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 MARCH 31, 1999
OR
/ / 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
PMA Capital 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.)
1735 Market Street, Suite 2800
Philadelphia, Pennsylvania 19103-7590
------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(215) 665-5046
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
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 13,262,600 shares outstanding of the registrant's Common Stock, $5
par value per share, and 9,814,548 shares outstanding of the registrant's Class
A Common Stock, $5 par value per share, as of the close of business on April 30,
1999.
<PAGE>
INDEX
- --------------------------------------------------------------------------------
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated statements of income for the three months
ended March 31, 1999 and 1998 (unaudited) 1
Consolidated balance sheets as of March 31, 1999 (unaudited)
and December 31, 1998 2
Consolidated statements of cash flows for the three months ended
March 31, 1999 and 1998 (unaudited) 3
Consolidated statements of comprehensive income for the three
months ended March 31, 1999 and 1998 (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 21
Signature 22
Exhibit index 23
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
PMA Capital Corporation
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands, except per share data) 1999 1998
- -------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C>
Net premiums written $ 168,517 $ 153,573
Change in net unearned premiums (59,195) (46,651)
--------- ---------
Net premiums earned 109,322 106,922
Net investment income 27,109 31,930
Net realized investment gains 877 7,514
Other revenues 3,138 3,020
--------- ---------
Total revenues 140,446 149,386
--------- ---------
Losses and expenses:
Losses and loss adjustment expenses 81,736 84,857
Acquisition expenses 20,398 22,703
Operating expenses 17,084 19,467
Dividends to policyholders 5,068 3,917
Interest expense 3,013 3,701
--------- ---------
Total losses and expenses 127,299 134,645
--------- ---------
Income before income taxes and cumulative effect of
accounting change 13,147 14,741
--------- ---------
Provision for income taxes:
Current 945 210
Deferred 3,734 2,443
--------- ---------
Total 4,679 2,653
--------- ---------
Income before cumulative effect of accounting change 8,468 12,088
--------- ---------
Cumulative effect of accounting change (net of income tax benefit
of $1,485) (2,759) --
--------- ---------
Net income $ 5,709 $ 12,088
========= =========
Earnings per share:
Basic:
Income before cumulative effect of accounting change $ 0.36 $ 0.51
Cumulative effect of accounting change (0.12) --
--------- ---------
Net income $ 0.24 $ 0.51
========= =========
Diluted:
Income before cumulative effect of accounting change $ 0.35 $ 0.49
Cumulative effect of accounting change (0.11) --
--------- ---------
Net income $ 0.24 $ 0.49
========= =========
</TABLE>
1
<PAGE>
PMA Capital Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
As of As of
March 31, December 31,
(dollar amounts in thousands, except share data) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale, at fair value
(amortized cost:1999 - $1,764,922; 1998 - $1,781,188) $1,772,829 $1,827,354
Equity securities, at fair value (cost: 1999 - $5; 1998 - $5) 16 17
Short-term investments, at amortized cost which approximates fair value 515,504 498,038
---------- ----------
Total investments 2,288,349 2,325,409
Cash 18,438 2,562
Accrued investment income 22,971 19,900
Premiums receivable (net of valuation allowance:1999 - $20,067; 1998 - $19,874) 317,006 279,633
Reinsurance receivables (net of valuation allowance:1999 - $2,178; 1998 - $2,178) 605,420 610,291
Deferred income taxes, net 75,072 63,929
Deferred acquisition costs 62,699 51,115
Other assets 118,759 107,879
---------- ----------
Total assets $3,508,714 $3,460,718
========== ==========
Liabilities:
Unpaid losses and loss adjustment expenses $1,914,737 $1,940,895
Unearned premiums 296,649 227,945
Long-term debt 163,000 163,000
Accounts payable and accrued expenses 112,700 107,952
Funds held under reinsurance treaties 86,375 77,674
Dividends to policyholders 11,015 10,700
Payable under securities loan agreements 440,890 421,072
---------- ----------
Total liabilities 3,025,366 2,949,238
---------- ----------
Commitments and contingencies (Note 4)
Shareholders' Equity:
Common stock, $5 par value (40,000,000 shares authorized;
1999 - 13,736,007 shares issued and 13,300,000 outstanding;
1998 - 13,956,268 shares issued and 13,520,261 outstanding) 68,680 69,781
Class A common stock, $5 par value (40,000,000 shares authorized;
1999 - 10,706,938 shares issued and 9,821,263 outstanding;
1998 - 10,486,677 shares issued and 9,837,963 outstanding) 53,534 52,433
Additional paid-in capital - Class A common stock 339 339
Retained earnings 378,644 377,601
Accumulated other comprehensive income 5,147 30,016
Notes receivable from officers (209) (498)
Treasury stock, at cost:
Common stock (1999 - 436,007 shares; 1998 - 436,007 shares) (5,583) (5,583)
Class A common stock (1999 - 885,675 shares; 1998 - 648,714 shares) (17,204) (12,609)
---------- ----------
Total shareholders' equity 483,348 511,480
---------- ----------
Total liabilities and shareholders' equity $3,508,714 $3,460,718
========== ==========
</TABLE>
2
<PAGE>
PMA Capital Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,709 $ 12,088
Adjustments to reconcile net income to net cash flows provided by (used in)
operating activities:
Depreciation and amortization 2,002 942
Provision for deferred income taxes 3,734 2,443
Net realized investment gains (877) (7,514)
Cumulative effect of accounting change 2,759 --
Change in:
Premiums receivable and unearned premiums, net 31,331 (8,543)
Dividends to policyholders 315 (883)
Reinsurance receivables 4,871 (21,707)
Unpaid losses and loss adjustment expenses (26,158) (14,072)
Accrued investment income (3,071) (3,027)
Deferred acquisition costs (11,584) (11,274)
Other, net (1,863) 6,962
--------- ---------
Net cash flows provided by (used in) operating activities 7,168 (44,585)
--------- ---------
Cash flows from investing activities:
Fixed maturity investments available for sale:
Purchases (292,740) (461,925)
Maturities or calls 30,955 41,154
Sales 278,168 367,404
Net sales of short-term investments 2,349 75,940
Other, net (1,052) (887)
--------- ---------
Net cash flows provided by investing activities 17,680 21,686
--------- ---------
Cash flows from financing activities:
Dividends paid to shareholders (1,909) (2,008)
Repayments of notes receivable from officers 289 --
