As filed with the Securities and Exchange Commission on June 2, 2006

Registration No. 333-131874

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

PROASSURANCE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

100 Brookwood Place

Birmingham, Alabama 35209

(205) 877-4400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

A. Derrill Crowe

100 Brookwood Place

Birmingham, Alabama 35209

(205) 877-4400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

Copies To:

 

 

Approximate date of commencement of proposed sale of the securities to the public:  As soon as practicable after this Registration Statement becomes effective and upon completion of the merger as described in the proxy statement-prospectus included herein.

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box:  o

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the “Securities Act”), check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  o

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED JUNE 2, 2006

 

PROXY STATEMENT FOR THE SPECIAL MEETING OF
SHAREHOLDERS OF PHYSICIANS INSURANCE COMPANY OF WISCONSIN, INC.
and
PROSPECTUS OF PROASSURANCE CORPORATION

 

MERGER PROPOSED — YOUR VOTE IS IMPORTANT

 

The boards of directors of Physicians Insurance Company of Wisconsin, Inc., which we refer to as PIC Wisconsin, and ProAssurance Corporation, which we refer to as ProAssurance, have unanimously approved an agreement to combine the two companies. Under the Agreement and Plan of Merger dated as of December 8, 2005, as amended on February 14, 2006, which we refer to as the merger agreement, by and among PIC Wisconsin, ProAssurance and its wholly-owned subsidiary Physicians Merger Company, PIC Wisconsin will merge with Physicians Merger Company, and PIC Wisconsin will survive the merger as a wholly-owned subsidiary of ProAssurance. The board of directors of PIC Wisconsin believes that the merger presents an attractive opportunity to combine with a leading medical malpractice insurance group that will have significantly greater financial strength and stability than PIC Wisconsin would have on its own.

 

Under the terms of the merger agreement, each share of PIC Wisconsin common stock will be converted into not less than 83.738 nor more than 125.628 shares of ProAssurance common stock pursuant to the following exchange ratio:

 

 

For purposes of determining the exchange ratio, the average price of a share of ProAssurance common stock at the effective time of the merger will be equal to the arithmetic average of the last reported sale price of a share of ProAssurance common stock as reported by the New York Stock Exchange, which we refer to as the NYSE, on the ten trading days preceding the effective time of the merger. The last sale price of a share of ProAssurance common stock on December 7, 2005 (the last trading day prior to the public announcement of the merger) was $49.30 and on May 31, 2006 was $47.21. The shares of PIC Wisconsin common stock are not publicly traded. You should obtain a current market quotation for ProAssurance common stock. ProAssurance common stock is listed on the NYSE under the symbol “PRA”.

 

The merger will generally be tax free to the shareholders of PIC Wisconsin except for taxes on cash received instead of fractional shares of ProAssurance common stock and cash received by PIC Wisconsin shareholders who exercise their dissenters’ rights. The merger will also be tax free to PIC Wisconsin and ProAssurance and their respective subsidiaries.

 

ProAssurance and PIC Wisconsin cannot complete the merger unless the shareholders of PIC Wisconsin approve it. PIC Wisconsin will hold a special meeting of its shareholders on July 26, 2006 to vote on the approval and adoption of the merger agreement and the merger. Your vote is important. Whether or not you plan to attend the meeting, please take the time to submit your proxy in accordance with the voting instructions contained in this proxy statement-prospectus. If you do not vote, it will have the same effect as voting against the merger agreement and the merger. Please read this proxy statement-prospectus carefully because it contains important information about the merger. In particular, you should carefully consider the discussion in the section titled “Risk Factors” beginning on page 11.

 

Neither the SEC nor any state securities commission has approved or disapproved the securities to be issued in the merger or determined if this proxy statement-prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

 

This document is a proxy statement that PIC Wisconsin is using to solicit proxies for use at its special meeting of shareholders. It is also a prospectus relating to the shares of the ProAssurance common stock proposed to be issued in connection with the merger.

 

The date of this proxy statement-prospectus is June   , 2006, and it is first being mailed to the shareholders of PIC Wisconsin on or about June   , 2006.

References to Additional Information

 

This proxy statement-prospectus incorporates important business and financial information about ProAssurance from other documents that are not included in or delivered with this proxy statement-prospectus. This information is available to you without charge upon your written or oral request. You can obtain documents related to ProAssurance that are incorporated by reference in this proxy statement-prospectus through the SEC’s web site at http://www.sec.gov or by requesting them in writing or by telephone from ProAssurance by contacting:

 

Frank B. O’Neil

100 Brookwood Place

Birmingham, Alabama 35209

(205) 877-4400

 

If you would like to request documents, please do so by July 19, 2006 to receive them before PIC Wisconsin’s special meeting.

 

See “Where You Can Find More Information” on page 85.

 

PHYSICIANS INSURANCE COMPANY OF WISCONSIN, INC.
1002 DEMING WAY
MADISON, WISCONSIN 53744

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, JULY 26, 2006

 

To the Shareholders of Physicians Insurance Company of Wisconsin, Inc.:

 

Notice is hereby given that a special meeting of the shareholders of Physicians Insurance Company of Wisconsin, Inc. will be held on Wednesday, July 26, 2006, at 10:00 a.m., local time, at the offices of Physicians Insurance Company of Wisconsin, Inc., 1002 Deming Way, Madison, Wisconsin 53744, for the following purposes:

 

1. Merger Proposal.  To approve and adopt the Agreement and Plan of Merger dated as of December 8, 2005, as amended on February 14, 2006, which we refer to as the merger agreement, by and among PIC Wisconsin, ProAssurance Corporation and its wholly-owned subsidiary Physicians Merger Company, and the related merger of PIC Wisconsin with Physicians Merger Company. Upon completion of the merger, PIC Wisconsin will be the surviving corporation in the merger and will be a wholly owned subsidiary of ProAssurance, and shareholders of PIC Wisconsin will have the right to receive shares of ProAssurance common stock based on an exchange ratio that values each share of PIC Wisconsin common stock at $5,000 (subject to adjustment).

 

2. Adjournment.  To approve a proposal to adjourn the special meeting to permit further solicitation of proxies, if necessary, in the event that there is an insufficient number of votes to approve and adopt the merger agreement and the merger.

 

3. Other Matters.  To transact such other business within the preceding purposes as may properly come before the special meeting or any adjournments or postponements thereof.

 

The boards of directors of PIC Wisconsin and ProAssurance have unanimously approved and adopted the merger agreement and the merger. Among other conditions, the merger agreement and the merger must also be approved and adopted at the special meeting of PIC Wisconsin’s shareholders by the affirmative vote of a majority of all the votes entitled to be cast thereon. The board of directors of PIC Wisconsin has fixed the close of business on June 6, 2006 as the record date for determining the shareholders entitled to notice of, and to vote at, the special meeting or any adjournments or postponements thereof. The attached proxy statement-prospectus gives you detailed information about the merger and the other proposals and includes a copy of the merger agreement as Appendix A. You should read these documents carefully.

 

Directors and officers of PIC Wisconsin will be present at the special meeting to answer questions and to discuss the proposed merger. You are welcome and urged to attend the special meeting. The PIC Wisconsin board of directors unanimously recommends that PIC Wisconsin shareholders vote “FOR” the approval and adoption of the merger agreement and the merger.

 

By Order of the Board of Directors

 

Christopher J. Brady

Secretary

 

Madison, Wisconsin

June   , 2006

 

 

 

 

TABLE OF CONTENTS

 

 

The following are some questions that you, as a shareholder of PIC Wisconsin, may have regarding the merger and the other matters being considered at the special meeting of shareholders and the answers to those questions. PIC Wisconsin and ProAssurance urge you to read carefully the remainder of this proxy statement-prospectus because the information in this section does not provide all of the information that might be important to you with respect to the merger and the other matters being considered at the special meeting of shareholders. Additional important information is also contained in the appendices to and the documents incorporated by reference in this proxy statement-prospectus.

 

 

 

 

 

 

 

 

 

 

 

Physicians Insurance Company of Wisconsin, Inc.

 

Attention: David L. Maurer
1002 Deming Way
Madison, Wisconsin 53744
Telephone: (608) 831-8331; (800) 279-8331

 

SUMMARY

	•	approve and adopt the merger agreement and the merger;
	•	vote upon an adjournment of the PIC Wisconsin special meeting, if necessary, to solicit additional proxies if there are not sufficient votes for the foregoing proposal; and
	•	transact any other business that may properly be brought before the PIC Wisconsin special meeting or any adjournments or postponements thereof.

	•	If the average price of a share of ProAssurance common stock at the effective time of the merger is more than $59.71 per share, a share of PIC Wisconsin common stock will be converted into 83.738 shares of ProAssurance common stock in which event the implied value of a share of PIC Wisconsin common stock will be more than $5,000;
	•	If the average price of a share of ProAssurance common stock at the effective time of the merger is no more than $59.71 and no less than $39.80 per share, a share of PIC Wisconsin common stock will be converted into a number of ProAssurance shares determined by dividing $5,000 by the average price of a share of ProAssurance common stock at the effective time of the merger, so that the implied value of a share of PIC Wisconsin common stock will be fixed at $5,000; or

	•	If the average price of a share of ProAssurance common stock at the effective time of the merger is less than $39.80 per share, a share of PIC Wisconsin common stock will be converted into 125.628 shares of ProAssurance common stock in which event the implied value of a share of PIC Wisconsin common stock will be less than $5,000.

		Average Price of a Share of ProAssurance Common Stock
		at the Effective Time of the Merger:
		$65.00				$60.00				$55.00				$50.00				$45.00				$40.00				$35.00
Number of Shares:			83.738				83.738				90.909				100.000				111.111				125.000				125.628
Value:			$5,443				$5,024				$5,000				$5,000				$5,000				$5,000				$4,397

	•	December 7, 2005, the last trading date before the public announcement of the merger;
	•	December 9, 2005, the first trading date after the public announcement of the merger;

	•	May 31, 2006, shortly before the mailing of this proxy statement-prospectus; and

	•	The high, low and average prices for the period from December 7, 2005, through May 31, 2006.

		Closing ProAssurance
		Share Price
December 7, 2005		$	49.30
December 9, 2005		$	50.63
May 31, 2006		$	47.21
High (for period)		$	53.08
Low (for period)		$	46.16
Average (for period)		$	50.20

	•	the approval and adoption of the merger agreement and the merger by PIC Wisconsin’s shareholders;
	•	the listing of the shares of ProAssurance common stock to be issued in the merger on the NYSE;
	•	the filing of articles of merger with the appropriate governmental authorities;
	•	the receipt of the approval of the Commissioner of Insurance in the State of Wisconsin as required by Wisconsin’s insurance laws and regulations;
	•	the receipt of the required approvals of other federal and state regulatory authorities;
	•	the absence of any government action or other legal restraint or prohibition that would prohibit the merger or make it illegal;
	•	the absence of a material adverse effect suffered by either ProAssurance or PIC Wisconsin on a consolidated basis;
	•	the absence of any inquiries, proceedings, claims or actions by any government or regulatory authority alleging violations of federal securities laws by PIC Wisconsin, its subsidiaries or any of their respective directors or officers;
	•	the number of shares of PIC Wisconsin common stock whose holders exercise their right to dissent and obtain payment for their shares pursuant to their dissenters’ rights when added to the number of shares of PIC Wisconsin common stock repurchased from participants of the long term stock plan does not exceed 19.9% of the outstanding shares of PIC Wisconsin common stock;
	•	the delivery of certain customary closing documents and other certificates;
	•	the absence of certain events under PIC Wisconsin’s amended shareholder rights agreement;
	•	the receipt of legal opinions that, for United States federal income tax purposes, the merger will be treated as a plan of reorganization and no gain or loss will be recognized by PIC Wisconsin shareholders who receive ProAssurance common stock in exchange for all of their PIC Wisconsin common stock (except with respect to any cash received for fractional interests or in lieu of the merger consideration as a result of the exercise of dissenters’ rights) and no gain or loss will be recognized by ProAssurance, PIC Wisconsin and their respective subsidiaries; and
	•	the truth and accuracy of the representations and warranties of each party to the merger agreement, except as would not have or would not reasonably be expected to have a material adverse effect, and the performance by each party to the merger agreement in all material respects of all its obligations under the merger agreement.

	•	if there is a final denial of a required regulatory approval;
	•	if the merger is not completed on or before December 31, 2006;
	•	if there is a continuing breach of any representation or warranty in the merger agreement by the other party that has had or is reasonably expected to have a material adverse effect and such breach continues after 45 days’ written notice to the breaching party, as long as the terminating party is not in material breach of any representation, warranty, covenant or other agreement in the merger agreement;
	•	if PIC Wisconsin fails to obtain the shareholder vote required for the approval and adoption of the merger agreement and the merger;
	•	if the other party discloses a material adverse effect or change to its disclosure schedule that has or would be likely to have a material adverse effect; or
	•	if the Form S-4 registration statement has not been filed with the SEC on or before June 30, 2006, unless the failure to do so is due to the failure of the party seeking to terminate the merger agreement.

	•	fails to recommend approval and adoption of the merger agreement and the merger to its shareholders or withdraws, modifies or amends its recommendation in any respect materially adverse to ProAssurance;
	•	authorizes, recommends, approves or proposes an acquisition proposal other than the merger; or
	•	enters into an agreement with a third party regarding an acquisition proposal other than the merger.

	•	fails to recommend approval and adoption of the merger agreement and the merger to its shareholders or withdraws, modifies or amends its recommendation in any respect materially adverse to ProAssurance;
	•	authorizes, recommends, approves or proposes an acquisition proposal other than the merger; or
	•	enters into an agreement with a third party regarding an acquisition proposal other than the merger.

