professional liability coverages; however, the effect was less in 2013 due to a smaller amount of earned premium from tail coverages as compared to 2012.


•	Loss ratios associated with the business we acquired from Medmarc and IND, particularly the products liability business, were lower than the average for our other business, which decreased our average current accident year net loss ratio for 2013 as compared to 2012.

We recognized favorable loss development related to previously established reserves during the three months ended March 31, 2013 of $53.1 million within our retained layers of coverage (generally, $1 million and below) and $6.9 million related to our ceded coverage layers (generally, above $1 million). The reduction to gross losses in the ceded coverage layers

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was entirely offset by a corresponding reduction to loss recoveries. The net favorable development recognized of $53.1 million principally related to accident years 2005 through 2010 ; none related to the reserves acquired from Medmarc and IND. We recognized net favorable loss development of $47.5 million related to our retained layers of coverage during the three months ended March 31, 2012, primarily related to accident years 2004 through 2009 . A detailed discussion of factors influencing our recognition of loss development recognized is included in the Critical Accounting Estimates section of Item 2, under the caption “Reserve for Losses and Loss Adjustment Expenses.”

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 both 2013 and 2012 .

Underwriting, Policy Acquisition and Operating Expenses

The table below provides a comparison of the three months ended March 31, 2013 and 2012 underwriting, policy acquisition and operating expenses:



	Three Months Ended March 31
($ in thousands)	2013		2012		Change
Underwriting, policy acquisition and operating expenses	$	37,285	$	34,398	$	2,887	8.4	%

Our expenses reflect an increase in 2013 as compared to 2012 because of both the additional operations acquired from Medmarc and IND and the effect of non-recurring costs incurred in both 2013 and 2012 .

Exclusive of the non-recurring expenses discussed below, expenses increased in 2013 as compared to 2012 by $2.0 million . The increase primarily consisted of additional expenses of $2.8 million associated with the operations acquired from Medmarc and IND, partially offset by lower amortization of deferred policy acquisition costs of $0.9 million due to the decline in premium volume exclusive of our acquisitions. Medmarc and IND policy acquisition expenses were approximately $1.8 million lower 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.

Our 2012 expenses included, on a net basis, approximately $2.0 million of expenses that were non-recurring in nature, as follows: $1.3 million related to the enhancement of our customer service capabilities, $0.8 million of higher amortization of deferred policy acquisition costs (as compared to 2013) that was attributable to the prospective adoption of new accounting guidance as of January 1, 2012, and $0.4 million related to the discontinuation of certain agency operations. Offsetting these higher costs was a $0.7 million reduction in expenses resulting from recoveries related to the settlement of litigation.

Our 2013 expenses included, on a net basis, approximately $2.9 million of expenses that were non-recurring in nature, as follows: $1.8 million of Medmarc and IND transaction related costs comprised of principally professional fees and one time compensation costs, and $1.1 million of other costs specific to the first quarter of 2013.

Underwriting Expense Ratio (the Expense Ratio)



	Underwriting Expense Ratio
	Three Months Ended March 31
	2013		2012		Change
Underwriting expense ratio, excluding listed factors	23.8	%	23.7	%	0.1
Reduction in premiums owed under reinsurance agreements, prior accident years	(0.8	%)	—	%	(0.8	)
Reduction in net premiums earned from prior year (see below)	2.5	%	—	%	2.5
Non-recurring expenses	2.2	%	1.5	%	0.7
Underwriting expense ratio, as reported	27.7	%	25.2	%	2.5

The increase in our consolidated underwriting expense ratio for 2013 was attributable to both the decline in net premiums earned, exclusive of premium earned from acquisitions and reductions to our estimate of ceded premiums (see discussion under "Premiums"), and to the effect of non-recurring expenses in 2013 as compared to 2012 , as previously discussed. The normal operating expenses of our acquired business had a nominal effect on the ratio as it was offset, almost in its entirety, by the effect on the ratio of the net premium earned contributed by our acquired business.

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Interest Expense

Interest expense declined during the three months ended March 31, 2013 as compared to the same period in 2012 . Average outstanding debt for the 2012 three-month period was approximately $50 million and consisted of long-term debt repaid during the third quarter of 2012. Average outstanding debt for the 2013 three-month period was $125 million , all of which was under our revolving credit agreement and bore a more favorable rate of interest than the debt held during 2012 . See Note 9 of the Notes to Condensed Consolidated Financial Statements for discussion of the Revolving credit agreement.

Interest expense for the three months ended March 31, 2013 and 2012 is provided in the following table:



	Three Months Ended March 31
(In thousands)	2013		2012		Change
Revolving credit agreement (including fees and amortization)	$	363	$	150	$	213
Long-term debt repaid in 2012	—		672		(672		)
Other	8		3		5
	$	371	$	825	$	(454	)

Taxes

Factors affecting our effective tax rate include the following:



	Three Months Ended March 31
	2013		2012
Statutory rate	35.0	%	35.0	%
Tax-exempt income	(5.8	%)	(5.8	%)
Tax credits	(7.3	%)	(4.3	%)
Gain on acquisition	(5.9	%)	—	%
Other	0.5	%	1.1	%
Effective tax rate	16.5	%	26.0	%

We estimate our annual effective tax rate at the end of each quarterly reporting period, which is used to record the provision for income taxes in our interim financial statements. Our effective tax rate in both the first quarter of 2013 and 2012 is different from the statutory Federal income tax rate primarily because a portion of our investment income is tax-exempt and because we utilize tax credit benefits transferred from our tax credit partnership investments. During the first quarter of 2013, net income included a non-taxable gain of $35.5 million , the effect of which further reduced our 2013 effective tax rate.

Tax benefits recognized, related to the tax credits, approximated $4.5 million for the three months ended March 31, 2013 , as compared to $2.6 million for the 2012 three-month period .

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Interest Rate Risk

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

The following table summarizes estimated changes in the fair value of our available-for-sale fixed maturity securities for specific hypothetical changes in interest rates by asset class at March 31, 2013 and December 31, 2012 . There are principally two factors that determine interest rates on a given security: market interest rates and credit spreads. As different asset classes can be affected in different ways by movements in those two factors, we have broken out our portfolio by asset class in the following table.



	Interest Rate Shift in Basis Points
	March 31, 2013
	(200)		(100)		Current		100		200
Fair Value (in millions):
U.S. Treasury obligations	$	235	$	234	$	231	$	226	$	222
U.S. Government-sponsored enterprise obligations	61		61		60		58		57
State and municipal bonds	1,348		1,334		1,293		1,238		1,185
Corporate debt	1,623		1,607		1,554		1,489		1,428
Asset-backed securities	495		497		489		476		458
All fixed maturity securities	$	3,762	$	3,733	$	3,627	$	3,487	$	3,350

Duration:
U.S. Treasury obligations	2.77		2.77		2.72		2.65		2.58
U.S. Government-sponsored enterprise obligations	2.75		2.75		2.80		2.92		2.91
State and municipal bonds	3.75		3.95		4.15		4.33		4.43
Corporate debt	4.21		4.22		4.23		4.18		4.11
Asset-backed securities	1.63		1.97		2.66		3.36		3.83
All fixed maturity securities	3.59		3.71		3.87		4.00		4.06

	December 31, 2012
Fair Value (in millions):
U.S. Treasury obligations	$	210	$	209	$	206	$	202	$	197
U.S. Government-sponsored enterprise obligations	58		58		57		55		53
State and municipal bonds	1,269		1,258		1,220		1,170		1,122
Corporate debt	1,533		1,521		1,471		1,409		1,350
Asset-backed securities	498		499		494		481		466
All fixed maturity securities	$	3,568	$	3,545	$	3,448	$	3,317	$	3,188

Duration:
U.S. Treasury obligations	2.92		2.89		2.84		2.77		2.70
U.S. Government-sponsored enterprise obligations	2.89		2.90		2.98		3.08		3.08
State and municipal bonds	3.78		3.91		4.06		4.17		4.26
Corporate debt	4.26		4.27		4.27		4.22		4.15
Asset-backed securities	1.81		1.82		2.35		3.06		3.66
All fixed maturity securities	3.65		3.70		3.81		3.93		4.01

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

Certain shortcomings are inherent in the method of analysis presented in the computation of the fair value of fixed rate instruments. Actual values may differ from the 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 March 31, 2013 was 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 March 31, 2013 , 93% of our fixed maturity securities were rated investment grade as determined by Nationally Recognized Statistical Rating Organizations (NRSROs), such as 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 also have exposure to credit risk related to our receivables from reinsurers. Our receivables from reinsurers (with regard to both paid and unpaid losses) approximated $254 million at March 31, 2013 and $196 million at December 31, 2012 , with the 2013 increase primarily attributable to acquisitions. We monitor the credit risk associated with our reinsurers using publicly available financial and rating agency data.

Equity Price Risk

At March 31, 2013 the fair value of our investment in common stocks was $258 million . These securities are subject to equity price risk, which is defined as the potential for loss in fair value due to a decline in equity prices. The weighted average beta of this group of securities was 0.95 . Beta measures the price sensitivity of an equity security or group of equity securities to a change in the broader equity market, in this case the S&P 500 Index. If the value of the S&P 500 Index increased by 10%, the fair value of these securities would be expected to increase by 9.5% to $282 million . Conversely, a 10% decrease in the S&P 500 Index would imply a decrease of 9.5% in the fair value of these securities to $233 million . The selected hypothetical changes of plus or minus 10% do not reflect what could be considered the best or worst case scenarios and are used for illustrative purposes only.

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ITEM 4. CONTROLS AND PROCEDURES.

The Chief Executive Officer and Chief Financial Officer of the Company participated in management’s evaluation of our disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of March 31, 2013 . 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

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. On January 1, 2013 we completed the acquisition of Medmarc Mutual Insurance Company, now Medmarc Casualty Insurance Company (Medmarc). Our management has concluded that it will exclude Medmarc's systems and processes from the scope of ProAssurance's assessment of internal control over financial reporting as of December 31, 2013 in reliance on the guidance set forth in Question 3 of a "Frequently Asked Questions" interpretive release issued by the staff of the Securities and Exchange Commission's Office of the Chief Accountant and the Division of Corporation Finance in September 2004 (and revised on October 6, 2004). We are excluding Medmarc from that scope because we will not have completed our assessment of Medmarc's systems and processes by that date.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

There are no changes to the “Risk Factors” in Part 1, Item 1A of the 2012 Form 10-K.

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


(a)	Not applicable.


(b)	Not applicable.


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



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs *
January 1 - 31, 2013	—	$	—	—	$	135,083,102
February 1 - 28, 2013	—	$	—	—	$	135,083,102
March 1 - 31, 2013	—	$	—	—	$	135,083,102
Total	—	$	—	—

* In November 2010, the ProAssurance Board of Directors authorized $200 million for the repurchase of common shares or the retirement of outstanding debt. This is ProAssurance’s only plan for the repurchase of common shares, and the plan has no expiration date.

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ITEM 6. EXHIBITS



Exhibit Number		Description

2.1		Stock Purchase Agreement dated as of June 26, 2012, by and among ProAssurance Corporation, PRA Professional Liability Group, Inc. and Medmarc Mutual Insurance Company. Exhibits and schedules are listed but not included in the filing. Copies of the omitted exhibits and schedules will be provided to the SEC supplementally upon request.

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

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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

May 6, 2013

/s/ Edward L. Rand, Jr.

Edward L. Rand, Jr.

Chief Financial and Accounting Officer

(Duly authorized officer and principal financial and

accounting officer)

Execution Copy

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (the “ Agreement ”), dated as of June 26, 2012, by and between PROASSURANCE CORPORATION, a Delaware corporation (“ PRA ”), PRA PROFESSIONAL LIABILITY GROUP, INC., a Delaware corporation (" PRA Professional ") and MEDMARC MUTUAL INSURANCE COMPANY, a Vermont mutual insurance corporation (“ Medmarc ”).

WITNESSETH:

WHEREAS, PRA is an insurance holding company and is the owner of all of the stock of PRA Professional; and

WHEREAS, PRA Professional serves as an intermediate holding company for PRA and provides, through its insurance subsidiaries, medical and legal professional liability insurance;

WHEREAS, Medmarc is a mutual insurance company which provides, directly and through its subsidiaries, products liability insurance for medical technology and life sciences companies throughout the United States and legal professional liability insurance;

WHEREAS, the Board of Directors of Medmarc has agreed to adopt a Plan of Conversion in accordance with Section 1.1 of this Agreement (as amended or supplemented from time to time, the “Plan of Conversion” ), pursuant to which Medmarc will be converted (the “Conversion” ) from a mutual insurance company to a stock insurance company pursuant to 8 V.S.A. § 3423 of the Vermont Insurance Code;

WHEREAS, the Plan of Conversion will provide for and be contingent on the sale (the “Sale” ) of all of the shares of common stock of Medmarc (the “Common Stock” ) to PRA Professional as part of the Conversion upon the terms and subject to the conditions set forth in this Agreement; and

WHEREAS, the Boards of Directors of PRA, PRA Professional and Medmarc have determined that it is in the best interests of their respective companies for PRA Professional to acquire Medmarc through the purchase of its newly authorized Common Stock as provided for in this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained in this Agreement, and intending to be legally bound by this Agreement, the parties to this Agreement agree as follows:

Article 1

PLAN OF CONVERSION

1.1 Medmarc Plan of Conversion . Medmarc has adopted the Plan of Conversion, substantially in the form of Exhibit A attached hereto, by action of not less than three-fourths of the members of the Board of Directors of Medmarc. Medmarc shall file the Plan of Conversion

with the Commissioner ( “Commissioner” ) of the Department of Financial Regulation of the State of Vermont (the “Department” ) in accordance with 8 V.S.A. § 3423 ( Converting mutual insurer or mutual insurance holding company ) of the Vermont Insurance Code ( “Conversion Statute” ). The Plan of Conversion may contain such additional terms not set forth in the form of Plan of Conversion included as Exhibit A or modifications to terms set forth in the form of the Plan of Conversion as Medmarc may determine; provided, however, that any such additional term or modification that modifies the (i) total Cash Consideration (herein defined) and Policyholder Renewal Credits (herein defined) or the method for allocating such Cash Consideration and Policyholder Renewal Credits among Medmarc’s Eligible Members, or (ii) the Amended and Restated Articles of Incorporation or the Amended and Restated Bylaws shall require the prior written consent of PRA, which consent shall not be unreasonably withheld or delayed.

1.2 Approval of the Plan of Conversion . Subject to the provisions of Section 7.9 hereof:

(a) Medmarc shall take such action as may reasonably be required to obtain approval of the Plan of Conversion by the Commissioner, in accordance with the Conversion Statute, including without limitation providing notice to the Eligible Members (as herein defined) of the Plan of Conversion and the public hearing thereon, if any, and appearing at the hearing on the Plan of Conversion.

(b) Medmarc, in accordance with the Plan of Conversion and Applicable Law, shall submit a proposal to Eligible Members to approve the Plan of Conversion (the “Proposal” ) and shall give such notice to Eligible Members containing the date, time and place for voting on the Proposal as may be required under Applicable Law (including the Conversion Statute). The Proposal shall include the determination of Medmarc’s Board of Directors that the Plan of Conversion is fair and equitable to the Members as a group and shall include the Board of Directors’ recommendation that the Eligible Members approve the Plan of Conversion.

(c) Medmarc, with PRA’s assistance at Medmarc’s reasonable request, shall prepare and provide to Eligible Members, in connection with the solicitation of approval of the Plan of Conversion, an information statement or similar document relating to the Plan of Conversion and the Sale, including a copy of the Plan of Conversion (the “ Information Statement ”) and use commercially reasonable efforts to obtain and furnish the information required to be included by state and federal law, and, if required, to obtain the approval of the Commissioner of the Department for the Information Statement. Each of Medmarc and PRA agrees that the information provided and to be provided by Medmarc or PRA, as the case may be, specifically for use in the Information Statement shall not, with respect to the information supplied by such party (i) on the date upon which the Information Statement is mailed to Eligible Members, (ii) on the date of the public hearing before the Commissioner in respect of the Plan of Conversion, if any, or (iii) on the date of the meeting at which Eligible Members are entitled to vote on the proposal, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein, in light of the circumstances under which they were made, not misleading. No less than three days prior to the filing of the Information Statement with Commissioner of the Department, Medmarc shall provide PRA a draft of the Information Statement and an opportunity to comment on such draft; provided , however , that Medmarc shall have the right to accept or reject any such comments in its sole

discretion. Each of PRA and Medmarc agrees to correct as promptly as practicable any such information provided by it that shall have become false or misleading in any material respect and if required to take all steps necessary to furnish to the Commissioner and obtain the approval of the Commissioner for any amendment or supplement to the Information Statement so as to correct the same and to cause the Information Statement as so corrected to be disseminated to Eligible Members to the extent required by or advisable under Applicable Law.

1.3 Approval of the Change of Control . Promptly after the execution of this Agreement, PRA and PRA Professional shall request the Commissioner to approve the change of control of Medmarc and the Medmarc Subsidiaries (as defined in Section 4.2 hereof) as contemplated by the Plan of Conversion and this Agreement in accordance with the requirements of 8 V.S.A. § 3683 of the Vermont Insurance Code. PRA shall prepare and file with the Department a Form A and shall take such commercially reasonable actions consistent with the terms of this Agreement as may be required under 8 V.S.A. § 3683 of the Vermont Insurance Code and the regulations promulgated thereunder to obtain the Commissioner's approval of the change of control of Medmarc and the Medmarc Subsidiaries as contemplated in the Plan of Conversion and this Agreement.

1.4 Effective Time of the Plan of Conversion. The Effective Time of the Plan of Conversion (the “Effective Time” ) shall be at such time on the Closing Date as determined by the parties to this Agreement, subject to any required consent of the Commissioner, after all of the following have been completed: (a) the Plan of Conversion shall have been approved by the Commissioner in accordance with the Conversion Statute and the change of control filing referred to in Section 1.3 hereof shall have been approved by the Commissioner; (b) the Plan of Conversion shall have been approved by the Eligible Members in accordance with the Conversion Statute; (c) the Amended and Restated Articles of Incorporation of Medmarc shall have been filed in accordance with 8 V.S.A. § 3446; and (d) such additional documents are filed with the Commissioner as may be required by applicable law.

ARTICLE 2
SALE AND PURCHASE

2.1 Sale and Purchases of the Shares . Subject to the terms and conditions of this Agreement, the following exchange shall occur at the Effective Time without any action on the part of any Member: in accordance with the Plan of Conversion, Medmarc will issue and sell all of the issued and outstanding shares of Common Stock (the “Shares” ) to PRA Professional, which shall constitute all of the issued and outstanding stock of Medmarc, and PRA Professional will purchase the shares from Medmarc.

2.2 Purchase Price . The purchase price (the “Purchase Price” ) to be paid by PRA Professional for the purchase of the Shares shall be equal to $153,700,000, consisting of (a) $146,200,000 in cash (the “Cash Consideration” ) payable to the Eligible Members pursuant to Section 3 hereof and in accordance with the Plan of Conversion, and (b) $7,500,000 payable to the Eligible Members as Policyholder Renewal Credits in accordance with the Plan of Conversion and Section 2.7 hereof.

2.3 Articles of Incorporation . Subject to the terms and conditions of this Agreement, at the Effective Time, the Amended and Restated Articles of Incorporation of Medmarc shall be the articles of incorporation of Medmarc until amended in accordance with applicable law.

2.4 Bylaws . Subject to the terms and conditions of this Agreement, at the Effective Time, the Amended and Restated Bylaws of Medmarc shall be the bylaws of Medmarc until amended in accordance with applicable law.

2.5 Management and Officers . At the Effective Time, each of the Directors of Medmarc shall resign from its Board of Directors, and PRA Professional shall as the sole shareholder of Medmarc elect new Directors set forth on Exhibit B to serve on the Board of Directors of Medmarc. At the Effective Time, the officers of Medmarc shall continue as the officers of Medmarc until their successors are elected and qualified.

2.6 Advisory Committees . PRA shall cause Medmarc to offer to each Person who, as of the date of this Agreement, is a member of the Board of Directors of Medmarc, but is not an officer or full-time employee of Medmarc or a subsidiary of Medmarc, a Consulting and Noncompetition Agreement (each a “ Consulting Agreement ”), substantially in the form set forth in Exhibit C attached hereto. Pursuant to his or her Consulting Agreement, each such Person shall be paid an aggregate payment of $60,000, of which $20,000 shall be payable on the Closing Date and the balance shall be payable in two equal annual installments on the successive anniversaries of the Closing Date. Notwithstanding the foregoing, no fees of any type shall be paid to such Person unless he or she shall have executed a Consulting Agreement.

2.7 Policyholder Credits .

(a) In accordance with and pursuant to the Plan of Conversion, PRA hereby agrees to cause Medmarc to declare dividends and distribute such declared dividends as premium credits to its Eligible Members in amounts credited to such Eligible Members in accordance with the Plan of Conversion and adjusted pursuant thereto (collectively, the “ Policyholder Renewal Credits ”).

(b) The Policyholder Renewal Credits shall be allocated among the Eligible Members entitled thereto in accordance with the Plan of Conversion. The Policyholder Renewal Credits shall be payable as a credit against premium payments on Medmarc insurance policies that are renewed during the applicable period by Eligible Members in accordance with the Plan of Conversion. If an Eligible Member fails to renew its Medmarc insurance policy during the applicable twelve (12) month period as required by the Plan of Conversion, such Eligible Member shall not be entitled to be paid the Policyholder Renewal Credit for such twelve (12) month period.

(c) PRA shall (i) pay to Medmarc, via wire transfer of immediately available funds, a portion of the Purchase Price in the amount of $7,500,000 to fund the crediting of the Policyholder Renewal Credits to Eligible Members pursuant to the Plan of Conversion and Section 2.7(a) hereof and (ii) cause Medmarc to deposit such amount in a segregated account established by Medmarc on or before the Closing Date to be held in trust by Medmarc, separate and apart from

any other assets of Medmarc, for the sole purpose of funding the payment of the Policyholder Renewal Credits as required by the Plan of Conversion and Section 2.7(a) (the “ Credit Account ”).

(d) It is the intent of the parties hereto that all amounts held in trust in the Credit Account will qualify as admitted assets of Medmarc. Any interest earned on amounts held in trust in the Credit Account shall be transferred to the general account of Medmarc. No interest shall be accrued or payable to the Eligible Members on the Policyholder Renewal Credits.

