UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2009 or
o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to
Commission file number 0-16533

ProAssurance Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware		63-1261433
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
100 Brookwood Place, Birmingham, AL		35209
(Address of Principal Executive Offices)		(Zip Code)

(205) 877-4400

(Registrant’s Telephone Number, Including Area Code)

 

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

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

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

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

     As of April 24, 2009, there were 33,083,968 shares of the registrant’s common stock outstanding.

 

 

FORWARD-LOOKING STATEMENTS

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

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

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

	•		general economic conditions, either nationally or in our market areas, that are different than anticipated;
	•		regulatory, legislative and judicial actions or decisions could affect our business plans or operations;
	•		the enactment or repeal of tort reforms;
	•		formation of state-sponsored malpractice insurance entities that could remove some physicians from the private insurance market;
	•		the impact of deflation or inflation;
	•		changes in the interest rate environment;
	•		the effect that changes in laws or government regulations affecting the U.S. economy or financial institutions, including the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, may have on the U.S. economy and our business;
	•		performance of financial markets affecting the fair value of our investments or making it difficult to determine the value of our investments;
	•		changes in accounting policies and practices that may be adopted by our regulatory agencies and the Financial Accounting Standards Board, or the Securities and Exchange Commission;
	•		changes in laws or government regulations affecting medical professional liability insurance or the financial community;
	•		the effects of changes in the health care delivery system;
	•		uncertainties inherent in the estimate of loss and loss adjustment expense reserves and reinsurance, and changes in the availability, cost, quality, or collectability of insurance/reinsurance;
	•		the results of litigation, including pre-or-post-trial motions, trials and/or appeals we undertake;
	•		bad faith litigation which may arise from our handling of any particular claim, including failure to settle;
	•		loss of independent agents;
	•		changes in our organization, compensation and benefit plans;
	•		our ability to retain and recruit senior management;
	•		our ability to purchase reinsurance and collect payments from our reinsurers;
	•		increases in guaranty fund assessments;

	•		our ability to achieve continued growth through expansion into other states or through acquisitions or business combinations;
	•		changes to the ratings assigned by rating agencies to our insurance subsidiaries, individually or as a group;
	•		changes in competition among insurance providers and related pricing weaknesses in our markets; and
	•		the expected benefits from completed and proposed acquisitions may not be achieved or may be delayed longer than expected due to business disruption, loss of customers and employees, increased operating costs or inability to achieve cost savings, and assumption of greater than expected liabilities, among other reasons.

     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 annual report on Form 10K and other documents we file with the Securities and Exchange Commission, such as our current reports on Form 8-K, and our regular reports on Forms 10-Q and 10-K.

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

ProAssurance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

		March 31				December 31
(In thousands, except per share data)		2009				2008
Assets
Investments
Fixed maturities, available for sale, at fair value		$	3,039,373			$	2,961,568
Equity securities, available for sale, at fair value			4,793				6,981
Equity securities, trading, at fair value			11,533				11,852
Short-term investments			365,011				441,996
Business owned life insurance			63,862				63,440
Investment in unconsolidated subsidiaries			45,229				44,522
Other investments			44,270				45,583
Total Investments			3,574,071				3,575,942
Cash and cash equivalents			23,132				3,459
Premiums receivable			99,537				86,137
Receivable from reinsurers on paid losses and loss adjustment expenses			20,872				17,826
Receivable from reinsurers on unpaid losses and loss adjustment expenses			268,727				268,356
Prepaid reinsurance premiums			14,703				13,009
Deferred policy acquisition costs			23,282				19,505
Deferred taxes			124,105				138,034
Real estate, net			23,307				23,496
Goodwill			90,250				72,213
Other assets			60,081				62,961
Total Assets		$	4,322,067			$	4,280,938
Liabilities and Stockholders’ Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses		$	2,372,788			$	2,379,468
Unearned premiums			227,286				185,756
Reinsurance premiums payable			128,801				127,877
Total Policy Liabilities			2,728,875				2,693,101
Other liabilities			95,701				129,322
Long-term debt			35,427				34,930
Total Liabilities			2,860,003				2,857,353
Stockholders’ Equity
Common stock, par value $0.01 per share
100,000,000 shares authorized, 34,190,201 and 34,109,196 shares issued, respectively			342				341
Additional paid-in capital			520,364				518,687
Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $(7,432) and $(19,328) respectively			(13,805	)			(35,898	)
Retained earnings			999,257				970,891
			1,506,158				1,454,021
Treasury stock, at cost, 1,106,233 shares and 763,316 shares, respectively			(44,094	)			(30,436	)
Total Stockholders’ Equity			1,462,064				1,423,585
Total Liabilities and Stockholders’ Equity		$	4,322,067			$	4,280,938

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

						Accumulated
						Other								Other
						Comprehensive				Retained				Capital
(In thousands)		Total				Income (Loss)				Earnings				Accounts
Balance at December 31, 2008		$	1,423,585			$	(35,898	)		$	970,891			$	488,592
Net income			28,366				—				28,366				--
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments			22,093				22,093				—				--
Purchase of treasury stock			(18,642	)			—				—				(18,642	)
Treasury shares issued in acquisition (see Note 3)			5,161				—				—				5,161
Common shares issued as compensation and net effect of stock options exercised			188				—				—				188
Share-based compensation			1,313				—				—				1,313
Balance at March 31, 2009		$	1,462,064			$	(13,805	)		$	999,257			$	476,612

						Accumulated
						Other								Other
						Comprehensive				Retained				Capital
(In thousands)		Total				Income (Loss)				Earnings				Accounts
Balance at December 31, 2007		$	1,255,070			$	9,902			$	793,166			$	452,002
Net income			35,868				—				35,868				—
Change in net unrealized gains (losses) on investments, after tax, net of reclassification adjustments			2,659				2,659				—				—
Purchase of treasury stock			(23,436	)			—				—				(23,436	)
Common shares issued as compensation and net effect of stock options exercised			3,254				—				—				3,254
Share-based compensation			2,440				—				—				2,440
Balance at March 31, 2008		$	1,275,855			$	12,561			$	829,034			$	434,260

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

		Three Months Ended
		March 31
(In thousands, except per share data)		2009				2008
Revenues
Gross premiums written		$	154,544			$	160,266
Net premiums written		$	142,387			$	148,415
Premiums earned		$	115,553			$	132,018
Premiums ceded			(11,662	)			(11,441	)
Net premiums earned			103,891				120,577
Net investment income			34,569				41,059
Equity in earnings (loss) of unconsolidated subsidiaries			(1,428	)			(1,946	)
Net realized investment gains (losses)			(7,537	)			(1,426	)
Other income			1,474				1,362
Total revenues			130,969				159,626
Expenses
Losses and loss adjustment expenses			76,707				90,579
Reinsurance recoveries			(7,590	)			(8,897	)
Net losses and loss adjustment expenses			69,117				81,682
Underwriting, acquisition and insurance expenses			23,979				26,243
Interest expense			627				2,422
Total expenses			93,723				110,347
Income before income taxes			37,246				49,279
Provision for income taxes
Current expense (benefit)			6,082				5,365
Deferred expense (benefit)			2,798				8,046
			8,880				13,411
Net income		$	28,366			$	35,868
Earnings per share:
Basic		$	0.85			$	1.11
Diluted		$	0.84			$	1.04
Weighted average number of common shares outstanding:
Basic			33,367				32,182
Diluted			33,609				35,068