Proceeds from exercise of stock options 3,906 441
Purchase of treasury stock (11,258) (5,415)
--------- ---------
Net cash flows used in financing activities (8,972) (6,982)
--------- ---------
Net increase (decrease) in cash 15,876 (29,881)
Cash - beginning of period 2,562 32,148
--------- ---------
Cash - end of period $ 18,438 $ 2,267
========= =========
Supplementary cash flow information:
Income taxes paid $ 2,997 $ --
Interest paid $ 3,061 $ 3,316
</TABLE>
3
<PAGE>
PMA Capital Corporation
Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 5,709 $ 12,088
--------- -----------
Other comprehensive loss, net of tax:
Unrealized losses on securities:
Holding gains (losses) arising during the period (24,299) 966
Reclassification adjustment for gains included in net
income (net of tax effect: 1999 - $307; 1998 - $2,630) (570) (4,884)
--------- -----------
Other comprehensive loss (24,869) (3,918)
--------- -----------
Comprehensive income (loss) $ (19,160) $ 8,170
========= ===========
</TABLE>
4
<PAGE>
PMA Capital Corporation
Notes to the Consolidated Financial Statements
1. BUSINESS DESCRIPTION
The accompanying consolidated financial statements include the accounts of PMA
Capital Corporation and its wholly and majority owned subsidiaries ("PMA
Capital" or the "Company"). PMA Capital is an insurance holding company that
operates three specialty risk management businesses, which are more fully
described below.
Reinsurance -- PMA Capital's reinsurance operations ("PMA Re") consist mainly of
PMA Reinsurance Corporation, a Pennsylvania domiciled insurance company, which
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 -- PMA Capital's property
and casualty insurance subsidiaries ("The PMA Insurance Group") include
Pennsylvania domiciled insurance companies as well as certain foreign
subsidiaries. The PMA Insurance Group primarily writes workers' compensation,
and to a lesser extent other standard lines of commercial insurance, primarily
in the Mid-Atlantic and Southern regions of the U.S.
Specialty Property and Casualty -- In January 1998, the Company's specialty
insurance unit, Caliber One, commenced writing business. Caliber One writes
business through surplus lines brokers on a national basis. Caliber One's excess
and surplus lines insurance affiliate, Caliber One Indemnity Company, is
authorized as a surplus lines carrier in 40 states, the District of Columbia and
Puerto Rico, with applications pending for the remaining states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - 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 1999 presentation.
The preparation of consolidated financial statements in conformity with GAAP
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Due to this and certain other factors,
such as the seasonal nature of portions of the insurance business as well as
competitive and other market conditions, operating results for the three months
ended March 31, 1999 are not necessarily indicative of the results to be
expected for the full year.
The information included in this Form 10-Q should be read in conjunction with
the Company's audited consolidated financial statements and footnotes included
in its 1998 Annual Report to Shareholders and incorporated by reference in its
Form 10-K for the year ended December 31, 1998.
B. Recent Accounting Pronouncements - Effective January 1, 1999, the Company
adopted Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." SOP 97-3 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.
As a result of adopting SOP 97-3, the Company recorded a liability of $4.3
million pre-tax and a resulting charge to earnings of $2.8 million, net of
income tax benefit of $1.5 million, which has been reported as a cumulative
effect of accounting change. This accounting change impacts The PMA Insurance
Group segment.
5
<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," 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 an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. 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,
results of operations or liquidity.
In October 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." This statement identifies several methods of deposit accounting
and provides guidance on the application of each method. This statement
classifies insurance and reinsurance contracts for which the deposit method is
appropriate as contracts that (i) transfer only significant timing risk, (ii)
transfer only significant underwriting risk, (iii) transfer neither significant
timing nor underwriting risk and (iv) have an indeterminate risk. SOP 98-7 is
effective for financial statements for fiscal years beginning after June 15,
1999. While the Company is presently evaluating the impact of SOP 98-7, the
adoption of SOP 98-7 is not expected to have a material impact on the Company's
financial condition, results of operations or liquidity.
3. REINSURANCE
In the ordinary course of business, PMA Capital's reinsurance and insurance
subsidiaries assume and cede premiums with other insurance companies and are
members of various pools and associations. The reinsurance and insurance
subsidiaries cede business, primarily on an excess of loss basis, in order to
limit the maximum net loss from large risks and limit the accumulation of many
smaller losses from a catastrophic event. The reinsurance and insurance
subsidiaries remain primarily liable to their clients in the event their
reinsurers are unable to meet their financial obligations.
The components of net premiums earned and losses and loss adjustment expenses
("LAE") are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands) 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Earned Premiums:
Direct ............................ $75,326 $73,399
Assumed ........................... 69,446 61,892
Ceded ............................. (35,450) (28,369)
-------- --------
Net ................................... $109,322 $106,922
======== ========
Losses and LAE:
Direct ............................ $ 62,643 $68,178
Assumed ........................... 36,056 32,528
Ceded ............................. (16,963) (15,849)
-------- --------
Net ................................... $ 81,736 $84,857
======== ========
</TABLE>
6
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
The Company's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to restrict insurance pricing and the application of
underwriting standards and reinterpretation of insurance contracts long after
the policies were written to provide coverage unanticipated by the Company. The
eventual effect on the Company of the changing environment in which it operates
remains uncertain.