(e) It is the specific intent of the parties hereto that each Eligible Member is and will be a third party beneficiary of this Agreement for the purposes of enforcing its rights to receive the Policyholder Renewal Credits in the amounts credited to such Eligible Member, as adjusted, in accordance with the Plan of Conversion.

ARTICLE 3
CONVERSION PROCEDURES

3.1 Conversion Agent . (a) As soon as practicable after the execution and delivery of this Agreement and, in any event, not less than five days prior to the mailing of the notice to Eligible Members, PRA shall designate a bank to act as conversion agent (the “Conversion Agent” ) acceptable to Medmarc, to act as paying agent in effecting the distribution of the Cash Consideration to Eligible Members pursuant to this Agreement and the Plan of Conversion. PRA shall be solely responsible for and pay the charges and expenses of the Conversion Agent.

3.2 Conversion and Exchange Procedures .

(a) Prior to the Effective Time, Medmarc shall deliver to the Conversion Agent and PRA a complete and correct copy of the Plan of Conversion as approved by the Commissioner and the Eligible Members, and Medmarc shall deliver to the Conversion Agent the certificate(s) to be dated as of the date of the Effective Time for the Shares registered in the name of PRA Professional.

(b) Prior to the Effective Time, PRA shall cause PRA Professional to deposit in trust with the Conversion Agent for the benefit of the Eligible Members receiving cash pursuant to the Plan of Conversion, cash in the amount of the Cash Consideration (the “Conversion Fund” ), for distribution to such Eligible Members in accordance with this Agreement and the Plan of Conversion. The cash deposited with the Conversion Agent pursuant to this Section 3.2(b) shall be held in cash and cash equivalents.

(c) No less than thirty (30) calendar days prior to the Effective Time, Medmarc shall provide to the Conversion Agent and PRA (i) a list setting forth the (A) names and addresses of each of the Eligible Members, (B) amount of the cash payment that each of the Eligible Members is entitled to receive under the Plan of Conversion (the “ Distribution List ”) and (ii) forms of the Consideration Notices.

(d) On the Closing Date, the Conversion Agent shall deliver to PRA Professional the certificates for the Shares. As promptly as practicable, but in no event more than ten (10)

Business Days after the Closing Date, the Conversion Agent shall distribute to each Eligible Member (i) the cash in the Conversion Fund, in the form of a check for good funds, in the amount set forth on the Distribution List and required to be paid to such Eligible Member in exchange for such Member’s Membership Interest pursuant to the Plan of Conversion and (ii) a notice setting forth the method by which the amount of such cash, and with respect to each Eligible Member the amount of Policyholder Renewal Credits to be credited to such Eligible Member and payable in accordance with the Plan of Conversion was or will be derived from such Eligible Member’s allocation of the Purchase Price and, in the case of the Policyholder Renewal Credits, when such Policyholder Renewal Credits will be distributed (the “ Consideration Notices ”).

(e) Any other provision of this Agreement notwithstanding, neither PRA nor the Conversion Agent shall be liable to an Eligible Member for any amounts paid or property delivered in good faith to a public official pursuant to any applicable abandoned property law.

3.3 Conversion Fund . All cash that remains in the Conversion Fund undistributed to the Eligible Members for twelve (12) months after the Effective Time shall be delivered to PRA Professional, on demand, and the Conversion Agent’s duties hereunder shall terminate. Thereafter and subject to applicable abandoned property, escheat and similar laws, each Eligible Member that has not yet received the Cash Consideration to which it is entitled to pursuant to the Plan of Conversion may contact PRA and PRA shall cause PRA Professional to pay to such Eligible Member cash to which it is entitled.

3.4 Withholding . PRA, PRA Professional or the Conversion Agent will be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement or the transactions contemplated hereby to any Eligible Member such amounts as PRA (or any Affiliate thereof) or the Conversion Agent is required to deduct and withhold with respect to the making of such payment under the Code, as herein defined, or any applicable provision of U.S. federal, state, local or non-U.S. tax law. To the extent that such amounts are properly withheld by PRA, PRA Professional or the Conversion Agent, such withheld amounts will be treated for all purposes of this Agreement as having been paid to the Eligible Member in respect of whom such deduction and withholding were made by PRA, PRA Professional or the Conversion Agent. At least 10 business days prior to the Closing Date, PRA shall notify Medmarc of any amounts that PRA intends to deduct and withhold pursuant to this Section 3.4. PRA agrees to consult with Medmarc in good faith to determine whether such deduction and withholding is required under Applicable Law.

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MEDMARC

Concurrently with the execution and delivery of this Agreement, Medmarc shall deliver to PRA a disclosure schedule (the “ Medmarc Disclosure Schedule ”). The Medmarc Disclosure Schedule will be arranged in paragraphs corresponding to the sections contained in this Article; provided , however , (i) any item disclosed in any section of the Medmarc Disclosure Schedule shall be deemed to be fully disclosed with respect to all sections of the Medmarc Disclosure Schedule under which such item may be relevant to the extent that it is reasonably clear on the face of such

section that such item applies to such other sections, and (ii) the mere inclusion of an exception in the Medmarc Disclosure Schedule shall not be deemed an admission by Medmarc that such exception represents a material fact, event or circumstance or would result in a material adverse change or Material Adverse Effect on Medmarc. All documents and instruments attached as exhibits or annexes to the Medmarc Disclosure Schedule are incorporated by reference into the Medmarc Disclosure Schedule. Except as set forth in the Medmarc Disclosure Schedule and in any changes to the Medmarc Disclosure Schedule that are disclosed by Medmarc to PRA in accordance with Section 7.7 hereof, Medmarc hereby represents and warrants to PRA, as of the date hereof or such other date as specified, as follows:

4.1 Corporate Organization .

(f) Medmarc is a mutual insurer duly organized and validly existing under the laws of the State of Vermont. Medmarc has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on Medmarc.

(g) Medmarc is (i) duly licensed or authorized as an insurance company in Vermont, (ii) duly licensed or authorized to carry on an insurance business in each other jurisdiction where it is required to be so licensed or authorized, and (iii) duly authorized in Vermont and each other applicable jurisdiction to write its lines of business as required by Applicable Law except, in each case, where such failure to be so licensed or authorized would not individually or in the aggregate have a Material Adverse Effect on Medmarc. Section 4.1 of the Medmarc Disclosure Schedule identifies the type of insurance products that Medmarc is authorized or licensed to offer in each state. All of such licenses are in full force and effect, and there is no proceeding or investigation pending or, to the Knowledge of Medmarc, threatened which would reasonably be expected to lead to the revocation, amendment, failure to renew, limitation, suspension or restriction of such license.

4.2 Subsidiaries .

(a) Section 4.2(a) of the Medmarc Disclosure Schedule sets forth a complete and correct list of each Subsidiary of Medmarc (the “ Medmarc Subsidiaries ”), together with the state of incorporation or organization of each Medmarc Subsidiary. Each Medmarc Subsidiary (i) is duly organized and validly existing as a corporation under the laws of its jurisdiction of organization, (ii) is duly qualified to do business and in good standing in all jurisdictions (whether federal, state, local or foreign) where its ownership or leasing of property or the conduct of its business requires it to be so qualified and in which the failure to be so qualified would have a Material Adverse Effect on Medmarc, and (iii) has all requisite corporate power and authority to own or lease its properties and assets and to carry on its business as now conducted.

(b) Section 4.2(b) of the Medmarc Disclosure Schedule identifies the Medmarc Subsidiaries that offer insurance and the states or other jurisdictions in which they are authorized

or licensed to conduct business, and the type of insurance products that they are authorized or licensed to offer in each such state (the “Medmarc Insurance Subsidiaries” ). Each Medmarc Insurance Subsidiary is (i) duly licensed or authorized as an insurer in its jurisdiction of incorporation, (ii) duly licensed or authorized to carry on an insurance business in each other jurisdiction where it is required to be so licensed or authorized, and (iii) duly authorized in its jurisdiction of incorporation and each other applicable jurisdiction to write its line of business as required by Applicable Law except, in each case, where such failure to be so licensed or authorized would not individually or in the aggregate have a Material Adverse Effect on Medmarc. All of such licenses are in full force and effect and there is no proceeding or investigation pending or, to the Knowledge of Medmarc, threatened which would reasonably be expected to lead to the revocation, amendment, failure to renew, limitation, suspension or restriction of such license.

(c) Except as set forth in Section 4.2(c) of the Medmarc Disclosure Schedule, Medmarc is, directly or indirectly, the record and beneficial owner of all of the outstanding shares of capital stock of each of the Medmarc Subsidiaries. There are no irrevocable proxies granted by Medmarc or any Medmarc Subsidiary with respect to such shares. There are no equity securities of any of the Medmarc Subsidiaries that are or may become required to be issued by reason of any option, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of any capital stock of any of the Medmarc Subsidiaries except shares of the Medmarc Subsidiaries issued to, or required to be issued to, other wholly owned Medmarc Subsidiaries. There are no contracts, commitments, understandings or arrangements by which any of the Medmarc Subsidiaries is bound to issue additional shares of its capital stock or options, warrants or rights to purchase or acquire any additional shares of its capital stock or securities convertible into or exchangeable for such shares. All of the shares of the Medmarc Subsidiaries described in the first sentence of this Section 4.2(c) are validly issued, fully paid and nonassessable and free of preemptive rights, and are owned by Medmarc or a Medmarc Subsidiary free and clear of any and all Liens.

4.3 Corporate Affairs .

(a) Medmarc has made available to PRA correct and complete copies of the Articles of Association or Incorporation and Bylaws of Medmarc and each of the Medmarc Subsidiaries (as amended to date). Except as set forth in Section 4.3(a) of the Medmarc Disclosure Schedule, Medmarc has made available to PRA all of the minute books containing the records of the meetings of the members or shareholders, the Board of Directors and any committee of the Board of Directors of Medmarc and each of the Medmarc Subsidiaries (except for confidential portions of such minutes relating to the Plan of Conversion, this Agreement and the transactions contemplated hereby). The minute books of Medmarc and the Medmarc Subsidiaries reflect all of the material actions taken at a meeting or by written consent of the Board of Directors of Medmarc.

(b) Pursuant to the Plan of Conversion and the Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, when approved by three-fourths of the members of the Board of Directors of Medmarc, the Commissioner of the Department, and the Eligible Members of Medmarc as required under Section 1.1 and Section 1.2, Medmarc will be converted from a mutual insurer to a stock insurer at the Effective Time in accordance with the

Applicable Law of the state of Vermont, including without limitation, 8 V.S.A. § 3423. At the Effective Time, the Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws shall be duly authorized and validly adopted and in full force and effect.

4.4 Capitalization .

(a) At the Effective Time, the authorized capital stock of Medmarc under the Amended and Restated Articles of Incorporation will consist of 1,000 shares, all of which are designated as common stock, and 1,000 shares of Medmarc Common Stock will be issued and sold to PRA Professional pursuant to the Plan of Conversion and this Agreement. The shares of Medmarc Common Stock issued to PRA Professional pursuant to the Plan of Conversion will constitute all of the issued and outstanding shares of Medmarc Common Stock, all of which will be duly authorized and validly issued and fully paid, nonassessable and free of preemptive rights. As of the date of this Agreement and other than as provided in the Plan of Conversion or this Agreement, Medmarc does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase or issuance of any shares of Medmarc Common Stock or any other equity securities of Medmarc or any securities representing the right to purchase or otherwise receive any shares of Medmarc Common Stock or any other equity securities of Medmarc. As of the date of this Agreement no shares of Medmarc Common Stock were reserved for issuance except as provided in the Plan of Conversion.

4.5 Authority; No Violation; Consents and Approvals .

(f) Subject to the receipt of all Requisite Regulatory Approvals (as defined in Section 8.1(c) of this Agreement), Medmarc has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby and Medmarc has the authority to adopt the Plan of Conversion and carry out its obligations thereunder. The execution and delivery of this Agreement by Medmarc and the consummation of the transactions contemplated hereby have been authorized by the Board of Directors of Medmarc. The Board of Directors of Medmarc has adopted the Plan of Conversion and directed that the Plan of Conversion and this Agreement and the transactions contemplated by the Plan of Conversion and this Agreement be submitted to the Eligible Members for approval at a meeting of such Eligible Members and, other than obtaining Eligible Member approval and adoption of the Plan of Conversion and this Agreement by the affirmative vote of at least three-fourths of the Eligible Members voting thereon in accordance with Section 1.2 and any actions required to obtain all Requisite Regulatory Approvals, no other corporate proceedings on the part of Medmarc are necessary to approve the Plan of Conversion and this Agreement and to consummate the transactions contemplated by this Agreement. Subject to the foregoing, this Agreement has been duly and validly executed and delivered by Medmarc and (assuming this Agreement constitutes a valid and binding obligation of PRA) constitutes a valid and binding obligation of Medmarc, subject to applicable bankruptcy, fraudulent conveyance, insolvency and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity. On or prior to the date of this Agreement, the Board of Directors of Medmarc received the opinion of Sandler O'Neill & Partners that the Purchase Price is fair from a financial point of view to the Members as a group.

(g) Neither the execution and delivery of this Agreement by Medmarc nor the consummation by Medmarc of the transactions contemplated by the Plan of Conversion and this Agreement, nor compliance by Medmarc with any of the terms or provisions of the Plan of Conversion and this Agreement, will (i) violate any provision of the Articles of Association or Bylaws of Medmarc or (ii) assuming that all Requisite Regulatory Approvals and all of the consents and approvals referred to in Section 4.5(c) of this Agreement are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Medmarc or any of its properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of Medmarc under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, surplus debentures, deed of trust, license, lease, agreement or other instrument or obligation to which Medmarc is a party, or by which it or any of its properties or assets may be bound or affected, except (in the case of clause (y) above) as set forth in Section 4.5(b) of the Medmarc Disclosure Schedule, or (in the case of clauses (x) and (y) above) for such violations, conflicts, breaches, terminations, cancellations, accelerations, liens or defaults which, either individually or in the aggregate, would not have a Material Adverse Effect on Medmarc.

(h) Except for (i) the filing of applications, notices and forms with, and the obtaining of approvals from, the Insurance Regulators pursuant to the Insurance Laws, with respect to the transactions contemplated by this Agreement, including all Requisite Regulatory Approvals, (ii) the approval of the Plan of Conversion by the Commissioner of the Department pursuant to the Vermont Insurance Code as contemplated in Section 1.2(a) hereof, (iii) the filing of a notification and report form (the “ HSR Act Report ”) with the Premerger Notification Office of the Federal Trade Commission and with the Antitrust Division of the Department of Justice (collectively, the “ Premerger Notification Agencies ”) pursuant to the Hart-Scott-Rodino Anti-Trust Improvements Act, as amended, and the rules and regulations thereunder (collectively, the “ HSR Act ”), (iv) any consents, authorizations, orders and approvals required under the HSR Act, (v) the approval of the Plan of Conversion and this Agreement by the requisite votes of the Eligible Members, (vi) the consents and approvals referred to in Section 4.5(b) of the Medmarc Disclosure Schedule, and (vii) the approvals set forth in Section 4.5(c) of the Medmarc Disclosure Schedule, no consents or approvals of or filings or registrations with any Governmental Authority, or with any other Person are necessary in connection with the execution and delivery by Medmarc of this Agreement or the consummation by Medmarc of the transactions contemplated by this Agreement.

4.6 Insurance Reports .

(a) “ Medmarc SAP Statements ” means (i) the annual statutory statements of each of Medmarc and the Medmarc Insurance Subsidiaries filed with the Insurance Regulator of the jurisdiction of domicile of Medmarc or the applicable Medmarc Insurance Subsidiary as of and for each of the years ended December 31, 2011, 2010 and 2009, and (ii) all exhibits, interrogatories, notes, schedules and any actuarial opinions, affirmations or certifications or other supporting documents filed in connection with such annual statutory statements and quarterly statutory statements.

(b) Each Medmarc SAP Statement was prepared (i) in accordance with statutory accounting principles (“ SAP ”) prescribed or permitted by the Insurance Regulator of the jurisdiction of domicile of Medmarc or the applicable Medmarc Subsidiaries in conformity with practices consistently applied by Medmarc or the Medmarc Insurance Subsidiary, as applicable, without modification of the accounting principles used in the preparation thereof and fairly presents the statutory financial position and results of operations of Medmarc or the Medmarc Insurance Subsidiary as applicable as of the dates and for the periods indicated in accordance with SAP. The annual balance sheets and income statements included in the Medmarc SAP Statements have been, where required by Insurance Laws, audited by an independent accounting firm.

(c) Since January 1, 2009 Medmarc and each Medmarc Insurance Subsidiary (i) have filed or submitted with all applicable Insurance Regulators all registration statements, notices and reports, together with all supplements and amendments thereto required by Regulation 71-2 of the Department promulgated under the Vermont Insurance Code or similar Applicable Laws governing insurance holding company systems in other states (the “ Medmarc Holding Company Act Reports ”), (ii) have filed all Medmarc SAP Statements, (iii) have filed all other reports and statements, together with all amendments and supplements thereto, required to be filed with any Insurance Regulator under the Insurance Laws, and (iv) have paid all fees and assessments due and payable by them under the Insurance Laws. Section 4.6(c) of the Medmarc Disclosure Schedule (i) sets forth a list of, and Medmarc has made available to PRA accurate and complete copies of, all Medmarc SAP Statements and all audit opinions related thereto and all Medmarc Holding Company Act Reports for periods ending and events occurring, after January 1, 2009 and prior to the Closing Date, and (ii) identifies each denial of a request for approval of dividends or rate increases received by Medmarc from any Insurance Regulator since January 1, 2009. All such Medmarc SAP Statements, Medmarc Holding Company Act Reports and other reports and statements substantially complied with the Insurance Laws when filed and, as of their respective dates, contained substantially all information required under the Insurance Laws and did not contain any false statements or material misstatements of fact or omit to state any material facts necessary to make the statements set forth therein not materially misleading in light of the circumstances in which such statements were made. No deficiencies have been asserted by any Governmental Authority with respect to such Medmarc SAP Statements, Medmarc Holding Company Act Reports and other reports and statements. This Section 4.6(c) does not apply to Taxes, which are covered exclusively by Section 4.12.

(d) Except for normal examinations conducted by an Insurance Regulator in the regular course of the business of Medmarc and its Subsidiaries, and except as set forth in Section 4.6(d) of the Medmarc Disclosure Schedule, to the knowledge of Medmarc, no Insurance Regulator has initiated any proceeding or investigation into the business or operations of Medmarc, any Medmarc Insurance Subsidiary, or any director or officer of Medmarc or any Medmarc Insurance Subsidiary, since January 1, 2009 that remains open on date hereof. There is no unresolved violation or exception by any Insurance Regulator with respect to any examinations of Medmarc or any of its Subsidiaries.

(e) Section 4.6(e) of the Medmarc Disclosure Schedule lists all financial examinations that any Insurance Regulator has conducted with respect to Medmarc or any of the

Medmarc Insurance Subsidiaries since December 31, 2008. Medmarc has made available to PRA correct and complete reports issued by the applicable Insurance Regulator with respect to such financial examinations. Except as set forth in Section 4.6(e) of the Medmarc Disclosure Schedule, there are no regulatory examinations of Medmarc or any of the Medmarc Insurance Subsidiaries currently in process.

(f) Except as set forth in Section 4.6(f) of the Medmarc Disclosure Schedule, since January 1, 2009, neither Medmarc nor any Medmarc Insurance Subsidiary has received from any Person any notice on Form A or such other form as may be prescribed under Applicable Law indicating that such Person intends to make or has made a tender offer for or a request or invitation for tenders of, or intends to enter into or has entered into any agreement to exchange securities for, or intends to acquire or has acquired (in the open market or otherwise), any voting security of Medmarc or a Medmarc Insurance Subsidiary, if after the consummation thereof such Person would directly or indirectly be in control of Medmarc or a Medmarc Insurance Subsidiary.

4.7 Financial Statements; Financial Reporting .

(a) Medmarc has made available to PRA correct and complete copies of the audited combined statements of admitted assets, liabilities and capital and surplus–statutory basis of Medmarc Mutual Insurance Company and its wholly-owned subsidiaries as of December 31, 2011, 2010 and 2009, and the related audited combined statements of income and changes in capital and surplus–statutory basis and cash flows–statutory basis for the years ended December 31, 2011, 2010 and 2009, together with reports on all such financial statements by Johnson Lambert & Co., LLP (“ Johnson Lambert ”) (such financial statements are collectively referred to as the “ Combined Financial Statements ”).

(b) The Combined Financial Statements including all notes and schedules thereto, have been prepared in accordance with the accounting practices prescribed or permitted by the by the Insurance Regulator of the jurisdiction of domicile of Medmarc or the applicable Medmarc Subsidiaries throughout the periods involved (except in cases of unaudited financial statements that do not contain all footnotes and year end adjustments which may be required by SAP) and fairly present in all material respects the combined financial position of Medmarc and its Subsidiaries as of the dates thereof and the combined results of their operations and their combined cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments and to any other adjustments described therein).

(c) Medmarc maintains internal controls designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements of Medmarc and the Medmarc Subsidiaries and such internal controls have been considered by Johnson Lambert as a basis for designing their auditing procedures but not for the purpose of expressing an opinion on the effectiveness of Medmarc’s internal controls. Neither the Board of Directors nor audit committee of Medmarc or any Medmarc Subsidiary has been advised by their accountants or consultants of: (x) any significant deficiencies or material weaknesses in the design or operation of the internal controls over financial reporting (as such term is defined in AU Section 325 paragraphs .05 and .06 of the Auditing Standards of the American Institute of Certified Public Accountants) of Medmarc or any Medmarc Subsidiary which could adversely affect

its ability to record, process, summarize and report financial data, or (y) any fraud, whether or not material, that involves management or other employees who have a role in the internal controls over financial reporting of Medmarc or any Medmarc Subsidiary.

(d) As of the date hereof, neither Medmarc nor any of the Medmarc Subsidiaries had any liabilities or obligations of any nature, whether accrued, absolute, contingent or otherwise which would be required to be reflected, reserved for or disclosed in a combined statement of admitted assets, liabilities and changes in capital and surplus of Medmarc and the combined Medmarc Subsidiaries, including the notes thereto, prepared in accordance with SAP except (i) as reflected, reserved for or disclosed in the combined statement of admitted assets, liabilities and changes in capital and surplus of each of Medmarc and the Medmarc Subsidiaries as of December 31, 2011, including the notes thereto, (ii) as incurred since December 31, 2011 in the ordinary course of business consistent with past practice, (iii) as incurred or to be incurred by Medmarc or any Medmarc Subsidiary pursuant to, in connection with, or as a result of, the Plan of Conversion and the other transactions contemplated by this Agreement, or (iv) other than liabilities pursuant to contractual obligations identified in this Agreement or the Medmarc Disclosure Schedule.

