As filed with the Securities and Exchange Commission on February 15, 2006

Registration No. 333-      

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

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

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

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 FEBRUARY 15, 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          , 2006 was $          . 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          , 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          , 2006, and it is first being mailed to the shareholders of PIC Wisconsin on or about          , 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          , 2006 to receive them before PIC Wisconsin’s special meeting.

 

See “Where You Can Find More Information” on page 84.

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

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON          , 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          , 2006, at     .m., local time, at          , Madison, Wisconsin, 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          , 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

 

/s/  Christopher J. Brady

Christopher J. Brady

Secretary

 

Madison, Wisconsin

          , 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 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;
	•	, 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          , 2006.

		Closing ProAssurance
		Share Price
December 7, 2005		$	49.30
December 9, 2005		$	50.63
, 2006		$
High (for period)		$
Low (for period)		$
Average (for period)		$

	•	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

		Nine Months Ended
		September 30								Year Ended December 31
Selected Financial Data(1)		2005				2004				2004				2003				2002				2001				2000
		(Unaudited)								(In thousands except per share data)
Gross premiums written		$	601,589			$	600,295			$	789,660			$	740,110			$	636,156			$	388,983			$	223,871
Net premiums written			539,794				538,085				717,059				668,909				537,123				310,291				194,279
Premiums earned			601,457				569,583				765,643				698,347				576,414				381,510				216,297
Premiums ceded			(64,818	)			(60,497	)			(69,623	)			(74,833	)			(99,006	)			(68,165	)			(38,701	)
Net premiums earned			536,639				509,086				696,020				623,514				477,408				313,345				177,596
Net investment income			79,646				63,192				87,225				73,619				76,918				59,782				41,450
Net realized investment gains (losses)			1,761				7,346				7,609				5,992				(5,306	)			5,441				913
Other income			4,612				3,069				3,699				6,515				6,747				3,987				2,630
Total revenues			622,658				582,693				794,553				709,640				555,767				382,555				222,589
Net losses and loss adjustment expenses			412,931				422,980				572,881				551,376				448,029				298,558				155,710
Income from continuing operations before cumulative effect of accounting change			78,784				51,302				72,811				38,703				10,513				12,450				24,300
Net income(2)			78,739				51,302				72,811				38,703				12,207				12,450				24,300
Income from continuing operations per share before cumulative effect of accounting change(3)
Basic		$	2.65			$	1.76			$	2.50			$	1.34			$	0.40			$	0.51			$	1.04
Diluted		$	2.49			$	1.67			$	2.37			$	1.32			$	0.39			$	0.51			$	1.04

		Nine Months Ended
		September 30								Year Ended December 31
Selected Financial Data(1)		2005				2004				2004				2003				2002				2001				2000
		(Unaudited)								(In thousands except per share data)
Net income per share:(2)(3)
Basic		$	2.65			$	1.76			$	2.50			$	1.34			$	0.47			$	0.51			$	1.04
Diluted		$	2.49			$	1.67			$	2.37			$	1.32			$	0.46			$	0.51			$	1.04
Weighted average number of shares outstanding:(3) Basic			29,700				29,153				29,164				28,956				26,231				24,263				23,291
Diluted			32,546				31,967				31,984				30,389				26,254				24,267				23,291
Balance Sheet Data (at period end)
Total investments		$	2,915,226			$	2,375,883			$	2,455,053			$	2,055,672			$	1,679,497			$	1,521,279			$	796,526
Total assets			3,833,088				3,217,171				3,239,198				2,879,352				2,586,650				2,238,325				1,122,836
Reserve for losses and loss adjustment expenses			2,394,631				2,007,116				2,029,592				1,814,584				1,622,468				1,442,341				659,659
Long-term debt			167,166				151,406				151,480				104,789				72,500				82,500				0
Total liabilities			3,094,616				2,623,446				2,628,179				2,333,047				2,055,086				1,802,606				777,669
Total capital			738,472				593,725				611,019				546,305				505,194				413,231				345,167
Total capital per share of common stock outstanding		$	23.76			$	20.34			$	20.92			$	18.77			$	17.49			$	16.02			$	15.22
Common stock outstanding at end of period			31,079				29,188				29,204				29,105				28,877				25,789				22,682

(1)		Includes Professionals Group, Inc. since the date of consolidation, June 27, 2001.
(2)		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 our consolidated financial statements. In accordance with SFAS 142, we 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.
(3)		Diluted net income per share for 2003 has 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.

 

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 84.

 

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 will each receive an opinion of its legal counsel as to certain anticipated federal income tax consequences as described under “Material Federal Income Tax Consequences”. Such opinion is qualified in certain respects and is not binding on the Internal Revenue Service. No assurance can be given that the Internal Revenue Service will not challenge the favorable income tax consequences of the merger. 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.