In the event a property and casualty insurer operating in a jurisdiction where
the Company's insurance subsidiaries also operate becomes or is declared
insolvent, state insurance regulations provide for the assessment of other
insurers to fund any capital deficiency of the insolvent insurer. Generally,
this assessment is based upon the ratio of an insurer's voluntary premiums
written to the total premiums written for all insurers in that particular
jurisdiction. The Company is not aware of any material potential assessments at
March 31, 1999 (see Note 2-B regarding SOP 97-3).
The Company has provided guarantees of approximately $10.6 million, primarily
related to loans on properties in which the Company has an interest.
The Company is continuously involved in numerous lawsuits arising, for the most
part, in the ordinary course of business, either as a liability insurer
defending third-party claims brought against its insureds, or as an insurer
defending coverage claims brought against it by its policyholders or other
insurers. While the outcome of all litigation involving the Company, including
insurance-related litigation, cannot be determined, litigation is not expected
to result in losses that differ from recorded reserves by amounts that would be
material to results of operations, liquidity or financial condition. In
addition, reinsurance recoveries related to claims in litigation, net of the
allowance for uncollectible reinsurance, are not expected to result in
recoveries that differ from recorded recoverables by amounts that would be
material to the results of operations, liquidity or financial condition.
5. EARNINGS PER SHARE
A reconciliation of the shares used as the denominator of the basic and diluted
earnings per share computations is presented below. For all periods presented,
there were no differences in the numerator (income before cumulative effect of
accounting change) for the basic and diluted earnings per share calculation:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Denominator:
Basic shares - weighted average
common and Class A common
shares outstanding 23,317,630 23,850,631
Effect of dilutive stock options 785,822 731,704
---------- ----------
Total diluted shares 24,103,452 24,582,335
========== ==========
</TABLE>
7
<PAGE>
6. BUSINESS SEGMENTS
The following table indicates the Company's revenues, all of which are generated
within the U.S., and pre-tax operating income (loss) by principal business
segment:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands) 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Revenues:
PMA Re $ 66,061 $ 59,598
The PMA Insurance Group:
Excluding Run-off Operations 68,835 75,943
Run-off Operations 1,126 5,839
--------- ---------
Total 69,961 81,782
Caliber One 3,046 369
Corporate and Other 501 123
Net realized investment gains 877 7,514
--------- ---------
Total revenues $ 140,446 $ 149,386
========= =========
Components of pre-tax operating
income (1) and net income:
PMA Re $ 12,749 $ 11,372
The PMA Insurance Group:
Excluding Run-off Operations 4,919 2,601
Run-off Operations 66 135
--------- ---------
Total 4,985 2,736
Caliber One (696) (389)
Corporate and Other (1,755) (2,791)
--------- ---------
Pre-tax operating income before
interest expense 15,283 10,928
Interest expense 3,013 3,701
--------- ---------
Pre-tax operating income 12,270 7,227
Net realized investment gains 877 7,514
--------- ---------
Income before income taxes and
cumulative effect of accounting change 13,147 14,741
Provision for income taxes 4,679 2,653
--------- ---------
Income before cumulative effect of
accounting change 8,468 12,088
Cumulative effect of accounting change,
net of tax (2,759) --
--------- ---------
Net income $ 5,709 $ 12,088
========= =========
</TABLE>
(1) The Company excludes net realized investment gains (losses) from the profit
and loss measure it utilizes to assess the performance of its operating
segments.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion of PMA Capital's financial condition as of March
31, 1999, compared with December 31, 1998, and its results of operations for the
quarter ended March 31, 1999, compared with the same period last year. This
discussion should be read in conjunction with Management's Discussion and
Analysis included in PMA Capital's 1998 Annual Report to Shareholders (pages 28
through 49), to which the reader is directed for additional information. The
term "SAP" refers to the statutory accounting practices prescribed or permitted
by applicable state insurance departments and the term "GAAP" refers to
generally accepted accounting principles.
CONSOLIDATED RESULTS OF OPERATIONS
The table below presents the major components of revenues, pre-tax operating
income and net income:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands, except per share data) 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues:
Net premiums written $ 168,517 $ 153,573
========= =========
Net premiums earned $ 109,322 $ 106,922
Net investment income 27,109 31,930
Other revenues 3,138 3,020
--------- ---------
Total operating revenues $ 139,569 $ 141,872
========= =========
Components of pre-tax operating
income (1) and net income:
PMA Re $ 12,749 $ 11,372
The PMA Insurance Group:
Excluding Run-off Operations 4,919 2,601
Run-off Operations 66 135
--------- ---------
Total 4,985 2,736
Caliber One (696) (389)
Corporate and Other (1,755) (2,791)
--------- ---------
Pre-tax operating income before interest expense 15,283 10,928
Interest expense 3,013 3,701
--------- ---------
Pre-tax operating income 12,270 7,227
Net realized investment gains 877 7,514
--------- ---------
Income before income taxes and cumulative
effect of accounting change 13,147 14,741
Provision for income taxes 4,679 2,653
--------- ---------
Income before cumulative effect of accounting change 8,468 12,088
Cumulative effect of accounting change, net of tax (2,759) --
--------- ---------
Net income $ 5,709 $ 12,088
========= =========
</TABLE>
(1) Pre-tax operating income is defined as income from continuing operations
before income taxes, excluding net realized investment gains (losses). The
Company excludes 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 current operating
fundamentals or 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 Company reported pre-tax operating income of $12.3 million for the three
months ended March 31, 1999, compared to $7.2 million for the three months ended
March 31, 1998. The increase in pre-tax operating income was primarily due to
higher earnings from The PMA Insurance Group and PMA Re, and, to a lesser
extent, lower losses for Corporate and Other. After-tax operating income was
$7.9 million and $7.2 million for the three months ended March 31, 1999 and
1998, respectively, which reflects the increases mentioned above for pre-tax
operating income, partially offset by a higher effective tax rate. The Company
currently expects earnings to continue to improve in 1999 reflecting higher
earnings from PMA Re and The PMA Insurance Group. This expectation may differ
materially from actual results because of the risk factors noted in the
"Cautionary Statements" on page 20.
