SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14a

(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO    )

Filed by the Registrant þ

Filed by a Party other than the Registrant o

Check the appropriate box:

o Preliminary proxy statement

o Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)(2))

þ Definitive proxy statement

o Definitive additional materials

o Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12

ProAssurance Corporation

 

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy statement, if Other Than the Registrant)

Payment of filing fee (Check the appropriate box):

þ No fee required

o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

The filing fee of $                     was calculated on the basis of the information that follows:

1.		Title of each class of securities to which transaction applies:
2.		Aggregate number of securities to which transaction applies:
3.		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
4.		Proposed maximum Aggregate value of transaction:
5.		Total fee paid:
o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14a

(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO    )

Filed by the Registrant þ

Filed by a Party other than the Registrant o

Check the appropriate box:

o Preliminary proxy statement

o Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)(2))

o Definitive proxy statement

þ Definitive additional materials

o Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12

ProAssurance Corporation

 

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy statement, if Other Than the Registrant)

Payment of filing fee (Check the appropriate box):

þ No fee required

o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

The filing fee of $                     was calculated on the basis of the information that follows:

1.		Title of each class of securities to which transaction applies:
2.		Aggregate number of securities to which transaction applies:
3.		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
4.		Proposed maximum Aggregate value of transaction:
5.		Total fee paid:
o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

PROASSURANCE CORPORATION
100 Brookwood Place
Birmingham, Alabama 35209

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
to be held May 21, 2008

 

To our Stockholders:

 

The Annual Meeting of Stockholders of ProAssurance Corporation (“ProAssurance”) will be held at 10:00 a.m., local time, on Wednesday, May 21, 2008, on the 5th floor of the headquarters of ProAssurance, located at 100 Brookwood Place, Birmingham, Alabama 35209, for the following purposes:

 

 

(6) To transact such other business as may properly come before the annual meeting or any adjournment or postponement thereof.

 

The Board of Directors has set March 28, 2008, as the record date for the annual meeting. You will only be entitled to notice of, and to vote at, the annual meeting if you are a holder of record of shares of ProAssurance’s common stock at the close of business on the record date. The stock transfer books will not be closed.

 

We may adjourn the annual meeting without notice other than announcement at the meeting or adjournments thereof, and any business for which notice is hereby given may be transacted at any such adjournment.

 

We have provided details concerning those matters to come before the annual meeting in the accompanying proxy statement. Whether you plan to attend the annual meeting or not, please sign, date and return the enclosed proxy card in the envelope provided. Returning your proxy card does not deprive you of your right to attend the annual meeting and to vote your shares in person.

 

A copy of ProAssurance’s Annual Report to the Stockholders for the year ended December 31, 2007, is enclosed. We hope you will find it informative.

 

By order of the Board of Directors,

 

Jeffrey P. Lisenby
Secretary

 

April 11, 2008

 

PROASSURANCE CORPORATION
100 Brookwood Place
Birmingham, Alabama 35209

 

PROXY STATEMENT

 

Annual meeting of Stockholders

to be held May 21, 2008

 

 

INTRODUCTION

 

We are furnishing this proxy statement and proxy card to the stockholders of ProAssurance Corporation, which we sometimes refer to as “ProAssurance,” on behalf of ProAssurance’s Board of Directors on or about April 11, 2008. Our Board of Directors is soliciting your proxy to vote your shares at the annual meeting of ProAssurance’s stockholders to be held at 10:00 a.m., local time, on Wednesday, May 21, 2008, on the 5th floor of our headquarters located at 100 Brookwood Place, Birmingham, Alabama 35209, or at any adjournment or postponement thereof.

 

At the annual meeting, the stockholders will be asked to elect five (5) members to the Board of Directors of ProAssurance, as Class I directors, to serve until the 2011 annual meeting; to ratify the election of W. Stancil Starnes as a Class III director; to approve the ProAssurance Corporation 2008 Annual Incentive Compensation Plan; to approve the ProAssurance Corporation 2008 Equity Incentive Plan; and to ratify the appointment of Ernst & Young LLP as independent auditors.

 

The Board of Directors has set March 28, 2008 as the record date for the annual meeting. You are entitled to notice of and to vote at the annual meeting if you own shares as of the close of business on our record date. At the close of business on the record date there were 32,087,795 outstanding shares of our common stock, par value $0.01 per share (“Common Stock”). You are entitled to one vote in person or by proxy on all matters properly to come before the annual meeting for each share of our common stock that you own on the record date.

 

The presence, in person or by proxy, of the holders of one-third of the shares of Common Stock entitled to vote at the meeting will constitute a quorum to conduct business at the annual meeting. Proxies received but marked as abstentions and “broker non-votes” (which occur where shares held by brokers or nominees for beneficial owners are not voted on a matter) will be included in the calculation of the number of shares considered to be present at the meeting.

 

Voting Instructions

 

If you are a record owner of our Common Stock you may vote your shares on matters properly presented at the annual meeting in any of four ways:

 

 

If you properly cast your vote, and your vote is not subsequently revoked, your vote will be voted in accordance with your instructions. You may revoke your proxy prior to the annual meeting by either (i) submitting to ProAssurance a properly executed proxy and bearing a later date, (ii) by voting by telephone or Internet at a later date or in person at the meeting, or (iii) by giving written notice of revocation to the Secretary of ProAssurance. The mailing address of ProAssurance is P.O. Box 590009, Birmingham, Alabama 35259, and the street address is 100 Brookwood Place, Birmingham, Alabama 35209.

 

If you hold shares in “street name” (that is, through a bank, broker or other nominee), your shares must be voted in accordance with instructions provided by the nominee. If your shares are held in the name of a nominee and you

would like to attend the annual meeting and vote in person, you may contact the person in whose name your shares are registered and obtain a proxy from that person and bring it to the annual meeting.

 

Availability of Certain Documents

 

Our Board of Directors has adopted a Policy Regarding Determination of Director Independence, including categorical standards to assist in determining independence and has adopted charters for our Audit Committee, Compensation Committee, and Nominating/Corporate Governance Committee, as well as Corporate Governance Principles. All of these documents and policies, together with our Code of Ethics and Conduct, are available in the Corporate Governance section of our website, www.ProAssurance.com. Printed copies of our committee charters, Corporate Governance Principles, Code of Ethics and Conduct, and the Policy Regarding Determination of Director Independence may be obtained by contacting Frank O’Neil, Senior Vice President, ProAssurance Corporation, either by mail at P. O. Box 590009, Birmingham, Alabama 35259-0009, or by telephone at (205) 877-4400 or (800) 282-6242 or by e-mail at Investor@ProAssurance.com. Our Policy Regarding Determination of Director Independence is also attached to this proxy statement as Exhibit A.

 

The materials for ProAssurance’s 2008 Annual Meeting of Stockholders (the 2007 Annual Report to the Stockholders, which includes our Annual Report on Form 10-K for the year ended December 31, 2007, Proxy Statement and Proxy Card) are available on the internet. If you hold shares in certificate form or through the Direct Registration System (“DRS”) at BNYMellon Shareowner Services (“BNYMellon”), formerly Mellon Investor Services, LLC, you may view these documents and cast your proxy vote at www.bnymellon.mobular.net/bnymellon/pra. If you hold your shares through a brokerage firm, you may view these documents and cast your proxy vote at www.bnymellon.mobular.net/bnymellon/pra_beneficial. Our proxy statement and proxy card for the 2008 Annual Meeting and our 2007 Annual Report will be available through the “Investor Relations” section of our website at www.ProAssurance.com until at least May 21, 2009, and will be available from the “Home Page” of our website until May 21, 2008. Our Annual Report to the Stockholders and Annual Report on Form 10-K, and other materials on our website are not proxy soliciting materials.

 

You may also obtain a copy of our 2007 Annual Report to the Stockholders and 2007 Annual Report on Form 10-K (including the financial statements and financial statement schedules) without charge by contacting Mr. O’Neil at the address shown above, or by telephone at (205) 877-4400 or (800) 282-6242, or by e-mail at Investor@ProAssurance.com.

 

SOLICITATION BY BOARD OF DIRECTORS

 

Our Board of Directors is soliciting your proxy to vote at the 2008 Annual Meeting. ProAssurance will pay the expenses of the preparation of proxy materials and the solicitation of proxies for the annual meeting. In addition to the solicitation of proxies by mail and the interest, solicitation may be made by certain of our directors, officers or employees telephonically, electronically or by other means of communication and they will receive no additional compensation for such solicitation. We will reimburse brokers and other nominees for costs incurred by them in mailing proxy materials to beneficial owners in accordance with applicable rules.

 

Board of Directors

 

Our Certificate of Incorporation provides that our Board of Directors is comprised of at least three and not more than twenty-four directors, as determined by the Board of Directors. The Certificate of Incorporation requires that our directors be divided into three classes as nearly equal as possible and that the directors serve staggered terms of three years. The remaining directors may fill any vacancies on the Board of Directors resulting from the death, resignation or removal of a director or from any increase in the number of directors. A director elected by the directors to fill a vacancy on the Board of Directors holds office until the next election of the class of directors for which such director has been chosen.

 

At its meeting in September 2007, the Board of Directors, on the recommendation of the Nominating/Corporate Governance Committee, elected W. Stancil Starnes as a director and increased the size of the board from eleven to twelve members in order to create a vacancy for his election. Mr. Starnes was named the Chief Executive

Officer of ProAssurance on July 1, 2007, and the Board of Directors determined that the Chief Executive Officer should serve on the Board of Directors. In accordance with the requirements of ProAssurance’s Certificate of Incorporation, Mr. Starnes will serve as a Class III director until the 2010 Annual Meeting when the current term of the Class III directors will expire.

 

At its meeting in December 2007, the Board of Directors, on the recommendation of the Nominating/Corporate Governance Committee, elected Drayton Nabers, Jr. as a director and increased the size of the board from twelve to thirteen members to create a vacancy for his election. Mr. Nabers was elected to serve as a Class I director as required under ProAssurance’s Certificate of Incorporation, and his current term will expire at the 2008 Annual Meeting.

 

The Board of Directors has nominated Lucian F. Bloodworth, A. Derrill Crowe, M.D., Robert E. Flowers, M.D., Ann F. Putallaz, and Drayton Nabers, Jr. for election to the Board of Directors at the 2008 Annual Meeting upon the expiration of their current terms as Class I directors as set forth under the caption “Proposal 1 — Election of Directors” included elsewhere in this proxy statement. The Board of Directors has also recommended that the stockholders ratify the election of W. Stancil Starnes to the Board of Directors by vote at the 2008 Annual Meeting as described under the caption “Proposal 2 — Ratification of the Election of W. Stancil Starnes as a Director” included elsewhere in this proxy statement. Set forth below is information regarding the nominees and the directors continuing in office, which was confirmed by them for inclusion in this proxy statement. Information regarding stock ownership is set forth in the table under the caption “Beneficial Ownership of Our Common Stock” included elsewhere in this proxy statement.

 

Nominees for Election as Class I Directors for a Three-Year Term Expiring in 2011

 

Lucian F. Bloodworth (Age 67) has served as a director of ProAssurance since August 22, 2002. Mr. Bloodworth is the chairman of Cain Manufacturing, a manufacturer of specialty parts for air distribution and roofing based in Birmingham, Alabama. Mr. Bloodworth has been a fellow of the Society of Actuaries and a member of the American Academy of Actuaries.

 

A. Derrill Crowe, M.D. (Age 71) has served as a director and as Chairman of the Board of ProAssurance since it began operation in June 2001. Dr. Crowe currently serves as non-executive Chairman of the Board. Dr. Crowe served as chief executive officer of ProAssurance and its predecessors, Medical Assurance, Inc. and The Medical Assurance Company, Inc., from the commencement of operations in 1977 until July 1, 2007.

 

Robert E. Flowers, M.D. (Age 58) has served as a director of ProAssurance since it began operation in June 2001. Prior to June 2001, Dr. Flowers served as a director of our insurance subsidiary, The Medical Assurance Company, Inc. (1985-2001), and as a director of its former holding company, Medical Assurance, Inc. (1995-2001). Dr. Flowers practiced as a physician with Gynecology Associates of Dothan P.C., Dothan, Alabama, prior to his retirement in 2001.

 

Ann F. Putallaz, Ph.D. (Age 62) has served as a director of ProAssurance since it began operation upon completion of the consolidation of Professionals Group, Inc. and Medical Assurance, Inc. in June 2001. Prior to the consolidation, Ms. Putallaz served as a director of Professionals Group, Inc. (1996-2001), and its vice chairman (1999-2001). For the past five years, Ms. Putallaz has been Director of Data and Communication Services of Munder Capital Management, an investment advisor to The Munder Funds, an open end investment company registered under the Investment Company Act of 1940.

 

Drayton Nabers, Jr., Esq. (Age 67) served as a director of ProAssurance from February 2002 until he resigned effective December 31, 2002, to serve as Finance Director of the State of Alabama. Mr. Nabers served as Finance Director until June 2004, when he was appointed Chief Justice of the Alabama Supreme Court. He left the Court in 2006, and is currently in private practice with the law firm of Maynard, Cooper & Gale, PC in Birmingham, Alabama. Mr. Nabers was the chief executive officer of Protective Life Corporation, an insurance holding company based in Birmingham, Alabama, from 1979 to 2001. He is currently a director of Infinity Corporation.

Class II Directors Continuing in Office — Term Expiring in 2009

 

John J. McMahon, Jr., Esq. (Age 65) has served as a director of ProAssurance since February 22, 2002. Mr. McMahon is chairman of Ligon Industries, a manufacturer of waste water treatment equipment, aluminum castings and hydraulic cylinders. He served as chairman of the executive committee of McWane, Inc. in Birmingham, Alabama, from 1999 until December 31, 2005. Mr. McMahon also serves as a director of Protective Life Corporation.

 

John P. North, Jr., C.P.A. (Age 72) has served as a director of ProAssurance since it began operation in June 2001. Prior to June 2001, Mr. North had served as a director of our predecessor, Medical Assurance, Inc., beginning in 1996. Mr. North is a certified public accountant who was a partner of the accounting firm of Coopers & Lybrand LLP until his retirement in September 1995.

 

William H. Woodhams M.D. (Age 70) has served as a director of ProAssurance since it began operation in June 2001. Prior to June 2001, Dr. Woodhams served as a director of one of our insurance subsidiaries, ProNational Insurance Company (1980-2001), and served as a director of its former holding company, Professionals Group, Inc. (1996-2001). Dr. Woodhams is a board certified family practice physician and has been in private practice in Kalamazoo, Michigan since 1964.

 

Wilfred W. Yeargan, Jr.  M.D. (Age 68) has served as a director of ProAssurance since 2002. Dr. Yeargan is a board certified ophthalmologist who has practiced in Tuscaloosa, Alabama for over thirty years.

 

Class III Directors Continuing in Office — Term 2010

 

Victor T. Adamo, Esq. CPCU (Age 60) has served as a director and President of ProAssurance since it began operation in June 2001. Prior to June 2001, Mr. Adamo served as an officer of our insurance subsidiary, ProNational Insurance Company (1985-2001), and as a director and president and chief executive officer of its former holding company, Professionals Group (1996-2001). Prior to joining ProNational, Mr. Adamo was in private legal practice from 1975 to 1985.

 

Paul R. Butrus (Age 67) has served as a director of ProAssurance since it began operation in June 2001, during which time he served as an executive officer of ProAssurance until December 31, 2007. Mr. Butrus has held various positions with our insurance subsidiary, The Medical Assurance Company, Inc., since it began operations in 1977, and was a director and executive vice president and chief operating officer of its former holding company, Medical Assurance, Inc. (1995-2001).

 

William J. Listwan, M.D. (Age 65) has served as a director of ProAssurance since September 2006. Dr. Listwan was a member of the Board of Directors of Physicians Insurance Company of Wisconsin (“PIC Wisconsin”) from its organization in 1986 until its merger with ProAssurance in August 2006. Dr. Listwan practiced Internal Medicine with the Aurora Health Center (formerly General Clinic) in West Bend, Wisconsin, from July 1974 to April 2006. He currently holds an appointment as Assistant Clinical Professor of Medicine at the Medical College of Wisconsin. Dr. Listwan was nominated by PIC Wisconsin as its designated director to be elected to the Board of Directors of ProAssurance pursuant to the terms of the Merger Agreement between PIC Wisconsin and ProAssurance.

 

W. Stancil Starnes, Esq. (Age 59) was elected to the Board of Directors on September 5, 2007. Mr. Starnes was appointed as Chief Executive Officer (CEO) of ProAssurance on July 1, 2007. Mr. Starnes served as the senior and managing partner of the law firm of Starnes & Atchison LLP in Birmingham, Alabama, where he was extensively involved with ProAssurance and its predecessors in the defense of medical liability claims for over 25 years. He withdrew from the firm in October 2006 to serve as President, Corporate Planning and Administration of Brasfield & Gorrie, Inc., a commercial construction firm based in Birmingham, Alabama, where he served until May 2007.

Independent Directors

 

As required by The New York Stock Exchange Corporate Governance Listing Standards, our Board of Directors has determined that a majority of the directors on the board are “independent” directors. In compliance with the corporate governance requirements of Sarbanes-Oxley Act of 2002 and the applicable rules of the New York Stock Exchange, or NYSE, our Board of Directors has adopted a policy that a director will be presumed to be independent if he or she satisfies certain specified criteria. A complete description of the criteria adopted by our Board of Directors in determining the independence of our directors is set forth in Exhibit A to this proxy statement.

 

Our Board of Directors has determined that the following directors satisfy the independence criteria described above, and therefore constitute “independent” directors:

 

 

We have engaged Dr. Listwan as a consultant under a Consulting and Confidentiality Agreement which provides that Dr. Listwan will provide consulting services to ProAssurance in consideration of an annual retainer of $44,000. At its meeting on December 5, 2007, the Board of Directors reviewed this consulting arrangement and determined that Dr. Listwan satisfied the current independence criteria for directors because:

 

 

Meetings and Committees of the Board of Directors

 

Our Board of Directors held seven meetings during 2007. Our Bylaws establish four standing committees of the Board of Directors: the Nominating/Corporate Governance Committee, the Compensation Committee, the Audit Committee and the Executive Committee, each of which is described below. Each of our incumbent directors attended at least 75% of the meetings of the Board of Directors and the committees of the board on which he or she served during 2007 (in each case, which were held during the period for which he or she was a director).

 

Neither our Board of Directors nor our Nominating/Corporate Governance Committee has implemented a formal policy regarding director attendance at annual meetings of our stockholders. However, our Board of Directors typically holds its annual organizational meeting directly following the annual stockholders’ meeting, and it is customary for our directors to attend the annual meeting. Ten of our then eleven directors attended the annual meeting of our stockholders held on May 16, 2007.

Nominating/Corporate Governance Committee

 

Our Nominating/Corporate Governance Committee currently consists of three independent directors, and operates pursuant to a written charter, which is available in the Corporate Governance section of our website, www.ProAssurance.com. The primary purposes of the Nominating/Corporate Governance Committee are to:

 

 

The Nominating and Corporate Governance Committee is empowered to engage a third party search firm to assist in identifying and evaluating director candidates. However, the committee did not hire any search firm during 2007 and, accordingly, paid no fees to any such company.

 

Under our Corporate Governance Principles, the Nominating/Corporate Governance Committee will consider a nominee proposed by a stockholder for a vacancy on our board when such nomination has been submitted in accordance with the provisions contained in our Bylaws, which are described under the caption “Stockholder Proposals” in this proxy statement. A vacancy does not exist where:

 

 

Our Board of Directors may, at any time, elect not to fill a vacancy arising on the Board. The Board of Directors may elect to not recommend a director candidate nominated by a stockholder even if such director candidate is the only candidate submitted to the Nominating/Corporate Governance Committee to fill a vacancy.

 

The Nominating/Corporate Governance Committee is responsible for determining the appropriate composition of our Board and for the selection of individual candidates consistent with such determination. Our Corporate Governance Principles do not establish any firm requirement of minimum qualifications or skills that an individual candidate must possess other than the maximum age requirements described in the Corporate Governance Principles. Rather, the Corporate Governance Principles direct our Nominating/Corporate Governance Committee to take into account all factors it considers appropriate, including a candidate’s reputation for ethical business dealings, knowledge, skill, experience, expertise, and the extent to which the candidate would fill a present need in the composition of the Board.

 

Subject to the qualifications described above, our Nominating/Corporate Governance Committee will consider a director candidate nominated by a stockholder in the same manner as candidates brought before the Nominating/Corporate Governance Committee from other sources. Generally, the Nominating/Corporate Governance Committee initially evaluates a prospective nominee on the basis of his or her résumé and other background information that has been made available to the Nominating/Corporate Governance Committee. A member of the Nominating/Corporate Governance Committee will contact for further review those candidates who the committee believes are qualified, who may fulfill a specific board need and who the committee believes would otherwise best make a contribution to the board. If, after further discussions with the candidate, and other further review and consideration as necessary, the Nominating/Corporate Governance Committee believes that it has identified a qualified candidate, it will make a recommendation to the Board.

The charter of the Nominating/Corporate Governance Committee provides for at least three members, each of whom must be an independent director. The current members of our Nominating/Corporate Governance Committee are John J. McMahon, Jr., Chairman, Lucian F. Bloodworth and William H. Woodhams. Our Board of Directors has found that each member of our Nominating/Corporate Governance Committee is “independent” within the meaning of the rules of the NYSE.

 

During 2007, our Nominating/Corporate Governance Committee met two times.

 

Compensation Committee

 

Our Compensation Committee currently consists of four independent directors, and operates pursuant to a written charter, which is available in the Corporate Governance section of our website, www.ProAssurance.com. The primary purposes of the Compensation Committee are to:

 

 

The charter of the Compensation Committee charges the committee with the responsibility to determine and approve, subject to ratification by a majority of independent directors, the CEO’s compensation level based on the committee’s evaluation of the CEO’s performance in light of the corporate goals and objectives relevant to the CEO’s compensation as approved by the committee. The charter also charges the Compensation Committee with the responsibility to, among other duties, review the competitiveness of the non-CEO executive compensation programs of ProAssurance; approve change of control agreements or severance plans for executive officers of ProAssurance; and make recommendations for director compensation to our Board of Directors. The charter further provides that the Compensation Committee has the exclusive authority to retain outside compensation consultants and advisors as it deems appropriate to fulfill its responsibilities.

 

The current practice of the Compensation Committee is to retain an outside consultant to gather data from peer companies and to compare ProAssurance’s compensation practices with that of its peers. The Compensation Committee, with the assistance of ProAssurance’s management and its consultant, identifies the peer companies to be used in the compensation analysis. The peer companies are competitors with ProAssurance in terms of direct business, senior executive talent, and market capitalization and include the following categories of companies:

 

 

After reviewing peer companies’ data, the compensation consultant provides a report to the committee that describes market practices with regard to executive compensation and identifies any gaps between the market and ProAssurance’s executive compensation practices. In addition, from time to time the Compensation Committee retains the compensation consultant to provide a review and analysis of particular aspects of ProAssurance’s compensation program, and reports of these studies are also considered by the committee in making its recommendations. The Compensation Committee customarily makes its compensation recommendations to our Board of Directors at its regularly scheduled meeting in the first quarter of each year.

 

ProAssurance’s senior management makes no recommendations with respect to compensation of the CEO. The Compensation Committee is exclusively responsible for making compensation recommendations for adoption by the Board of Directors as to changes in base salary for the CEO and the number of stock options and performance shares to be granted to the CEO as long term compensation. The Compensation Committee also approves the annual

incentive award guidelines for non-equity incentive compensation to be paid to the CEO. All decisions of the Compensation Committee with respect to the CEO compensation are subject to ratification by a majority of the independent directors under the committee’s charter.

 

In accordance with its charter, the Compensation Committee also makes recommendations as to compensation of our directors. In 2007, the Compensation Committee engaged a compensation consultant to provide a review of the compensation of our Board of Directors and made recommendations for changes in the compensation of directors for their service on the Board of Directors and for their service on the various committees. These recommendations were considered and adopted by our Board of Directors at its meeting in the first quarter of 2007.

 

The Compensation Committee also administers the ProAssurance Corporation Incentive Compensation Stock Plan and the ProAssurance Corporation 2004 Equity Incentive Plan. If approved at the by the stockholders at the 2008 Annual Meeting, the Compensation Committee will administer the ProAssurance Corporation 2008 Annual Incentive Compensation Plan and the ProAssurance Corporation 2008 Equity Incentive Plan.

