<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 000-22761
Pennsylvania Manufacturers Corporation
--------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2217932
------------------------------------------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
THE PMA BUILDING
380 SENTRY PARKWAY
Blue Bell, Pennsylvania 19422-2328
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 665-5046
--------------
Securities to be registered pursuant to Section 12(b): None
Securities to be registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $5.00 PER SHARE
-----------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO /_/
There were 14,329,013 shares outstanding of the registrant's common stock, $5
par value per share, and 9,356,995 shares outstanding of the registrant's Class
A common stock, $5 par value per share, as of the close of business on June 30,
1998.
<PAGE>
INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial statements
Consolidated statements of operations for the three and six months
ended June 30, 1998 (unaudited) and 1997 (unaudited) 1
Consolidated balance sheets as of June 30, 1998 (unaudited) and
December 31, 1997 2
Consolidated statements of comprehensive income for the three and
six months ended June 30, 1998 (unaudited) and 1997 (unaudited) 3
Consolidated statements of cash flows for the six months ended
June 30, 1998 (unaudited) and 1997 (unaudited) 4
Notes to the consolidated financial statements (unaudited) 5
Item 2. Management's discussion and analysis of financial condition
and results of operations 8
Part II. OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders 22
Item 5. Other information 22
Item 6. Exhibits and reports on Form 8-K 22
<PAGE>
Part 1. Item 1.
PENNSYLVANIA MANUFACTURERS CORPORATION
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands, except per share data) 1998 1997 1998 1997
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums written $100,852 $101,846 $257,038 $253,125
Change in net unearned premiums 17,507 16,062 (28,977) (25,870)
Change in accrued retrospective premiums (3,705) (3,457) (6,485) (4,854)
-------- -------- -------- --------
Net premiums earned 114,654 114,451 221,576 222,401
Net investment income 32,685 32,612 65,200 68,459
Net realized investment gains (losses) 3,749 (680) 11,263 (1,931)
Service revenues 2,655 2,490 5,090 5,038
-------- -------- -------- --------
Total revenues 153,743 148,873 303,129 293,967
-------- -------- -------- --------
Losses and expenses:
Losses and loss adjustment expenses 87,900 98,230 172,757 193,134
Acquisition expenses 29,060 28,130 51,763 46,469
Operating expenses 18,033 19,963 37,500 36,905
Dividends to policyholders 4,213 3,360 8,130 6,617
Interest expense 3,762 3,888 7,463 8,222
-------- -------- -------- --------
Total losses and expenses 142,968 153,571 277,613 291,347
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary loss 10,775 (4,698) 25,516 2,620
Provision (benefit) for income taxes:
Current 481 -- 691 (353)
Deferred 937 (5,218) 3,380 (2,304)
-------- -------- -------- --------
Total 1,418 (5,218) 4,071 (2,657)
-------- -------- -------- --------
Income before extraordinary loss 9,357 520 21,445 5,277
Extraordinary loss from early
extinguishment of debt (net of
Income tax benefit of $2,549) -- -- -- (4,734)
-------- -------- -------- --------
Net income $ 9,357 $ 520 $ 21,445 $ 543
======== ======== ======== ========
EARNINGS PER BASIC AND DILUTED SHARE:
Basic:
Earnings before extraordinary loss $ 0.39 $ 0.02 $ 0.90 $ 0.22
Extraordinary loss -- -- -- (0.20)
-------- -------- -------- --------
Net income $ 0.39 $ 0.02 $ 0.90 $ 0.02
======== ======== ======== ========
Diluted:
Earnings before extraordinary loss $ 0.38 $ 0.02 $ 0.87 $ 0.21
Extraordinary loss -- -- -- (0.19)
-------- -------- -------- --------
Net income $ 0.38 $ 0.02 $ 0.87 $ 0.02
======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
1
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
(dollar amounts in thousands, except share data) 1998 1997
------------ -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: 1998 - $1,955,206; 1997 - $1,900,594) $1,995,653 $1,929,518
Equity securities, at fair value (cost: 1998 - $5; 1997 - $5) 15 13
Short-term investments, at amortized cost which approximates fair value 163,635 265,207
---------- ----------
Total investments 2,159,303 2,194,738
Cash 7,585 32,148
Investment income due and accrued 20,808 23,818
Uncollected premiums (net of allowance for uncollectible accounts:
1998 - $18,495; 1997 - $18,406) 293,303 252,425
Reinsurance receivables (net of allowance for uncollectible reinsurance:
1998 - $2,085; 1997 - $2,096) 347,821 332,406
Property and equipment (net of accumulated depreciation:
1998 -$49,822; 1997 - $42,771) 37,901 38,621
Deferred income taxes, net 62,978 70,391
Deferred acquisition costs 53,363 45,288
Other assets 92,351 67,423
---------- ----------
Total assets $3,075,413 $3,057,258
========== ==========
LIABILITIES
Unpaid losses and loss adjustment expenses $1,939,568 $2,003,187
Unearned premiums 243,012 211,455
Long-term debt 203,000 203,000
Dividends to policyholders 10,779 10,200
Funds held under reinsurance treaties 75,806 69,545
Taxes, licenses and fees, and other expenses 52,543 49,410
Other liabilities 54,322 32,114
---------- ----------
Total liabilities 2,579,030 2,578,911
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, $5 par value (40,000,000 shares authorized;
14,765,020 shares issued and 14,329,013 outstanding - 1998;
15,286,263 shares issued and 14,850,789 outstanding - 1997) 73,825 76,431
Class A common stock, $5 par value (40,000,000 shares authorized;
9,677,925 shares issued and 9,356,995 outstanding - 1998;
9,156,682 shares issued and 9,117,735 outstanding - 1997) 48,389 45,783
Additional paid-in capital - Class A common stock 339 339
Retained earnings 359,486 343,368
Unrealized gain on investments available for sale
(net of deferred income taxes: $(14,160) - 1998 and $(10,126) - 1997) 26,297 18,806
Notes receivable from officers (198) (198)
Treasury stock, at cost:
Common stock (shares: 436,007 - 1998 and 435,474 - 1997) (5,582) (5,572)
Class A common stock (shares: 320,930 - 1998 and 38,947 - 1997) (6,173) (610)
---------- ----------
Total shareholders' equity 496,383 478,347
---------- ----------
Total liabilities and shareholders' equity $3,075,413 $3,057,258
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands)
1998 1997 1998 1997
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 9,357 $ 520 $21,445 $ 543
------- ------- ------- -------
Other comprehensive income (loss), net of tax:
Unrealized losses on securities:
Holding gains (losses) arising during the period 15,433 30,637 16,399 (8,230)
Less: reclassification adjustment for (gains)
losses included in net income (4,024) 137 (8,908) 950
------- ------- ------- -------
Other comprehensive income (loss) 11,409 30,774 7,491 (7,280)
------- ------- ------- -------
Comprehensive income (loss) $20,766 $31,294 $28,936 $(6,737)
======= ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(dollar amounts in thousands)
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,445 $ 543
Adjustments to reconcile net income to net cash flows used by
operating activities:
Depreciation 2,773 3,945
(Accretion) amortization (1,307) 3,160
Provision (benefit) for deferred income taxes 3,380 (2,304)
Extraordinary loss from early extinguishment of debt -- (4,734)
Net realized investment (gains) losses (11,263) 1,931
Change in uncollected premiums and unearned premiums, net (9,321) (16,998)
Change in dividends to policyholders 579 883
Change in reinsurance receivables (56,740) (26,482)
Change in unpaid losses and loss adjustment expenses (27,346) (38,281)
Change in investment income due and accrued 3,010 4,333
Other, net 1,251 (15,789)
--------- ---------
Net cash flows used in operating activities (73,539) (89,793)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturity investments available for sale:
Purchases (927,342) (771,135)
Maturities or calls 84,915 75,400
Sales 802,825 790,994
Net sales of short-term investments 101,572 81,974
Net purchases of property and equipment (2,053) (2,239)
--------- ---------
Net cash flows provided by investing activities 59,917 174,994
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to shareholders (4,059) (3,982)
Proceeds from long-term debt -- 210,000
Repayments of long-term debt -- (211,650)
Repayments of notes receivable from officers -- 507
Treasury stock transactions, net (6,882) 486
--------- ---------
Net cash flows used in financing activities (10,941) (4,639)
--------- ---------
Net (decrease) increase in cash (24,563) 80,562
Cash January 1 32,148 7,176
--------- ---------
Cash June 30 $ 7,585 $ 87,738
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash received for income taxes $ $ (2,900)
--
Cash paid for interest $ 7,467 $ 12,161
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
Notes to the Consolidated Financial Statements
(dollar amounts in thousands, except per share data)
1. General
The accompanying consolidated financial statements include the accounts of
Pennsylvania Manufacturers Corporation (PMC) and its wholly and majority owned
subsidiaries (the Company). PMC is an insurance holding company that sells
property and casualty reinsurance and insurance through its insurance
subsidiaries. PMC's insurance subsidiaries are domiciled in Pennsylvania, except
for its excess and surplus lines affiliate which is domiciled in Delaware, and
certain foreign subsidiaries.