On a consolidated basis, net income was $5.7 million for the first quarter of
1999, compared to $12.1 million for the same period in 1998. Net income for 1999
includes an after-tax charge of $2.8 million for the effect of adopting
Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." See Note 2-B to the Company's Consolidated
Financial Statements for additional information.
Also included in net income were net realized investment gains of $900,000 for
the three months ended March 31, 1999, compared to $7.5 million for the
comparable 1998 period. The decrease in net realized investment gains reflects a
higher level of purchase and sale activity in 1998, due to the restructuring of
a portion of the investment portfolio.
PMA RE
Summarized financial results of PMA Re are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $78,327 $70,819
======= =======
Net premiums earned $52,433 $46,098
Net investment income 13,628 13,500
------- -------
Operating revenues 66,061 59,598
------- -------
Losses and loss adjustment expenses ("LAE") 37,861 32,814
Acquisition and operating expenses 15,451 15,412
------- -------
Total losses and expenses 53,312 48,226
------- -------
Pre-tax operating income $12,749 $11,372
======= =======
GAAP loss and LAE ratio 72.2% 71.2%
GAAP combined ratio 101.7% 104.6%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
PMA Re's pre-tax operating income increased to $12.7 million for the three
months ended March 31, 1999, compared to $11.4 million for the three months
ended March 31, 1998. This increase is primarily due to higher premium volume
and a lower acquisition expense ratio, partially offset by a higher loss and LAE
ratio, all of which reflects expansion of finite and financial product
offerings.
10
<PAGE>
Premiums
The following table indicates PMA Re's gross and net premiums written by major
category of business:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross premiums written:
Casualty lines $73,188 $60,804
Property lines 25,765 25,911
Other lines 542 394
------- -------
Total $99,495 $87,109
======= =======
Net premiums written:
Casualty lines $56,547 $48,421
Property lines 21,252 22,004
Other lines 528 394
------- -------
Total $78,327 $70,819
======= =======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Net premiums written increased $7.5 million, or 10.6%, in the first quarter of
1999, compared to the first quarter of 1998, primarily due to expanding
relationships with PMA Re's existing clients, as well as contracts with new
clients, which primarily reflect the successful expansion of finite and
financial product offerings. This increase was partially offset by increased
retrocessional protection purchased during the first quarter of 1999.
Net premiums earned increased 13.7% in the first quarter of 1999, compared to
the first quarter of 1998, which corresponds to the increase in net premiums
written. Generally, trends in net premiums earned follow patterns similar to net
premiums written, with premiums being earned principally on a pro rata basis
over the terms of the contracts.
Losses and Expenses
The following table reflects the components of PMA Re's GAAP combined ratios:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loss and LAE ratio 72.2% 71.2%
----- -----
Expense ratio:
Acquisition expenses 23.2% 26.0%
Operating expenses 6.3% 7.4%
----- -----
Total expense ratio 29.5% 33.4%
----- -----
Combined ratio - GAAP(1) 101.7% 104.6%
====== ======
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The combined ratio computed on a GAAP basis is equal to losses and LAE, plus
the sum of acquisition expenses and operating expenses, all divided by net
premiums earned.
PMA Re's loss and LAE ratio increased 1.0 point for the three months ended March
31, 1999, compared to the same period last year. This increase primarily relates
to a change in PMA Re's business mix in the quarter with finite and
11
<PAGE>
financial products representing an increasing percentage. Such products
typically carry a higher loss and LAE ratio and a lower acquisition expense
ratio than traditional reinsurance products.
The acquisition expense ratio decreased 2.8 points for the three months ended
March 31, 1999, compared to the same period in 1998. This decrease is primarily
attributable to the change in business mix described above, and by changes PMA
Re made to its retrocessional program in the first quarter of 1999, which
resulted in higher ceding commissions.
The operating expense ratio decreased 1.1 points for the three months ended
March 31, 1999, compared to the same period in 1998, primarily reflecting growth
in earned premium and essentially flat operating expenses year-over-year.
THE PMA INSURANCE GROUP
Summarized financial results of The PMA Insurance Group are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $83,021 $82,542
======= =======
Net premiums earned $54,399 $60,798
Net investment income:
Excluding Run-off Operations 12,007 12,560
Run-off Operations(1) 1,126 5,839
------- -------
Total 13,133 18,399
Other revenues 2,429 2,585
------- -------
Operating revenues 69,961 81,782
------- -------
Losses and LAE:
Excluding Run-off Operations 41,209 47,206
Run-off Operations(1) 548 4,896
------- -------
Total 41,757 52,102
------- -------
Acquisition and operating expenses:
Excluding Run-off Operations 17,639 22,219
Run-off Operations(1) 512 808
------- -------
Total 18,151 23,027
------- -------
Dividends to policyholders 5,068 3,917
------- -------
Total losses and expenses 64,976 79,046
------- -------
Pre-tax operating income $ 4,985 $2,736
======= =======
GAAP loss and LAE ratio(2) 76.8% 85.7%
GAAP combined ratio(2) 116.2% 126.2%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Run-off operations ("Run-off Operations") of The PMA Insurance Group
were established and segregated from ongoing operations effective
December 31, 1996 to reinsure certain obligations primarily associated
with workers' compensation claims written by The PMA Insurance Group's
Pooled Companies for the years 1991 and prior.