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

		Three Months Ended
(In thousands)		March 31
		2009				2008
Comprehensive income:
Net income		$	28,366			$	35,868
Decrease in net unrealized losses on investments, after tax, net of reclassification adjustments			22,093				2,659
Comprehensive income		$	50,459			$	38,527

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

		Three Months Ended
(In thousands)		March 31
		2009				2008
Operating Activities
Net income		$	28,366			$	35,868
Depreciation and amortization			4,052				3,756
Net realized investment (gains) losses			7,537				1,426
Share-based compensation			1,314				2,440
Deferred income taxes			2,798				8,046
Changes in assets and liabilities, net of the effects of acquisitions:
Premiums receivable			(13,603	)			(7,293	)
Reserve for losses and loss adjustment expenses			(12,496	)			(4,304	)
Unearned premiums			38,959				27,994
Reinsurance related assets and liabilities			(2,284	)			5,257
Other liabilities			(46,393	)			(20,130	)
Other			(218	)			8,265
Net cash provided by operating activities			8,032				61,325
Investing Activities
Purchases of:
Fixed maturities available for sale			(182,191	)			(276,176	)
Equity securities available for sale			(38	)			(2,346	)
Equity securities trading			(1,478	)			(2,288	)
Other investments			(106	)			(277	)
Cash invested in unconsolidated subsidiaries			(2,135	)			(20,960	)
Proceeds from sale or maturities of:
Fixed maturities available for sale			137,831				282,155
Equity securities available for sale			333				196
Equity securities trading			144				463
Other investments			697				1,886
Net (increase) decrease in short-term investments			81,872				(54,119	)
Cash paid for acquisitions, net of cash received			(3,900	)			—
Other			1,931				4,144
Net cash provided (used) by investing activities			32,960				(67,322	)
Financing Activities
Repurchase of treasury stock			(18,642	)			(23,436	)
Book overdraft			(2,677	)			13,501
Other			—				24
Net cash provided (used) by financing activities			(21,319	)			(9,911	)
Increase (decrease) in cash and cash equivalents			19,673				(15,908	)
Cash and cash equivalents at beginning of period			3,459				30,274
Cash and cash equivalents at end of period		$	23,132			$	14,366
Significant Non-cash Transactions:
Treasury stock issued in acquisition		$	5,161			$	—

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

1. Basis of Presentation

     The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation and its consolidated subsidiaries (ProAssurance). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (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. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes contained in ProAssurance’s December 31, 2008 report on Form 10-K.

     Certain reclassifications have been made in the prior period consolidated financial statements to conform to the current period presentation.

Accounting Changes

     FASB Staff Position (FSP) EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No.99-20, was issued in January 2009 to amend the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. EITF 99-20 specifies that an impairment is considered other-than-temporary if, based on an estimate of cash flows that a market participant would use in determining the current fair value, there has been an adverse change in those estimated cash flows. FSP EITF 99-20-1 alters this guidance by specifying that an impairment be considered other-than-temporary if it is “probable” there has been an adverse change in the holder’s estimated cash flows from those previously projected. ProAssurance adopted FSP EITF 99-20-1 as of December 31, 2008 and considered the guidance provided therein in its impairment evaluations performed as of December 31, 2008 and March 31, 2009. There was no material effect from adoption.

     In May 2008 the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which alters the accounting for Convertible Debentures. FSP APB 14-1 requires issuers to account for convertible debt securities that allow for either mandatory or optional cash settlement (including partial cash settlement) by separating the liability and equity components in a manner that reflects the issuer’s nonconvertible debt borrowing rate at the time of issuance and requires recognition of additional (non-cash) interest expense in subsequent periods based on the nonconvertible rate. Additionally, FSP APB 14-1 requires that when such debt instruments are repaid or converted any consideration transferred at settlement is to be allocated between the extinguishment of the liability component and the reacquisition of the equity component. FSP APB 14-1 is applicable to the Convertible Debentures which ProAssurance converted in July 2008. ProAssurance adopted FSP APB 14-1 on its effective date January 1, 2009. The adoption of FSP APB 14-1 has no effect on 2009 operating results because no convertible debt has been outstanding during 2009. The cumulative effect of adoption, which would be an increase to additional paid-in capital of $65,000 and an offsetting decrease to retained earnings of the same amount, has not been recorded because the effect is immaterial and would not change total stockholders’ equity.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

1. Basis of Presentation (continued)

     In December 2007 the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research Bulletin 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. ProAssurance adopted SFAS 160 on its effective date, January 1, 2009. Adoption did not have a significant effect on ProAssurance’s results of operations or financial position.

     In December 2007 the FASB issued SFAS 141 (Revised December 2007) Business Combinations. SFAS 141(R) replaces FASB Statement No. 141, Business Combinations, but retains the fundamental requirement in SFAS 141 that the acquisition method (referred to as the purchase method in SFAS 141) of accounting be used for all business combinations. SFAS 141(R) provides new or additional guidance with respect to business combinations including: defining the acquirer in a transaction, the valuation of assets and liabilities when noncontrolling interests exist, the treatment of contingent consideration, the treatment of costs incurred to effect the acquisition, the treatment of reorganization costs, and the valuation of assets and liabilities when the purchase price is below the net fair value of assets acquired. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. ProAssurance adopted SFAS 141(R) as of its effective date, January 1, 2009. ProAssurance accounted for its acquisitions of Mid-Continent General Agency, Inc. (Mid-Continent) and Georgia Lawyers Insurance Company (Georgia Lawyers) during the first quarter of 2009 in accordance with SFAS 141(R).

Recent Accounting Developments

			On April 9, 2009 the FASB issued three related FSPs:
	(1)		FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
			This FSP clarifies factors to be considered in determining whether there has been a significant decrease in market activity for an asset in relation to normal activity. The FSP provides additional guidance on when the use of multiple (or different) valuation techniques may be warranted and considerations for determining the weight that should be applied to the various techniques. The FSP also establishes a requirement that conclusions about whether transactions are orderly be based on the weight of the evidence. Entities are required to disclose any changes to valuation techniques (and related inputs) that result from a conclusion that markets are not orderly and to disclose the effect of the change, if practicable.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

1. Basis of Presentation (continued)

	(2)		FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments
			This FSP replaces existing guidance that requires an impairment of a debt security be considered as other-than-temporary unless management is able to assert both the intent and the ability to hold the impaired security until recovery of value. The revised guidance establishes new criteria that must be met to avoid classification of an impairment as other-than-temporary: an entity must assert it has no intent to sell the security and that it is more likely than not that the entity will not be required to sell the security before recovery of its anticipated amortized cost basis.
			The FSP also establishes the concept of credit loss. Credit loss is defined in the FSP as the difference between the present value of the cash flows expected to be collected from a debt security and the amortized cost basis of the security. The FSP states that “in instances in which a determination is made that a credit loss exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis” an impairment is to be separated into (a) the amount of total impairment related to the credit loss and (b) the amount of total impairment related to all other factors. The credit loss component of the impairment is to be recognized in income of the current period. The non-credit component is to be recognized as a part of other comprehensive income. Transition provisions of the FSP require a cumulative effect adjustment to reclassify the noncredit component of a previously recognized other-than temporary impairment from retained earnings to accumulated other comprehensive income “if an entity does not intend to sell and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis.”
	(3)		FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments
			This FSP amends FAS 107 to require publicly traded companies to provide disclosures about fair values of financial instruments for interim reporting periods as well as in annual financial statements. The FSP also amends APB 28 to require that fair value disclosures be included in any summarized financial information issued at interim reporting periods.

