<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 SEPTEMBER 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 14,179,580 shares outstanding of the registrant's common stock, $5
par value per share, and 9,146,028 shares outstanding of the registrant's Class
A common stock, $5 par value per share, as of the close of business on September
30, 1998.
<PAGE>
<TABLE>
<CAPTION>
INDEX
---------------------------------------------------------------------------------------------
PAGE
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial statements
Consolidated statements of operations for the three and nine months
ended September 30, 1998 (unaudited) and 1997 (unaudited) 1
Consolidated balance sheets as of September 30, 1998 (unaudited) and
December 31, 1997 2
Consolidated statements of comprehensive income for the three and
nine months ended September 30, 1998 (unaudited) and 1997 (unaudited) 3
Consolidated statements of cash flows for the nine months ended
September 30, 1998 (unaudited) and 1997 (unaudited) 4
Notes to the consolidated financial statements 5
Item 2. Management's discussion and analysis of financial condition
and results of operations 9
Part II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 24
</TABLE>
<PAGE>
Part1. Item 1.
PENNSYLVANIA MANUFACTURERS CORPORATION
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(dollar amounts in thousands, except per share data) 1998 1997 1998 1997
---------------- ---------------- ----------------- -----------------
REVENUES:
<S> <C> <C> <C> <C>
Net premiums written $120,653 $ 67,475 $369,134 $315,760
Change in net unearned premiums (6,636) (4,505) (33,541) (30,389)
-------- -------- -------- --------
Net premiums earned 114,017 62,970 335,593 285,371
Net investment income 29,163 34,353 94,363 102,812
Net realized investment gains 4,099 5,531 15,362 3,600
Service revenues 2,192 2,674 7,282 7,712
-------- -------- -------- --------
Total revenues 149,471 105,528 452,600 399,495
-------- -------- -------- --------
Losses and expenses:
Losses and loss adjustment expenses 83,473 47,785 256,230 240,919
Acquisition expenses 25,985 20,093 77,748 66,562
Operating expenses 18,154 18,765 55,654 55,670
Dividends to policyholders 5,507 3,566 13,637 10,183
Interest expense 3,768 3,803 11,231 12,025
-------- -------- -------- --------
Total losses and expenses 136,887 94,012 414,500 385,359
-------- -------- -------- --------
Income before income taxes and
extraordinary loss 12,584 11,516 38,100 14,136
Provision (benefit) for income taxes:
Current (424) (741) 267 (1,094)
Deferred 2,456 4,913 5,836 2,609
-------- -------- -------- --------
Total 2,032 4,172 6,103 1,515
-------- -------- -------- --------
Income before extraordinary loss 10,552 7,344 31,997 12,621
Extraordinary loss from early
extinguishment of debt (net of
income tax benefit of $2,549) -- -- -- (4,734)
-------- -------- -------- --------
Net income $ 10,552 $ 7,344 $ 31,997 $ 7,887
======== ======== ======== ========
INCOME PER BASIC AND DILUTED SHARE:
Basic:
Income before extraordinary loss $ 0.45 $ 0.31 $ 1.35 $ 0.53
Extraordinary loss -- -- -- (0.20)
-------- -------- -------- --------
Net income $ 0.45 $ 0.31 $ 1.35 $ 0.33
======== ======== ======== ========
Diluted:
Income before extraordinary loss $ 0.43 $ 0.30 $ 1.30 $ 0.51
Extraordinary loss -- -- -- (0.19)
-------- -------- -------- --------
Net income $ 0.43 $ 0.30 $ 1.30 $ 0.32
======== ======== ======== ========
</TABLE>
1
See accompanying notes to the consolidated financial statements.
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
September 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 - $1,805,137; 1997 - $1,900,594) $1,875,910 $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 91,328 265,207
---------- ----------
Total investments 1,967,253 2,194,738
Cash 7,595 32,148
Investment income due and accrued 23,674 23,818
Uncollected premiums (net of allowance for uncollectible accounts:
1998 - $18,545; 1997 - $18,406) 294,534 252,425
Reinsurance receivables (net of allowance for uncollectible reinsurance:
1998 - $2,168; 1997 - $2,096) 604,108 332,406
Property and equipment (net of accumulated depreciation:
1998 -$50,910; 1997 - $42,771) 37,088 38,621
Deferred income taxes, net 49,907 70,391
Deferred acquisition costs 55,958 45,288
Other assets 91,805 67,423
---------- ----------
Total assets $3,131,922 $3,057,258
========== ==========
LIABILITIES
Unpaid losses and loss adjustment expenses $1,951,497 $2,003,187
Unearned premiums 253,216 211,455
Long-term debt 203,000 203,000
Dividends to policyholders 9,605 10,200
Funds held under reinsurance treaties 75,678 69,545
Taxes, licenses and fees, and other expenses 53,622 49,410
Other liabilities 67,724 32,114
---------- ----------
Total liabilities 2,614,342 2,578,911
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, $5 par value (40,000,000 shares authorized;
1998 - 14,615,587 shares issued and 14,179,580 outstanding;
1997 - 15,286,263 shares issued and 14,850,789 outstanding) 73,078 76,431
Class A common stock, $5 par value (40,000,000 shares authorized;
1998 - 9,827,358 shares issued and 9,146,028 outstanding;
1997 - 9,156,682 shares issued and 9,117,735 outstanding) 49,136 45,783
Additional paid-in capital - Class A common stock 339 339
Retained earnings 367,999 343,368
Accumulated other comprehensive income 46,009 18,806
Notes receivable from officers (198) (198)
Treasury stock, at cost:
Common stock (shares: 1998 - 436,007 and 1997 - 435,474) (5,582) (5,572)
Class A common stock (shares: 1998 - 681,330 and 1997 - 38,947) (13,201) (610)
---------- ----------
Total shareholders' equity 517,580 478,347
---------- ----------
Total liabilities and shareholders' equity $3,131,922 $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 Nine Months Ended
(dollar amounts in thousands) September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $10,552 $ 7,344 $ 31,997 $ 7,887
------- ------- -------- -------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Holding gains arising during the period 22,363 28,185 38,761 19,955
Less: reclassification adjustment for gains
included in net income (2,651) (3,334) (11,558) (2,384)
------- ------- -------- -------
Other comprehensive income 19,712 24,851 27,203 17,571
------- ------- -------- -------
Comprehensive income $30,264 $32,195 $ 59,200 $25,458
======= ======= ======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(dollar amounts in thousands)
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,997 $ 7,887
Adjustments to reconcile net income to net cash flows used in
operating activities:
Depreciation 4,155 7,117
(Accretion) amortization (878) 3,832
Provision for deferred income taxes 5,836 2,609
Extraordinary loss from early extinguishment of debt -- (4,734)