(2) The loss and LAE ratio and GAAP combined ratio exclude the impact of
the cumulative effect of accounting change of $4.3 million ($2.8
million after-tax) for insurance-related assessments.
12
<PAGE>
Operating Results
Pre-tax operating income for The PMA Insurance Group increased to $5.0 million
for the three months ended March 31, 1999, compared to $2.7 million for the same
period in 1998. The increase in operating income for The PMA Insurance Group was
primarily due to improved loss experience, reduced exposures and lower operating
expenses resulting from ongoing cost reduction initiatives.
The PMA Insurance Group Excluding Run-off Operations
Premiums
The following table reflects the components of net premiums written for The PMA
Insurance Group, excluding Run-off Operations:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Workers' compensation:
Direct premiums written $71,290 $67,182
Premiums assumed 725 893
Premiums ceded (9,298) (3,187)
------- -------
Net premiums written 62,717 64,888
------- -------
Commercial Lines:
Direct premiums written 28,269 29,091
Premiums assumed 894 474
Premiums ceded (8,859) (11,911)
------- -------
Net premiums written 20,304 17,654
------- -------
Total:
Direct premiums written 99,559 96,273
Premiums assumed 1,619 1,367
Premiums ceded (18,157) (15,098)
------- -------
Net premiums written $83,021 $82,542
======= =======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Net premiums written, which represent direct premiums written plus premiums
assumed, less premiums ceded, increased to $83.0 million for the three months
ended March 31, 1999, compared to $82.5 million for the same period in 1998. The
slight increase in 1999 primarily reflects higher direct premiums written for
workers' compensation of $4.1 million, substantially offset by an increase in
reinsurance premiums ceded of $3.1 million.
Direct workers' compensation premiums written were higher in 1999, compared to
1998, due to an increase in the level of risks underwritten. This increase was
partially offset by manual rate reductions averaging approximately 4.6% in The
PMA Insurance Group's principal marketing territories, continued intense price
competition and an increase in the level of net premium adjustments returned to
the insureds--$3.1 million in the first quarter of 1999 compared to $1.7 million
in the first quarter of 1998. Changes in actuarial estimates of future premium
adjustments on retrospective policies are recorded in direct premiums written
and direct premiums earned in the period in which they are identified.
The increase in reinsurance premiums ceded of $3.1 million reflects higher ceded
workers' compensation premiums of $6.1 million for the three months ended March
31, 1999, compared to the same period in 1998, due to a new reinsurance cover
effective January 1, 1999, under which the net retention level on workers'
compensation exposures has been reduced from $1.5 million to $150,000 per
occurrence. Partially offsetting such increase was a decrease of $3.0 million in
ceded premiums for commercial lines of business other than workers'
compensation, such as
13
<PAGE>
commercial auto, general liability, umbrella, multi-peril and commercial
property lines (collectively, "Commercial Lines") for the three months ended
March 31, 1999, compared to the same period in 1998. The decrease in ceded
Commercial Lines premiums is primarily due to the reduction in direct Commercial
Lines business written and negotiated rate reductions for various treaties
reinsuring certain Commercial Lines business.
Net premiums earned decreased $6.4 million for the three months ended March 31,
1999, compared to the same period in 1998. Generally, trends in net premiums
earned follow patterns similar to net premiums written adjusted for the
customary lag related to the timing of premium writings within the year. Direct
premiums are earned principally on a pro rata basis over the terms of the
policies.
Losses and Expenses
The following table reflects the components of The PMA Insurance Group's GAAP
combined ratios, excluding Run-off Operations:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loss and LAE ratio(1) 75.8% 77.6%
------ ------
Expense ratio:
Acquisition expenses 13.8% 17.7%
Operating expenses (2) 15.4% 15.1%
------ ------
Total expense ratio 29.2% 32.8%
------ ------
Policyholders' dividends 9.3% 6.4%
------ ------
Combined ratio - GAAP (1) (3) (4) 114.3% 116.8%
====== ======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The loss and LAE ratio and GAAP combined ratio exclude the impact of the
cumulative effect of accounting change of $4.3 million ($2.8 million
after-tax) for insurance-related assessments.
(2) The GAAP Operating Expense Ratio excludes $1.8 million and $2.3 million in
1999 and 1998, respectively, for expenses related to service revenues,
which are not included in premiums earned.
(3) The combined ratio computed on a GAAP basis is equal to losses and LAE,
plus the sum of acquisition expenses, operating expenses and policyholders'
dividends, all divided by net premiums earned.
(4) The GAAP combined ratios for The PMA Insurance Group including the Run-off
Operations were 116.2% and 126.2% in the first quarter of 1999 and 1998,
respectively.
For the three months ended March 31, 1999, the GAAP loss and LAE ratio improved
by 1.8 points, compared to the same period in 1998. This improvement was
primarily due to favorable prior year reserve development and improved loss and
LAE ratios in workers' compensation and Commercial Lines in 1999, partially
offset by a decline in the level of reserve discount.
The PMA Insurance Group has experienced $905,000 of favorable development of
prior accident year results for the first quarter of 1999 compared to $85,000 of
unfavorable development for the same period in 1998, which improved the overall
loss and LAE ratio by 1.8 points in the first quarter of 1999.
The improvement in the Commercial Lines accident year loss and LAE ratio from
86.3% for the first quarter of 1998 to 81.3% for the first quarter of 1999 has
favorably impacted the overall first quarter 1999 loss and LAE ratio by 1.4
points, compared to the same period in 1998. The improvement in the Commercial
Lines loss and LAE ratio was primarily due to the continued reduction in
exposures underwritten reflecting the application of stricter underwriting
standards and continued intense price competition.
14
<PAGE>
In addition, the improvement in the workers' compensation accident year loss and
LAE ratio from 74.8% for the first quarter of 1998 to 73.7% for the first
quarter of 1999 has favorably impacted the overall first quarter 1999 loss and
LAE ratio by 0.8 points, compared to the same period in 1998 due to a reduction
in net exposures underwritten.