 

During 2007, our Compensation Committee met three times. The charter of the Compensation Committee provides for at least three members, each of whom must be an independent director. The current members of the Compensation Committee are Wilfred W. Yeargan, Jr., Chairman, Lucian F. Bloodworth, William J. Listwan and John J. McMahon, Jr. Our Board of Directors has determined that each member of the Compensation Committee is “independent” within the meaning of the rules of the NYSE and, as required by the Compensation Committee charter, no member of the Compensation Committee has any interlocking relationships required to be disclosed under federal securities laws.

 

This year’s report of the Compensation Committee is on page 35 of this proxy statement.

 

Audit Committee

 

Our Audit Committee consists of three independent directors, and operates pursuant to a written charter that was amended in 2007 and is available in the Corporate Governance section of our website, www.ProAssurance.com. The primary purposes of our Audit Committee are to represent and assist the Board of Directors in discharging its oversight responsibility relating to:

 

 

The Audit Committee also prepares the Report of the Audit Committee, included on page 24 of this proxy statement as required by the rules of the SEC to be included in our annual proxy statements.

 

Our Audit Committee is responsible for carrying out all of the duties and responsibilities required for audit committees under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the corporate governance rules of the NYSE for listed companies. A description of the specific duties and responsibilities of our Audit Committee can be found in its charter. Our Audit Committee and Board of Directors have established a procedure which establishes a confidential means for complaints or concerns with respect to accounting, internal controls and auditing matters to be submitted to the committee, which is described under the caption titled “Other Matters — Policies on Reporting of Concerns Regarding Accounting and Other Matters and Communicating with Directors” in this proxy statement.

 

The charter of the Audit Committee provides for at least three members, each of whom must be an independent director. John P. North, Jr. is the chairman, and Lucian F. Bloodworth and Ann F. Putallaz are the other members of our Audit Committee. Our Nominating/Corporate Governance Committee and our Board of Directors have determined that each member of the Audit Committee is “independent” within the meaning of the rules of both the NYSE and the SEC. Our board has also determined that each member of the Audit Committee is financially

literate as such qualification is defined under the rules of the NYSE and that John P. North, Jr., based upon his education and extensive experience in public accounting, including his leadership roles at Coopers and Lybrand, is an “audit committee financial expert” within the meaning of the rules of the SEC. No member of the Audit Committee is presently serving on the audit committee of another company.

 

During 2007, the Audit Committee held nine meetings.

 

Executive Committee

 

Our Executive Committee has the authority during intervals between the meetings of the Board of Directors to exercise all powers and authority of the Board of Directors in the management of our business and affairs, except that the Executive Committee may not:

 

 

The Bylaws provide that the Executive Committee have at least three members including the Chairman of the Board. The members of the Executive Committee are: A. Derrill Crowe, Chairman, W. Stancil Starnes, Victor T. Adamo, Paul R. Butrus and Robert E. Flowers. The Executive Committee met once during 2007.

 

Non-Management Directors Meetings

 

Our Corporate Governance Principles require our non-management directors to hold executive sessions at which management, including the chief executive officer, is not present, on a regularly scheduled basis and not less than two times per year. The Corporate Governance Principles further provide that the non-management directors on the board will select one of the non-management directors to preside at each executive session. At the annual meeting in May 2007, the non-management directors selected John P. North as the non-management director to preside at each meeting, but did not designate him as a “lead director.” The schedule for the executive sessions and selection of Mr. North as the director to preside at those meetings are each subject to change by the non-management directors. During 2007, our non-management directors held an executive session after three of the regularly scheduled Board meetings.

 

PROPOSAL 1 — ELECTION OF DIRECTORS

 

At the annual meeting, you will be asked to elect the following persons as Class I directors to hold office for terms ending at the annual meeting of stockholders to be held in 2011:

 

Lucian F. Bloodworth

A. Derrill Crowe, M.D.

Robert E. Flowers, M.D.

Drayton Nabers, Jr.

Ann F. Putallaz

 

The persons named in the board’s proxy card have advised us that, unless a contrary direction is indicated on your proxy card, they intend to vote the shares appointing them as proxies in favor of the named nominees. If the nominees should be unable to serve, and the Board of Directors knows of no reason to anticipate that this will occur, the persons named in the proxy card will vote for such other person or persons as may be recommended by our Nominating/Corporate Governance Committee and designated by the Board of Directors, or the Board of Directors may decide not to elect an additional person as a director. The persons named in the proxy card will have no

authority to vote for the election of any person other than the nominees or their substitutes in the election of directors.

 

All of the nominees currently are members of our Board of Directors and have been approved, recommended and nominated for re-election to the Board of Directors by our Nominating/Corporate Governance Committee and by our Board of Directors in accordance with our Corporate Governance Principles.

 

Directors will be elected by a plurality of the votes cast in person or by proxy at the annual meeting. With respect to the election of directors, you may vote for all of the nominees or withhold authority to vote for any or all of the nominees. Because directors are elected by a plurality of the votes cast, votes to withhold authority with respect to one or more nominees and broker non-votes will have no effect on the outcome of the election. If you do not give instructions to your proxy, your shares represented by that proxy will be voted FOR the election of each director nominee nominated by the Board of Directors.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE NOMINEES NOMINATED FOR ELECTION AS DIRECTORS BY THE BOARD OF DIRECTORS.

 

PROPOSAL 2 — RATIFICATION OF ELECTION OF W. STANCIL STARNES AS A DIRECTOR

 

At the annual meeting, you will be asked to ratify the election of W. Stancil Starnes as a Class III director to serve until the 2010 annual meeting of stockholders. Mr. Starnes was elected as a director in September 2007. The Board of Directors increased the size of the board in order to elect him as a director to continue our past practice of having the CEO serve on the Board of Directors. Mr. Starnes has been designated as a Class III director because his addition to that class made each of the classes of directors equal in number as required by our Certificate of Incorporation. Although it is not required under our Certificate of Incorporation or Bylaws, the Board of Directors has directed that Mr. Starnes’ election as a director be submitted to our stockholders for ratification.

 

The ratification of Mr. Starnes’ election as a Class III director will require the affirmative vote of a majority of the shares voting on the matter at the 2008 Annual Meeting without regard to broker non-votes or abstentions. The persons named on the proxy card have advised us that, unless a contrary intention is indicated on your proxy card, they intend to vote the shares appointing them as proxies in favor of the ratification of the election of Mr. Starnes as a director. If you do not give instructions to your proxy, the shares represented by that proxy will be voted FOR the ratification of the election of Mr. Starnes as a director.

 

In the event that the ratification of Mr. Starnes’ election as a director is not approved by a majority of the shares voting at the meeting, the Board of Directors will determine whether or not the board should request that Mr. Starnes resign as a director.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE RATIFICATION OF THE ELECTION BY THE BOARD OF DIRECTORS OF W. STANCIL STARNES AS A DIRECTOR.

 

PROPOSAL 3 — APPROVAL OF THE PROASSURANCE CORPORATION

2008 ANNUAL INCENTIVE COMPENSATION PLAN

 

Introduction

 

ProAssurance has paid annual incentive compensation to its senior executives and other key employees pursuant to annual incentive award guidelines established by the Compensation Committee. The annual incentive compensation has been subject to the limitation on the deduction of certain executive’s compensation imposed by Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Under Code Section 162(m) compensation in excess of $1,000,000 to certain executive officers cannot be deducted for federal income tax purposes unless it is considered performance based compensation. Payment of incentive compensation under the current annual incentive award guidelines is not considered performance based compensation because the guidelines have not been approved by the stockholders and because the guidelines include subjective individual performance criteria.

Our Board of Directors, on the recommendation of the Compensation Committee, has recommended that the ProAssurance Corporation 2008 Annual Incentive Compensation Plan (the “2008 Annual Incentive Plan”) be submitted to the stockholders for approval at the 2008 Annual Meeting. The terms of the 2008 Annual Incentive Plan have been structured to qualify annual incentive awards as performance based compensation under Code Section 162(m) and to allow the Compensation Committee to continue the practice of adopting annual incentive award guidelines as a basis for paying annual incentive compensation to executives under the 2008 Annual Incentive Plan.

 

Description of Plan

 

The principal features of the 2008 Annual Incentive Plan are described below. The description is subject to, and qualified by reference to, the definitive terms of the 2008 Annual Incentive Plan, which is set forth in its entirety as Exhibit B to this Proxy Statement.

 

Purpose.  The purpose of the 2008 Annual Incentive Compensation is to:

 

 

The 2008 Annual Incentive Plan assumes the opportunity to earn incentive compensation in addition to a competitive base salary.

 

Eligibility.  The Compensation Committee will designate participants from our executive officers and other key employees for payment of annual incentive compensation under the 2008 Annual Incentive Plan. Eligibility is conditioned on a participant’s continuous employment with us from the date of designation until payment of the award of annual incentive compensation. The participants may include our CEO and our four most highly compensated executive officers required to be named in the Summary Compensation Table in our annual proxy statement (“Named Executive Officers”).

 

The number of eligible participants in the 2008 Annual Incentive Plan will vary from year to year in the discretion of the Compensation Committee. In 2007, all Named Executive Officers (except for Mr. Starnes, who was employed mid-year) were designated to receive incentive compensation awards under the annual incentive award guidelines, and it is expected they will be selected under the 2008 Annual Incentive Plan.

 

Performance Criteria.  Prior to March 31 each year (or such earlier date as may be required under Code Section 162(m)), the Compensation Committee will establish performance objectives that must be attained in order for the payment of incentive compensation to participants under the 2008 Annual Incentive Plan. The performance objectives must be based on one or more of the following criteria:

 

 

 

The performance criteria may be described in terms of company-wide objectives or in terms of objectives that relate to the performance of a subsidiary, division, region or function, or in terms of relative performance as compared to an outside reference or peer group. Performance objectives with respect to the performance criteria may be specified in absolute terms, in percentages, or in terms of growth from period to period, or growth rates over time, as the Compensation Committee deems appropriate. Performance objectives need not be based upon an increase in positive results under any of the performance criteria.

 

Payment of Annual Incentive Awards.  If one or more of the performance objectives established by the Compensation Committee are satisfied in any year, the committee may award annual incentive compensation to an eligible participant in an amount up to 200% of such participant’s base salary, but not exceeding $2,000,000. Annual incentive compensation will be denominated in dollars and will be payable in shares of Common Stock, cash, or a combination as the Compensation Committee may determine. Shares of Common Stock will have a dollar value equal to the market value of the share on the date payment of the award is authorized or such later date as may be authorized by the Compensation Committee. Shares of Common Stock to be awarded as annual incentive compensation will be derived from the shares of Common Stock reserved for issuance under any equity compensation plan of ProAssurance that is then in effect and that has been approved by the stockholders. The delivery of shares of Common Stock to participants as incentive compensation will be considered to be awards or grants under the equity compensation plan for which they have been reserved, and the shares reserved for issuance under the equity compensation plan will be reduced by the number of shares delivered to participants as annual incentive compensation.

 

The Compensation Committee has the discretion to reduce the amount that would otherwise be payable to a participant as annual incentive compensation based on the performance criteria in the 2008 Annual Incentive Plan by reason of individual performance or other factors the committee deems appropriate and may establish rules and procedures that will limit amounts paid to each participant to a level below the maximum amount authorized under the 2008 Annual Incentive Plan. The Compensation Committee also has the authority to pay incentive compensation to any participant who is not a Named Executive Officer based on other reasonable subjective criteria, including individual performance, as the committee deems appropriate so long as the incentive compensation does not exceed the maximum allowed under the 2008 Annual Incentive Plan. The Compensation Committee may provide for a minimum amount of incentive compensation in a year in connection with the hiring of a Named Executive Officer notwithstanding the requirements of Code Section 162(m).

Administration.  The Compensation Committee will be responsible for the administration of the 2008 Annual Incentive Plan. The charter of the Compensation Committee requires that each member be an “independent director” under the corporate governance listing standards of the New York Stock Exchange, and a “non-employee director” as defined in SEC Rule 16b-3. The terms of the 2008 Annual Incentive Plan also require that each member of the Compensation Committee be an “outside director” as defined in Code Section 162(m).

 

The Compensation Committee is required to administer and interpret the 2008 Annual Incentive Plan in a manner that will qualify all payments to Named Executive Officers as performance-based compensation under Code Section 162(m). Prior to making any payment to a participant under the 2008 Annual Incentive Plan, the Compensation Committee is required to certify whether the established performance objectives have been obtained and to determine the amount and the method of payment of the incentive compensation payable to the participants.

 

Amendment and Termination.  The Board of Directors or the Compensation Committee may at any time amend, terminate or discontinue the 2008 Annual Incentive Plan, except that no such action may adversely affect the right of any participant with respect to an award for any calendar year which has already commenced and no amendment will be effective without approval of the stockholders if such approval is required to continue to qualify the payments under the plan as performance-based compensation under Code Section 162(m). If the Compensation Committee determines that the 2008 Annual Incentive Plan or any payments to be made thereunder are not in compliance with Code Section 409A, the committee may amend the plan or outstanding awards to the extent necessary to comply with Code Section 409A even if it adversely affects awards previously made to a participant, but the amendment will be subject to stockholder approval if and to the extent necessary to continue to qualify the payments under the plan as performance-based compensation under Code Section 162(m).

 

Effective Date.  If approved by our stockholders at the 2008 Annual Meeting, the 2008 Annual Incentive Plan will immediately be effective and will apply to incentive awards in annual periods beginning after December 31, 2008. The 2008 Annual Incentive Plan will serve as the basis for the annual incentive award guidelines for annual periods beginning after December 31, 2008.

 

Deferral of Payment.  Each participant who is entitled to participate in our Non-Qualified Excess Plan may elect to defer payment of any award amount under the 2008 Annual Incentive Plan in accordance with the terms of such plan.

 

Federal Income Tax Consequences.  Payments made under the 2008 Annual Incentive Plan will be taxable to the recipients when paid and we will be entitled to a federal income tax deduction in the calendar year for which the amount is paid unless the payment is subject to the limitation under Code Section 162(m).

 

Code Section 162(m) prohibits a public company from deducting executive compensation in excess of $1,000,000 paid in any year to its CEO and to any of the other four highest compensated executive officers required to be named in the summary compensation table in its proxy statement. Executive compensation includes base salary, annual bonus, stock option exercises, transfers of property (e.g. stock awards) and benefits paid under non-qualified plans. Code Section 162(m) exempts “performance-based compensation” from the limitation on the deduction for executive compensation. To qualify for the Code Section 162(m) exemption, performance-based compensation must meet the following requirements:

 

 

The 2008 Annual Incentive Plan, if approved by our stockholders, has been structured to allow the Compensation Committee to award annual incentive compensation that will qualify as performance-based compensation under Code Section 162(m). The 2008 Annual Incentive Plan has been structured so that payments must be made in compliance with Code Section 409A relating to the taxation of deferred compensation.

 

Recommendation by the Board; Vote Required

 

The affirmative vote of the holders of a majority of the shares present or represented by proxy at the 2008 Annual Meeting is required to approve the 2008 Annual Incentive Plan. If you do not give instructions to your proxy on this proposal, your shares represented by that proxy will be voted FOR the approval of the 2008 Annual Incentive Plan. In accordance with the requirements of the New York Stock Exchange, brokers may not vote on the 2008 Annual Incentive Plan without specific instructions from the beneficial owners of shares. Broker non-votes and abstentions will be included in the number of shares present at the 2008 Annual Meeting and will have the same effect as a negative note.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE APPROVAL OF THE 2008 ANNUAL INCENTIVE PLAN.

 

PROPOSAL 4:
APPROVAL OF THE PROASSURANCE CORPORATION 2008 EQUITY INCENTIVE PLAN

 

Introduction

 

At its March meeting, our Board of Directors, upon recommendation of the Compensation Committee, adopted the ProAssurance Corporation 2008 Equity Incentive Plan (the “2008 Equity Plan”) to be effective upon approval of the plan by our stockholders at the 2008 Annual Meeting. If approved by the stockholders, future equity compensation awards will be granted under the 2008 Equity Plan and no further awards will be granted under the ProAssurance Corporation 2004 Equity Compensation Plan (the “2004 Plan”). The Board of Directors has recommended that the 2008 Equity Plan be submitted to the stockholders for approval for the following reasons:

 

 

Description of the 2008 Equity Plan

 

The terms and conditions of the 2008 Equity Plan are similar to those of the 2004 Plan. The following constitutes a brief discussion of the material features of the 2008 Equity Plan. The description is subject to, and qualified by reference to, the definitive terms of the 2008 Equity Plan, which is set forth in its entirety as Exhibit C to this Proxy Statement.

Purpose.  The purpose of the 2008 Equity Plan is to further our corporate profitability and growth in our share value by offering equity or other proprietary interests in ProAssurance to those key officers, employees, consultants and directors who will be largely responsible for such growth. A further purpose of the 2008 Equity Plan is to enhance our ability to recruit and retain qualified executives and key employees through long-term incentive compensation in the form of equity or other proprietary interests in ProAssurance.

 

Effective Date.  If approved by our stockholders at the 2008 Annual Meeting, the 2008 Equity Plan will source for incentive awards in annual periods beginning after December 31, 2008. The 2008 Equity Plan will replace the 2004 Plan for any awards granted after December 31, 2008. Awards granted prior to that date will continue to be governed by the 2004 Plan.

 

Administration.  The Compensation Committee will be responsible for the administration of the 2008 Equity Plan. The charter of the Compensation Committee requires that each member be an “independent director” under the corporate governance listing standards of the New York Stock Exchange, and a “non-employee director” as defined in SEC Rule 16b-3. The 2008 Equity Plan also requires that each member be an “outside director” as defined in Code Section 162(m). The Compensation Committee will select from eligible participants those persons who in its judgment have the opportunity to influence our long-term profitability. The committee will determine the awards to be made to participants under the 2008 Equity Plan and the conditions upon which awards will become payable under the plan.

 

Eligibility.  The Compensation Committee may designate any of our employees or directors as participants in the 2008 Equity Plan and may also select as participants persons engaged by ProAssurance to provide services as a consultant or advisor, except that performance shares may be granted only to our employees. An employee is any person (including an officer) who is employed by ProAssurance or a subsidiary in a continuous and regular salaried relationship.

 

Awards.  The Compensation Committee has the authority to make the following type of equity-based awards to participants under the 2008 Equity Plan: (1) performance shares; (2) stock options; (3) stock appreciation rights; (4) restricted stock; (5) restricted units; and (6) other stock based awards. No participant may receive more than a total of 300,000 shares of Common Stock subject to awards granted to such participant under the 2008 Equity Plan in any calendar year.

 

Available Shares.  Our Board of Directors has authorized the issuance of up to 3,000,000 shares of Common Stock under the 2008 Equity Plan. The shares may be made available from our authorized and unissued shares of Common Stock or from treasury shares. Awards payable solely in cash are not deducted from the number of shares available for issuance under the 2008 Equity Plan unless paid upon the exercise of a stock appreciation right. Shares subject to awards that are forfeited or cancelled will again be available for issuance under new awards under the 2008 Equity Plan.

 

If the 2008 Annual Incentive Plan and the 2008 Equity Plan are approved by the stockholders at the 2008 Annual Meeting, the shares of Common Stock issued as annual incentive compensation under the 2008 Annual Incentive Plan will be issued from the shares reserved under the 2008 Equity Plan as “other stock based awards,” and will reduce the number of shares available for awards under the 2008 Equity Plan.

 

The Compensation Committee is required to adjust the shares authorized under the 2008 Equity Plan and outstanding awards as necessary to preserve, but not to enlarge, the benefits under the 2008 Equity Plan as a result of a stock split, stock dividend, recapitalization, warrant or rights offering, or other similar event. In such event, the Compensation Committee may, in such manner as the committee deems equitable, adjust the number and kind of shares which may be awarded in the future under the 2008 Equity Plan, the number and kinds of shares subject to outstanding awards under the 2008 Equity Plan, and the grant, base or exercise price of any outstanding awards. In addition, the Compensation Committee may, in its discretion, modify the terms of outstanding awards in anticipation of any of the previously described corporate events or transactions as well as any merger, consolidation or exchange of shares involving ProAssurance in order to settle the awards in cash, accelerate vesting or exercisability of awards, provide for the assumption or conversion of such awards, modify the performance targets and performance periods for performance shares, or effect any combination of the foregoing. The

Compensation Committee has no authority to make adjustments solely as a result of the decline in the market value of our Common Stock.

 

Performance Shares.  A performance share is the equivalent of one share of Common Stock which becomes vested and nonforfeitable upon the attainment of performance objectives established by the Compensation Committee. The Compensation Committee establishes the performance objectives and the length of the performance period to attain such objectives at the time a performance share is awarded. The committee may prescribe different conditions for different participants. If the committee intends for performance shares awarded to an executive to qualify as performance based compensation under Code Section 162(m), the performance objectives must relate to at least one of the criteria listed below:

 

 

The performance objectives for performance shares may be described in terms of company wide objectives or in terms of objectives that relate to the performance of the participant or a subsidiary, division, region or function within the company, or in terms of relative performance as compared to an outside reference or peer group.

 

The Compensation Committee will determine whether the performance objectives for the performance shares awarded to a participant have been attained at the end of the performance period, or if one or more interim periods are authorized by the committee, at the end of an interim period within the performance period. If the committee determines that such performance objectives have been obtained, the participant will be entitled to receive payment for each performance share in an amount equal to the value of one share of Common Stock on the date of payment. Unless otherwise directed by the Compensation Committee, payment is to be made partly in shares of Common Stock and partly in cash, with the cash portion being approximately equal to the withholding required for taxes.

 

Stock Options and Stock Appreciation Rights.  The Compensation Committee may grant participants incentive stock options within the meaning of Section 422 of the Code or nonqualified stock options that fail

to meet one or more requirements of an incentive stock option. The exercise price for each option must not be less than 100% of the market value of a share of Common Stock on the date of grant. Under the terms of the 2008 Equity Plan, the options become exercisable in five equal annual installments or at such other time(s) as may be specified by the Compensation Committee at the time of grant. Options may be exercised upon payment of the exercise price to ProAssurance. The exercise price is payable in cash or by delivery of shares of Common Stock having a market value equal to the option price. A participant may effect a “cashless exercise” by directing ProAssurance to withhold shares otherwise issuable upon the exercise of the option with a market value equal to the option price.

 

A Stock Appreciation Right, or SAR, is a contractual right to receive the appreciation in the value of a share of Common Stock from date of grant to the date of exercise payable in cash, Common Stock or a combination. The Compensation Committee may grant SARs in tandem with options granted under the 2008 Equity Plan or independent of any option. The base price for SARs must not be less than 100% of the market value of a share of Common Stock on date of grant in the case of SARs granted independent of options or the option price of related options in the case of SARs granted in tandem with options. SARs granted in tandem with options may be exercised only at such times as the related options are exercisable and the exercise of a SAR (or option) will result in the cancellation of any option (or SAR) issued in tandem to the extent of the number of shares in respect of which such option or SAR has been exercised. Under the 2008 Equity Plan, SARs that are independent of options may be exercised at such time as may be determined by the Compensation Committee, or if no determination is made, they will become exercisable in five equal annual installments.

 

Restricted Stock Grants and Restricted Units.  The Compensation Committee may award shares of Common Stock under a restricted stock grant. The grant will set forth a restriction period (without limitation, a specified period of time or a period related to the attainment of performance goals) during which the shares of restricted stock granted will remain subject to forfeiture. The grantee cannot dispose of the shares prior to the expiration of the restriction period. During this period, the grantee will generally have all the rights of a stockholder, including the right to vote the shares and receive dividends. During the restriction period, each certificate will be held in the custody of ProAssurance and bear a legend giving notice of the restrictions in the grant.

 

The Compensation Committee may grant awards of restricted units, which grant will set forth the terms of a restriction period in the same manner as those applicable to the grant of restricted stock. No shares of Common Stock will actually be issued to a participant at the time a restricted unit award is made. Instead, ProAssurance will establish a separate account for the participant and will record in such account the number of restricted units awarded to the participant. The Compensation Committee will determine whether outstanding restricted units will be credited with amounts equal to any dividends paid by ProAssurance with respect to the corresponding number of shares of Common Stock (“dividend equivalents”), and whether the dividend equivalents or restricted units will be paid to participants currently or will be credited to the accounts of participants as additional restricted units. The holder of a restricted unit will be entitled to receive, upon termination of the restricted period, one share of Common Stock for each restricted unit with respect to which restrictions have lapsed (or, at the discretion of the Committee, cash in lieu thereof) plus the additional units resulting from the crediting of dividend equivalents. Unless otherwise determined by the Committee, the restrictions on restricted stock and restricted units will lapse in five equal annual installments.

 

Other Stock-Based Awards.  The Compensation Committee is authorized to grant other awards under the 2008 Equity Plan that are denominated or payable in shares of Common Stock. The Committee may determine the terms of such awards so long as they are consistent with the purposes and are subject to the terms of the 2008 Equity Plan.

 

Termination of Employment by Reason of Death or Disability.  If a participant’s employment is terminated by reason of death or disability and the termination occurs prior to the close of any performance period for outstanding awards of performance shares held by the participant, the performance shares will be deemed to have been earned at the target level and the participant will be paid for the performance shares deemed to have been earned, except any performance shares awarded in the year of termination will automatically be cancelled. Each outstanding option and SAR held by a participant at the time of his or her termination for death or disability will be fully exercisable for a period of 180 days after termination, and each restricted share or restricted unit then held by a participant will become free of all restrictions.

Termination of Employment by a Participant upon Retirement or for Good Reason.  If a participant terminates employment by reason of his or her normal retirement or termination for good reason and such termination occurs prior to the close of any performance period for outstanding awards of performance shares held by the participant, the Compensation Committee will determine the number of performance shares that would have been earned if the performance periods had ended at the end of the last complete year prior to the participant’s termination, except that any performance shares awarded in the year of termination will be automatically cancelled. The participant will be entitled to payment of a pro rata portion of the performance shares deemed to be earned based on the ratio that the number of months that the participant was actually employed in the performance period bears to the total number of months in the performance period. Unless the Compensation Committee otherwise determines, each stock option and SAR held by a participant at the time of his or her termination upon normal retirement or for good reason will be fully exercisable for 180 days after termination, and restricted stock and restricted units held at the time of such termination will be free of all restrictions.

 

A participant will be deemed to have terminated for “good reason” if the terms of his or her employment or severance agreement or the award notice provides for constructive termination under certain circumstances; conversely, if good reason or constructive termination is not defined in such an agreement, then a participant has no ability to terminate for good reason under the 2008 Equity Plan. “Normal retirement” is defined as retirement after the participant reaches sixty years of age or if later, the earliest age at which the participant may retire under any qualified retirement plan maintained by the Companies. The Compensation Committee may consent to an earlier retirement in which event the participant will be treated under the 2008 Equity Plan as if he or she terminated upon normal retirement.

 

Change of Control.  Upon a change of control of ProAssurance (as defined in the 2008 Equity Plan), outstanding performance shares will be deemed to be earned at the target level and paid to participants; all options and SARs will become fully exercisable, and all time based vesting restrictions on restricted stock and restricted units will lapse. In addition, the Compensation Committee may, in its discretion, provide that upon acceleration of vesting upon the change of control, any of the following may occur:

 

 

If the Compensation Committee elects to have outstanding awards assumed or equitably converted or substituted after a change of control, all of the stock options and SARs will become fully exercisable, and all time based vesting restrictions on the awards will lapse, after giving effect to the assumption, conversion or substitution.

 

Amendment and Termination.  Our Board of Directors may terminate or suspend the 2008 Equity Plan at any time, but such termination or suspension will not affect any awards then outstanding under the 2008 Equity Plan. Unless terminated earlier by action of the Board, the 2008 Equity Plan will continue in effect until May 21, 2018, but awards granted prior to such date will continue in effect until they expire in accordance with their terms. The Board of Directors may also amend the 2008 Equity Plan as it deems advisable. Our stockholders must approve any amendment that would result in a material change to the terms of the 2008 Equity Plan that requires stockholder approval under the corporate governance listing standards of the New York Stock Exchange, or under Code Section 162(m), or under SEC Rule 16b-3. The Compensation Committee may amend the terms of any outstanding award, retroactively or prospectively, but no such amendment will adversely affect any such award without the participant’s consent, and no amendment may increase compensation payable with respect to a performance share or reduce the exercise price of an outstanding option or the base price of an outstanding SAR (except as permitted for stock splits, stock dividends and other relevant changes affecting the Common Stock).

Federal Income Tax Consequences

 

The following is a brief summary of the significant aspects of federal income tax treatment of awards that may be granted under the 2008 Equity Plan based upon the federal income tax laws in effect on the date hereof. This summary is not intended to be exhaustive and does not describe state or local tax consequences.

 

Performance Shares.  A participant will not realize taxable income upon the grant of a performance share award. When the performance shares are earned and paid, the participant will realize ordinary income equal to the fair market value of the shares of Common Stock delivered (or the amount of cash paid in lieu of such shares). We will be entitled to a tax deduction at the same time and in the same amount.

 

Incentive Stock Options.  A participant will not realize taxable income upon the grant or exercise of an Incentive Stock Option. If a participant does not sell the stock received upon the exercise of an Incentive Stock Option for at least two years from the date of grant and within one year from the date of exercise, any gain (loss) realized from the sale of the shares will be long-term capital gain (loss). In such circumstances, we will not be allowed a deduction for federal income tax purposes.

 

If shares purchased on exercise of an Incentive Stock Option are disposed of before the expiration of the holding periods described above, the participant generally will realize ordinary income at that time equal to the excess, if any, of the fair market value of the shares at exercise (or, if less, the amount realized on the disposition of the shares) over the price paid for such shares. We will be entitled to a tax deduction at the same time and in the same amount. The shares so disposed of will have a tax basis equal to their fair market value on date of exercise and the participant will have short-term or long-term capital gain or loss to the extent the amount realized on the disposition exceeds the basis in the shares. Subject to certain exceptions for disability or death, if an Incentive Stock Option is exercised more than three months following the termination of the participant’s employment, the option will generally be taxed as a nonqualified stock option.

 

Nonqualified Stock Options.  A participant will not realize taxable income upon the grant of a nonqualified stock option under the 2008 Equity Plan because the plan requires that the option price must be at least 100% of the fair market value of a share on date of grant. When a nonqualified stock option is exercised, the participant generally will realize ordinary income in an amount equal to the difference between the fair market value of the shares on the date of exercise and the price paid for the shares. We will be entitled to a tax deduction at the same time and in the same amount. Any further gain or loss realized by the participant after the date of exercise will be either short-term or long-term capital gain or loss, depending upon the length of time that the participant has held the shares.

 

Stock Appreciation Rights.  A participant will not realize taxable income upon the grant of a SAR under the 2008 Equity Plan because the plan requires that the base price must be at least 100% of the fair market value of a share on date of grant. When a SAR is exercised, the participant will generally realize ordinary income in an amount equal to the amount of cash and the fair market value of any shares received. We will be entitled to a tax deduction at the same time and in the same amount. If the participant receives Common Stock upon exercise of a SAR, the post-exercise gain or loss will be treated as discussed above under Nonqualified Stock Options.

 

Restricted Stock.  A participant who receives restricted stock generally will realize ordinary income in the amount of the fair market value of the restricted stock at the time the stock is no longer subject to forfeiture, less any consideration paid for the stock. We will be entitled to a tax deduction at the same time and in the same amount. The holding period to determine whether the participant has long-term or short-term capital gain or loss on a subsequent sale will generally begin when the restriction period expires, and the participant’s tax basis for such shares will generally equal the fair market value of such shares on such date.

 

However, a participant may elect, under Section 83(b) of the Code, within 30 days of the grant of the stock, to realize ordinary income on the date of grant equal to the excess of the fair market value of the shares of restricted stock (determined without regard to the restrictions) over the purchase price of the restricted stock. By reason of such an election, the participant’s holding period will commence on the date of grant and the participant’s tax basis will equal the fair market value of the shares on that date (determined without regard to restrictions). Likewise, we will be entitled to a tax deduction at the date of grant in an amount equal to the ordinary income realized by the participant. If shares are forfeited after making such an election, the participant will be entitled to a deduction, refund, or loss for tax purposes only in an amount equal to the purchase price of the forfeited shares.

Restricted Units.  A participant will not realize taxable income when restricted units or dividend equivalents are credited to the participant’s account. The participant will realize ordinary income equal to the fair market value of the shares of Common Stock delivered (or the amount of cash paid in lieu of such shares) when the shares and/or cash are delivered or paid in accordance with the plan. We will be entitled to a tax deduction at the same time and in the same amount.

 

Code Section 162(m) Limitation.  Code Section 162(m) exempts “performance based compensation” from the limitation on the deduction for executive compensation in excess of $1,000,000. We have designed the 2008 Equity Plan to qualify the stock options and SARs as performance based compensation under Code Section 162(m) and to allow the Compensation Committee to issue performance shares in such manner as will qualify them as Code Section 162(m) performance based compensation. Restricted Stock, Restricted Units and Other Stock Based Awards granted under the 2008 Equity Plan will not be considered performance based compensation under Code Section 162(m).

 

Recommendation of the Board; Vote Required

 

The affirmative vote of the holders of a majority of the shares present or represented by proxy at the Annual Meeting is required to approve the 2008 Equity Plan. If you do not give instructions on this proposal to your proxy, your shares will be voted FOR the approval of the 2008 Equity Incentive Plan. In accordance with the requirements of the New York Stock Exchange, brokers may not vote on the 2008 Equity Plan without specific instructions from the beneficial owners of the shares. Broker non-votes and abstentions will be included in the calculation of the number of shares present at the Annual Meeting and will have the same effect as a negative vote.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE APPROVAL OF THE 2008 EQUITY INCENTIVE PLAN.

 

Securities Authorized under Equity Compensation Plans

 

The following table sets forth information as of December 31, 2007, with respect to equity securities authorized for issuance pursuant to equity compensation plans previously approved by stockholders of ProAssurance and equity compensation plans not previously approved by ProAssurance’s stockholders.

 

 

The above table does not reflect 3,000,000 shares of ProAssurance’s Common Stock that are proposed to be reserved for issuance under the 2008 Equity Plan. The terms and provisions of the 2008 Equity Plan are similar to those of the 2004 Plan. If the 2008 Equity Plan is adopted by the stockholders, the 2008 Equity Plan will replace the 2004 Plan for awards granted after December 31, 2008. In such event, the Compensation Committee will grant future awards under the 2008 Equity Plan and no further awards will be made from the shares reserved for future issuance under the 2004 Plan. As of March 31, 2008, the number of shares available for future issuance of awards under the 2004 Plan was 1,165,314 shares.

 

The Compensation Committee cannot determine the amount and nature of awards that will be granted under the 2008 Equity Plan. The following table reflects certain information respecting certain stock awards, stock options

and performance shares that were granted to the following persons under the 2004 Plan for the year ended December 31, 2007.

 

 

 

 

PROPOSAL 5 — RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

 

The Audit Committee has selected Ernst & Young LLP as our auditors for the current fiscal year ending December 31, 2008. Although ratification of the stockholders is not required for selection of independent auditors under Delaware law or our Bylaws, the Board of Directors believes it is appropriate to seek stockholder ratification of the selection of Ernst & Young LLP as independent auditor.

 

Ernst & Young LLP served as the independent auditor of ProAssurance for the year ended December 31, 2007. Representatives of Ernst & Young will be present at the 2008 Annual Meeting and will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Fees for 2006 and 2007

 

The table below sets forth the aggregate fees paid by ProAssurance for audit, audit-related, tax and other services provided by Ernst & Young LLP to ProAssurance during each of the last two years.

 

 

The other fees in 2007 related to non-audit online services provided by Ernst & Young LLP for research on accounting matters. Substantially all of the other fees in 2006 related to non-audit services provided in connection with the development of a predictive model for use by our insurance subsidiaries in underwriting their medical professional liability risks through an analysis of internal and external data. The Audit Committee does not believe that these services are prohibited non-audit services. The Audit Committee further believes that provision of these services does not impair the independence of the auditor.

 

All fees paid to Ernst &Young, LLP in 2007 which required the pre-approval of the Audit Committee were approved in accordance with our pre-approval policies and procedures described below.

 

Pre-Approval Policies and Procedures

 

Under the Sarbanes-Oxley Act of 2002, the audit committee of the board of directors is responsible for the appointment, compensation and oversight of the work of the independent auditor. As part of this responsibility, the audit committee is required to pre-approve the audit and non-audit services performed by the independent auditor in order to assure that they do not impair the auditor’s independence. To implement these provisions of the Sarbanes-Oxley Act of 2002, the SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client and governing the audit committee’s administration of the engagement of the independent auditor. Our Audit Committee has adopted an Audit and Non-Audit Services Pre-Approval Policy, which sets forth the procedures and the conditions pursuant to which services proposed to be performed by our independent auditor may be pre-approved.

 

For pre-approval of non-audit services, our Audit Committee will consider whether services are consistent with the SEC’s rules on auditor independence. Our Audit Committee will also consider whether the independent auditor is able to provide effective and efficient service, for reasons such as its familiarity with our business, people, culture, accounting systems, risk profile and other factors, and whether the services will enhance our ability to manage or control risk or improve audit quality. Our Audit Committee is also mindful of the relationship between fees for audit and non-audit services in deciding whether to pre-approve any such services. All such factors will be considered as a whole, and no one factor should necessarily be determinative.

 

Our Audit Committee determines from time to time the eligible services that may be provided to ProAssurance by our independent auditors in accordance with the requirements and guidance of the SEC and the NYSE, or other exchanges or market systems in which our stock is traded. The Audit Committee also determines whether such services fit in the categories of Audit Services, Audit Related Services, Tax Services and other Permitted Non-Audit Services as described below and as the description of such services may be modified under subsequent guidance and interpretation of the regulatory and self-regulatory organizations applicable to ProAssurance, including without limitation, the SEC and the NYSE. The independent auditor may not provide any non-audit services that are prohibited under the provisions of Section 10A of the Exchange Act and the rules and regulations promulgated thereunder.

 

Audit Services.  Audit services in the annual audit engagement include the annual financial statement audit (including required quarterly reviews), subsidiary audits, equity investment audits and other procedures required to be performed by the independent auditor in order for the independent auditor to form an opinion on our consolidated financial statements. These other procedures include information systems and procedural reviews and testing

performed in order to understand and place reliance on the systems of internal control and consultations relating to the annual audit or quarterly review. Audit services also include the engagement for the independent auditor’s report on the effectiveness of internal controls for financial reporting. In addition to the audit services included in the annual audit engagement, the Audit Committee may approve other audit services. Other audit services are those services that only the independent auditor can reasonably provide and include statutory audits or financial audits for our subsidiaries or affiliates and services associated with SEC registration statements, periodic reports and other documents we file with the SEC or other documents issued in connection with a securities offering.

 

Audit-Related Services.  Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that are traditionally performed by the independent auditor. Because our Audit Committee believes that the provision of audit-related services does not impair the independence of the auditor and is consistent with SEC rules on auditor independence, the Audit Committee may grant pre-approval to audit-related services. Audit-related services include, among others: due diligence services pertaining to potential business acquisitions/dispositions; accounting consultations relating to accounting, financial reporting or disclosure matters not classified as “audit services;” assistance with understanding and implementing new accounting and financial reporting guidance from rule-making authorities; financial audits of employee benefit plans; agreed upon or expanded audit procedures related to accounting and/or billing records required to respond or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements.

 

Tax Services.  Our Audit Committee believes that the independent auditor can provide tax services to ProAssurance such as tax compliance, tax planning and tax advice without impairing the auditor’s independence, and the SEC has stated that the independent auditor may provide such services. Hence, our Audit Committee believes it may grant pre-approval to those tax services that:

 

 

The Audit Committee will not permit the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the sole business purpose of which may be tax avoidance and the tax treatment of which may not be supported in the Code and related regulations. The Audit Committee will consult with the chief accounting officer or outside counsel to determine that tax planning and reporting positions are consistent with this policy.

 

Other Non-Audit Services.  Our Audit Committee believes, based on the SEC’s rules prohibiting the independent auditor from providing specific non-audit services, that certain types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant pre-approval for those permissible non-audit services that it believes are routine and recurring services, would not impair the independence of the auditor, and are consistent with the SEC’s rules on auditor independence. Our Audit Committee may not pre-approve any of SEC’s prohibited non-audit services.

 

Annual Audit Engagement.  Our Audit Committee appoints the independent auditor of ProAssurance and pre-approves the services to be provided in connection with the preparation or issuance of the annual audit report or related work. The annual audit services are set forth in an engagement letter prepared by the independent auditor which is submitted to the Audit Committee for approval. The engagement letter provides that the independent auditor reports directly to the Audit Committee. Any audit services within the scope of the engagement letter are deemed to have been pre-approved by our Audit Committee.

 

Pre-Approval of Other Audit and Non-Audit Services.  Other audit services, audit-related services, tax services, and other non-audit services may be pre-approved by our Audit Committee in accordance with the following procedure either on a specific case-by-case basis as services are needed or on a pre-approval basis for services that are expected to be needed. Our Audit Committee may delegate to one or more designated members of the Audit Committee, who are independent directors of the Board of Directors, the authority to grant pre-approval of these services to be performed by the independent auditors. The member to whom such authority is delegated

must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

Our management may submit requests for pre-approval of eligible services by the independent auditor from time to time to our Audit Committee or to the member or members of the committee to whom pre-approval authority has been delegated. The request for approval must be sufficiently detailed as to the particular services to be provided so that the Audit Committee knows precisely what services it is being asked to pre-approve and so that it can make a well reasoned assessment of the impact of the service on the auditor’s independence. Budgeted amounts or fee levels for services to be provided by the independent auditor must be submitted with the request for pre-approval. Requests for pre-approval of services by the independent auditor must include a joint statement of the independent auditor and our chief accounting officer as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.

 

Our Audit Committee will be informed not less frequently than quarterly of the services rendered by the independent auditor. Our chief accounting officer will be responsible for tracking all independent auditors’ fees against the budget for such services and report at least quarterly to the Audit Committee.

 

The Audit Committee has designated our internal auditor to monitor the performance of all services provided by ProAssurance’s independent auditor and to determine whether such services are in compliance with this policy. Our internal auditor will report to the Audit Committee on a periodic basis on the results of its monitoring. Both our internal auditor and management will immediately report to the chairman of the Audit Committee any breach of this policy that comes to the attention of the internal auditor or any member of management. The Audit Committee will also review our internal auditor’s annual internal audit plan to determine that the plan provides for monitoring of the independent auditor’s services.

 

Vote Required

 

The ratification of Ernst & Young LLP as ProAssurance’s independent auditor for 2008 will require the affirmative vote of a majority of the shares voting on the matter at the 2008 Annual Meeting without regard to broker non-votes or abstentions. If you vote your shares without instructions to your proxy on this proposal, your shares will be voted FOR the ratification of the selection of Ernst & Young LLP. In the event that the selection of Ernst & Young LLP as independent auditor for 2008 is not approved by the affirmative vote of a majority of the shares voting on the matter, the Board of Directors will request the Audit Committee to reconsider its selection of independent auditors for the year ending December 31, 2008.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF ERNST & YOUNG LLP AS INDEPENDENT AUDITOR OF PROASSURANCE FOR 2008.

 

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee is comprised of three independent directors and operates pursuant to a written charter. The charter was amended in 2007 to provide a more complete checklist of the duties and responsibilities of the Audit Committee based on the actual practice of the committee and the guidance provided by the commentary to the SEC and NYSE requirements. The amended charter is available in the Corporate Governance section of our website at www.ProAssurance.com. During 2007, the Audit Committee held nine meetings. In conjunction with some of these meetings, the Audit Committee met in executive sessions and met in private sessions with our independent auditors, our internal auditors, our CEO, our CFO, and our outside corporate counsel.

 

Our management is responsible for the preparation, presentation and integrity of ProAssurance’s financial statements, accounting and financial reporting principles and the establishment and effectiveness of internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. The independent auditors are responsible for performing an independent audit of ProAssurance’s financial statements in accordance with generally accepted auditing standards and expressing an opinion as to their conformity with generally accepted accounting principles. The independent auditors are also required to review the adequacy and effectiveness of ProAssurance’s internal controls on financial reporting, including any significant deficiencies in internal controls on financial reporting and significant changes in such controls that are reported to

the Audit Committee by the independent auditor or ProAssurance’s management. The Audit Committee is directly responsible in its capacity as a committee of the board for the appointment, compensation and oversight of the work of the independent auditor. The independent auditor reports directly to the Audit Committee.

 

In performing its oversight role, the Audit Committee has considered and discussed the audited financial statements with management and with Ernst & Young LLP, our independent auditors. The Audit Committee also has discussed with the independent auditors the matters required to be discussed by Statement on Accounting Standards (“SAS”) No. 61, Communications with Audit Committees, as currently in effect. SAS No. 61 requires the independent auditors to provide ProAssurance with additional information regarding the scope and results of their audit of ProAssurance’s financial statements, including information with respect to the following, if applicable:

 

 

The Audit Committee has received from Ernst & Young LLP a letter providing the disclosures required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, with respect to any relationships between Ernst & Young LLP and ProAssurance that in their professional judgment may reasonably be thought to bear on independence. Ernst & Young LLP has discussed its independence with us, and has confirmed in such letter that, in its professional judgment, it is independent of ProAssurance within the meaning of federal securities laws.

 

In addition to the disclosures and discussions mandated by SAS No. 61 and ISB Standards No. 1, the Audit Committee discussed with Ernst & Young LLP risks of fraud and illegal acts as required by SAS No. 99 and other matters required to be communicated to the Committee by our independent auditor under the requirements of the PCAOB, SEC and NYSE, including without limitation, information with respect to the following, if applicable:

 

 

All non-audit services performed by the independent auditors must be specifically pre-approved by the Audit Committee or a member thereof. The Audit Committee approved the non-audit services rendered by our

independent auditors during ProAssurance’s most recent fiscal year as required by Section 10A(i) of the Exchange Act and Rule 2.01(c)(7) of Regulation S-X and considered whether the approved non-audit services are compatible with maintaining the independence of such auditors.

 

Members of the Audit Committee rely without independent verification on the information provided to them and on the representations made by management and the independent auditors. Accordingly, the Audit Committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations.

 

Based on the reports and discussions described in this report, and subject to the limitations on the role and responsibilities of the Audit Committee referred to above and in the charter, the Audit Committee recommended to the Board of Directors that the audited financial statements of ProAssurance for 2007 be included in its Annual Report on Form 10-K for the year ended December 31, 2007, prior to the filing of such report with the SEC.

 

Audit Committee:

John P. North, Jr., Chairman

Lucian F. Bloodworth

Ann F. Putallaz

April 4, 2008

 

OTHER MATTERS THAT MAY COME BEFORE THE ANNUAL MEETING

 

We have no present knowledge of any other matters to be presented at the annual meeting. If any other matters should properly come before the annual meeting, or any adjournment or postponement thereof, it is the intention of the persons named in the accompanying Proxy to vote such Proxy in accordance with their best judgment.

 

BENEFICIAL OWNERSHIP OF OUR COMMON STOCK

 

Owners of More than 5% of Our Common Stock

 

 

 

 

 

Ownership by Our Directors and Executive Officers

 

Our Board of Directors has adopted stock ownership targets for our directors and executive officers to further align their interests with our stockholders. The target for non-management directors is a level of stock ownership that is five times their annual cash compensation as directors. The level of stock ownership for executive officers varies by position and their stock ownership targets are as follows: five times base salary for our chief executive officer; three times base salary for our president; and two times base salary for other executive officers of ProAssurance. Directors and executive officers are encouraged to achieve these levels within the first five years of service.

The following table sets forth, as of March 28, 2008, information regarding the ownership of Common Stock by:

 

 

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Overview

 

We seek to offer competitive compensation that is designed to attract and retain qualified and motivated individuals and reward them based on performance. Our executive compensation includes three elements: base salary, annual incentive awards and long-term incentive awards. With the assistance of an outside consultant we compare our executive compensation to that of a group of peer companies to evaluate the appropriate types and levels of compensation for our executives as well as the appropriate percentage that each element of executive compensation should bear to total compensation of the executives. For purposes of this discussion, the term “executive” refers to our Chief Executive Officer and each of the other executive officers named in the Summary Compensation Table on page 36 of this proxy statement.

 

We emphasize incentive compensation that rewards executives for performance and places the majority of their potential compensation at risk. The amount of an executive’s incentive compensation (annual incentive and long-term compensation) at risk relative to their base salary is intended to be significant and in each case is intended to be at least 60% of total potential compensation for the executive. This reflects our objective to reward performance and to link those rewards to our strategic business objectives.

 

 

Compensation Review Process

 

For 2006, 2007 and 2008, our Compensation Committee retained Total Compensation Solutions (“TCS”) to assist the Committee in the evaluation of our executive compensation. With assistance of our senior management, TCS identified a list of peer companies comprised of medical malpractice insurance companies, other property and casualty specialty insurance companies of similar size and structure, and insurance companies located in the area of our home office. TCS reviewed the list of companies for appropriateness and compiled compensation data of the peer companies with respect to base salaries, annual incentive compensation, and long term incentive compensation. TCS evaluated each element of ProAssurance’s executive compensation in comparison to the compensation information compiled from the peer companies.