Net realized investment gains (15,362) (3,600)
Change in uncollected premiums and unearned premiums, net (348) 23,523
Change in dividends to policyholders (595) (1,820)
Change in reinsurance receivables (54,165) (36,523)
Change in unpaid losses and loss adjustment expenses (51,690) (101,912)
Change in investment income due and accrued 144 (313)
Other, net 7,671 14,275
----------- -----------
Net cash flows used in operating activities (73,235) (89,659)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturity investments available for sale:
Purchases (1,377,422) (1,462,705)
Maturities or calls 108,013 122,974
Sales 1,175,526 1,432,258
Equity securities:
Sales -- 3
Net sales (purchases) of short-term investments 162,296 (7,047)
Proceeds from sale of corporate properties -- 7,145
Proceeds from sale of subsidiary 2,902 --
Net purchases of property and equipment (2,601) (2,245)
----------- -----------
Net cash flows provided by investing activities 68,714 90,383
----------- -----------
Cash flows from financing activities:
Dividends paid to shareholders (6,086) (5,966)
Proceeds from long-term debt -- 210,000
Repayments of long-term debt -- (211,699)
Repayments of notes receivable from officers -- 1,034
Treasury stock transactions, net (13,946) 626
----------- -----------
Net cash flows used in financing activities (20,032) (6,005)
----------- -----------
Net decrease in cash (24,553) (5,281)
Cash January 1 32,148 7,176
----------- -----------
Cash September 30 $ 7,595 $ 1,895
=========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash received for income taxes $ (616) $ (19,312)
Cash paid for interest $ 11,150 $ 15,637
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
Notes to the Consolidated Financial Statements
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 operations ("PMA Re"), including PMA
Reinsurance Corporation, emphasize risk-exposed, excess of loss reinsurance and
operate 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 Insurance -- In January of 1998, the Company's
specialty insurance unit, Caliber One, commenced writing business. Caliber One
writes 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 41
states, Washington, DC, and Puerto Rico, with applications pending 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 to the 1998 presentation. Additionally, net premiums written were
reduced by $37.0 million for both the three and nine months ended September 30,
1997, representing estimated retrospective policy adjustments related to the
current accident year and retrospective policy adjustments paid. These
adjustments to net premiums written were made for presentation purposes only and
had previously been reflected in the Company's reported revenues, financial
position and results of operations.
Operating results for the three and nine months ended September 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 PMC's Form 10-K annual report
for the year ended December 31, 1997.
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 in 1997.
In accordance with SFAS No. 128, all prior period data presented has been
restated to conform to 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
earnings per share calculation to the numerators and denominators used in the
diluted earnings per share calculation. Such reconciliation is provided below:
5
<PAGE>
<TABLE>
<CAPTION>
(dollar amounts in thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Numerator:
Control number - income
Before extraordinary loss........... $ 10,552 $ 7,344 $ 31,997 $ 12,621
DENOMINATOR:
Basic shares - weighted average
Common and Class A common
Shares outstanding.................. 23,573,472 23,870,089 23,704,376 23,845,194
Dilutive stock options................ 1,043,105 639,843 945,028 661,544
----------- ----------- ----------- -----------
Total diluted shares.................. 24,616,577 24,509,932 24,649,404 24,506,738
=========== =========== =========== ===========
</TABLE>
Basic earnings per share: For the three and nine months ended September 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
periods.
Diluted earnings per share: For the three and nine months ended September 30,
1998 and 1997, diluted earnings per share calculations were based upon the
weighted average number of common and Class A common shares outstanding for 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 $2.7 million (after income taxes of $1.4 million) and
$11.6 million (after income taxes of $6.2 million) for the three and nine months
ended September 30, 1998 and $3.3 million (after income taxes of $1.8 million)
and $2.4 million (after income taxes of $1.3 million) for the three and nine
months ended September 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.
The Company has excluded net realized investment gains (losses) from the profit
and loss measurement it utilizes to assess the performance of its operating
segments because (i) net realized investment gains (losses) are unpredictable
and not necessarily indicative of future performance and (ii) in many instances,
decisions to buy and sell securities are made at the parent holding company
level, and such decisions result in net realized gains (losses) that do not
relate to the operations of the individual segments. 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.
6
<PAGE>
The following table indicates the Company's pre-tax operating income (loss) by
principal business segment for the three and nine months ended September 30,
1998 and 1997:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 (1) 1998 1997 (1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PMA Re $11,930 $11,487 $34,882 $34,674
The Property and Casualty Group:
Excluding Run-off Operations 3,389 (76) 8,343 (4,857)
Run-off Operations (387) 999 41 (108)
------- ------- ------- -------
Total 3,002 923 8,384 (4,965)
Caliber One (247) -- (1,317) --
Corporate and Other (2,432) (2,622) (7,980) (7,148)
------- ------- ------- -------
Pre-tax operating income before
interest expense 12,253 9,788 33,969 22,561
Interest expense 3,768 3,803 11,231 12,025
------- ------- ------- -------
Pre-tax operating income 8,485 5,985 22,738 10,536
Net realized investment gains 4,099 5,531 15,362 3,600
------- ------- ------- -------
Income before income taxes and
extraordinary loss 12,584 11,516 38,100 14,136
Provision for income taxes 2,032 4,172 6,103 1,515
------- ------- ------- -------
Income before extraordinary loss 10,552 7,344 31,997 12,621
Extraordinary loss -- -- -- (4,734)
------- ------- ------- -------
Net income $10,552 $ 7,344 $31,997 $ 7,887
------- ------- ------- -------
</TABLE>
(1) Pre-tax operating income (loss) by principal business segment has been
reclassified for 1997 to reflect the changes related to the implementation
of SFAS No. 131.