(e) Section 4.7(e) of the Medmarc Disclosure Schedule lists, and Medmarc has made available to PRA copies of the documentation creating or governing, all “off-balance sheet arrangements” (as defined in Item 303(a)(4)(ii) of Regulation S-K of the SEC ) effected by Medmarc or any of the Medmarc Subsidiaries since December 31, 2008.

(f) Johnson Lambert is and has been throughout the periods covered by such financial statements a registered public accounting firm (as defined in Section 2(a)(12) of Sarbanes Oxley Act of 2002 (“ SOX ”). Section 4.7(f) of the Medmarc Disclosure Schedule lists all non-audit services (as such term is defined by SOX) performed by Johnson Lambert for Medmarc and each Medmarc Subsidiary for each year commencing after December 31, 2008. Johnson Lambert has conducted their audits of the Combined Financial Statements in accordance with auditing standards generally accepted in the United States as promulgated by the American Institute of Certified Public Accountants.

(g) The books and records of Medmarc and each of the Medmarc Subsidiaries (i) are and have been properly prepared and maintained in form and substance adequate for preparing audited combined financial statements, in accordance with regulatory accounting principles required by SAP and any other applicable legal and accounting requirements, (ii) reflect only actual transactions, and (iii) fairly and accurately reflect all assets and liabilities of Medmarc and each of the Medmarc Subsidiaries and all contracts and other transactions to which Medmarc or any of the Medmarc Subsidiaries is or was a party or by which Medmarc or any of the Medmarc Subsidiaries or any of their respective businesses or assets is or was affected.

4.8 Broker’s Fees . None of Medmarc, the Medmarc Subsidiaries and Persons acting on their respective behalf, has employed any broker or finder or incurred any liability for any broker’s fees or commissions, or investment banker fees or commissions, or finder’s fees in connection with the transactions contemplated by this Agreement, except for the engagement of Sandler O’Neill & Partners, L.P. as Medmarc’s financial advisor or as otherwise set forth in Section 4.8 of the Medmarc

Disclosure Schedule (which sets forth amounts paid or to be paid and names of parties to which such amounts were or will be paid).

4.9 Absence of Certain Changes or Events .

(a) Since December 31, 2011, and except as set forth in Section 4.9(a) of the Medmarc Disclosure Schedule, neither Medmarc nor any of the Medmarc Subsidiaries has (except as required by applicable law): (i) increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any executive officer, employee, or director from the amount thereof in effect as of December 31, 2011, except for changes in benefits in the ordinary course of business, (ii) granted any equity based compensation or severance or termination pay, entered into any contract to make or grant any equity based compensation or severance or termination pay, or paid any bonuses, or (iii) suffered any strike, work stoppage, slowdown, or other labor disturbance.

(b) Since December 31, 2011, and except as set forth in Section 4.9(b) of the Medmarc Disclosure Schedule or as set forth in the Combined Financial Statements, there has not been: (i) any Material Adverse Effect on Medmarc; (ii) any material change in any method of accounting or accounting principles or practice by Medmarc or any Medmarc Subsidiary, except as required by SAP and disclosed in the notes to the unaudited financial statements of Medmarc and the Medmarc Subsidiaries; (iii) any material change in the actuarial, investment, reserving, underwriting or claims administration policies, practices, procedures, methods, assumptions or principles of Medmarc or any Medmarc Subsidiary; (iv) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties or business of Medmarc or any Medmarc Subsidiary; (v) any discharge or cancellation, whether in part or in whole, of any indebtedness owed by Medmarc or any Medmarc Subsidiary to any Person, except reimbursement to employees of ordinary business expenses or other debts arising in the ordinary course of business; (vi) any sale or transfer of any material asset or property, of Medmarc or any Medmarc Subsidiary, except in the ordinary course of business; (vii) any sale, assignment or transfer of any trademarks, trade names, or other intangible assets of Medmarc or any Medmarc Subsidiary; or (viii) any material amendment to or termination of any Medmarc Contract or Permit.

4.10 Legal Proceedings and Judgments .

(a) Except as set forth in Section 4.10(a) of the Medmarc Disclosure Schedule and excluding claims made with respect to insurance policies issued by Medmarc or any Medmarc Insurance Subsidiary for which adequate claims reserves have been established, neither Medmarc nor any Medmarc Subsidiary is a party to any, and there are no pending or, to the Knowledge of Medmarc, threatened, legal, administrative, arbitral or other inquiries, proceedings, claims (whether asserted or unasserted), actions or governmental or regulatory or Self-Regulatory Organization investigations of any nature against Medmarc, any Medmarc Subsidiary, any of their respective businesses or assets, any assets of any other Person which are used in any of the business or operations of Medmarc or any Medmarc Subsidiary, any directors or officers of Medmarc or any Medmarc Subsidiary, in their respective capacities as directors and officers of Medmarc or any Medmarc Subsidiary, or challenging the validity or propriety of the transactions contemplated by this Agreement and neither Medmarc nor any of the Medmarc Subsidiaries is subject to an order, writ, injunction or decree.

(b) As to each matter, if any, described in Section 4.10(a) of the Medmarc Disclosure Schedule, accurate and complete copies of all relevant pleadings, judgments, orders and correspondence have been made available to PRA subject to any applicable confidentiality obligations of Medmarc or any Medmarc Subsidiary.

4.11 Insurance .

(a) Section 4.11(a) of the Medmarc Disclosure Schedule sets forth a list of the policies of general liability, fire and casualty, automobile, directors and officers, errors and omissions, fiduciary, and other forms of insurance (the “ Medmarc Insurance Policies ”) maintained by Medmarc and the Medmarc Subsidiaries. The Medmarc Insurance Policies provide insurance coverage against such risks and losses as Medmarc’s management has reasonably determined to be prudent in accordance with industry practices for the business and assets of Medmarc and the Medmarc Subsidiaries. All Medmarc Insurance Policies are in full force and effect, all premiums due and payable thereon have been paid (other than retroactive or retrospective premium adjustments that are not yet, but may be, required to be paid with respect to any period ending prior to the Closing Date under comprehensive general liability and workers’ compensation insurance policies), and no notice of cancellation or termination has been received with respect to any such policy which has not been replaced on substantially similar terms prior to the date of such cancellation. To the Knowledge of Medmarc, the activities and operations of Medmarc and the Medmarc Subsidiaries have been conducted in a manner so as to conform in all material respects to all applicable provisions of the Medmarc Insurance Policies.

(b) Except as set forth in Section 4.11(b) of the Medmarc Disclosure Schedule, no issuer of the Medmarc Insurance Policies has issued a reservation-of-rights letter, or entered into a nonwaiver agreement, or otherwise denied or limited coverage (in whole or in part), under any of the Medmarc Insurance Policies, and to the Knowledge of Medmarc, no declaratory judgment has been sought by any Person or entered by any court of competent jurisdiction that denies or limits coverage (in whole or in part) under any of the Medmarc Insurance Policies.

4.12 Taxes and Tax Returns .

(a) As used in this Agreement, “ Tax ” or “ Taxes ” means all federal, state, county, local, and foreign income, excise, gross receipts, gross income, profits, franchise, license, ad valorem, profits, gains, capital, sales, transfer, use, payroll, employment, severance, withholding, duties, intangibles, franchise, backup withholding, stamp, occupation, premium, social security (or similar), unemployment, disability, real property, personal property, sales, use, registration, alternative or add on minimum, estimated, and other taxes, charges, levies or like assessments together with all penalties and additions to tax and interest thereon. “ Tax Return ” or “ Tax Returns ” means any and all returns, declarations, claims for refunds, reports, information returns and information statements (including, without limitation, Form 1099, Form W-2 and W-3, Form 5500, and Form 990) with respect to Taxes filed, or required to be filed, by any Person or any Subsidiary of such Person with the Internal Revenue Service (“ IRS ”) or any other Governmental Authority or tax authority or agency, whether domestic or foreign (including consolidated, combined and unitary tax returns).

(b) Medmarc and the Medmarc Subsidiaries have duly filed all Tax Returns required to be filed by them on or prior to the date of this Agreement (all such Tax Returns being accurate and complete in all material respects) and have duly paid or made sufficient provisions for the payment of all Taxes shown thereon as owing on or prior to the date of this Agreement (including, if and to the extent applicable, those due in respect of their properties, income, business, capital stock, premiums, franchises, licenses, sales and payrolls) other than Taxes which are not yet delinquent or are being contested in good faith and have not been finally determined for which adequate reserves have been made on the Combined Financial Statements. Except as disclosed on Section 4.12(b) of the Medmarc Disclosure Schedule, neither Medmarc nor any Medmarc Subsidiary has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax Return or tax assessment or deficiency other than extensions that are automatically granted by the taxing authorities upon filing an application therefor. The unpaid Taxes of Medmarc and the Medmarc Subsidiaries do not exceed the reserve for tax liability set forth on the balance sheets referenced in Section 4.7 of this Agreement as adjusted for the passage of time through the Closing Date in accordance with past custom and practice of Medmarc in filing its returns. No claim has been made since December 31, 2006 by an authority in a jurisdiction where Medmarc or any Medmarc Subsidiary does not file Tax Returns that it is or may be subject to taxation by that jurisdiction.

(c) There is no claim, audit, action, suit, proceeding or investigation now pending or, to the Knowledge of Medmarc, threatened against or with respect to Medmarc or any Medmarc Subsidiary in respect of any material Tax. Medmarc and each Medmarc Subsidiary in connection with amounts paid or owed to any employee, independent contractor, creditor, policyholder, shareholder or other third party have complied with applicable tax withholding in all material respects. Medmarc and each Medmarc Subsidiary have reported such withheld amounts to the appropriate taxing authority and to each such employee, independent contractor, creditor, policyholder, shareholder or other third party as required by Applicable Law.

(d) There are no Tax Liens upon any property or assets of Medmarc or the Medmarc Subsidiaries except Liens for current Taxes not yet due. Neither Medmarc nor any Medmarc Subsidiary has been required to include in income any adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by Medmarc or any Medmarc Subsidiary, and the IRS has not initiated or proposed any such adjustment or change in accounting method. Except as set forth in the financial statements described in Section 4.7(a) of this Agreement, neither Medmarc nor any Medmarc Subsidiary has entered into a transaction which is being accounted for as an installment obligation under Section 453 of the Code. Neither Medmarc nor any Medmarc Subsidiary is a party to or bound by any tax indemnity, tax sharing or tax allocation agreement (other than such agreements as exist by and among themselves). Except as set forth in Section 4.12(d) of the Medmarc Disclosure Schedule, neither Medmarc nor any Medmarc Subsidiary has ever been a member of an affiliated group of corporations within the meaning of Section 1504 of the Code other than an affiliated group in which Medmarc has been the common parent corporation. Except with respect to membership in the affiliated groups disclosed in Section 4.12(d) of the Medmarc Disclosure Schedule, neither Medmarc nor any Medmarc Subsidiary is liable for the Taxes of any person under Section 1.1502‑6 of the Treasury Regulations (or any similar provision of state, local or foreign Tax law) or by contract, as a successor or otherwise.

During the five (5) year period ending on the date of this Agreement, neither Medmarc nor any Medmarc Subsidiary was a distributing corporation or a controlled corporation in a transaction intended to be governed by Section 355 of the Code. Neither Medmarc nor any Medmarc Subsidiary is a party to any joint venture, partnership or other arrangement or contract that could be treated as a partnership for federal income tax purposes. Medmarc’s basis and excess loss account, if any, in each Medmarc Subsidiary is set forth in Section 4.12(d) of the Medmarc Disclosure Schedule.

(e) Except as set forth in Section 4.12(e) of the Medmarc Disclosure Schedule, any amount that is reasonably likely to be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of Medmarc or any of its affiliates who is a “Disqualified Individual” (as such term is defined in Treasury Regulation Section 1.280G‑1) under any employment, severance or termination agreement, other compensation arrangement or Medmarc Employee Plan (as defined in Section 4.13 of this Agreement) currently in effect will not be characterized as an “excess parachute payment” (as such term is defined in Section 280G(b)(1) of the Code).

(f) To the Knowledge of Medmarc, there is no dispute or claim concerning any tax liability of Medmarc or any Medmarc Subsidiary except as disclosed in Section 4.12(f) of the Medmarc Disclosure Schedule. Section 4.12(f) of the Medmarc Disclosure Schedule identifies the last Tax Returns that have been audited by the taxing authority with whom they were filed, and indicates those Tax Returns that currently are the subject of an audit procedure or that Medmarc or any Medmarc Subsidiary has received notice will be subject to an audit procedure. Medmarc has made available to PRA correct and complete copies of all federal income tax returns (including amendments thereto) of, all examination reports of, and statements of deficiencies assessed against or agreed to by, Medmarc or any Medmarc Subsidiary since December 31, 2008.

4.13 Employee Plans; Labor Matters .

(a) Section 4.13(a) of the Medmarc Disclosure Schedule sets forth a true and complete list of all of the Employee Plans (as defined in Section 10.16(a)) for employees of Medmarc and any Medmarc Subsidiary (“ Medmarc Employee Plans ”). Those Medmarc Employee Plans which are non-qualified deferred compensation plans for purposes of Section 409A of the Code are separately identified in Section 4.13(a) of the Medmarc Disclosure Schedule. Except with respect to the Medmarc Employee Plans, neither Medmarc nor any Medmarc Subsidiary sponsors, maintains or contributes to, or has any ongoing obligation or liability whatsoever with respect to: (i) any employee benefit plan as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”), or (ii) any other program, plan, trust agreement or arrangement for any bonus, severance, hospitalization, vacation, sick pay, deferred compensation, pension, profit sharing, post-employment, retirement, payroll savings, stock option, stock purchase, group insurance, self insurance, death benefit, fringe benefit, welfare or any other employee benefit plan or fringe benefit arrangement of any nature whatsoever including those for the benefit of former employees. Medmarc and the Medmarc Subsidiaries have not made or entered into any written or oral agreement, arrangement, commitment, or understanding to create any additional Medmarc Employee Plan or to continue, modify, change, or terminate, in any material respect, any Medmarc Employee Plan.

(b) Medmarc has heretofore delivered or made available to PRA true and complete copies or descriptions of each Medmarc Employee Plan and certain related documents, including where applicable, (i) the plan document and the related trust agreement or annuity contract for such Medmarc Employee Plan; (ii) the summary plan description and material employee communication document for such Medmarc Employee Plan; (iii) the actuarial report for such Medmarc Employee Plan for each of the last two completed plan years; (iv) the most current determination letters from the IRS for such Medmarc Employee Plan; (v) all insurance policies relating thereto and any written materials used by Medmarc to describe employee benefits to employees of Medmarc and the Medmarc Subsidiaries; (vi) the most recent annual return on Form 5500 (including all schedules thereto along with the accompanying auditor’s opinion) and tax return (Form 990) for such Medmarc Employee Plan; (vii) the most current actuarial, valuation, and trustee’s reports for such Medmarc Employee Plan; and (viii) all material communications with any Governmental Authority (including the Department of Labor, the IRS, the Pension Benefit Guaranty Corporation, and the SEC) with respect to such Medmarc Employee Plan. Each such actuarial or valuation report correctly shows the value of the assets of such Medmarc Employee Plan as of the date thereof, the total accrued and vested liabilities, all contributions by Medmarc and the Medmarc Subsidiaries, and the assumptions on which the calculations are based.

(c) Except as set forth in Section 4.13(c) of the Medmarc Disclosure Schedule, each of the Medmarc Employee Plans has been operated and administered in substantial compliance with applicable laws, including, but not limited to, ERISA and the Code. To the Knowledge of Medmarc, there has not been any material violation of the reporting and disclosure provisions of the Code and ERISA. Except as set forth in Section 4.13(c) of the Medmarc Disclosure Schedule, the Employee Plans which are nonqualified deferred compensation plans for purposes of Section 409A of the Code are in compliance with the requirements of Code Section 409A and the regulations promulgated thereunder. There has not been any termination or partial termination (including any termination or partial termination attributable to the transactions contemplated by this Agreement) of such plans. Neither Medmarc nor any Medmarc Subsidiary nor any of their respective ERISA affiliates, nor any predecessor thereof, contributes to, or has within the past six years contributed to, any multiemployer plans, as defined in Section 3(37) of ERISA, or any multiple employer welfare arrangements, as defined in Section 3(40) of ERISA. Neither Medmarc nor any Medmarc Subsidiary nor any of their respective ERISA affiliates, nor any predecessor thereof, sponsors, participates in, or contributes to, or has at any time in the past sponsored, participated in, or contributed to (i) any plan which is subject to the funding standards or requirements described in Section 412 of the Code, or (ii) any plan which is subject to any of the requirements, obligations, and liabilities imposed by Title IV of ERISA.

(d) Each Medmarc Employee Plan which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter or has pending or has time remaining in which to file, an application for such determination from the IRS, and Medmarc is not aware of any reason why any such determination letter should be revoked or not be reissued, and any related trust is exempt from taxation under Section 501(a) of the Code. Medmarc has made available to PRA copies of the most recent Internal Revenue Service determination letters with respect to each such Medmarc Employee Plan (if applicable). To the Knowledge of Medmarc, no prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code,

or breach of fiduciary duty under Title I of ERISA has occurred with respect to any Medmarc Employee Plan or with respect to Medmarc or any Medmarc Subsidiary, and no events have occurred with respect to any Medmarc Employee Plan that could result in payment or assessment by or against Medmarc or any of its Subsidiaries of any material excise taxes under Sections 4972, 4975, 4976, 4977, 4979, 4980B, 4980D, 4980E or 5000 of the Code.

(e) There has been no amendment to, written interpretation or announcement (whether or not written) by Medmarc or any of the Medmarc Subsidiaries relating to, or change in employee participation or coverage under, any Medmarc Employee Plan which would increase materially the expense of maintaining Medmarc Employee Plans above the level of the expense incurred in respect thereof for the fiscal year ended December 31, 2011. No event has occurred or circumstances exist that could result in a material increase in the premium costs of Medmarc Employee Plans that are insured, or a material increase in benefit costs of the Medmarc Employee Plans that are self-insured.

(f) Except as set forth in Section 4.13(f) of the Medmarc Disclosure Schedule, there is no action, suit, investigation, audit or proceeding pending against or involving or, to the Knowledge of Medmarc, threatened against or involving any Medmarc Employee Plan before any court or arbitrator or any state, federal or local governmental body, agency or official, except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Medmarc. Other than claims for benefits submitted by participants or beneficiaries, no claim against, or legal proceeding involving, any Medmarc Employee Plan is pending or, to the Knowledge of Medmarc, threatened.

(g) Except as described in Section 4.13(g) of the Medmarc Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated by the Plan of Conversion and this Agreement will (i) result in any material payment (including severance, unemployment compensation, golden parachute or otherwise) becoming due to any director or employee of Medmarc or any of its Subsidiaries from Medmarc or any of its Subsidiaries under any Medmarc Employee Plan or otherwise; (ii) materially increase any benefits otherwise payable under any Medmarc Employee Plan; (iii) result in any acceleration of the time of payment or vesting of any such benefits to any material extent (in each case under clauses (i), (ii) or (iii) whether or not such payment or benefit would constitute a parachute payment within the meaning of Section 280G of the Code); (iv) constitute an acceleration of the payment or vesting of deferred compensation in violation of the requirements of Section 409A of the Code; or (v) constitute a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code, or breach of fiduciary duty under Title I of ERISA.

(h) Neither Medmarc nor any Medmarc Subsidiary has any direct or indirect material liability or obligation under any Medmarc Employee Plan other than as described in the terms of such Medmarc Employee Plans. There are no circumstances arising out of the sponsorship of any Medmarc Employee Plan which will result in any direct or indirect material liability to Medmarc or any Medmarc Subsidiary, other than liability for contributions, benefit payments, administrative costs and liabilities incurred in accordance with the terms of the Medmarc Employee Plans consistent with past practice.

(i) Medmarc and each Medmarc Subsidiary have made all payments and contributions due from them to each Medmarc Employee Plan. Except as set forth in Section 4.13(i) of the Medmarc Disclosure Schedule, there are no funded benefit obligations under any Medmarc Employee Plan for which contributions have not been made or properly accrued, and there are no unfunded benefit obligations that have not been accounted for by reserves, or otherwise properly footnoted in the Combined Financial Statements.

(j) Each Medmarc Employee Plan which is an “employee pension benefit plan” within the meaning of Section 3(2) of ERISA that is not qualified under Section 401(a) or 403(a) of the Code is exempt from Parts 2, 3, and 4 of Title I of ERISA as an unfunded plan that is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, pursuant to Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. Except as set forth in Section 4.13(j) of the Medmarc Disclosure Schedule, no assets of Medmarc or any Medmarc Subsidiary are allocated to or held in a “rabbi trust” or similar funding vehicle.

(k) Each Medmarc Employee Plan that is a “group health plan” (as defined in Section 607(1) of ERISA or Section 5001(b)(1) of the Code) has been operated at all times in compliance in all material respects with the provisions of Section 4980B of the Code and Part 6 of Subtitle B of Title I of ERISA (“ COBRA ”), with the provisions of the Code and ERISA enacted by the Health Insurance Portability and Accountability Act of 1996 (“ HIPAA ”), and with the provisions of any applicable similar state law.

(l) Except as set forth in Section 4.13(l) of the Medmarc Disclosure Schedule, neither Medmarc nor any Medmarc Subsidiary is obligated to provide welfare benefits to current or former employees beyond their retirement or other termination of service (other than coverage mandated by COBRA).

(m) Neither Medmarc nor any Medmarc Subsidiary has the obligation to maintain, establish, sponsor, participate in, or contribute to any Employee Plan for the benefit of any employee, former employee, director or consultant of either Medmarc or any Medmarc Subsidiary or any ERISA Affiliate who performs services outside of the United States.

4.14 Employees .

(a) Medmarc has made available to PRA a true and correct list of the names of the employees of Medmarc and the Medmarc Subsidiaries, their birth dates, hire dates, compensation rates, name of employer and capacity in which employed, and accrued vacation and sick leave, if any, all as of May 31, 2012. Except as limited by any employment agreements and severance agreements listed on Section 4.14(a) of the Medmarc Disclosure Schedule, and except for any limitations of general application which may be imposed under Applicable Laws, Medmarc and the Medmarc Subsidiaries have the right to terminate the employment of any of their respective employees at will and without payment to such employees.