 

At the request of the Compensation Committee, TCS has performed, and may perform, other analyses with respect to our executive compensation. In addition to the annual executive compensation evaluation performed in 2004 through 2008, TCS performed evaluations of Board of Director compensation in 2005 and 2007. TCS has also provided the committee with special reports including an evaluation of the competitiveness of our incentive compensation in comparison to the peer companies in 2005 and a report on long term incentive compensation design and practices in 2006.

Our senior management has provided the Compensation Committee information for use in developing its recommendations on executive compensation in the following respects:

 

 

Our senior management made no recommendations with respect to compensation of the CEO. The Compensation Committee is exclusively responsible for making compensation recommendations as to changes in base salary for the CEO and the opportunity for payment of non-equity incentive compensation and the number of stock options and performance shares to be granted to the CEO as long term incentive compensation. All recommendations of the Compensation Committee with respect to the CEO compensation, which are subject to ratification by the independent directors under the committee’s charter, were unanimously approved by the independent directors on our Board of Directors in 2006, 2007 and 2008.

 

Our CEO, with the assistance of the President, recommends to our Compensation Committee the appropriate changes in compensation for executive officers (other than the CEO) within the compensation framework established by the Compensation Committee. The CEO and President have access to TCS’s reports when making these recommendations. The Compensation Committee reviews these recommendations at a committee meeting generally held in February after the financial results of the prior year are reasonably certain. The Compensation Committee receives the recommendations of the CEO together with supporting material, and reviews this information along with the report of TCS. After analysis of the information, the Compensation Committee makes its decisions which are transmitted to the full board through the minutes of the Compensation Committee. In 2006, 2007 and 2008, the Compensation Committee accepted the recommendations of the CEO.

 

C.E.O. and Management Transition

 

Effective July 1, 2007, A. Derrill Crowe, M.D. retired as Chief Executive Officer and assumed the role of non-executive Chairman of the Board of Directors. For the remainder of 2007, Dr. Crowe continued to receive base salary at his then in-force rate and had total base salary during 2007 of $713,200. Dr. Crowe agreed to reduce his annual incentive award to one-half of the amount that would otherwise have been paid to him under the 2007 annual incentive award guidelines. As a result, Dr. Crowe received an annual incentive award for 2007 of $407,371. For 2008, Dr. Crowe will receive a base salary of $500,000 but will not be eligible for 2008 annual incentive compensation nor receive a 2008 long-term incentive compensation grant.

 

Dr. Crowe was succeeded as CEO by W. Stancil Starnes. Mr. Starnes received base salary during 2007 of $501,923. This amount reflects his employment with us beginning May 1, 2007 under an Employment Agreement that established his initial base salary at the rate of $750,000 per year. Also pursuant to the Employment Agreement, Mr. Starnes received a 2007 annual incentive award of $539,567 and a guaranty that his annual incentive award for 2008 will not be less than the amount equal to the base salary paid to him in 2008. Mr. Starnes was also granted 100,000 options effective upon his assuming the position of CEO on July 2, 2007. In establishing the economic terms of the Employment Agreement, the Compensation Committee and Board of Directors considered several factors including: the compensation being paid to Dr. Crowe as CEO which had been reviewed and benchmarked in February 2007 as a part of the 2007 executive compensation review; the compensation level of Mr. Starnes at the employment that he resigned to accept the CEO position at ProAssurance; the responsibilities and duties of the CEO of ProAssurance; and the overall executive compensation structure at ProAssurance.

For 2008, Paul R. Butrus, Senior Advisor, will receive a base salary of $300,000 but will not be eligible for 2008 annual incentive compensation nor receive a 2008 long-term incentive compensation grant.

 

Base Salary

 

Base salary for our executives is established and adjusted according to the following criteria: areas of responsibility, experience, annual rate of inflation and individual performance. In 2007, the base salary paid to our executives, other than the CEO, ranged from 21% to 28% of total direct compensation (the sum of base salary paid, annual incentive awards paid, and the value of long term incentive compensation grants for financial reporting purposes ). For 2008, the Compensation Committee increased Mr. Starnes’ base compensation by 4% to $780,000 and increased the base compensation of the other executives, except Dr. Crowe and Mr. Butrus, by 4% or less. The increases in base salary for 2008 are consistent with past practice in terms of the ratio of base salary to total direct compensation.

 

Annual Incentive Compensation

 

Our annual incentive compensation program for executives proceeds from and assumes a base salary that is competitive in the market. Annual incentive compensation is intended to maximize the efficiency and effectiveness of our operations by providing significant “at risk” compensation opportunities for our executives and other selected key employees.

 

In 2006, 2007 and 2008, the Compensation Committee established guidelines for annual incentive compensation for executives and other key employees. In awarding incentive compensation, the committee has the discretion to deviate from the guidelines if it determines that external or internal circumstances require such deviation. The committee uses the guidelines to determine the annual incentive award for our CEO. Our CEO recommends annual incentive awards for the other executives pursuant to the guidelines and subject to the review and modification by the committee.

 

Annual incentive award targets are established during the first quarter for the current year and are expressed as a percentage of base salary. If target guidelines are achieved, the CEO was and is eligible to receive an incentive award of 100% of his base salary and other named executive officers were and are entitled to receive incentive awards ranging from 40% to 70% of their base salaries. Annual incentive awards are subject to increase or decrease to the extent actual performance is greater or less than the target guidelines and within the respective minimum and maximum guidelines established by the Compensation Committee. For 2008, Mr. Starnes is guaranteed to receive a minimum of 100% of his base salary pursuant to his Employment Agreement, and Messrs Crowe and Butrus are not entitled to receive annual incentive compensation after 2007.

 

Annual incentive awards for executives are primarily based on corporate performance using stock performance, operating income, and the combined ratio performance as measures. For executives other than the CEO and President (Senior Advisor in 2007), individual performance is also considered. The committee assigns a goal and a relative weight for each of the performance criteria in order to determine whether and to what extent the executive receives an award.

 

For 2008, the Compensation Committee approved certain changes to the weighting of the performance criteria in the annual incentive award guidelines. The 2008 performance criteria have been modified to place more emphasis on operating income for all executives and to place more emphasis on objective goals and less emphasis on the subjective individual evaluation of those executives whose evaluation includes individual performance. A summary of the performance guidelines 2007 and 2008 follows:

 

 

 

 

 

We target a long term average return on equity (ROE) of 12% to 14% and focus on combined ratio and investment return, both of which directly affect our ROE:

 

 

For 2007 and 2008, the targets for operating income and combined ratio have been set at a level that is expected to result in achievement of ROE in accordance with our current strategic goals for corporate growth. The shift in emphasis to operating income in 2008 reflects the increasing importance of investment performance in achieving our targeted ROE as we enter into a soft market for our insurance products. The stock performance element, while not directly related to ROE, provides a basis for a comparison of our performance with peer companies.

 

We believe the subjective individual performance criteria is an appropriate measurement of incentive compensation for executives (other than the CEO and President) because it allows a significant percentage of the recommended annual incentive compensation to be based on a general assessment of the executive’s quality of performance, leadership effectiveness, and contribution to the success of the enterprise regardless of corporate performance. The incentive compensation for the CEO and President are based exclusively on corporate performance because the Compensation Committee believes that corporate performance is the most appropriate measurement for these positions.

 

For 2007 the annual incentive compensation paid to Dr Crowe was an amount equal to 114% of his base salary and was prorated to reflect the time he served as CEO. Annual incentive compensation paid to our other executives ranged from 43% to 80% of their base salary in 2007. The target goals for each of the corporate performance criteria in 2007, as well as a comparison of the actual result for 2007, are set forth under the table titled “Grants of Plan-Based Awards” in this proxy statement. We believe our annual incentive compensation is appropriate; however, TCS has advised that on average our annual incentive awards for executives have historically been lower as a

percentage of base salary than the annual incentive awards paid to persons in comparable positions at the peer companies.

 

Our annual incentive compensation is not currently considered performance based compensation under Code Section 162(m) because our annual incentive award guidelines have not been approved by our stockholders and because the guidelines include subjective individual performance criteria. Under Code Section 162(m) no federal income tax deduction is allowed for annual compensation in excess of $1 million paid to the chief executive officer and other executives named in the “Summary Compensation Table” included in our proxy statement unless the excess compensation is considered performance based compensation. We have placed before the shareholders an Annual Incentive Compensation Plan designed to permit annual incentive awards made in the future to qualify as performance based compensation under Code Section 162(m). The new Annual Incentive Compensation Plan is described under the caption “Proposal 3 - Approval of ProAssurance Corporation 2008 Annual Incentive Compensation Plan” beginning on page 10 of this proxy statement.

 

Long Term Incentive Compensation

 

Our long term incentive compensation is intended to align the interests of our executives with the interests of our stockholders by rewarding them for long term corporate performance and increases in share value. Stock options granted under stockholder-approved equity incentive plans were the exclusive long term incentive compensation provided to our executives in years prior to 2006. Beginning in 2006, we have used a combination of options and performance shares available under the stockholder-approved 2004 Equity Incentive Plan.

 

We believe that the combination of options and performance shares satisfies our long-term objective of growth in stockholder value. The performance shares and options will reward executives if our stock increases in value during their respective terms. At the same time, the performance shares will reward executives if corporate value is enhanced through achievement of either the “Total Return” or the “Economic Value Added” performance measures, even if the market price of our stock fails to increase in the measurement period.

 

We believe an effective long term incentive compensation program is necessary to attract and retain well qualified and experienced executives and other key employees. In establishing the amount of our annual grants of long term incentive compensation, we consider past practice, recommendations of the compensation consultant and the value of the award (including the value attributable to the award for financial reporting purposes). We monitor the level of awards based on the findings of our compensation consultant and we believe that our long term incentive opportunities are appropriate when compared to awards made available to executives at our peer companies.

 

Our practice over the last five years has been to make long term incentive grants to our current executives and other key employees at the first meeting of the Compensation Committee in each fiscal year which is generally held in February after the financial results of the prior year are reasonably certain. Grants of options are priced on a date after our financial results for the prior year have been released. We believe that pricing the option grants at this time is most appropriate since the market is then in possession of our earnings and any other material information. We occasionally grant options at other meetings of the Board of Directors, for example, when we retain new senior level executives.

 

Performance shares are based on pre-established performance criteria that must be obtained over a period of three years. Each executive is granted a target and maximum award expressed as a number of shares of our Common Stock. Performance shares will be paid to executives if at the end of the three year measurement period either of the following performance criteria is achieved:

 

 

 

Performance shares will be paid to executives if the Compensation Committee finds that either of the performance measures is met in the measurement period. Performance shares for results falling between the stated goals are interpolated. If an executive terminates employment prior to the expiration of the performance period by reason of death, disability, or retirement or by reason of certain major changes in our operations, a pro rata portion of the performance shares may be paid if the committee finds that the performance criteria had been satisfied at the end of the year preceding termination of employment. Upon a change of control of ProAssurance, performance shares are payable to executives at the target level, or if greater, a pro rata portion of the performance shares may be paid if the committee finds that the performance criteria had been satisfied at the end of the year preceding change of control.

 

The options and performance shares authorized under the 2004 Equity Compensation Plan have been structured to qualify as performance based compensation under Code Section 162(m). We have placed before the shareholders a new equity based long term incentive compensation plan to replace the 2004 plan that has also been structured so that options and performance shares granted in the future will qualify as performance based compensation under Code Section 162(m). The new long term incentive compensation plan is described under the caption “Proposal 4 — Approval of ProAssurance Corporation 2008 Equity Incentive Plan” beginning on page 14 of this proxy statement.

 

Other Compensation

 

Executive perquisites are not intended to be a material element of compensation for executives. Our executives participate in our qualified retirement plan on terms generally available to our employees. In addition, we have adopted a non-qualified deferred compensation plan for executives and other highly compensated employees that provides for a matching contribution with respect to deferrals by employees whose base compensation exceeds the compensation limit established by the Code for qualified retirement plans. The matching contributions are comparable to the employer contributions to our qualified retirement plan within the compensation limits under the Code.

 

Post-Termination and Change of Control Compensation

 

We offer executives severance compensation in the event we terminate the executive without cause or the executive terminates his or her employment for good reason. The severance agreements are intended to aid in recruitment and retention of qualified executives.