     Each of these FSPs is effective for interim and annual periods ending after June 15, 2009 with early adoption for periods ending after March 15, 2009 permitted in specified groupings. ProAssurance has elected to adopt the FSPs on the effective date but has not yet completed its evaluation of the effects of adoption.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

2. Fair Value Measurement

     Fair value is defined by SFAS 157 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. SFAS 157 establishes a three level hierarchy 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 by SFAS 157 as follows:

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

Level 2:		market data obtained from sources independent of the reporting entity (observable inputs). For ProAssurance, Level 2 inputs generally include quoted prices in markets that are not active, quoted prices for similar assets/liabilities, and other 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 (unobservable 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 and discounted cash flow methodologies as well as adjustments to externally quoted prices that are based on management judgment or estimation.

     The following tables present information about ProAssurance’s assets measured at fair value on a recurring basis as of March 31, 2009, and indicate the fair value hierarchy of the valuation techniques utilized to determine such value. No liabilities are measured at fair value at March 31, 2009. 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 in the table based on the lowest level input that is significant to the fair value measurement in its entirety. ProAssurance’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the assets being valued.

     Assets measured at fair value on a recurring basis as of March 31, 2009 are as follows:

		March 31, 2009
		Fair Value Measurements Using												Total
(In thousands)		Level 1				Level 2				Level 3				Fair Value
Assets:
Fixed maturities, available for sale
Government/Government agencies		$	—			$	208,654			$	—			$	208,654
State and municipal bonds			—				1,336,377				9,581				1,345,958
Corporate bonds			101				663,826				28,303				692,230
Asset-backed securities			—				791,771				760				792,531
Equity securities, available for sale			4,721				—				72				4,793
Equity securities, trading			11,533				—				—				11,533
Short-term investments(1)			294,156				70,855				—				365,011
Other investments(2)			—				—				13,173				13,173
Total assets		$	310,511			$	3,071,483			$	51,889			$	3,433,883

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

2. Fair Value Measurement (continued)

     Level 3 assets in the previous table consist primarily of auction rate municipal bonds (included in State and Municipal bonds), private placement senior notes (included in Corporate bonds), asset-backed securities (as shown in the above table) and a beneficial interest in asset-backed securities held in a private investment fund (included in Other Investments).

     The auction rate municipal bonds are rated A or better. The private placement senior notes are unconditionally guaranteed by large regional banks rated A or better. The asset-backed securities have a weighted average rating of AA or better, and are collateralized by a timber trust. The fair values of these three types of assets are primarily derived using pricing models, which may require multiple market input parameters, considered appropriate for the asset being valued.

     The asset-backed securities held in a private investment fund are primarily backed by manufactured housing, recreational vehicle receivables, and subprime securities, have an average rating of B, and are valued using a broker dealer quote.

     The following table presents additional information about assets measured at fair value using Level 3 inputs for the three months ended March 31, 2009:

		Fair Value Measurements
		Asset-								State and								Other
		backed				Corporate				Municipal				Equity				Invested
(In thousands)		Securities				Bonds				Bonds				Securities				Assets				Total
Balance January 1, 2009		$	1,327			$	36,472			$	—			$	357			$	14,576			$	52,732
Total gains (losses), realized and unrealized:
Included in earnings, as a part of net realized investment gains (losses)			—				(327	)			—				(285	)			(536	)			(1,148	)
Included in other comprehensive income			(31	)			(61	)			(443	)			—				(762	)			(1,297	)
Purchases, sales or settlements			(21	)			(5,781	)			—				—				(105	)			(5,907	)
Transfers in			—				2,000				10,024				—				—				12,024
Transfers out			(515	)			(4,000	)			—				—				—				(4,515	)
Balance March 31, 2009		$	760			$	28,303			$	9,581			$	72			$	13,173			$	51,889
The amount of total gains (losses) for the quarter ended March 31, 2009 included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at March 31, 2009		$	—			$	—			$	—			$	(285	)		$	(536	)		$	(821	)

     Certain municipal bonds in the portfolio are not widely traded. When observable inputs (Level 2) are not available such bonds have been valued using either a pricing model or a single dealer quote. Trades of these bonds by market participants were not completed during the quarter, which provided fewer inputs for establishing the fair value of these municipal bonds as of March 31, 2009. The municipal bond transfers into Level 3 of $10 million are due to the non-availability of Level 2 inputs for these bonds.

     During the first quarter of 2009, a $4 million private placement bond had more Level 2 inputs as compared to market activity than in 2008. It was a new issue during 2008 and did not trade frequently enough to have inputs to qualify as Level 2. Also, a corporate bond totaling $2 million was valued using a single broker dealer quote because a value based on observable inputs could not be obtained from the independent pricing service, Interactive Data Corporation (IDC), that had provided such data at December 31, 2008.

     Asset-backed securities having a value of $515,000 were transferred to Level 2 from Level 3 because IDC began providing values for the securities based upon observable inputs. Such information was not available in the prior period.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

3. Acquisitions

     ProAssurance acquired 100% of the outstanding shares of Mid-Continent and Georgia Lawyers during the first quarter of 2009 as a means of expanding its professional liability business. Both acquisitions have been accounted for as purchase transactions in accordance with SFAS 141(R) and related FSPs. Assets acquired and liabilities assumed were recorded based on estimated fair values as of the date of acquisition. The excess of the purchase price over the fair values of the identifiable net assets acquired was recognized as goodwill totaling $18.0 million for the two acquisitions. Approximately $1 million of the goodwill is not expected to be tax deductible. The acquisitions were not material to ProAssurance individually or in the aggregate. A portion of the consideration given in these acquisitions was 100,533 ProAssurance common shares, reissued from treasury stock. The shares, which had a cost basis of approximately $5.0 million, were valued at $5.2 million, based on the market value of ProAssurance common shares on the date of closing.

4. Investments

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

		March 31, 2009
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
(In thousands)		Cost				Gains				Losses				Value
Fixed maturities		$	3,046,653			$	82,575			$	(89,855	)		$	3,039,373
Equity securities			6,984				383				(2,574	)			4,793
		$	3,053,637			$	82,958			$	(92,429	)		$	3,044,166

		December 31, 2008
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
(In thousands)		Cost				Gains				Losses				Value
Fixed maturities		$	3,004,821			$	58,135			$	(101,388	)		$	2,961,568
Equity securities			7,949				558				(1,526	)			6,981
		$	3,012,770			$	58,693			$	(102,914	)		$	2,968,549

     ProAssurance maintains a direct beneficial interest in a private investment fund focused on managing high yield asset-backed bonds. The securities held in the fund are included in Other Investments, at fair value totaling $8.1 million at March 31, 2009 (recorded cost basis of $19.9 million).

     Proceeds from sales of fixed maturities and equity securities during the three months ended March 31, 2009 and 2008 are $51.2 million and $126.6 million, respectively.