(b) Medmarc and the Medmarc Subsidiaries are in compliance, in all material respects, with all Applicable Laws regarding labor and employment and the compensation therefor, labor and employment matters, discrimination in employment, terms and conditions of employment,

wages, hours and occupational safety and health, and employment practices, whether state or federal (including, without limitation, to the extent applicable, wage and hour laws; workplace safety laws; workers’ compensation laws; equal employment opportunity laws; equal pay laws; civil rights laws; the Occupational Safety and Health Act of 1970, as amended; the Equal Employment Opportunity Act, as amended; the Americans With Disabilities Act, 42 U.S.C. § 12101 et seq., as amended; the Fair Labor Standards Act, 29 U.S.C. § 201 et seq., as amended; the Equal Pay Act, 29 U.S.C. § 206d, as amended, the Portal-to-Portal Pay Act of 1947, 29 U.S.C. § 255 et seq., as amended; Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e, as amended and 42 U.S.C. § 1981, as amended; the Rehabilitation Act of 1973, as amended; the Vietnam-Era Veterans’ Readjustment Assistance Act of 1974, as amended; the Immigration Reform and Control Act, 8 U.S.C. § 1324A et seq., as amended; the Employee Polygraph Protection Act of 1988, as amended; the Veterans Re-employment Act - Handicap Bias, 38 U.S.C. § 2027 et seq., as amended; the Civil Rights Act of 1991, as amended; the Family and Medical Leave Act of 1993, as amended; the Religious Freedom Restoration Act of 1993, as amended; and the Age Discrimination and Employment Act of 1967, as amended); the Lilly Ledbetter Fair Pay Act of 2009. No action or investigation has been instituted or, to the Knowledge of Medmarc, is threatened to be conducted by any state or federal agency regarding any potential violation by Medmarc or any Medmarc Subsidiary of any Applicable Laws regarding labor and employment or the compensation therefor (including, without limitation, any of the aforementioned statutes) during the past five (5) years.

(c) Neither Medmarc nor any Medmarc Subsidiary has ever been a party to or bound by any union or collective bargaining contract, nor is any such contract currently in effect or being negotiated by Medmarc or any Medmarc Subsidiary. Medmarc does not know of any activities or proceedings of any labor union to organize any employees of Medmarc or any Medmarc Subsidiary. Since December 31, 2011, no executive officer of Medmarc or any Medmarc Subsidiary has indicated to the Chief Executive Officer of Medmarc an intention to terminate his or her employment.

(d) Medmarc and each Medmarc Subsidiary have complied in all material respects with all applicable notice provisions of and have no material obligations under COBRA with respect to any former employees or qualifying beneficiaries thereunder. Except as set forth in Section 4.14(d) of the Medmarc Disclosure Schedule, there is no action, claim, suit or proceeding pending or, to the Knowledge of Medmarc, threatened, on the part of any employee, independent contractor or applicant for employment, including any such action, claim, suit or proceeding based on allegations of wrongful termination or discrimination on the basis of age, race, religion, sex, sexual preference, or mental or physical handicap or disability. Except as set forth in Section 4.14(d) of the Medmarc Disclosure Schedule, all sums due from Medmarc or any Medmarc Subsidiary for employee compensation (including, without limitation, wages, salaries, bonuses, relocation benefits, stock options and other incentives) have been paid, accrued or otherwise provided for, and all employer contributions for employee benefits, including deferred compensation obligations, and all benefits under any Medmarc Employee Plan have been duly and adequately paid, accrued or provided for in accordance with plan documents. To the Knowledge of Medmarc, no person treated as an independent contractor by Medmarc or any Medmarc Subsidiary is an employee as defined in Section 3401(c) of the Code, nor has any employee been otherwise improperly classified, as

exempt, nonexempt or otherwise, for purposes of federal or state income tax withholding or overtime laws, rules, or regulations.

(e) Since December 31, 2011, neither Medmarc nor any Medmarc Subsidiary has effectuated (i) a “plant closing” (as defined in the Worker Adjustment and Retraining Notification Act (the “ WARN Act ”)) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of Medmarc or any Medmarc Subsidiary; (ii) a “mass layoff” (as defined in the WARN Act); or (iii) such other transaction, layoff, reduction in force or employment terminations sufficient in number to trigger application of any similar foreign, state or local law.

4.15 Compliance with Applicable Law .

(a) Medmarc and each of the Medmarc Subsidiaries (i) hold all licenses, franchises, permits and authorizations from all Governmental Authorities necessary for the lawful conduct of their respective businesses in the manner and the jurisdictions where such business is being conducted (collectively, the “Permits” ), and (ii) to the Knowledge of Medmarc, each of them has conducted its respective business in all respects in compliance with all terms and conditions of the Permits, except for any failure to have such Permits or the failure to so comply that does not have a Material Adverse Effect on Medmarc.

(b) Neither Medmarc nor any Medmarc Subsidiary is subject to any cease‑and‑desist or other order issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been a recipient of any supervisory letter from, or has adopted any board resolutions at the request of any Insurance Regulator that is currently in effect and that: (i) limits the ability of Medmarc or any Medmarc Subsidiary to conduct any line of business, (ii) requires any investments of Medmarc or any Medmarc Subsidiary to be treated as non-admitted assets, (iii) requires divestiture of any investments of Medmarc or any Medmarc Subsidiary, (iv) in any manner imposes any requirements on Medmarc or any Medmarc Subsidiary in respect of risk based capital requirements that add to or otherwise modify the risk based capital requirements imposed under the Insurance Laws, (v) in any manner relate to the ability of Medmarc or any Medmarc Subsidiary to pay or declare dividends or distributions, or (vi) restricts in any material respect the conduct of the business, credit policies or Medmarc’s management or any Medmarc Subsidiary (each, whether or not set forth in the Medmarc Disclosure Schedule, a “ Medmarc Regulatory Agreement ”), nor has Medmarc or any of the Medmarc Subsidiaries been advised by any Insurance Regulator that it is considering issuing or requesting any such Medmarc Regulatory Agreement. Neither Medmarc nor any Medmarc Subsidiary, directly or indirectly, engages in any activity prohibited by Applicable Law.

(c) Except as set forth in Section 4.15(c) of the Medmarc Disclosure Schedule, there is no pending or, to the Knowledge of Medmarc, threatened charge by any Governmental Authority that Medmarc or any Medmarc Subsidiary has violated any applicable laws, rules or regulations (including any Insurance Laws), nor any pending or, to the Knowledge of Medmarc, threatened investigation by any Governmental Authority with respect to possible violations of any applicable laws, rules or regulations (including any Insurance Laws).

(d) Except as set forth in Section 4.15(d) of the Medmarc Disclosure Schedule, there are no material contracts (other than contracts relating to employment), real estate leases, loans, guarantees or other arrangements or transactions of any nature between Medmarc or any Medmarc Subsidiary, on the one hand, and any of their respective officers, directors, or other Affiliates, on the other hand. Medmarc has not extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof) of Medmarc or any Medmarc Subsidiary that is now or will be outstanding on the Closing, except for advancement of expenses incurred in the performance of business for Medmarc consistent with the expense policy of Medmarc.

(e) None of Medmarc, the Medmarc Subsidiaries, and, to the Knowledge of Medmarc, any of their respective current or former officers or directors or current or former employees, agents or representatives have: (i) used any corporate funds for any illegal contributions, gifts, entertainment or other unlawful expenses relating to political activity, (ii) used any corporate funds for any direct or indirect unlawful payments to any foreign or domestic government officials or employees, (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, (iv) established or maintained any unlawful or unrecorded fund of corporate monies or other assets, (v) made any false or fictitious entries on the books and records of Medmarc or any Medmarc Subsidiary, (vi) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any nature, or (vi) made any material favor or gift which is not deductible for federal income tax purposes.

4.16 Certain Contracts .

(a) Section 4.16(a) of the Medmarc Disclosure Schedule sets forth a complete list of the following described contracts or agreements by which either Medmarc or any Medmarc Subsidiary is bound in any respect:

(i) contracts from or to third parties for the furnishing of services to, or receipt of services by, Medmarc or any Medmarc Subsidiary (including without limitation, legal and accounting services, and risk management services but excluding the agency and distribution agreements described in Section 4.16(a)(vi) of the Medmarc Disclosure Schedule) involving more than $50,000 or that has a non-cancelable term in excess of one year (as to the latter, which is still in effect);

(ii) investment advisory contracts to which Medmarc or any Medmarc Subsidiary is a party;

(iii) except for the Medmarc Real Property Leases disclosed in Section 4.19(a) of the Medmarc Disclosure Schedule, contracts or agreements for the acquisition by purchase, lease or otherwise, or for the disposition by sale, lease or otherwise, of real property (including but not limited to any listing or similar agreement), equipment, goods, materials, research and development, supplies, studies or capital assets, in any case involving more than $50,000, provided , however , that if there are multiple agreements or service orders with one party or any affiliate of such party exceeding $100,000 in the aggregate, such information shall be included in Section 4.16(a) of the Medmarc Disclosure Schedule;

(iv) contracts or agreements for the joint performance of work or services, and all other joint venture, partnership or other similar agreements, in any case involving more than $25,000;

(v) any notes, mortgages, deeds of trust, loan agreements, security agreements, guarantees, debentures, indentures, credit agreements, warehousing agreements, repurchase agreements and other evidences of indebtedness, other than endorsements for collection or deposit in the ordinary course of business, in any case involving more than $25,000;

(vi) any agency agreements, managing general agent agreements, reinsurance intermediary agreements and other distribution agreements, and material agreements relating to the sale or servicing of insurance products offered by Medmarc and the Medmarc Insurance Subsidiaries, in any case involving more than $25,000;

(vii) powers of attorney or similar authorizations to any third party;

(viii) licenses or sublicenses, excluding off-the-shelf software license agreements, royalty agreements, and any other contract or agreement relating to technical assistance or Intellectual Property (as defined in Section 4.18 of this Agreement);

(ix) all letters of credit and other security devices held or maintained for the benefit of Medmarc or any Medmarc Subsidiary;

(x) contracts or agreements containing covenants limiting the freedom of either Medmarc or a Medmarc Subsidiary to compete in any line of business or with respect to any particular product or service or with any Person; and

(xi) any material contract or agreement, not of the type covered by or excluded from any of the other items of this Section 4.16(a) which by its terms is either (A) not to be completely performed by either Medmarc or an Medmarc Subsidiary within 30 days of the date hereof or (B) is not to terminate, or is not terminable, without penalty to the Medmarc or an Medmarc Subsidiary prior to thirty (30) days from the date hereof, in any case involving more than $25,000;

(b) Medmarc has made available to PRA written summaries of all oral contracts and agreements referred to in Section 4.16(a) of the Medmarc Disclosure Schedule and has made available to PRA true and correct copies of all such written contracts or agreements. As used in this Agreement, the terms “ contract ” and “ agreement ” each mean and include every binding contract, agreement, commitment, understanding, or promise, whether written or oral.

(c) Each contract or agreement (whether written or oral) of the type described in Section 4.16(a) of this Agreement, whether or not set forth in the Medmarc Disclosure Schedule, is referred to in this Agreement as a “ Medmarc Contract ”, and neither Medmarc nor any Medmarc Subsidiary knows of, or has received written notice of, any material violation of any Medmarc Contract by any of the other parties thereto. Each Medmarc Contract is in full force and effect

(except for contracts that have expired pursuant to the terms thereof) and is legally valid, binding and enforceable in accordance with its terms (except as may be limited by bankruptcy, fraudulent conveyance, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies). There are no material defaults by Medmarc or any Medmarc Subsidiary, or, to the Knowledge of Medmarc, any other party, under such Medmarc Contract. Neither Medmarc nor any Medmarc Subsidiary has received written notice of any default, offset, counterclaim or defense under such Medmarc Contract. No condition or event has occurred that with the passage of time or the giving of notice or both would constitute a default or breach by Medmarc or any Medmarc Subsidiary, or, to the Knowledge of Medmarc, any other party under the terms of such Medmarc Contract. All security deposits, reserve funds, and other sums and charges that have become due and payable under such Medmarc Contract have been paid in full. No party has repudiated any provision of such Medmarc Contract.

(d) (i) Schedule 4.16(d)(i) of the Medmarc Disclosure Schedule sets forth a list all of the written agreements and a description of any material unwritten agreements or arrangements that currently exist between Medmarc and The Hartford and their respective Subsidiaries (the “ Hartford Agreements ”). Medmarc has provided PRA true and correct copies of all of the written Hartford Agreements. Each of the Hartford Agreements is currently in full force and effect. Neither Medmarc nor any Medmarc Subsidiary has received written notice of default, offset, counterclaim or defense under any of the Hartford Agreements. No condition or event has occurred that with the passage of time or the giving of notice or both would constitute a default or breach by Medmarc or any Medmarc Subsidiary, or to the Knowledge of Medmarc, any other party under the terms of the Hartford Agreements. Neither Medmarc nor any Medmarc Subsidiary has received any written or oral notice of termination or nonrenewal with respect to the Hartford Agreements and neither Medmarc nor any Medmarc Subsidiary has taken or will take any action that would reasonably be expected to result in the termination or nonrenewal of any of the Hartford Agreements.

(ii) Schedule 4.16(d)(ii) of the Medmarc Disclosure Schedule sets forth the amount of in force direct premiums written with respect to the product liability policies issued by Medmarc or a Medmarc Subsidiary as of March 31, 2012, which schedule distinguishes between Hartford-referred business and business that originates directly from broker submission. Except for rights of procuring agents and brokers, Medmarc and the Medmarc Subsidiaries collectively own all of the expiration or renewal rights on policies written Medmarc or a Medmarc Subsidiary free and clear of any claims of The Hartford and its Subsidiaries. Medmarc and the Medmarc Subsidiaries have the right (i) to solicit its policyholders and/or their procuring brokers for the renewal of insurance products written by Medmarc or a Medmarc Subsidiary under any of the Hartford Agreements; and (ii) to solicit the customers on the customer lists developed under or pursuant to the Hartford Agreements for the sale of insurance products written by Medmarc and the Medmarc Subsidiaries.

4.17 Investments and Interest Rate Risk Management Instruments .

(a) Except as set forth in Section 4.17(a) of the Medmarc Disclosure Schedule, Medmarc and each Medmarc Subsidiary are the record or beneficial owners of all of its investment

securities (except securities sold under repurchase agreements or held in any fiduciary or agency capacity), free and clear of any Lien. Such securities are valued on the books of Medmarc in accordance with SAP. Section 4.17(a) of the Medmarc Disclosure Schedule sets forth a list of the securities which are in default in the payment of principal, interest or dividends or which Medmarc has recorded as impaired to any extent. Medmarc has provided to PRA a copy of the investment policies of Medmarc and the Medmarc Subsidiaries as of December 31, 2011. There has been no material change in investment policy of Medmarc and the Medmarc Subsidiaries or in the composition of the investments of Medmarc and the Medmarc Subsidiaries since December 31, 2011.

(b) All interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements entered into for the account of Medmarc or any of the Medmarc Subsidiaries were entered into in the ordinary course of business and, to the best Knowledge of Medmarc, in accordance with Applicable Laws and with counterparties reasonably determined by Medmarc's management to be financially responsible at the time. All of such interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements are (assuming due power and authority of, and due execution and delivery by, the other parties thereto) legal, valid and binding obligations of Medmarc or any of the Medmarc Subsidiaries enforceable in accordance with their terms (except as may be limited by bankruptcy, fraudulent conveyance, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies), and are in full force and effect. Medmarc and each Medmarc Subsidiary have duly performed in all material respects all of their material obligations thereunder to the extent that such obligations to perform have accrued; and, to the Knowledge of Medmarc, there are no material breaches, violations or defaults or allegations or assertions of such by any party thereunder.

4.18 Intellectual Property .

(a) Medmarc or a Medmarc Subsidiary owns or has the right to use, pursuant to license, sublicense, agreement or permission, all Intellectual Property necessary for the operation of the businesses of Medmarc and the Medmarc Subsidiaries as presently conducted except for such Intellectual Property, the absence of which is not reasonably likely to have a Material Adverse Effect on Medmarc. As used in this Agreement, “ Intellectual Property ” means all trademarks, service marks, logos, domains and domain names, trade names and corporate names and registrations and applications for registration thereof, copyrights and registrations and applications for registration thereof, computer software (including computer software used in insurance operations or for accounting operations), data and documentation, trade secrets and confidential business information (including financial, marketing and business data, pricing and cost information, business and marketing plans, and customer and supplier lists and information), other proprietary rights, and copies and tangible embodiments thereof (in whatever form or medium). Section 4.18(a) of the Medmarc Disclosure Schedule lists all Intellectual Property owned by Medmarc and each Medmarc Subsidiary and used in their respective businesses.

(b) To the Knowledge of Medmarc, neither the businesses of Medmarc nor any Medmarc Subsidiary infringes, violates or misappropriates any Intellectual Property of third parties.

Since December 31, 2011, none of Medmarc, the Medmarc Subsidiaries, and any of the directors, officers or employees with responsibility for intellectual property matters of Medmarc or any Medmarc Subsidiary in their respective capacities as directors, officers or employees has received any charge, complaint, claim or notice alleging any such infringement, misappropriation or violation. To the Knowledge of Medmarc, no third party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of Medmarc or any Medmarc Subsidiary.

(c) Section 4.18(c) of the Medmarc Disclosure Schedule identifies each item of Intellectual Property that any third party owns and that Medmarc or any Medmarc Subsidiary uses, pursuant to a written license, sublicense, agreement, or permission; provided that Section 4.18(c) of the Medmarc Disclosure Schedule omits Intellectual Property that constitutes commercially available computer software (and associated documentation). Medmarc has made correct and complete copies of all such licenses, sublicenses, agreements and permissions (as amended to date) available to PRA. With respect to each such item of such Intellectual Property: (i) the license, sublicense, agreement or permission covering the item is legal, valid, binding and enforceable against Medmarc or the applicable Medmarc Subsidiary and, to the Knowledge of Medmarc, against the third party thereto, and in full force and effect; (ii) except as set forth in Section 4.5(b)(ii)(y) of the Medmarc Disclosure Schedule, the license, sublicense, agreement or permission will continue to be legal, valid, binding and enforceable against Medmarc or the applicable Medmarc Subsidiary and, to the Knowledge of Medmarc, the third party thereto, and in full force and effect on identical terms on and after the Effective Time; (iii) to the Knowledge of Medmarc, no party to the license, sublicense, agreement or permission is in breach or default, and no event of default has occurred which with notice or lapse of time, or both, would constitute a breach or default or permit termination, modification or acceleration thereunder; (iv) to the Knowledge of Medmarc, no party to the license, sublicense, agreement or permission has repudiated any provision thereof; and (v) neither Medmarc nor any Medmarc Subsidiary has granted any sublicense or similar right with respect to the license, sublicense, agreement or permission.

4.19 Real Property; Environmental Liability .

(a) Neither Medmarc nor any Medmarc Subsidiary owns any right, title or interest in any real property. Section 4.19(a) of the Medmarc Disclosure Schedule sets forth a complete and accurate list and general description of all material leases for real property (“ Medmarc Real Property Leases ”) to which Medmarc or any Medmarc Subsidiary is a party or by which any of them are bound. Medmarc or any Medmarc Subsidiary has a valid leasehold interest in each Medmarc Real Property Leases, in each case free and clear of all Liens except for (i) rights of lessors, co-lessees or sublessees that are reflected in each Medmarc Real Property Lease; (ii) current taxes not yet due and payable; and (iii) such nonmonetary imperfections of title and encumbrances, if any, as do not materially detract from the value of or materially interfere with the present use of the subject property. To the Knowledge of Medmarc, the activities of Medmarc and the Medmarc Subsidiaries with respect to all Medmarc Real Property Leases used in connection with their operations are in all material respects permitted and authorized by applicable zoning laws, ordinances and regulations.

(b) Medmarc and the Medmarc Subsidiaries enjoy peaceful and undisturbed possession under all Medmarc Real Property Leases. Medmarc has made available to PRA complete and correct copies of all of the Medmarc Real Property Leases. Each Medmarc Real Property Lease is (assuming due power and authority of, and due execution by, the other party) in full force and effect and is legally valid, binding and enforceable against Medmarc or the applicable Medmarc Subsidiary and, to the Knowledge of Medmarc, the third party thereto in accordance with its terms (except as may be limited by bankruptcy, fraudulent conveyance, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies). There are no monetary defaults and no material nonmonetary defaults by Medmarc or any Medmarc Subsidiary, or, to the Knowledge of Medmarc, any other party, under any Medmarc Real Property Lease. Neither Medmarc nor any Medmarc Subsidiary has received written or, to the Knowledge of Medmarc, oral notice of any default, offset, counterclaim or defense under any Medmarc Real Property Lease. Except as set forth in Section 4.5(b)(ii)(y) of the Medmarc Disclosure Schedule, no condition or event has occurred which with the passage of time or the giving of notice or both would constitute a default or breach by Medmarc or any Medmarc Subsidiary, or, to the Knowledge of Medmarc, any other party, under the terms of any Medmarc Real Property Lease. To the Knowledge of Medmarc, there are no purchase contracts, options or other agreements of any kind whereby any Person has acquired or will have any basis to assert any right, title or interest in, or right to the possession, use, enjoyment or proceeds of, any part or all of the interests in the real property subject to the Medmarc Real Property Leases.

(c) Medmarc and the Medmarc Subsidiaries are and have been in compliance with all applicable Environmental Laws and all Environmental Permits, except for instances of non-compliance which would not have a Material Adverse Effect on Medmarc. There are no legal, administrative, arbitral or other proceedings pending, no claims, actions, or causes of action filed or asserted in writing, or, to the Knowledge of Medmarc, private environmental investigations or remediation activities or governmental investigations of any nature ongoing or threatened seeking to impose on Medmarc or any Medmarc Subsidiary, or that could reasonably be expected to result in the imposition on Medmarc or any Medmarc Subsidiary of, any liability or obligation arising under any Environmental Law which would have a Material Adverse Effect on Medmarc. To the Knowledge of Medmarc, there is no reasonable basis for any such proceeding, claim, action, investigation or remediation activity. Neither Medmarc nor any Medmarc Subsidiary is subject to any agreement, order, judgment, decree, or binding agreement by or with any Governmental Authority or private Person imposing any liability or obligation under any Environmental Law that would have a Material Adverse Effect on Medmarc. For purposes of this Section 4.19, the terms “Medmarc” and “Medmarc Subsidiaries” include any Person that is, in whole or in part, a predecessor of Medmarc or any of its Subsidiaries.