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 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 84.

 

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 prior to the end of the second 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 which 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 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 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, 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 85.

 

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 opinion by delivering to the board a written opinion dated the same day.

 

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 its December 7, 2005 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 its December 7, 2005 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 the Cochran 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 85.

 

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 had not nominated a person to serve on ProAssurance’s board of directors as of the date of mailing this proxy statement-prospectus. If PIC Wisconsin nominates a person who meets the above requirements, the ProAssurance board of directors will elect PIC Wisconsin’s nominee promptly 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 PIC Wisconsin’s nominee for election as a director at the 2007 annual meeting. If elected, PIC Wisconsin’s nominee will serve for a three year term expiring at the 2010 annual meeting of stockholders.

 

Some of PIC Wisconsin’s executive officers and directors have interests in the merger that are in addition to and may be different from the 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 is completed on June 30, 2006, (2) the executive officer terminates 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.  The merger agreement provides that the executive officers of PIC Wisconsin will continue to serve in the same capacities after the merger. In that regard, ProAssurance has 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. The consulting agreement will provide for compensation through June 30, 2007 at the rate of $2,000 per month for the current chairman and 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 January 31, 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 January 31, 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 80.

 

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 has not yet been scheduled. The commissioner is expected to rule on ProAssurance’s request for approval of the merger after the hearing.

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.

 

PIC Wisconsin is the indirect owner of Century American Insurance Company which is a Tennessee stock insurer. As such, PIC Wisconsin is the parent company in an insurance holding company system that is regulated by the Tennessee insurance laws. The Tennessee holding company act requires approval of any transaction that will result in the change of control of a domestic insurer, including a change of control of the parent of the domestic insurer. PIC Wisconsin has entered into an agreement to sell Century American Insurance Company to an unrelated third party subject to approval of the Tennessee Commissioner of Insurance, and a Form A has been filed requesting approval of the transaction. If the Form A is not approved or the sale is otherwise abandoned, the merger will be subject to approval by the Tennessee Commissioner of Insurance and ProAssurance will be required to file a Form A under the Tennessee holding company act. ProAssurance has provided the Tennessee Commissioner of Insurance with a copy of its Form A filed with the OCI of Wisconsin.

 

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 84.

 

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 80.

 

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 prior to the end of the second 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 51 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:

 

 

 

 

 

ProAssurance also has made certain representations and warranties concerning the accuracy and completeness of its publicly filed reports with the SEC.

 

In addition, PIC Wisconsin has made representations and warranties with respect to:

 

 

The merger agreement contains various restrictions on the operations of PIC Wisconsin before the effective time of the merger. PIC Wisconsin has agreed that, except as expressly contemplated or permitted by the merger agreement, it will not, and will not agree to, without ProAssurance’s consent:

 

 

 

 

In addition, PIC Wisconsin has agreed to inform and have discussions with ProAssurance with respect to reserve policies and practices relating to losses and loss adjustment expenses of PIC Wisconsin and PIC Wisconsin’s subsidiaries, any litigation against PIC Wisconsin and its subsidiaries and amount and timing of restructuring charges. PIC Wisconsin has also agreed to make its financial officers available to discuss with ProAssurance PIC Wisconsin’s disclosure controls, internal controls and financial statements in anticipation of ProAssurance’s need to comply with the requirements of the Sarbanes-Oxley Act of 2002 after the merger with respect to PIC Wisconsin.

 

ProAssurance has agreed, except as expressly contemplated or permitted by the merger agreement, that it will not, and will not agree to, without PIC Wisconsin’s consent:

 

 

Under the merger agreement, prior to the completion of the merger, neither PIC Wisconsin nor any of its subsidiaries can acquire, directly or indirectly, beneficial or record ownership of any equity securities of ProAssurance, including shares of ProAssurance common stock, or any securities convertible into or exercisable for any equity securities of ProAssurance.

 

In addition, federal law generally prohibits ProAssurance and PIC Wisconsin from purchasing shares of ProAssurance’s common stock from the date this proxy statement-prospectus is first mailed to shareholders until completion of PIC Wisconsin’s special meeting of shareholders. ProAssurance does not own any shares of PIC Wisconsin common stock. Neither PIC Wisconsin nor ProAssurance has purchased any shares of ProAssurance common stock since December 8, 2005.

 

ProAssurance has agreed to continue PIC Wisconsin’s employee benefit plans until it determines whether to continue, amend or terminate the plans. ProAssurance agreed that it will provide employees of PIC Wisconsin and its subsidiaries who continue in employment with ProAssurance:

 

 

In addition, stock awards that have been granted to directors and officers that have not yet vested under PIC Wisconsin’s long term stock plan will immediately vest upon the effectiveness of the merger and be converted into the right to receive shares of ProAssurance common stock or purchased at a cash price of $5,000 at the option of the holder of the award as described under “The Merger Agreement — Treatment of stock awards” on page 44. In the event they are not repurchased, such shares will be converted into the right to receive shares of ProAssurance common stock pursuant to the merger agreement at the effective time of the merger.