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

		Three Months Ended
(In thousands)		March 31
		2009				2008
Gross realized gains		$	2,750			$	401
Gross realized (losses)			(586	)			(84	)
Other-than-temporary impairment (losses)			(8,048	)			(857	)
Trading portfolio net gains (losses)			(1,653	)			(886	)
Net realized investment gains (losses)		$	(7,537	)		$	(1,426	)

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

4. Investments (continued)

     Other-than-temporary impairment losses for the first quarter of 2009 included $2.5 million related to asset-backed bonds, $1.5 million related to corporate bonds, $0.4 million related to our equity holdings, $3.1 million related to a reduction of the amount expected to be received from the dissolution of the Reserve Primary Fund, and $0.5 million related to other investments.

5. Income Taxes

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

6. Deferred Policy Acquisition Costs

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

     Amortization of deferred acquisition costs are $10.1 million and $12.2 million for the three months ended March 31, 2009 and 2008, respectively.

7. Reserves 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 $18.5 million related to previously established reserves for the three months ended March 31, 2009. The favorable net loss development reflects reductions in the Company’s estimates of claim severity, principally for the 2004 through 2007 accident years.

     For the three months ended March 31, 2008, ProAssurance recognized favorable net loss development of $20.0 million to reflect reductions in estimated claim severity principally for accident years 2003 through 2006.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

8. Long-term Debt

     Outstanding long-term debt, as of March 31, 2009 and December 31, 2008, consists of the following:

(In thousands)		2009				2008
Trust Preferred Securities/Debentures due 2034, unsecured, bearing interest at a floating rate of 5.09% at March 31, 2009, rate adjusted quarterly.		$	22,992			$	22,992
Surplus Notes due May 2034, unsecured, principal of $12 million, net of unamortized discount of $25,000 and $62,000 at March 31 2009 and December 31, 2008, respectively, bearing a fixed interest rate of 7.7%, until May 2009, when the rate converts to a floating rate of LIBOR plus 3.85%, adjusted quarterly.			11,975				11,938
Surplus Note due February 2012, unsecured, principal of $517,000, net of discount of $58,000 at March 31, 2009, bearing interest at the prime rate, paid and adjusted quarterly.			460				—
		$	35,427			$	34,930

2012 Surplus Note

     In connection with the acquisition of Georgia Lawyers, ProAssurance issued a surplus note (the 2012 Surplus Note) due February 2012. The 2012 Surplus Note is the unsecured obligation of ProAssurance. Under the agreement ProAssurance may repay the note, plus any accrued and unpaid interest at any time without penalty or fee. Interest is payable based on the prime rate, adjusted quarterly.

     The 2012 Surplus Note was recorded at fair value on the acquisition date estimated in accordance with the purchase accounting requirement of SFAS 141(R). The resulting discount recorded at the acquisition date totaled $58,000 and is being amortized over the remaining expected life of the debt using the effective interest method. Such amortization is recorded in the financial statements as additional interest expense.

Additional Information

     For additional information regarding the terms of ProAssurance’s outstanding long-term debt see Note 11 of the Notes to the Consolidated Financial Statements in ProAssurance’s December 31, 2008 Annual Report on Form 10K.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

9. Stockholders’ Equity

     At March 31, 2009 ProAssurance had 100 million shares of authorized common stock and 50 million shares of authorized preferred stock. The Board of Directors of ProAssurance Corporation (the Board) has the authority to determine the 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. As of March 31, 2009 the Board of Directors has not approved the issuance of preferred stock.

     ProAssurance repurchased approximately 443,000 common shares, having a total cost of $18.6 million, during the three months ended March 31, 2009. ProAssurance repurchased approximately 445,000 common shares, having a total cost of $23.4 million, during the three months ended March 31, 2008. ProAssurance reissued 100,533 treasury shares, having a cost basis of approximately $5.0 million, during the first quarter of 2009 as a part of the consideration for acquisitions completed in the quarter. The Board of Directors of ProAssurance authorized $150 million in April 2007 and $100 million in August 2008 for the repurchase of common shares or the retirement of outstanding debt. Approximately $55.8 million of the amounts previously authorized by the Board remains available for use at March 31, 2009.

     Share-based compensation expense is approximately $1.3 million with a related tax benefit of approximately $460,000 for the three months ended March 31, 2009. Share-based compensation expense is approximately $2.4 million with a related tax benefit of approximately $837,000 for the three months ended March 31, 2008.

     ProAssurance granted approximately 29,000 shares of restricted stock to certain employees on February 26, 2009. The awards cliff vest on February 26, 2012 based on a service requirement. The fair value of each restricted share was estimated as $47.70, equal to the market value of a ProAssurance common share on the date of grant.

     ProAssurance issued approximately 44,000 common shares related to performance share awards granted in 2006. The awards were issued at the maximum level (125% of target) based on performance levels achieved. Cash was given in lieu of shares sufficient to satisfy required tax withholdings. ProAssurance granted approximately 71,000 (target) Performance Shares awards to employees during the first quarter of 2009. The Performance Shares cliff vest on December 31, 2011 based upon requirements for continued service and achievement of specified performance goals. The number of shares ultimately awarded can vary from 75% to 125% of the target award depending upon the degree to which goals are achieved. The fair value of each Performance Share was estimated as $47.70, equal to the market value of a ProAssurance common share on the date of grant.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

10. Commitments and Contingencies

     As a result of the acquisition of NCRIC Corporation in 2005, ProAssurance assumed the risk of loss for a judgment entered against PRA National on February 20, 2004 by a District of Columbia Superior Court in favor of Columbia Hospital for Women Medical Center, Inc. (CHW) in the amount of $18.2 million (the judgment). The judgment was appealed to the District of Columbia Court of Appeals, which affirmed the judgment in October 2008 and denied PRA National’s petition for rehearing in January 2009. ProAssurance included a liability of $19.5 million related to the judgment and post trial interest as a component of the fair value of assets acquired and liabilities assumed in the allocation of the NCRIC purchase price in 2005, and has continued to accrue post trial interest. In April 2009 the judgment and post trial interest, $20.8 million in total, were paid in full.

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

     The acquisition of Podiatry Insurance Company of America (PICA) closed on April 1, 2009. In accordance with the acquisition agreement, ProAssurance paid $120 million directly to PICA policyholders and contributed $15 million to PICA surplus for premium credits usable by eligible PICA policyholders over a three year period beginning in 2010.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

11. Earnings Per Share

     The following table provides detailed information regarding the calculation of basic and diluted earnings per share for each period presented:

		Three Months Ended
(In thousands, except per share data)		March 31
		2009				2008
Basic earnings per share calculation:
Numerator:
Net income		$	28,366			$	35,868
Denominator:
Weighted average number of common shares outstanding			33,367				32,182
Basic earnings per share		$	0.85			$	1.11
Diluted earnings per share calculation:
Numerator:
Net income		$	28,366			$	35,868
Effect of assumed conversion of contingently convertible debt			—				742
Net income—diluted computation		$	28,366			$	36,610
Denominator:
Weighted average number of common shares outstanding			33,367				32,182
Assumed exercise of dilutive stock options and issuance of performance shares			242				314
Assumed conversion of contingently convertible debt			—				2,572
Diluted weighted average equivalent shares			33,609				35,068
Diluted earnings per share		$	0.84			$	1.04

     In accordance with SFAS 128, Earnings Per Share, the diluted weighted average number of shares outstanding includes an incremental adjustment for the assumed exercise of dilutive stock options. Stock options are considered dilutive stock options if the assumed exercise of the options, using the treasury stock method as specified by SFAS 128, produces an increased number of shares. Approximately 491,000 and 328,000 of ProAssurance’s outstanding options were not considered to be dilutive during the three-month periods ended March 31, 2009 and 2008, respectively.