4.20 Personal Property .

(a) None of the personal property owned by Medmarc or any Medmarc Subsidiary is subject to any Lien except Permitted Liens.

(b) Section 4.20(b) of the Medmarc Disclosure Schedule lists each personal property lease to which Medmarc or any Medmarc Subsidiary is a party that is not cancelable upon

ninety (90) days notice without penalty and has monthly rent that exceeds $1,500 (collectively, the “ Medmarc Personal Property Leases ”). Medmarc has made available to PRA complete and correct copies of all of the Medmarc Personal Property Leases. Each Medmarc Personal Property Leases is in full force and effect and is (assuming due power and authority of, and due execution by, the other party) legally valid, binding and enforceable against Medmarc or the applicable Medmarc Subsidiary and, to the Knowledge of Medmarc, against the third party thereto, in accordance with its terms (except as may be limited by bankruptcy, fraudulent conveyance, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies). There are no material defaults by Medmarc or any Medmarc Subsidiary, or, to the Knowledge of Medmarc, any other party, under any Medmarc Personal Property Lease. Neither Medmarc nor any Medmarc Subsidiary has received written or, to the Knowledge of Medmarc, oral notice of any material default, offset, counterclaim or defense under any Medmarc Personal Property Lease. No condition or event has occurred which with the passage of time or the giving of notice or both would constitute a material default or breach by Medmarc or any Medmarc Subsidiary, or, to the Knowledge of Medmarc, any other party under of the terms of any Medmarc Personal Property Lease. To the Knowledge of Medmarc, there are no purchase contracts, options or other agreements of any kind whereby any Person has acquired or will have any basis to assert any right, title or interest in, or right to the possession, use, enjoyment or proceeds of, any part or all of the interests in the real property subject to the Medmarc Personal Property Leases.

4.21 Insurance Matters .

(a) Except as set forth in Section 4.21(a) of the Medmarc Disclosure Schedule, all policies, binders, slips, certificates and other agreements of insurance in effect as of the date hereof (including all applications, endorsements, supplements, endorsements, riders and ancillary agreements in connection therewith) issued by Medmarc and the Medmarc Insurance Subsidiaries, and any and all marketing materials, agents agreements, brokers agreements, service contracts, and managing general agents agreements to which Medmarc or any Medmarc Insurance Subsidiary is a party, are, to the extent required under Applicable Law, on forms approved by the Insurance Regulators or have been filed with and not objected to by such Insurance Regulators within the period provided for objection subject to such exceptions that, individually or in the aggregate, can be cured and that have not had and would not reasonably be expected to have, a Material Adverse Effect on Medmarc, and all of such forms comply with the Insurance Laws in all material respects. As to premium rates established by Medmarc or any Medmarc Insurance Subsidiary which are required to be filed with or approved by any Insurance Regulators, such rates have been so filed or approved and the premiums charged conform thereto. Section 4.21(a) of the Medmarc Disclosure Schedule sets forth all increases in premium rates for insurance submitted by Medmarc and the Medmarc Insurance Subsidiaries which have been disapproved by any Insurance Regulators since December 31, 2008. Section 4.21(a) of the Medmarc Disclosure Schedule lists all written correspondence or written communications from any Insurance Regulator received by Medmarc or any Medmarc Insurance Subsidiary after December 31, 2008, that requests or suggests that its premium rates, if applicable, for products liability or professional liability insurance should be reduced below the current approved premium levels.

(b) Except as set forth in Section 4.21(b) of the Medmarc Disclosure Schedule, neither Medmarc nor any Medmarc Insurance Subsidiary has issued any participating policies or any retrospectively rated policies of insurance. Neither Medmarc nor any Medmarc Insurance Subsidiary has declared any policyholder dividend which has not been paid prior to the date of this Agreement.

(c) All reinsurance treaties or agreements, including retrocessional agreements, to which Medmarc or any Medmarc Insurance Subsidiary is a party and under which Medmarc or any Medmarc Insurance Subsidiary has any existing rights, obligations or liabilities are listed on Section 4.21(c) of the Disclosure Schedule (the “ Medmarc Reinsurance Treaties ”). Medmarc has made available to PRA correct and complete copies of all of such Medmarc Reinsurance Treaties and all such Medmarc Reinsurance Treaties are in full force and effect, and the consummation of the transactions contemplated by this Agreement will not result in the termination of any Medmarc Reinsurance Treaties solely as a result of the consummation of the transactions contemplated hereby. The Medmarc Reserves (as defined in Section 4.21(d) of this Agreement) at each of December 31, 2011 and December 31, 2010, as reflected in the Medmarc SAP Statements, are stated net of reinsurance ceded amounts. The Medmarc SAP Statements accurately reflect as of and for the dates indicated therein the extent to which, pursuant to Insurance Laws, Medmarc is entitled to take credit for reinsurance under the Medmarc Reinsurance Treaties. To the Knowledge of Medmarc, all reinsurance recoverable amounts reflected in said balance sheets are collectible, and Medmarc is unaware of any material adverse change in the financial condition of its reinsurers that might raise concern regarding their ability to honor their reinsurance commitments. No party to any of the Medmarc Reinsurance Treaties has given written notice to Medmarc or any Medmarc Insurance Subsidiary that such party intends to terminate or cancel any of the Medmarc Reinsurance Treaties as a result of or following consummation of the Plan of Conversion and the transactions contemplated herein. Assuming due power and authority of, and due execution by, the other party, each Medmarc Reinsurance Treaty is valid and binding on Medmarc and each applicable Medmarc Insurance Subsidiary and, to the Knowledge of Medmarc, on the other parties thereto, and none of Medmarc, any Medmarc Insurance Subsidiary, and, to the Knowledge of Medmarc, any other party thereto, is in default in any material respect with respect to any such Medmarc Reinsurance Treaty. No Medmarc Reinsurance Treaty contains any provision providing that the other party thereto may terminate the same solely by reason of the transactions contemplated by this Agreement, and no party to a Medmarc Reinsurance Treaty has issued a reservation of rights notice or otherwise denied or limited coverage (in whole or in part) under any Medmarc Reinsurance Treaty. Since December 31, 2011 no Medmarc Reinsurance Treaty has been canceled and there has not been any change in the retention level under any of such Medmarc Reinsurance Treaties.

(d) The reserves for the losses and loss adjustment expenses of Medmarc and each of the Medmarc Insurance Subsidiaries ( the “Medmarc Reserves” ) reflected in the Medmarc SAP Statements as of and for the year ended December 31, 2011 (the “ 2011 Statements ”) were determined in accordance with generally accepted actuarial methods and standards, consistently applied except as set forth therein. The insurance reserving practices and policies of Medmarc and the Medmarc Insurance Subsidiaries have not changed, in any material respect, since December 31, 2011 and the results of the application of such practices and policies are reflected in the 2011 Statements. All reserves of Medmarc and the Medmarc Insurance Subsidiaries set forth in the 2011

Statements were fairly stated in accordance with sound actuarial principles consistently applied and met the requirements of the Insurance Laws of the applicable Insurance Regulator as of the dates indicated therein. To the Knowledge of Medmarc, since December 31, 2011, there has not been any event or occurrence affecting the reserves of Medmarc and the Medmarc Insurance Subsidiaries that has resulted, or would be reasonably likely to result, in a Material Adverse Effect on Medmarc. Subject to confidentiality objections of Medmarc, Medmarc has made available to PRA copies of all internally prepared work papers used as the basis for establishing the Medmarc Reserves. Except for regular periodic or special assessments based on developments that are publicly known within the insurance industry generally or the medical or legal professional liability and products liability insurance industry, to the Knowledge of Medmarc, no claim or assessment is pending or threatened against Medmarc or any Medmarc Insurance Subsidiary which is peculiar or unique to Medmarc or such Medmarc Insurance Subsidiary by any state insurance guaranty association in connection with such association’s fund relating to insolvent insurers.

(e) Section 4.21(e) of the Medmarc Disclosure Schedule lists each actuary, independent or otherwise, that has reviewed, on behalf of Medmarc or any Medmarc Insurance Subsidiary, the reserves for losses and loss adjustment expenses of Medmarc or any Medmarc Insurance Subsidiary, and their premium rates for liability insurance in each of the years commencing after December 31, 2009 (collectively the “ Medmarc Actuaries ” and separately a “ Medmarc Actuary ”). Section 4.21(e) of the Medmarc Disclosure Schedule lists each and every actuarial report, and all attachments, supplements, addenda and modifications thereto prepared for or on behalf of Medmarc or any Medmarc Insurance Subsidiary by the Medmarc Actuaries, or delivered by the Medmarc Actuaries to Medmarc or any Medmarc Insurance Subsidiary, since December 31, 2009, in which a Medmarc Actuary has (i) either expressed an opinion on the adequacy of reserves for losses and loss adjustment expenses or made recommendations as to either the amount of reserves for losses and loss adjustment expenses that should be maintained by Medmarc or any Medmarc Insurance Subsidiary, or (ii) expressed an opinion as to the adequacy of such premiums or made a recommendation as to the premiums that should be charged by Medmarc or any Medmarc Insurance Subsidiary for liability insurance (collectively, the “ Medmarc Actuarial Analyses ”). To the Knowledge of Medmarc, the information and data furnished by Medmarc to the Medmarc Actuaries in connection with the Medmarc Actuarial Analyses were accurate in all material respects. To the Knowledge of Medmarc, each Medmarc Actuarial Analysis was based upon an accurate inventory of policies in force for Medmarc and the Medmarc Insurance Subsidiaries, as the case may be, at the relevant time of preparation, was prepared using appropriate modeling procedures accurately applied and in conformity with generally accepted actuarial principles consistently applied, and the projections contained therein were properly prepared in accordance with the assumptions stated therein. Medmarc has made available to PRA a true and correct copy of each of the Medmarc Actuarial Analyses.

4.22 No Investment Company . Neither Medmarc nor any Medmarc 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.

4.23 Accuracy of Information Supplied . None of the representations and warranties made by Medmarc in this Agreement, taken together and with the Medmarc Disclosure Schedule, contains

an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements set forth herein and therein, in light of the circumstances in which such statements were made, not misleading. The copies of documents attached to the Medmarc Disclosure Schedule or otherwise made available to PRA by Medmarc in connection with the transactions contemplated hereby are accurate and complete in all respects.

ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PRA

Except as disclosed by PRA and PRA Professional to Medmarc in accordance with Section 7.7 of this Agreement, PRA and PRA Professional hereby represent and warrant to Medmarc, as of the date hereof or such other date as specified, as follows:

5.1 Corporate Organization . Each of PRA and PRA Professional is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as now being conducted.

5.2 Authority; No Violation; Consents and Approvals .

(c) PRA has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly and validly approved by the Board of Directors of PRA, and no other corporate proceedings on the part of PRA (including any approval of the stockholders of PRA) are necessary to approve this Agreement and to consummate the transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by PRA and (assuming due authorization, execution and delivery by Medmarc and the receipt of all Requisite Regulatory Approvals) constitutes a valid and binding obligation of PRA, subject to applicable bankruptcy, fraudulent conveyance, insolvency and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity.

(d) Neither the execution and delivery of this Agreement by PRA nor the consummation by PRA of the transactions contemplated by this Agreement, nor compliance by PRA with any of the terms or provisions of this Agreement, will (i) violate any provision of the certificate of incorporation or bylaws of PRA or (ii) assuming that all Requisite Regulatory Approvals and all of the consents and approvals referred to in Section 5.2(c) of this Agreement are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to PRA or any of its properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the properties or assets of PRA under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which PRA is a party, or by which it or any of its

properties or assets may be bound or affected, except for such violations, conflicts, breaches or defaults which, either individually or in the aggregate, would not have a Material Adverse Effect on PRA.

(e) Except for (i) the filing of applications, notices and forms with, and the obtaining of approvals from, the Insurance Regulators pursuant to the Insurance Laws, with respect to the transactions contemplated by this Agreement, (ii) the approval of the Plan of Conversion and the change of control contemplated by this Agreement by the Commissioner of Department pursuant to the Vermont Insurance Code, (iii) the filing of the HSR Act Report with the Premerger Notification Agencies pursuant to the HSR Act, (iv) any consents, authorizations, orders and approvals required under the HSR Act, and (v) the approval of the Plan of Conversion and this Agreement by the requisite votes of the Eligible Members of Medmarc, no consents or approvals of, or filings or registrations with any Governmental Authority or with any other Person are necessary in connection with the execution and delivery by PRA of this Agreement or the consummation by PRA or any PRA Subsidiary (including PRA Professional) of the transactions contemplated by this Agreement.

(f) PRA Professional has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly and validly approved by all necessary corporate action on the part of PRA Professional. This Agreement has been duly and validly executed and delivered by PRA Professional and (assuming due authorization, execution and delivery by PRA and Medmarc and the receipt of all Requisite Regulatory Approvals) constitutes a valid and binding obligation of PRA Professional, subject to applicable bankruptcy, fraudulent conveyance, insolvency and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity.

(g) Neither the execution and delivery of this Agreement by PRA Professional nor the consummation by PRA Professional of the transactions contemplated by this Agreement, nor compliance by PRA Professional with any of the terms or provisions of this Agreement, will (i) violate any provision of the certificate of incorporation or bylaws of PRA Professional or (ii) assuming that all Requisite Regulatory Approvals and all of the consents and approvals referred to in Section 5.2(c) of this Agreement are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to PRA Professional or any of its properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of PRA Professional under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which PRA Professional is a party, or by which it or any of its properties or assets may be bound or affected, except (in the case of clauses (x) and (y) above) for such violations, conflicts, breaches or defaults which, either individually or in the aggregate, will not have or be reasonably likely to have a Material Adverse Effect on PRA Professional.

5.3 SEC Reports of PRA; Financial Statements .

(b) PRA has on a timely basis filed all forms, reports and documents required to be filed by it with the SEC since January 1, 2009, including (i) Annual Reports on Form 10-K for each fiscal year of PRA commencing after December 31, 2008, (ii) its Quarterly Reports on Form 10-Q for each of the first three fiscal quarters in each of the fiscal years of PRA commencing after December 31, 2008, (iii) all proxy statements relating to PRA’s meetings of stockholders (whether annual or special) held, and all information statements relating to stockholder consents, since December 31, 2008, (iv) all certifications and statements required by Rule 13a-14 or 15d-14 under the Securities and Exchange Act of 1934, as amended (the “ Exchange Act ”) or 18 U.S.C. §1350 with respect to any report referred to in clause (i) or (ii) of this sentence, (v) all other forms, reports, registration statements and other documents (the forms, reports, registration statements and other documents referred to in clauses (i), (ii), (iii), (iv) and (v) of this sentence together with any and all amendments thereto are, collectively, the “ PRA SEC Reports .”

(c) The PRA SEC Reports (i) were prepared in accordance with the requirements of the Securities Act of 1933, as amended (the “Securities Act” ) and the Exchange Act, as the case may be, in all material respects, and (ii) did not at the time they were filed with the SEC, or if thereafter amended, at the time of such amendment, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. No Subsidiary of PRA is or has been required to file any form, report, registration statement or other document with the SEC. As used in this Section 5.3, the term “file” shall be broadly construed to include any manner in which a document or information is furnished, supplied or otherwise made available to the SEC.

(d) The financial statements of PRA and its Subsidiaries included in the PRA SEC Reports (including the related notes) complied as to form, as of their respective dates of filing with the SEC, in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto (including, without limitation, Regulation S-X), were prepared in accordance with generally accepted accounting principles (“ GAAP ”) during the periods and at the dates involved (except as may be indicated in the notes thereto and except, in the case of unaudited statements, to the extent permitted by Regulation S-X for Quarterly Reports on Form 10-Q), and fairly present the consolidated financial condition of PRA and its Subsidiaries at the dates thereof and the consolidated results of operations and cash flows for the periods then ended. Except (x) as reflected in PRA’s unaudited balance sheet at December 31, 2011, or liabilities described in any notes thereto (or liabilities for which neither accrual nor footnote disclosure is required pursuant to GAAP), or (z) for liabilities incurred in the ordinary course of business since December 31, 2011, consistent with past practice, neither PRA nor its Subsidiaries has any material liabilities or obligations of any nature.

5.4 Broker’s Fees . None of PRA, the PRA Subsidiaries and their respective officers and directors has employed any broker or finder or incurred any liability for any broker’s fees or commissions, or investment banker fees or commissions, or finder’s fees in connection with the

transactions contemplated by this Agreement, except for the engagement of Wells Fargo Securities LLC as PRA's financial adviser for which PRA shall be responsible.

5.5 Absence of Certain Changes or Events . Since December 31, 2011, there has not been: (i) any change in the financial condition, assets, liabilities, prospects (financial and otherwise) or business of PRA or any of its subsidiaries which, either individually or in the aggregate, has had or would have a Material Adverse Effect on PRA; or (ii) any material change in any method of accounting or accounting principals or practice by PRA, except as required by GAAP or statutory accounting principles and disclosed in the notes to the consolidated financial statements of PRA and its Subsidiaries.

5.6 Securities Laws Considerations . PRA and PRA Professional understand and agree that the Medmarc Common Stock has not been registered under the Securities Act or under any state securities laws. PRA (or PRA Professional) will receive the shares of Medmarc Common Stock solely for PRA’s (or PRA Professional’s) own account and not with a view toward the transfer, sale, fractional subdivision or other disposition of the Medmarc Common Stock.

5.7 Financial Ability . PRA and PRA Professional have the financial ability to consummate the transactions contemplated by this Agreement.

5.8 Employee Benefit Plans .

(c) Section 5.8(a) of the PRA Disclosure Schedule sets forth a true and complete list of all of the Employee Plans (as defined in Section 10.16(a)) for employees of PRA and any PRA Subsidiary (“ PRA Employee Plans ”).

(d) Except as set forth in Section 5.8(b) of the PRA Disclosure Schedule, each of the PRA Employee Plans have been operated and administered in substantial compliance with applicable laws, including, but not limited to, ERISA and the Code. Each PRA Employee Plan which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter or has pending or has time remaining in which to file, an application for such determination from the IRS, and PRA is not aware of any reason why any such determination letter should be revoked or not be reissued, and any related trust is exempt from taxation under Section 501(a) of the Code. To the Knowledge of PRA, no prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code, or breach of fiduciary duty under Title I of ERISA has occurred with respect to any PRA Employee Plan or with respect to PRA or any PRA Subsidiary, and no events have occurred with respect to any PRA Employee Plan that could result in payment or assessment by or against PRA or any of its Subsidiaries of any material excise taxes under Sections 4972, 4975, 4976, 4977, 4979, 4980B, 4980D, 4980E or 5000 of the Code.

(e) To the Knowledge of PRA, each PRA Employee Plan that is a “group health plan” (as defined in Section 607(1) of ERISA or Section 5001(b)(1) of the Code) has been operated in substantial compliance with the provisions of COBRA, with the provisions of the Code and ERISA enacted by HIPAA, and with the provisions of any applicable similar state law.

ARTICLE 6
COVENANTS

6.1 Conduct of Businesses of Medmarc Prior to the Effective Time .

(h) During the period between the date of this Agreement and the Effective Time, except as expressly contemplated or permitted by this Agreement, Medmarc shall, and shall cause each Medmarc Insurance Subsidiary to: (a) conduct its business in the usual, regular and ordinary course consistent with past practice and its current business plan, and (b) use commercially reasonable best efforts to maintain and preserve intact its business organization, employees, agents and advantageous business relationships and retain the services of its key employees and agents.

(i) During the period between the date of this Agreement and the Effective Time, Medmarc shall permit PRA’s senior officers to meet with the Chief Financial Officer of Medmarc and officers of Medmarc responsible for the financial statements and the internal controls of Medmarc to discuss such matters as PRA may deem reasonably necessary or appropriate for PRA to satisfy its obligations under Sections 302, 404 and 906 of SOX and any rules and regulations relating thereto.

(j) Subject to applicable confidentiality obligations of Medmarc, Medmarc agrees to inform and have discussions with PRA with respect to reserve policies and practices with respect to (i) losses and loss adjustment expenses of Medmarc and the Medmarc Insurance Subsidiaries and (ii) litigation against Medmarc and the Medmarc Subsidiaries; provided , however , this Section 6.1(c) shall not require Medmarc to discuss or disclose any information, where such discussion or disclosure would jeopardize the attorney-client and work product privileges of the entity in possession or control of such information or contravene any Applicable Law, fiduciary duty or binding agreement entered into prior to the date of this Agreement. PRA and Medmarc shall also inform and have discussions with each other with respect to the character, amount and timing of restructuring charges to be taken by each of them in connection with the transactions contemplated hereby.

(k) During the period between the date of this Agreement and the Effective Time, Medmarc shall not, and shall cause the Medmarc Subsidiaries to not, terminate or impair in any way the Hartford Agreement, and shall use its best efforts to continue its relationship with The Hartford pursuant to the Hartford Agreement. Medmarc shall promptly notify PRA of any communications, whether written or oral, from The Hartford that are material the Hartford Agreement or the relationship of the parties thereunder.

6.2 Medmarc Forbearances . During the period from the date of this Agreement to the Effective Time, except as set forth in the Medmarc Disclosure Schedule, and, except as expressly contemplated or permitted by the Plan of Conversion and this Agreement, Medmarc shall not, and Medmarc shall not permit any Medmarc Subsidiary to, without the prior written consent of PRA (which consent will not be unreasonably withheld):

(e) incur any indebtedness for borrowed money (other than short-term indebtedness incurred on commercially reasonable terms to refinance indebtedness of Medmarc or

any Medmarc Subsidiary, on the one hand, to Medmarc or any Medmarc Subsidiary, on the other hand), or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, or make any loan or advance (other than, in each case, in the ordinary course of business consistent with past practice, including with regard to any premium finance activities of Medmarc and its Subsidiaries, it being understood and agreed that incurrence of indebtedness in the ordinary course of business shall include entering into repurchase agreements and reverse repurchase agreements);

(f) redeem, repay, discharge or defease any surplus note, unless such redemption, repayment, discharge or defeasance is an express condition of any Requisite Regulatory Approval;

(g) grant any stock options or stock awards or stock appreciation rights or right with respect to the Medmarc Common Stock to be authorized under the Plan of Conversion;

(h) other than paying dividends that have been declared prior to the date hereof, make, declare or pay any dividend or make any other distribution on or with respect to insurance policies written by Medmarc or any Medmarc Insurance Subsidiary;

(i) sell, transfer, mortgage, encumber or otherwise dispose of any of its properties or assets to any Person other than a Medmarc Subsidiary, or cancel, release or assign any indebtedness of any such Person or any claims held by any such Person, except in the ordinary course of business consistent with past practice;

(j) except pursuant to contracts or agreements in force at the date of this Agreement, make any material investment (by purchase of stock or securities, contributions to capital, property transfers, or purchase of any property or assets) in any Person other than a Medmarc Subsidiary that results in a non-admitted asset, other than self-insured retentions incurred in the ordinary course of business, consistent with past practice;

(k) enter into, change or terminate any Medmarc Contract, other than renewals of contracts, leases and agreements without material adverse changes of terms;.