The new reinsurance cover for workers' compensation business caused the level of
discount to decline in the first quarter of 1999 compared to 1998. As a result,
the accretion of discount on prior year's reserves (net of the discount recorded
for current accident year reserves) increased the overall loss and LAE ratio in
the first quarter of 1999 by 2.0 points, compared to the same period in 1998.
The GAAP expense ratio decreased by 3.6 points for the three months ended March
31, 1999, compared to the same period in 1998, primarily due to a lower
acquisition expense ratio. The decrease in the acquisition expense ratio of 3.9
points was primarily due to higher ceded commissions received as a result of the
new reinsurance treaty in 1999 and a reduction in expenses for certain state
assessments that were reported as surcharges.
The policyholders' dividend ratio was 9.3% for the three months ended March 31,
1999, compared to 6.4% for the same period in 1998. The increase in the dividend
ratio is primarily due to selling more business under dividend plans and
improved loss experience, which results in higher dividend payouts to
policyholders.
Net Investment Income
Net investment income was $12.0 million for the three months ended March 31,
1999, compared to $12.6 million for the same period in 1998. The decrease
primarily reflects lower yields.
Run-off Operations
Investment income for the Run-off Operations decreased by $4.7 million in the
three months ended March 31, 1999, compared to the same period in 1998 primarily
due to lower invested assets. The decline in invested assets reflects the sale
of PMA Insurance, Cayman Limited ("PMA Cayman"), which included the transfer of
$231.5 million in cash and invested assets to the buyer effective July 1, 1998.
In addition, invested assets decreased as a result of the paydown of losses at
the remaining run-off entities.
Losses and LAE, acquisition expenses and operating expenses of the Run-off
Operations decreased by $4.6 million in the three months ended March 31, 1999,
compared to the same period in 1998 primarily due to the sale of PMA Cayman.
15
<PAGE>
CALIBER ONE
Summarized financial results of Caliber One are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollar amounts in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net premiums written $ 7,322 $ 212
======= =======
Net premiums earned $ 2,643 $ 26
Net investment income 403 343
------- -------
Operating revenues 3,046 369
------- -------
Losses and LAE 2,118 20
Acquisition and operating expenses 1,624 738
------- -------
Total losses and expenses 3,742 758
------- -------
Pre-tax operating loss $ (696) $ (389)
======= =======
- ---------------------------------------------------------------------------------------------------
</TABLE>
For the three months ended March 31, 1999, Caliber One recorded a pre-tax
operating loss of $696,000, compared with a loss of $389,000 for the same period
last year. The increase in losses primarily relates to costs to expand
operations. The growth in net premiums written and net premiums earned in the
first quarter of 1999 compared to the same period in 1998, reflects higher staff
levels, increased market acceptance and an expanded distribution network.
CORPORATE AND OTHER
The Corporate and Other segment includes unallocated investment income,
expenses, including debt service, and taxes, as well as the results of certain
of the Company's real estate properties. For the three months ended March 31,
1999, Corporate and Other recorded a pre-tax operating loss of $4.8 million
compared to a loss of $6.5 million for the three months ended March 31, 1998.
The decrease in the operating loss is primarily due to lower interest expense
reflecting a $40 million paydown in outstanding debt in the fourth quarter of
1998 and higher net revenues from non-core real estate properties.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is a measure of an entity's ability to secure sufficient cash to meet
its contractual obligations and operating needs. At the holding company level,
the Company requires cash to pay debt obligations, dividends to shareholders and
taxes to the Federal government, as well as to capitalize subsidiaries from time
to time. PMA Capital's primary sources of liquidity are dividends from
subsidiaries, net tax payments received from subsidiaries and borrowings.
At March 31, 1999 and December 31, 1998, the Company had $163.0 million of
outstanding debt under its Revolving Credit Facility (the "Credit Facility").
The final expiration of the Credit Facility will be December 31, 2002, which
matures in an installment of $38.0 million in 2000 and installments of $62.5
million in 2001 and 2002.
In addition to the Credit Facility, the Company maintains a committed facility
of $50.0 million for letters of credit (the "Letter of Credit Facility"). The
Letter of Credit Facility is utilized primarily for securing reinsurance
obligations of the Company's insurance subsidiaries. As of March 31, 1999, the
Company had $45.8 million outstanding in letters of credit under the Letter of
Credit Facility, compared with $46.9 million as of December 31, 1998.
16
<PAGE>
The Company paid interest of $3.1 million and $3.3 million on both credit
facilities for the three months ended March 31, 1999 and 1998, respectively.
The Company's domestic insurance subsidiaries' ability to pay dividends to the
holding company is limited by the insurance laws and regulations of Pennsylvania
and Delaware (such laws are substantially similar). Under Pennsylvania laws and
regulations, without prior approval of the Pennsylvania Insurance Commissioner
(the "Commissioner"), dividends may not be paid in excess of the greater of (i)
10% of surplus as regards to policyholders as of the end of the preceding year
or (ii) SAP net income for the preceding year, but in no event to exceed
unassigned funds. Under this standard, the Pooled Companies and PMA Reinsurance
Corporation can pay an aggregate of $51.8 million of dividends without the prior
approval of the Commissioner during 1999. Caliber One Indemnity Company, a
Delaware-domiciled company, is directly owned by PMA Reinsurance Corporation
and, as such, its dividends may not be paid directly to PMA Capital. As stated
above, Delaware's insurance laws as they apply to restricting the payment of
dividends are substantially similar to Pennsylvania's insurance laws. Under
Delaware insurance laws, Caliber One Indemnity Company can pay $2.5 million in
dividends during 1999. Dividends received from subsidiaries were $10.8 million
and $4.0 million for the first quarter of 1999 and 1998, respectively.