Reinsurance -- PMC's reinsurance subsidiary, PMA Reinsurance Corporation (PMA
Re), emphasizes risk-exposed, excess of loss reinsurance and operates in the
brokered market. PMA Re's business is predominantly in casualty lines of
reinsurance.
Workers' Compensation and Primary Standard Insurance -- PMC's property and
casualty insurance subsidiaries (the Property and Casualty Group) write workers'
compensation and other standard lines of commercial insurance primarily in the
Mid-Atlantic and Southern regions of the U.S.
Specialty Property and Casualty -- In January of 1998, the Company's specialty
insurance unit, Caliber One, commenced writing business. It is management's
intention that Caliber One will write primarily casualty business through
surplus lines brokers on a nationwide basis. Caliber One's excess and
surplus lines insurance affiliate, Caliber One Indemnity Company, is presently
authorized as a surplus lines carrier in 37 states, Washington, DC, and Puerto
Rico, with applications either pending or being prepared for the remaining
states.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. It is management's opinion that all adjustments, including normal
recurring accruals, considered necessary for a fair presentation have been
included. Certain reclassifications of prior year amounts have been made to
conform with the 1998 presentation. Additionally, net premiums written were
adjusted to include $3,705 and $6,485 for the three and six months ended June
30, 1998, respectively, and $3,457 and $4,854 for the three and six months ended
June 30, 1997, respectively, representing estimated retrospective policy
adjustments related to the current accident year and retrospective policy
adjustments paid. These adjustments were made for presentation purposes only
and do not impact the Company's reported revenues, financial position or results
of operations as these adjustments have no effect on net premiums earned.
Operating results for the three and six months ended June 30, 1998, are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the December 31, 1997, audited consolidated
financial statements and footnotes thereto included in PMC's 1997 Annual Report
to Shareholders and incorporated by reference in Form 10-K.
2. Per Share Data
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"),
which supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share," and Related Interpretations. The Company adopted SFAS No. 128 during
1997. In accordance with SFAS No. 128, all prior period data presented has been
restated to conform with the provisions of this statement. SFAS No. 128
replaces the presentation of primary earnings per share with a presentation of
basic earnings per share and requires the presentation of both basic and diluted
earnings per share on the face of the income statement. SFAS No. 128 also
requires a reconciliation of the numerators and denominators used in the basic
5
<PAGE>
earnings per share calculation to the numerators and denominators used in the
diluted earnings per share calculation. Such reconciliation is provided below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator:
Control number - income
before extraordinary loss........... $ 9,357 $ 520 $ 21,445 $ 5,277
DENOMINATOR:
Basic shares weighted average
Common and Class A common
shares outstanding.................. 23,692,071 23,828,248 23,770,912 23,832,562
Dilutive stock options................ 1,002,385 613,862 887,999 672,330
----------- ----------- ----------- -----------
Total diluted shares.................. 24,694,456 24,442,110 24,658,911 24,504,892
=========== =========== =========== ===========
</TABLE>
Basic earnings per share: For the three and six months ended June 30, 1998 and
1997, basic earnings per share calculations were based upon the weighted average
number of common and Class A common shares outstanding for the period.
Diluted earnings per share: For the three and six months ended June 30, 1998
and 1997, diluted earnings per share calculations were based upon the weighted
average number of common and Class A common shares outstanding during the
periods and the assumed exercise price of dilutive stock options, less the
number of treasury shares assumed to be purchased from the proceeds using the
average market price of the Company's Class A common stock.
3. Accounting Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" ("SFAS No. 130"), which establishes
standards for the reporting and disclosure of comprehensive income and its
components (revenues, expenses, gains and losses). SFAS No. 130 requires that
all items required to be recognized under accounting standards as components of
comprehensive income, be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income
includes a reclassification adjustment for net realized investment gains
included in net income of $4,024 (after income taxes of $2,167) and $8,908
(after income taxes of $4,797) for the three and six months ended June 30, 1998
and net realized investment losses of $137 (after income taxes of $74) and $950
(after income taxes of $512) for the three and six months ended June 30, 1997.
The new standard requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial position or
results of operations.
6
<PAGE>
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. In
connection with the adoption of SFAS No. 131, the Company has identified four
reportable segments: (i) PMA Re, which provides reinsurance products and
services; (ii) the Property and Casualty Group, which writes workers'
compensation and other standard lines of commercial insurance and includes run-
off operations; (iii) Caliber One, which writes specialty insurance focusing on
excess and surplus lines; and (iv) Corporate and Other, which is primarily
comprised of corporate overhead and the operations of the Company's properties.
Pursuant to the adoption of SFAS No. 131, the Company has restated the
corresponding information for 1997 for comparability, primarily related to
certain corporate expenses that were previously allocated to the operating
segments. SFAS No. 131 requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial position or
results of operations.
In January 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" ("SOP 97-3"). SOP 97-3, which is effective for fiscal years
beginning after December 15, 1998, provides guidance for determining when an
insurance company should recognize a liability for guaranty fund and other
insurance related assessments and how to measure that liability. While the
Company is presently evaluating the impact of SOP 97-3, the adoption of SOP 97-3
is likely to result in an increase in the Company's liabilities for such
assessments, and such increase may be material. If material, the impact of
adopting SOP 97-3 will be reflected as a cumulative effect of an accounting
change in the first quarter of 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (i) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (ii) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. While the
Company is presently evaluating the impact of SFAS No. 133, the adoption of SFAS
No. 133 is not expected to have a material impact on the Company's financial
condition or results of operations.
4. Sale of Subsidiary
The Company entered into a definitive letter of intent, dated June 26, 1998, to
sell PMA Insurance, Cayman Ltd., one of the run-off entities included in the
Property and Casualty Group's Run-off Operations. The transaction is subject to
customary closing conditions, including regulatory approvals, and is expected to
be completed in the third quarter of 1998. In connection with the announced
sale, the Company recorded a pre-tax loss of $2,442 in the second quarter of
1998, which is included in "Net Realized Investment Gains."
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis and other statements made throughout
this report contain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
expected by the Company. The factors that could cause actual results to vary
materially, some of which are described with the forward-looking statements,
include, but are not limited to, the following: changes in general economic
conditions, including the performance of financial markets and interest rates;
regulatory or tax changes, including changes in risk-based capital or other
regulatory standards that affect the ability of the Company to conduct its
business; competitive or regulatory changes that affect the cost of or demand
for the Company's products; the effect of changes in workers' compensation
statutes and the administration thereof; the Company's ability to predict and
effectively manage claims related to insurance and reinsurance policies;
reliance on key management; adequacy of claim liabilities; adequacy and
collectibility of reinsurance purchased by the Company; and natural disasters.