(l) except as contemplated by the agreements and plans set forth on Section 6.2(h) of the Medmarc Disclosure Schedule, increase in any manner the compensation of the employees of Medmarc and the Medmarc Subsidiaries, or pay any bonus or incentive compensation to such employees; provided that Medmarc and the Medmarc Subsidiaries (x) may make annual increases in the salaries and wages of their employees in the ordinary course of business and consistent with past practice so long as the amount, on an individualized basis, of the increase in compensation on an annualized basis does not exceed three percent (3%) of the aggregate amount of the compensation paid to the affected employees in the twelve (12) months preceding the effective date of the increase in compensation, (y) may grant promotions and establish new salaries for vice president and director levels commensurate with such individuals’ new duties and past compensation practices and (z) may pay the retention bonuses to each of the senior executives listed on Section 6.2(h) of the Medmarc Disclosure Schedule in accordance with the terms and conditions in each of the senior executives’ existing severance/retention agreements and to other employees of Medmarc and

Medmarc Subsidiaries in accordance with the terms set forth on Section 6.2(h) of the Medmarc Disclosure Schedule;

(m) except as contemplated in Section 7.5 hereof, pay any pension or retirement allowance not required by any existing plan or agreement to any of its employees or become a party to, amend (except as may be required by law) or commit itself to any pension, retirement, profit‑sharing or welfare benefit plan or agreement or employment agreement with or for the benefit of any employee or accelerate the vesting of any deferred compensation plan;

(n) settle any claim, action or proceeding involving money damages against Medmarc or a Medmarc Subsidiary, except in the ordinary course of business consistent with past practice; provided, however, that prior to the settlement of any lawsuit, claim, action or proceeding against Medmarc or any Medmarc Subsidiary or otherwise in which Medmarc or any Medmarc Subsidiary is a named defendant involving a payment by Medmarc or any Medmarc Subsidiary in excess of $1,000,000 or the settlement of any Extra-Contractual Obligation, Excess Policy Limits or bad faith claim involving any insurance policy of Medmarc involving a payment by Medmarc in excess of $1,000,000, Medmarc will notify PRA of the terms of the proposed settlement and will consult with PRA regarding the terms of the settlement and release, but shall not be required to obtain PRA’s consent to the terms of the settlement;

(o) take any action that would cause the Plan of Conversion to result in the recognition of gain by Medmarc under the Code;

(p) amend its articles of incorporation or bylaws, except as provided for in the Plan of Conversion and this Agreement;

(q) other than in accordance with its current investment guidelines, restructure or materially change its investment securities portfolio through purchases, sales or otherwise, or the manner in which such portfolio is classified or reported;

(r) offer or sell insurance or reinsurance of any type other than such lines of insurance and reinsurance that it offers and sells on the date of this Agreement or lines that are substantially similar to such lines;

(s) take any action that is intended or may reasonably be expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions set forth in Article 8 of this Agreement not being satisfied, or in a violation of any provision of this Agreement, except, in every case, as may be required by Applicable Law; or

(t) agree to, or make any commitment to, take any of the actions prohibited by this Section 6.2; provided that except for and subject to Section 6.2(n), nothing in this Section 6.2 shall prevent Medmarc or any Medmarc Subsidiary from issuing any insurance policy or contract, including any certificates of insurance, riders and endorsements thereto.

6.3 PRA Forbearances . During the period from the date of this Agreement to the Effective Time, except as set forth in the PRA Disclosure Schedule, and, except as expressly contemplated or permitted by this Agreement, PRA shall not, and PRA shall not permit PRA Professional or any other PRA Subsidiary to, without the prior written consent of Medmarc, which consent shall not be unreasonably withheld:

(i) take any action that would cause the Plan of Conversion to result in the recognition of gain by Medmarc under the Code;

(j) take any action that is intended or may reasonably be expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions set forth in Article 8 of this Agreement not being satisfied, or in a violation of any provision of this Agreement, except, in every case, as may be required by Applicable Law;

(k) take any action that is intended or likely to adversely affect its ability to perform its covenants and agreements under this Agreement; or

(l) agree to, or make any commitment to, take any of the actions prohibited by this Section 6.3.

ARTICLE 7
ADDITIONAL AGREEMENTS

7.1 Regulatory Matters .

(u) The parties shall promptly make all filings and notifications with, and shall use commercially reasonable efforts to promptly obtain all authorizations, consents, orders and approvals of all Governmental Authorities that may be or become necessary for their respective execution and delivery of, and the performance of their respective obligations pursuant to, and the consummation of the transactions contemplated by, this Agreement, including as set forth in Sections 7.1(b) and (c) below, and shall take all actions as may be requested by any such Governmental Authorities to obtain such authorizations, consents, orders and approvals; provided , however , that in no event shall PRA or any of its Affiliates be required to agree to (i) the divestiture of any business or entity of PRA or Medmarc or any of their Subsidiaries, (ii) an increase in the Purchase Price or (iii) any requirement imposed by a Governmental Authority that would reasonably be expected to have a (A) Material Adverse Effect on Medmarc, or (B) material and adverse effect on the aggregate economic value and business benefits that would reasonably be expected to be obtained by PRA and its Subsidiaries (including Medmarc and its Subsidiaries after the Effective Time) (each requirement or limitation specified in clauses (i), (ii) or (iii) of this paragraph, a “ Burdensome Condition ”). Neither PRA nor Medmarc shall take any action that they should be reasonably aware would have the effect of delaying, impairing or impeding the receipt of any required approvals.

(v) Promptly after the execution of this Agreement, Medmarc shall use commercially reasonable efforts to obtain approval of the Plan of Conversion in accordance with Article 1 hereof.

(w) To the extent applicable, PRA shall use commercially reasonable efforts to prepare and file with all necessary Governmental Authorities (i) a request for approval of the transactions contemplated by this Agreement by all applicable Insurance Regulators on Form A or on such other form as may be required by such Insurance Regulators and (ii) the preacquisition notification and report forms and related material on Form E or any other forms required by a necessary Governmental Authority in connection with the transactions contemplated by this Agreement.

(x) Pursuant to the HSR Act, PRA and Medmarc will use commercially reasonable efforts to promptly prepare and file, or cause to be filed, the HSR Act Report with the Premerger Notification Agencies in respect of the transactions contemplated by this Agreement, which filing shall comply as to form with all requirements applicable thereto and all of the data and information reported therein shall be accurate and complete in all material respects. Each of PRA and Medmarc will use commercially reasonable efforts to promptly comply with all requests, if any, of the Premerger Notification Agencies for additional information or documentation in connection with the HSR Act Report forms filed by or on behalf of each of such parties pursuant to the HSR Act, and all such additional information or documentation shall comply as to form with all requirements applicable thereto and shall be accurate and complete in all material respects.

(y) Each party shall provide to the other, (i) promptly after filing thereof, copies of all statements, applications, correspondence or forms filed by such party prior to the Closing Date with the Premerger Notification Agencies, the Insurance Regulators and any other Governmental Authority in connection with the transactions contemplated by this Agreement and (ii) promptly after delivery to, or receipt from, such regulatory authorities, all written communications, letters, reports or other documents relating to the transactions contemplated by this Agreement; provided , however , nothing contained in this Section 7.1 shall require Medmarc to provide PRA with any presentations, board books, work papers or other materials prepared in support of any appraisal or other valuation analysis of Medmarc; provided , further that the party sharing such filing or materials may redact from such filing and communications any confidential competitive information of such party and its Affiliates.

(z) The parties hereto shall cooperate with each other and use their commercially reasonable efforts to promptly prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, to obtain as promptly as practicable all permits, consents, approvals and authorizations of all third parties and Governmental Authorities which are necessary or advisable to consummate the transactions contemplated by this Agreement (including the Plan of Conversion), and to comply with the terms and conditions of all such permits, consents, approvals and authorizations of all such Governmental Authorities. PRA and Medmarc shall have the right to review in advance, and, to the extent practicable, each will consult the other on, in each case subject to Applicable Laws relating to the exchange of information, all the information relating to PRA or Medmarc, as the case may be, and any of their respective Subsidiaries, which appear in any filing

made with, or written materials submitted to, any third party or any Governmental Authority in connection with the transactions contemplated by this Agreement. The cooperation and coordination of each party required under this Section 7.1 shall include giving timely public notice of any public hearings regarding the transactions contemplated by this Agreement, and having its representatives attend and testify at such public hearings. In addition, each of the parties hereto shall act reasonably and as promptly as practicable. The parties hereto agree that they will consult with each other with respect to the obtaining of all permits, consents, approvals and authorizations of all third parties and Governmental Authorities necessary or advisable to consummate the transactions contemplated by this Agreement and each party will keep the other apprised of the status of matters relating to completion of the transactions contemplated by this Agreement.

(aa) PRA and Medmarc shall, upon request, furnish each other with all information concerning themselves, their Subsidiaries, directors, officers and shareholders or stockholders, as applicable, and such other matters as may be reasonably necessary or advisable in connection with any statement, filing, notice or application made by or on behalf of PRA, Medmarc or any of their respective Subsidiaries to any Governmental Authority in connection with the Plan of Conversion and the other transactions contemplated by this Agreement. Medmarc and the Medmarc Subsidiaries understand and agree that PRA may be required to include in PRA SEC Reports to be filed prior to Closing some or all of the SAP financial statements described in Section 4.7(b) hereof, in which event Medmarc agrees to consent to the inclusion of such financial statements. In such event, Medmarc shall also request the independent auditors of Medmarc to consent to the inclusion of said financial statements in any registration statement of PRA that incorporates the financial statements included in such PRA SEC Report by reference.

(bb) PRA and Medmarc shall promptly advise each other upon receiving any communication from any Governmental Authority relating to the consent or approval from such Governmental Authority that is required for consummation of the transactions contemplated by this Agreement.

7.2 Access to Information .

(m) Upon reasonable prior notice and subject to Applicable Laws relating to the exchange of information and to the Confidentiality Agreement dated September 28, 2011 and Addendum thereto (the “ Confidentiality Agreement ”) which is hereby incorporated into this Agreement by reference and shall continue in full force and effect until Closing, Medmarc shall, and shall cause each of the Medmarc Subsidiaries to, afford to the officers, employees, accountants, counsel and other representatives of PRA, access, during normal business hours during the period prior to the Closing Date, to all its properties, books, contracts, commitments and records. During such period, each of PRA and Medmarc shall, and shall cause their respective Subsidiaries to, make available to the other party a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws or Insurance Laws (other than reports or documents which PRA or Medmarc, as the case may be, is not permitted to disclose under Applicable Law or by agreement); provided, however, that all such access shall be on a basis and follow procedures that the parties shall mutually agree upon, and shall not unreasonably interfere with any of the businesses or operations of Medmarc or any Medmarc

Subsidiary. Neither PRA nor Medmarc nor any of their respective Subsidiaries shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of PRA’s, Medmarc’s, or any Medmarc Subsidiary’s, as the case may be, customers, jeopardize the attorney-client and work product privileges of the entity in possession or control of such information or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties hereto will make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply.

(n) Each of PRA and Medmarc agrees to keep confidential, and not divulge to any other party or person (other than employees of, and attorneys, accountants, financial advisors and other representatives for, any said party who agrees to be bound by the terms of the Confidentiality Agreement), all non-public documents, information, records and financial statements received from the other and, in addition, any and all reports, information and financial information obtained through audits or other reviews conducted pursuant to this Agreement (unless readily ascertainable from public or published information, or trade sources, or already known or subsequently developed by a party independently of any investigation or received from a third party not under an obligation to the other party to keep such information confidential), and to use the same only in connection with the transactions contemplated by this Agreement; and if the transactions contemplated by this Agreement are not consummated for any reason, each party agrees to promptly return to the other party all written materials (including electronic) furnished by the other party, and all copies thereof, in connection with such investigation, and to destroy all documents and records in its possession containing extracts or summaries of any such non-public information.

(o) No investigation by either of the parties or their respective representatives shall affect the representations, warranties, covenants or conditions of the other set forth in this Agreement.

7.3 Meeting of Members; Recommendation to Eligible Members . Medmarc shall hold a meeting of the Eligible Members for the purpose of obtaining the requisite approval required in connection with the Plan of Conversion and this Agreement. Medmarc will, through its Board of Directors, subject to its fiduciary obligations as determined by its Board of Directors, recommend that its Eligible Members vote in favor of the approval and adoption of the Plan of Conversion and this Agreement.

7.4 Compliance with Securities Laws . Medmarc and PRA understand and agree that the Shares to be issued pursuant to the Plan of Conversion will not be registered under the Securities Act or applicable state securities laws in reliance on exemptions from such registration. Medmarc and PRA shall cooperate with each other and use commercially reasonable efforts to cause the Medmarc Common Stock to be issued pursuant to available exemptions from registration under the Securities Act and state securities laws.

7.5 Employee Plans .

(a) From and after the Effective Time, the Medmarc Employee Plans in effect as of the date of this Agreement and at the Effective Time shall remain in effect with respect to the

current and former employees of Medmarc and the Medmarc Subsidiaries (the “ Medmarc Employees ”) covered by such Medmarc Employee Plans at the Effective Time, until such time as PRA shall otherwise determine. PRA will review all Medmarc Employee Plans to determine whether to maintain, terminate or continue such plans. Following the Effective Time, PRA and any applicable PRA Subsidiary shall honor and perform in accordance with their terms all benefit obligations to, and contractual rights of, current and former employees and directors of Medmarc and the Medmarc Subsidiaries existing as of the Effective Time, under any Medmarc Employee Plan that has not been terminated and fully distributed as of the Effective Time and which has been disclosed to PRA on Section 4.13(a) of the Medmarc Disclosure Schedule. However, unless specifically set forth otherwise herein, this Section 7.5(a) shall not be construed to limit the ability of PRA to review any Medmarc Employee Plan from time to time and to make such changes following the Effective Time (including terminating any Medmarc Employee Plan) as its deems appropriate. In the event employee compensation and/or benefits as provided by Medmarc or any Medmarc Subsidiary at the Effective Time are changed or terminated by PRA, in whole or in part, PRA shall provide any Medmarc Employees who continue in employment with PRA or any of its Subsidiaries (“ Continuing Employees ”) with compensation and benefits that are, in the aggregate, substantially similar to the compensation and benefits provided to employees of PRA or applicable PRA Subsidiary (as of the date any such compensation or benefit is provided).

(b) Subject to the provisions of this Section 7.5(b), Section 7.5(a) above and Sections 7.5(g), 7.5(h) and 7.5(i) below, PRA shall use reasonable commercial efforts to cause the Continuing Employees to be eligible to participate in PRA Employee Plans provided to similarly situated employees of PRA or applicable PRA Subsidiary (“ PRA Employee Plans ”) effective on January 1 following the Effective Time (the “ First Eligibility Date ”). Notwithstanding the foregoing, if the Effective Time occurs in the fourth calendar quarter, the Continuing Employees shall become eligible to participate in the PRA Employee Plans no later than January 1 next following the First Eligibility Date and, until such time, the Continuing Employees shall participate in comparable Medmarc Employee Plans with no gap in coverage. The Continuing Employees who become participants in a PRA Employee Plan shall, for purposes of determining eligibility for and for any applicable vesting periods of such employee benefits only (and not for benefit accrual purposes unless specifically set forth herein) be given credit for meeting eligibility and vesting requirements in such plans for service as an employee of Medmarc or any predecessor thereto prior to the Effective Time, provided, however, that credit for benefit accrual purposes will be given only for purposes of PRA vacation policies or programs. Continuing Employees who have accrued unused vacation days under Medmarc’s vacation policy for the calendar year in which the Effective Time occurs shall be permitted to carry over up to ten (10) unused vacation days under PRA vacation policies as of the First Eligibility Date. In the event of any termination or consolidation of any Medmarc health plan with any PRA health plan, PRA shall make available to the Continuing Employees and their dependents employer-provided health coverage on substantially the same basis as it provides such coverage to PRA employees. Unless a Continuing Employee affirmatively terminates coverage under a Medmarc health plan prior to the time that such Continuing Employee becomes eligible to participate in the PRA health plan, or unless a Continuing Employee and/or a dependent of a Continuing Employee has an event which, under the terms of the Medmarc health plan, results in a loss of coverage (which may include a sale or other disposition of an Medmarc Subsidiary or substantially all of the business operations thereof), no coverage of any of the

Continuing Employees or their dependents shall terminate under any of the Medmarc health plans prior to the time such Continuing Employees and their dependents become eligible to participate in the health plans, programs and benefits common to all employees of PRA and their dependents. In the event of a termination or consolidation of any Medmarc health plan, terminated Medmarc employees and qualified beneficiaries will have the right to continued coverage under group health plans of PRA in accordance with Code Section 4980B(f), consistent with the provisions below. In the event of any termination of any Medmarc health plan, or consolidation of any Medmarc health plan with any PRA health plan, any coverage limitation under the PRA health plan due to any pre-existing condition shall be waived by the PRA health plan to the degree that such condition was covered by the Medmarc health plan and such condition would otherwise have been covered by the PRA health plan in the absence of such coverage limitation. All Medmarc Employees who cease participating in a Medmarc health plan and become participants in a comparable PRA health plan during any plan year shall receive credit toward the applicable deductible under the PRA health plan for any amounts paid by the employee under Medmarc’s health plan during the applicable plan year, upon substantiation, in a form satisfactory to PRA that such payments have been made.

(c) It is understood that employees of PRA and its Subsidiaries are “at-will” employees. Nothing in this Section 7.5 shall be interpreted as preventing PRA from terminating the employment of any individual or from amending, modifying or terminating any PRA Employee Plans, or any Medmarc Employee Plans, or any benefits under any PRA Employee Plans or any Medmarc Employee Plans, or any other contracts, arrangements, commitments or understandings, in accordance with their terms and Applicable Law, subject to the commitments provided in Sections 7.5(b), 7.5(d), 7.5(f), 7.5(g) 7.5(h) and 7.5(i) herein. In the event that an employee is terminated in connection with the Sale under the terms and conditions of this Agreement, PRA will honor the retention and severance plans listed on Section 7.5(c) of the Medmarc Disclosure Schedule in accordance with their terms as in effect at the Effective Time.

(d) The persons named in Section 7.5(d) of the Medmarc Disclosure Schedule (the “ Medmarc Executives ”) have entered into Executive Agreements with a Medmarc Subsidiary that provide for the payment of certain benefits on a change of control of Medmarc as described in Section 7.5(d) of the Medmarc Disclosure Schedule (the “ Medmarc Executive Agreements ”). PRA has offered and/or entered into a retention and severance agreement with each of the Medmarc Executives (the “ Retention and Severance Compensation Agreement ”). The execution of the Retention and Severance Compensation Agreement by a Medmarc Executive will terminate the applicable Medmarc Executive Agreement as of the Effective Time. In the event that a Medmarc Executive does not execute the Retention and Severance Compensation Agreement on or before the Effective Time, PRA shall cause Medmarc or the applicable Medmarc Subsidiary to pay the Medmarc Executive the change of control benefit under the applicable Medmarc Executive Agreement and to honor the obligations to pay severance benefits under the applicable Medmarc Executive Agreement; provided that, if the Medmarc Executive elects to terminate employment within one (1) year after the Effective Time, the Medmarc Executive shall be entitled to severance benefits payable upon an “Involuntary Termination” after a “Change of Control” as provided in the Medmarc Executive Agreements; provided further that PRA shall require in connection with the payment of such severance benefits that the Medmarc Executive execute a resignation and release in substantially the form attached to the Retention and Severance Compensation Agreement.

(e) Section 7.5(e) of the Medmarc Disclosure Schedule sets forth a list of all Persons (other than the Medmarc Executives) who are entitled to change of control or severance benefits under the terms of their respective agreements with Medmarc or a Medmarc Subsidiary, which list sets forth the name of each Person entitled to such benefits and the amounts payable to each of such Persons on a change of control and/or separation from employment. PRA shall cause Medmarc or the applicable Medmarc Subsidiary to honor its obligations to pay to any Person listed in Section 7.5(e) of the Medmarc Disclosure Schedule the change of control and severance benefits described in Schedule 7.5(e) of the Medmarc Disclosure Schedule; provided that PRA shall require in connection with such payments that each officer or employee receiving a payment shall execute a resignation and release of claims against Medmarc and PRA with respect to their severance benefits.

(f) Section 7.5(f) of the Medmarc Disclosure Schedule sets forth the names of the participants of the Medmarc Mutual Insurance Company Supplemental Executive Retirement Plan (“ SERP ”) and the amount of projected accrued benefits accrued for their respective accounts in the SERP as of December 31, 2012. Medmarc shall prior to the Effective Time and subject to the occurrence of the Effective Time (i) take such actions as are permitted to terminate the SERP in connection with the change of control resulting from the Sale effective on at the Effective Time; (ii) take such actions as shall be reasonably necessary to determine the value of the accrued benefits to be distributed to participants in the liquidation of their respective interests in the SERP; and (iii) subject to the execution of a receipt and release of claims with respect to such participant’s interest in the SERP, distribute to each participant in accordance with the terms of the SERP and Section 409A of the Code a lump sum amount equal to the liquidation value of such participant’s accrued benefit as so determined. In connection with the liquidation of the SERP and subject to the execution of a release of claims with respect to their interest in the SERP, Medmarc shall pay to the persons who are currently receiving payment of benefits under the SERP an amount equal to the sum of (A) the actuarially determined lump sum payment payable for their future benefits in liquidation of the SERP plus, (B) such additional amount which, when the after-tax value of the additional amount is added to the after-tax value of the payment described in clause (A), will equal the amount required to purchase an annuity from a commercial carrier (A.M. Best Rating of A or better) that would provide substantially equivalent after-tax annuitized payments as such person was receiving under the SERP immediately prior to the termination of the SERP. For purposes of this Section 7.5(f), the after-tax amount of a payment shall be determined after subtracting a sum equal to the person’s obligations to pay applicable federal, state and local taxes, including the person’s obligations under the Federal Insurance Contributions Act or Self-Employment Contributions Act, from the payment.