ProAssurance has agreed to honor PIC Wisconsin’s change of control benefits policy and employment agreements with certain officers or employees of PIC Wisconsin, including the obligation to pay cash severance on termination of employment after a change of control as described under “Proposal 1: The Merger — Interests of certain persons in the merger” on page 36.

 

Each of ProAssurance and PIC Wisconsin agreed to obtain a separate opinion as to the material tax consequences to ProAssurance, PIC Wisconsin and their respective shareholders in connection with the merger. Each opinion is required to be delivered on or before the date of this proxy statement-prospectus and is required to be updated at closing. The opinions are discussed under “Material Federal Income Tax Consequences” beginning on page 54.

 

PIC Wisconsin has agreed that it will not, as long as the merger agreement is in effect, initiate, entertain, solicit, encourage, engage in or participate in any negotiations with any person (other than ProAssurance) relating to any acquisition proposal. However, if PIC Wisconsin receives an unsolicited acquisition proposal and PIC Wisconsin’s board determines in good faith that such action is appropriate in furtherance of the best interests of its shareholders, PIC Wisconsin can participate in negotiations with and provide confidential information to the third party and approve and recommend the proposal to its shareholders. Before providing any nonpublic information, PIC Wisconsin must enter into a written agreement which provides for (i) the furnishing to PIC Wisconsin of information regarding such third party that is relevant to its ability to finance its acquisition proposal, (ii) the confidentiality of all non-public information furnished to the third party by PIC Wisconsin, and (iii) procedures designed to restrict or limit the provision of information regarding PIC Wisconsin that could be used to the competitive disadvantage of PIC Wisconsin or in a manner that would be detrimental to its shareholders. PIC Wisconsin must disclose to ProAssurance that it is furnishing information to and entering into negotiations with such third party, as well as disclose the terms of such negotiations (but not the identity of the third party), must keep ProAssurance informed of the status of such negotiations (except to the extent it would require PIC Wisconsin to disclose confidential information about the third party) and may not furnish any non-public information regarding ProAssurance or the transactions contemplated by the merger agreement.

 

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 and PIC Wisconsin can terminate the merger agreement.

 

For purposes of the merger agreement, the term “acquisition proposal” means:

 

 

In addition, PIC Wisconsin has agreed to use all reasonable best efforts to obtain from its shareholders approval and adoption of the merger agreement and the merger, subject to the fiduciary duties of PIC Wisconsin’s board of directors. However, if PIC Wisconsin’s board notifies ProAssurance in writing that it is unable or unwilling to recommend the merger agreement to its shareholders, then ProAssurance may

terminate the merger agreement. Such termination by ProAssurance will result in PIC Wisconsin’s obligation to pay liquidated damages under the merger agreement in the amount of $2 million.

 

In addition to the agreements described above, ProAssurance and PIC Wisconsin have also agreed in the merger agreement to take several other actions, such as:

 

 

ProAssurance’s and PIC Wisconsin’s obligations to complete the merger are subject to the satisfaction or waiver, where permissible, of a number of conditions, including the following:

 

 

 

The merger agreement also provides that the obligation of ProAssurance and PIC Wisconsin to consummate the merger is further subject to the following conditions:

 

 

ProAssurance’s obligation to consummate the merger is further subject to there having been no “distribution date” under the rights agreement and no holder of rights thereunder being entitled to exercise such rights as a result of the execution of the merger agreement, the public announcement thereof, or the consummation of the merger.

 

No assurance can be provided as to whether or not, or when, the required regulatory approvals necessary to consummate the merger will be obtained, or whether all of the other conditions to the merger will be satisfied or waived by the party permitted to do so. As discussed below, if the merger is not completed on or before December 31, 2006, either ProAssurance or PIC Wisconsin may terminate the merger agreement, 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 covenants and agreements set forth in the merger agreement.

 

The merger agreement may be terminated at any time before or after the merger agreement is approved and adopted by the PIC Wisconsin shareholders:

 

 

 

Any decision by the PIC Wisconsin board of directors to authorize, recommend, approve or propose an acquisition proposal other than the merger, or enter into an agreement with a third party regarding an acquisition proposal other than the merger will result in PIC Wisconsin’s obligation to pay to ProAssurance liquidated damages in the amount of $2 million. Furthermore, if ProAssurance terminates the merger agreement as a result of the board of directors of PIC Wisconsin failing to recommend approval and adoption of the merger agreement and the merger or withdrawing, amending or modifying its recommendation of the merger in any respect materially adverse to ProAssurance, PIC Wisconsin shall be obligated to pay such liquidated damages in the amount of $2 million.

 

The boards of directors of both companies considered, and believed it was appropriate to make, the foregoing commitments for the period of time involved, especially in light of the term of the commitments and the regulatory process involved in such transactions.

 

The merger agreement may be amended by mutual agreement of ProAssurance and PIC Wisconsin, and either of them may waive the right to require the other party to follow particular provisions of the merger agreement. However, the merger agreement may not be amended after PIC Wisconsin’s shareholders approve and adopt the merger agreement if the amendment would change the amount or the form of consideration to be delivered to PIC Wisconsin shareholders. If any amendment or waiver changes the amount or form of the consideration to be delivered to PIC Wisconsin shareholders after approval for the merger has already been obtained, then such amendment or waiver would require further approval by PIC Wisconsin shareholders.

 

The merger agreement provides that each of ProAssurance and PIC Wisconsin will pay its own expenses in connection with the merger and the transactions contemplated by the merger agreement. However,

(i) ProAssurance and PIC Wisconsin will share the cost of the HSR Act filing fees in proportion to their relative assets as of December 31, 2004, (ii) ProAssurance will pay all expenses and filing fees in connection with the Form A filing with the OCI of Wisconsin and any other required filings with insurance regulators, (iii) PIC Wisconsin will pay all costs and expenses relating to printing and mailing this proxy statement-prospectus to PIC Wisconsin shareholders, and (iv) ProAssurance will pay all registration, filing and other fees paid to the SEC or NYSE in connection with the merger.

 

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.

 

The PIC Wisconsin special meeting may be adjourned to permit further solicitation of proxies, if necessary, in the event than there is an insufficient number of votes to approve and adopt the merger agreement and the merger (Proposal 1 above).

 

The PIC Wisconsin board of directors 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.

 

In the opinion of Burr & Forman LLP, counsel to ProAssurance, and Quarles & Brady LLP, counsel to PIC Wisconsin, the following section describes the anticipated material United States federal income tax consequences of the merger to holders of PIC Wisconsin common stock. This discussion addresses only those PIC Wisconsin shareholders who hold their PIC Wisconsin common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, and does not address all the United States federal income tax consequences that may be relevant to particular PIC Wisconsin shareholders in light of their individual circumstances or to PIC Wisconsin shareholders who are subject to special rules, such as:

 

 

 

The following discussion is based upon the Internal Revenue Code, its legislative history, existing and proposed regulations thereunder and published rulings and decisions, all as currently in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or federal laws other than those pertaining to the income tax, are not addressed in this proxy statement-prospectus. Determining the actual tax consequences of the merger to you may be complex. They will depend on your specific situation and on factors that are not within either ProAssurance’s or PIC Wisconsin’s control. You should consult with your own tax advisor as to the tax consequences of the merger in your particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local or foreign and other tax laws and of changes in those laws.

 

In rendering their opinions, Burr & Forman LLP and Quarles & Brady LLP have relied upon representations of ProAssurance and PIC Wisconsin and upon customary assumptions, including the assumption that the merger will be consummated in accordance with the terms of the merger agreement. Neither of these tax opinions will be binding on the Internal Revenue Service. Neither ProAssurance nor PIC Wisconsin intends to request any ruling from the Internal Revenue Service as to the United States federal income tax consequences of the merger.

 

Tax consequences of the merger generally.  The merger will qualify as a plan of reorganization within the meaning of Section 368(a) of the Internal Revenue Code. As a consequence:

 

 

Cash received instead of a fractional share of ProAssurance common stock.  A shareholder of PIC Wisconsin who receives cash instead of a fractional share of ProAssurance common stock will be treated as having received the fractional share pursuant to the merger and then as having exchanged the fractional share for cash in a redemption by ProAssurance. As a result, a PIC Wisconsin shareholder will generally recognize gain or loss equal to the difference between the amount of cash received and the basis in his or her fractional share interest as set forth above. This gain or loss will generally be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the holding period for such shares is greater than one year. The deductibility of capital losses is subject to limitations.

 

Cash received by holders exercising dissenters’ rights.  Shareholders of PIC Wisconsin who dissent from the merger pursuant to the dissenters’ rights statutes and who receive cash for their shares of PIC Wisconsin common stock will be treated as having exchanged their shares of PIC Wisconsin common stock for cash in the merger. As a result, those dissenting shareholders will generally recognize gain or loss equal to the difference between the amount of cash received and their basis in the shares of PIC Wisconsin common stock exchanged for such cash. This gain or loss will generally be capital gain or loss, and will be long term capital