Investors should not place undue reliance on any such forward-looking
statements.
RESULTS OF OPERATIONS
The table below presents the major components of net income for the Company for
the three and six months ended June 30, 1998 and 1997:
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- -------- ------- -------
<S> <C> <C> <C> <C>
Pre-tax operating income (loss) (1) $ 7,026 $(4,018) $14,253 $ 4,551
Net realized investment gains (losses) 3,749 (680) 11,263 (1,931)
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary loss 10,775 (4,698) 25,516 2,620
Provision (benefit) for income taxes 1,418 (5,218) 4,071 (2,657)
------- ------- ------- -------
Income before extraordinary loss 9,357 520 21,445 5,277
Extraordinary loss, net of related taxes -- -- -- (4,734)
------- ------- ------- -------
Net income $ 9,357 $ 520 $21,445 $ 543
======= ======= ======= =======
PER BASIC SHARE:
Income before extraordinary loss $ 0.39 $ 0.02 $ 0.90 $ 0.22
Extraordinary loss -- -- -- (0.20)
------- ------- ------- -------
Net income $ 0.39 $ 0.02 $ 0.90 $ 0.02
======= ======= ======= =======
After-tax operating income (2) $ 0.29 $ 0.04 $ 0.59 $ 0.27
PER DILUTED SHARE:
Income before extraordinary loss $ 0.38 $ 0.02 $ 0.87 $ 0.21
Extraordinary loss -- -- -- (0.19)
------- ------- ------- -------
Net income $ 0.38 $ 0.02 $ 0.87 $ 0.02
======= ======= ======= =======
After-tax operating income (2) $ 0.28 $ 0.04 $ 0.57 $ 0.27
======= ======= ======= =======
</TABLE>
(1) Pre-tax operating income (loss) is defined as income from continuing
operations before income taxes, but excluding net realized investment gains
(losses).
(2) After-tax operating income is defined as pre-tax operating income (loss)
less a provision for income tax adjusted for the taxes attributable to net
realized investment gains (losses).
8
<PAGE>
The following table indicates the Company's pre-tax operating income (loss) by
principal business segment for the three and six months ended June 30, 1998 and
1997:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 (1) 1998 1997 (1)
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
PMA Re $11,580 $ 9,829 $22,952 $23,187
The Property and Casualty Group 2,646 (7,310) 5,382 (5,888)
Caliber One (681) -- (1,070) --
Corporate and Other (2,757) (2,649) (5,548) (4,526)
------- ------- ------- -------
Pre-tax operating income (loss) before
interest expense 10,788 (130) 21,716 12,773
Interest expense 3,762 3,888 7,463 8,222
------- ------- ------- -------
Pre-tax operating income (loss) $ 7,026 $(4,018) $14,253 $ 4,551
======= ======= ======= =======
</TABLE>
The following table indicates the Company's total assets by principal business
segment at June 30, 1998 and 1997:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 (1)
---------- ----------
<S> <C> <C>
PMA Re $1,188,852 $1,080,178
The Property and Casualty Group 1,822,760 1,869,333
Caliber One 62,465 --
Corporate and Other 1,336 136,129
---------- ----------
Total assets $3,075,413 $3,085,640
========== ==========
</TABLE>
(1) Pre-tax operating income and total assets by business segment have been
reclassified for 1997 to reflect the changes related to the implementation
of SFAS No. 131 (see Note 3 to the Consolidated Financial Statements for
further discussion).
On a consolidated basis, the Company reported pre-tax operating income of $7.0
million and $14.3 million for the three and six months ended June 30, 1998,
respectively, compared to a pre-tax operating loss of $4.0 million for the
second quarter of 1997 and pre-tax operating income of $4.6 million for the six
months ended June 30, 1997. The increases in pre-tax operating income for the
three and six months ended June 30, 1998, compared to the same periods in 1997,
were primarily due to increased operating income at PMA Re for the second
quarter of 1998 and the Property and Casualty Group for both the first and
second quarter of 1998 partially offset by the Caliber One pre-tax operating
loss of $1.1 million related to the commencement of its operations. The increase
in operating income at PMA Re for the second quarter was mainly related to
higher premium volume, lower loss ratios and higher investment income. Operating
income for PMA Re for the first half of 1998 was comparable to the first half of
1997, due primarily to increases in acquisition costs as well as timing issues
related to certain operating expenses in the first six months of 1998. The
increase in operating income for the Property and Casualty Group was due to
lower losses and expenses recorded in the first half of 1998 compared to 1997 as
a result of the restructuring efforts initiated during 1997. The operating loss
at Corporate and Other for the second quarter of 1998 was comparable to the 1997
period, while the operating loss for the first half of 1998 was $1.0 million
higher than the comparable 1997 period, related to certain compensation
programs, which were not adopted until the second half of 1997, partially offset
by costs incurred in 1997 related to certain corporate properties that were
disposed of in the third quarter of 1997.
9
<PAGE>
Interest expense for the second quarter was comparable to the 1997 period and
decreased $759,000 for the six months ended June 30, 1998 compared to the same
period in 1997 due to the March 1997 refinancing of the Company's debt facility.
Net income on a consolidated basis, before extraordinary item, was $9.4 million,
or $0.39 per basic share and $0.38 per diluted share, and $21.4 million, or
$0.90 per basic share and $0.87 per diluted share, for the three and six months
ended June 30, 1998, respectively, compared to $520,000, or $0.02 per basic and
diluted share, and $5.3 million, or $0.22 per basic share and $0.21 per diluted
share, for the three and six months ended June 30, 1997, respectively. On March
14, 1997, the Company refinanced substantially all of its outstanding credit
agreements not already maturing in 1997. In connection with this refinancing,
the Company recognized an extraordinary loss from the early extinguishment of
debt of $4.7 million, or $0.20 per basic share and $0.19 per diluted share, net
of tax.
PMA RE RESULTS OF OPERATIONS
Summarized financial results of PMA Re for the three and six months ended June
30, 1998 and 1997, are as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net premiums written $47,089 $36,789 $117,908 $ 96,279
======= ======= ======== ========
Net premiums earned $54,869 $45,791 $100,967 $ 85,087
Net investment income 13,671 12,134 27,171 25,288
------- ------- -------- --------
Operating revenues 68,540 57,925 128,138 110,375
------- ------- -------- --------
Losses and LAE incurred 36,864 32,386 69,678 62,231
Acquisition and operating expenses 20,096 15,710 35,508 24,957
------- ------- -------- --------
Total losses and expenses 56,960 48,096 105,186 87,188
------- ------- -------- --------
Pre-tax operating income $11,580 $ 9,829 $ 22,952 $ 23,187
======= ======= ======== ========
GAAP loss ratio 67.2% 70.7% 69.0% 73.1%
GAAP combined ratio 103.8% 105.0% 104.2% 102.4%
SAP loss ratio 66.2% 70.7% 68.4% 73.1%
SAP combined ratio 108.9% 105.1% 104.5% 103.5%
</TABLE>
Premium Revenues
The following table indicates PMA Re's gross and net premiums written by major
category of business:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Gross premiums written:
Casualty lines $41,804 $32,861 $102,608 $ 83,289
Property lines 15,402 13,150 41,313 36,916
Other lines 107 48 501 501
------- ------- -------- --------
Total $57,313 $46,059 $144,422 $120,706
======= ======= ======== ========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net premiums written:
Casualty lines $35,122 $25,536 $ 83,535 $68,286
Property lines 11,845 11,214 33,849 27,501
Other lines 122 39 524 492
------- ------- -------- -------
Total $47,089 $36,789 $117,908 $96,279
======= ======= ======== =======
</TABLE>
Gross premiums written increased $11.3 million, or 24.4%, and $23.7 million, or
19.6%, for the three and six months ended June 30, 1998, respectively, compared
to the same periods ended June 30, 1997. For the six months ended June 30,
1998, gross premiums written increased 23.2% for casualty lines and 11.9% for
property lines compared to the same period in 1997. The main reasons for these
increases in gross premiums written were increased participations on reinsurance
treaties and new programs with existing clients, as well as contracts with new
clients. These increases were partially offset by the trend toward large ceding
companies increasing their retentions, which decreases PMA Re's subject premium.