The following table indicates the Company's total assets by principal business
segment at September 30, 1998:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
<S> <C>
PMA Re $1,223,315
The Property and Casualty Group:
Excluding Run-off Operations 1,722,177
Run-off Operations 116,242
----------
Total 1,838,419
Caliber One 63,725
Corporate and Other 6,463
----------
Total assets $3,131,922
==========
</TABLE>
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, although such increase is not expected to exceed $5.0 million. The
impact of adopting SOP 97-3 will be reflected as a cumulative effect of an
accounting change in the first quarter of 1999.
7
<PAGE>
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
Effective July 1, 1998, the Company sold PMA Insurance, Cayman Ltd. ("PMA
Cayman"), one of the entities included in the Property and Casualty Group's Run-
off Operations, which reinsures claims for certain policies written by
Pennsylvania Manufacturers' Association Insurance Company, Manufacturers
Alliance Insurance Company and Pennsylvania Manufacturers Indemnity Company (the
"Pooled Companies"), to a third party for a purchase price of $1.8 million and
recorded an after-tax loss of $1.6 million. In addition, the Company
transferred to the buyer $231.5 million in cash and invested assets and recorded
reinsurance receivables of $241.8 million as of September 30, 1998 related to
the existing reinsurance agreements with PMA Cayman. If the actual claim
payments in the aggregate exceed the estimated payments upon which the loss
reserves have been established, the Company has agreed to indemnify the buyer,
up to a maximum of $15.0 million. If the actual claim payments in the aggregate
are less than the estimated payments upon which the loss reserves have been
established, the Company will participate in such favorable loss reserve
development.
5. Cost Reduction Initiatives
During 1997, the Company recorded a $7.0 million charge in operating expenses
for costs associated with nonvoluntary terminations of approximately 60
employees in various operational and management positions. During 1998, the
Company recorded additional charges of approximately $500,000 in operating
expenses for such terminations. As of September 30, 1998, approximately $2.0
million of such charges remained in Other Liabilities on the balance sheet.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
(dollar amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pre-tax operating income (1) $ 8,485 $ 5,985 $22,738 $10,536
Net realized investment gains 4,099 5,531 15,362 3,600
------- ------- ------- -------
Income before income taxes and
extraordinary loss 12,584 11,516 38,100 14,136
Provision for income taxes 2,032 4,172 6,103 1,515
------- ------- ------- -------
Income before extraordinary loss 10,552 7,344 31,997 12,621
Extraordinary loss, net of related taxes -- -- -- (4,734)
------- ------- ------- -------
Net income $10,552 $ 7,344 $31,997 $ 7,887
======= ======= ======= =======
PER BASIC SHARE:
Income before extraordinary loss $ 0.45 $ 0.31 $ 1.35 $ 0.53
Extraordinary loss -- -- -- (0.20)
------- ------- ------- -------
Net income $ 0.45 $ 0.31 $ 1.35 $ 0.33
======= ======= ======= =======
PER DILUTED SHARE:
Income before extraordinary loss $ 0.43 $ 0.30 $ 1.30 $ 0.51
Extraordinary loss -- -- -- (0.19)
------- ------- ------- -------
Net income $ 0.43 $ 0.30 $ 1.30 $ 0.32
======= ======= ======= =======
</TABLE>
(1) Pre-tax operating income is defined as income from continuing operations
before income taxes, but excluding net realized investment gains. The
Company has excluded net realized investment gains (losses) from the profit
and loss measurement it utilizes to assess the perfornance of its operating
segments because (i) net realized investment gains (losses) are
unpredictable and not necessarily indicative of future performance and (ii)
in many instances, decisions to buy and sell securities are made at the
parent holding company level, and such decisions result in net realized
gains (losses) that do not relate to the operations of the individual
segments.
9
<PAGE>
The following table indicates the Company's pre-tax operating income (loss) by
principal business segment for the three and nine months ended September 30,
1998 and 1997:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 (1) 1998 1997 (1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PMA Re $11,930 $11,487 $34,882 $34,674
The Property and Casualty Group:
Excluding Run-off Operations 3,389 (76) 8,343 (4,857)
Run-off Operations (387) 999 41 (108)
------- ------- ------- -------
Total 3,002 923 8,384 (4,965)
Caliber One (247) -- (1,317) --
Corporate and Other (2,432) (2,622) (7,980) (7,148)
------- ------- ------- -------
Pre-tax operating income before
interest expense 12,253 9,788 33,969 22,561
Interest expense 3,768 3,803 11,231 12,025
------- ------- ------- -------
Pre-tax operating income $ 8,485 $ 5,985 $22,738 $10,536
======= ======= ======= =======
</TABLE>
(1) Pre-tax operating income (loss) by principal business segment has 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).
The following table indicates the Company's total assets by principal business
segment at September 30, 1998:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
<S> <C>
PMA Re $1,223,315
The Property and Casualty Group:
Excluding Run-off Operations 1,722,177
Run-off Operations 116,242
----------
Total 1,838,419
Caliber One 63,725
Corporate and Other 6,463
----------
Total assets $3,131,922
==========
</TABLE>
On a consolidated basis, the Company reported pre-tax operating income of $8.5
million and $22.7 million for the three and nine months ended September 30,
1998, respectively, compared to pre-tax operating income of $6.0 million and
$10.5 million for the three and nine months ended September 30, 1997. The
increases in pre-tax operating income for the three and nine months ended
September 30, 1998, compared to the same periods in 1997, were primarily due to
increased operating income at the Property and Casualty Group and PMA Re,
partially offset by the Caliber One pre-tax operating losses related to the
commencement of its operations. The improvements in pre-tax operating results
for the Property and Casualty Group were primarily related to improved loss
experience in workers' compensation business, reduced exposures in other
commercial lines business and lower operating expenses resulting from the
Property and Casualty Group's ongoing cost reduction initiatives. PMA Re's
increased pre-tax operating results for the three and nine months ended
September 30, 1998 compared to the same periods in 1997 were as a result
of increased premium volume, lower loss ratios and higher investment income,
partially offset by increased acquisition costs.
10
<PAGE>
Interest expense for the three months ended September 30, 1998 was comparable to
the third quarter of 1997 and decreased $794,000 for the nine months ended
September 30, 1998 compared to the same period in 1997 due to the March 1997
refinancing of the Company's debt facility.