 

SELECTED CONDENSED CONSOLIDATED HISTORICAL FINANCIAL AND
OPERATING DATA OF PROASSURANCE CORPORATION

		Three Months Ended
		March 31								Year Ended December 31
Selected Financial Data(1)		2006				2005				2005				2004				2003				2002				2001
		(Unaudited)								(In thousands except per share data)
Gross premiums written(2)			$182,187				$163,397				$572,960				$573,592				$543,323				$461,715				$315,698
Net premiums written(2)			172,632				152,643				521,343				535,028				497,659				389,901				238,867
Premiums earned(2)			152,748				140,002				596,557				555,524				509,260				412,656				310,222
Premiums ceded(2)			(10,318	)			(11,274	)			(53,316	)			(35,627	)			(49,389	)			(78,460	)			(61,208	)
Net premiums earned(2)			142,430				128,728				543,241				519,897				459,871				334,196				249,014
Net investment income(2)			34,362				22,778				99,193				77,670				64,532				67,616				55,554
Net realized investment gains (losses)(2)			144				1,253				912				7,572				5,858				(6,099	)			5,441
Other income(2)			1,255				1,213				4,604				2,419				5,580				6,388				4,176
Total revenues(2)			178,191				153,972				647,950				607,558				535,841				402,101				314,185
Net losses and loss adjustment expenses(2)			111,132				110,450				438,201				460,437				439,368				351,320				250,257
Income from continuing operations before cumulative effect of accounting change			27,835				14,596				80,026				43,043				15,345				(8,100	)			5,362
Net income(3)			137,276				21,937				113,457				72,811				38,703				12,207				12,450
Income from continuing operations per share before cumulative effect of accounting change:(4)
Basic			$0.89				$0.50				$2.66				$1.48				$0.53				$(0.31	)			$0.22
Diluted			$0.84				$0.48				$2.52				$1.44				$0.53				$(0.31	)			$0.22
Net income per share:(3)(4)
Basic			$4.40				$0.75				$3.77				$2.50				$1.34				$0.47				$0.51
Diluted			$4.05				$0.71				$3.54				$2.37				$1.33				$0.46				$0.51
Weighted average number of common shares outstanding:(3)(4)
Basic			31,155				29,217				30,049				29,164				28,956				26,231				24,263
Diluted			34,050				32,070				32,908				31,984				30,389				26,254				24,267
Balance Sheet Data (at period end)
Total investments(2)(5)			$3,104,522				$2,217,332				$2,614,319				$2,145,609				$1,792,323				$1,446,342				$1,312,924
Total assets, continuing operations			3,852,908				2,841,584				3,341,600				2,743,295				2,448,088				2,214,564				1,913,606
Total assets			3,852,908				3,343,773				3,909,379				3,239,198				2,879,352				2,586,650				2,238,325
Reserve for losses and loss adjustment expenses(2)			2,276,697				1,881,995				2,224,436				1,818,636				1,634,749				1,492,140				1,317,980

		Three Months Ended
		March 31								Year Ended December 31
Selected Financial Data(1)		2006				2005				2005				2004				2003				2002				2001
		(Unaudited)								(In thousands except per share data)
Long-term debt(2)			167,314				151,554				167,240				151,480				104,789				72,500				82,500
Total liabilities from continuing operations			2,960,637				2,436,094				2,806,820				2,333,405				2,074,560				1,854,573				1,622,121
Total stockholders’ equity			892,271				611,659				765,046				611,019				546,305				505,194				413,231
Total stockholders’ equity per share of common stock outstanding			28.60				20.91				24.59				20.92				18.77				17.49				16.02
Common stock outstanding at end of period			31,194				29,252				31,109				29,204				29,105				28,877				25,789

(1)		Includes acquired entities since date of acquisition only. Professionals Group, Inc. was acquired June 27, 2001 and NCRIC Group, Inc. was acquired effective August 1, 2005. ProAssurance’s personal lines operations were acquired in the Professionals Group transaction, but were sold effective January 1, 2006, and are included in discontinued operations in all periods presented.

(2)		Excludes discontinued operations.

(3)		Net income for the year ended December 31, 2002 was increased by $1.7 million due to the adoption of SFAS 141 and 142. See Note 13 to ProAssurance’s consolidated financial statements. In accordance with SFAS 142, ProAssurance wrote off the unamortized balance of deferred credits that related to business combinations completed prior to July 1, 2001. The cumulative effect increased net income per share (basic and diluted) by $0.07 per share.

(4)		Diluted earnings per share and diluted weighted average number of shares outstanding for 2003 have been restated to reflect implementation of Emerging Issues Task Force 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share”. The restatement reduced previously reported diluted net income per share by $0.01.

(5)		Real estate holdings are included in Total Assets but are not included in Total Investments. Rather than being considered components of net investment income, rental income is included in Other Income and real estate expenses are included as a part of underwriting, acquisition and insurance expenses. Prior to 2006, ProAssurance included its real estate holdings as a part of total investments and included rental income from real estate holdings, net of real estate related expenses, as components of net investment income. The above table presents all periods in a manner consistent with ProAssurance’s 2006 presentation. Due to the reclassification, amounts in the table for periods prior to 2006 do not agree to previously presented amounts. The reclassifications increased (decreased) amounts previously disclosed as shown in the following table, but had no effect on total assets, total liabilities, stockholders’ equity, income from continuing operations or net income.

		Three Months
		Ended
		March 31,				Year Ended December 31
		2005				2005				2004				2003				2002				2001
		(Unaudited)				(In thousands)
Net investment income			$371				$1,544				$1,323				$1,166				$769				$775
Other income			$236				$1,094				$1,078				$1,120				$1,428				$1,046
Total revenues			$607				$2,638				$2,401				$2,286				$2,197				$1,821

		March 31,				December 31
		2005				2005				2004				2003				2002				2001
Total investments			$(16,877	)			$(16,623	)			$(16,538	)			$(14,962	)			$(15,249	)			$(15,636	)

 

In addition to the other information included and incorporated by reference in this proxy statement-prospectus, including the matters addressed in the section entitled “Forward-Looking Statements,” (page 85), you should carefully consider the risks set forth below before deciding whether to vote for the approval and adoption of the merger agreement and the merger. You should also read and consider other information in this proxy statement-prospectus and other documents incorporated by reference in this proxy statement-prospectus. See the section entitled “Where You Can Find More Information” beginning on page 85.

 

PIC Wisconsin shareholders cannot be sure the ProAssurance common stock to be issued in the merger will have a value of $5,000.

 

The merger agreement provides that you will receive ProAssurance common stock having a value of $5,000 if the average price of a share of ProAssurance common stock in the ten trading days preceding the merger is within a 20% range around the average price of a share of ProAssurance common stock in the ten trading days preceding the date of the merger agreement, which was $49.76. Thus, PIC Wisconsin shareholders may receive more than $5,000 for each share of common stock if the average price of ProAssurance common stock is more than $59.71; conversely, PIC Wisconsin shareholders may receive less than $5,000 for each share of common stock if the average price of ProAssurance common stock is less than $39.80. Any change in the market price of ProAssurance common stock prior to completion of the merger will affect the number of ProAssurance shares you receive and may possibly affect the value that you receive upon completion of the merger. Share price changes may result from a variety of factors including general market and economic conditions, changes in ProAssurance’s operations and prospects and regulatory considerations. Many of these factors are beyond either ProAssurance’s or PIC Wisconsin’s control.

 

Accordingly, PIC Wisconsin shareholders who submit their proxies before the special meeting will not necessarily know or be able to calculate the number of shares of ProAssurance common stock that will be issued upon the completion of the merger or the value of such shares. Further, shares of ProAssurance common stock will be subject to market fluctuations after the merger and there can be no assurance that the value of a share of ProAssurance common stock after the merger will not be less than the average price used in determining the exchange ratio.

 

Combining PIC Wisconsin and ProAssurance may be more difficult, costly or time consuming than expected.

 

ProAssurance and PIC Wisconsin have operated, and until completion of the merger will continue to operate, independently. It is possible that the integration process could result in the loss of key employees or the disruption of each company’s ongoing business or inconsistencies in standards, procedures and policies that adversely affect each company’s ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the merger.

 

ProAssurance and PIC Wisconsin must obtain several governmental consents to complete the merger which, if delayed, not granted or granted with burdensome conditions, may jeopardize or postpone the merger, result in additional expense or reduce the anticipated benefits of the transaction.

 

ProAssurance and PIC Wisconsin must obtain approvals and consents in a timely manner from several federal and state agencies prior to completion of the merger. If these approvals are not received, or are not on terms that satisfy the conditions set forth in the merger agreement, then the parties will not be obligated to complete the merger. The governmental agencies from which ProAssurance and PIC Wisconsin will seek these approvals have broad discretion in administering governing laws. As a condition to approval of the merger, agencies may impose requirements, limitations or costs that could negatively affect the way ProAssurance conducts business following the merger. These requirements, limitations or costs could jeopardize or delay completion of the merger. If ProAssurance and PIC Wisconsin agree to any material requirements, limitations or costs in order to obtain any approvals required to complete the merger, these requirements, limitations or

additional costs could adversely affect ProAssurance’s ability to integrate the common aspects of the two companies’ operations or reduce the anticipated benefits of the merger. This could result in a material adverse affect on the business and results of operations of ProAssurance following the merger.

 

Failure to complete the merger could negatively impact the future business and financial results of PIC Wisconsin.

 

If the merger is not completed, the ongoing business of PIC Wisconsin may be adversely affected and PIC Wisconsin will be subject to several risks, including the following:

 

 

The ability of PIC Wisconsin’s shareholders to benefit from a competing business combination is limited.

 

The merger agreement limits PIC Wisconsin’s ability to directly or indirectly initiate, entertain, solicit, encourage, engage in or participate in proposals from third parties regarding acquiring PIC Wisconsin or its businesses. In addition, if PIC Wisconsin’s board of directors has authorized, recommended, approved or entered into an agreement with any third party to effect an acquisition proposal, then PIC Wisconsin must pay to ProAssurance $2 million in liquidated damages.

 

In addition, PIC Wisconsin entered into a shareholder rights agreement to protect its shareholders from takeover attempts that are not acceptable to the board of directors of PIC Wisconsin. In general, the rights agreement allows PIC Wisconsin shareholders to acquire additional shares of PIC Wisconsin common stock after a person, group or company, unless exempted, acquires or agrees to acquire 15% or more of the outstanding PIC Wisconsin common stock. The rights agreement is intended to prevent an acquisition of PIC Wisconsin stock on terms that PIC Wisconsin’s board of directors determines are unfair or coercive to PIC Wisconsin and its shareholders. PIC Wisconsin amended the rights agreement to exempt ProAssurance, the merger agreement and the merger from application of the rights agreement, and to provide that the rights agreement will terminate in all respects immediately prior to the effective time of the merger. Until the effective time of the merger, however, the rights agreement remains in effect and may discourage acquisition proposals from parties other than ProAssurance.

 

The Internal Revenue Service may disagree with the parties’ description of the federal income tax consequences.

 

Neither ProAssurance nor PIC Wisconsin has applied for, or expects to obtain, a ruling from the Internal Revenue Service with respect to the federal income tax consequences of the merger. PIC Wisconsin and ProAssurance each received an opinion of its legal counsel as to certain anticipated federal income tax consequences as described under “Material Federal Income Tax Consequences”. Each such opinion is qualified in certain respects and is not binding on the Internal Revenue Service and is expected to be updated as of the closing date of the merger. No assurance can be given that the Internal Revenue Service will not challenge the favorable income tax consequences of the merger or that the opinion will be so updated. ProAssurance and PIC Wisconsin will vigorously contest any such challenge.

 

The PIC Wisconsin directors and officers have interests in the merger besides those of a shareholder.

 

The directors and officers of PIC Wisconsin have interests in the merger that are different from and in addition to your interests as PIC Wisconsin shareholders. You should be aware of these interests relating to the benefits available to PIC Wisconsin’s directors and officers in considering their support of the merger.

As discussed under “Proposal 1: The Merger — Interests of certain persons in the merger”, certain of the executive officers of PIC Wisconsin, including Mr. Montei, who is also a director, have been offered continued employment after the merger on terms that may be deemed more favorable than the current terms of employment. In addition, all of the PIC Wisconsin executive officers are covered by a change of control benefits policy that provides for payments in the event that their employment is terminated after a change of control of PIC Wisconsin. Additionally, stock awards that have been granted to officers that have not yet vested under PIC Wisconsin’s long term stock plan will immediately vest upon a change of control. Shares issued or to be issued pursuant to these stock awards may be purchased at a cash price of $5,000 at the option of the holder of the award or converted into shares of ProAssurance common stock using the exchange ratio. The merger will result in a change of control for purposes of such arrangements and other benefits.

 

Each of the non-employee directors of PIC Wisconsin will be offered a consulting agreement pursuant to which ProAssurance will pay a monthly consulting fee through June 30, 2007.

 

The merger agreement also provides that PIC Wisconsin may nominate one person who is a physician to serve on ProAssurance’s board of directors, and the nominee may be a director of PIC Wisconsin in which event the nominee would be entitled to compensation as a non-management director of ProAssurance and would not be offered the consulting agreement referred to above. PIC Wisconsin has nominated William J. Listwan, M.D. to serve on ProAssurance’s board of directors.

 

As a result, the PIC Wisconsin directors and officers are more likely to support the merger than if they did not hold these interests.

 

Substantial sales of ProAssurance common stock could adversely affect its market price.

 

A maximum of 2,480,050 shares of ProAssurance common stock will be issued to holders of PIC Wisconsin common stock upon completion of the merger, representing approximately 7.4% of the issued and outstanding common stock of ProAssurance. ProAssurance common stock issued in the merger will not be subject to any restrictions on transfer arising under the Securities Act of 1933, as amended, or Securities Act, except for shares issued to any PIC Wisconsin shareholder who may be deemed to be an “affiliate” of ProAssurance or PIC Wisconsin for purposes of Rule 145 under the Securities Act. The sale of a substantial amount of ProAssurance common stock after the merger could adversely affect its market price. It could also impair ProAssurance’s ability to raise money through the sale of more common stock or other forms of capital. In addition, the sale of authorized but unissued shares of ProAssurance common stock by ProAssurance could adversely affect its market price.

 

Holders of more than 19.9% of all the outstanding shares of PIC Wisconsin common stock may exercise their right to receive cash in the merger.