In addition, highly competitive conditions in the U.S. reinsurance market caused
PMA Re to non-renew certain accounts due to inadequate rates and/or other
underwriting concerns.
Net premiums written increased $10.3 million, or 28.0%, and $21.6 million, or
22.5%, for the three and six months ended June 30, 1998, respectively, compared
to the same periods ended June 30, 1997. PMA Re made changes to its
retrocessional program in the second half of 1997 and in 1998, which reduced the
percentage of premiums ceded to retrocessionaires in 1998. Net premiums earned
for PMA Re also increased $9.1 million, or 19.8%, and $15.9 million, or 18.7%,
for the three and six months ended June 30, 1998, respectively, compared to the
same periods in 1997. Net premiums earned generally follow growth patterns
similar to net premiums written after giving effect to a lag in premium
earnings.
Losses and Expenses
The following table reflects the components of PMA Re's combined ratios, as
computed under GAAP:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Loss ratio 67.2% 70.7% 69.0% 73.1%
----- ----- ----- -----
Expense ratio:
Amortization of deferred acquisition costs 30.5% 27.9% 28.5% 23.8%
Operating expenses 6.1% 6.4% 6.7% 5.5%
----- ----- ----- -----
Total expense ratio 36.6% 34.3% 35.2% 29.3%
----- ----- ----- -----
Combined ratio - GAAP (1) 103.8% 105.0% 104.2% 102.4%
===== ===== ===== =====
</TABLE>
(1) The combined ratio computed on a GAAP basis is equal to losses and loss
adjustment expenses, plus amortization of deferred acquisition costs, plus
operating expenses, plus policyholders' dividends (where applicable), all
divided by net premiums earned.
For both the three and six month periods ended June 30, 1998, PMA Re posted
lower loss ratios, reflecting higher levels of favorable loss reserve
development and the effects of more treaties written with ceding commissions,
which increases the proportion of the subject premium assumed by PMA Re. The
quarter and six month periods in 1998 were also impacted by higher acquisition
costs, which reflected the aforementioned increase in the number of treaties
written with ceding commissions, as well as competitive conditions.
11
<PAGE>
The ratio of operating expenses to net premiums earned (the "Operating Expense
Ratio") for the three months ended June 30, 1998 is comparable with the three
months ended June 30, 1997. The Operating Expense Ratio increased 1.2 points for
the six months ended June 30, 1998, compared to the same period in 1997. The
increase in the Operating Expense Ratio for the year to date periods relates to
increases in staff relating to higher activity levels, as well as the timing of
certain expenses in 1997, such as costs relating to the restructuring of PMA
Re's compensation plans. In addition, the increase is partially due to the Year
2000 Project ("Year 2000 Project"), for which the majority of expenses incurred
began in the second half of 1997. PMA Re has incurred costs of approximately
$425,000 during 1998 related to the Year 2000 Project. Management expects that
PMA Re will incur approximately $175,000 of additional expenses in 1998 related
to the Year 2000 Project and that such project will be completed in 1998 (see
"Liquidity and Capital Resources" for further discussion).
Net Investment Income
PMA Re's operating income was also impacted by higher levels of investment
income, which reflected higher levels of invested assets. For the quarter ended
June 30, 1998, PMA Re's net investment income increased $1.5 million versus the
second quarter of 1997, and for the six months ended June 30, 1998, net
investment income increased $1.9 million versus the comparable 1997 period.
THE PROPERTY AND CASUALTY GROUP RESULTS OF OPERATIONS
The Property and Casualty Group is comprised of Pennsylvania Manufacturers'
Association Insurance Company, Manufacturers Alliance Insurance Company and
Pennsylvania Manufacturers Indemnity Company (the "Pooled Companies"), PMA
Management Corp., and Pennsylvania Manufacturers International Insurance,
Limited. Run-off operations ("Run-off Operations") of the Property and Casualty
Group are comprised of Mid-Atlantic States Casualty Company, PMA Insurance,
Cayman Limited and PMA Life Insurance Company and have been established
internally to reinsure certain obligations primarily associated with workers'
compensation claims written by the Pooled Companies for the years 1991 and prior
for statutory accounting purposes. The Run-off Operations have been segregated
into separate legal entities and substantially all of the assets of the Run-off
Operations are held in trust for the benefit of the Pooled Companies.
Net premiums written for the Property and Casualty Group were adjusted to
include $3.7 million and $6.5 million for the three and six months ended June
30, 1998, respectively, and $3.5 million and $4.9 million for the three and six
months ended June 30, 1997, respectively, representing estimated retrospective
policy adjustments related to the current accident year and retrospective policy
adjustments paid. These adjustments were made for presentation purposes only
and do not impact the Property and Casualty Group's reported revenues, financial
position or results of operations as these adjustments have no effect on net
premiums earned. Summarized financial results of the Property and Casualty
Group for the three and six months ended June 30, 1998 and 1997, are as follows:
12
<PAGE>
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net premiums written:
Workers' compensation $39,451 $41,512 $106,952 $104,464
Commercial lines 13,778 23,545 31,432 52,382
------- ------- -------- --------
Total $53,229 $65,057 $138,384 $156,846
======= ======= ======== ========
Net premiums earned:
Workers' compensation $42,698 $45,897 $ 87,011 $ 95,616
Commercial lines 17,093 22,763 33,578 41,698
------- ------- -------- --------
Total 59,791 68,660 120,589 137,314
------- ------- -------- --------
Net investment income:
Excluding Run-off Operations 12,657 12,315 25,367 26,930
Run-off Operations 5,464 7,459 11,303 14,972
------- ------- -------- --------
Total 18,121 19,774 36,670 41,902
------- ------- -------- --------
Service revenues 2,655 2,490 5,090 5,038
------- ------- -------- --------
Operating revenues 80,567 90,924 162,349 184,254
------- ------- -------- --------
Losses and LAE incurred:
Excluding Run-off Operations 46,478 58,890 93,684 115,873
Run-off Operations 4,505 6,989 9,401 15,097
------- ------- -------- --------
Total 50,983 65,879 103,085 130,970
------- ------- -------- --------
Acquisition and operating expenses:
Excluding Run-off Operations 22,059 27,992 44,278 50,759
Run-off Operations 666 1,003 1,474 1,796
------- ------- -------- --------
Total 22,725 28,995 45,752 52,555
------- ------- -------- --------
Policyholders' dividends 4,213 3,360 8,130 6,617
------- ------- -------- --------
Total losses and expenses 77,921 98,234 156,967 190,142
------- ------- -------- --------
Pre-tax operating income (loss) $ 2,646 $(7,310) $ 5,382 $ (5,888)
======= ======= ======== ========
GAAP loss ratio 85.3% 95.9% 85.5% 95.4%
GAAP combined ratio 126.3% 139.8% 126.2% 135.2%
SAP loss ratio (1) 78.4% 85.1% 77.9% 85.3%
SAP combined ratio (1) 119.0% 123.1% 113.4% 118.9%
</TABLE>
(1) The SAP loss and combined ratios above relate to the Pooled Companies only
and do not include the results of other statutory entities within the Run-
off Operations.
