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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
=========== =========== =========== ===========
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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
========================= ============
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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
============================== =============
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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.
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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
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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.
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(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
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(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.
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(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.
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(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.
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