-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AO0W8lBmkJjHrMZdWqN4mKwgP5/JCxiq7cE1HsxYWCvpMYk9OjCLNmHOW7glDbg6 e2XwfaAbRidNm4DgDxDHQA== 0000950144-01-504406.txt : 20010713 0000950144-01-504406.hdr.sgml : 20010713 ACCESSION NUMBER: 0000950144-01-504406 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010727 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010712 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROASSURANCE CORP CENTRAL INDEX KEY: 0001127703 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 631261433 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-16533 FILM NUMBER: 1680004 BUSINESS ADDRESS: STREET 1: 100 BROOKWOOD PLACE CITY: BIRMINGHAM STATE: AL ZIP: 35209 BUSINESS PHONE: 2058774400 8-K 1 g70454e8-k.txt PROASSURANCE CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): June 27, 2001 PROASSURANCE CORPORATION (Exact name of registrant as specified in its charter) Delaware 001-16533 63-1261433 (State or other jurisdiction (Commission File No.) (IRS Employer of incorporation) Identification No.) 100 Brookwood Place, Birmingham, Alabama 35209 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (205) 877-4400 (Former name or former address, if changed since last report) 2 ITEM 5. ACQUISITION OR DISPOSITION OF ASSETS. On June 27, 2001, Medical Assurance, Inc. ("Medical Assurance") and Professionals Group, Inc. ("Professionals Group") completed their consolidation and became wholly owned subsidiaries of a newly formed holding company named ProAssurance Corporation ("ProAssurance"). The consolidation was consummated through the mergers of two wholly owned subsidiaries of ProAssurance with and into Medical Assurance and Professionals Group, with Medical Assurance and Professionals Group being the surviving corporations of the mergers. Upon consummation of the consolidation, each outstanding share of common stock, par value $1.00 per share, of Medical Assurance was converted into one share of common stock, par value $0.01 per share, of ProAssurance. Each outstanding share of common stock, no par value per share, of Professionals Group was converted into the right to receive, at the holder's election (i) .897 of a share of ProAssurance common stock plus $13.47 in cash, or (ii) $27.47 in cash. ProAssurance issued approximately 22.6 million shares of its common stock to former Medical Assurance shareholder and approximately 3.3 million shares of its common stock and approximately $193.9 million in cash to former Professionals Group shareholders. ProAssurance funded the cash requirements of the consolidation with the proceeds of a $110.0 million bank syndicate term loan arranged by SouthTrust Bank and Bank of America and with internal funds generated from dividends paid by Medical Assurance and Professionals Group at the time of closing. The shares of ProAssurance common stock issued in connection with the consolidation were registered under the Securities Act of 1933 pursuant to a Registration Statement on Form S-4 (File No. 333-49378). This Registration Statement was declared effective on April 30, 2001. The consolidation is described in greater detail in the Registration Statement. On June 28, 2001, ProAssurance common stock began trading on the New York Stock Exchange under the symbol "PRA" and the common stock of Medical Assurance and Professionals Group was delisted from the New York Stock Exchange and Nasdaq National Market, respectively. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements of Business Acquired. The audited consolidated balance sheets of Professionals Group as of December 31, 1999 and 2000 and the consolidated statements of income and cash flows of Professionals Group for the fiscal years ended December 31, 1998, 1999, and 2000 have been filed with the SEC as part of Professionals Group's Annual Report on Form 10-K, filed March 28, 2001, and are incorporated herein by reference. The audited consolidated balance sheets of Medical Assurance as of December 31, 1999 and 2000 and the consolidated statements of income and cash flows of Medical Assurance for the fiscal years ended December 31, 1998, 1999, and 2000 have been filed 2 3 with the SEC as part of Medical Assurance's Annual Report on Form 10-K, filed March 29, 2001, and are incorporated herein by reference. The unaudited consolidated balance sheet of Professionals Group as of March 31, 2001, and unaudited