 

Under applicable Wisconsin law, PIC Wisconsin shareholders have dissenters’ rights in connection with the merger. Under the terms of PIC Wisconsin’s long term stock plan, holders of shares issued or to be issued pursuant to the plan may request that PIC Wisconsin repurchase the shares for cash as a result of the merger. It is a condition to the closing of the merger that holders of not more than 19.9% of all the outstanding shares of PIC Wisconsin common stock shall have exercised their right to obtain cash payment under the dissenters’ rights statutes and the long term stock plan.

 

PIC Wisconsin shareholders should consider the following risk factors regarding the business of ProAssurance in their consideration of the merger and the merger agreement because they will own shares of ProAssurance stock upon completion of the merger. ProAssurance is a holding company for specialty property and casualty insurance subsidiaries that focus on writing professional liability insurance. For convenience, references to ProAssurance’s business include the insurance operations of its insurance subsidiaries.

ProAssurance’s results may be affected if actual insured losses differ from its loss reserves.

 

Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss by the insured and payment of that loss. To recognize liabilities for unpaid losses, ProAssurance establishes reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expense. The process of estimating loss reserves is a difficult and complex exercise involving many variables and subjective judgments. As part of the reserving process, ProAssurance reviews historical data and consider the impact of various factors such as:

 

 

This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate, but not necessarily accurate, basis for predicting future events. There is no precise method for evaluating the impact of any specific factor on the adequacy of reserves, and actual results are likely to differ from original estimates.

 

ProAssurance’s loss reserves also may be affected by court decisions that expand liability on its policies after they have been issued and priced. In addition, a significant jury award, or series of awards, against one or more of its insureds could require ProAssurance to pay large sums of money in excess of its reserved amounts. ProAssurance’s policy to aggressively litigate claims against its insureds may increase the risk that it may be required to make such payments.

 

To the extent loss reserves prove to be inadequate in the future, ProAssurance would need to increase its loss reserves and incur a charge to earnings in the period the reserves are increased, which could have a material adverse impact on ProAssurance’s financial condition and results of operations and the price of its common stock.

 

If ProAssurance is unable to maintain a favorable financial strength rating, it may be more difficult for ProAssurance to write new business or renew its existing business.

 

Independent rating agencies assess and rate the claims-paying ability of insurers based upon criteria established by the agencies. Periodically the rating agencies evaluate ProAssurance to confirm that it continues to meet the criteria of previously assigned ratings. The financial strength ratings assigned by rating agencies to insurance companies represent independent opinions of financial strength and ability to meet policyholder obligations and are not directed toward the protection of investors. Ratings by rating agencies are not ratings of securities or recommendations to buy, hold or sell any security and are not applicable to the securities being offered by this proxy statement-prospectus.

 

ProAssurance’s principal operating subsidiaries hold favorable financial strength ratings with A.M. Best, Standard & Poor’s and other rating agencies. Financial strength ratings are used by agents and customers as an important means of assessing the financial strength and quality of insurers. If ProAssurance’s financial position deteriorates, it may not maintain its favorable financial strength ratings from the rating agencies. Further, ProAssurance cannot assure you that the merger will not result in a downgrade of its ratings. A downgrade or withdrawal of any such rating could limit or prevent ProAssurance from writing desirable business.

 

ProAssurance operates in a highly competitive environment.

 

The property and casualty insurance business is highly competitive. ProAssurance competes with large national property and casualty insurance companies, locally-based specialty companies, self-insured entities and alternative risk transfer arrangements (such as captive insurers and risk retention groups) whose activities are directed to limited markets. Competitors include companies with substantially greater financial resources

than ProAssurance as well as companies that may have lower return on equity objectives than ProAssurance, such as mutual companies and other companies not owned by shareholders.

 

Competition in the property and casualty insurance business is based on many factors, including premiums charged and other terms and conditions of coverage, services provided, financial ratings assigned by independent rating agencies, claims services, reputation, perceived financial strength and the experience of the insurance company in the line of insurance to be written. Increased competition could adversely affect ProAssurance’s ability to attract and retain business at current premium levels and reduce the profits that would otherwise arise from operations.

 

ProAssurance’s revenues may fluctuate with insurance market conditions.

 

ProAssurance derives substantially all of its insurance premium revenue from medical malpractice risks. Between 2000 and 2004, premium rates increased significantly which improved ProAssurance’s operating results. ProAssurance believes competition has increased in the medical malpractice insurance industry in recent years. Should ProAssurance’s competitors become less disciplined in pricing, or more permissive in their terms, ProAssurance may lose customers who base their purchasing decisions primarily on price because its policy has been to charge adequate premiums on risks that meet its underwriting standards. ProAssurance cannot predict whether, when or how market conditions will change, or the manner in which, or the extent to which any such changes may adversely impact its results of operations.

 

ProAssurance’s revenues may fluctuate with interest rates and investment results.

 

ProAssurance generally relies on the positive performance of its investment portfolio to offset insurance losses and to contribute to its profitability. As its investment portfolio is primarily comprised of interest-earning assets, prevailing economic conditions, particularly changes in market interest rates, may significantly affect ProAssurance’s operating results. Changes in interest rates also can affect the value of ProAssurance’s interest-earning assets, which are principally comprised of fixed and adjustable-rate investment securities. Generally, the value of fixed-rate investment securities fluctuate inversely with changes in interest rates. Interest rate fluctuations could adversely affect ProAssurance’s GAAP stockholders’ equity, income and/or cash flows. ProAssurance’s total investments at March 31, 2006 were $3.1 billion, of which $2.5 billion was invested in fixed maturities. Unrealized pre-tax net investment losses on investments in fixed maturities were $39.5 million at March 31, 2006.

 

At March 31, 2006, ProAssurance held equity investments having a fair value of $10.1 million in an available-for-sale portfolio and held additional equity securities having a fair value of $5.5 million in a trading portfolio. The fair value of these securities fluctuates depending upon company specific and general market conditions. Any decline in the fair value of available-for-sale securities that ProAssurance determines to be other-than-temporary will reduce ProAssurance’s net income. Any changes in the fair values of trading securities, whether gains or losses, will be included in net income in the period changed.

 

Changes in healthcare could have a material impact on ProAssurance’s operations.

 

ProAssurance derives substantially all of its medical professional liability insurance premiums from physicians and other individual healthcare providers, physician groups and smaller healthcare facilities. Significant attention has been focused on reforming the healthcare industry at both the federal and state levels which could result in changes to how health care providers insure their medical malpractice risks. A broad range of healthcare reform measures has been suggested, and public discussion of such measures will likely continue in the future. Proposals have included, among others, spending limits, price controls, limiting increases in insurance premiums, limiting the liability of doctors and hospitals for tort claims, imposing liability on institutions rather than physicians, and restructuring the healthcare insurance system. ProAssurance cannot predict which, if any, reform proposals will be adopted, when they may be adopted or what impact they may have on ProAssurance. The adoption of certain of these proposals could materially adversely affect ProAssurance’s financial condition or results of operations.

In addition to regulatory and legislative efforts, there have been significant market driven changes in the healthcare environment. In recent years, a number of factors related to the emergence of managed care have negatively impacted or threatened to impact the medical practice and economic independence of medical professionals. Medical professionals have found it more difficult to conduct a traditional fee-for-service practice and many have been driven to join or contractually affiliate with larger organizations. Such change and consolidation may result in the elimination of, or a significant decrease in, the role of the physician in the medical malpractice insurance purchasing decision. It could also result in greater emphasis on the role of professional managers, who may seek to purchase insurance on a price competitive basis, and who may favor insurance companies that are larger and more highly rated than ProAssurance. In addition, such change and consolidation could reduce ProAssurance’s medical malpractice premiums as groups of insurance purchasers generally retain more risk or self insure.

 

The movement from traditional fee-for-service practice to the managed care environment may also result in an increase in the liability profile of ProAssurance’s insureds. The majority of ProAssurance’s insured physicians practice in primary care specialties such as internal medicine, family practice, general practice and pediatrics. In the managed care environment, these primary care physicians are being required to take on the role of “gatekeeper” and restrain the use of specialty care by controlling access to specialists and by performing certain procedures that would customarily be performed by specialists in a fee-for-service setting. These practice changes may result in an increase in the claims frequency and severity experienced by primary care physicians and by ProAssurance as their insurance carrier.

 

ProAssurance is a holding company and is dependent on dividends and other payments from its operating subsidiaries, which are subject to dividend restrictions.

 

ProAssurance is a holding company whose principal source of funds is cash dividends and other permitted payments from operating subsidiaries. If ProAssurance’s subsidiaries are unable to make payments to it, or are able to pay only limited amounts, ProAssurance may be unable to make payments on its indebtedness. The payment of dividends by these operating subsidiaries is subject to restrictions set forth in the insurance laws and regulations of their respective states of domicile as discussed under “Price Range of Common Stock and Dividends — Dividends” on page 57.

 

Regulatory requirements could have a material impact on ProAssurance’s operations.

 

ProAssurance’s insurance businesses are subject to extensive regulation by state insurance authorities in each state in which it operates. Regulation is intended for the benefit of policyholders rather than shareholders. In addition to the amount of dividends and other payments that can be made to a holding company by insurance subsidiaries, these regulatory authorities have broad administrative and supervisory power relating to:

 

 

These regulations may impede or impose burdensome conditions on rate increases or other actions that ProAssurance may want to take to enhance its operating results. In addition, ProAssurance may incur significant costs in the course of complying with regulatory requirements. Most states also regulate insurance holding companies like ProAssurance in a variety of matters such as acquisitions, changes of control and the terms of affiliated transactions.

 

Future legislative or regulatory changes may also adversely affect ProAssurance’s business operations.

The unpredictability of court decisions could have a material impact on ProAssurance’s operations.

 

The financial position of ProAssurance’s insurance subsidiaries may also be affected by court decisions that expand insurance coverage beyond the intention of the insurer at the time it originally issued an insurance policy. In addition, a significant jury award, or series of awards, against one or more of ProAssurance’s insureds could require it to pay large sums of money in excess of its reserve amounts.

 

The passage of tort reform or other legislation, and the subsequent review of such laws by the courts could have a material impact on ProAssurance’s operations.

 

Tort reforms generally restrict the ability of a plaintiff to recover damages by, among other limitations, eliminating certain claims that may be heard in a court, limiting the amount or types of damages, changing statutes of limitation or the period of time to make a claim, and limiting venue or court selection. A number of states in which ProAssurance does business have enacted, or are considering, tort reform legislation. Proposed federal tort reform legislation has failed to win Congressional approval to date.

 

While the effects of tort reform would appear to be beneficial to ProAssurance’s business generally, there can be no assurance that such reforms will be effective or ultimately upheld by the courts in the various states. Further, if tort reforms are effective, the business of providing professional liability insurance may become more attractive, thereby causing an increase in competition for ProAssurance.

 

In addition, there can be no assurance that the benefits of tort reform will not be accompanied by legislation or regulatory actions that may be detrimental to ProAssurance’s business. For example, various states have established or are evaluating their intention to establish state sponsored malpractice insurance for their resident physicians that may eliminate targeted physicians from the private insurance market. Furthermore, insurance regulatory authorities may require premium rate limitations and expanded coverage requirements as well as other requirements in anticipation of the expected benefits of tort reform which may or may not be actually realized.

 

ProAssurance’s geographic concentration ties its performance to the economic, regulatory and demographic conditions of the midwestern, southern and mid-Atlantic states.

 

ProAssurance’s revenues and profitability are subject to prevailing economic, regulatory, demographic and other conditions in the states in which it writes insurance. ProAssurance currently writes professional liability insurance primarily in the midwestern, southern and mid-Atlantic United States with approximately 68% of gross premiums written in Alabama, Florida, Indiana, Michigan and Ohio in 2005. Further, the business of PIC Wisconsin is concentrated in Wisconsin and other midwestern states. Because its business currently is concentrated in a limited number of markets, adverse developments that are limited to a geographic area in which ProAssurance does business may have a disproportionately greater affect on it than they would have if it did business in markets outside that particular geographic area.

 

ProAssurance’s business could be adversely affected by the loss of independent agents.

 

ProAssurance depends in part on the services of independent agents and brokers in the marketing of its insurance products. ProAssurance faces competition from other insurance companies for the services and allegiance of independent agents and brokers. These agents and brokers may choose to direct business to competing insurance companies or may direct less desirable risks to ProAssurance.

 

If market conditions cause reinsurance to be more costly or unavailable, ProAssurance may be required to bear increased risks or reduce the level of its underwriting commitments.

 

As part of its overall risk and capacity management strategy, ProAssurance purchases reinsurance for significant amounts of risk underwritten by its insurance company subsidiaries. Market conditions beyond ProAssurance’s control determine the availability and cost of the reinsurance, which may affect the level of ProAssurance’s business and profitability. ProAssurance may be unable to maintain current reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If ProAssurance

is unable to renew its expiring coverage or to obtain new reinsurance coverage, either its net exposure to risk would increase or, if it is unwilling to bear an increase in net risk exposures, ProAssurance would have to reduce the amount of its underwritten risk.

 

ProAssurance cannot guarantee that its reinsurers will pay in a timely fashion, if at all, and, as a result, it could experience losses.

 

ProAssurance transfers some of its risks to reinsurance companies in exchange for part of the premium it receives in connection with the risk. Although reinsurance makes the reinsurer liable to ProAssurance to the extent the risk is transferred, it does not relieve ProAssurance of its liability to its policyholders. If reinsurers fail to pay ProAssurance or fail to pay on a timely basis, ProAssurance’s financial results would be adversely affected. At March 31, 2006, ProAssurance had reinsurance recoverables on paid losses and loss adjustment expenses of approximately $331.5 million.

 

The guaranty fund assessments that ProAssurance is required to pay to state guarantee associations may increase and results of operations and financial condition could suffer as a result.

 

Each state in which ProAssurance operates has separate insurance guaranty fund laws requiring admitted property and casualty insurance companies doing business within their respective jurisdictions to be members of their guaranty associations. These associations are organized to pay covered claims (as defined and limited by the various guaranty association statutes) under insurance policies issued by insolvent insurance companies. Most guaranty association laws enable the associations to make assessments against member insurers to obtain funds to pay covered claims after a member insurer becomes insolvent. These associations levy assessments (up to prescribed limits) on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the covered lines of business in that state. Maximum assessments permitted by law in any one year generally vary between 1% and 2% of annual premiums written by a member in that state. Some states permit member insurers to recover assessments paid through surcharges on policyholders or through full or partial premium tax offsets, while other states permit recovery of assessments through the rate filing process.