PROPERTY AND CASUALTY GROUP EXCLUDING RUN-OFF OPERATIONS
--------------------------------------------------------
Premium Revenues
Direct premiums written for the Property and Casualty Group decreased $11.7
million and $19.9 million for the three and six months ended June 30, 1998,
respectively, compared to the same periods in 1997. Direct premiums written for
commercial lines of business other than workers' compensation, such as
commercial auto, general liability, umbrella, multi-peril and commercial
property lines (collectively, "Commercial Lines") decreased $8.0 million and
$19.6 million for the three and six months ended June 30, 1998, respectively,
compared to the same periods in 1997. Direct premiums written for workers'
compensation decreased $3.7 million and $298,000 for the three and six months
13
<PAGE>
ended June 30, 1998, respectively, compared to the same periods in 1997. For
the three months ended June 30, 1998, reinsurance premiums assumed increased
$570,000 compared to the same period in 1997 and decreased $73,000 for the six
months ended June 30, 1998 compared to the same period in 1997. Reinsurance
premiums ceded increased $717,000 and decreased $1.5 million for the three and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. The percentage of net workers' compensation premiums written to total net
premiums written increased to 74% and 77% for the three and six months ended
June 30, 1998, respectively, from 64% and 67% in the three and six months ended
June 30, 1997, respectively. This increase was primarily due to a planned
reduction in Commercial Lines business, as more fully described below.
For the three and six months ended June 30, 1998, net premiums written decreased
$11.8 million and $18.5 million compared to the same periods in 1997. Earned
premiums decreased by $8.9 million and $16.7 million for the three and six
months ended June 30, 1998, compared to the same periods in 1997. Net premiums
earned generally follow growth patterns similar to net premiums written after
giving effect to a lag in premium earnings, absent any significant adjustments
to accrued retrospective premiums. Such adjustments did not fluctuate materially
between periods.
The decrease in direct premiums written for workers' compensation was primarily
due to continued intense price competition in the workers' compensation market
as well as the impact of rate changes associated with workers' compensation
benefit reforms in Pennsylvania. Workers' compensation reform laws adopted in
Pennsylvania ("Act 57") resulted in a reduction in manual workers' compensation
rates in excess of 25%, effective February 1997 for new and renewal business.
Management does not expect manual rate decreases to be as significant for the
1998 policy year as compared to the 1997 policy year, although manual rate
levels in all of its principal marketing states continue to decrease.
The Property and Casualty Group has continued its marketing of alternative
market workers' compensation products for larger accounts, including large-
deductible policies and providing excess coverage to self-insured groups.
Typically, the Property and Casualty Group receives a lower up-front premium for
these types of alternative market product plans. However, under this type of
business, the insured retains a greater share of the underwriting risk than
under rate-sensitive or loss-sensitive products, which reduces the potential for
unfavorable claim activity on the accounts and encourages loss control on the
part of the insured. A substantial portion of related revenues are recorded as
service revenues. Such service revenues increased $165,000 and $52,000 for the
three and six months ended June 30, 1998, compared to the same periods in 1997.
Direct workers' compensation premiums written were also impacted by changes in
the level of premium adjustments, primarily related to audit premiums. For the
three and six months ended June 30, 1998, such adjustments increased premiums
written by $3.6 million and $8.1 million, compared to increases of $4.0 million
and $8.3 million in the comparable 1997 periods.
The decreases in Commercial Lines direct writings for the three and six months
ended June 30, 1998 compared to 1997 were primarily due to a planned reduction
in net Commercial Lines business as well as continued competitive conditions in
Commercial Lines pricing in 1998. Rather than lower prices to what it believes
are unacceptable levels, the Property and Casualty Group has chosen not to renew
some of its Commercial Lines business. Additionally, the Property and Casualty
Group has reduced its writings of new Commercial Lines accounts in the first six
months of 1998 compared to the same period in 1997.
14
<PAGE>
Losses and Expenses
The following table reflects the components of the Property and Casualty Group's
combined ratios, as computed under GAAP:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Loss ratio 77.7% 85.8% 77.7% 84.9%
----- ----- ----- -----
Expense ratio:
Amortization of deferred acquisition costs 20.7% 22.4% 19.2% 19.2%
Operating expenses (1) 12.1% 15.1% 13.6% 14.7%
----- ----- ----- -----
Total expense ratio 32.8% 37.5% 32.8% 33.9%
----- ----- ----- -----
Policyholders' dividends 7.0% 4.9% 6.7% 4.8%
----- ----- ----- -----
Combined ratio - GAAP(2) 117.5% 128.2% 117.2% 123.6%
===== ===== ===== =====
</TABLE>
(1) The GAAP Operating Expense Ratio excludes $2.4 million and $2.2 million in
the second quarter and $4.7 million and $4.5 million for the six months
ended June 30, 1998 and 1997, respectively, of PMA Management Corp. direct
expenses related to service revenues, which are not included in premiums
earned.
(2) The GAAP combined ratios for the Property and Casualty Group including the
Run-off Operations were 126.3% and 126.2% for the three and six months
ended June 30, 1998, respectively, compared to 139.8% and 135.2% for the
three and six months ended June 30, 1997, respectively. See "Run-off
Operations."
For the three months and six months ended June 30, 1998, respectively, the GAAP
loss ratio improved by 8.1 and 7.2 points compared to the same periods in 1997.
This improvement was primarily due to a lower amount of discount accretion on
workers' compensation loss reserves, improved loss and LAE ratios in Commercial
Lines, and an improvement in medical costs and in loss adjustment expenses in
the workers' compensation line.
The improvement in loss and LAE ratios in Commercial Lines has favorably
impacted the overall loss ratio by 1.7 and 1.4 points for the three months and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. This improvement in the Commercial Lines loss and LAE ratio was primarily
due to a reduction in exposures underwritten by the Property and Casualty Group
in 1998 compared to the same period in 1997. The Property and Casualty Group
believes that reduced exposures, which have been primarily as a result of price
competition and more stringent underwriting, have improved the overall loss
ratio on its remaining Commercial Lines business.
Measures to control medical costs and loss adjustment expenses in workers'
compensation have improved the overall loss and LAE ratio by 3.0 and 2.5 points
in the three and six months ended June 30, 1998, compared to the same periods in
1997. Medical costs have improved primarily due to the Property and Casualty
Group's affiliation with a national preferred provider organization, which
became effective January 1998. This affiliation has enabled the Property and
Casualty Group to lower its cost in providing medical benefits to injured
workers. Loss adjustment expenses have decreased primarily due to continued use
of certain claims resolution practices. By using techniques such as managed care
and commutations, the Property and Casualty Group has reduced the amount and
number of outstanding claims and the amount of time that a claim remains open.
This in turn has lowered costs associated with managing open claims.
In July 1997, the Property and Casualty Group completed a formal program under
which it commuted a large number of workers' compensation claims from accident
years 1991 and prior. The commutation program resulted in current payments,
which were less than the carried reserves. As substantially all of these
reserves were carried on a discounted basis, the ultimate level of discount on
the Property and Casualty Group's carried reserves decreased as well. As the
level of discount has decreased, the loss ratio has benefited from lower amounts
of discount accretion.
15
<PAGE>
During the past five years, direct premiums written for workers' compensation
have declined significantly and the Property and Casualty Group has underwritten
less exposures in more recent years. As a result, loss reserve levels have
declined and the level of discount has declined as well. This has decreased the
amount of discount accretion related to the established loss reserves. As a
result, this lower amount of discount accretion improved the overall loss and
LAE ratio by 2.6 points in the first three and six months of 1998, compared to
the same periods in 1997. The Property and Casualty Group has initiated another
commutation program, which is currently underway and expected to continue
through 1998. This program is expected to focus on claims from accident years
1992 to 1996.
The increase in the percentage of net workers' compensation premiums written and
earned to total net premiums written and earned had a favorable impact on the
loss and LAE ratio, as workers' compensation business has had better loss
experience than other Commercial Lines in the Property and Casualty Group's
marketing territory. This mix of business caused a 0.8 point and 0.7 point
reduction in the loss and LAE ratio for the three months and six months ended
June 30, 1998, respectively, compared to the same periods in 1997.