Net tax payments received from subsidiaries were $3.5 million and $6.0 million
for the three months ended March 31, 1999 and 1998, respectively.
PMA Capital's dividends to shareholders are restricted by its debt agreements.
Based upon the terms of the Credit Facility and the Letter of Credit Facility,
under the most restrictive debt covenant, PMA Capital would be able to pay
dividends of approximately $15.6 million in 1999. The Company paid dividends to
shareholders of $1.9 million and $2.0 million for the three months ended March
31, 1999 and 1998, respectively.
PMA Capital also made capital contributions in the form of cash to its
subsidiaries totaling $2.6 million during the first quarter of 1999. No cash
capital contributions were made to subsidiaries during 1998.
In February 1998, the Company's Board of Directors authorized a plan to
repurchase shares of common stock and Class A common stock in an amount not to
exceed $25.0 million. In February 1999, an additional $20.0 million of share
repurchase authority was approved by the Company's Board of Directors. During
the first quarter of 1999, the Company repurchased 577,000 shares at a total
cost of $11.3 million (average per share price was $19.53), leaving $14.9
million of share repurchase authorization remaining. Decisions regarding share
repurchases are subject to prevailing market conditions and the costs and
benefits associated with alternative uses of capital.
Management believes that the Company's sources of funds will provide sufficient
liquidity to meet short-term and long-term obligations.
Capital Resources
The Company's total assets increased to $3,508.7 million at March 31, 1999,
compared to $3,460.7 million at December 31, 1998. Total investments decreased
$37.1 million to $2,288.3 million at March 31, 1999. The decrease in investments
is primarily attributable to declines in market value due to rising interest
rates. All other assets increased $85.1 million at March 31, 1999, compared to
December 31, 1998, primarily due to an increase of $37.4 million in premiums
receivable. The increase in premiums receivable primarily relates to the
increase in net premiums written.
Presently, management believes that the existing capital structure is
appropriate. However, management continually monitors the capital structure in
light of developments in the business, and the present assessment could change
as management becomes aware of new opportunities and challenges in the Company's
business.
OTHER MATTERS
The Company's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to restrict insurance pricing and the application of
underwriting standards and reinterpretation of insurance contracts long after
the policies were written to provide
17
<PAGE>
coverage unanticipated by the Company. The eventual effect on the Company of the
changing environment in which it operates remains uncertain.
Year 2000 Issue
As a consequence of the programming convention which utilized a two-digit field
rather than a four-digit field, certain information technology ("IT") systems
and non-IT systems, such as equipment with embedded chips or microprocessors,
require reprogramming or replacement to enable them to perform correctly date
operations involving year 2000 or later ("Year 2000 Issue").
With the assistance of outside consulting groups, the Company began evaluating
and reprogramming its IT systems to address the Year 2000 Issue in late 1995.
The Company's Year 2000 systems' program consists of four phases: (i)
identifying systems requiring remediation; (ii) assessing the requirements to
remediate those systems; (iii) remediating those systems to make them Year 2000
ready by either modifying or replacing them; and (iv) testing the systems for
Year 2000 readiness, including, where applicable, that they properly interface
with third parties. The Company has completed the identification and assessment
phases with respect to its IT systems that are critical to maintaining
operations or the failure of which would result in significant costs or
disruption of operations ("mission critical systems"). As of February 28, 1999,
the Company had remediated and tested all of its mission critical systems. In
addition, the Company will continue to test its mission critical systems under
varying testing scenarios throughout 1999.
The Company has identified all of its non-IT systems that may require Year 2000
remediation, including office equipment and physical facilities, which contain
microprocessors or other embedded technology over which it has control. As of
April 30, 1999, substantially all of these non-IT systems are believed to be
Year 2000 ready to the extent reasonably necessary to conduct the Company's
day-to-day operations. Because the Company is not materially dependent upon
non-IT systems, the effect of a failure of these systems is not expected to be
material to the Company's financial condition or results of operations. The cost
of the Company's Year 2000 readiness work through March 31, 1999 has been
approximately $5.4 million. No material costs were incurred in the first quarter
of 1999. The Company does not expect to incur material costs in 1999 in
connection with the Year 2000 Issue.
The Company also is continuing to evaluate its relationships with certain third
parties with which the Company has a direct and material relationship to
determine whether they are Year 2000 ready, such as banks, brokers, reinsurers,
third party service providers, software and other service vendors, and agents
and other intermediaries. As of April 30, 1999, the responses received from such
third parties to inquiries made by the Company indicate that these third parties
either are or expect to be Year 2000 ready by December 31, 1999.
Even assuming that all material third parties provide a timely representation
concerning their Year 2000 readiness, 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 ready. Consequently, the effect, if any, on the
Company's results of operations from the failure of such third parties to be
Year 2000 ready is not reasonably estimable. However, the failure of one or more
third parties with whom the Company has a material relationship to be Year 2000
ready 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 ready include replacing the third party,
performing directly the services performed by the third party and maintaining
liquidity under the Company's Credit Facility.
Although the Company believes that Year 2000 Issues related to its hardware and
internal software programs are not likely to result in any material adverse
disruptions in the Company's computer systems or its other business operations,
18
<PAGE>
it has begun, but not yet completed, an analysis of the operational problems
that the Company believes would be reasonably likely to result from the failure
by the Company and certain third parties to successfully complete efforts
necessary to achieve Year 2000 readiness on a timely basis. The Company expects
to complete this analysis in the second quarter of 1999. The Company is also
developing contingency plans to provide for the resumption of its computer
systems and its other business operations in the event such Year 2000 problems
occur. These plans are expected to be completed in the second quarter of 1999;
however, the Company intends throughout 1999 to review and modify such plans on
an ongoing basis as new information becomes available or circumstances
materially change.