consolidated statements of income and cash flows of Professionals Group for the three months ended March 31, 2000 and 2001, have been filed with the SEC as part of Professionals Group's Quarterly Report on Form 10-Q, filed May 11, 2001, and are incorporated herein by reference. The unaudited consolidated balance sheet of Medical Assurance as of March 31, 2001, and unaudited consolidated statements of income and cash flows of Medical Assurance for the three months ended March 31, 2000 and 2001 have been filed with the SEC as part of Medical Assurance's Quarterly Report on Form 10-Q, filed May 15, 2001, and incorporated herein by reference. (b) Pro Forma Financial Information. The pro forma condensed consolidated balance sheet of ProAssurance as of March 31, 2001 and the pro forma condensed consolidated statements of income of ProAssurance for the year ended December 31, 2000 and the three months ended March 31, 2001 along with notes to the condensed consolidated financial statements are filed as exhibits to this report. The unaudited pro forma condensed consolidated balance sheet gives effect to the consolidation transaction as if it had occurred on March 31, 2001. The unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2000, and for the three months ended March 31, 2001, give effect to the corporate reorganization of Medical Assurance into ProAssurance, treated in a manner similar to a pooling of interests, and to the consolidation of Professionals Group and ProAssurance, treated as a purchase transaction, as if the transactions had occurred January 1, 2000. The statements include pro forma adjustments as described in the notes accompanying the financial statements. ProAssurance derived this information from the audited consolidated financial statements of Medical Assurance and Professionals Group for the year ended December 31, 2000, and from the unaudited consolidated financial statements of Medical Assurance and Professionals Group for the three months ended March 31, 2001. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the audited historical financial statements and related notes of Medical Assurance and Professionals Group which are incorporated by reference in this report. The unaudited pro forma consolidated financial information is presented for illustrative purposes only and does not purport to be indicative of the operating results or financial position that would have actually occurred if the consolidation had been in 3 4 effect on the dates indicated, nor is it indicative of the future operating results or financial position of the consolidated company. The pro forma adjustments are based on the information and assumptions available at the time of this report. (c) Exhibits.
Exhibit Reference Number Exhibit Description ----------------- ------------------- 99.1 Audited consolidated balance sheets of Professionals Group as of December 31, 1999 and 2000 and consolidated statements of income and cash flows of Professionals Group for the fiscal years ended December 31, 1998, 1999, and 2000 (incorporated by reference to Professionals Group's Annual Report on Form 10-K filed March 28, 2001) 99.2 Audited consolidated balance sheets of Medical Assurance as of December 31, 1999 and 2000 and consolidated statements of income and cash flows of Medical Assurance for the fiscal years ended December 31, 1998, 1999, and 2000 (incorporated by reference to Medical Assurance's Annual Report on Form 10-K filed March 29, 2001) 99.3 Unaudited consolidated balance sheet of Professionals Group as of March 31, 2001, and unaudited consolidated statements of income and cash flows of Professionals Group for the three months ended March 31, 2000 and 2001 (incorporated by reference to Professionals Group's Quarterly Report on Form 10-Q filed May 11, 2001). 99.4 Unaudited consolidated balance sheet of Medical Assurance as of March 31, 2001, and unaudited consolidated statements of income and cash flows of Medical Assurance for the three months ended March 31, 2000 and 2001 (incorporated by reference to Medical Assurance's Quarterly Report on Form 10-Q filed May 15, 2001).
4 5 99.5 Proforma condensed consolidated balance sheet of ProAssurance as of March 31, 2001 and proforma condensed consolidated statements of income of ProAssurance for the year ended December 31, 2000 and three months ended March 31, 2001 along with notes thereto.