(g) The Hamilton Resources Short-Term Incentive Plan (the “ STIP ”) shall remain in effect until, and including, the last day of the calendar year in which the Effective Time occurs (the “ Initial Short-Term Incentive Period ”). Continuing Employees who are participating in the STIP as of the Effective Time shall be eligible to receive a bonus payable in accordance with the terms of the STIP. In calculating the bonuses payable to the Continuing Employees under the STIP, the performance of Medmarc shall be measured without taking into account the transaction costs incurred by Medmarc in connection with the Plan of Conversion and the transactions contemplated by this Agreement. The STIP shall terminate following the completion of the Initial Short-Term Incentive Period, and Continuing Employees shall be eligible to participate in PRA’s short-term incentive compensation program as of the First Eligibility Date.

(h) The Medmarc Mutual Insurance Company Long Term Incentive Plan (the “ LTIP ”) shall remain in effect until, and including, the last day of the calendar year in which the Effective Time occurs (“ Initial Long-Term Incentive Period ”). Continuing Employees who are participating in the LTIP as of the Effective Time shall be eligible to receive a bonus payable in accordance with the terms of the LTIP. In calculating the bonuses payable to the Continuing Employees under the LTIP, the performance of Medmarc shall be measured without taking into account the transaction costs incurred by Medmarc in connection with the Plan of Conversion and the transactions contemplated by this Agreement. The LTIP shall terminate following the completion of the Initial Long-Term Incentive Period, and Continuing Employees shall be eligible to participate in PRA’s long-term incentive compensation program as of the First Eligibility Date.

(i) Section 7.5(i) of the Medmarc Disclosure Schedule sets forth the names of the participants of the Hamilton Resources Corporation Deferred Compensation Plan, No.2 and the Hamilton Resources Corporation Deferred Compensation Plan (collectively referred to as the “ Deferred Plans ”) and the amount of accrued benefits accrued for their respective accounts in the Deferred Plans as of May 31, 2012. Medmarc shall prior to the Effective Time and subject to the occurrence of the Effective Time (i) take such actions as are permitted to terminate the Deferred Plans in connection with the change of control resulting from the Sale effective on at the Effective Time; (ii) take such actions as shall be reasonably necessary to determine the value of the accrued benefits to be distributed to participants in the liquidation of their respective interests in the Deferred Plans; and (iii) subject to the execution of a receipt and release of claims with respect to such participant’s interest in the Deferred Plans, distribute to each participant in accordance with the terms of the Deferred Plans and Section 409A of the Code a lump sum amount equal to the liquidation value of such participant’s accrued benefit as so determined.

(j) In the event the Medmarc 401(k) Plan (“ Medmarc 401(k) Plan ”) becomes frozen, terminated or merged into the PRA 401(k) Plan (“ PRA 401(k) Plan ”) on or after the Effective Time (collectively referred to as the “ 401(k) Plan Termination Date ”), Continuing Employees who satisfy the conditions for eligibility as of the 401(k) Plan Termination Date shall be eligible to participate in the PRA 401(k) Plan as of such date, and shall receive credit for service with Medmarc solely for purposes of vesting and determination of eligibility to participate in the PRA 401(k) Plan. If the Medmarc 401(k) Plan is terminated or merged into the PRA 401(k) Plan, PRA shall agree to permit Continuing Employees to roll over their account balances, including outstanding loans, in the Medmarc 401(k) Plan to the PRA 401(k) Plan.

(k) Notwithstanding anything herein to the contrary, all payments made to Medmarc Employees under this Section 7.5 shall be subject to withholding to the extent required by applicable federal, state and local taxing authorities.

7.6 Directors’ and Officers’ Indemnification and Insurance .

(f) Medmarc shall immediately prior to the Closing purchase a single payment, run-off policy or policies of directors’ and officers’ liability insurance covering current and former officers and directors of Medmarc and the Medmarc Subsidiaries with respect to acts or omissions occurring prior to the Effective Time which were committed by such officers and directors in their capacity as such, with such policy or policies to be on terms and conditions, including limits, as

favorable as their respective directors and officers liability insurance policy in effect on the date of this Agreement and to become effective at the Effective Time and remain in effect for a period of six (6) years after the Effective Time (the “ Tail Policy ”); provided that PRA may substitute therefor a policy or policies (issued by an insurance company that has an A.M. Best Rating of A or better) of the same or substantially similar coverage and amounts containing terms and conditions which are not less advantageous in any material respect than such policy; and provided further that in no event shall the premium for any such insurance be more than 300% of the current amount expended by Medmarc or the Medmarc Subsidiary (the “ Insurance Premium Amount ”). If Medmarc is unable to maintain or obtain the insurance called for by this Section 7.6, PRA shall use its best efforts to obtain as much comparable insurance as available for the Insurance Premium Amount.

(g) In addition to the obligations set forth in Section 7.6(a), PRA shall indemnify, defend and hold harmless each person who is now, or who has been at any time before the date hereof or who becomes before the Effective Time, an officer, director or employee of Medmarc or a Medmarc Subsidiary (the “ Indemnified Parties ”) against all losses, claims, damages, costs, expenses (including attorney’s fees), liabilities or judgments or amounts that are paid in settlement of or in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, or administrative (each a “ Claim ”), in which an Indemnified Party is, or is threatened to be made, a party or witness in whole or in part on or arising in whole or in part out of the fact that such person is or was a director, officer or employee of Medmarc or a Medmarc Subsidiary if such Claim pertains to any matter of fact arising, existing or occurring at or before the Effective Time (including, without limitation, the Plan of Conversion and this Agreement and the transactions contemplated thereby), regardless of whether such Claim is asserted or claimed before, or after, the Effective Time (the “ Indemnified Liabilities ”), to the fullest extent Medmarc is permitted under, and in accordance with the terms of indemnification provisions under, Applicable Law or the Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws of Medmarc. PRA shall pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the full extent permitted by Applicable Law. The Indemnified Parties may retain counsel reasonably satisfactory to them after consultation with PRA; provided, however, that (A) PRA shall have the right to assume the defense thereof and upon such assumption PRA shall not be liable to any Indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by any Indemnified Party in connection with the defense thereof, except that if PRA elects not to assume or fails to promptly assume such defense, the Indemnified Party may retain counsel reasonably satisfactory to him or her after consultation with PRA, and PRA shall pay the reasonable fees and expenses of such counsel for the Indemnified Party, (B) PRA shall be obligated pursuant to this paragraph to pay for only one firm of counsel for all Indemnified Parties except to the extent representation by a single firm or attorney is, in the absence of an informed consent by the Indemnified Party, prohibited by ethical rules relating to lawyers’ conflicts of interest, (C) PRA shall not be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld), (D) PRA shall have no obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and nonappealable, that indemnification of such Indemnified Party in the manner contemplated by this Agreement is prohibited by Applicable Law and (E) PRA shall have no obligation hereunder to any Indemnified Party for which and to the extent payment is actually and unqualifiedly made to such Indemnified Party under any insurance policy, any other

agreement for indemnification or otherwise. Any Indemnified Party wishing to claim Indemnification under this Section 7.6, upon learning of any such Claim, shall notify PRA thereof, provided that the failure to so notify shall not affect the obligations of PRA under this Section 7.6 except to the extent such failure to notify prejudices PRA by depriving PRA of the reasonable opportunity to investigate and assume the defense of the claim. PRA’s obligations under this Section 7.6 continue in full force and effect for a period of six (6) years from the Effective Time (or the period of the applicable statute of limitations, if longer); provided, however, that all rights to indemnification in respect of any Claim asserted or made within such period shall continue until the final disposition of such Claim.

7.7 Advice of Changes .

(c) PRA and Medmarc shall give prompt notice to the other party as soon as practicable after it has actual Knowledge of (i) the occurrence, or failure to occur, of any event which would or would be reasonably likely to cause any party’s representations or warranties contained in this Agreement to be untrue or incorrect in any material respect at any time from the date of this Agreement to the Closing Date, or (ii) any failure on its part or on the part of any of its or its Subsidiaries’ officers, directors, employees, representatives or agents (other than persons or entities who are such employees, representatives or agents only because they are appointed insurance agents of such parties) to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by such party under this Agreement. Each party shall deliver to the other party a written disclosure schedule as to any matter of which it becomes aware following execution of this Agreement which would constitute a breach of any representation, warranty or covenant of this Agreement by such party, identifying on such disclosure schedule the representation, warranty or covenant which would be so breached, provided that each such disclosure schedule shall be delivered as soon as practicable after such party becomes aware of the matter disclosed therein. If disclosure of a matter which would constitute a breach of any representation, warranty or covenant of this Agreement is made by either party, the nondisclosing party shall have the right, in its discretion, to terminate this Agreement to the extent such termination is permitted under Section 9.1 of this Agreement.

(d) Medmarc shall update the Medmarc Disclosure Schedule (the “ Closing Date Medmarc Disclosure Schedule ”) to a date that is no earlier than ten (10) business days prior to the Closing Date and no later than seven (7) business days prior to the Closing Date and shall deliver the Closing Date Medmarc Disclosure Schedule to PRA not less than three (3) business days prior to the Closing Date. The obligation of Medmarc to deliver to PRA the Closing Date Medmarc Disclosure Schedule shall be a material obligation for purposes of Section 8.2(a) hereof.

(e) The provisions of this Section 7.7 and any notices by PRA on the one hand, and Medmarc on the other, shall not be deemed in any way to constitute a waiver by the counterparty of the conditions set forth in Article 8 hereof or any of its remedies under Article 9 hereof, nor shall any such notices cure any breach of any representation or warranty which is inaccurate.

7.8 Additional Agreements .

(c) Medmarc understands that PRA intends to merge Medmarc with and into its subsidiary Medmarc Casualty Insurance Company (“ Medmarc Casualty ”) after the Effective Time and that PRA intends to disclose its intention to merge the two companies in its Form A to be filed with the Commissioner. In order to facilitate regulatory approval of the merger, Medmarc will, upon request of PRA, cause its Board of Directors and the Board of Directors of Medmarc Casualty to vote on the adoption of an agreement of merger that provides for the merger of Medmarc with and into Medmarc Casualty pursuant to Section 8 V.S.A. 3424 subject to (i) the completion of the Plan of Conversion and the transactions contemplated by this Agreement; (ii) the approval of the stockholders of Medmarc and Medmarc Casualty (if required) after the Effective Time; and (iii) the receipt of all required governmental approvals, including the approval of the Commissioner as required under 8 V.S.A. 3424. If requested by PRA, Medmarc shall cause said agreement of merger to be executed by each of Medmarc and Medmarc Casualty and to be filed with the Commissioner in connection with the filings required to be made under Section 1.3 and Section 7.1(c) hereof. PRA and Medmarc shall use commercially reasonable efforts to obtain all approvals required for the completion of the merger; provided that PRA shall defer or withdraw the request for approval if and to the extent Medmarc reasonably believes that the submission of the merger for such approval is causing a delay in obtaining the Requisite Regulatory Approvals for the Plan of Conversion and the change of control of Medmarc. The approval of the merger by Governmental Authorities shall not be a condition to the transactions contemplated by this Agreement.

(d) In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement (including any merger between a Subsidiary of PRA and a Subsidiary of Medmarc) or to vest PRA or any of its Subsidiaries with full title to all properties, assets, rights, approvals, immunities and franchises of any of the parties to this Agreement or the Plan of Conversion, the proper officers and directors of each party to this Agreement and their respective Subsidiaries shall take all such necessary action as may be reasonably requested by, and at the sole expense of, PRA.

(e) Prior to the Effective Time, neither Medmarc nor the Medmarc Subsidiary shall acquire, directly or indirectly, beneficial or record ownership of any shares of PRA Common Stock or other equity securities of PRA, or any securities convertible into or exercisable for any shares of PRA Common Stock or other equity securities of PRA.

7.9 Negotiations with Other Parties .

(g) Subject to Section 7.9(b), so long as this Agreement remains in effect and no notice of termination has been given under this Agreement, Medmarc shall not authorize or knowingly permit any of its representatives, directly or indirectly, to initiate, entertain, solicit, encourage, engage in, or participate in, negotiations with any Person or any group of Persons other than PRA or any of its Affiliates (a “ Potential Acquiror ”) concerning any Acquisition Proposal (as defined in this Section 7.9) other than as expressly provided in this Agreement. Medmarc will promptly inform PRA of any serious, bona fide inquiry it receives with respect to any Acquisition Proposal and shall furnish to PRA the information required by Section 7.9(b).

(h) Nothing contained in this Agreement shall prohibit the Board of Directors of Medmarc from either furnishing information to, or entering into discussions or negotiations with,

any Person or group of Persons regarding any Acquisition Proposal, or approving and recommending to the Eligible Members of Medmarc an Acquisition Proposal from any Person or group of Persons, if the Board of Directors of Medmarc determines in good faith that such action is appropriate in furtherance of the best interests of the Members. In connection with any such determination: (i) Medmarc shall direct its officers and other appropriate personnel to cooperate with and be reasonably available to consult with any such Person, or group of Persons; (ii) Medmarc will disclose to PRA that it is furnishing information to, or entering into discussions or negotiations with, such Person or group of Persons, which disclosure shall describe the terms thereof (but need not identify the Person, or group of Persons making the offer); (iii) prior to furnishing such information to such Person or group of Persons, Medmarc shall enter into a written agreement with such Person or group of Persons which provides for, among other things, (A) the furnishing to Medmarc of information regarding such Person or group of Persons that is relevant to its ability to finance and otherwise perform its obligations under its Acquisition Proposal, (B) the confidentiality of all non-public information furnished to such Person or group of Persons by Medmarc, and (C) procedures reasonably satisfactory to Medmarc that are designed to restrict or limit the provision of information regarding Medmarc that could be used to the competitive disadvantage of Medmarc or PRA; (iv) Medmarc will not furnish any non-public information regarding PRA or the transactions contemplated hereby; and (v) Medmarc will keep PRA informed of the status of any such discussions or negotiations (provided that Medmarc shall not be required to disclose to PRA confidential information concerning the business or operations of such Person or group of Persons).

(i) As used in this Agreement, “ Acquisition Proposal ” means (i) any proposal pursuant to which any Person or group of Persons, other than PRA, PRA Professional, or Medmarc, would acquire or participate in a merger, consolidation, or other business combination involving Medmarc or any of the Medmarc Subsidiaries, directly or indirectly; (ii) any proposal by which any Person or group of Persons, other than PRA or Medmarc, would acquire a substantial equity interest in Medmarc or any of the Medmarc Subsidiaries, including the right to vote 10% or more of the capital stock (following a reorganization or conversion) of Medmarc or any of the Medmarc Subsidiaries entitled to vote thereon for the election of directors; (iii) any acquisition of 10% or more of the combined assets of Medmarc and the Medmarc Subsidiaries, other than in the ordinary course of business; (iv) any acquisition in excess of 10% of the outstanding capital stock (following a reorganization or conversion) of Medmarc or any of the Medmarc Subsidiaries, other than as contemplated by this Agreement; (v) any acquisition of control (as defined under the Insurance Laws) of Medmarc or any Medmarc Subsidiary; or (vi) any transaction similar to the foregoing.

ARTICLE 8
CONDITIONS PRECEDENT

8.1 Conditions to Each Party’s Obligation . The respective obligation of each party to consummate the transactions contemplated by the Plan of Conversion and this Agreement shall be subject to the satisfaction at or prior to the Effective Time of the following conditions:

(p) The Plan of Conversion and this Agreement and the transactions contemplated by this Agreement shall have been approved and adopted by the requisite affirmative vote of the Eligible Members of Medmarc entitled to vote thereon; and

(q) The Plan of Conversion shall have been approved by the Commissioner of the Department prior to or on the Closing Date; and

(r) All approvals of Governmental Authorities required to consummate the transactions contemplated by this Agreement shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired, (all such approvals and the expiration of all such waiting periods being referred to in this Agreement as the “ Requisite Regulatory Approvals ”). Without limiting the generality of the foregoing: (i) the HSR Act Report shall have been submitted to the Premerger Notification Agencies, and the waiting period under the HSR Act shall have expired or notice of early termination of the waiting period shall have been received; and (ii) the Plan of Conversion and the transfer of ownership of Medmarc and the Medmarc Subsidiaries to PRA shall have been approved by the Insurance Regulators, to the extent such approvals are required; and

(s) No order, injunction or decree issued by any Governmental Authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Plan of Conversion or any of the transactions contemplated by this Agreement shall be in effect. No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any Governmental Authority which prohibits, materially restricts or makes illegal consummation of the Plan of Conversion, including the transactions contemplated by this Agreement.

8.2 Conditions to Obligation of PRA . The obligation of PRA to consummate the transactions contemplated by the Plan of Conversion and this Agreement is also subject to the satisfaction or waiver by PRA at or prior to the Effective Time of the following conditions:

(g) Medmarc shall have performed in all material respects all material obligations required to be performed by it under this Agreement at or prior to the Closing Date, and PRA shall have received a certificate signed on behalf of Medmarc by the Chief Executive Officer and the Chief Financial Officer of Medmarc to such effect.

(h) The representations and warranties of Medmarc contained in Article 4 of this Agreement shall be true and correct on and as of the Closing Date without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth in such representation and warranties as if made on and as of such date (except to the extent that any such representation or warranty has by its terms been made as of a specific date in which case such representation and warranty shall have been true and correct as of such specific date, and PRA shall have received a certificate signed on behalf of Medmarc by the Chief Executive Officer and Chief Financial Officer to such effect; provided, however, that if the failure of any such representations and warranties to be true and correct on and as of the Closing Date, individually or in the aggregate, has not resulted in a Material Adverse Effect on Medmarc, the foregoing condition shall be deemed to have been fulfilled.

(i) Medmarc or the Medmarc Subsidiaries, taken as a whole, shall not have suffered a Material Adverse Effect and there shall have been no occurrence, circumstance or combination thereof (whether arising on, prior to, or after the date hereof), including litigation pending or threatened, which, as of the Closing Date, is reasonably likely to result in a Material Adverse Effect on Medmarc, and PRA shall have received a certificate signed on behalf of Medmarc by the Chief Executive Officer and Chief Financial Officer of Medmarc to such effect.

(j) Opinion of counsel of Luse Gorman Pomerenk & Schick, P.C. as counsel for Medmarc that neither Medmarc nor any of the Medmarc Subsidiaries will recognize any gain or loss for federal income tax purposes as a result of the transactions contemplated by the Plan of Conversion and this Agreement.

8.3 Conditions to Obligation of Medmarc . The obligation of Medmarc to consummate the transactions contemplated by the Plan of Conversion and this Agreement is also subject to the satisfaction or waiver by Medmarc at or prior to the Effective Time of the following conditions:

(h) Each of PRA and PRA Professional shall have performed in all material respects all material obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Medmarc shall have received a certificate signed on behalf of PRA and PRA Professional by the Chief Executive Officer and the Chief Financial Officer of PRA to such effect.

(i) PRA shall have deposited in trust with the Conversion Agent for the benefit of the Eligible Members cash in the amount of the Cash Consideration in accordance with Section 3.2(b) of this Agreement.

(j) The representations and warranties of PRA and PRA Professional contained in Article 5 of this Agreement shall be true and correct on and as of the Closing Date without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth in such representations and warranties as if made on and as of such date (except to the extent that any such representation or warranty has by its terms been made as of a specific date in which case such representation and warranty shall have been true and correct as of such specific date), and Medmarc shall have received a certificate signed on behalf of PRA by the Chief Executive Officer and Chief Financial Officer of PRA to such effect; provided, however, that if the failure of any such representations and warranties to be true and correct on and as of the Closing Date, individually or in the aggregate, has not resulted in a Material Adverse Effect on PRA, the foregoing condition shall be deemed to have been fulfilled.

ARTICLE 9
TERMINATION AND AMENDMENT

9.1 Termination . This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Plan of Conversion by the Eligible Members of Medmarc:

(k) by mutual consent of PRA and Medmarc in a written instrument, if the Board of Directors of PRA and the Board of Directors of Medmarc so determine to terminate this Agreement by an affirmative vote of a majority of the members of such party's entire Board of Directors;

(l) by either PRA or Medmarc, by written notice to the other party, if (i) any Governmental Authority which must grant a Requisite Regulatory Approval has denied approval of the Plan of Conversion (including the transactions contemplated by this Agreement) or approval of the change of control of Medmarc or the Medmarc Subsidiaries as herein contemplated, and such denial has become final and nonappealable or any Governmental Authority of competent jurisdiction shall have issued a final nonappealable order permanently enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement, and (ii) the Board of Directors of PRA or the Board of Directors of Medmarc, as the case may be, determines to terminate this Agreement by an affirmative vote of a majority of the members of its entire Board of Directors;

(m) by either PRA or Medmarc (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained in this Agreement), by written notice to the other party, if (i) (x) there shall have been a breach of any of the representations and warranties set forth in this Agreement on the part of the other party (without giving effect to any limitation as to “materiality” or “Material Adverse Effect” set forth in such representations and warranties), which breach is not cured within forty-five (45) days following written notice to the party committing such breach, or which breach, by its nature or timing, cannot be cured prior to the date specified in Section 9.1(h) and (y) such material breach or breaches of the representations and warranties, individually or in the aggregate, has resulted in a Material Adverse Effect on such party and its Subsidiaries taken as a whole and (ii) the Board of Directors of the terminating party determines to terminate this Agreement by an affirmative vote of a majority of the members of its entire Board of Directors.

(n) by PRA upon written notice to Medmarc if (i) the Board of Directors of Medmarc does not, or shall indicate in writing to PRA that the Board of Directors of Medmarc is unwilling or unable to, recommend that its Eligible Members approve and adopt the Plan of Conversion and this Agreement, or (ii) after recommending that its Eligible Members approve and adopt the Plan of Conversion and this Agreement, the Board of Directors of Medmarc shall have withdrawn, modified or amended such recommendation in any respect materially adverse to PRA, without PRA's prior written consent (each a “ Medmarc Recommendation Event ”), provided that any such notice of termination must be provided to Medmarc not later than fifteen (15) business days after the later of the date PRA shall have been advised by Medmarc in writing of a Medmarc Recommendation Event, or such later date as may be agreed upon by PRA and Medmarc in writing;

(o) by PRA upon written notice to Medmarc if Medmarc shall have authorized, recommended, or approved, or if Medmarc shall have entered into an agreement with any Person other than PRA or PRA Professional, to effect an Acquisition Proposal;

(p) by either PRA or Medmarc, by written notice to the other party, if (i) a meeting of the Eligible Members has been duly held for purposes of voting on the Plan of Conversion and the transactions contemplated by this Agreement, and (ii) approval of the Eligible Members of Medmarc required for the consummation of the Plan of Conversion shall not have been obtained

by reason of the failure to obtain the required vote at such duly held meeting of Eligible Members or at any adjournment or postponement thereof;

(q) by PRA, upon written notice to Medmarc, if the Closing Date Medmarc Disclosure Schedule discloses any Material Adverse Effect on Medmarc or any change from the Medmarc Disclosure Schedule which has, or is likely to have, a Material Adverse Effect on Medmarc;

(r) by written notice from Medmarc to PRA, or from PRA to Medmarc, if the Closing does not occur on or before March 31, 2013, for any reason other than breach of this Agreement by the party giving such notice; or

(s) by Medmarc upon written notice to PRA upon the occurrence of a Medmarc Acquisition Event (as defined in Section 9.5 hereof) or Medmarc Recommendation Event.