 

Property and casualty guaranty fund assessments incurred by ProAssurance totaled $226,000 and $396,000 for 2005 and 2004, respectively. ProAssurance’s policy is to accrue the insurance insolvencies when notified of assessments. ProAssurance is not able to reasonably estimate the liabilities of an insolvent insurer or develop a meaningful range of the insolvent insurer’s liabilities because of inadequate financial data with respect to the estate of the insolvent company as supplied by the guaranty funds.

 

ProAssurance’s business could be adversely affected by the loss of one or more key employees.

 

ProAssurance is heavily dependent upon its senior management and the loss of services of its senior executives could adversely affect its business. ProAssurance’s success has been, and will continue to be, dependent on its ability to retain the services of existing key employees and to attract and retain additional qualified personnel in the future. The loss of the services of key employees or senior managers, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect the quality and profitability of ProAssurance’s business operations.

 

ProAssurance’s board of directors is in the process of considering succession planning relating to its Chief Executive Officer. Dr. Crowe, its current Chairman and Chief Executive Officer, has indicated to the board that he has no immediate plans for retirement.

 

Provisions in ProAssurance’s charter documents, Delaware law and state insurance law may impede attempts to replace or remove management or impede a takeover, which could adversely affect the value of its common stock.

 

ProAssurance’s certificate of incorporation, bylaws and Delaware law contain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination. Additionally, the board of directors may issue preferred stock, which could be used as an anti-takeover device, without a further vote of

ProAssurance’s stockholders. ProAssurance currently has no preferred stock outstanding, and no present intention to issue any shares of preferred stock. However, because the rights and preferences of any series of preferred stock may be set by the board of directors in its sole discretion, the rights and preferences of any such preferred stock may be superior to those of ProAssurance’s common stock and thus may adversely affect the rights of the holders of common stock.

 

The voting structure of common stock and other provisions of ProAssurance’s certificate of incorporation are intended to encourage a person interested in acquiring ProAssurance to negotiate with, and to obtain the approval of, the board of directors in connection with a transaction. However, certain of these provisions may discourage ProAssurance’s future acquisition, including an acquisition in which stockholders might otherwise receive a premium for their shares. As a result, stockholders who might desire to participate in such a transaction may not have the opportunity to do so.

 

In addition, state insurance laws provide that no person or entity may directly or indirectly acquire control of an insurance company unless that person or entity has received approval from the insurance regulator. An acquisition of control of ProAssurance’s insurance operating subsidiaries generally would be presumed if any person or entity acquires 10% (5% in Alabama) or more of its outstanding common stock, unless the applicable insurance regulator determines otherwise.

 

These provisions apply even if the offer may be considered beneficial by stockholders.

 

If a change in management or a change of control is delayed or prevented, the market price of ProAssurance’s common stock could decline.

 

This section contains information from PIC Wisconsin for PIC Wisconsin shareholders about the special shareholders’ meeting PIC Wisconsin has called to consider the approval and adoption of the merger agreement and the merger. PIC Wisconsin is mailing this proxy statement-prospectus to you, as a PIC Wisconsin shareholder, on or about June   , 2006. Together with this proxy statement-prospectus, PIC Wisconsin is also sending to you a notice of the PIC Wisconsin special meeting, a form of proxy that PIC Wisconsin’s board of directors is soliciting for use at the special meeting and at any adjournments or postponements of the meeting.

 

The special meeting will be held on Wednesday, July 26, 2006, at 10:00 a.m., local time, at the offices of PIC Wisconsin, 1002 Deming Way, Madison, Wisconsin 53744.

 

At the PIC Wisconsin special meeting, PIC Wisconsin shareholders will be asked to:

 

1. approve and adopt the merger agreement and the merger;

 

 

A copy of the merger agreement is attached to this proxy statement-prospectus as Appendix A.

 

Vote required for proposal 1.  The approval and adoption of the merger agreement and the merger requires the affirmative vote of a majority of the votes that record holders of the outstanding shares of PIC Wisconsin common stock are entitled to cast on the merger proposal at the special meeting. Abstentions

will have the same effect as votes cast against the proposal to approve and adopt the merger agreement and the merger.

 

Vote required for proposal 2.  Assuming a quorum is present, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote thereon is required to approve the proposal to adjourn the special meeting, if necessary, for the purpose of soliciting additional proxies. Abstentions will have the same effect as a vote against this proposal.

 

You should complete and return the proxy card accompanying this proxy statement-prospectus to ensure that your vote is counted at the special meeting, regardless of whether you plan to attend the special meeting.

 

All shares of PIC Wisconsin common stock represented by valid proxies that PIC Wisconsin receives through this solicitation, and not revoked before they are exercised, will be voted in the manner specified on the proxies. If you sign and return your proxy card but make no specification on your proxy card, your proxy will be voted “FOR” approval and adoption of the merger agreement and the merger and “FOR” approval of any adjournment or postponement of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes for approval and adoption of the merger agreement and the merger.

 

Adjournments of the special meeting may be made in accordance with PIC Wisconsin’s bylaws. If the persons named as proxies by you are asked to vote for one or more adjournments of the special meeting for matters incidental to the conduct of the special meeting, such persons will have the authority to vote in their discretion on such matters. However, if the persons named as proxies by you are asked to vote for one or more proposals to adjourn the special meeting to a later date to solicit additional proxies in favor of the proposal to approve and adopt the merger agreement and the merger in the event that there are not sufficient votes to approve and adopt the merger agreement and the merger at the special meeting, such persons will only have the authority to vote on such matter as directed by you or your proxy, or, in the absence of such direction, in favor of such adjournment. No proxy voted against the proposal to approve and adopt the merger agreement and the merger will be voted in favor of any adjournments, postponements or continuations of the special meeting, unless specifically so designated on the proxy.

 

If you are a record holder of PIC Wisconsin common stock, you can revoke your proxy at any time before the vote is taken at the special meeting by submitting to PIC Wisconsin’s corporate secretary written notice of revocation or a properly executed proxy of a later date, or by attending the special meeting and voting in person. Attendance at the special meeting will not by itself constitute revocation of a proxy. Written notices of revocation and other communications about revoking PIC Wisconsin proxies should be addressed to:

 

Attn: Corporate Secretary

Physicians Insurance Company of Wisconsin, Inc.

1002 Deming Way

Madison, Wisconsin 53744

 

PIC Wisconsin’s board is unaware of any other matters that may be presented for action at the special meeting. If other matters do properly come before the special meeting, however, PIC Wisconsin intends that shares represented by proxies in the form accompanying this proxy statement-prospectus will be voted by and at the discretion of the persons named as proxies on the proxy card.

 

You should not send in any stock certificates with your proxy card. The exchange agent will mail to PIC Wisconsin shareholders a transmittal letter with instructions for the surrender of stock certificates as soon as practicable after the completion of the merger.

 

The proxies are solicited by and at the direction of the board of directors of PIC Wisconsin. PIC Wisconsin will bear the entire cost of soliciting proxies from its shareholders and the costs and expenses of printing and mailing this proxy statement-prospectus, except that ProAssurance will engage Mellon Investor

Services LLC, which we refer to as Mellon, to act as exchange agent in the merger and to be responsible for tabulating the votes at the special meeting at the expense of ProAssurance. ProAssurance will pay all registration, filing and other fees relating to the merger paid to the SEC and the NYSE. In addition, PIC Wisconsin’s directors, officers and regular employees may solicit proxies, without payment of additional compensation to such persons, either personally or by telephone, the Internet, telegram, fax, letter or special delivery letter.

 

In accordance with Wisconsin law and PIC Wisconsin’s bylaws, PIC Wisconsin has fixed June 6, 2006, as the record date for determining the PIC Wisconsin shareholders entitled to notice of and to vote at the special meeting. Only PIC Wisconsin shareholders of record at the close of business on the record date are entitled to notice of and to vote at the special meeting and any adjournments or postponements of the special meeting. At the close of business on the record date, there were           shares of PIC Wisconsin common stock outstanding, held by approximately           holders of record. The presence in person or by proxy of a majority of shares of common stock outstanding on the record date and entitled to vote will constitute a quorum for purposes of conducting business at the special meeting. On each matter properly submitted for consideration at the special meeting, each record holder is entitled to one vote for each outstanding share of PIC Wisconsin common stock.

 

Shares of PIC Wisconsin common stock present in person at the special meeting but not voting, and shares of PIC Wisconsin common stock for which PIC Wisconsin has received proxies indicating that their holders have abstained, will be counted as present at the special meeting for purposes of determining whether there is a quorum for transacting business at the special meeting.

 

As of the record date:

 

 

The PIC Wisconsin board has approved and adopted the merger agreement and the merger. The PIC Wisconsin board believes that the merger agreement and the transactions it contemplates are in the best interests of PIC Wisconsin and its shareholders, and unanimously recommends that PIC Wisconsin shareholders vote “FOR” approval and adoption of the merger agreement and the merger. The PIC Wisconsin board of directors also unanimously recommends that PIC Wisconsin shareholders vote “FOR” the approval of the proposal to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes for the merger proposal.

 

See “Proposal 1: The Merger — Recommendation of PIC Wisconsin’s board of directors” beginning on page 25 for a more detailed discussion of the PIC Wisconsin board’s recommendation with regard to the merger agreement and the merger.

 

The following discussion contains material aspects of the merger. Because this discussion is a summary, it may not contain all of the information that is important to you. To understand the merger fully, and for a more complete description of the legal terms of the merger, you should read carefully this entire proxy statement-prospectus and the documents we referred you to, including the merger agreement. See “Where You Can Find More Information” beginning on page 85.

 

A copy of the merger agreement without any schedules is attached as Appendix A to this proxy statement-prospectus and is incorporated by reference. You are encouraged to read the merger agreement completely and carefully as it is the legal document that governs the merger.

 

ProAssurance’s and PIC Wisconsin’s boards of directors have unanimously approved and adopted the merger agreement and the merger. When the merger is completed:

 

 

 

The shares of ProAssurance common stock to be issued in the merger will be authorized for listing on the NYSE, subject to official notice of issuance, before the completion of the merger.

 

ProAssurance and PIC Wisconsin are working towards completing the merger as quickly as possible, and expect to complete the merger early in the third quarter of 2006.

 

PIC Wisconsin was formed in 1986 as a Wisconsin stock insurance company. PIC Wisconsin’s common stock was offered and sold at an initial offering price of $600 from 1986 through January 1990 to licensed physicians and certain associated medical professionals who purchased shares as a condition of becoming policyholders of PIC Wisconsin’s medical professional liability insurance. There has never been any public market for PIC Wisconsin common stock and, other than limited sales, gifts and bequests between and among shareholders, very few transfers of the stock have been made. PIC Wisconsin has never paid cash dividends to its shareholders.

 

Although the initial sale of PIC Wisconsin’s common stock was accompanied by explicit cautionary representations regarding the stock’s lack of liquidity and limited potential for investment returns, over the years PIC Wisconsin’s board of directors has considered various means of providing shareholders with an opportunity to realize liquidity for their shares. Among the approaches considered were the creation or encouragement of a public trading market for the stock, as well as a public offering of PIC Wisconsin’s common stock. The board concluded that neither of these approaches was feasible, considering the costs involved and PIC Wisconsin’s paramount desire to maintain its physician ownership and governance.

 

In 1994, the board of directors authorized the redemption of approximately $1.5 million, or a total of 2,480 shares of PIC Wisconsin common stock, from shareholders who wanted to sell their shares. Those who accepted the offer were paid $600 in cash for each of their shares.

 

In 1995, PIC Wisconsin entered into a Reciprocal Stock Purchase Agreement with Physicians Insurance Company of Michigan, which is referred to as PICOM, pursuant to which the two companies exchanged shares of each other’s stock. For purposes of that sale of stock, PIC Wisconsin’s shares were valued at approximately $1,580 per share. When PICOM, now known as ProNational Insurance Company, became part of the ProAssurance group of companies in 2001, PIC Wisconsin repurchased all of PICOM’s shares for

$3,466 per share, which was the statutory book value of the shares at that time, pursuant to a call option in the Reciprocal Stock Purchase Agreement that was triggered by the change of control of PICOM.

 

In 1998, PIC Wisconsin again offered to redeem shares of PIC Wisconsin common stock. This redemption resulted in the repurchase of 2,528 shares for a total of approximately $2.6 million, or an average of approximately $1,014 per share.

 

By 2002, a renewed desire by PIC Wisconsin’s shareholders for liquidity and value caused its board of directors again to review the available options. The board authorized management and counsel to prepare another redemption offer, this time for a maximum of 8,824 shares at $1,700 per share, or a total of approximately 45% of the outstanding common stock for a total of $15 million. This redemption program was abandoned, however, after PIC Wisconsin’s shareholders failed to approve amendments to PIC Wisconsin’s articles of incorporation necessary to implement the program at a special shareholders’ meeting held in January 2003.

 

In late 2003 and continuing into 2004, management developed and presented to PIC Wisconsin’s board of directors a recapitalization plan designed to offer liquidity to its shareholders, while at the same time retaining a base of ownership and control by its policyholders. For purposes of the recapitalization plan, PIC Wisconsin’s common stock was valued at $2,200 per share. The recapitalization plan was to use internally generated capital along with $12 million from the proceeds of the sale of surplus notes. In May 2004, the board authorized the issuance of the surplus notes and set the date of a special meeting of shareholders to vote on the elements of the recapitalization plan. A proxy statement was prepared for the special shareholders’ meeting that was scheduled for September 2004 and filed with the Office of the Commissioner of Insurance of Wisconsin, which is referred to as the OCI of Wisconsin.