5 6 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PROASSURANCE CORPORATION Date: July 12, 2001 By: /s/ James J. Morello ------------------------------------- Name: James J. Morello Its: Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 6 EX-99.5 2 g70454ex99-5.txt PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET 1 EXHIBIT 99.5 PROASSURANCE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS) MARCH 31, 2001
MEDICAL PROFESSIONALS ASSURANCE GROUP PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ----------- ------------- ------------ ------------ ASSETS Investments: Fixed maturities available for sale, at fair value $ 576,477 $ 698,937 $ (98,964)(A) $ 1,176,450 Equity securities available for sale, at fair value 79,179 4,893 -- 84,072 Real estate, net 11,196 2,300 -- 13,496 Short-term investments 143,247 109,764 -- 253,011 ----------- ----------- ----------- ----------- Total investments 810,099 815,894 (98,964) 1,527,029 Cash and cash equivalents 16,260 11,054 -- 27,314 Premiums receivable 65,446 55,040 -- 120,486 Receivable from reinsurers 172,436 193,373 -- 365,809 Prepaid reinsurance premiums 7,491 10,327 -- 17,818 Deferred taxes 30,851 50,100 539 (C) 81,490 Other assets 59,205 39,389 (5,334)(C) 82,136 (11,124)(B) ----------- ----------- ----------- ----------- Total assets $ 1,161,788 $ 1,175,177 $ (114,883) $ 2,222,082 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policy liabilities and accruals: Reserve for losses and loss adjustment expenses $ 671,939 $ 719,126 $ -- $ 1,391,065 Unearned premiums 95,205 113,705 -- 208,910 Reinsurance premiums payable 33,102 -- -- 33,102 ----------- ----------- ----------- ----------- Total policy liabilities 800,246 832,831 -- 1,633,077 Long-term debt -- 14,500 98,500 (A) 113,000 Excess of net assets acquired over cost -- 16,161 (16,161)(D) -- Other liabilities 12,436 41,379 -- 53,815 ----------- ----------- ----------- ----------- Total liabilities 812,682 904,871 82,339 1,799,892 Commitments and contingencies -- -- -- -- Minority interest -- 18,099 -- 18,099 Stockholders' equity: Common stock 25,107 8,851 33 (E) 260 (8,851)(F) (24,880)(G) Additional paid-in capital 231,994 44,173 51,952 (E) 264,495 3,000 (H) (44,173)(F) (22,451)(G) Accumulated other comprehensive (loss) income 806 11,830 (11,830)(F) 806 Retained earnings 138,530 187,353 (187,353)(F) 138,530 ----------- ----------- ----------- ----------- 396,437 252,207 (244,553) 404,091 Less treasury stock, at cost (47,331) -- 47,331 (G) -- ----------- ----------- ----------- ----------- Total stockholders' equity 349,106 252,207 (197,222) 404,091 ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity $ 1,161,788 $ 1,175,177 $ (114,883) $ 2,222,082 =========== =========== =========== ===========
1 2 PROASSURANCE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS EXCEPT PER SHARE DATA)
MEDICAL PROFESSIONALS ASSURANCE GROUP PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ------------ ------------- ------------ ------------ Revenues: Net premiums earned $ 177,596 $ 226,390 $ -- $ 403,986 Net investment income 41,450 46,232 (5,607)(I) 81,647 (428)(J) Other income 3,543 803 -- 4,346 ------------ ----------- ---------- ------------ Total revenues 222,589 273,425 (6,035) 489,979 Expenses: Net losses and loss adjustment expenses 155,710 213,628 -- 369,338 Underwriting, acquisition and insurance expenses 38,579 48,446 (1,614)(K) 87,370 1,959 (L) Interest expense -- 1,104 5,610 (M) 6,714 ------------------------- ---------- ------------ Total expenses 194,289 263,178 5,955 463,422 ------------------------- ---------- ------------ Income before income taxes and minority interest 28,300 10,247 (11,990) 26,557 Income taxes 4,000 (5,121) (3,338)(N) (4,459) ------------------------- ---------- ------------ Income before minority interest 24,300 15,368 (8,652) 31,016 Minority interest -- (3,669) -- (3,669) ------------------------- ---------- ------------ Net income $ 24,300 $ 11,699 $ (8,652) $ 27,347 ========================= ========== ============ Earnings per share: Net income--basic $ 1.04 1.32 $ 1.03 ========================= ============ Net income--diluted $ 1.04 1.27 $ 1.02 ========================= ============ Weighted average shares outstanding: Basic 23,291 8,894 26,634 ========================= ============ Diluted 23,291 8,986 26,637 ========================= ============
2 3 PROASSURANCE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS EXCEPT PER SHARE DATA)