 

We believe that severance protection, particularly in the context of a change of control transaction, plays a valuable role in attracting and retaining key executives. Our general approach has been to avoid employment agreements (for executive officers other than the CEO) and to rely on severance agreements to define the terms of severance when an executive is involuntarily terminated without cause or elects to terminate for good reason. In change of control situations, severance agreements provide key executives with a level of comfort that allows them to devote their energies to the completion of the transaction for the benefit of the stockholders. In other situations, severance agreements facilitate changes in management by providing for a clean departure of terminated executives with a pre-negotiated set of benefits that are acceptable to all parties.

 

We have provided for severance benefits in our employment agreements with our current and former CEO and in severance agreements with other key executives (including our other named executive officers) in the amounts reflected in the table on page 46 of this proxy statement. Severance compensation is payable only when we terminate an executive without cause or an executive resigns for good reason. Executives are required to sign a

general release of claims as a condition to the receipt of severance benefits, and the employment and severance agreements include the executive’s covenant not to compete with our insurance subsidiaries. Severance compensation is paid in monthly installments during the life of the covenant and is subject to forfeiture if an executive breaches the covenant.

 

In 2007, the Compensation Committee reviewed the terms of the severance agreements with executives. The terms of the agreements were modified generally to increase the amount of severance compensation if termination of employment occurs after a change of control and to expand the scope of the covenant not to compete. The severance agreements continue to provide for severance compensation in an amount equal to the executive’s base salary and average annual incentive compensation if we terminate the executive without cause or the executive resigns for good reason. However, an executive will be entitled to twice that amount if the executive is terminated for cause or resigns for good reason within two years after the occurrence of a change of control. The severance agreements retain the “double trigger” for the payment of the increased benefits, e.g. a change of control must occur and the executive must be terminated without cause or must terminate for good reason after the change of control.

 

We also added a provision that requires us to reimburse an executive for the excise tax that is payable by the executive if the severance benefits paid after a change of control are deemed to be “excess parachute payments” under Code Section 280G. Although the severance benefits payable after a change of control are substantially below the threshold of three times annual compensation, the calculation of severance benefits for purposes of Code Section 280G includes the value of benefits accelerated on a change of control under other compensation arrangements. Because the applicability of Code Section 280G will vary among the executives based on the amount of outstanding equity compensation grants and the rate of exercise of those benefits, the inclusion of the 280G reimbursement provision was considered appropriate to avoid the unintended reduction in severance benefits as a result of the acceleration of benefits on the occurrence of a change of control transaction.

 

We believe the level of our severance benefits for executives is appropriate and that the increase in the severance benefits after a change of control is reasonable. We are familiar with the level of severance benefits that were made available to executives of professional liability insurance companies that we have acquired, such as NCRIC Corporation and Physicians Insurance Company of Wisconsin, and are generally familiar with the levels of severance benefits offered to executives by other insurance companies in our industry. As part of the NCRIC transaction in 2005, the Insurance Commissioner of the District of Columbia required us to provide a survey demonstrating the reasonableness of NCRIC’s change of control and severance benefits as a condition to the approval of the transaction. The survey was performed by TCS, and it supported our belief that our severance benefits are reasonable with respect to industry standards.

 

Report of Our Compensation Committee

 

The Compensation Committee has reviewed and discussed the above Compensation Discussion and Analysis with our management, and based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

The Compensation Committee:

Wilfred W. Yeargan, Jr. Chairman

Luke F. Bloodworth,

William J. Listwan, M.D.,

John J. McMahon, Jr.

April 4, 2008

 

Compensation Committee Interlocks and Insider Participation

 

No executive officer of ProAssurance served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire board) of another entity, one of whose executive officers served on the compensation committee of ProAssurance. No executive officer of ProAssurance served as a director of another entity, one of whose executive officers served on the compensation committee of ProAssurance.

Compensation Of Executive Officers

 

The following table sets forth a summary of the compensation paid or accrued by ProAssurance and its subsidiaries during the last fiscal year with respect to ProAssurance’s principal executive officer, principal financial officer and the three other most highly compensated persons considered to be executive officers or their equivalent. The individuals required to be included in the table are referred to as the “Named Executive Officers.”

 

Summary Compensation Table

 

 

 

 

 

 

Perquisites include group health, life and disability insurance, individual life and disability policies, and personal use of the corporate aircraft. The perquisites include $71,013 for Dr. Crowe and $38,270 for Mr. Starnes for personal use of the corporate aircraft as the aggregate incremental cost for their personal use. The compensation attributable to personal use was computed by multiplying the number of hours the airplane was used for their personal benefit by the amount of the variable expenses incurred in the use of the airplane per flight hour. The variable expenses per flight hour was calculated by dividing the total flight hours during each year into the sum of the variable expenses incurred (e.g., fuel, airport charges, travel and lodging expense for the crew during such year) and the tax effect resulting from the nondeductibility of these expenses. In 2007, the cost of the loss of the tax deduction was spread over the personal use hours instead of all hours of usage, as was the case in 2006. This change resulted in an increase in the compensation attributable to Dr. Crowe’s usage of the aircraft from $84,252 in 2006 (as reflected in our 2007 proxy statement) to $148,958 in 2007 (as reflected in the above table).

 

GRANTS OF PLAN-BASED AWARDS

 

 

 

 

We currently award equity compensation to our Named Executive Officers under two different plans: the ProAssurance Corporation 2004 Equity Incentive Plan and the ProAssurance Corporation Amended and Restated Stock Ownership Plan. The 2004 Equity Incentive Plan, or the equity incentive plan, is designed to further our long-term growth profitability by offering proprietary interests in the company to those key officers, employees, consultants and directors who will be largely responsible for such growth, and to enhance the our ability to retain such persons through long-term incentive compensation in the form of proprietary interests in ProAssurance. We originally reserved 2,500,000 shares of Common Stock reserved for awards under the equity incentive plan. This number is subject to adjustment to reflect any increase or decrease in the number of Common Stock shares outstanding resulting from: stock split or stock dividend on the shares; a recapitalization or reclassification of the shares; or a merger or consolidation. No participant may receive awards for more than 250,000 shares of our Common Stock (or their equivalent) in any year under the equity incentive plan. The Compensation Committee has the authority to make the following types of equity-based awards under the equity incentive plan: (1) performance shares; (2) stock options; (3) stock appreciation rights; (4) restricted stock; (5) restricted units; and (6) other stock based awards.

 

Non-Equity Incentive Plan Awards.  The amounts in this column reflect the incentive compensation payable to the Named Executive Officers under the 2007 Annual Incentive Award Guidelines as recommended by the Compensation Committee and ratified by the Board of Directors at its meeting on March 7, 2007. Incentive awards are expressed as a percentage of base salary. The Named Executive Officers were eligible to receive the following percentages of their respective base salaries as their targeted incentive compensation for 2007: Dr. Crowe — 100%; Mr. Adamo — 70%; Mr. Butrus — 40%; Mr. Rand — 50%; and Mr. Friedman — 50%. Annual incentive awards are based on corporate performance and individual performance (other than Messrs. Crowe, Starnes, Adamo and Butrus) and each of the criteria are assigned a percentage share of the annual incentive compensation as described

under “Executive Compensation — Annual Incentive Compensation” beginning on page 31 of this proxy statement. A threshold and a goal are established for each performance criteria. The Compensation Committee uses these performance criteria as guidelines in determining the amount of annual incentive compensation to be paid to the Named Executive Officers. If the threshold is met but the goal is not achieved for any of the performance criteria, the Compensation Committee may reduce the incentive compensation below the targeted amount; conversely, if the goal for any of the performance criteria is exceeded, the Compensation Committee may increase the incentive compensation above the targeted amount, up to a maximum pre-established percentage of the applicable performance criteria. The target goals for each of the performance criteria in 2007 and the credit given for each of the corporate performance criteria are set forth below.

 

 

The annual incentive compensation paid to the Named Executive Officers in 2008 for 2007 is reflected in the Summary Compensation Table. The annual incentive compensation comprised the following percentages of base salary of the senior executive officers: Crowe — 114%; Rand — 54%; Adamo — 80%; Friedman - 54%; and Butrus — 43%. Annual incentive award payments are paid as follows: 50% in cash and 50% in shares of our common stock based on the market value of the shares on the date the Board of Directors approves the annual incentive awards. We use the shares of common stock reserved for issuance under our 2004 Equity Incentive Plan to fund the stock portion of our annual incentive payments.

 

Equity Incentive Plan Awards.  The Compensation Committee has granted performance shares to the Named Executive Officers and our senior executives. The performance shares are included in the table as Estimated Future Payments under “Equity Incentive Plan Awards.”

 

A performance share is the equivalent of one share of Common Stock which becomes vested and nonforfeitable upon the attainment of performance objectives established by the Compensation Committee. The Compensation Committee establishes the performance objectives and the length of the performance period to attain such objectives at the time a performance share is awarded. The Compensation Committee may prescribe different conditions for different participants, but the performance objectives for performance shares awarded to a participant must relate to at least one of the following criteria which may be based on the performance of ProAssurance or a subsidiary or a business segment (either alone or on a comparative basis relative to other companies): (1) income per share; (2) return on equity; (3) economic value added; (4) total return; (5) sales or revenues; or (6) other reasonable bases. The Compensation Committee determines whether the performance objectives for performance shares have been attained at the end of each participant’s performance period, or if one or more interim periods are authorized by the Compensation Committee, at the end of an interim period within the relevant performance period. If the Compensation Committee determines that such performance objectives have been obtained, the participant will be entitled to receive payment for each performance share in an amount equal to the value of one share of our Common Stock on the date of payment. In March 2007, the Board of Directors, on the recommendation of the Compensation Committee, granted performance shares to the Named Executive Officers. The performance criteria are described in the discussion under “Executive Compensation — Long Term Incentive Compensation” on page 33 of this proxy statement. The performance shares are payable if either of the following performance criteria are met in the three year period ending December 31, 2010.

 

All Other Stock Awards.  The ProAssurance Corporation Amended and Restated Stock Ownership Plan, or the stock ownership plan, is a stock purchase plan that allows all of our employees and directors who have completed six months or more of service to contribute funds through periodic payroll deductions, or through a single lump sum deposit, for the purchase of shares of our Common Stock in ordinary brokerage transactions in the open market. Under the terms of our stock ownership plan, we make matching contributions that match an amount equal to 100% of the first $2,000 contributed by a participating employee during a calendar year and 50% of the next

$8,000 contributed by a participating employee in such calendar year. Employees may receive a matching contribution if previously owned shares are contributed to the plan in lieu of cash. The proceeds from our matching contributions are used to purchase shares of our Common Stock in the open market. The shares purchased with our matching contributions are held for the account of each participant. Shares purchased with matching contributions are forfeited if the employment of the participant is terminated before the occurrence of any of the following:

 

 

The shares purchased with our contributions for Named Executive Officers in 2007 are reflected in the Summary Compensation Table under “Other Stock Awards: Number of Shares or Units.”

 

All Other Option Awards.  The Board of Directors has granted stock options to the Named Executive Officers and other key employees of ProAssurance and its subsidiaries under the 2004 Equity Incentive Plan. The exercise price for each option must not be less than 100% of the market value of a share of our Common Stock on the date of grant. Under the terms of the equity incentive plan the stock options become exercisable in five equal annual installments or at such other time(s) as may be specified by the Compensation Committee at the time of grant. On March 7, 2007, the Board of Directors, on the recommendation of the Compensation Committee, granted stock options to the Named Executive Officers at an option price or exercise price of $51.48 based on the closing market price of a share of Common Stock on the date of grant. These options vest and become exercisable at the rate of 20% per year commencing six months after the date of grant. Unvested options accelerate and become exercisable upon termination of employment by reason of death or retirement and upon a change of control. In connection with his employment, the Board of Directors also granted 100,000 options to W. Stancil Starnes at an option or exercise price of $56.15, being the closing market price of a share of Common Stock on July 2, 2007 (the first business day after his election as CEO). All of the options granted to Mr. Starnes became fully vested on January 2, 2008. Mr. Butrus was granted 32,059 options at an exercise price of $55.34 per share pursuant to reload rights in connection with his exercise of options on June 26, 2007. The options granted to the Named Executive Officers are reflected in the table as “All Other Option Awards: Number of Securities Underlying Options.”

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

 

 

 

OPTION EXERCISES AND STOCK VESTED
(During Last Completed Fiscal Year)

 

 

 

 

NON-QUALIFIED DEFERRED COMPENSATION