Net realized investment gains were $4.1 million and $15.4 million for the three
and nine months ended September 30, 1998, respectively, compared to $5.5 million
and $3.6 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.
Net income on a consolidated basis, before extraordinary loss, was $10.6
million, or $0.45 per basic share and $0.43 per diluted share, and $32.0
million, or $1.35 per basic share and $1.30 per diluted share, for the three and
nine months ended September 30, 1998, respectively, compared to $7.3 million, or
$0.31 per basic share and $0.30 per diluted share, and $12.6 million, or $0.53
per basic share and $0.51 per diluted share, for the three and nine months ended
September 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 nine months ended
September 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 (1) 1998 1997 (1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $54,687 $45,019 $172,595 $141,298
======= ======= ======== ========
Net premiums earned $56,386 $39,208 $157,353 $124,295
Net investment income 13,732 13,460 40,903 38,748
------- ------- -------- --------
Operating revenues 70,118 52,668 198,256 163,043
------- ------- -------- --------
Losses and LAE incurred 37,633 28,512 107,311 90,743
Acquisition and operating expenses 20,555 12,669 56,063 37,626
------- ------- -------- --------
Total losses and expenses 58,188 41,181 163,374 128,369
------- ------- -------- --------
Pre-tax operating income $11,930 $11,487 $ 34,882 $ 34,674
======= ======= ======== ========
GAAP loss ratio 66.7% 72.7% 68.2% 73.0%
GAAP combined ratio 103.2% 105.0% 103.8% 103.3%
SAP loss ratio 66.6% 72.5% 67.8% 72.9%
SAP combined ratio 104.7% 102.6% 104.5% 103.2%
</TABLE>
11
<PAGE>
Premium Revenues
The following table indicates PMA Re's gross and net premiums written by major
category of business:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross premiums written:
Casualty lines $49,857 $34,331 $152,465 $117,620
Property lines 17,066 21,789 58,379 58,705
Other lines 308 206 809 707
------- ------- -------- --------
Total $67,231 $56,326 $211,653 $177,032
======= ======= ======== ========
Net premiums written:
Casualty lines $40,922 $25,576 $124,457 $ 93,862
Property lines 13,516 19,259 47,365 46,760
Other lines 249 184 773 676
------- ------- -------- --------
Total $54,687 $45,019 $172,595 $141,298
======= ======= ======== ========
</TABLE>
Gross premiums written increased $10.9 million, or 19.4%, and $34.6 million, or
19.6%, for the three and nine months ended September 30, 1998, respectively,
compared to the same periods ended September 30, 1997. For the three months
ended September 30, 1998, gross premiums written increased 45.2% for casualty
lines and decreased 21.7% for property lines compared to the same period in
1997. For the nine months ended September 30, 1998, gross premiums written
increased 29.6% for casualty lines and decreased 0.6% for property lines
compared to the same period in 1997. Premium growth has resulted primarily from
expanding relationships with existing clients reflecting PMA Re's focus on
increased participations on existing reinsurance treaties and participations on
new programs for current clients. PMA Re added 33 new programs for existing
clients during the first nine months of 1998. PMA Re also added contracts with
14 new ceding companies, which meet the criteria established internally defining
small to medium size companies. These increases were partially offset by the
highly competitive conditions in the U.S. reinsurance market, which resulted in
46 accounts being non-renewed during the first nine months of 1998, largely due
to inadequate rates and/or other underwriting concerns.
Net premiums written increased $9.7 million, or 21.5%, and $31.3 million, or
22.1%, for the three and nine months ended September 30, 1998, respectively,
compared to the same periods ended September 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 $17.2 million, or 43.8%, and $33.1 million, or
26.6%, for the three and nine months ended September 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.
12
<PAGE>
Losses and Expenses
The following table reflects the components of PMA Re's combined ratios, as
computed under GAAP:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss ratio 66.7% 72.7% 68.2% 73.0%
----- ----- ----- -----
Expense ratio:
Acquisition expenses 30.6% 24.5% 29.2% 24.0%
Operating expenses 5.9% 7.8% 6.4% 6.3%
----- ----- ----- -----
Total expense ratio 36.5% 32.3% 35.6% 30.3%
----- ----- ----- -----
Combined ratio - GAAP (1) 103.2% 105.0% 103.8% 103.3%
===== ===== ===== =====
</TABLE>
(1) The combined ratio computed on a GAAP basis is equal to losses and loss
adjustment expenses, plus acquisition expenses, plus operating expenses, plus
policyholders' dividends (where applicable), all divided by net premiums earned.
For both the three and nine month periods ended September 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
three and nine-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.
The ratio of operating expenses to net premiums earned (the "Operating Expense
Ratio") decreased 1.9 points for the three months ended September 30, 1998,
compared to the same period in 1997 and, for the nine months ended September 30,
1998, remained comparable to the same period in 1997. The decrease in the
Operating Expense Ratio for the three months ended September 30, 1998 compared
to the same period in 1997 primarily reflects a 43.8% increase in net premiums
earned versus a 7.4% increase in operating expenses.
Net Investment Income
PMA Re's operating income was also impacted by higher levels of investment
income, which reflected higher average invested assets. For the quarter ended
September 30, 1998, PMA Re's net investment income increased $272,000 versus the
third quarter of 1997, and for the nine months ended September 30, 1998, net
investment income increased $2.2 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., Pennsylvania Manufacturers International Insurance, Limited
and the Run-off Operations. Run-off operations ("Run-off Operations") of the
Property and Casualty Group are comprised of Mid-Atlantic States Casualty
Company, PMA Life Insurance Company and PMA Insurance, Cayman Ltd. (which was
sold effective July 1, 1998 - see Run-off Operations below for further
discussion) 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's Run-off Operations
were reduced by $37.0 million for both the three and nine months ended September
30, 1997, representing estimated retrospective policy adjustments related to the
current accident
13
<PAGE>
year and retrospective policy adjustments paid. These adjustments to net
premiums written were made for presentation purposes only and had previously
been reflected in the Company's reported revenues, financial position and
results of operations. Summarized financial results of the Property and Casualty
Group for the three and nine months ended September 30, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written:
Workers' compensation $49,107 $ 8,989 $147,502 $108,613
Commercial lines 15,397 13,467 46,829 65,849
------- -------- -------- --------
Total $64,504 $ 22,456 $194,331 $174,462
======= ======== ======== ========
Net premiums earned:
Workers' compensation $40,931 $ 4,366 $127,942 $ 99,982
Commercial lines 16,458 19,396 50,036 61,094
------- -------- -------- --------
Total 57,389 23,762 177,978 161,076
------- -------- -------- --------
Net investment income:
Excluding Run-off Operations 13,180 13,143 38,547 40,073
Run-off Operations 1,477 7,161 12,780 22,133
------- -------- -------- --------
Total 14,657 20,304 51,327 62,206
------- -------- -------- --------
Service revenues 2,192 2,674 7,282 7,712
------- -------- -------- --------
Operating revenues 74,238 46,740 236,587 230,994
------- -------- -------- --------
Losses and LAE incurred:
Excluding Run-off Operations 44,326 50,957 138,010 166,830
Run-off Operations 1,241 (31,610) 10,642 (16,513)
------- -------- -------- --------
Total 45,567 19,347 148,652 150,317
------- -------- -------- --------
Acquisition and operating expenses:
Excluding Run-off Operations 19,539 22,132 63,817 72,891
Run-off Operations 623 772 2,097 2,568
------- -------- -------- --------
Total 20,162 22,904 65,914 75,459
------- -------- -------- --------
Policyholders' dividends 5,507 3,566 13,637 10,183
------- -------- -------- --------
Total losses and expenses 71,236 45,817 228,203 235,959
------- -------- -------- --------
Pre-tax operating income (loss) $ 3,002 $ 923 $ 8,384 $ (4,965)
======= ======== ======== ========
GAAP loss ratio 79.4% 81.4% 83.5% 93.3%
GAAP combined ratio (1) 120.4% 182.6% 124.4% 142.1%
SAP loss ratio (2) 78.1% 84.2% 78.0% 84.9%
SAP combined ratio (2) 113.6% 120.7% 113.5% 119.3%
</TABLE>
(1) The GAAP combined ratio excludes $2.2 million and $6.9 million for the
three and nine months ended September 30, 1998, respectively, and $2.4
million and $6.9 million for the three and nine months ended September 30,
1997, respectively, of PMA Management Corp. direct expenses related to
service revenues, which are not included in net premiums earned.
(2) The SAP loss and combined ratios above relate to the Pooled Companies only.
14
<PAGE>
PROPERTY AND CASUALTY GROUP EXCLUDING RUN-OFF OPERATIONS
--------------------------------------------------------
Premium Revenues
For the three and nine months ended September 30, 1998, net premiums written
increased $5.1 million and decreased $16.3 million compared to the same periods
in 1997. Earned premiums decreased by $3.4 million and $19.3 million,
respectively, for the three and nine months ended September 30, 1998, compared
to the same periods in 1997. Net premiums earned generally follow growth
patterns similar to net premiums written with the earnings lag factored into the
process, absent any significant adjustments to unearned premiums. Such
adjustments did not fluctuate materially between periods.
Net premiums written are comprised of direct premiums written, reinsurance
premiums assumed and reinsurance premiums ceded. Direct premiums written for
the Property and Casualty Group increased $2.7 million and decreased $20.1
million for the three and nine months ended September 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 $3.0 million and $21.8 million for
the three and nine months ended September 30, 1998, respectively, compared to
the same periods in 1997. Direct premiums written for workers' compensation
increased $5.7 million and $1.7 million for the three and nine months ended
September 30, 1998, respectively, compared to the same periods in 1997.
Reinsurance premiums assumed decreased $323,000 and $395,000 for the three and
nine months ended September 30, 1998, respectively, compared to the same periods
in 1997. Reinsurance premiums ceded decreased $2.7 million and $4.2 million for
the three and nine months ended September 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 75.9% for the nine months
ended September 30, 1998, from 69.1% for the nine months ended September 30,
1997, primarily due to a planned reduction in Commercial Lines of business, as
more fully described below.
Direct premiums written for workers' compensation increased due to product
marketing, in spite of 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.
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 nine months ended September 30, 1998, such adjustments increased
premiums written by $1.6 million and $9.7 million, compared to increases of $3.5
million and $11.8 million in the same periods in 1997.
The decreases in Commercial Lines direct writings for the three and nine months
ended September 30, 1998 compared to the same periods in 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.
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 because the insured retains a
greater portion of the underwriting risk than under rate-sensitive or loss-
sensitive products. A substantial portion of related revenues are recorded as
service revenues. Such service revenues decreased $482,000 and $430,000 for the
three and nine months ended September 30, 1998, compared to the same periods in
1997.
15
<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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss ratio 77.2% 83.9% 77.5% 84.6%
----- ----- ----- -----
Expense ratio:
Amortization of deferred acquisition costs 13.5% 17.2% 17.3% 18.6%
Operating expenses (1) 16.8% 15.2% 14.7% 14.8%
----- ----- ----- -----
Total expense ratio 30.3% 32.4% 32.0% 33.4%
----- ----- ----- -----
Policyholders' dividends 9.6% 5.9% 7.7% 5.2%
----- ----- ----- -----
Combined ratio - GAAP (2) 117.1% 122.2% 117.2% 123.2%
===== ===== ===== =====
</TABLE>
(1) The GAAP Operating Expense Ratio excludes $2.2 million and $6.9 million for
the three and nine months ended September 30, 1998, respectively, and $2.4
million and $6.9 million for the three and nine months ended September 30,
1997, respectively, of PMA Management Corp. direct expenses related to
service revenues, which are not included in net premiums earned.
(2) The GAAP combined ratios for the Property and Casualty Group including the
Run-off Operations were 120.4% and 124.4% for the three and nine months
ended September 30, 1998, respectively, compared to 182.6% and 142.1% for
the three and nine months ended September 30, 1997, respectively. See
"Run-off Operations."
For the three months and nine months ended September 30, 1998, respectively, the
loss ratio improved by 6.7 and 7.1 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 loss adjustment expense
("LAE") ratios in Commercial Lines, and an improvement in medical costs and in
loss adjustment expenses in the workers' compensation line.
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.
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 on such reserves. As a result, loss reserve
levels have declined and the level of discount on such reserves 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 4.4 and 3.2 points for the three and
nine months ended September 30, 1998, respectively, 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 improvement in loss and LAE ratios in Commercial Lines has favorably
impacted the overall loss ratio by 1.3 and 1.9 points, respectively, for the
three and nine months ended September 30, 1998, 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 1.0 and 1.7 points
in the three and nine months ended September 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 of providing medical benefits to injured
workers. Loss adjustment expenses have
16
<PAGE>
decreased primarily due to continued use of certain claims resolution practices.
By using claims management 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.
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
1998 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 increase in the percentage of net workers'
compensation premiums written caused a 0.3 point decrease in the loss and LAE
ratio for the nine months ended September 30, 1998, compared to the same period
in 1997.
The expense ratio decreased by 2.1 points and 1.4 points for the three and nine
months ended September 30, 1998, respectively, compared to the same periods in
1997. The decrease in the Acquisition Expense Ratio of 3.7 points and 1.3
points for the three and nine months ended September 30, 1998, respectively, was
primarily due to lower taxes and assessments compared to the same periods in
1997. The Operating Expense Ratio increased by 1.6 points for the three months
ended September 30, 1998, as compared with the same period in 1997, primarily
due to lower earned premiums.
For the nine months ended September 30, 1998, the Property and Casualty Group
recorded approximately $500,000 of severance and other restructuring costs
compared with $2.7 million for the nine months ended September 30, 1997. In
addition, for the nine months ended September 30, 1998, $1.1 million of costs
related to the Year 2000 Project were incurred compared with $681,000 for the
comparable 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's dividend ratio increased 3.7 points and 2.5 points for the
three and nine months ended September 30, 1998, respectively, compared to the
same periods in 1997. The increase in the dividend ratio is primarily due to
increased writings of participating business within the Pooled Companies and
favorable loss experience in the workers' compensation line of business.
Net Investment Income
Net investment income was $13.2 million and $38.5 million, respectively, for
the three and nine months ended September 30, 1998, compared to $13.1 million
and $40.1 million for the same periods in 1997. Year-to-date net investment
income decreased $1.6 million primarily as a result of lower fixed income
yields, partially offset by slightly higher average invested assets.
17
<PAGE>
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 September 30, 1998, MASCCO had $93.7 million in total
assets and $74.4 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 as a
wholly owned subsidiary of the Company, and had no material operations until
1996. In 1996, the Pooled Companies ceded to PMA Cayman substantially all of its
remaining liability for 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.
Effective July 1, 1998, the Company sold PMA Cayman to a third party for a
purchase price of $1.8 million and recorded an after-tax loss of $1.6 million.
In addition, the Company transferred to the buyer $231.5 million in cash and
invested assets and recorded reinsurance receivables of $241.8 million as of
September 30, 1998 related to the existing reinsurance agreements with PMA
Cayman. If the actual claim payments in the aggregate exceed the estimated
payments upon which the loss reserves have been established, the Company has
agreed to indemnify the buyer, up to a maximum of $15.0 million. If the actual
claim payments in the aggregate are less than the estimated payments upon which
the loss reserves have been established, the Company will participate in such
favorable loss reserve development.
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 September
30, 1998, PMA Life had assets of $22.6 million and $17.4 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 nine months ended
September 30, 1998 and 1997:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $1,477 $ 7,161 $12,780 $ 22,133
Net premiums earned (1) -- (37,000) -- (36,186)
------ -------- ------- --------
Total operating revenues 1,477 (29,839) 12,780 (14,053)
------ -------- ------- --------
Losses and LAE incurred 1,241 (31,610) 10,642 (16,513)
Operating expenses 623 772 2,097 2,568
------ -------- ------- --------
Total expenses 1,864 (30,838) 12,739 (13,945)
------ -------- ------- --------
Pre-tax operating (loss) income $ (387) $ 999 $ 41 $ (108)
====== ======== ======= ========
</TABLE>
(1) Amount represents a $37.0 million reduction of accrued retrospective
premiums, primarily due to commutation of claims for accident years 1991 and
prior in 1997 and the re-estimation of claims liabilities for more recent
accident years, and net premiums earned during the first nine months of 1997
for PMA Life prior to the reinsurance
18
<PAGE>
transaction mentioned above, after which PMA Life was placed into run-off.
The $37.0 million reduction in earned premiums was offset by a corresponding
loss and LAE reserve release.
Investment income for the Run-off Operations decreased by $5.7 million and $9.4
million, respectively, in the three and nine months ended September 30, 1998,
compared to the same periods in 1997 primarily due to the sale of PMA Cayman and
lower levels of invested assets.
Losses and LAE of the Run-off Operations are comprised primarily of discount
accretion on established loss reserves within the Run-off Operations. The
decrease in losses and LAE was primarily due to the sale of PMA Cayman as
discussed above, plus the reduction in discount accretion associated with
payments made for the underlying claims since 1997.
CALIBER ONE RESULTS OF OPERATIONS
Summarized financial results of Caliber One for the three and nine months ended
September 30, 1998 are as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $1,660 $ 2,577
====== =======
Net premiums earned $ 440 $ 631
Net investment income 361 1,075
------ -------
Operating revenues 801 1,706
------ -------
Losses and LAE incurred 352 505
Acquisition and operating expenses 696 2,518
------ -------
Total losses and expenses 1,048 3,023
------ -------
Pre-tax operating loss $ (247) $(1,317)
====== =======
</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 for the three months ended September 30
1998 were $2.5 million and $1.7 million, respectively, compared to $1.3 million
and $705,000 for the three months ended June 30, 1998, respectively,
representing a 90.7% increase in gross premiums written and a 135.5% increase in
net premiums written compared to the second quarter of 1998. The loss ratio for
the third quarter of 1998 was 80%. As expected, operating expenses, which
include start-up costs, in the first nine months of 1998 were high relative to
the premium volume, which distorts the expense ratio. Management expects
operating expenses to become more commensurate with premium volume over time as
premium volume continues to grow.
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 nine months ended
September 30, 1998, Corporate and Other recorded pre-tax operating losses before
interest expense of $2.4 million and $8.0 million, respectively, compared to
$2.6 million and $7.1 million for the three and nine months ended September 30,
1997, respectively. The operating loss in the third quarter of 1998 was
comparable to the third quarter of 1997, while the year-to-date loss in 1998 was
$832,000 higher than the comparable 1997 period due to higher corporate
operating costs.
19
<PAGE>
NET REALIZED INVESTMENT GAINS
The Company recorded net realized investment gains of $4.1 million and $15.4
million for the three and nine months ended September 30, 1998, respectively,
compared to $5.5 million and $3.6 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 $1.6
million after tax loss related to the sale of PMA Cayman was included in net
realized investment gains for the nine months ended September 30, 1998.
INTEREST EXPENSE AND INCOME TAXES
Interest expense for the third quarter of 1998 was comparable to the same period
in 1997, with a decrease of approximately $794,000 for the nine months ended
September 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 16.1% and
16.0%, respectively, for the three and nine months ended September 30, 1998,
compared to 36.2% and 10.7% for the three and nine months ended September 30,
1997. The Company recorded a net deferred tax asset of $49.9 million as of
September 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 $3.7 million and $11.2 million for the three and
nine months ended September 30, 1998, respectively, compared to $3.5 million and
$15.6 million for the three and nine months ended September 30, 1997. The
decrease in interest paid for the first nine months 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 $2.0 million
and $6.1 million of dividends to shareholders in the three and nine month
periods ended September 30, 1998, respectively, compared to $2.0 million and
$6.0 million for the comparable periods in 1997.
Dividends received from subsidiaries were $8.0 million and $18.0 million for the
three and nine months ended September 30, 1998, respectively, compared to $4.0
million and $12.0 million for the comparable 1997 periods. Net tax cash flows
from subsidiaries were $7.5 million and $22.3 million for the three and nine
months ended September 30, 1998, respectively, compared to $5.5 million and
$13.9 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.
20
<PAGE>
CAPITAL RESOURCES
The Company's total assets increased $74.7 million to $3,131.9 million at
September 30, 1998 compared to $3,057.3 million at December 31, 1997. Total
investments decreased $227.5 million to $1,967.3 million at September 30, 1998.
This decrease was primarily attributable to the sale of PMA Cayman, plus the
pay-down of loss reserves from prior accident years by the Property and Casualty
Group. All other assets increased $302.2 million, mainly due to increases in
reinsurance receivables of $271.7 million and uncollected premiums of $42.1
million in comparison to December 31, 1997. The increase in reinsurance
receivables primarily relates to the sale of PMA Cayman, which increased
reinsurance receivables by $241.8 million and had an offsetting decrease in
invested assets. Also, the Property and Casualty Group's new reinsurance treaty
for Commercial Lines entered into during 1997 has increased the amount of ceded
losses, which increases the reinsurance receivables balance. The increase in
uncollected premiums compared to December 31, 1997 was primarily related to the
cyclical nature of the premium volume and collection patterns throughout the
year. The uncollected premiums at September 30, 1998 are more comparable to the
balance at September 30, 1997. Deferred acquisition costs increased $10.7
million compared to December 31, 1997 primarily due to the cyclical nature of
the premium writings throughout the year plus increased acquisition costs at PMA
Re ( see "PMA Re Results of Operations"). Additional increases in other assets
of $24.4 million 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 September 30, 1998 compared to December 31, 1997 primarily
relates to timing differences in prepaid expenses and miscellaneous assets at
the operating companies.
Consolidated shareholders' equity at September 30, 1998, totaled $517.6 million
or $22.19 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 $46.0 million at September 30,
1998, compared to $18.8 million at December 31, 1997, resulting in an increase
in shareholders' equity of $27.2 million or $1.17 per share.
At September 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
As a consequence of the programming convention which utilized a two-digit date
field rather than a four-digit date field, most computers require relatively
costly reprogramming to enable them to perform correctly date operations
involving year 2000 ("Year 2000") or later (the "Year 2000 Issue"). Many
anticipate that the Year 2000 Issue will have substantial repercussions on the
business world, since computer operations involving date calculations are
pervasive.
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 September 30, 1998 has been approximately $5.3 million,
including approximately $1.5 million incurred during the first nine months of
1998. The Company estimates that the total remaining cost will be approximately
$120,000, which will be expensed throughout the remainder of 1998.
21
<PAGE>
In addition to assessing Year 2000 Issues relating to computer systems, the
Company is also in the process of reviewing its use of equipment which contains
microprocessors or other embedded technology ("non-IT Systems") over which it
has control to ensure that they are, to the extent reasonably necessary to
conduct the Company's day-to-day operations, Year 2000 compliant. Because the
Company is not materially dependent upon non-IT Systems, the Company does not
believe it has any material non-IT Systems Year 2000 exposure.
The Company is currently in the process of evaluating its relationships with
third parties with which the Company has a direct and material relationship to
determine whether they are Year 2000 compliant, such as banks, brokers,
reinsurers, third party service providers, software and other service vendors,
insureds and agents and other intermediaries. 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. The failure of
one or more third parties with whom the Company has a material relationship to
be Year 2000 compliant could cause significant disruptions in the Company's
ability to pay claims, receive and deposit funds and make investments, which
could have a material adverse effect on the Company's financial condition and
results of operations. The Company's contingency plans in the event of failure
of such third parties to be Year 2000 compliant include replacing the third
party, performing directly the services performed by the third party and
maintaining liquidity under the Company's Revolving Credit Facility, which may
have a material impact on the Company.
Many experts now believe that Year 2000 Issues may have a material adverse
effect 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. Management of the
Property and Casualty Group and Caliber One believe that under a fair reading of
the various policies issued by them, no coverage for Year 2000 Issues should
exist. Management of PMA Re also believes that the policies of its ceding
company clients which are reinsured by PMA Re do not provide coverage for Year
2000 Issues. However, in the event that claims for Year 2000 Issues are asserted
against the Property and Casualty Group, Caliber One or PMA Re, 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, or, if found, the effect
thereof on any of such companies or the Company. In addition, to the extent that
the Property and Casualty Group, Caliber One or PMA Re contest the assertion of
Year 2000 coverage claims, it is likely that the costs of litigation could be
material, even if they are able to prevail in their coverage positions as to
which no assurance can be given.
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 reclassification adjustment for net realized investment gains included in net
income of $2.7 million (after income taxes of $1.4 million) and $11.6 million
(after income taxes of $6.2 million) for the three and nine months ended
September 30, 1998 and $3.3 million (after income taxes of $1.8 million) and
$2.4 million (after income taxes of $1.3 million) for the three and nine months
ended September 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
22
<PAGE>
properties. The Company has excluded net realized investment gains (losses) from
the profit and loss measurement it utilizes to assess the performance of its
operating segments because (i) net realized investment gains (losses) are
unpredictable and not necessarily indicative of future performance and (ii) in
many instances, decisions to buy and sell securities are made at the parent
holding company level, and such decisions result in net realized gains (losses)
that do not relate to the operations of the individual segments. 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 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, although such increase is not expected to exceed $5.0 million. 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.
23
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1*: Amended or Restated Articles of Incorporation of the Registrant
Exhibit 3.2**: Amended or Restated By-laws of the Registrant
Exhibit 11.1: Statement of Computation of Earnings per Share
Exhibit 27: Financial Data Schedule
___________
* Incorporated by reference to the initial filing of Registrant's Registration
Statement on Form 10 filed June 26, 1997
** Incorporated by reference to Registrant's Form S-3 Registration Statement
(Registration No. 333-63469) filed September 16, 1998
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1998:
24
<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: 11/13/98 By: /s/ Francis W. McDonnell
-------- --------------------------
Francis W. McDonnell, Senior Vice
President, Chief Financial Officer and
Treasurer
25
<PAGE>
EXHIBIT INDEX
(a) Exhibits
Exhibit 3.1*: Amended or Restated Articles of Incorporation of the Registrant
Exhibit 3.2**: Amended or Restated By-laws of the Registrant
Exhibit 11.1: Statement of Computation of Earnings per Share
Exhibit 27: Financial Data Schedule
___________
* Incorporated by reference to the initial filing of Registrant's Registration
Statement on Form 10 filed June 26, 1997
** Incorporated by reference to Registrant's Form S-3 Registration Statement
(Registration No. 333-63469) filed September 16, 1998
26
<PAGE>
EXHIBIT 11.1
PENNSYLVANIA MANUFACTURERS CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1998 1997 1998 1997
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Basic:
Weighted average shares outstanding 23,573,472 23,870,089 23,704,376 23,845,194
Net income before extraordinary loss $ 10,552 $ 7,344 $ 31,997 $ 12,621
Extraordinary loss - - - (4,734)
---------------------------- ----------------------------
Net income $ 10,552 $ 7,344 $ 31,997 $ 7,887
============================ ============================
Net income per common and equivalent share
before extraordinary loss $ 0.45 $ 0.31 $ 1.35 $ 0.53
Extraordinary loss - - - (0.20)
---------------------------- ----------------------------
Net income per common and equivalent share $ 0.45 $ 0.31 $ 1.35 $ 0.33
============================ ============================
Diluted:
Weighted average shares outstanding 23,573,472 23,884,223 23,704,376 23,845,194
Net effect of dilutive stock options - based
on the treasury stock method using average
market price or end of period market price 1,043,105 639,843 945,028 661,544
---------------------------- ----------------------------
Total diluted common shares 24,616,577 24,509,932 24,649,404 24,506,738
============================ ============================
Net income before extraordinary loss $ 10,552 $ 7,344 $ 31,997 $ 12,621
Extraordinary loss - - - (4,734)
---------------------------- ----------------------------
Net income $ 10,552 $ 7,344 $ 31,997 $ 7,887
============================ ============================
Net income per common and equivalent share
before extraordinary loss $ 0.43 $ 0.30 $ 1.30 $ 0.51
Extraordinary loss - - - (0.19)
---------------------------- ----------------------------
Net income per common and equivalent share $ 0.43 $ 0.30 $ 1.30 $ 0.32
============================ ============================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 2,060,521
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 261
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,202,645
<CASH> 1,895
<RECOVER-REINSURE> 294,506
<DEFERRED-ACQUISITION> 49,033
<TOTAL-ASSETS> 3,066,361
<POLICY-LOSSES> 1,989,160
<UNEARNED-PREMIUMS> 239,112
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 10,704
<NOTES-PAYABLE> 203,000
0
0
<COMMON> 121,716
<OTHER-SE> 324,548
<TOTAL-LIABILITY-AND-EQUITY> 3,066,361
285,371
<INVESTMENT-INCOME> 102,812
<INVESTMENT-GAINS> 3,600
<OTHER-INCOME> 7,712
<BENEFITS> 240,919
<UNDERWRITING-AMORTIZATION> 66,562
<UNDERWRITING-OTHER> 65,853
<INCOME-PRETAX> 14,136
<INCOME-TAX> 1,515
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (4,734)
<CHANGES> 0
<NET-INCOME> 7,887
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<DEBT-HELD-FOR-SALE> 1,875,910 1,929,518
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 15 13
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 1,967,253 2,194,738
<CASH> 7,595 32,148
<RECOVER-REINSURE> 604,108 332,406
<DEFERRED-ACQUISITION> 55,958 45,288
<TOTAL-ASSETS> 3,129,000 3,057,258
<POLICY-LOSSES> 1,951,497 2,003,187
<UNEARNED-PREMIUMS> 253,216 211,455
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 9,605 10,200
<NOTES-PAYABLE> 203,000 203,000
0 0
0 0
<COMMON> 122,214 122,214
<OTHER-SE> 395,366 356,133
<TOTAL-LIABILITY-AND-EQUITY> 3,129,000 3,057,258
335,593 375,951
<INVESTMENT-INCOME> 94,363 136,698
<INVESTMENT-GAINS> 15,362 8,598
<OTHER-INCOME> 7,282 10,311
<BENEFITS> 256,230 307,281
<UNDERWRITING-AMORTIZATION> 77,748 93,501
<UNDERWRITING-OTHER> 69,291 89,855
<INCOME-PRETAX> 38,100 25,153
<INCOME-TAX> 6,103 5,400
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (4,734)
<CHANGES> 0 0
<NET-INCOME> 31,997 15,019
<EPS-PRIMARY> 1.35 0.63
<EPS-DILUTED> 1.30 0.61
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