MEDICAL PROFESSIONALS ASSURANCE GROUP PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ------------- ------------- ------------- ------------- Revenues: Net premiums earned $ 49,545 $ 63,002 $ -- $ 112,547 Net investment income 10,178 12,244 (1,576)(I) 19,780 (1,066)(J) Other income 691 1,243 -- 1,934 ------------- ------------- ------------- ------------- Total revenues 60,414 76,489 (2,642) 134,261 Expenses: Net losses and loss adjustment expenses 46,986 62,353 -- 109,339 Underwriting, acquisition and insurance expenses 12,016 13,055 (404)(K) 25,157 490 (L) Interest expense -- 268 1,309 (M) 1,577 ------------------------------ ------------- ------------- Total expenses 59,002 75,676 1,395 136,073 ------------------------------ ------------- ------------- Income before income taxes and minority interest 1,412 813 (4,037) (1,812) Income taxes (861) (2,338) (826)(N) (4,025) ------------------------------ ------------- ------------- Income before minority interest 2,273 3,151 (3,211) 2,213 Minority interest -- (465) -- (465) ------------------------------ ------------- ------------- Net income $ 2,273 $ 2,686 $ (3,211) $ 1,748 ============================== ============= ============= Earnings per share: Net income--basic 0.10 $ 0.30 $ 0.07 ============================== ============= Net income--diluted 0.10 $ 0.29 $ 0.07 ============================== ============= Weighted average shares outstanding: Basic 22,697 8,851 26,040 ============================== ============= Diluted 22,697 8,961 26,047 ============================== =============
3 4 PROASSURANCE CORPORATION NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The Unaudited Pro Forma Condensed Consolidated Balance Sheet and Unaudited Pro Forma Condensed Consolidated Income Statements give effect to the consolidation of Medical Assurance and Professionals Group into the newly formed holding company, ProAssurance Corporation. The corporate reorganization of Medical Assurance into ProAssurance has been treated similar to a pooling of interests whereby the historical basis of Medical Assurance has been carried over as the basis for ProAssurance. The consolidation of Professionals Group into ProAssurance has been treated as a purchase transaction. - Each share of Medical Assurance common stock has been converted into one share of ProAssurance common stock; and - Each share of Professionals Group common stock has been converted into the right to receive either 0.897 ProAssurance shares and $13.47 in cash or $27.47 in cash. The pro forma consolidated financial statements give effect to the exchange of approximately 5,230,000 shares of Professionals Group stock for the all cash option and approximately 3,727,000 shares for the cash and ProAssurance shares option. The pro forma consolidated financial statements reflect the exchange ratio for Professionals Group shares of 0.897 shares of ProAssurance common stock for one share of Professionals Group stock or a total of approximately 3,343,000 shares of ProAssurance common stock. The value of the ProAssurance shares used to determine the purchase price is $15.61, which approximates the average Medical Assurance market closing price for a few days prior to and including the measurement and consummation date of the transaction, June 27, 2001. The fair values of Professionals Group's reserves for losses and loss adjustment expenses and related reinsurance recoverables were estimated based on the present value of the expected underlying cash flows of the loss reserves and reinsurance recoverables, and include a risk premium and a profit margin. In determining the fair value estimate, management discounted Professionals Group's historical GAAP undiscounted net loss reserves to present value assuming a 5% discount rate, which approximates the current U.S. Treasury rate. The discounting pattern was actuarially developed from Professionals Group's historical loss data. An expected profit margin of 5% was applied to the discounted loss reserves, which is consistent with management's understanding of the returns anticipated by the reinsurance market (the reinsurance market representing a willing party in the purchase of loss reserves). Additionally, for the medical malpractice loss reserves of Professionals Group, an estimated risk premium of 5% was applied to the discounted reserves which is deemed to be reasonable and consistent with expectations in the marketplace given the long-tail nature and the related high degree of uncertainty of such reserves. For the personal lines loss reserves (homeowners and automobile) of Professionals Group, an estimated risk premium of 2% was applied to discounted loss reserves as such reserves develop over a much shorter period of time and, generally, are less volatile than medical malpractice reserves. 4 5 PROASSURANCE CORPORATION NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS Described below is the pro forma estimate of the total purchase price of the transaction as well as the adjustments to allocate the purchase price based on preliminary estimates of the fair values of the assets and liabilities of Professionals Group. (Amounts in thousands, except for per share amounts) Calculation of Purchase Price: Professionals Group outstanding common shares, adjusted, (see Note O below) 8,957 Consideration payable per Professionals Group common share $ 27.47 --------- Total consideration for Professionals Group common shares $ 246,049(O) Total consideration for Professionals Group common stock options 3,000(H) Acquisition costs 3,400(P) --------- Total purchase price $ 252,449 ========= Allocation of Purchase Price: Book value of Professionals Group net assets acquired $ 252,207 Elimination of Professionals Group intangibles: Excess of fair value of assets acquired over cost 16,161 (D) Other intangibles, primarily goodwill, and related deferred taxes (4,795)(C) Adjustment to carrying value of Professionals Group property and equipment (11,124)(B)(C) --------- Total purchase price $ 252,449 ========= The consolidation was funded as follows: Available cash (primarily from sale of fixed maturity investments) $ 98,964(A) Borrowings through long-term debt 98,500(A) ProAssurance common stock (approximately 3,343,000 shares) issued to Professionals Group stockholders 51,985(E) ProAssurance paid-in capital recorded related to Professionals Group options assumed as a part of the consolidation 3,000(H) --------- Total purchase price $ 252,449 =========
5 6 PROASSURANCE CORPORATION NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. ADJUSTMENTS The purchase accounting and pro forma adjustments related to the unaudited pro forma consolidated balance sheet and statements of income are described below. All amounts are in thousands, except per share and share amounts. (A) Approximately $99 million of the funds needed for the consolidation were provided from currently available funds generated from the sale of fixed maturity investments. The remaining cash needs were financed with increased long-term debt of $98.5 million. (B) The purchase price for Professionals Group was allocated to the Professionals Group net assets acquired based on the fair value of those assets. The fair value of the net assets acquired exceeds the Professionals Group purchase price and the resulting excess has been allocated as a reduction to the long-lived tangible assets acquired, primarily property and equipment. The allocation of the purchase price resulted in adjustments to Professionals Group historical book values as described in (C) and (D) below. (C) Purchase adjustments have been recorded to eliminate intangibles (a decrease of $5.3 million), primarily goodwill, and related deferred taxes (a increase of $0.5 million) recorded in the historical Professionals Group balance sheet. Purchase adjustments have also been recorded to reduce the Professionals Group carrying value for long-lived assets, primarily property and equipment, to the extent that the fair value of the net assets acquired exceeds the purchase price. (D) Elimination of the excess of net assets acquired over cost included in the Professionals Group historical financial statements. (E) Approximately 3,343,000 shares of ProAssurance common stock have been issued to Professionals Group shareholders in the transaction (for approximately 3,727,000 shares of Professionals Group common stock based on the 0.897 exchange ratio). Paid-in capital was reduced by stock registration fees of $0.2 million. (F) Elimination of Professionals Group's historical stockholders' equity accounts. 6 7 (G) Adjustments required to reflect the one-for-one exchange of outstanding Medical Assurance shares for ProAssurance shares and the retirement of Medical Assurance treasury shares, at cost.
Additional Paid-in Treasury Common Stock Capital Stock ------------------------------------------- Exchange of 22,682,333 outstanding Medical Assurance $1.00 par value shares for a like number of ProAssurance $0.01 par value shares $ (22,455) $ 22,455 $ -- Retirement of 2,425,039 Medical Assurance treasury shares, at cost (2,425) (44,906) 47,331 ------------------------------------------ Adjustment total $ (24,880) $ (22,451) $ 47,331 ==========================================
(H) Fair value of vested Professionals Group stock options outstanding assumed by ProAssurance. The number of shares under option assumed is based on the average value of Medical Assurance shares during the twenty trading day period ending June 27, 2001. Utilizing the average Medical Assurance price of $15.61, approximately 492,000 options were outstanding upon completion of the consolidation. The fair value was calculated using the Black Scholes option pricing model using the following assumptions, which vary, as noted, due to differing terms of the various option agreements. Volatility .288 to .341 Risk-free interest rate 6.75% Dividend yield 0% Expected life 3 to 8 years
7 8 (I) The decrease in investment income due to internal funds used for (1) completion of the consolidation, (2) payment of interest on the long-term debt incurred due to the consolidation transaction and (3) required principal repayments of the long-term debt. The effect on investment income was estimated using the Medical Assurance weighted average rate of return for 2000.