9.2 Effect of Termination . In the event of termination of this Agreement by either PRA or Medmarc as provided in Section 9.1 of this Agreement, (i) this Agreement shall forthwith become void and have no effect, except that Sections 9.2, 9.5, 10.2, 10.3, 10.4, 10.5, 10.6, 10.12, 10.13, 10.15 and 10.16 of this Agreement shall survive any termination of this Agreement, and (ii) none of PRA, PRA Professional nor Medmarc, nor any of their respective Subsidiaries or any of the officers or directors of any of them shall have any liability of any nature whatsoever under this Agreement, or in connection with the transactions contemplated by this Agreement, except as otherwise provided in Section 9.5 of this Agreement; provided, however, that notwithstanding anything to the contrary contained in this Agreement, neither PRA nor Medmarc shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement.

9.3 Amendment . This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Subject to the previous sentence and in compliance with Applicable Law, this Agreement may be amended by the parties hereto, by action taken or authorized by the Board of Directors of PRA and the Board of Directors of Medmarc, at any time before or after approval of the matters presented in connection with the Plan of Conversion and this Agreement by the Eligible Members of Medmarc; provided, however, that after any approval of the Plan of Conversion and transactions contemplated by this Agreement by the Eligible Members of Medmarc, there may not be, without further approval of such Eligible Members, any amendment of this Agreement which changes or otherwise modifies or amends the amount or the form of the consideration to be delivered to the Eligible Members of Medmarc under this Agreement other than as contemplated by this Agreement.

9.4 Extension; Waiver . At any time prior to the Effective Time, the parties to this Agreement may, to the extent permitted by Applicable Law, (a) extend the time for the performance of any of the obligations or other acts of the other parties to this Agreement, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant hereto, or (c) waive compliance with any of the agreements or conditions contained in this Agreement; provided, however, that after any approval of the Plan of Conversion and the transactions contemplated by this Agreement by the Eligible Members of Medmarc, there

may not be, without further approval of such Eligible Members, any extension or waiver of this Agreement or any portion thereof which reduces the amount or changes the form of the consideration to be delivered to the Eligible Members of Medmarc under this Agreement other than as contemplated by this Agreement. Any agreement on the part of a party to this Agreement to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.

9.5 Liquidated Damages; Termination Fee . Notwithstanding anything to the contrary contained in this Agreement, in the event that any of the following events or circumstances shall occur, Medmarc shall, within ten (10) business days after notice of the occurrence thereof by PRA, Medmarc shall pay to PRA the sum equal to $4,600,000 (which the parties agree and stipulate as reasonable and full liquidated damages and reasonable compensation for the involvement of PRA in the transactions contemplated in this Agreement, is not a penalty or forfeiture, and will not affect the provisions of this Section 9.5): (i) at any time prior to termination of this Agreement a Medmarc Acquisition Event shall occur; (ii) PRA shall terminate this Agreement pursuant to Section 9.1(d) or (e); (iii) Medmarc shall terminate this Agreement pursuant to Section 9.1(i); or (iv) if Medmarc fails to call and the Eligible Members of Medmarc fail to hold the meeting of the Eligible Members of Medmarc as required by Section 1.2 of this Agreement. For purposes of this Agreement a “ Medmarc Acquisition Event ” shall mean that Medmarc shall have authorized, recommended, approved, or entered into an agreement with any Person (other than any of the parties to this Agreement) to effect an Acquisition Proposal. Upon the making and receipt of such payment under this Section 9.5, Medmarc shall have no further obligation of any kind under this Agreement and neither PRA nor PRA Professional shall have any further obligation of any kind under this Agreement, except in each case under Section 9.2 of this Agreement, and no party shall have any liability for any breach or alleged breach by such party of any provision of this Agreement.

ARTICLE 10
GENERAL PROVISIONS

10.1 Closing . Subject to the terms and conditions of this Agreement, the closing of the Plan of Conversion and the transactions contemplated by this Agreement (the “ Closing ”) will take place at the offices of Luse Gorman Pomerenk & Schick, P.C. in Washington, D.C., at 10:00 a.m. on a date to be specified in a notice delivered by PRA, which shall be no later than five (5) business days after the satisfaction or waiver (subject to Applicable Law) of the latest to occur of the conditions set forth in Article 8 of this Agreement, or at such other time and place as may be mutually agreed by the parties (the “ Closing Date ”). The parties shall use their respective commercially reasonable efforts to cause the Effective Time to occur on or before December 31, 2012.

10.2 Nonsurvival of Representations, Warranties and Agreements . None of the representations, warranties, covenants and agreements of Medmarc, PRA or PRA Professional in this Agreement or in any instrument delivered by Medmarc, PRA or PRA Professional pursuant to this Agreement shall survive the Effective Time, except as otherwise provided in Section 9.2 of this

Agreement and except for those covenants and agreements contained in this Agreement and in any such instrument which by their terms apply in whole or in part after the Effective Time.

10.3 Expenses . Except as otherwise expressly provided in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such expense; provided, however, that (a) PRA and Medmarc will share the cost of the HSR Act filing fee in proportion to their relative assets as of December 31, 2011, (b) Medmarc shall pay all expenses relating to the approval of the Plan of Conversion by the Commissioner of the Department, and (c) PRA shall pay all expenses in connection with the approval of the change of control of Medmarc contemplated by this Agreement by the Commissioner of the Department, and any other required filings with any Insurance Regulator.

10.4 Notices . All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, by facsimile (with confirmation) followed by delivery of an original via overnight courier service, mailed by registered or certified mail (return receipt requested) or delivered by an overnight courier service (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

(a) if to PRA or PRA Professional to:

ProAssurance Corporation

100 Brookwood Place

Birmingham, Alabama 35209

Attention: Chief Executive Officer, copy to Corporate Secretary

Fax: (205) 877-4405

with copies to:

Burr & Forman LLP

420 N. 20 ^th Street, Suite 3100

Birmingham, Alabama 35203

Attention: Jack P. Stephenson, Esq.

Fax: (205) 458-5100

and

(b) if to Medmarc, to:

Medmarc Mutual Insurance Company

14280 Park Meadow Drive

Suite 300

Chantilly, Virginia 20151-2219

Attention: Mary Todd Peterson

with copies to:

Luse Gorman Pomerenk & Schick, P.C.

5335 Wisconsin Avenue, NW

Suite 780

Washington, D.C. 20015

Attention: John J. Gorman, Esq.

Fax: (202) 362-2902

10.5 Further Assurances . Prior to the Closing, at the reasonable request of any party to this Agreement, the other parties shall execute, acknowledge and deliver such other documents and/or instruments as may be reasonably required by the requesting party to carry out the purposes of this Agreement. In the event any party to this Agreement shall be involved in litigation, threatened litigation or government inquiries with respect to a matter covered by this Agreement, every other party to this Agreement shall also make available to such party, at reasonable times and subject to the reasonable requirements of its own businesses, such of its personnel as may have information relevant to such matters, provided that such party shall reimburse the providing party for its reasonable costs for employee time incurred in connection therewith if more than one business day is required. Following the Closing, the parties will cooperate with each other in connection with tax audits and in the defense of any legal proceedings.

10.6 Remedies Cumulative . Unless expressly made the exclusive remedy by the terms of this Agreement, all remedies provided for in this Agreement are cumulative and shall be in addition to any other remedies which any party may have under this Agreement or otherwise.

10.7 Presumptions . It is expressly acknowledged and agreed that all parties have been represented by counsel and have participated in the negotiation and drafting of this Agreement, and that there shall be no presumption against any party on the ground that such party was responsible for preparing this Agreement or any part of it.

10.8 Exhibits and Schedules . Each of the Exhibits and Schedules referred to in, and/or attached to, this Agreement is an integral part of this Agreement and is incorporated in this Agreement by this reference.

10.9 Interpretation . When a reference is made in this Agreement to Sections, Exhibits or Schedules, such reference shall be to a Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation”. No provision of this Agreement shall be construed to require PRA, PRA Professional or Medmarc or any of their respective Subsidiaries or Affiliates to take any action which would violate any Applicable Law, rule or regulation. In the event of any conflict between the terms of this Agreement and the Plan of Conversion, but subject to the provisions of Section 1.1 and Section 7.1(a) of this Agreement, the terms of the Plan of Conversion shall control.

10.10 Counterparts . This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. A facsimile copy or electronic transmission of a signature page shall be deemed to be an original signature page.

10.11 Entire Agreement . This Agreement (including the documents and the instruments referred to in this Agreement) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement.

10.12 Governing Law . This Agreement shall be governed and construed in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law principles, except that the Plan of Conversion shall be effected in accordance with and governed by the laws of the State of Vermont, and the insurance laws of the State of Vermont as they relate to Medmarc shall govern to the extent the application of such laws would be inconsistent with or in contravention of the laws of the State of Delaware.

10.13 Severability . Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.

10.14 Publicity . PRA and Medmarc shall develop a joint communications plan and each party shall (i) ensure that all press releases and other public statements and communications with respect to this Agreement and the transactions contemplated hereby shall be consistent with such joint communications plan and (ii) unless otherwise required by Applicable Law or by obligations pursuant to any listing agreement with or rules of the NYSE, consult with each other for a reasonable time before issuing any press release or otherwise making any public statement or communication (including any communications that would require a filing with the SEC), and mutually agree upon any such press release or any such public statement or communication, with respect to this Agreement or the transactions contemplated hereby. In addition to the foregoing, unless otherwise required by Applicable Law or by obligations pursuant to any listing agreement with or rules of the NYSE, neither PRA nor Medmarc shall issue any press release or otherwise make any public statement or disclosure concerning the other party or the other party’s business, financial conditions or results of operations without the consent of the other party.

10.15 Assignment; No Third Party Beneficiaries . Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties to this Agreement (whether by operation of law or otherwise) without the prior written consent of the other parties to this Agreement. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Except as otherwise provided in Sections 7.5 and 7.6, this Agreement (including the documents and

instruments referred to in this Agreement) is not intended to confer upon any person other than the parties to this Agreement any rights or remedies under this Agreement.

10.16 Definitions .

(a) The following terms, as used in this Agreement, have the meanings that follow:

“Affiliate” means with respect to any specified Person, any other Person that at the time of determination directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified Person.

“ Amended and Restated Articles of Incorporation ” means the articles of incorporation of Medmarc amended and restated at the Effective Time and in the form attached as Exhibit D to this Agreement.

“ Amended and Restated Bylaws ” means the bylaws of Medmarc as amended and restated at the Effective Time and in the form attached as Exhibit E to this Agreement.

“ Applicable Law ” means all laws, published rules, statutes, regulations, policies and codes and judgments, injunctions, orders, decrees, licenses, permits and all other requirements of Governmental Authorities applicable to the Person, place and situation in question.

“ Board of Directors ” means the Board of Directors (or similar governing body) of Medmarc, PRA or PRA Professional, as applicable.

“ Code ” means the United States Internal Revenue Code of 1986, as amended.

“ Control ” means, as to any Person, the power to direct or cause the direction of the management and polices of such Person, whether through the ownership of voting securities, by contract or otherwise. The terms “Controlled by”, “under common Control with” and “Controlling” shall have correlative meanings.

“ Eligible Member ” means each Member eligible under the Plan of Conversion to receive consideration in exchange for such Member’s Membership Interests.

“Employee Plan” means any “employee benefit plan,” as defined in Section 3(3) of ERISA; any employment, severance or similar service agreement, plan, arrangement or policy; any other plan or arrangement providing for compensation, bonuses, profit-sharing, stock option or other equity-related rights or other forms of incentive or deferred compensation, vacation benefits, insurance (including any self-insured arrangements), medical, dental or vision benefits, disability or sick leave benefits, life insurance, employee assistance program, workers’ compensation, supplemental unemployment benefits, severance benefits and post-employment or retirement benefits (including compensation, pension, insurance or medical benefits); or any loan; in each case including plans or arrangements, both written and oral, covering or extended to any current or former director, employee or independent contractor.

“Environmental Laws” means any federal, state, local or foreign law (including common law) treaty, judicial decision, regulation, rule, judgment, order, decree, injunction, permit or governmental restriction or requirement relating to protection of the environment or to pollutants, contaminants, wastes or chemicals or any toxic, radioactive, ignitable, corrosive, reactive or otherwise hazardous substances, wastes or materials.

“Environmental Permits” means, with respect to any Person, all permits, licenses, franchises, certificates, approvals and other similar authorizations of Governmental Authorities required by Environmental Laws and affecting, or relating in any way to, the business of such Person or any of such Person’s Subsidiaries, as currently conducted.

“ Governmental Authority ” means any United States federal, state or local or any supra-national or non-U.S. governmental, political subdivision, governmental, regulatory or administrative authority, instrumentality, agency, body or commission, self-regulatory organization or any court, tribunal, or judicial or arbitral body.

“Insurance Laws” means all Applicable Laws applicable to the business of insurance and the regulation of insurance holding companies, whether domestic or foreign, and all applicable orders and directives of Governmental Authorities and market conduct recommendations resulting from market conduct examinations of Insurance Regulators.

“Insurance Regulators” means all Governmental Authorities regulating the business of insurance under the Insurance Laws.

“ Knowledge of Medmarc ” means the actual knowledge of any person listed on Exhibit F.

“ Knowledge of PRA ” means the actual knowledge of any person listed on Exhibit G.

“Lien” means, with respect to any property or asset (real or personal, tangible or intangible), any mortgage, lien, pledge, charge, security interest, encumbrance or other adverse claim of any kind in respect of such property or asset. For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any property or asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such property or asset.

“ Material Adverse Effect on Medmarc ” or “ Material Adverse Effect on PRA ” means, with respect to Medmarc or PRA, as the case may be, a material adverse effect on the business, assets, properties, operations, or condition (financial or otherwise) of such party and its Subsidiaries taken as a whole; provided that any adverse change or effect arising out of or resulting from or attributable to the following shall be excluded in any determination of Material Adverse Effect: (i) any circumstance, change or effect (including international events such as acts of terrorism or war) affecting generally companies operating in the products or professional liability insurance business; (ii) any circumstance, change or effect affecting generally the United States or world economy or capital markets generally, including changes in interest or exchange rates; (iii) changes

or prospective changes in laws, rules or regulations or accounting or actuarial practices (iv) the execution or announcement of or the consummation of the transactions contemplated by this Agreement or the Plan of Conversion (including the adverse effect of any loss or threatened loss of, or disruption or threatened disruption in, any customer, reinsurer, policyholder, supplier, and/or vendor relationships or loss of personnel resulting from such execution, announcement or consummation), (v) actions taken or omitted by such party at the direction of, or with the prior written consent of, the other party, or (vi) the effect of any action taken by the other party or its Affiliates with respect to the transactions contemplated by this Agreement. Without limiting the foregoing, a Material Adverse Effect on Medmarc shall be conclusively presumed if the effect results in a reduction of Medmarc’s unassigned surplus to a level below $138,700,000, as computed on a SAP basis.

“Member” means, as of any date of determination, a Person who, in accordance with the records of Medmarc, Medmarc’s articles of incorporation and bylaws, and Applicable law, is a member of Medmarc as of such date.

“ Membership Interest ” means all policyholders’ rights as members arising prior to the Conversion under the bylaws of Medmarc or otherwise under Applicable Law. These include the right to vote and to participate in any distribution of surplus in the event that Medmarc is liquidated. The term “Membership Interest” does not include rights expressly conferred upon the policyholders by their policies or contract (other than any right to vote), such as the right to any declared policy dividends.

“ Permitted Liens ” means any Liens included in the Medmarc Disclosure Schedules.

“Person” means an individual, corporation, partnership (general or limited), limited liability company, association, trust or other entity or organization, including any Governmental Authority.

“SEC” means the United States Securities and Exchange Commission.

“ Subsidiary ” of any Person means any corporation, general or limited partnership, joint venture, limited liability company, limited liability partnership or other Person that is a legal entity, trust or estate (i) where such Person has the right to elect a majority of the Board of Directors (or a majority of another body performing similar functions) of such corporation or other Person, whether through ownership of voting securities or interests, by exercising of contractual rights or otherwise, or (ii) of which (or in which ) more than 50% of the (a) voting capital stock of such corporation or other Person, (b) interest in the capital or profits of such partnership, joint venture or limited liability company or (c) the beneficial interest in such trust or estate, is at the time of determination directly or indirectly owned or controlled by such Person.

(b) Set forth below is an index to the definitions set forth in this Agreement.

Term Section

401(k) Plan Termination Date 7.5(j)

Acquisition Proposal 7.9(c)

Affiliate 10.16(a)

Agreement Recitals

Amended and Restated Articles 10.16(a)

Amended and Restated Bylaws 10.16(a)

Applicable Law 10.16(a)

Board of Directors 10.16(a)

Burdensome Condition 7.1(a)

Cash Consideration 2.2

Claim 7.6(b)

Closing 10.1

Closing Date 10.1

Closing Date Medmarc Disclosure Schedule 7.7(b)

COBRA 4.13(k)

Code 10.16(a)

Combined Financial Statements 4.7(a)

Commissioner 1.1

Common Stock Recitals

Confidentiality Agreement 7.2(a)

Consulting Agreement 2.6

Continuing Employees 7.5(a)

Control 10.16(a)

Conversion Recitals

Conversion Statute 1.1

Conversion Agent 3.1

Conversion Fund 3.2(b)

Credit Account 2.7(c)

Deferred Plans 7.5(i)

Department 1.1

Effective Time 1.5

Eligible Members 10.16(a)

Employee Plan 10.16(a)

Environmental Laws 10.16(a)

Environmental Permits 10.16(a)

ERISA 4.13(a)

Exchange Act 5.3(a)

GAAP 5.3(c)

Governmental Authority 10.16(a)

Hartford Agreements 4.16(d)(i)

HIPAA 4.13(k)

HSR Act 4.5(c)

HSR Act Report 4.5(c)

Indemnified Liabilities 7.6(b)

Indemnified Parties 7.6(b)

Information Statement 1.2(c)

Initial Long-Term Incentive Period 7.5(h)

Initial Short-Term Incentive Period 7.5(g)

Insurance Laws 10.16(a)

Insurance Premium Amount 7.6(a)

Insurance Regulators 10.16(a)

Intellectual Property 4.18(a)

IRS 4.12(a)

Knowledge 10.16(a)

Lien 10.16(a)

LTIP 7.5(h)

Material Adverse Effect 10.16(a)

Medmarc Recitals

Medmarc 401(k) Plan 7.5(j)

Medmarc Acquisition Event 9.5

Medmarc Actuarial Analyses 4.21(e)

Medmarc Actuaries 4.21(e)

Medmarc Contract 4.16(c)

Medmarc Disclosure Schedule 4

Medmarc Employees 7.5(a)

Medmarc Executive Agreements 7.5(d)

Medmarc Executives 7.5(d)

Medmarc Holding Company Act Report 4.6(c)

Medmarc Insurance Policies 4.11(a)

Medmarc Insurance Subsidiaries 4.2(b)

Medmarc Personal Property Leases 4.20(b)

Medmarc Real Property Leases 4.19(a)

Medmarc Recommendation Event 9.1(d)

Medmarc Regulatory Agreement 4.15(b)

Medmarc Reinsurance Treaties 4.21(c)

Medmarc Reserves 4.21(d)

Medmarc SAP Statements 4.6(a)

Medmarc Subsidiaries 4.2(a)

Member 10.16(a)

Membership Interest 10.16(a)

Permits 4.15(a)

Permitted Liens 10.16(a)

Person 10.16(a)

Plan of Conversion Recitals

Policyholder Renewal Credit 2.7(a)

Potential Acquiror 7.9(a)

PRA Recitals

PRA 401(k) Plan 7.5(j)

PRA Professional Recitals

PRA SEC Reports 5.3(a)

Premerger Notification Agencies 4.5(c)

Proposal 1.2(b)

Purchase Price 2.2

Requisite Regulatory Approvals 8.1(c)

Retention and Severance Compensation Agreement 7.5(d)

Sale Recitals

SAP 4.6(b)

SEC 10.16(a)

SERP 7.5(f)

Securities Act 5.3(b)

Shares 2.1

SOX 4.7(f)

STIP 7.5(g)

Subsidiary 10.16(a)

Tail Policy 7.6(a)

Tax or Taxes 4.12(a)

Tax Return or Tax Returns 4.12(a)

WARN Act 4.14(e)

IN WITNESS WHEREOF, PRA, PRA Professional, and Medmarc have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written.

PROASSURANCE CORPORATION,

a Delaware corporation

By: _s/ Victor T. Adamo_ ______

Name: Victor T. Adamo

Title: Vice Chairman

PRA PROFESSIONAL LIABILITY GROUP, INC.,

a Delaware corporation

By: __s/ Victor T. Adamo

Name: Victor T. Adamo

Title: President

MEDMARC MUTUAL INSURANCE COMPANY,

a Vermont mutual insurance corporation

By: s/ Mary Todd Peterson

Name: Mary Todd Peterson

Title: President and Chief Executive Officer

Exhibits and Schedules

Exhibits

Exhibit A Form of Plan of Conversion

Exhibit B Directors of Medmarc to be Elected by PRA

Exhibit C Form of Consulting Agreement

Exhibit D Amended and Restated Articles of Incorporation

Exhibit E Amended and Restated Bylaws

Exhibit F Knowledge of Medmarc

Exhibit G Knowledge of PRA

Schedules

Medmarc Disclosure Schedule

PRA Disclosure Schedule

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: May 6, 2013

/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;

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: May 6, 2013

/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 March 31, 2013 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

May 6, 2013

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 March 31, 2013 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

May 6, 2013

Exhibit 32.2