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2009

12. Subsequent Event

     ProAssurance acquired PICA on April 1, 2009 through a cash sponsored demutualization. ProAssurance purchased all of PICA’s outstanding stock created in the demutualization for $120 million in cash and provided a $15 million cash surplus contribution to offset the impact of premium credits to be given to eligible policyholders over a three year period beginning in 2010. Shortly after the transaction closed, ProAssurance provided PICA with an additional $15 million surplus contribution to support its ongoing operations. PICA primarily provides professional liability insurance to podiatric physicians throughout the United States and had gross written premium of approximately $96 million in 2008.

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

     The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes to those statements which accompany this report as well as ProAssurance’s Annual Report on Form 10K for the year ended December 31, 2008, which includes a glossary of insurance terms and phrases. Throughout the discussion, references to ProAssurance, “PRA,” “we,” “us” and “our” refers to ProAssurance Corporation and its consolidated subsidiaries. The discussion contains certain forward-looking information that involves risks and uncertainties. As discussed under “Forward-Looking Statements,” our actual financial condition and operating results could differ significantly from these forward-looking statements.

Critical Accounting Estimates

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

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

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

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

     The estimation of professional liability losses is inherently difficult. Ultimate loss costs, even for claims with similar characteristics, vary significantly depending upon many factors, including but not limited to, the nature of the claim and the personal situation of the claimant or the claimant’s family, the outcome of jury trials, the legislative and judicial climate where the insured event occurred, general economic conditions and, for medical professional liability, the trend of health care costs. Professional liability claims are typically resolved over an extended period of time, often five years or more. The combination of changing conditions and the extended time required for claim resolution results in a loss cost estimation process that requires actuarial skill and the application of judgment, and such estimates require periodic revision.

     In establishing our reserve for losses, management considers a variety of factors including claims frequency, historical paid and incurred loss development trends, the effect of inflation, general economic trends and the legal and political environment. We perform an in-depth review of our reserve for losses on a semi-annual basis. Additionally, during each reporting period we update and review the data underlying the estimation of our reserve for losses and make adjustments that we believe best reflect emerging data. Any adjustments are reflected in the then-current operations. Due to the size of our reserve for losses, even a small percentage adjustment to these estimates could have a material effect on our results of operations for the period in which the adjustment is made.

Reinsurance

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

     We evaluate each of our ceded reinsurance contracts at inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting guidance. At March 31, 2009 all ceded contracts are accounted for as risk transferring contracts.

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

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

Investment Valuations

     Virtually all of our financial assets are comprised of investments recorded at fair value. We determine fair value in accordance with SFAS 157, Fair Value Measurements, which defines fair value 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. The framework establishes a three level hierarchy for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value. For example, a quoted market price for an actively traded security on an established trading exchange is considered the most transparent (observable) input used to establish a fair value for that security and is classified as a Level 1 in the fair value hierarchy. An investment valued using multiple broker dealer quotes is considered to be valued using observable input that is not as transparent as a quoted market price on an exchange and is classified as a Level 2. An investment valued using either a single broker dealer quote or based on a cash flow valuation model is considered to be valued based on limited observable input and a significant amount of judgment and is classified as Level 3. See Note 2 to the Condensed Consolidated Financial Statements.

     Of the Company’s investments recorded at fair value totaling $3.4 billion, approximately 98% of our investments are based on observable market prices or observable market parameters (i.e. broker quotes, benchmark yield curves, issuer spreads, bids, etc.). The availability of observable market prices and pricing parameters (referred to as observable inputs) can vary from investment to investment. We utilize observable inputs, where available, to value our investments. In many cases, we obtain multiple observable inputs for an investment to derive the fair value without requiring significant judgments.

     We use a pricing service, Interactive Data Corporation (IDC), to value our investments that have an exchange traded price or multiple observable inputs. We do not utilize IDC to price investments that do not have multiple observable inputs (Level 3). IDC discloses the inputs used for each asset class that it prices. We review the inputs for the asset classes we own in order to make the appropriate level designation.

     All securities priced by IDC using an exchange traded price are designated by us as Level 1. Level 1 investments are currently limited to exchange traded common and preferred equity securities, and money market funds with quoted Net Asset Values (NAVs).

     We designate as Level 2 those securities not actively traded on an exchange for which IDC uses multiple verifiable observable inputs including last reported trade, non-binding broker quotes, benchmark yield curves, issuer spreads, two sided markets, benchmark securities, bids, offers, and assumed prepayment speeds.

     IDC provides a single price per instrument quoted. We review the pricing for reasonableness each quarter by comparing market yields generated by the supplied price versus market yields observed in the market place. If a supplied price is deemed unreasonable, we will challenge the price with IDC and make adjustments if deemed necessary. To date, we have not adjusted any prices supplied by IDC.

     For securities that do not have multiple observable inputs (Level 3), we do not rely on a price from IDC. Our Level 3 assets, which primarily are private placements and limited partnerships, are valued by management either using non-binding broker quotes or pricing models that utilize market based assumptions which have limited observable inputs including treasury yield levels, issuer spreads and non-binding broker quotes. The valuation techniques involve some degree of judgment. Approximately $52 million (2% of investments recorded at fair value) are valued in this manner.

     Most of our investments recorded at fair value are considered available-for-sale with a small portion classified as trading. For investments considered available-for-sale, changes in the fair value are recognized as unrealized gains and losses and are included, net of related tax effects, in stockholders’ equity as a component of other comprehensive income (loss). Gains or losses on these investments are recognized in earnings in the period the investment is sold or an other-than-temporary impairment (OTTI) is deemed to have occurred. Changes in the fair value of investments considered as trading are recorded in realized investment gains and losses in the current period.

     We also have other investments, primarily comprised of equity interests in private investment funds (non-public investment partnerships and limited liability companies), $45.2 million of which are accounted for using the equity method and $31.0 million of which are carried at cost. We evaluate these investments for OTTI by considering any declines in fair value below the recorded value. Determining whether there has been a decline in fair value involves assumptions and estimates as there are typically no observable inputs to determine the fair value of these investments.

     We evaluate all our investments on at least a quarterly basis for declines in fair value that represent OTTI. Some of the factors we consider in the evaluation of our investments are:

	•		the extent to which the fair value of an investment is less than its recorded basis;
	•		the length of time for which the fair value of the investment has been less than its recorded basis;
	•		the financial condition and near-term prospects of the issuer underlying the investment, taking into consideration the economic prospects of the issuer’s industry and geographical region, to the extent that information is publicly available;
	•		third party research and credit rating reports;
	•		the extent to which the decline in fair value is attributable to credit risk specifically associated with an investment or its issuer;
	•		the extent to which we believe market assessments of credit risk for a specific investment or category of investments are either well founded or are speculative;
	•		our internal assessments and those of our external portfolio managers regarding specific circumstances surrounding an investment, which can cause us to believe the investment is more or less likely to recover its value than other investments with a similar structure;
	•		for asset-backed securities: the origination date of the underlying loans, the remaining average life, the probability that credit performance of the underlying loans will deteriorate in the future, and our assessment of the quality of the collateral underlying the loan; and
	•		our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

     Determining whether a decline in the fair value of investments is an OTTI may also involve a variety of assumptions and estimates, particularly for investments that are not actively traded in

established markets or during periods of market dislocation. For example, assessing the value of certain investments requires us to perform an analysis of expected future cash flows or prepayments. For investments in tranches of structured transactions, we are required to assess the credit worthiness of the underlying investments of the structured transaction.