THREE MONTHS ENDED YEAR ENDED 3/31/2001 12/31/2000 ------------- ------------- Pro forma reduction in invested funds, at beginning of period presented: Funds used in completion of consolidation $ (98,964) $ (98,964) Prior year reductions: Debt service (13,652) -- Investment income, before tax effect (5,607) -- Pro forma tax effect, investment income 966 -- ------------- ------------- (117,257) (98,964) ============= ============= Reductions in invested funds for debt service: Interest expense, (see Note M below), net of related tax effect - 35% (842) (3,652) Repayment of debt (2,500) (10,000) ------------- ------------- Pro forma reduction in invested funds (3,342) (13,652) ------------- ------------- Pro forma reduction in invested funds, end of year $ (120,599) $ (112,616) ============= ============= Average reduction in invested funds $ (118,928) $ (105,790) ============= ============= Average annual investment yield 5.3% 5.3% ============= ============= Pro forma reduction in investment income $ (1,576) $ (5,607) ============= =============
(J) Professionals Group available-for-sale investment securities are stated at fair value in the historical Professionals Group financial statements. However, the accounting cost basis of these securities will be adjusted from historical cost to the fair value of the securities on the date of the consolidation transaction. This, in effect, creates a purchase premium related to fixed maturity securities. The purchase premium related to fixed maturity securities will be amortized to investment income over the remaining life of the related fixed maturity securities. 8 9 (K) Adjustment to reduce amortization and depreciation expense related to the purchase adjustments described in (C) above, that eliminate intangibles and adjust the carrying value of property and equipment. Adjustments to carrying value of property and equipment will be amortized over the estimated remaining useful life of the related assets.
Three Months Ended Year Ended 3/31/01 12/31/00 ------- ---------- Increased depreciation expense due to the reversal of prior Professionals Group purchase adjustments $ 123 $ 490 Reduction of depreciation expense (318) (1,271) Reduction of amortization expense (209) (833) ------- -------- $ (404) $ (1,614) ======= ========
(L) The elimination of amortization credits related to the purchase adjustments to eliminate, as noted in (D) above, the excess of fair value of assets acquired over cost that is included in the historical Professionals Group balance sheet. 9 10 (M) Increase in interest expense related to $98.5 million of increased long-term debt incurred to finance the consolidation. The loan agreement provides for an interest rate equal to LIBOR plus a variable margin. The interest rate of 6.0% approximates current LIBOR plus the maximum margin. Initial debt incurred to fund consolidation $ 98,500 Repayment of debt following consolidation: First year (10,000) First three months of second year (2,500) Average debt outstanding following consolidation: First year 93,500 First three months of second year 87,250 Estimated interest expense, assuming average rate of 6.0% and average debt outstanding balance shown above: First year $ 5,610 First three months of second year $ 1,309
(N) The income tax effect of the pro forma adjustments reflected in the income statements at the federal statutory rate of 35%, excluding adjustments related to tax-exempt investment income and the elimination of non-deductible goodwill amortization and the non-deductible purchase adjustments related to property and equipment. (O) The purchase calculation is based on the actual number of outstanding shares of Professionals Group common stock as of March 31, 2001 increased by approximately 106,000 Professionals Group shares issued prior to the consolidation pursuant to the vesting of Professionals Group stock award agreements. (P) Acquisition costs are the direct costs expected to be incurred by ProAssurance related to the consolidation and consist primarily of professional fees. 10 -----END PRIVACY-ENHANCED MESSAGE-----