The GAAP expense ratio decreased by 4.7 points and 1.1 points for the three and
six months ended June 30, 1998, compared to the same periods in 1997. The
decrease in the Acquisition Expense Ratio of 1.7 points for the three months
ended June 30, 1998 was primarily due to lower taxes and assessments in the
quarter ended June 30, 1998 compared to the same period in 1997. The operating
expense ratio decreased by 3.0 points and 1.1 points for the three and six
months ended June 30, 1998, respectively, as compared with the same periods in
1997, due to decreases in operating expenses ($3.3 and $3.7 million for the
three and six months ended June 30, 1998, respectively) compared to the same
periods in 1997 as a result of continued cost reduction measures initiated
during 1997.
The Property and Casualty Group incurred approximately $80,000 for the three
months and $498,000 for the six months ended June 30, 1998, of severance and
other restructuring costs compared with $1.7 million for the same periods in
1997. In addition, approximately $875,000 for the three months and $1.0 million
for the six months ended June 30, 1998, of costs related to the Year 2000
Project were incurred compared with $145,000 and $438,000 for the same period in
1997. The remaining Year 2000 costs are not expected to be material and
management anticipates that such project will be completed in 1998 (see
"Liquidity and Capital Resources" for further discussion).
The policyholder dividend ratio was 7.0% for the three months and 6.7% for the
six months ended June 30, 1998, compared to 4.9% and 4.8 % for the same periods
in 1997. The increase in the dividend ratio is primarily due to improved loss
experience in the workers' compensation line of business and increased writings
of participating business.
Net Investment Income
Net investment income was $12.7 million for the three months and $25.4 million
for the six months ended June 30, 1998, compared to $12.3 million and $26.9
million for the same periods in 1997. Year-to-date net investment income
decreased primarily as a result of lower fixed income yields, partially offset
by slightly higher average invested assets.
RUN-OFF OPERATIONS
------------------
Mid-Atlantic States Casualty Company ("MASCCO") is a Pennsylvania insurance
company and a wholly owned subsidiary of the Company. Prior to December 31,
1996, MASCCO was a party to a pooling agreement with the Pooled Companies.
Effective December 31, 1996, and with the approval of the Pennsylvania Insurance
Commissioner (the "Commissioner"), MASCCO withdrew from the pooling agreement
and ceased writing any new business. The Pooled Companies also ceded to MASCCO
the indemnity portion of Pennsylvania workers' compensation claims for accident
years 1991 and prior. At June 30, 1998, MASCCO had $97.0 million in total
assets and $80.1 million in total reserves. Substantially all of MASCCO's
assets are held in trust for the benefit of the Pooled Companies. MASCCO is
also included in the Property and Casualty Group's GAAP results.
PMA Insurance, Cayman Ltd. ("PMA Cayman"), was incorporated in Grand Cayman, and
had no material operations until 1996. In 1996, the Pooled Companies ceded to
PMA Cayman substantially all of its remaining liability for
16
<PAGE>
workers' compensation claims for accident years 1991 and prior. In 1997, the
Pooled Companies also ceded to PMA Cayman a portion of its workers compensation
reserves from accident years 1992 to 1996. At June 30, 1998, PMA Cayman had
$233.0 million in total assets and $215.5 million in total reserves.
Substantially all of PMA Cayman's assets are held in trust for the benefit of
the Pooled Companies. The Company has entered into a definitive letter of intent
to sell PMA Cayman. See discussion below for further details.
PMA Life Insurance Company ("PMA Life") is a Pennsylvania life insurance company
that derives all of its insurance revenues from intercompany transactions with
the Pooled Companies. In 1997, the Property and Casualty Group reinsured
substantially all of PMA Life's insurance liabilities with a third party
reinsurer and no longer places insurance business with PMA Life. At June 30,
1998, PMA Life had assets of $22.9 million and $17.7 million in total reserves.
The following table reflects the components of the Property and Casualty Group -
Run-off Operations' operating results for the three and six months ended June
30, 1998 and 1997:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net investment income $5,464 $7,459 $11,303 $14,972
Net premiums earned (1) -- -- -- 814
------ ------ ------- -------
Total operating revenues 5,464 7,459 11,303 15,786
------ ------ ------- -------
Losses and LAE incurred 4,505 6,989 9,401 15,097
Operating expenses 666 1,003 1,474 1,796
------ ------ ------- -------
Total expenses 5,171 7,992 10,875 16,893
------ ------ ------- -------
Pre-tax operating income (loss) $ 293 $ (533) $ 428 $(1,107)
====== ====== ======= =======
</TABLE>
(1) Amount represents net premiums earned during the first six months of 1997
for PMA Life prior to the reinsurance transaction mentioned above, after
which PMA Life was placed into run-off.
Investment income for the Run-off Operations decreased by $2.0 million in the
three months and $3.6 million in the six months ended June 30, 1998, compared to
the same periods in 1997 primarily due to lower average invested balances, as
the Run-off Operations paid claims aggregating $160.7 million in 1997 and $58.4
million in the first six months of 1998. The aforementioned commutation program
initiated by the Property and Casualty Group in late 1996 and completed in July
1997 accelerated payments to claimants, and a portion of such payments were
funded by the Run-off Operations.
Losses and LAE of the Run-off Operations are comprised of discount accretion on
established loss reserves within the Run-off Operations. The decrease in loss
reserve discount accretion was primarily due to the payments made for the
underlying claims in 1997.
The Company entered into a definitive letter of intent, dated June 26, 1998, to
sell PMA Cayman. The transaction is subject to customary closing conditions,
including regulatory approvals, and is expected to be completed in the third
quarter of 1998. In connection with the announced sale, the Company recorded a
$2.4 million pre-tax loss in the second quarter, which is included in "Net
Realized Investment Gains.".
17
<PAGE>
CALIBER ONE RESULTS OF OPERATIONS
Summarized financial results of Caliber One for the three and six months ended
June 30, 1998, are as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1998
------ -------
<S> <C> <C>
Net premiums written $ 705 $ 917
====== =======
Net premiums earned $ 165 $ 191
Net investment income 371 714
------ -------
Operating revenues 536 905
------ -------
Losses and LAE incurred 133 153
Acquisition and operating expenses 1,084 1,822
------ -------
Total losses and expenses 1,217 1,975
------ -------
Pre-tax operating income $ (681) $(1,070)
====== =======
</TABLE>
Due to the start-up nature of the business, the financial ratios for Caliber One
do not provide meaningful representation of the operating results, and
therefore, have been excluded from the table above. Gross premiums written and
net premiums written for Caliber One in the second quarter of 1998 were $1.3
million and $705,000, respectively, representing a 345% increase in gross
premiums written and a 233% increase in net premiums written compared to the
first quarter of 1998. The loss ratio for the second quarter of 1998 was 80.6%.
As expected, operating expenses, which include start-up costs, in the first half
of 1998 were high relative to the premium volume, which distorts the expense
ratio. Management expects operating expenses to be more commensurate with
premium volume over time as premium volume continues to grow. Net investment
income was $371,000 for the second quarter of 1998.
CORPORATE AND OTHER RESULTS OF OPERATIONS
Corporate and Other is primarily comprised of corporate overhead and the
operations of the Company's properties. For the three and six months ended June
30, 1998, Corporate and Other recorded pre-tax operating losses before interest
expense of $2.8 million and $5.5 million, respectively, compared to $2.6 million
and $4.5 million for the three and six months ended June 30, 1997, respectively.
The higher operating loss in 1998 compared to the same period in 1997 relates to
increased corporate operating costs, primarily related to compensation as the
Company implemented a new management incentive compensation plan in the second
quarter of 1997 that increased expenses for 1998 relative to the first half of
1997, partially offset by operating costs associated with certain corporate
properties disposed of in the third quarter of 1997.