 

In August 2004, PIC Wisconsin learned that a number of the largest PIC Wisconsin shareholders had retained a securities firm to find a buyer for their shares. Among the potential purchasers were ProAssurance and American Physicians Capital, Inc., both publicly traded medical malpractice insurance groups and competitors of PIC Wisconsin. In response, PIC Wisconsin’s board of directors authorized management to investigate the facts and circumstances of this proposed transaction, analyze the potential impact of these sales on PIC Wisconsin, its other shareholders, policyholders and other constituencies, and make recommendations to the board of directors. In light of this development, the board postponed the special shareholders’ meeting to consider and vote on the recapitalization plan.

 

On September 21, 2004, American Physicians Assurance Corporation, which is referred to as APA, a wholly-owned subsidiary of American Physicians Capital, Inc., filed a request with the OCI of Wisconsin for approval of the acquisition of 4,450 shares of PIC Wisconsin common stock from five current shareholders at a purchase price of $3,800 per share. The APA filing also indicated that APA might purchase an additional 332 shares from an unidentified shareholder, which would bring APA’s percentage ownership of PIC Wisconsin common stock to approximately 24%. Such an acquisition would give APA presumed “control” of PIC Wisconsin under Wisconsin’s insurance laws, and therefore would require regulatory approval from the OCI of Wisconsin.

 

The board of directors of PIC Wisconsin considered the proposed acquisition by APA and determined that the proposed acquisition would not be in the best interests of PIC Wisconsin’s shareholders and policyholders. At the board’s direction, PIC Wisconsin President and CEO William T. Montei filed a letter dated September 29, 2004 with the OCI of Wisconsin opposing the proposed acquisition of control of PIC Wisconsin by APA on the grounds that the acquisition would be contrary to the interests of PIC Wisconsin’s policyholders, would negatively affect its business and operations and would jeopardize the Wisconsin medical liability insurance market. The letter also stated that APA is not a fit and proper owner of PIC Wisconsin, and that the manner in which APA solicited proposed sellers of PIC Wisconsin shares may have been in violation of the law. The OCI of Wisconsin permitted PIC Wisconsin to become a party to the APA proceeding and commenced the process of evaluating the APA approval request.

In October 2004, the PIC Wisconsin board of directors indefinitely postponed the special shareholders’ meeting to vote on the recapitalization plan and directed management to explore and present to the board strategies to defend PIC Wisconsin against unwelcome acquisitions of its stock and hostile takeovers.

 

In November 2004, PIC Wisconsin received a letter from the President and CEO of APA requesting a meeting with the PIC Wisconsin board of directors. On the advice of counsel, the board directed PIC Wisconsin management to respond that the board would be willing to consider such a meeting if APA would first provide sufficient information about its business and intentions such that the board could properly assess the consequences to PIC Wisconsin’s policyholders and its financial stability resulting from APA’s proposed acquisition of PIC Wisconsin shares. In addition, the board reviewed with counsel and then adopted a shareholder rights agreement that permits PIC Wisconsin to defend itself against takeover attempts that the board considers contrary to the best interests of PIC Wisconsin and its shareholders. See “Proposal 1: The Merger — Shareholder rights agreement” on page 40.

 

In March 2005, PIC Wisconsin retained the investment banking firm of Cochran to advise the board of directors and assist in finding a suitable means of providing shareholder liquidity. Cochran contacted five potential investors who PIC Wisconsin or Cochran believed would be interested in making a minority investment in the company or other transactions that would offer at least some of its shareholders an opportunity to realize liquidity for their shares. None of these potential investors chose to pursue the purchase of a non-controlling interest in PIC Wisconsin. Concurrently, the board considered another redemption plan, as well as a plan to mutualize PIC Wisconsin that would transfer control of the company from the shareholders to policyholders. Ultimately, neither of these plans was deemed to fully satisfy the objectives of offering all PIC Wisconsin shareholders an opportunity to sell their shares at a fair price, while preserving the financial stability of PIC Wisconsin.

 

In April 2005, Cochran began contacting potential strategic partners for PIC Wisconsin. As part of that process, Cochran obtained confidentiality agreements from and distributed offering memoranda to three parties, including ProAssurance. Each of these parties responded by providing written indications of interest in a business combination with PIC Wisconsin, which Cochran reviewed with management and the board. One of the companies’ offers involved a multi-step process with significant challenges at each step, so PIC Wisconsin’s board of directors chose not to pursue it further.

 

In June 2005, the board of directors met with representatives of ProAssurance and one other company to discuss a potential transaction in which PIC Wisconsin would become a part of the acquiring organization, and its shareholders would receive either stock or cash, or a combination of stock and cash, in consideration for their shares. Both companies presented the board with term sheets. ProAssurance proposed a merger transaction in which PIC Wisconsin’s shareholders would have a right to receive (i) the greater of the statutory book value or $4,000 in cash, or (ii) shares of ProAssurance common stock with a value of the greater of 105% of statutory book value or $4,200. As of March 31, 2005, PIC Wisconsin’s statutory book value was $3,789 per share. The other company offered a cash payment equal to statutory book value as of the date of the merger, and later raised its offer to 115% of statutory book value per share of PIC Wisconsin stock. In July 2005, PIC Wisconsin’s board of directors met to consider the two proposals, by which time ProAssurance had increased its offer to (x) ProAssurance common stock with an implied value of $5,000 per share of PIC Wisconsin common stock, or (y) cash equal to the greater of $4,000 or the statutory book value per share of PIC Wisconsin common stock. ProAssurance later withdrew the cash option from its offer. The board authorized management to proceed with reciprocal due diligence with both companies.

 

During this period, two other parties expressed an interest in entering into discussions for the acquisition of PIC Wisconsin, including APA. Cochran was asked by PIC Wisconsin’s board of directors to analyze these overtures and advise the board whether to pursue discussions with these companies. In July 2005, Cochran and PIC Wisconsin’s legal counsel met with the board to consider these issues. Cochran advised the board that one of the two candidates had a significant market share in Wisconsin which, when combined with PIC Wisconsin’s sales figures, would comprise more than 50% of the Wisconsin medical malpractice insurance market. Discussions with that company did not go further because of the perceived risk that a merger with that company could raise issues with antitrust and insurance regulators, which could substantially delay or prevent

the proposed merger. That company also verbally indicated that it did not foresee paying more than statutory book value for PIC Wisconsin shares, which was less than the bids PIC Wisconsin received from ProAssurance and the other bidder. The other company, APA, had already entered into contracts to purchase approximately 24% of PIC Wisconsin’s common stock, subject to approval by the OCI of Wisconsin. PIC Wisconsin’s legal counsel reviewed the reasons that PIC Wisconsin was opposing that acquisition in the proceeding pending before the OCI of Wisconsin and the information about APA obtained in discovery. Cochran informed the board of the risks that a transaction with APA may have to PIC Wisconsin. Among other things, Cochran noted that in November 2003, APA took a reserve charge of $43.4 million, or 6.4% of total reserves. Furthermore, APA was rated B+ (with negative implications) by A.M. Best, while PIC Wisconsin was rated A- (excellent with stable outlook), so an acquisition by APA would pose a threat to its A.M. Best rating. Cochran also pointed out that, based upon an accretion/dilution analysis, it was unlikely that APA would top the ProAssurance offer. PIC Wisconsin’s board of directors requested Cochran to continue its analysis of the two potential merger partners and prepare recommendations.

 

In September 2005, APA announced that it had purchased approximately 9.9% of the PIC Wisconsin common stock and filed a motion with OCI of Wisconsin to withdraw its original September 2004 request for approval to acquire approximately 24% of PIC Wisconsin common stock and to dismiss the proceeding. The OCI of Wisconsin denied APA’s motion to withdraw on the grounds that APA’s intentions were not conclusively established by its representations that it does not intend to acquire any more PIC Wisconsin common stock, and the OCI of Wisconsin retained jurisdiction in the matter. That proceeding before the OCI of Wisconsin, although stayed, remains pending.

 

At its meeting in October 2005, PIC Wisconsin’s board of directors, with Cochran’s advice, reviewed alternative courses of action, including its search for a passive minority investor, consideration of a redemption and recapitalization plan, potential mutualization of the company, and solicitation of expressions of interest for the purchase of the company. The board determined that the best alternative for both the company and its shareholders would be a sale of the company, and that a transaction with ProAssurance was preferable to any other transaction that had been proposed. The board directed management and counsel to continue due diligence with ProAssurance and prepare a definitive agreement for the board’s consideration. The board met again in November 2005 to receive a report on the status of the merger agreement and due diligence activities with ProAssurance.

 

On December 7, 2005, PIC Wisconsin’s board of directors, following a presentation by PIC Wisconsin’s legal counsel and by Cochran, receipt of Cochran’s oral opinion that the ProAssurance merger consideration is fair from a financial point of view to the PIC Wisconsin shareholders, and a review of the terms of the ProAssurance merger agreement, authorized management to enter into the merger agreement. The board also approved amendments to the rights agreement that excluded ProAssurance, the merger agreement and the merger from the effects of the rights agreement.

 

On December 8, 2005, the rights agreement was amended, Cochran delivered its written opinion dated December 8, 2005 that the merger consideration is fair from a financial point of view to the PIC Wisconsin shareholders, the merger agreement was signed and delivered, and the merger was publicly announced. On December 21, 2005, ProAssurance filed with the OCI of Wisconsin its request for approval of the acquisition of control of PIC Wisconsin on Form A, in accordance with the terms of the merger agreement.

 

At a special meeting of PIC Wisconsin’s board of directors held on December 7, 2005, after careful consideration, PIC Wisconsin’s board of directors determined that the approval and adoption of the merger agreement and the merger are advisable and in the best interests of PIC Wisconsin and its shareholders. PIC Wisconsin’s board of directors has unanimously approved and adopted the merger agreement and the merger. PIC Wisconsin’s board of directors unanimously recommends that holders of PIC Wisconsin common stock vote “FOR” the approval and adoption of the merger agreement and the merger.

In reaching its decision to approve and adopt the merger agreement and the merger and to recommend that holders of PIC Wisconsin common stock vote to approve and adopt the merger agreement and the merger, PIC Wisconsin’s board of directors considered a number of factors, including the following:

 

 

 

 

 

 

 

In the course of its deliberations, PIC Wisconsin’s board of directors also considered a variety of risks and other potentially negative factors, including the following:

 

 

 

PIC Wisconsin’s board concluded that the anticipated benefits of combining with ProAssurance outweighed the preceding risks.

 

Although each member of PIC Wisconsin’s board individually considered these and other factors, the board did not collectively assign any specific or relative weights to the factors considered and did not make any determination with respect to any individual factor. The board collectively made its determination with respect to the merger based on the conclusion reached by its members that, in light of the factors that each of them considered appropriate, the merger is in the best interests of PIC Wisconsin and its shareholders.

 

PIC Wisconsin’s board of directors realized there can be no assurance about future results, including results expected or considered in the factors listed above. However, the board concluded the potential positive factors outweighed the potential risks of consummating the merger.

 

It should be noted that this explanation of the PIC Wisconsin board’s reasoning and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Forward-Looking Statements” on page 86.

 

By an engagement letter dated March 8, 2005, PIC Wisconsin retained Cochran to act as financial advisor to PIC Wisconsin in connection with any proposed business combination involving PIC Wisconsin and, among other things, to render an opinion to PIC Wisconsin’s board of directors as to the fairness, from a financial point of view, of a business combination. Cochran is a nationally recognized investment banking firm whose principal business specialty is insurance-related entities. In the ordinary course of its investment banking business, Cochran is regularly engaged in the valuation of insurance companies and their securities in connection with mergers and acquisitions and other corporate transactions. Cochran was selected to act as investment banker to PIC Wisconsin, in part, because of Cochran’s expertise and its reputation in investment banking and mergers and acquisitions with respect to insurance-related entities.

 

Cochran acted as financial advisor to PIC Wisconsin in connection with the proposed merger and participated in certain of the negotiations leading to the merger agreement. At the December 7, 2005 meeting of PIC Wisconsin’s board, at which PIC Wisconsin’s board considered and approved the final form of the merger agreement, Cochran delivered to the board, Cochran’s oral opinion, that, as of such date, the consideration to be received by PIC Wisconsin’s shareholders in the merger was fair from a financial point of view. Cochran confirmed its December 7, 2005 oral opinion by delivering to the board a written opinion dated December 8, 2005, which is referred to herein as Cochran’s opinion.

 

The full text of Cochran’s opinion is attached as Appendix C to this proxy statement-prospectus, and is incorporated by reference into this proxy statement-prospectus. The opinion outlines the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Cochran in rendering its opinion. The opinion was directed to the PIC Wisconsin board and is directed only to the fairness, from a financial point of view, of the merger consideration to holders of PIC Wisconsin common stock. It does not address the underlying business decision of PIC Wisconsin to engage in the merger or any other aspect of the merger, and is not a recommendation to any PIC Wisconsin shareholder as to how such shareholder should vote at the special meeting with respect to the merger or any other matter. Cochran expressed no opinion as to the price at which either PIC Wisconsin or ProAssurance shares may trade prior to or following consummation of the merger. Cochran’s opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Cochran as of, the date of the Cochran opinion. Cochran’s opinion speaks only as of the date of the opinion, and Cochran assumed no responsibility for updating or revising the Cochran opinion based on circumstances or events occurring after the date of the Cochran opinion. The description of the opinion set forth below is qualified in its entirety by reference to the opinion. The following is only a summary of the Cochran opinion. You are urged to read the entire opinion carefully in connection with your consideration of the proposed merger.

 

In connection with rendering Cochran’s opinion, Cochran reviewed and considered, among other things:

 

 

 

Cochran also discussed with certain members of senior management of PIC Wisconsin the business, financial condition, results of operations and prospects of PIC Wisconsin and held similar discussions with certain members of senior management of ProAssurance regarding the business, financial condition, results of operations and prospects of ProAssurance. Cochran’s financial statement analysis of PIC Wisconsin was done entirely from statutory accounting statements. PIC Wisconsin does not produce GAAP statements in its normal course of operation. Cochran, with the consent of PIC Wisconsin’s management, estimated GAAP financial results based on PIC Wisconsin’s statutory results and projections, which estimates were judged reasonable by PIC Wisconsin’s management.