     When we judge a decline in fair value to be other-than-temporary, we reduce the basis of the investment to fair value and recognize a loss in the current period income statement for the amount of the reduction. In subsequent periods, we base any measurement of gain or loss or decline in value upon the recorded cost basis of the investment.

Deferred Policy Acquisition Costs

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

Deferred Taxes

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

Goodwill

     We make at least an annual assessment as to whether the value of our goodwill assets is impaired. Management evaluates the carrying value of goodwill annually during the fourth quarter and before the annual evaluation if events occur or circumstances change that would more likely than not reduce the fair value below the carrying value. In assessing goodwill, management estimates the fair value of the reporting unit and compares that estimate to external indicators such as market capitalization. We did not record any impairment of goodwill as of our last evaluation date, October 1, 2008, and do not believe there has been any change of events or circumstances that would indicate that a re-evaluation of goodwill is required as of March 31, 2009.

Recent Accounting Pronouncements and Guidance

			On April 9, 2009 the FASB issued three related FASB Staff Positions (FSPs):
	(1)		FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
			This FSP clarifies factors to be considered in determining whether there has been a significant decrease in market activity for an asset in relation to normal activity. The FSP provides additional guidance on when the use of multiple (or different) valuation techniques may be warranted and considerations for determining the weight that should be applied to the various techniques. The FSP also establishes a requirement that conclusions about whether transactions are orderly be based on the weight of the evidence. Entities are also required to disclose any changes to valuation techniques (and related inputs) that result from a conclusion that markets are not orderly and to disclose the effect of the change, if practicable.

	(2)		FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments
			This FSP replaces existing guidance that requires an impairment of a debt security be considered as other-than-temporary unless management is able to assert both the intent and the ability to hold the impaired security until recovery of value. The revised guidance establishes new criteria that must be met to avoid classification of an impairment as other-than-temporary: an entity must assert it has no intent to sell the security and that it is more likely than not that the entity will not be required to sell the security before recovery of its anticipated amortized cost basis.
			The FSP also establishes the concept of credit loss. Credit loss is defined in the FSP as the difference between the present value of the cash flows expected to be collected from a debt security and the amortized cost basis of the security. The FSP states that “in instances in which a determination is made that a credit loss exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis” an impairment is to be separated into (a) the amount of the total impairment related to the credit loss and (b) the amount of total impairment related to all other factors. The credit loss component of the impairment is to be recognized in income of the current period. The non-credit component is to be recognized as a part of other comprehensive income. Transition provisions of the FSP require a cumulative effect adjustment to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income “if any entity does not intend to sell and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis”.
	(3)		FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments
			This FSP amends FAS 107 to require publicly traded companies to provide disclosures about fair values of financial instruments for interim reporting periods as well as in annual financial statements. The FSP also amends APB 28 to require that fair value disclosures also be included in any summarized financial information issued at interim reporting periods.

     Each of these FSPs is effective for interim and annual periods ending after June 15, 2009 with early adoption for periods ending after March 15, 2009 permitted in specified groupings. We have elected to adopt the FSPs on the effective date but have not yet completed our evaluation of the effects of adoption.

Accounting Changes

     In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which alters the accounting for Convertible Debentures. FSP APB 14-1 requires issuers to account for convertible debt securities that allow for either mandatory or optional cash settlement (including partial cash settlement) by separating the liability and equity components in a manner that reflects the issuer’s nonconvertible debt borrowing rate at the time of issuance and requires recognition of additional (non-cash) interest expense in subsequent periods based on the nonconvertible rate. Additionally, FSP APB 14-1 requires that when such debt instruments are repaid or converted any consideration transferred at settlement is to be allocated between the extinguishment of the liability component and the reacquisition of the equity component. FSP APB 14-1 is applicable to the Convertible Debentures which we converted in July, 2008. ProAssurance adopted FSP APB 14-1 on its effective date, January 1, 2009. The adoption of FSP APB 14-1 has no effect on our 2009 operating results because we did not have any convertible debt outstanding during 2009. We did not record the cumulative effect of adoption — estimated as a $65,000 increase to additional paid-in capital and a corresponding decrease to retained earnings — because the effect is immaterial and does not change total stockholders’ equity.

     In December 2007 the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research Bulletin (ARB) 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We adopted SFAS 160 on its effective date, January 1, 2009. Adoption did not have a significant effect on our results of operations or financial position.

     In December 2007 the FASB issued SFAS 141 (Revised December 2007), Business Combinations. SFAS 141(R) replaces FASB Statement No. 141, Business Combinations, but retains the fundamental requirement in SFAS 141 that the acquisition method (referred to as the purchase method in SFAS 141) of accounting be used for all business combinations. SFAS 141(R) provides new or additional guidance with respect to business combinations including: defining the acquirer in a transaction, the valuation of assets and liabilities when noncontrolling interests exist, the treatment of contingent consideration, the treatment of costs incurred to effect the acquisition, the treatment of reorganization costs, and the valuation of assets and liabilities when the purchase price is below the net fair value of assets acquired. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted the Statement as of its effective date, January 1, 2009.

     FSP EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No 99-20, was issued in January 2009 to amend the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. EITF 99-20 specifies that an impairment is considered other-than-temporary if, based on an estimate of cash flows that a market participant would use in determining the current fair value, there has been an adverse change in those estimated cash flows. FSP EITF 99-20-1 alters this guidance by specifying that an impairment be considered other-than- temporary if it is “probable” there has been an adverse change in the holder’s estimated cash flows from those previously projected. We adopted FSP EITF 99-20-1 as of December 31, 2008 and considered the guidance provided therein in our impairment evaluations performed as of December 31, 2008 and March 31, 2009. There was no material effect from adoption.

Liquidity and Capital Resources and Financial Condition

Overview

     ProAssurance Corporation is a holding company and is a legal entity separate and distinct from its subsidiaries. Because it has no other business operations, dividends from its operating subsidiaries represent a significant source of funds for its obligations, including debt service. The ability of our insurance subsidiaries to pay dividends is subject to limitation by state insurance regulations. See our discussions under “Regulation of Dividends and Other Payments from Our Operating Subsidiaries” in Part I of our 2008 Form 10K, and in Note 16 of our Notes to the Consolidated Financial Statements included therein, for additional information regarding the ordinary dividends that can be paid by our insurance subsidiaries in 2009. At March 31, 2009 we held cash and investments of approximately $197 million outside of our insurance subsidiaries that are available for use without regulatory approval. Subsequent to the end of the quarter, we used $120 million of our available cash in the ProAssurance-sponsored demutualization of PICA Group (PICA) that closed April 1, 2009. We also made surplus contributions totaling $30 million to PICA in April 2009, $15 million of which was made pursuant to the purchase agreement to offset the impact to PICA of premium credits that will go to eligible policyholders for three years beginning in 2010. The remaining $15 million is to support PICA’s ongoing operations.

Acquisitions

     We acquired 100% of the outstanding shares of Mid-Continent and Georgia Lawyers during the first quarter of 2009 as a means of expanding our professional liability business. The acquisitions were not material to ProAssurance individually or in the aggregate. See Note 3 to the Condensed Consolidated Financial Statements for additional information regarding acquisitions.