NET REALIZED INVESTMENT GAINS
The Company recorded net realized investment gains of $3.7 million and $11.3
million for the three and six months ended June 30, 1998, respectively, compared
to net realized investment losses of $680,000 and $1.9 million for the
comparable 1997 periods. Gains and losses on the sale of investments are
recognized as a component of net income, but the timing and recognition of such
gains and losses are unpredictable and are not indicative of future results. In
addition, the $2.4 million pre-tax loss related to the announced sale of PMA
Cayman was included in net realized investment gains for the three and six
months ended June 30, 1998.
18
<PAGE>
INTEREST EXPENSE AND INCOME TAXES
Interest expense for the second quarter decreased $126,000 compared to the same
period in 1997 due to interest rate fluctuations. Interest expense decreased
$759,000 for the six months ended June 30, 1998 compared to the 1997 period due
to the refinancing of the Company's debt in March of 1997. The Company's
effective tax rate was 13.2% and 16.0% for the three and six months ended June
30, 1998, compared to 111.1% and (101.4%) for the three and six months ended
June 30, 1997. The Company recorded a net deferred tax asset of $63.0 million
as of June 30, 1998 compared to $70.4 million as of December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. At the holding company level, the
Company requires cash to pay debt obligations and dividends to shareholders, pay
taxes to the federal government, as well as to capitalize subsidiaries from time
to time. The Company's primary sources of liquidity are dividends from
subsidiaries, net tax payments received from subsidiaries, and borrowings.
The Company paid interest of $4.2 million and $7.5 million for the three and six
months ended June 30, 1998, compared to $4.2 million and $12.2 million for the
three and six months ended June 30, 1997. The decrease in interest paid for the
first half of 1998 relates to the fact that the March 1997 refinancing of PMC's
debt obligations accelerated certain interest payments to the first quarter of
1997. The Company paid $2.1 million and $4.1 million of dividends to
shareholders in the three and six month periods ended June 30, 1998,
respectively, compared to $2.0 million and $4.0 million for the comparable
periods in 1997.
Dividends received from subsidiaries were $6.0 million and $10.0 million for the
three and six months ended June 30, 1998, respectively, compared to $4.0 million
and $8.0 million for the comparable 1997 periods. Net tax cash flows from
subsidiaries were $8.7 million and $14.7 million for the three and six months
ended June 30, 1998, respectively, compared to $5.8 million and $8.4 million for
the comparable 1997 periods.
The Company's domestic insurance subsidiaries' ability to pay dividends to the
holding company is limited by the insurance laws and regulations of
Pennsylvania. Under such laws and regulations, dividends may not be paid
without prior approval of the Commissioner in excess of the greater of (i) 10%
of surplus as regards to policyholders as of the end of the preceding year or
(ii) statutory net income for the preceding year, but in no event to exceed
unassigned funds. Under this standard, the Company's domestic insurance
subsidiaries can pay an aggregate of $51.2 million of dividends, without the
prior approval of the Commissioner, during 1998. Caliber One Indemnity Company
is directly owned by PMA Re, and as such, its dividends may not be paid directly
to PMC.
PMC's dividends to shareholders are restricted by its debt agreements. Based
upon the terms of the Company's credit facility, under the most restrictive debt
covenant, PMC would be able to pay dividends of approximately $14.5 million in
1998.
Management believes that the Company's sources of funds will provide sufficient
liquidity to meet its short-term and long-term obligations.
CAPITAL RESOURCES
The Company's total assets increased $18.2 million to $3,075.4 million at June
30, 1998 compared to $3,057.3 million at December 31, 1997. Total investments
decreased $35.4 million to $2,159.3 million at June 30, 1998. This decrease was
primarily attributable to the Property and Casualty Group's pay-down of loss
reserves from prior accident years. All other assets increased $53.6 million,
mainly due to increases in uncollected premiums of $40.9 million and reinsurance
receivables of $15.4 million in comparison to December 31, 1997. The increases
in uncollected premiums compared to December 31, 1997 were primarily related to
the cyclical nature of the premium volume and collection
19
<PAGE>
patterns throughout the year. The uncollected premiums are more comparable to
the balances at June 30, 1997. The increase in reinsurance receivables compared
to December 31, 1997 primarily relates to the Property and Casualty Group's new
reinsurance treaty for Commercial Lines entered into during 1997 which has
increased the amount of ceded losses, which increases the reinsurance
receivables balance. Additional increases in other assets and deferred
acquisition costs of $24.9 million and $8.1 million, respectively, were offset
by a decrease in cash of $24.6 million related to settlement timing of
investment transactions at December 31, 1997. The increase in other assets at
June 30, 1998 compared to December 31, 1997 primarily relates to timing
differences in prepaid expenses and miscellaneous assets at the operating
companies. The increase in deferred acquisition costs at June 30, 1998 compared
to December 31, 1997 is primarily due to the higher acquisition costs at PMA Re
(see "PMA Re Results of Operations") as well as the cyclical nature of the
premium writings which increases acquisition costs in the beginning of the year.
Consolidated shareholders' equity at June 30, 1998, totaled $496.4 million or
$20.96 per share compared to $478.3 million or $19.96 per share at December 31,
1997. As a result of changes in market interest rates, the unrealized
appreciation of investments, net of tax, was $26.3 million at June 30, 1998,
compared to $18.8 million at December 31, 1997, resulting in an increase in
shareholders' equity of $7.5 million or $0.32 per share.
At June 30, 1998, the Company had $203.0 million outstanding under its existing
credit facility, with $32.0 million available for additional borrowings.
Management also entered into an interest rate swap agreement which is intended
to manage the impact of the potential volatility of the interest rate associated
with the floating rates on the credit facility. The interest rate swap covers a
notional principal amount of $150.0 million and effectively converts the
floating rate on such portion of the credit facility to a fixed rate of 7.24%.
The Company's interest rate swap agreement involves the exchange of interest
payment obligation without the exchange of underlying principal. The
differential to be paid or received is recognized as an adjustment of interest
expense. In the event that a counterparty fails to meet the terms of the
agreement, the Company's exposure is limited to the interest rate differential
on the notional principal amount ($150.0 million). Management believes such
credit risk is minimal and any loss would not be significant.
YEAR 2000 ISSUE
With the assistance of outside consulting groups, the Company began evaluating
and reprogramming its own computer systems to address the Year 2000 issue in
late 1995. Management anticipates that by year-end 1998, it will have
substantially completed all necessary programming work. Accordingly, management
believes that Year 2000 issues related to the Company's hardware and internal
software programs are not likely to result in any material adverse disruptions
in the Company's computer systems or its internal business operations. The cost
of this work through June 30, 1998 has been approximately $5.3 million. The
Company estimates that the total remaining cost will be approximately $175,000,
which will be expensed throughout the remainder of 1998.
The Company is currently in the process of evaluating its relationships with
third parties with whom the Company has a direct and material relationship to
determine whether they are Year 2000 compliant. The responses by such third
parties to inquiries made by the Company as have been received to date indicate
that these third parties either are or expect to be compliant by the year 2000.
Even assuming that all material third parties provide a timely representation
affirming such Year 2000 compliance, however, it is not possible to state with
certainty that such representations will turn out to have been accurate, or that
the operations of such third parties will not be materially impacted in turn by
other parties with whom they themselves have a material relationship, and who
fail to timely become Year 2000 compliant. Consequently, it is not possible to
predict whether or to what extent the Year 2000 issues may have an adverse
material impact on the Company as a result of their impact on the operations of
third parties with whom the Company has a material relationship.
Many experts now believe that Year 2000 issues may have a material adverse
impact on the national and global economy generally. In addition, it seems
likely that if businesses are materially damaged as a result of Year 2000
issues, at least some such businesses may attempt to recoup their losses by
claiming coverage under various types of insurance policies. Although management
has concluded that under a fair reading of the various policies of insurance
issued by the Company no coverage for Year 2000 issues should be considered to
exist, it is not possible to predict whether or to what extent any such coverage
could ultimately be found to exist by courts in various jurisdictions.