 

In performing its reviews and analyses and in rendering its opinion, Cochran relied upon the accuracy and completeness of all of the financial and other information that was available from public sources, that was provided by PIC Wisconsin or ProAssurance or their respective representatives or that was otherwise reviewed by Cochran and have assumed such accuracy and completeness for purposes of rendering this opinion. Cochran further relied on the assurances of management of PIC Wisconsin and ProAssurance that they were not aware of any facts or circumstances that would make any of such information materially inaccurate or misleading. With respect to financial forecasts, Cochran assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of PIC Wisconsin as to its future financial performance. Cochran assumed no responsibility for and expressed no view as to such forecasts or the assumptions on which they were based. Cochran has not been asked to and has not undertaken an independent verification of any of such information and Cochran does not assume any responsibility or liability for the accuracy or completeness thereof. Cochran did not make an independent evaluation or appraisal of the specific assets, the collateral securing assets or the liabilities (contingent or otherwise) of PIC Wisconsin or ProAssurance or any of their subsidiaries, or the collectibility of any such assets, nor has Cochran been furnished with any such evaluations or appraisals. Cochran has not been furnished with any actuarial analysis or reports, except for certain analysis and reports prepared by PIC Wisconsin’s actuarial advisors. Cochran is not an actuarial firm and its services did not include actuarial determinations or evaluations by it or an attempt to evaluate any actuarial assumptions. In that regard, Cochran has made no analysis of, and expresses no opinion as to, the adequacy of PIC Wisconsin’s losses and loss adjustment expense reserves or of ProAssurance’s under any state or federal laws relating to bankruptcy, insolvency or similar matters.

 

Cochran’s opinion was necessarily based upon financial, economic, market and other conditions as they existed on, and could be evaluated as of, the date of the opinion. Cochran assumed, in all respects material to its analyses, that all of the representations and warranties contained in the merger agreement and all related agreements are true and correct, that each party to such agreements will perform all of the covenants required to be performed by such party under such agreements and that the conditions precedent in the merger agreement are not waived. Cochran also assumed, with PIC Wisconsin’s consent, that there has been no material change in PIC Wisconsin’s or ProAssurance’s assets, financial condition, results of operations, business or prospects since the date of the last financial statements made available to Cochran, that

PIC Wisconsin and ProAssurance will remain as going concerns for all periods relevant to its analyses, and that the merger will qualify as a tax-free reorganization for federal income tax purposes. Finally, with PIC Wisconsin’s consent, Cochran relied upon the advice PIC Wisconsin received from its legal, actuarial, accounting and tax advisors as to all legal, actuarial, accounting and tax matters relating to the merger agreement and the other transactions contemplated thereby. Cochran did not express any opinion as to any tax or other consequences that might result from the merger, nor did the Cochran opinion address any legal, tax, regulatory or accounting matters.

 

In rendering Cochran’s opinion, Cochran performed a variety of financial analyses. The following is a summary of the material analyses performed by Cochran, but is not a complete description of all the analyses underlying Cochran’s opinion. The summary includes information presented in tabular format. In order to fully understand the financial analyses, these tables must be read together with the accompanying text. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Cochran’s financial analyses.

 

The preparation of a fairness opinion is a complex process involving subjective judgments as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances. The process, therefore, is not necessarily susceptible to a partial analysis or summary description. Cochran believes that its analyses must be considered as a whole and that selecting portions of the factors and analyses considered without considering all factors and analyses, or attempting to ascribe relative weights to some or all such factors and analyses, could create an incomplete view of the evaluation process underlying its opinion. Also, no company included in Cochran’s comparative analyses described below is identical to PIC Wisconsin or ProAssurance and no transaction is identical to the merger. Accordingly, an analysis of comparable companies or transactions involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values or merger transaction values, as the case may be, of PIC Wisconsin or ProAssurance and the companies to which they are being compared. Accordingly, the estimates used in, and the results derived from, Cochran’s analyses are inherently subject to substantial uncertainty.

 

The financial projections and earning estimates used and relied upon by Cochran in its analyses for PIC Wisconsin were reviewed with the senior management of PIC Wisconsin who confirmed to Cochran that those projections reflected the best currently available estimates and judgments of such management of the future financial performance of PIC Wisconsin. The earnings per share estimates used and relied upon by Cochran in its analyses for ProAssurance were reviewed by senior management of ProAssurance as to reasonableness for use in Cochran’s analyses. The projections of transaction costs, estimates of purchase accounting adjustments and expected cost savings relating to the merger used and relied upon by Cochran in its analyses were reviewed with senior management of ProAssurance and such management confirmed that those projections reflected the best currently available estimates and judgments of such management. With respect to all projections and estimates used in its analyses, Cochran assumed that financial projections or estimates or the assumptions on which they were based were reasonable. These projections and estimates, as well as the other estimates used by Cochran in its analyses, were based on numerous variables and assumptions which are inherently uncertain and, accordingly, actual results could vary materially from those set forth in such projections and estimates.

 

In performing its analyses, Cochran also made numerous assumptions with respect to industry performance, business and economic conditions and various other matters, many of which cannot be predicted and are beyond the control of PIC Wisconsin, ProAssurance and Cochran. The analyses performed by Cochran are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Cochran prepared its analyses solely for purposes of rendering its opinion and provided such analyses to the PIC Wisconsin board at the board’s December 7, 2005 meeting. Estimates of the values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities may actually be sold. Such estimates are inherently subject to uncertainty and actual values may be materially different. Accordingly, Cochran’s analyses do not necessarily reflect the value

of PIC Wisconsin’s stock or ProAssurance’s common stock or the prices at which PIC Wisconsin’s or ProAssurance’s common stock may be sold at any time.

 

Summary of Merger Consideration.  Cochran reviewed the financial terms of the proposed transaction. Within a range, the ratio of PIC Wisconsin shares exchanged for ProAssurance shares will float to ensure that each share of PIC Wisconsin will be exchanged in the merger for ProAssurance common stock having an implied value of $5,000. This mechanism will remain in effect so long as the average price of a share of common stock of ProAssurance at the effective time of the merger is no less than $39.80 and no more than $59.71 per share, which is a range of 20% above or below the average price of a share of stock of ProAssurance on the ten trading days preceding the date of the execution of the merger agreement.

 

 

 

 

Based upon estimated per share financial information for PIC Wisconsin for the twelve-month period ending December 31, 2005, Cochran calculated multiples of the transaction value to estimated statutory book value per share of PIC Wisconsin as of December 31, 2005, adjusted as described below. Cochran also calculated multiples of the transaction value to estimated 2006 earnings per share of PIC Wisconsin as provided by PIC Wisconsin management, adjusted as described below.

 

 

 

 

Discounted Cash Flow Analysis.  Cochran performed an analysis that estimated the future stream of cash flows of PIC Wisconsin through December 31, 2010 assuming that PIC Wisconsin performed in accordance with the earnings projections for 2005 and the years thereafter, furnished by and/or reviewed with senior management of PIC Wisconsin. To approximate the terminal value of PIC Wisconsin’s common stock at December 31, 2010, Cochran applied a multiple of book value of 1.30, based on PIC Wisconsin’s return on equity in 2010 and utilizing a regression analysis of the price to book value ratios and returns on equity of companies whose stock is publicly traded and which Cochran determined were comparables to PIC Wisconsin. Cochran then discounted the cash flow streams and terminal values to present values using different discount rates ranging from 10.5% to 14.5%, which were chosen to reflect different assumptions regarding required rates of return of holders or prospective buyers of PIC Wisconsin’s stock. As shown below, the analysis indicated a range of values per share of PIC Wisconsin stock of $3,644 to $4,653, which is below the implied value of $5,000 per share of PIC Wisconsin common stock in the merger.

 

Selected Merger Transactions Analysis.  Cochran also reviewed certain merger and acquisition transactions announced since 1997 involving medical malpractice insurers as acquired institutions for which public information was available. To the extent available, Cochran reviewed the transaction equity values as a multiple of (a) last twelve months’ earnings of the target companies, and (b) the target companies’ book values as of the transaction date. Cochran then applied the high and low multiples from the transaction to the financial information of PIC Wisconsin for the last twelve months ending December 31, 2005 and calculated an implied range of values for PIC Wisconsin stock of $3,039 to $4,812 per share. The implied value of $5,000 per share of PIC Wisconsin stock in the merger is above the high point of this range.

 

 

 

 

 

Comparable Company Analysis.  Cochran next used publicly available information to compare selected financial and market trading data for a group of publicly traded malpractice insurance groups which consisted of the following:

 

 

To the extent publicly available, Cochran reviewed the stock price of the comparable companies as of December 6, 2005 as a multiple of the following for each of the companies: (a) 2005 estimated earnings per share; (b) 2006 estimated earnings per share; and (c) estimated book value at December 31, 2005. Cochran calculated the multiples for the above comparable companies and then applied the 2005 and 2006 high and low estimated earnings per share and book value multiples for those companies to PIC Wisconsin’s estimated earnings and to PIC Wisconsin’s estimated GAAP book value as of December 31, 2005 to derive imputed ranges of values for PIC Wisconsin’s stock. Cochran applied a control premium of 10% for the low range and 20% for the high range to the implied values to arrive at a range of $3,293 to $4,559 per share of

PIC Wisconsin stock. The implied value of $5,000 per share of PIC Wisconsin stock is above the high point of this range.

 

 

 

 

 

Premiums Paid Analysis.  In addition to applying the above multiples to recent precedent transactions, Cochran reviewed five publicly traded insurance groups that have been wholly acquired over the last year. The average premium paid to the closing stock price the day before the transaction was announced was 8.3%. ProAssurance’s offer of $5,000 per share is 31.6% higher than the $3,800 price per share of APA’s recent reported acquisition of PIC Wisconsin shares.

 

 

Pro Forma Merger Analysis.  Cochran also analyzed certain potential pro forma effects of the merger, assuming the following:

 

 

The analyses indicated that for the years ending December 31, 2006 and 2007, the merger would be dilutive to ProAssurance’s projected earnings per share and accretive to book value per share for the same time period. The actual results will vary depending on synergies achieved by the combination of the companies.

 

Cochran’s opinion and financial analyses were not the only factors considered by PIC Wisconsin’s board of directors in its evaluation of the merger and should not be viewed as determinative of the views of the PIC Wisconsin’s board of directors or management. Cochran has consented to the inclusion of and references to Cochran’s opinion in this proxy statement-prospectus.

 

Cochran acted as financial advisor to PIC Wisconsin in connection with the merger and has received and will receive fees for its services. PIC Wisconsin has agreed to pay Cochran a transaction fee in connection with the merger, of which $350,000 has been paid and the balance of which is contingent, and payable, upon closing of the merger. The total transaction fee will be $1,000,000. The $350,000 represented a non-refundable fee for rendering its opinion, which will be credited against the transaction fee payable at closing. PIC Wisconsin has also agreed to reimburse certain of Cochran’s reasonable out-of-pocket expenses incurred in connection with its engagement (including the fees and expenses of its legal counsel), and to indemnify Cochran and its affiliates and their respective partners, directors, officers, employees, agents, and controlling persons against certain expenses and liabilities, including liabilities under securities laws, related to its engagement. In 2004, Cochran also acted as an advisor to PIC Wisconsin in connection with the placement of PIC Wisconsin’s surplus notes, in the principal amount of $12 million, and acted as an advisor to PIC Wisconsin on certain corporate restructuring matters, and received customary fees for such services.

 

Cochran also has acted as a financial advisor to ProAssurance in the past and has received customary compensation for such services. Among the services provided by Cochran to ProAssurance in the last two years, are the following:

 

 

 

Cochran may also provide investment banking services for ProAssurance in the future and may receive compensation for such services, including payments following the date of its fairness opinion but prior to the consummation of the merger.

 

In the ordinary course of Cochran’s business as a broker-dealer, Cochran may purchase securities from and sell securities to ProAssurance and its affiliates. Cochran may also actively trade the debt and/or equity securities of ProAssurance or its affiliates for Cochran’s own account and for the accounts of Cochran customers and, accordingly, may at any time hold a long or short position in such securities.

 

After careful consideration, at its meeting on December 7, 2005, ProAssurance’s board determined that the merger agreement and the merger are in the best interests of ProAssurance and its stockholders. Accordingly, ProAssurance’s board, by a unanimous vote of the directors, adopted the merger agreement.

 

In concluding that the merger is in the best interests of ProAssurance and its stockholders, ProAssurance’s board considered information and analyses regarding the business of PIC Wisconsin and the proposed merger provided by management and by outside financial, legal and actuarial advisors. ProAssurance’s board considered, among other things, the following factors that supported the decision to approve the merger:

 

 

 

 

ProAssurance’s board also considered the following factors that potentially created risks if the board decided to approve the merger:

 

 

 

ProAssurance’s board concluded that the anticipated benefits of combining with PIC Wisconsin outweighed the preceding risks.

 

Although each member of ProAssurance’s board individually considered these and other factors, the board did not collectively assign any specific or relative weights to the factors considered and did not make any determination with respect to any individual factor. The board collectively made its determination with respect to the merger based on the conclusion reached by its members that, in light of the factors that each of them considered appropriate, the merger is in the best interests of ProAssurance and its stockholders.

 

ProAssurance’s board of directors realized there can be no assurance about future results, including results expected or considered in the factors listed above, such as assumptions regarding anticipated earnings accretion. However, the board concluded the potential positive factors outweighed the potential risks of consummating the merger.

 

It should be noted that this explanation of the ProAssurance board’s reasoning and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Forward-Looking Statements” on page 86.

 

The merger agreement provides that PIC Wisconsin has the right to nominate one person for election as a director of ProAssurance promptly after the effective time of the merger. The person to be appointed as a director must meet the following conditions before the person will be elected as a director of ProAssurance:

 

 

PIC Wisconsin has nominated William J. Listwan, M.D. to serve on ProAssurance’s board of directors upon completion of the merger. Dr. Listwan is a director and the Chair of the board of directors of PIC Wisconsin and has consented to serve as a director of ProAssurance. Based on information provided by Dr. Listwan, ProAssurance’s board of directors, at a meeting on May 17, 2006, found that Dr. Listwan met ProAssurance’s criteria for independent directors as of that date. If Dr. Listwan continues to meet the above requirements, the ProAssurance board of directors will elect Dr. Listwan at its first meeting after the effective time of the merger to serve in the class of directors whose terms will expire at the 2007 annual meeting of ProAssurance’s stockholders, and the ProAssurance board will nominate Dr. Listwan or another nominee of PIC Wisconsin for election as a director at the 2007 annual meeting. If elected, Dr. Listwan or another nominee of PIC Wisconsin will serve for a three year term expiring at the 2010 annual meeting of stockholders.