The costs of the Company's Year 2000 efforts and the dates on which the Company
believes it will complete such efforts are based on management's best estimates,
which were derived using numerous assumptions regarding future events, including
the continued availability of certain resources, third-party remediation plans,
and other factors. There can be no assurance that these estimates will prove to
be accurate, and actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and costs of personnel trained
in Year 2000 Issues; the Company's ability to identify, assess, remediate and
test all relevant computer codes and embedded technology; the risk that
reasonable testing will not uncover all Year 2000 problems; and similar
uncertainties.
In addition to the costs and risks associated with internal systems and third
parties, the Company may have underwriting exposure related to the Year 2000
Issue. Businesses materially damaged as a result of the Year 2000 Issue may
attempt to recoup their losses by claiming coverage under various types of
insurance policies underwritten by the Company and by ceding companies to whom
the Company provides reinsurance. The Company is attempting, whenever possible,
to avoid or otherwise limit its potential Year 2000 exposure through its
underwriting process. In the event that claims for Year 2000 Issues are asserted
against the Company, 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 the Company. In addition,
even if such coverage were found not to exist, which cannot be predicted, the
costs of litigation could be material. In the absence of any claims experience
at this time, such losses and costs are not currently reasonably estimable.
Comparison of SAP and GAAP Results
The results presented above vary in certain respects from SAP prescribed or
permitted by the Pennsylvania Insurance Department and the Delaware Insurance
Department. Prescribed SAP includes state laws, regulations and general
administrative rules, as well as a variety of National Association of Insurance
Commissioners ("NAIC") publications. Permitted SAP encompasses all accounting
practices that are not prescribed. In 1998, the NAIC adopted the Codification of
Statutory Accounting Principles ("Codification") guidance, which will replace
the current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas, such as deferred income taxes.
The Pennsylvania Insurance Department has adopted Codification, effective
January 1, 2001. The Company is in the process of estimating the impact that
Codification will have on its statutory surplus.
Recent Accounting Pronouncements
Effective January 1, 1999, the Company adopted Statement of Position ("SOP")
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." 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. In the first quarter of 1999, the
Company recorded a $2.8 million after-tax charge for the effect of adopting SOP
97-3, which is reflected as a cumulative effect of an accounting change (see
Note 2-B for additional information).
19
<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," 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 an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. 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,
results of operations or liquidity.
In October 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." This statement identifies several methods of deposit accounting
and provides guidance on the application of each method. This statement
classifies insurance and reinsurance contracts for which the deposit method is
appropriate as contracts that (i) transfer only significant timing risk, (ii)
transfer only significant underwriting risk, (iii) transfer neither significant
timing nor underwriting risk and (iv) have an indeterminate risk. SOP 98-7 is
effective for financial statements for fiscal years beginning after June 15,
1999. While the Company is presently evaluating the impact of SOP 98-7, the
adoption of SOP 98-7 is not expected to have a material impact on the Company's
financial condition, results of operations or liquidity.
CAUTIONARY STATEMENTS
Except for historical information provided in this Management's Discussion and
Analysis and otherwise in this report, statements made throughout this report
are forward-looking and contain information about financial results, economic
conditions, trends and known uncertainties. These forward-looking statements are
based on currently available financial, competitive and economic data and the
Company's current operating plans based on assumptions regarding future events.
The Company's actual results could differ materially from those expected by the
Company's management. 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, 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 Company's ability to meet its marketing objectives; the
effect of changes in workers' compensation statutes and their administration;
the Company's ability to predict and effectively manage claims related to
insurance and reinsurance policies; reliance on key management; adequacy of
reserves for claim liabilities; adverse property and casualty loss development
for events the Company insured in prior years; adequacy and collectibility of
reinsurance purchased by the Company; severity of natural disasters and other
catastrophes; and other factors disclosed from time to time in reports filed by
the Company with the Securities and Exchange Commission. Investors should not
place undue reliance on any such forward-looking statements.
20
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits are listed in the Index to Exhibits on page 23.
(b) Reports on Form 8-K filed during the quarter ended March 31, 1999:
None.
21
<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.
PMA CAPITAL CORPORATION
Date: May 12, 1999 By: /s/ Francis W. McDonnell
------------ --------------------------
Francis W. McDonnell,
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
22
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Method of Filing
<S> <C> <C>
(10) Company's 1999 Equity Incentive Plan Filed as Annex A to the registrant's Definitive
Proxy Statement on Schedule 14A dated March 26,
1999 and incorporated herein by reference
(12) Computation of Ratio of Earnings to Fixed Charges Filed herewith
(27) Financial Data Schedule Filed herewith (EDGAR version only)
</TABLE>
23
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (1)
(In Thousands, except ratio)
For the three months ended
March 31,
1999 1998
- -------------------------------------------------------------------------
EARNINGS
Pre-tax income $13,147 $14,741
Fixed charges 3,217 3,915
=============================
Total(a) $16,364 $18,656
=============================
FIXED CHARGES
Interest expense and amortization of
debt discount and premium on all
indebtedness $3,013 $3,701
Interest portion of rental expense 204 214
-----------------------------
Total fixed charges (b) $3,217 $3,915
=============================
Ratio of earnings to fixed 5.1x 4.8x
charges(a)/(b)
(1) For purposes of determining this ratio, earnings consist of income
before income taxes and cumulative effect of accounting change (1999),
plus fixed charges. Fixed charges consist of interest expense and the
portion of operating leases that management believes are representative
of the interest factor.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in Form 10-Q for the quarter ended March 31, 1999
for PMA Capital Corporation and is qualified in its entirety by reference to
such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 1,772,829
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 16
<MORTGAGE> 0
<REAL-ESTATE> 0
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0
0
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109,322
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<CHANGES> (2,759)
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</TABLE>