Accordingly, important factors which could cause actual results to differ
materially from those expressed in the forward looking statements include, but
are not limited to, the inability of the Company to accurately estimate the
impact of the Year 2000 issue on the insurance issued by, or other business
operations of, the Company.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" ("SFAS No. 130"), which establishes
standards for the reporting and disclosure of comprehensive income and its
components (revenues, expenses, gains and losses). SFAS No. 130 requires that
all items required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income
includes a
20
<PAGE>
reclassification adjustment for net realized investment gains included in net
income of $4.0 million (after income taxes of $2.2 million) and $8.9 million
(after income taxes of $4.8 million) for the three and six months ended June 30,
1998 and net realized investment losses of $137,000 (after income taxes of
$74,000) and $950,000 (after income taxes of $512,000) for the three and six
months ended June 30, 1997. The new standard requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. In
connection with the adoption of SFAS No. 131, the Company has identified four
reportable segments: (i) PMA Re, which provides reinsurance products and
services; (ii) the Property and Casualty Group, which writes workers'
compensation and other standard lines of commercial insurance and includes run-
off operations; (iii) Caliber One, which writes specialty insurance focusing on
excess and surplus lines; and (iv) Corporate and Other, which is primarily
comprised of corporate overhead and the operations of the Company's properties.
Pursuant to the adoption of SFAS No. 131, the Company has restated the
corresponding information from 1997 for comparability, primarily related to
certain corporate expenses that were previously allocated to the operating
segments. SFAS No. 131 requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial position or
results of operations.
In January 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" ("SOP 97-3"). SOP 97-3, which is effective for fiscal years
beginning after December 31, 1998, and provides guidance for determining when an
insurance company should recognize a liability for guaranty-fund and other
insurance related assessments and how to measure that liability. While the
Company is presently evaluating the impact of SOP 97-3, the adoption of SOP 97-3
is likely to result in an increase in the Company's liabilities for such
assessments, and such increase may be material. The impact of adopting SOP 97-3
will be reflected as a cumulative effect of an accounting change in the first
quarter of 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (i) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (ii) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. While the
Company is presently evaluating the impact of SFAS No. 133, the adoption of SFAS
No. 133 is not expected to have a material impact on the Company's financial
condition or results of operations.
21
<PAGE>
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 Annual Meeting of Shareholders was held on April 27, 1998. At
the meeting, the following nominees were elected to serve as members of the
Class of 2001 of the Company's Board of Directors, to serve for a term of three
years and until their successors are elected:
<TABLE>
<CAPTION>
Name of Nominee Votes Cast For Votes Withheld
- ------------------------------------- --------------------------------------- ---------------------------------------
<S> <C> <C>
Louis N. McCarter, III 84,759,568 842,768
- -----------------------------------------------------------------------------------------------------------------------
John W. Miller, Jr. 85,524,568 77,768
- -----------------------------------------------------------------------------------------------------------------------
Edward H. Owlett 84,759,568 842,768
- -----------------------------------------------------------------------------------------------------------------------
Louis I. Pollock 84,759,568 842,768
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The name of each director whose term of office as a director continued after the
meeting and such director's respective class is as set forth below:
Class of 1999: Class of 2000:
- -------------------------- --------------------------
Paul I. Detwiler, Jr. Frederick W. Anton III
Anne S. Genter Joseph H. Foster
A. John May James F. Malone II
Roderic H. Ross L.J. Rowell, Jr.
John W. Smithson
Item 5. Other Information
Any shareholders who, in accordance with and subject to the provisions of the
proxy rules of the Securities and Exchange Commission, wishes to submit a
proposal for inclusion in the Company's proxy statement for its 1999 Annual
Meeting of Shareholders must deliver such proposal in writing to the Company's
Secretary at the Company's principal executive offices at The PMA Building, 380
Sentry Parkway, Blue Bell, Pennsylvania 19422, not later than November 26, 1998.
Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of
1934, as amended, if a shareholder who intends to present a proposal at the 1999
Annual Meeting of Shareholders does not notify the Company of such proposal on
or prior to February 9, 1999, then management proxies will be allowed to use
their discretionary authority to vote on the proposal when the proposal is
raised at the 1999 Annual Meeting of Shareholders, even though there is no
discussion of the 1999 proxy statement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1*: Amended and Restated Articles of Incorporation of the Company
Exhibit 3.2*: Amended and Restated Bylaws of the Company
Exhibit 11.1: Statement of Computation of Earnings Per Share
Exhibit 27: Financial Data Schedule
* Incorporated by reference to initial filing of Registrant's Registration
Statement on Form 10, filed June 26, 1997.
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1998:
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PENNSYLVANIA MANUFACTURERS
CORPORATION
Date: 8/13/98 By: /s/ Francis W. McDonnell
------- --------------------------
Francis W. McDonnell, Senior Vice
President, Chief Financial Officer and
Treasurer
23
<PAGE>
EXHIBIT INDEX
(a) Exhibits
Exhibit 3.1*: Amended and Restated Articles of Incorporation of the Company
Exhibit 3.2*: Amended and Restated Bylaws of the Company
Exhibit 11.1: Statement of Computation of Earnings Per Share
Exhibit 27: Financial Data Schedule
* Incorporated by reference to initial filing of Registrant's Registration
Statement on Form 10, filed June 26, 1997.
24
<PAGE>
Pennsylvania Manufacturers Corporation
Exhibit 11
Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
(dollars amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Basic:
Weighted average shares outstanding 23,692,071 23,828,248 23,770,912 23,832,562
============ ============ ============ ============
Net income before extraordinary loss $ 9,357 $ 520 $ 21,445 $ 5,277
Extraordinary loss - - - (4,734)
------------ ------------ ------------ ------------
Net income $ 9,357 $ 520 $ 21,445 $ 543
============ ============ ============ ============
Net income per common and equivalent share
before extraordinary loss $ 0.39 $ 0.02 $ 0.90 $ 0.22
Extraordinary loss - - - (0.20)
------------ ------------ ------------ ------------
Net income per common and equivalent share $ 0.39 $ 0.02 $ 0.90 $ 0.02
============ ============ ============ ============
Diluted:
Weighted average shares outstanding 23,692,071 23,828,248 23,770,912 23,832,562
Net effect of dilutive stock options - based
on the treasury stock method using average
market price or end of period market price 1,002,385 613,862 887,999 672,330
------------ ------------ ------------ ------------
Total diluted common shares 24,694,456 24,442,110 24,658,911 24,504,892
============ ============ ============ ============
Net income before extraordinary loss $ 9,357 $ 520 $ 21,445 $ 5,277
Extraordinary loss - - - (4,734)
------------ ------------ ------------ ------------
Net income $ 9,357 $ 520 $ 21,445 $ 543
============ ============ ============ ============
Net income per common and equivalent share
before extraordinary loss $ 0.38 $ 0.02 $ 0.87 $ 0.21
Extraordinary loss - - - (0.19)
------------ ------------ ------------ ------------
Net income per common and equivalent share $ 0.38 $ 0.02 $ 0.87 $ 0.02
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 1,995,653
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 15
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,159,303
<CASH> 7,585
<RECOVER-REINSURE> 347,821
<DEFERRED-ACQUISITION> 53,363
<TOTAL-ASSETS> 3,075,413
<POLICY-LOSSES> 1,939,568
<UNEARNED-PREMIUMS> 243,012
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 10,779
<NOTES-PAYABLE> 203,000
0
0
<COMMON> 122,214
<OTHER-SE> 374,169
<TOTAL-LIABILITY-AND-EQUITY> 3,075,413
221,576
<INVESTMENT-INCOME> 65,200
<INVESTMENT-GAINS> 11,263
<OTHER-INCOME> 5,090
<BENEFITS> 172,757
<UNDERWRITING-AMORTIZATION> 51,763
<UNDERWRITING-OTHER> 45,630
<INCOME-PRETAX> 25,516
<INCOME-TAX> 4,071
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,445
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.87
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