 

Dr. Listwan, 63, has been a member of the board of directors of PIC Wisconsin since its inception and Chair since May 2004. He also serves as Chair of PIC Wisconsin’s Claims and the Governance Committees and serves on the Audit and Underwriting & Risk Management Committees. Dr. Listwan is a past President and Director of the Wisconsin Medical Society and currently chairs the Statewide Physician Health Committee for the Wisconsin Medical Society. Dr. Listwan has practiced Internal Medicine at the Aurora Health Center-West Bend (formerly the General Clinic) from 1974 to April 2006. He currently is employed by the Medical College of Wisconsin and serves on its board. He attended Marquette University in Milwaukee and received his medical degree from the Medical College of Wisconsin.

 

Dr. Listwan received a total of $53,829 in director fees in 2005. The fees consisted of a $20,000 retainer as Chair of the board of directors, $1,200 per regular and special board meeting, $1,000 per Audit Committee and Underwriting & Risk Management Committee meeting, $1,200 per Claims Committee and Governance Committee meeting and a $429 holiday gift. The payment of director’s annual fees and meeting fees may be deferred by any director of PIC Wisconsin at the director’s election. Dr. Listwan’s stock ownership information is included in “Security Ownership of Certain Beneficial Owners and Management of PIC Wisconsin” on page 82. He did not receive in 2005 any shares under PIC Wisconsin’s long term stock plan. After he is elected as a director of ProAssurance, Dr. Listwan will receive director compensation in the amount of $2,000 per month plus $1,000 for each day that he attends a board or committee meeting. He will also be eligible to participate as a director in the ProAssurance Corporation Stock Ownership Plan and the ProAssurance Corporation Director Deferred Compensation Plan.

 

Some of PIC Wisconsin’s executive officers and directors have interests in the merger that are in addition to and may be different from their interests as PIC Wisconsin shareholders they may share with you. The PIC Wisconsin board of directors was aware of these different interests and considered them, among other matters, in approving and adopting the merger agreement and the merger.

 

Change of control benefits policy.  The board of directors of PIC Wisconsin adopted a change of control benefits policy effective January 31, 2005, which provides for severance benefits for certain officers of PIC Wisconsin if, within eighteen months after a change of control, employment of an eligible officer is terminated either by PIC Wisconsin without cause or by the officer after certain specified changes in employment conditions.

 

The change of control benefits policy provides severance benefits upon any such termination of employment for William T. Montei as chief executive officer, David L. Maurer as chief financial officer, Christopher J. Brady as senior vice president, and Penelope R. O’Hara as vice president, who comprise all of PIC Wisconsin’s executive officers. The severance benefits include:

 

 

The change of control benefits policy also provides similar severance benefits for other vice presidents and assistant vice presidents of PIC Wisconsin after a change of control. The principal difference from severance benefits described above is that the maximum period for severance benefits for the other vice presidents and assistant vice presidents is one year rather than two years and certain of the severance benefits (other than salary continuation) are limited or eliminated for those individuals.

 

ProAssurance has agreed to assume the obligations to pay severance benefits to eligible officers under the change of control benefits policy. In addition to conditioning the payment of severance benefits on termination of employment under the circumstances specified in the change of control benefits policy, an officer whose employment has been terminated will be required to execute a release with respect to claims relating to his or her employment with PIC Wisconsin or ProAssurance. The change of control benefits policy may be amended or terminated by PIC Wisconsin’s board of directors at any time after January 31, 2006, but the PIC Wisconsin board has resolved to keep the policy in effect through the effective time of the merger.

 

The following table sets forth the current salary and the estimated pro rata target bonus for each PIC Wisconsin executive officer, and sets forth an estimate of the total severance benefits that the executive officers would receive if (1) the merger were to be completed on June 30, 2006, (2) the executive officer were to terminate employment on that date, and (3) the entire target bonus is met for each individual. Actual pro rata bonus amounts and severance payments may be greater or less than the amount estimated.

 

 

 

 

Employment agreements.  In the merger agreement, ProAssurance agreed to assume (subject to the changes discussed below) the employment agreements of Messrs. Montei and Maurer. The employment agreements for each of Messrs. Montei and Maurer currently have one-year terms that may be renewed for additional one-year terms with the agreement of PIC Wisconsin and the executive and provide for a base salary, discretionary bonus compensation, and various fringe benefits, including use of an automobile, payment of life insurance premiums and participation in group health and retirement plans.

 

ProAssurance has further agreed to offer to continue the employment of Messrs. Montei and Maurer after the merger subject to the following changes in the terms of their employment:

 

 

 

 

ProAssurance consulting agreements.  The directors of PIC Wisconsin will be replaced as directors as of the effective time of the merger by the directors of Physicians Merger Company, all of whom are executive officers of ProAssurance. Those directors who are not employees of PIC Wisconsin will be retained by ProAssurance as consultants under separate consulting agreements, except that a director will not be eligible for a consulting agreement if he is elected as a director of ProAssurance. The merger agreement provides that PIC Wisconsin has the right to nominate one person for election as a director of ProAssurance promptly after the effective time of the merger. PIC Wisconsin has nominated William J. Listwan, M.D. to serve on

ProAssurance’s board of directors. The consulting agreement will provide for compensation through June 30, 2007 at the rate of $2,000 per month for the vice chairman and $1,500 for all other non-employee directors. The consulting agreement requires the directors to serve on an advisory committee to be established to facilitate the transition of PIC Wisconsin’s business and prohibits them from competing with the business of ProAssurance during the terms of their agreements.

 

Stock awards.  PIC Wisconsin has granted stock awards to directors and executive officers under its long term stock plan. As a result of the merger, all outstanding and unvested PIC Wisconsin stock awards will become vested and shares of PIC Wisconsin common stock will be issued to the holders of these awards in accordance with the terms of the PIC Wisconsin long term stock plan at the effective time of the merger. In accordance with the merger agreement, each participant may request that ProAssurance purchase for cash (in the amount equal to $5,000 per each repurchased share) some or all of the PIC Wisconsin shares issued to the participant under the long term stock plan, including those to be issued pursuant to unvested awards at the effective time of the merger, as further described in “The Merger Agreement — Treatment of stock awards” on page 44.

 

The following table sets forth, as of April 30, 2006, the number of vested and unvested shares held by individuals who served as executive officers of PIC Wisconsin since the beginning of 2005 that were awarded under the PIC Wisconsin long term stock plan.

 

 

The following table sets forth, as of April 30, 2006, the number of vested shares held by individuals who served as non-employee directors of PIC Wisconsin since the beginning of 2005 that were awarded under the PIC Wisconsin long term stock plan. None of such directors held any unvested shares as of such date.

 

 

Indemnification; directors’ and officers’ insurance.  The merger agreement provides that, upon completion of the merger, ProAssurance will, to the fullest extent permitted by law, indemnify, defend and hold harmless all present and former directors, officers and employees of PIC Wisconsin against all costs and liabilities arising out of actions or omissions occurring at or before the completion of the merger to the same extent as directors, officers and employees of PIC Wisconsin are indemnified or have the right to advancement of expenses under PIC Wisconsin’s articles of incorporation and bylaws.

 

The merger agreement also requires PIC Wisconsin to use its reasonable best efforts to acquire directors’ and officers’ liability insurance for the present and former officers and directors of PIC Wisconsin with respect to claims arising from facts or events occurring before the merger and to keep this insurance in effect for a period of six years after the merger. If PIC Wisconsin is unable to acquire such insurance, ProAssurance is

required to use its best efforts to acquire directors’ and officers’ liability insurance that contains at least the same coverage and amounts, and terms and conditions no less advantageous, as PIC Wisconsin’s existing coverage. However, if neither PIC Wisconsin nor ProAssurance is able to maintain or obtain such levels of insurance at a cost of less than 300% of the premium paid by PIC Wisconsin for such insurance or is otherwise unable to obtain such insurance, ProAssurance is required to use its best efforts to obtain as much comparable insurance as is reasonably available.

 

ProAssurance common stock issued in the merger will not be subject to any restrictions on transfer arising under the Securities Act, except for shares issued to any PIC Wisconsin shareholder who may be deemed to be an “affiliate” of ProAssurance or PIC Wisconsin for purposes of Rule 145 under the Securities Act.

 

Under Rule 145, former PIC Wisconsin shareholders who were affiliates of PIC Wisconsin at the time of the PIC Wisconsin special meeting and who are not affiliates of ProAssurance after the completion of the merger, may sell their ProAssurance common stock received in the merger at any time subject to the volume and sale limitations of Rule 144 under the Securities Act. Further, so long as such former PIC Wisconsin affiliates are not considered affiliates of ProAssurance following the completion of the merger, and a period of at least one year has elapsed from the completion of the merger, such former affiliates may sell their ProAssurance common stock received in the merger without regard to the volume and sale limitations of Rule 144 under the Securities Act so long as there is adequate current public information available about ProAssurance in accordance with Rule 144. After a period of two years has elapsed from the completion of the merger, and so long as such former affiliates are not affiliates of ProAssurance and have not been for at least three months prior to such sale, such former affiliates may freely sell their ProAssurance common stock. Former PIC Wisconsin shareholders who become affiliates of ProAssurance after completion of the merger will still be subject to the volume and sale limitations of Rule 144 under the Securities Act, until each such stockholder is no longer an affiliate of ProAssurance.

 

This proxy statement-prospectus does not cover resales of ProAssurance common stock received by any person upon completion of the merger, and no person is authorized to make any use of this proxy statement-prospectus in connection with any resale.

 

Under applicable Wisconsin law, holders of PIC Wisconsin common stock have dissenters’ rights in connection with the merger. See “Shareholder Dissenters’ Rights” on page 81.

 

PIC Wisconsin entered into the rights agreement to protect its shareholders from takeover attempts on terms that are not acceptable to the board of directors of PIC Wisconsin. In general, the rights agreement allows PIC Wisconsin shareholders to acquire additional shares of PIC Wisconsin common stock after a person, group or company, unless exempted, acquires or agrees to acquire 15% or more of the outstanding PIC Wisconsin common stock. The rights agreement is intended to prevent an acquisition of PIC Wisconsin stock on terms that PIC Wisconsin’s board of directors determines are unfair or coercive to PIC Wisconsin and its shareholders. PIC Wisconsin amended the rights agreement to exempt ProAssurance, the merger agreement and the merger from application of the rights agreement, and to provide that the rights agreement will terminate in all respects immediately prior to the effective time of the merger. Until the effective time of the merger, however, the rights agreement remains in effect and may discourage acquisition proposals from parties other than ProAssurance.

 

ProAssurance and PIC Wisconsin have agreed to use their best efforts to obtain the regulatory approvals required for the merger. These approvals, along with the expiration of any statutory waiting periods related to

these approvals, are referred to as the “requisite regulatory approvals”. These include approval from insurance regulators and various other state regulatory authorities. ProAssurance and PIC Wisconsin have either filed or intend to complete the filing promptly after the date of this proxy statement-prospectus of applications and notifications to obtain the requisite regulatory approvals. The merger cannot proceed in the absence of the requisite regulatory approvals.

 

ProAssurance and PIC Wisconsin cannot assure you as to whether or when the requisite regulatory approvals will be obtained, and, if obtained, the parties cannot assure you as to the date of receipt of any of these approvals, the terms thereof or the absence of any litigation challenging them. Likewise, ProAssurance and PIC Wisconsin cannot assure you that the DOJ or a state attorney general will not attempt to challenge the merger on antitrust grounds, or, if such a challenge is made, as to the result of that challenge.

 

ProAssurance and PIC Wisconsin are not aware of any other material governmental approvals or actions that are required prior to the parties’ completion of the merger other than those described below. The parties presently contemplate that if any additional governmental approvals or actions are required, these approvals or actions will be sought. However, the parties cannot assure you that any of these additional approvals or actions will be obtained.

 

Wisconsin insurance laws.  ProAssurance and PIC Wisconsin cannot complete the merger unless a statement regarding the acquisition of or a merger with a domestic insurer (Form A) containing information as prescribed by insurance holding company laws and regulations of the State of Wisconsin has been filed with and approved by the OCI of Wisconsin, after a public hearing on the Form A has been held. ProAssurance initially filed its Form A with the OCI of Wisconsin on December 21, 2005. A public hearing before the OCI of Wisconsin was held on May 12, 2006 and the Commissioner approved the merger by order dated May 17, 2006.

 

Other regulatory authorities.  Applications or notifications may be required to be filed with various state regulatory authorities and self-regulatory organizations in connection with the merger (including any necessary state blue sky registrations or exemption filings) or changes in control of subsidiaries of PIC Wisconsin that may be deemed to result from the merger.

 

Effective May 31, 2006, PIC Wisconsin sold all of the outstanding stock of Century American Insurance Company, a Tennessee stock insurer, to an unrelated third party. The sale was approved by the Tennessee Commissioner of Insurance by order dated May 11, 2006.

 

ProAssurance might also be subject to additional pre-acquisition notification filing requirements and approval, in addition to the Form A filing requirement, in states where PIC Wisconsin is authorized to do business. These authorities may be empowered under the applicable state laws and regulations to investigate or disapprove the merger under the circumstances and based upon the review provided for in applicable state laws and regulations.