Cash Flows

     The principal components of our operating cash flows are the excess of net investment income and premiums collected over net losses paid and operating costs, including income taxes. Timing delays exist between the collection of premiums and the ultimate payment of losses. Premiums are generally collected within the twelve-month period after the policy is written while our claim payments are generally paid over a more extended period of time. Likewise, timing delays exist between the payment of claims and the collection of any associated reinsurance recoveries. Our operating activities provided positive cash flows of approximately $8.0 million and $61.3 million for the three months ended March 31, 2009 and 2008, respectively.

     As shown in the table below, the decline in operating cash flows during the first quarter of 2009 as compared to the same period in 2008 is principally attributable to higher income tax payments (resulting from an increase in taxable income in the fourth quarter of 2008 as compared to 2007) and lower reimbursements from reinsurers.

		Year-to-date
		Cash Flow
		Increase (Decrease)
(In millions)		2009 vs. 2008
Lower premium receipts due to the decline in premiums written		$	(8	)
Decrease in net premium payments to reinsurers			4
Decrease in losses paid			6
Decrease in reinsurance recoveries			(21	)
Increase in Federal income tax payments			(28	)
Other amounts not individually significant, net			(6	)
Net decrease in operating cash flows		$	(53	)

     Two metrics commonly used to analyze the operating cash flows of insurance companies are the net paid-to-incurred ratio and the net paid loss ratio.

		Three Months Ended
		March 31
		2009				2008
Net paid-to-incurred ratio			116.5	%			108.5	%
Net paid loss ratio			77.5	%			73.5	%

     The net paid-to-incurred ratio is calculated as net paid losses divided by net incurred losses. The net paid loss ratio is calculated as net paid losses divided by net premiums earned.

     For a long-tailed business such as ProAssurance, fluctuations in the ratios over short periods of time are not unexpected and are not necessarily indicative of either positive or negative changes in loss experience. The timing of our indemnity payments is affected by many factors, including the nature and number of the claims in process during any one period and the speed at which cases work through the trial and appellate process. The ratios are affected not only by variations in net paid losses, but also by variations in premium volume and the recognition of reserve development.

     While net paid losses decreased during the three months ended March 31, 2009 as compared to the three months ended March 31, 2008, both the net paid loss ratio and net paid-to-incurred ratio increased. The increase in the net paid-to-incurred ratio is caused by the decline in incurred losses, the denominator of the ratio. Likewise, the increase in the net paid loss ratio is caused by the decline in earned premiums, the denominator of the ratio.

     We believe the net loss ratio (net incurred losses divided by net earned premium) is a more meaningful indicator of the adequacy of our premium revenues. Our net loss ratio for the first quarter of 2009 is 66.5% as compared to 67.7% for the first quarter of 2008.

     Losses paid in 2009 have not, as a whole, exceeded amounts reserved for those losses as of December 31, 2008, nor has the payment of losses accelerated in an unexpected manner. In the contractual obligations table included in Part II of our December 31, 2008 Form 10K we projected, largely based on historical payment patterns, that we would pay gross losses of $520 million during 2009 related to the reserves that were established at December 31, 2008. Through March 31, 2009, our gross loss payments total approximately $89 million, which, when annualized, is slightly lower than the amount estimated for purposes of the table.

Investment Exposures

     The following table provides summarized information regarding our investments as of March 31, 2009:

						Gross				Gross
		Carrying				Unrealized				Unrealized				Average				% Total
(In thousands)		Value				Gains				Losses				Rating				Investments
Fixed Maturities:
Government
U.S. Treasury		$	128,963			$	4,556			$	(173	)		AAA					4	%
U.S. Agency			79,691				3,601				—			AAA					2	%
Total government			208,654				8,157				(173	)		AAA					6	%
State and Municipal Bonds			1,345,958				41,057				(10,762	)		AA					38	%
Corporate Bonds
Financial institutions			247,520				2,631				(25,219	)			A				7	%
FDIC insured			59,430				561				—			AAA					2	%
Communications			41,761				823				(1,443	)		BBB+					1	%
Utilities			48,339				895				(804	)			A				1	%
Consumer cyclical			12,509				64				(3,207	)		BBB-					—
Consumer non-cyclical			18,805				53				(2,407	)		BBB-					1	%
Energy			39,713				810				(993	)		BBB					1	%
Basic materials			9,050				139				(1,391	)		BBB+					—
Industrial			201,090				4,068				(5,284	)			A				6	%
Technology			526				—				(388	)			B+				—
Other			13,487				37				(56	)		AA-					—
Total corporate bonds			692,230				10,081				(41,192	)			A				19	%
Asset-backed Securities
Agency mortgage-backed securities			502,383				21,024				—			AAA					14	%
Non-agency mortgage-backed securities			41,623				1,135				(4,786	)		AA					1	%
Subprime			8,147				—				(4,444	)		AA+					—
Alt-A			10,327				426				(902	)		AA-					—
Commercial mortgage-backed securities			163,438				5				(22,979	)		AAA					5	%
Credit card			33,638				223				(353	)		AAA					1	%
Automobile			24,997				111				(2,931	)		AA-					1	%
Other			7,978				356				(1,333	)		AA-					—
Total asset-backed securities			792,531				23,280				(37,728	)		AAA					22	%
Total fixed maturities			3,039,373				82,575				(89,855	)		AA					85	%
Equities
Equity—common
Financial			2,541				81				(50	)							—
Energy			3,490				1				(3	)							—
Consumer cyclical			932				19				(62	)							—
Consumer non-cyclical			3,266				107				(91	)							—
Technology			1,578				58				(203	)							—
Industrial			1,128				105				(37	)							—
All other			2,305				12				(78	)							—
Total equities—common			15,240				383				(524	)							—
Equity—preferreds			1,086				—				(2,050	)							—
Total equities			16,326				383				(2,574	)							1	%
Other Investments
High yield asset-backed securities			8,131				—				(11,763	)							—
Federal Home Loan Bank capital stock			5,042				—				—								—
Private fund—primarily invested in distressed debt			23,073				—				—								1	%
Private fund—primarily invested in long/short equities			6,010				—				—								—
Other			2,014				—				—								—
Total other investments			44,270				—				(11,763	)							1	%
BOLI			63,862				—				—			AA					2	%
Investment in Unconsolidated Subsidiaries
Private fund—primarily invested in high yield			27,876				—				—								1	%
asset-backed securities
Private fund—primarily invested in long/short equities			12,296				—				—								—
Private fund—primarily invested in equities			5,057				—				—								—
Total investment in unconsolidated subsidiaries			45,229				—				—								1	%
Short Term			365,011				—				—								10	%
Total Investments		$	3,574,071			$	82,958			$	(104,192	)							100	%

     A complete listing of our investment holdings as of March 31, 2009 is presented as “Supplemental Investor Information” in the “For Investors” section of our website, www.ProAssurance.com.

     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. At least $50 million of our investments mature or are paid down in a given quarter and are available, if needed, to meet our cash flow requirements. At our insurance subsidiaries’ level, the primary outflow of cash is related to net paid losses and operating costs, including income taxes. The payment of individual claims cannot be predicted with certainty; therefore, we rely upon the history of paid claims in estimating the timing of future claims payments. To the extent that we have an unanticipated shortfall in cash we may either liquidate securities or borrow funds under previously established borrowing arrangements. However, given the relatively short duration of our investments, we do not foresee any such shortfall.

     We held cash and short-term securities of $388.1 million at March 31, 2009 as compared to $445.5 million at December 31, 2008. During 2008 we held additional highly liquid assets in response to the instability of the credit markets to maintain maximum liquidity. We began investing in additional fixed maturities as credit markets stabilized during the first quarter of 2009.

     The weighted average effective duration of our fixed maturity securities at March 31, 2009 is 3.8 years; the weighted average effective duration of our fixed maturity securities combined with our short-term securities is 3.4 years.

     Our investment portfolio continues to be composed of high quality fixed income securities with approximately 98% of our fixed maturities being either United States government agency or investment grade securities as determined by national rating agencies.

     At March 31, 2009 we continue to hold fixed maturity securities in an unrealized loss position with pretax net unrealized losses of approximately $7 million as compared to pretax net unrealized losses of $43 million as of December 31, 2008. The improvement in net unrealized losses is primarily due to a reduction in credit spreads, particularly with respect to state and municipal securities, offset somewhat by the impact of slightly higher rates. We consider the declines in value to be temporary because we have the intent, and, due to the duration of our overall portfolio and positive cash flows, we have the ability to hold the securities to recovery of book value or maturity.

     At March 31, 2009 we held asset-backed securities with a fair value of $792.5 million (recorded cost basis of $807.0 million). In the first quarter of 2009, we realized $2.5 million of losses on asset-backed securities primarily relating to mortgage-backed securities impacted by the deterioration of the housing market. In performing our OTTI assessment of mortgage-backed securities, management projects expected cash flows, making assumptions regarding expected foreclosure rates and the value of collateral available to recover losses. If estimated cash flows project a loss, an OTTI is realized for the difference between the book value and fair value of the security in accordance with generally accepted accounting principles. In some cases, the impairment loss is greater than the projected loss because market values are depressed as a result of market uncertainty and an aversion to risk by market participants. If we continue to hold these securities, and our estimates of projected loss prove over time to be accurate, the economic loss that we ultimately realize will be less than the impairment loss that has been recorded. Conversely, because our judgments about future foreclosure rates, the timing of expected cash flows and the estimated value of collateral may not prove over time to be accurate, we may experience losses on asset-backed securities that we are not currently projecting.

     Mortgage-backed securities are generally categorized according to the expected credit quality of underlying mortgage loans. Generally, subprime loans are issued to borrowers with lower credit ratings while Alt-A borrowers have better credit ratings but the mortgage loan is of a type regarded as having a higher risk profile. As of March 31, 2009, we directly hold securities with a fair value of approximately $8.1 million (recorded cost basis of approximately $12.6 million and rated: 60% AAA, 24% AA, 11% A, 5% BBB or below) and a beneficial interest in securities with a fair value of approximately $592,000 (recorded cost basis of approximately $4.2 million and average rating of B) that are supported by collateral we classify as subprime. We also have subprime exposure of approximately $4.4 million through our interests

in private investment funds. We also hold securities with a fair value of approximately $10.3 million (recorded cost basis of approximately $10.8 million) that are supported by privately issued residential mortgage-backed securities we classify as Alt-A, of which approximately 24% are AAA rated, 30% are AA, 23% are A, and 23% are BB. Ratings given are as of March 31, 2009. During the first quarter of 2009, we evaluated our securities with subprime and Alt-A exposures and recognized impairment losses of $1.9 million for the three months ended March 31, 2009.

     Some of our investments became less liquid than they have historically been due to the extreme market volatility and disruption that began in 2008 and continued into the first quarter of 2009. While the markets for these securities have temporarily become more intermittent and less active, trades are occurring. We determine the fair value of these securities by obtaining information from IDC which includes trade data. We confirmed the reasonableness of the fair value of these securities as of March 31, 2009 by reviewing market yields of the securities. Current yields are substantially elevated and reflect those seen on similar securities of similar credit quality and collateral. In addition to those securities which have become illiquid as a result of market disruptions, we have historically purchased certain other investments that do not have a readily available market, including private placements, limited partnerships, inverse coupon mortgage-backed securities, municipal auction rate securities and Federal Home Loan Bank (FHLB) capital stock. The net unrealized gains (losses) as of March 31, 2009 associated with securities currently considered to be illiquid are detailed in the following table.

		Values at March 31, 2009
						Net Unrealized
(In thousands)		Fair Value				Gains (Losses)
Fixed maturities, available for sale
Mortgage-backed securities classified as:
Inverse coupon		$	22,901			$	3,176
Alt-A			8,071				(902	)
Subprime			8,147				(4,444	)
Prime, privately issued			33,943				(4,734	)
Other asset-backed securities:
Timber land			760				(240	)
Hotel			442				(559	)
Manufactured housing			193				(98	)
Other			5,523				357
Corporate bonds:
Privately placed			27,898				470
Municipal auction rate bonds			9,582				(443	)
Equity, available for sale:
Privately placed			72				—
		$	117,532			$	(7,417	)

     We believe the fair values of these securities reflect declines due to market disruptions and are below the true economic value. The unrealized losses should reverse over the remaining lives of the securities if we experience no further deterioration of collateral relative to our position in the securities’ capital structures.

     The global economy has suffered due to the current economic downturn, which has severely affected financial institutions and asset-backed securities in the United States. In 2008 the U.S. Government created several programs intended to help stabilize credit markets and financial institutions and restore liquidity. These programs include the Emergency Economic Stabilization Act of 2008 (EESA), the Federal Reserve’s Commercial Paper Funding Facility (CPFF) and Money Market Investor Funding Facility and the Federal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program. The EESA authorizes the Secretary of the U.S. Treasury to establish the Troubled Asset Relief Program (TARP) for the repurchase of up to $700 billion of mortgage-backed securities and other troubled financial instruments from financial institutions. Among other EESA provisions are tax code revisions, budget measures, guidance related to the administration of TARP, and measures intended to mitigate mortgage foreclosures. Additional government actions may occur as 2009 progresses. It is difficult to predict how recently enacted legislation and future government actions will impact the economy, certain industry sectors and specifically the value of certain investments we hold.

     We continue to monitor our exposure to financial institutions. Our largest exposures for fixed maturity securities including FDIC bonds, are to Morgan Stanley ($26.4 million), American Express ($23.0 million), and Bank of America ($19.8 million). Our largest exposures, for fixed maturity securities excluding FDIC bonds, are to Morgan Stanley ($20.0 million), Bank of America ($18.8 million), and Wells Fargo ($18.5 million). Our largest exposures to financial institution equity securities are to Wells Fargo ($100,000) and American Express ($54,000).

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

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

     At March 31, 2009 our receivable from reinsurers on unpaid losses is $268.7 million and our receivable from reinsurers on paid losses is $20.9 million.

Debt

     Our long-term debt as of March 31, 2009 is comprised of the following.

(In thousands, except %)				March 31				First
		Contractual Rate		2009				Redemption Date
2034 Trust Preferred Securities/Debentures		5.1%, based on LIBOR**		$	22,992			May 2009
2034 Surplus Notes		7.7%, fixed until May 2009			11,975			May 2009*
2012 Surplus Note		3.3%, equal to the U.S. prime rate**			460			Redeemable at any time
				$	35,427