 

Antitrust.  The merger is subject to the HSR Act. The HSR Act prohibits the completion of transactions such as the merger unless the parties notify the FTC and the DOJ in advance and a specified waiting period expires. ProAssurance and PIC Wisconsin each filed pre-merger notification and report forms with the FTC and the Antitrust Division of the DOJ on January 12, 2006. A transaction or portion of a transaction that is notifiable under the HSR Act may not be consummated until the expiration of a 30 calendar-day waiting period, or the early termination of that waiting period, following the filing of pre-merger notification and report forms by the parties with the FTC and DOJ. The parties received notice of early termination of the waiting period on January 27, 2006. However, at any time before or after the merger and the exchange of shares, the FTC or the DOJ could take whatever action under the antitrust laws it deems necessary or desirable in the public interest, including seeking to enjoin the merger or the exchange of shares, or seeking a divestiture of shares or assets.

 

ProAssurance will treat the merger as a purchase of PIC Wisconsin by ProAssurance under GAAP. Under the purchase method of accounting, the aggregate consideration paid by ProAssurance as merger consideration,

together with direct costs of the acquisition, will be allocated to the consolidated assets and liabilities of PIC Wisconsin based on their respective fair values as of the effective time of the merger. The assets and liabilities and results of operations of PIC Wisconsin will be consolidated into the assets and liabilities of ProAssurance after the merger is completed.

 

The final allocation of the purchase price will be determined after the merger is completed and after completion of a thorough analysis to determine the fair values of PIC Wisconsin’s tangible and identifiable intangible assets and liabilities. In addition, estimates related to restructuring and merger-related charges are subject to final decisions related to combining the companies.

 

ProAssurance has agreed to list the shares of ProAssurance common stock to be issued in the merger on the NYSE. It is a condition to the completion of the merger that those shares be authorized for listing on the NYSE, subject to official notice of issuance. Following the merger, ProAssurance’s common stock will continue to trade on the NYSE under the symbol “PRA”.

 

The following is a summary of the material terms and provisions of the merger agreement, a copy of which is attached as Appendix A and incorporated herein by reference. You are urged to read the entire merger agreement carefully and in its entirety.

 

The merger agreement has been included for your convenience to provide you with information regarding its terms. Except for its status as the contractual document that establishes and governs the legal relations between ProAssurance and PIC Wisconsin with respect to the merger, it is not intended to be a source of factual, business or operational information about ProAssurance or PIC Wisconsin. That kind of information can be found elsewhere in this proxy statement-prospectus and in filings that ProAssurance has made with the SEC. See “Where You Can Find More Information” beginning on page 85.

 

The merger agreement contains representations and warranties. The representations and warranties are qualified in their entirety by all of the information in the confidential disclosure schedules of each of ProAssurance and PIC Wisconsin prepared and delivered to the other immediately prior to signing the merger agreement. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts.

 

Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the merger agreement, and subsequently developed or new information qualifying a representation or warranty may or may not have been included in a filing with the SEC made, or in a confidential disclosure schedule delivered by one of the parties, since the date of the merger agreement (including in this proxy statement-prospectus).

 

ProAssurance formed Physicians Merger Company on February 10, 2006, as a Wisconsin corporation solely for the purpose of merging with PIC Wisconsin under the merger agreement. Under the terms of the merger agreement and in accordance with Wisconsin law, Physicians Merger Company will be merged into PIC Wisconsin with PIC Wisconsin surviving the merger as a wholly-owned subsidiary of ProAssurance. After completion of the merger:

 

 

 

Under the terms of the merger agreement, each share of PIC Wisconsin common stock that is issued and outstanding immediately prior to the effective time of the merger (other than shares held by a person validly exercising dissenters’ rights) will be converted into shares of ProAssurance common stock based on the following exchange ratio:

 

 

The average price of a share of ProAssurance common stock at the effective time of the merger will be equal to the arithmetic average of the last reported sale price of a share of ProAssurance common stock as reported by the NYSE on the 10 trading days preceding the effective time of the merger. The average price of a share of ProAssurance common stock on the date of the merger agreement was $49.76 based on the arithmetic average of the last reported sale price of a share of ProAssurance common stock as reported by the NYSE on the 10 trading days preceding December 8, 2005 (the date of the merger agreement).

 

The exchange ratio has the effect of fixing the implied dollar value to be received for a share of PIC Wisconsin common stock at $5,000 so long as the average price of a share of ProAssurance common stock at the effective time of the merger is no more than $59.71 (120% × $49.76) and no less than $39.80 (80% × $49.76). The exchange ratio also has the effect of establishing a maximum and minimum number of shares of ProAssurance common stock to be issued in the merger. If at the effective time of the merger the average price of a share of ProAssurance common stock is no more than $59.71 and no less than $39.80, the number of shares of ProAssurance common stock to be received for a share of PIC Wisconsin common stock will be determined by dividing $5,000 by the average price of a share of ProAssurance common stock at the effective time of the merger. If at the effective time of the merger the average price of a share of ProAssurance common stock is greater than $59.71, the number of shares of ProAssurance common stock to be received in exchange for a share of PIC Wisconsin common stock will be fixed at 83.738 shares, but the implied value of shares of PIC Wisconsin common stock will be more than $5,000 based on the average price of a share of ProAssurance common stock at the effective time of the merger. On the other hand, if at the effective time of the merger the average price of a share of ProAssurance common stock is less than $39.80, the number of shares of ProAssurance common stock to be received for a share of PIC Wisconsin common stock will be fixed at

125.628 shares, and the implied value of a share of PIC Wisconsin common stock will be less than $5,000 based on the average price of a share of ProAssurance common stock at the effective time of the merger.

 

The following table illustrates the number of shares of ProAssurance common stock that a holder of a share of PIC Wisconsin common stock will receive in the merger and the implied value of such ProAssurance shares assuming varying average prices for ProAssurance common stock at the effective time of the merger. The table assumes that a share of ProAssurance common stock has a value equal to the stated average prices and that a fractional share will be paid based on the stated average prices. You should bear in mind that the value of ProAssurance common stock is subject to market fluctuations, and therefore, the value of a share of ProAssurance common stock as of the effective date of the merger and after the merger may differ from the average price used to establish the exchange ratio. This table uses hypothetical ProAssurance common stock prices:

 

 

You should obtain current market prices for ProAssurance common stock. This information is available from your stock broker, in major newspapers and on the Internet.

 

The merger will result in a change of control under PIC Wisconsin’s long term stock plan. All outstanding and unvested PIC Wisconsin stock awards will become vested and shares of PIC Wisconsin common stock will be issued to the holders of these awards in accordance with the terms of the PIC Wisconsin long term stock plan at the effective time of the merger. Each of the shares so issued will be converted into shares of ProAssurance common stock using the exchange ratio.

 

Under the terms of the long term stock plan, all shares of PIC Wisconsin common stock that have been issued to participants under the long term stock plan will be subject to repurchase upon a change of control. The long term stock plan provides that after a change of control a participant can elect to require PIC Wisconsin to repurchase for cash all or part of the shares issued or to be issued to the participant under the plan; similarly, PIC Wisconsin can elect to repurchase for cash any or all of the shares issued or to be issued under the plan upon a change of control. The price for the shares must be equal to the price paid for a share of PIC Wisconsin common stock in the change of control transaction. PIC Wisconsin does not intend to repurchase any shares issued or to be issued pursuant to awards under the long term stock plan.

 

The merger agreement allows each participant to request by written notice to ProAssurance that ProAssurance purchase for cash some or all of the PIC Wisconsin shares issued or to be issued to the participant under the long term stock plan, including those to be issued pursuant to unvested awards at the effective time of the merger. The notice must be delivered by the participant to ProAssurance prior to the effective time of the merger in a form to be provided by ProAssurance, executed by the participant and specifying the number of shares to be repurchased for cash. Each of the shares of PIC Wisconsin common stock subject to a properly completed and executed notice will be converted into the right to receive cash in the amount of $5,000 per share and such shares shall not be converted into the right to receive ProAssurance common stock in the merger. If, however, no notice has been delivered by the participant to ProAssurance prior to the effective time of the merger, such participant’s shares will be converted into shares of ProAssurance common stock using the exchange ratio.

 

The merger agreement further provides that ProAssurance may request PIC Wisconsin to repurchase the shares of PIC Wisconsin common stock subject to the awards issued or to be issued to participants under the long term stock plan. Under the terms of the merger agreement, ProAssurance may make such request by written notice to PIC Wisconsin at any time prior to the effective time of the merger with respect to all of the shares issued or to be issued pursuant to awards under the long term stock plan, including shares to be issued pursuant to unvested awards at the time of the merger. Each of the shares of PIC Wisconsin common stock

subject to the notice will be converted into the right to receive cash in the amount of $5,000 per share, and such shares shall not be converted into the right to receive ProAssurance common stock in the merger. If ProAssurance does not repurchase the shares issued or to be issued pursuant to awards under the long term stock plan (and if participants have not requested that such repurchase be made), such shares will be converted into shares of ProAssurance common stock using the exchange ratio. ProAssurance does not intend to request that PIC Wisconsin repurchase any shares issued or to be issued pursuant to awards under the long term stock plan.

 

Exchange procedures.  Prior to the effective time of the merger, ProAssurance will deposit with an exchange agent, which will be Mellon, or another bank or trust company reasonably acceptable to PIC Wisconsin, (1) certificates representing the shares of ProAssurance common stock to be issued under the merger agreement (together with any dividends and distributions with respect to such shares with a record date after the merger) and (2) sufficient cash to be paid instead of any fractional shares of ProAssurance common stock to be issued under the merger agreement.

 

Promptly after the effective time, but no later than ten business days thereafter, ProAssurance will cause the exchange agent to mail transmittal materials to PIC Wisconsin shareholders. The transmittal materials will contain instructions about the surrender of PIC Wisconsin common stock certificates for ProAssurance common stock certificates and any cash to be paid instead of fractional shares of common stock.

 

PIC Wisconsin common stock certificates should not be returned with the enclosed proxy card. They should not be forwarded to the exchange agent unless and until you receive a transmittal letter following completion of the merger. The transmittal materials will contain instructions as to how and where to forward such certificates.

 

PIC Wisconsin common stock certificates presented for transfer after completion of the merger will be canceled and exchanged for certificates, or evidence of shares in book entry form, representing the applicable number of shares of ProAssurance common stock.

 

After the merger, the stock transfer books of PIC Wisconsin will be closed and there will be no transfers of shares of PIC Wisconsin common stock on the stock transfer books of PIC Wisconsin.

 

All shares of ProAssurance common stock into which shares of PIC Wisconsin common stock are converted pursuant to the merger will be deemed issued as of the effective time of the merger. After that date, former PIC Wisconsin shareholders of record will be entitled to vote, at any meeting of ProAssurance stockholders having a record date on or after the effective time of the merger, the number of whole shares of ProAssurance common stock into which their shares of PIC Wisconsin common stock have been converted, regardless of whether they have surrendered their PIC Wisconsin stock certificates. ProAssurance dividends having a record date on or after the effective time of the merger will include dividends on ProAssurance common stock issued to PIC Wisconsin shareholders in the merger. However, no dividend or other distribution payable to the holders of record of ProAssurance common stock after the effective time of the merger will be distributed to the holder of any PIC Wisconsin common stock certificates until that holder physically surrenders all of his or her PIC Wisconsin common stock certificates as described above. Promptly after surrender, ProAssurance’s common stock certificates to which that holder is entitled (or evidence of shares in book entry form), all undelivered dividends and other distributions, and payment for any fractional share interests, if applicable, will be delivered to that holder, in each case without interest.

 

No fractional shares will be issued.  ProAssurance will not issue fractional shares of ProAssurance common stock in the merger. There will be no dividends or voting rights with respect to any fractional common shares. For each fractional share of common stock that would otherwise be issued, ProAssurance will pay cash in an amount determined by multiplying the fractional share of PRA common stock to which such holder would otherwise be entitled by the average price of a share of ProAssurance common stock at the effective time of the merger, without giving effect to the exchange ratio.

None of ProAssurance, PIC Wisconsin or any other person will be liable to any former holder of PIC Wisconsin common stock for any amount properly delivered in good faith to a public official pursuant to any applicable abandoned property laws.

 

Lost, stolen or destroyed PIC Wisconsin common stock certificates.  If a holder has lost a certificate representing PIC Wisconsin common stock, or it has been stolen or destroyed, ProAssurance will issue to such holder the common stock payable under the merger agreement if:

 

 

Dissenters’ rights.  ProAssurance will not issue shares of ProAssurance common stock with respect to any shares of PIC Wisconsin common stock whose holder has exercised the right to dissent from the merger and complied with the Wisconsin dissenters’ rights statutes. Under the terms of the merger agreement, a person exercising dissenters’ rights may after the merger withdraw the demand for the fair value of his or her shares of PIC Wisconsin common stock. The shares of PIC Wisconsin common stock subject to the withdrawn demand will be converted into the right to receive shares of ProAssurance common stock in accordance with the exchange ratio, and the demand for the value of such shares will be forfeited.

 

For a description of ProAssurance common stock, a description of the differences between the rights of PIC Wisconsin shareholders and ProAssurance stockholders and a description of dissenters’ rights, see “Description of ProAssurance Capital Stock” beginning on page 58, “Comparison of Stockholder Rights” beginning on page 60, and “Shareholder Dissenters’ Rights” beginning on page 81.

 

The effective time of the merger will be the time set forth in the legal documents that are filed with the OCI of Wisconsin and the Department of Financial Institutions of Wisconsin on the date the merger is completed. ProAssurance and PIC Wisconsin anticipate that the merger will be completed in the third quarter of 2006. However, completion could be delayed if there is a delay in obtaining the requisite regulatory approvals or for other reasons. There can be no assurances as to if or when these approvals will be obtained or as to if or when the merger will be completed. If ProAssurance and PIC Wisconsin do not complete the merger by December 31, 2006, either party may terminate the merger agreement without penalty unless the failure to complete the merger by that date is due to the failure of the party seeking to terminate the merger agreement to perform or observe its obligations under the merger agreement. See “The Merger Agreement — Conditions to completion of the merger” beginning on page 52 and “Proposal 1: The Merger — Regulatory approvals required for the merger” beginning on page 40.

 

The merger agreement contains a number of representations and warranties by ProAssurance and PIC Wisconsin regarding aspects of their respective businesses, financial condition, structure and other facts pertinent to the merger that are customary for a merger transaction. They include, among other things: