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, 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.)
Mellon Bank Center, Suite 2800
1735 Market Street
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 12,669,378 shares outstanding of the registrant's Common Stock, $5
par value per share, and 10,081,009 shares outstanding of the registrant's Class
A Common Stock, $5 par value per share, as of the close of business on October
31, 1999.
<PAGE>
INDEX
- - --------------------------------------------------------------------------------
Page
Part I. Financial Information
Item 1. Financial statements
Consolidated statements of operations for the three
and nine months ended September 30, 1999 and 1998
(unaudited) 1
Consolidated balance sheets as of September 30, 1999
(unaudited) and December 31, 1998 2
Consolidated statements of cash flows for the nine
months ended September 30, 1999 and 1998 (unaudited) 3
Consolidated statements of comprehensive income (loss)
for the three and nine months ended September 30, 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 10
Part II. Other Information
Item 6. Exhibits and reports on Form 8-K 24
<PAGE>
PMA Capital 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) 1999 1998 1999 1998
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $ 124,970 $ 120,653 $ 395,418 $ 369,134
Change in net unearned premiums 3,449 (6,636) (28,536) (33,541)
--------- --------- --------- ---------
Net premiums earned 128,419 114,017 366,882 335,593
Net investment income 28,029 28,410 82,099 92,260
Net realized investment gains (losses) (3,283) 4,099 (4,161) 15,362
Other revenues 2,869 2,945 8,828 9,385
--------- --------- --------- ---------
Total revenues 156,034 149,471 453,648 452,600
--------- --------- --------- ---------
Losses and expenses:
Losses and loss adjustment expenses 91,491 83,473 268,136 256,230
Acquisition expenses 27,986 25,985 80,487 77,748
Operating expenses 17,354 18,154 50,886 55,654
Dividends to policyholders 5,782 5,507 15,108 13,637
Interest expense 3,052 3,768 9,134 11,231
--------- --------- --------- ---------
Total losses and expenses 145,665 136,887 423,751 414,500
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of accounting change 10,369 12,584 29,897 38,100
Income tax expense (benefit):
Current 2,770 (424) 8,555 267
Deferred 1,087 2,456 (384) 5,836
--------- --------- --------- ---------
Total 3,857 2,032 8,171 6,103
--------- --------- --------- ---------
Income before cumulative effect of accounting
change 6,512 10,552 21,726 31,997
Cumulative effect of accounting change (net of
income tax benefit of $1,458) -- -- (2,759) --
--------- --------- --------- ---------
Net income $ 6,512 $ 10,552 $ 18,967 $ 31,997
========= ========= ========= =========
Earnings per share:
Basic:
Income before cumulative effect of
accounting change $ 0.28 $ 0.45 $ 0.94 $ 1.35
Cumulative effect of accounting change -- -- (0.12) --
--------- --------- --------- ---------
Net income $ 0.28 $ 0.45 $ 0.82 $ 1.35
========= ========= ========= =========
Diluted:
Income before cumulative effect of
accounting change $ 0.27 $ 0.43 $ 0.90 $ 1.30
Cumulative effect of accounting change -- -- (0.11) --
--------- --------- --------- ---------
Net income $ 0.27 $ 0.43 $ 0.79 $ 1.30
========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
1
<PAGE>
PMA Capital Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
As of As of
September 30, December 31,
(dollar amounts in thousands, except per share data) 1999 1998
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: 1999 - $1,686,311; 1998 - $1,781,188) $ 1,642,788 $ 1,827,354
Equity securities, at fair value (cost: 1999 - $5; 1998 - $5) 5 17
Short-term investments, at amortized cost which approximates fair value 408,714 498,038
----------- -----------
Total investments 2,051,507 2,325,409
Cash 15,356 2,562
Accrued investment income 21,703 19,900
Premiums receivable (net of valuation allowance:
1999 - $20,840; 1998 - $19,874) 278,179 279,633
Reinsurance receivables (net of valuation allowance:
1999 - $2,178; 1998 - $2,178) 641,273 610,291
Deferred income taxes, net 97,194 63,929
Deferred acquisition costs 49,772 51,115
Other assets 140,426 107,879
----------- -----------
Total assets $ 3,295,410 $ 3,460,718
=========== ===========
Liabilities:
Unpaid losses and loss adjustment expenses $ 1,902,681 $ 1,940,895
Unearned premiums 266,425 227,945
Long-term debt 163,000 163,000
Accounts payable and accrued expenses 121,532 107,952
Funds held under reinsurance treaties 92,077 77,674
Dividends to policyholders 12,800 10,700
Payable under securitites loan agreements 284,986 421,072
----------- -----------
Total liabilities 2,843,501 2,949,238
----------- -----------
Commitments and contingencies (Note 4)
Shareholders' Equity:
Common stock, $5 par value (40,000,000 shares authorized;
1999 - 13,132,795 shares issued and 12,696,788 outstanding;
1998 - 13,956,268 shares issued and 13,520,261 outstanding) 65,664 69,781
Class A common stock, $5 par value (40,000,000 shares authorized;
1999 - 11,310,150 shares issued and 10,077,760 outstanding;
1998 - 10,486,677 shares issued and 9,837,963 outstanding) 56,550 52,433
Additional paid-in capital - Class A common stock 339 339
Retained earnings 387,577 377,601
Accumulated other comprehensive income (loss) (28,289) 30,016
Notes receivable from officers (151) (498)
Treasury stock, at cost:
Common stock (shares: 1999 - 436,007 and 1998 - 436,007) (5,582) (5,582)
Class A common stock (shares: 1999 - 1,232,390 and 1998 - 648,714) (24,199) (12,610)
----------- -----------
Total shareholders' equity 451,909 511,480
----------- -----------
Total liabilities and shareholders' equity $ 3,295,410 $ 3,460,718
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
PMA Capital Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(dollar amounts in thousands) 1999 1998
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,967 $ 31,997
Adjustments to reconcile net income to net cash flows used in
operating activities:
Depreciation and amortization 4,992 3,277
Provision (benefit) for deferred income taxes (384) 5,836
Net realized investment losses (gains) 4,161 (15,362)
Cumulative effect of accounting change 2,759 --
Change in:
Premiums receivable and unearned premiums, net 39,934 (348)
Dividends to policyholders 2,100 (595)
Reinsurance receivables (30,982) (54,165)
Unpaid losses and loss adjustment expenses (38,214) (51,690)
Accrued investment income (1,803) 144
Deferred acquisition costs 1,343 (10,670)
Other, net (9,114) 18,341
----------- -----------
Net cash flows used in operating activities (6,241) (73,235)
----------- -----------
Cash flows from investing activities:
Fixed maturity investments available for sale:
Purchases (1,021,204) (1,377,422)
Maturities or calls 106,397 108,013
Sales 1,003,836 1,175,526
Net sales (purchases) of short-term investments (46,725) 162,296
Proceeds from sale of subsidiary -- 2,902
Other, net (3,036) (2,601)
----------- -----------
Net cash flows provided by investing activities 39,268 68,714
----------- -----------
Cash flows from financing activities:
Dividends paid to shareholders (5,782) (6,086)
Proceeds from exercise of stock options 4,894 2,377
Purchase of treasury stock (19,693) (16,323)
Net repayments of notes receivable from officers 348 --
----------- -----------
Net cash flows used in financing activities (20,233) (20,032)
----------- -----------
Net increase (decrease) in cash 12,794 (24,553)
Cash - beginning of period 2,562 32,148
----------- -----------
Cash - end of period $ 15,356 $ 7,595
=========== ===========
Supplementary cash flow information:
Income taxes paid (refunded) $ 9,852 $ (616)
Interest paid $ 7,443 $ 11,150
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PMA Capital Corporation
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(dollar amounts in thousands) 1999 1998 1999 1998
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 6,512 $ 10,552 $ 18,967 $ 31,997
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during the period (9,582) 22,363 (61,010) 38,761
Less: reclassification adjustment for (gains)
losses included in net income (net of tax
expense (benefit): $(1,149) and $1,435 for
three months ended September 30, 1999
and 1998; $(1,456) and $5,377 for nine months
ended September 30, 1999 and 1998) 2,134 (2,651) 2,705 (11,558)
-------- -------- -------- --------
Other comprehensive income (loss) (7,448) 19,712 (58,305) 27,203
-------- -------- -------- --------
Comprehensive income (loss) $ (936) $ 30,264 $(39,338) $ 59,200
======== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
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 (collectively
referred to as "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 managed care workers'
compensation, integrated disability 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 in four other 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 and
nine months ended September 30, 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 ("FASB") 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. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. 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 underwriting 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 Nine Months Ended
September 30, September 30,
(dollar amounts in thousands) 1999 1998 1999 1998
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earned Premiums:
Direct ......... $ 81,135 $ 68,107 $ 235,262 $ 211,127
Assumed ........ 100,308 67,319 252,832 195,383
Ceded .......... (53,024) (21,409) (121,212) (70,917)
--------- --------- --------- ---------
Net ............ $ 128,419 $ 114,017 $ 366,882 $ 335,593
========= ========= ========= =========
Losses and LAE:
Direct ......... $ 62,613 $ 61,672 $ 187,642 $ 188,490
Assumed ........ 62,110 45,038 158,291 124,560
Ceded .......... (33,232) (23,237) (77,797) (56,820)
--------- --------- --------- ---------
Net ............ $ 91,491 $ 83,473 $ 268,136 $ 256,230
========= ========= ========= =========
</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
September 30, 1999 (see Note 2-B regarding SOP 97-3).
The Company has provided guarantees of approximately $8.5 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Denominator:
Basic shares - weighted average
common and Class A common
shares outstanding ............. 22,898,574 23,573,472 23,098,368 23,704,376
Effect of dilutive stock options ..... 809,659 1,043,105 820,388 945,028
---------- ---------- ---------- ----------
Total diluted shares ................. 23,708,233 24,616,577 23,918,756 24,649,404
========== ========== ========== ==========
</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 Nine Months Ended
September 30, September 30,
(dollar amounts in thousands) 1999 1998 1999 1998
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
PMA Re $ 83,900 $ 70,118 $ 233,867 $ 198,256
The PMA Insurance Group
Excluding Run-off Operations 65,254 72,761 203,229 223,807
Run-off Operations 1,110 1,477 3,333 12,780
--------- --------- --------- ---------
Total 66,364 74,238 206,562 236,587
Caliber One 8,556 801 16,095 1,706
Corporate and Other 497 215 1,285 689
Net realized investment gains (losses) (3,283) 4,099 (4,161) 15,362
--------- --------- --------- ---------
Total revenues $ 156,034 $ 149,471 $ 453,648 $ 452,600
========= ========= ========= =========
Components of pre-tax operating
income(1) and net income:
PMA Re $ 14,674 $ 11,930 $ 37,790 $ 34,882
The PMA Insurance Group:
Excluding Run-off Operations 4,045 3,389 13,719 8,343
Run-off Operations 174 (387) (320) 41
--------- --------- --------- ---------
Total 4,219 3,002 13,399 8,384
Caliber One 462 (247) (839) (1,317)
Corporate and Other (5,703) (6,200) (16,292) (19,211)
--------- --------- --------- ---------
Pre-tax operating income 13,652 8,485 34,058 22,738
Net realized investment gains (losses) (3,283) 4,099 (4,161) 15,362
--------- --------- --------- ---------
Income before income taxes and
cumulative effect of accounting change 10,369 12,584 29,897 38,100
Income tax expense 3,857 2,032 8,171 6,103
--------- --------- --------- ---------
Income before cumulative effect of
accounting change 6,512 10,552 21,726 31,997
Cumulative effect of accounting change,
net of tax -- -- (2,759) --
--------- --------- --------- ---------
Net income $ 6,512 $ 10,552 $ 18,967 $ 31,997
========= ========= ========= =========
</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>
7. DISPOSITIONS
Effective July 1, 1998, the Company sold PMA Insurance, Cayman Ltd. ("PMA
Cayman"), one of the entities included in The PMA Insurance Group's Run-off
Operations, which reinsured claims for certain policies written by other members
of The PMA Insurance Group, to a third party for a purchase price of $1.8
million and recorded an after-tax loss of $1.6 million. This transaction
included the transfer of $231.5 million in cash and invested assets to the
buyer. At September 30, 1999, the Company had recorded $240.8 million in
reinsurance receivables related to this transaction, all of which are secured by
assets in trust or by letters of credit. 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.
9
<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
September 30, 1999, compared with December 31, 1998, and its results of
operations for the three and nine months ended September 30, 1999, compared with
the same periods 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 Nine Months Ended
September 30, September 30,
(dollar amounts in thousands) 1999 1998 1999 1998
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues:
Net premiums written $ 124,970 $ 120,653 $ 395,418 $ 369,134
========= ========= ========= =========
Net premiums earned $ 128,419 $ 114,017 $ 366,882 $ 335,593
Net investment income 28,029 28,410 82,099 92,260
Other revenues 2,869 2,945 8,828 9,385
--------- --------- --------- ---------
Total operating revenues $ 159,317 $ 145,372 $ 457,809 $ 437,238
========= ========= ========= =========
Components of pre-tax operating
income (1) and net income:
PMA Re $ 14,674 $ 11,930 $ 37,790 $ 34,882
The PMA Insurance Group:
Excluding Run-off Operations 4,045 3,389 13,719 8,343
Run-off Operations 174 (387) (320) 41
--------- --------- --------- ---------
Total 4,219 3,002 13,399 8,384
Caliber One 462 (247) (839) (1,317)
Corporate and Other (5,703) (6,200) (16,292) (19,211)
--------- --------- --------- ---------
Pre-tax operating income 13,652 8,485 34,058 22,738
Net realized investment gains (losses) (3,283) 4,099 (4,161) 15,362
--------- --------- --------- ---------
Income before income taxes and
cumulative effect of accounting change 10,369 12,584 29,897 38,100
Income tax expense 3,857 2,032 8,171 6,103
--------- --------- --------- ---------
Income before cumulative effect of
accounting change 6,512 10,552 21,726 31,997
Cumulative effect of accounting change,
net of tax -- -- (2,759) --
--------- --------- --------- ---------
Net income $ 6,512 $ 10,552 $ 18,967 $ 31,997
========= ========= ========= =========
</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 holding company level, and such
decisions result in net realized gains (losses) that do not relate to the
operations of the individual segments.
10
<PAGE>
Pre-tax operating income for the three and nine months ended September 30, 1999
was $13.7 million and $34.1 million, respectively, compared to pre-tax operating
income of $8.5 million and $22.7 million for the same periods in 1998. After-tax
operating income was $8.6 million and $24.4 million for the three and nine
months ended September 30, 1999, respectively, compared to after-tax operating
income of $7.9 million and $22.0 million for the same periods in 1998. These
increases were primarily due to improved underwriting results attributable to
The PMA Insurance Group and PMA Re and lower interest expense, with after-tax
operating income being partially offset by a higher effective tax rate in 1999.
The Company currently expects operating income to continue to improve in 1999
reflecting higher operating income from The PMA Insurance Group and PMA Re. This
expectation may differ materially from actual results because of the risk
factors noted in the "Cautionary Statements" on page 23.
Net income was $6.5 million and $19.0 million for the three and nine months
ended September 30, 1999, respectively, compared to net income of $10.6 million
and $32.0 million for the three and nine months ended September 30, 1998,
respectively. Net income for the nine months ended September 30, 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 "Recent Accounting Pronouncements" for
additional information.
Net income also includes gains and losses on the sale of investments. The timing
and recognition of such gains and losses are unpredictable and are not
indicative of future operating performance. After-tax net realized investment
losses were $2.1 million and $2.7 million for the three and nine months ended
September 30, 1999, compared to after-tax net realized investment gains of $2.7
million and $10.0 million for the comparable 1998 periods. The realized losses
for 1999 reflect sales of investments in order to invest in yield enhancing
investment opportunities in an interest rate environment when rates were rising
in contrast to the realized gains in 1998 which reflect sales of investments
during a period when interest rates were declining. Also, net realized
investment gains for the nine months ended September 30, 1998 include a $2.4
million pre-tax loss related to the sale of PMA Insurance, Cayman Ltd. ("PMA
Cayman"). See Note 7 to the Company's Consolidated Financial Statements for
additional information.
11
<PAGE>
PMA RE
Summarized financial results of PMA Re are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(dollar amounts in thousands) 1999 1998 1999 1998
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $ 45,963 $ 54,687 $182,628 $172,595
======== ======== ======== ========
Net premiums earned $ 68,941 $ 56,386 $191,289 $157,353
Net investment income 14,959 13,732 42,578 40,903
-------- -------- -------- --------
Operating revenues 83,900 70,118 233,867 198,256
-------- -------- -------- --------
Losses and loss adjustment expenses ("LAE") 48,456 37,633 135,699 107,311
Acquisition and operating expenses 20,770 20,555 60,378 56,063
-------- -------- -------- --------
Total losses and expenses 69,226 58,188 196,077 163,374
-------- -------- -------- --------
Pre-tax operating income $ 14,674 $ 11,930 $ 37,790 $ 34,882
======== ======== ======== ========
GAAP loss and LAE ratio 70.3% 66.7% 70.9% 68.2%
GAAP combined ratio 100.4% 103.2% 102.5% 103.8%
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
PMA Re's pre-tax operating income was $14.7 million and $37.8 million for the
three and nine months ended September 30, 1999, compared to $11.9 million and
$34.9 million for the same periods in 1998. The increase in operating results
for the third quarter and first nine months of 1999 reflect an improvement in
the combined ratio and higher net investment income.
Premiums
The following table indicates PMA Re's gross and net premiums written by major
category of business:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(dollar amounts in thousands) 1999 1998 1999 1998
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross premiums written:
Casualty lines $ 57,093 $ 49,857 $180,055 $152,465
Property lines 13,514 17,066 59,647 58,379
Other lines 879 308 1,491 809
-------- -------- -------- --------
Total $ 71,486 $ 67,231 $241,193 $211,653
======== ======== ======== ========
Net premiums written:
Casualty lines $ 39,266 $ 40,922 $137,228 $124,457
Property lines 5,871 13,516 43,980 47,365
Other lines 826 249 1,420 773
-------- -------- -------- --------
Total $ 45,963 $ 54,687 $182,628 $172,595
======== ======== ======== ========
- - -----------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Net premiums written decreased $8.7 million, or 16.0%, and increased $10.0
million, or 5.8%, for the three and nine months ended September 30, 1999,
respectively, compared to the same periods in 1998. The decrease in net premiums
written for the three months ended September 30, 1999, reflects higher ceded
premiums, the cancellation of a finite treaty and the effects of the highly
competitive conditions in the U.S. reinsurance market, which more than offset
growth from expanded product offerings. The increase in net premiums written for
the nine months ended September 30, 1999, primarily reflects the successful
expansion of finite and financial product offerings, expansion of relationships
with PMA Re's existing clients, and contracts with new clients. Partially
offsetting this increase was the effect of highly competitive conditions in the
U.S. reinsurance market, which has caused PMA Re to non-renew certain accounts
largely due to inadequate rates and/or other underwriting issues.
Net premiums earned increased $12.6 million, or 22.3%, and $33.9 million, or
21.6%, for the three and nine months ended September 30, 1999, respectively,
compared to the same periods in 1998. 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. PMA Re's earned
premiums for the third quarter and first nine months of 1999 include
approximately $26 million related to a revision of the methodology used in
estimating unearned premiums on in-force contracts.
Losses and Expenses
The following table reflects the components of PMA Re's GAAP combined ratios:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss and LAE ratio 70.3% 66.7% 70.9% 68.2%
------- ------- ------- -------
Expense ratio:
Amortization of deferred acquisition costs 25.1% 30.6% 26.3% 29.2%
Operating expenses 5.0% 5.9% 5.3% 6.4%
------- ------- ------- -------
Total expense ratio 30.1% 36.5% 31.6% 35.6%
------- ------- ------- -------
GAAP combined ratio 100.4% 103.2% 102.5% 103.8%
======= ======= ======= =======
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
PMA Re's loss and LAE ratio increased 3.6 points and 2.7 points for the three
and nine months ended September 30, 1999, respectively, compared to the same
periods in 1998. These increases primarily relate to a change in PMA Re's
business mix, with finite and financial products representing an increasing
percentage of earned premiums. 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 5.5 points and 2.9 points for the three
and nine months ended September 30, 1999, respectively, compared to the same
periods last year. These decreases are primarily attributable to the change in
business mix as described above as well as lower acquisition expenses on
traditional business in 1999. In addition, PMA Re made changes to its
retrocessional program in 1999, resulting in higher ceding commissions, which
reduces the acquisition expense ratio.
The operating expense ratio decreased 0.9 points and 1.1 points for the three
and nine months ended September 30, 1999, respectively, compared to the same
periods last year, reflecting essentially flat operating expenses and growth in
earned premium.
Net Investment Income
Net investment income was $15.0 million and $42.6 million for the three and nine
months ended September 30, 1999, compared to $13.7 million and $40.9 million for
the same periods in 1998. These increases primarily reflect an increase in
investment yield and, to a lesser extent, higher average invested assets.
13
<PAGE>
THE PMA INSURANCE GROUP
Summarized financial results of The PMA Insurance Group are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(dollar amounts in thousands) 1999 1998 1999 1998
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $ 63,289 $ 64,504 $182,472 $194,331
======== ======== ======== ========
Net premiums earned $ 51,691 $ 57,389 $161,416 $177,978
Net investment income
Excluding Run-off Operations 11,329 13,140 34,839 38,426
Run-off Operations(1) 1,110 1,477 3,333 12,780
-------- -------- -------- --------
Total 12,439 14,617 38,172 51,206
Other revenues 2,234 2,232 6,974 7,403
-------- -------- -------- --------
Operating revenues 66,364 74,238 206,562 236,587
Losses and LAE:
Excluding Run-off Operations 36,297 44,326 118,425 138,010
Run-off Operations(1) 710 1,241 2,669 10,642
-------- -------- -------- --------
Total 37,007 45,567 121,094 148,652
Acquisition and operating expenses:
Excluding Run-off Operations 19,130 19,539 55,977 63,817
Run-off Operations(1) 226 623 984 2,097
-------- -------- -------- --------
Total 19,356 20,162 56,961 65,914
Dividends to policyholders 5,782 5,507 15,108 13,637
-------- -------- -------- --------
Total losses and expenses 62,145 71,236 193,163 228,203
-------- -------- -------- --------
Pre-tax operating income $ 4,219 $ 3,002 $ 13,399 $ 8,384
======== ======== ======== ========
GAAP loss and LAE ratio 71.6% 79.4% 75.0% 83.5%
GAAP combined ratio(2) 116.7% 120.4% 116.1% 124.4%
- - ----------------------------------------------------------------------------------------------------------
<FN>
(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 combined ratio for the nine months ended September 30, 1999 excludes
the impact of the cumulative effect of accounting change of $4.3 million
($2.8 million after-tax) for insurance-related assessments.
</FN>
</TABLE>
Operating Results
Pre-tax operating income for The PMA Insurance Group was $4.2 million and $13.4
million for the three and nine months ended September 30, 1999, compared to $3.0
million and $8.4 million for the same periods in 1998. The increases in
operating income were primarily due to improved loss experience and lower
operating expenses resulting from ongoing cost reduction initiatives. In
addition, the improvement in operating income reflects a reduction in the level
of net exposures underwritten due to disciplined and focused underwriting, as
well as an increase in the use of reinsurance.
14
<PAGE>
The PMA Insurance Group Excluding Run-off Operations
Premiums
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(dollar amounts in thousdands) 1999 1998 1999 1998
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Workers' compensation:
Direct premiums written $ 55,687 $ 51,472 $ 161,783 $ 152,961
Premiums assumed 661 1,072 1,855 3,532
Premiums ceded (7,095) (3,436) (23,923) (8,991)
--------- --------- --------- ---------
Net premiums written $ 49,253 $ 49,108 $ 139,715 $ 147,502
========= ========= ========= =========
Commercial Lines:
Direct premiums written $ 22,049 $ 23,254 $ 66,503 $ 74,617
Premiums assumed 249 340 1,277 1,728
Premiums ceded (8,262) (8,198) (25,023) (29,516)
--------- --------- --------- ---------
Net premiums written $ 14,036 $ 15,396 $ 42,757 $ 46,829
========= ========= ========= =========
Total:
Direct premiums written $ 77,736 $ 74,726 $ 228,286 $ 227,578
Premiums assumed 910 1,412 3,132 5,260
Premiums ceded (15,357) (11,634) (48,946) (38,507)
--------- --------- --------- ---------
Net premiums written $ 63,289 $ 64,504 $ 182,472 $ 194,331
========= ========= ========= =========
- - -------------------------------------------------------------------------------------------------------
</TABLE>
Direct workers' compensation premiums written increased by $4.2 million and $8.8
million for the three and nine months ended September 30, 1999, respectively,
compared to the same periods in 1998, due to an increase in the volume of risks
underwritten. Manual rate reductions averaging approximately 2.3% in The PMA
Insurance Group's principal marketing territories constrained the growth in
direct premiums written. In addition, continued intense price competition and
selected non-renewal of non-profitable accounts partially offset the increase in
direct premiums written. Direct workers' compensation premiums written were also
impacted by lower additional audit premiums of $1.5 million for the nine months
ended September 30, 1999, compared to the same period in 1998.
Direct writings of 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 by
$1.2 million and $8.1 million for the three and nine months ended September 30,
1999, respectively, compared to the same periods in 1998 primarily due to
planned reductions in such lines as well as continued competitive conditions.
Rather than lower prices to what it believes are unacceptable levels, The PMA
Insurance Group has chosen not to renew some of its business in the Commercial
Lines.
The increases in reinsurance premiums ceded of $3.7 million and $10.4 million
for the three and nine months ended September 30, 1999, compared to the same
periods in 1998 primarily reflect higher ceded workers' compensation premiums of
$3.7 million and $14.9 million for the three and nine months ended September 30,
1999, respectively, compared to the same periods in 1998. In 1999, a new
reinsurance treaty reduced the net retention level on workers' compensation
exposures from $1.5 million to $150,000 per occurrence. Partially offsetting
such increase for the nine months ended September 30, 1999, compared to the same
period in 1998 was a decrease of $4.5 million in ceded premiums for Commercial
Lines. 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 $5.7 million and $16.6 million for the three and
nine months ended September 30, 1999, respectively, compared to the same periods
in 1998. Generally, trends in net premiums earned follow patterns similar to net
15
<PAGE>
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
combined ratios:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss and LAE ratio 70.2% 77.2% 73.4% 77.5%
------- ------- ------- -------
Expense ratio:
Amortization of deferred acquisition costs 18.5% 13.5% 16.9% 17.3%
Operating expenses(1)(2) 15.0% 16.8% 14.2% 14.7%
------- ------- ------- -------
Total expense ratio 33.5% 30.3% 31.1% 32.0%
Policyholders' dividends 11.2% 9.6% 9.4% 7.7%
------- ------- ------- -------
GAAP combined ratio(1)(2)(3)(4) 114.9% 117.1% 113.9% 117.2%
======= ======= ======= =======
- - ------------------------------------------------------------------------------------------------------------
<FN>
(1) The expense ratio and the combined ratio for the nine months ended
September 30, 1999 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 expense ratio and the combined ratio exclude $1.8 million and $5.8
million for the three and nine months ended September 30, 1999,
respectively, and $2.2 million and $6.9 million for the three and nine
months ended September 30, 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 116.7% and 116.1% for the three and nine months ended
September 30, 1999, and 120.4% and 124.4% for the three and nine months
ended September 30, 1998, respectively.
</FN>
</TABLE>
For the three and nine months ended September 30, 1999, the GAAP loss and LAE
ratio improved by 7.0 points and 4.1 points, respectively, compared to the same
periods in 1998. These improvements were primarily due to favorable prior
accident year reserve development and improved loss and LAE ratios in workers'
compensation during 1999, partially offset by a decline in the level of reserve
discount.
The PMA Insurance Group had experienced $6.7 million and $9.2 million of
favorable development of prior accident year reserves ("prior year development")
for the three and nine months ended September 30, 1999, compared to $897,000 and
$2.3 million of favorable prior year development for the same periods in 1998,
which improved the overall loss and LAE ratio. The increases in favorable prior
year development reflect better than expected loss experience from
loss-sensitive and rent-a-captive workers' compensation business. Since most of
the favorable development occurred during the third quarter of 1999, it had a
substantially greater impact on the loss and LAE ratio for the quarter than the
impact on the loss and LAE ratio for the nine months ended September 30, 1999.
This favorable development has been substantially offset by policyholders'
dividends for rent-a-captive business and premium adjustments for loss-sensitive
business. Rent-a-captives are used by customers as an alternative method to
manage their loss exposure without establishing and capitalizing their own
captive insurance company.
In addition, the improvement in the workers' compensation current accident year
loss and LAE ratio has favorably impacted the overall loss and LAE ratio for the
three and nine months ended September 30, 1999, compared to the same periods in
1998.
16
<PAGE>
These improvements reflect the application of stricter underwriting standards
and a relatively lower risk profile of business written.
The loss and LAE ratio is negatively impacted by accretion of prior year
discounted reserves and favorably impacted by setting up discount for current
year reserves. The net of these is referred to as net discount accretion.
Accretion of prior year discounted reserves exceeded the setting up of discount
for the three and nine months ended September 30, 1999, whereas the setting up
of discount exceeded the accretion of prior year discounted reserves for the
same periods in 1998. This resulted in an increase in the loss and LAE ratio for
the three and nine months ended September 30, 1999, compared to the same periods
in 1998. This change in net discount accretion reflects a reduction in the
amount of discount recorded on current year's reserves as a result of higher
ceded loss reserves due to the new reinsurance treaty for workers' compensation.
The GAAP expense ratio increased by 3.2 points for the three months ended
September 30, 1999, compared to the same period in 1998, due to an increase in
the acquisition expense ratio of 5.0 points, partially offset by a decrease in
the operating expense ratio of 1.8 points compared to the same period in 1998.
The increase in the acquisition expense ratio is a result of an increase in
taxes and assessments and other acquisition expenses, primarily due to increases
in direct workers' compensation premium, paid losses and the guaranty fund rate
in certain states during the third quarter of 1999, compared to the same period
in 1998. The decrease in the operating expense ratio was due to continued cost
cutting measures in the third quarter of 1999.
The GAAP expense ratio decreased by 0.9 points for the nine months ended
September 30, 1999, compared to the same period in 1998, due to a decrease in
the operating expense ratio of 0.5 points and a decrease in the acquisition
expense ratio of 0.4 points compared to the same period in 1998. The decrease in
the operating expense ratio was primarily due to continued cost cutting measures
in 1999. The decrease in the acquisition expense ratio was primarily due to
higher ceded commissions received as a result of the new reinsurance treaty in
1999 and a reduction in certain state assessments.
The policyholders' dividend ratio was 11.2% and 9.4% for the three and nine
months ended September 30, 1999, respectively, compared to 9.6% and 7.7% for the
same periods last year. These increases are primarily due to selling more
business under dividend plans and improved loss experience, which resulted in
higher dividend payouts to policyholders, including the policyholder dividends
related to rent-a-captive customers.
Net Investment Income
Net investment income was $11.3 million and $34.8 million for the three and nine
months ended September 30, 1999, compared to $13.1 million and $38.4 million for
the same periods in 1998. The decrease primarily reflects a lower asset base,
due to the paydown of loss reserves from prior accident years.
Run-off Operations
Effective July 1, 1998, the Company sold PMA Cayman, one of the entities
included in The PMA Insurance Group's Run-off Operations, which reinsured claims
for certain policies written by other members of The PMA Insurance Group, to a
third party for a purchase price of $1.8 million and recorded an after-tax loss
of $1.6 million. See Note 7 to the Consolidated Financial Statements for
additional information. This transaction included the transfer of $231.5 million
in cash and invested assets to the buyer.
Net investment income for the Run-off Operations decreased by $367,000 and $9.4
million in the three and nine months ended September 30, 1999, respectively,
compared to the same periods in 1998. The decrease in investment income was
primarily due to the decrease in invested assets resulting from the sale, and to
a lesser extent, from the paydown of losses by the remaining run-off entities.
The sale of PMA Cayman also resulted in a reduction in losses and LAE,
acquisition expenses and operating expenses of the Run-off Operations for the
three and nine months ended September 30, 1999, compared to the same periods in
1998.
17
<PAGE>
CALIBER ONE
Summarized financial results of Caliber One are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $ 15,828 $ 1,660 $ 30,681 $ 2,577
======== ======== ======== ========
Net premiums earned $ 7,897 $ 440 $ 14,540 $ 631
Net investment income 659 361 1,555 1,075
-------- -------- -------- --------
Operating revenues 8,556 801 16,095 1,706
-------- -------- -------- --------
Losses and LAE incurred 6,028 352 11,343 505
Acquisition and operating expenses 2,066 696 5,591 2,518
-------- -------- -------- --------
Total losses and expenses 8,094 1,048 16,934 3,023
-------- -------- -------- --------
Pre-tax operating income (loss) $ 462 $ (247) $ (839) $ (1,317)
======== ======== ======== ========
- - ------------------------------------------------------------------------------------------------------
</TABLE>
Caliber One recorded pre-tax operating income of $462,000 for the three months
ended September 30, 1999, compared to a pre-tax operating loss of $247,000 for
the three months ended September 30, 1998, reflecting the establishment of a
solid premium base and stabilization of its expenses relative to that premium
base. Caliber One recorded pre-tax operating losses of $839,000 and $1.3 million
for the nine months ended September 30, 1999 and 1998, respectively.
The growth in net premiums written and earned for the three and nine months
ended September 30, 1999, compared to the same periods in 1998, reflects Caliber
One's rising market acceptance and expanded distribution network combined with
increased staffing levels.
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 and nine months ended
September 30, 1999, Corporate and Other recorded pre-tax operating losses of
$5.7 million and $16.3 million, respectively, compared to pre-tax operating
losses of $6.2 million and $19.2 million for the same periods in 1998. The
decrease in the operating loss is primarily due to lower interest expense of
$700,000 and $2.1 million for the third quarter and first nine months of 1999,
respectively, reflecting a $40.0 million paydown in outstanding debt in the
fourth quarter of 1998.
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 September 30, 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 is December 31, 2002, and the Credit
Facility 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
18
<PAGE>
obligations of the Company's insurance subsidiaries. As of September 30, 1999,
the Company had $44.7 million outstanding in letters of credit under the Letter
of Credit Facility, compared with $46.9 million as of December 31, 1998.
The Company paid interest of $1.4 million and $7.4 million on both credit
facilities for the three and nine months ended September 30, 1999, respectively,
compared to $3.7 million and $11.2 million for the same periods in 1998.
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 (the 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 policyholders' surplus 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 $8.0 million and $26.8 million
for the three and nine months ended September 30, 1999, respectively, compared
to $8.0 million and $18.0 million for the comparable 1998 periods.
Net tax payments received from subsidiaries were $7.4 million and $19.1 million
for the three and nine months ended September 30, 1999, respectively, compared
to $7.5 million and $22.3 million for the same periods in 1998.
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 $5.8 million for the three and nine months
ended September 30, 1999, respectively, compared to $2.0 million and $6.1
million for the three and nine months ended September 30, 1998, respectively.
PMA Capital also made capital contributions in the form of cash to its
subsidiaries totaling $4.1 million for the nine months ended September 30, 1999.
No cash capital contributions were made to subsidiaries during the three months
ended September 30, 1999 or 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 nine months of 1999, the Company repurchased 999,000 shares at a total
cost of $19.7 million (average per share price was $19.71). Since the inception
of its share repurchase program in February 1998, PMA Capital has repurchased a
total of 2.0 million shares at a total cost of $38.5 million (average per share
price was $19.32). On November 3, 1999, the Company's Board of Directors
approved an additional $30.0 million of share repurchase authority, which brings
PMA Capital's remaining share repurchase authorization to $36.5 million.
Decisions regarding share repurchases are subject to the costs and benefits
associated with alternative uses of capital and prevailing market conditions.
Management believes that the Company's sources of funds will provide sufficient
liquidity to meet its short-term and long-term obligations.
19
<PAGE>
Capital Resources
The Company's total assets decreased to $3,295.4 million at September 30, 1999,
compared to $3,460.7 million at December 31, 1998. Total investments decreased
$273.9 million to $2,051.5 million at September 30, 1999. The decrease in
investments is primarily attributable to declines in market value due to rising
interest rates as well as a decrease of $136.1 million in securities on loan
under the Company's securities lending program.
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 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"). The Company has
remediated and tested all of its mission critical systems. In addition, the
Company will continue testing its mission critical systems under varying testing
scenarios throughout the remainder of 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.
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 September 30, 1999 has been approximately $5.4
million. No material costs were incurred in the third quarter of 1999. The
Company does not expect to incur material costs through the rest of 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 October 31, 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.
20
<PAGE>
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 such as direct
billing of any customers whose agent's or broker's accounts current system
fails, 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,
it has analyzed 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. Based on this analysis, the Company has developed
contingency plans to provide for the resumption of its computer systems and its
other business operations in the event such Year 2000 problems occur. The
contingency plans include reallocation of existing resources and employees, use
of alternate processes and procedures, such as manual workarounds, and use of
outside service providers to supplement internal resources. The Company intends
throughout the remainder of 1999 to review and refine such plans on an ongoing
basis, as needed, when 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
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
Results presented in accordance with GAAP vary in certain respects from
statutory accounting practices prescribed or permitted by the Pennsylvania
Insurance Department and the Delaware Insurance Department (collectively,
"SAP"). 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.
21
<PAGE>
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.
In June 1998, the Financial Accounting Standards Board ("FASB") 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. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. 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.
22
<PAGE>
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.
23
<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 26.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1999:
During the quarterly period ended September 30, 1999, the Company filed the
following Report on Form 8-K:
- dated August 4, 1999, Item 5 - containing a news release regarding its
second quarter 1999 results.
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.
PMA CAPITAL CORPORATION
Date: 11/12/99 By: /s/ Francis W. McDonnell
-------- ------------------------------
Francis W. McDonnell,
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
25
<PAGE>
Exhibit Index
Exhibit No. Description of Exhibit Method of Filing
- - ----------- ---------------------- ----------------
(10) Amendment No. 4, dated as of September 27, Filed herewith
1999, to First Amended and Restated Letter of
Credit Agreement, dated March 14, 1997
(12) Computation of Ratio of Earnings to Fixed
Charges Filed herewith
(27) Financial Data Schedule Filed herewith
(EDGAR version
only)
26
AMENDMENT NO. 4 TO FIRST AMENDED
AND RESTATED LETTER OF CREDIT AGREEMENT
AMENDMENT NO. 4 (this "Amendment"), dated as of September 27, 1999,
under the First Amended and Restated Letter of Credit Agreement dated as of
March 14, 1997, among PMA CAPITAL CORPORATION (formerly Pennsylvania
Manufacturers Corporation), a Pennsylvania corporation (the "Applicant"), the
Banks party thereto, FIRST UNION NATIONAL BANK, as successor to CoreStates Bank
N.A., as Co-Agent, and THE BANK OF NEW YORK, as Issuing Bank and as agent for
the Banks (in such capacity, the "Agent"), as amended by (i) Amendment No. 1 and
Restatement dated as of September 29, 1997, (ii) Amendment No. 2 to Letter of
Credit Agreement dated as of September 28, 1998, and (iii) Amendment No. 3 to
Letter of Credit Agreement dated as of October 2, 1998 (as so amended, the
"Agreement").
RECITALS
A. Capitalized terms used herein which are not defined herein shall
have the respective meanings ascribed thereto in the Agreement.
B. The Applicant desires that the Banks agree to extend the Commitment
and Termination Date by 364 days and make certain other changes to the Agreement
as set forth herein.
C. The Banks signing below agree to such extension subject to the terms
and conditions set forth below.
Accordingly, in consideration of the terms and conditions hereinafter
set forth, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. The definition of Applicable Fee Percentage contained in Section 1.1
of the Agreement is amended in its entirety to read as follows:
"Applicable Fee Percentage" means with respect to the Letter
of Credit Commissions and Commitment Fees (i) with respect to Letter of
Credit Commissions, (x) in the case of each Secured Letter of Credit,
0.375% and (y) in the case of each Unsecured Letter of Credit, the
applicable percentage based on the Capitalization Ratio calculated as
provided below set forth in the following table under the heading
"Applicable Fee Percentage for Unsecured Letters of Credit" and (ii)
with respect to Commitment Fees, the applicable percentage based on the
Capitalization Ratio calculated as provided below set forth in the
following table under the heading "Commitment Fee Percentage":
<PAGE>
Capitalization Ratio Applicable Fee Percentage for Commitment Fee
Unsecured Letters of Credit Percentage
[less than] 0.20:1.00 0.500% 0.150%
[greater than
or equal to] 0.20:1.00 and 0.600% 0.175%
[less than] 0.25:1.00
[greater than
or equal to] 0.25:1.00 and 0.700% 0.200%
[less than] 0.30:1.00
[greater than
or equal to] 0.30:1.00 0.800% 0.250%
From the Amendment Effective Date (as defined in Amendment No.
4 to this Agreement) until reset as set forth below, the Applicable Fee
Percentage shall be based on the Capitalization Ratio as of the last
day of the fiscal quarter ended June 30, 1999. The Applicable Fee
Percentage shall be reset from time to time in accordance with the
above table on the day of the delivery by the Applicant in accordance
with Sections 5.1(a) and 5.1(b) of financial statements together with a
Compliance Certificate attaching a Covenant Compliance Worksheet
(reflecting the computation of the Capitalization Ratio as of the last
day of the preceding fiscal quarter, beginning with the fiscal quarter
ending September 30, 1999) that provides for a change in the Applicable
Fee Percentage from that then in effect. If the Applicant shall fail to
deliver a Compliance Certificate attaching a Covenant Compliance
Worksheet within sixty (60) days after the end of each of the first
three fiscal quarters (or one hundred twenty (120) days after the end
of the last fiscal quarter), the Applicable Fee Percentage for Letter
of Credit Commissions and Commitment Fees shall be 0.800% and 0.250%,
respectively, for the period from and including the 61st day (the 121st
day in the case of the last quarter) after the end of such fiscal
quarter to the date of the delivery by the Applicant to the
Administrative Agent of a Compliance Certificate attaching a Covenant
Compliance Worksheet demonstrating that a different Applicable Fee
Percentage is applicable.
2. Notwithstanding provisions of Section 2.6 to the contrary, each Bank
consents to the extension of the Commitment and Termination Date for 364 days
from the date hereof.
3. Paragraphs 1 and 2 of this Amendment shall not be effective until
the prior or simultaneous fulfillment of the following conditions: (the
"Amendment Effective Date"):
(a) the Agent shall have received this Amendment, duly executed by a
duly authorized officer or officers of the Applicant, the Agent
and each Bank;
(b) the Agent shall have received a certificate of the Secretary or
Assistant Secretary of the Applicant (i) attaching a true and
complete
-2-
<PAGE>
copy of the resolutions of the Executive and Finance
Committees of its Board of Directors authorizing this Amendment,
in form and substance satisfactory to the Agent, (ii) certifying
that its certificate of incorporation has not been amended since
March 14, 1997, and its by-laws have not been amended since
November 5, 1997, or, if so amended, setting forth the same, and
(iii) setting forth the incumbency of its officer or officers who
may sign this Amendment, including therein a signature specimen
of such officer or officers;
(c) a favorable opinion of counsel for the Applicant, addressed to
the Agent and the Banks, in form and substance satisfactory to
the Agent; and
(d) the Agent shall have received such other documents as it shall
reasonably request.
4. The Applicant hereby (i) reaffirms and admits the validity and
enforceability of the Agreement and the other Credit Documents and all of its
obligations thereunder, (ii) represents and warrants that there exists no
Default or Event of Default immediately after giving effect to this Amendment,
and (iii) represents and warrants that the representations and warranties
contained in the Credit Documents, including the Agreement as amended by this
Amendment (other than the representations and warranties made as of a specific
date), are true and correct in all material respects on and as of the date
hereof.
5. In all other respects, the Agreement and the other Credit Documents
shall remain in full force and effect.
6. This Amendment may be executed in any number of counterparts, each
of which shall be an original and all of which shall constitute one agreement.
It shall not be necessary in making proof of this Amendment to produce or
account for more than one counterpart signed by the party against which
enforcement is sought.
7. This Amendment is being delivered in and is intended to be performed
in the State of New York and shall be construed and enforceable and be governed
by, the internal laws of the State of New York without regard to principles of
conflict of laws.
[signature pages follow]
-3-
<PAGE>
AS EVIDENCE of the agreement by the parties hereto to the terms and
conditions herein contained, each such party has caused this Amendment No. 4 to
the First Amended and Restated Letter of Credit Agreement to be executed on its
behalf.
PMA CAPITAL CORPORATION (formerly
Pennsylvania Manufacturers Corporation)
By: /s/ Albert D. Ciavardelli
----------------------------
Name: Albert D. Ciavardelli
Title: Vice President - Finance
<PAGE>
PMA CAPITAL CORPORATION
AMENDMENT NO. 4 TO FIRST AMENDED
AND RESTATED LETTER OF CREDIT AGREEMENT
THE BANK OF NEW YORK, Individually and
as Agent and as Issuing Bank
By: /s/ David Trick
----------------------------
Name: David Trick
Title: Assistant Vice President
<PAGE>
PMA CAPITAL CORPORATION
AMENDMENT NO. 4 TO FIRST AMENDED
AND RESTATED LETTER OF CREDIT AGREEMENT
FIRST UNION NATIONAL BANK,
Individually and as Co-Agent
By: /s/ Thomas L. Stitchberry
----------------------------
Name: Thomas L. Stitchberry
Title: Senior Vice President
<PAGE>
PMA CAPITAL CORPORATION
AMENDMENT NO. 4 TO FIRST AMENDED
AND RESTATED LETTER OF CREDIT AGREEMENT
FLEET NATIONAL BANK
By: /s/Anson T. Harris
----------------------------
Name: Anson T. Harris
Title: Vice President
<PAGE>
PMA CAPITAL CORPORATION
AMENDMENT NO. 4 TO FIRST AMENDED
AND RESTATED LETTER OF CREDIT AGREEMENT
PNC BANK, NATIONAL ASSOCIATION
By: /s/Paul Devine
----------------------------
Name: Paul Devine
Title: Vice President
<PAGE>
PMA CAPITAL CORPORATION
AMENDMENT NO. 4 TO FIRST AMENDED
AND RESTATED LETTER OF CREDIT AGREEMENT
CREDIT LYONNAIS
By: /s/ Sebastian Rocco
----------------------------
Name: Sebastian Rocco
Title: Senior Vice President
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ in Thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1999 1998
- - ----------------------------------------------------------------------------------
<S> <C> <C>
EARNINGS
Pre-tax income $29,897 $38,100
Fixed charges 9,738 11,871
------- -------
Total(a) $39,635 $49,971
======= =======
FIXED CHARGES
Interest expense and amortization of debt discount
and premium on all indebtedness $ 9,134 $11,231
Interest portion of rental expenses 604 640
------- -------
Total fixed charges(b) $ 9,738 $11,871
======= =======
------- -------
Ratio of earnings to fixed charges(a)/(b) 4.1x 4.2x
======= =======
- - ----------------------------------------------------------------------------------
</TABLE>
<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 September 30,
1999 for PMA Capital Corporation and is qualified in its entirety by reference
to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 1,642,788
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,051,507
<CASH> 15,356
<RECOVER-REINSURE> 641,273<F1>
<DEFERRED-ACQUISITION> 49,772
<TOTAL-ASSETS> 3,295,410
<POLICY-LOSSES> 1,902,681
<UNEARNED-PREMIUMS> 266,425
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 12,800
<NOTES-PAYABLE> 163,000
0
0
<COMMON> 122,214
<OTHER-SE> 329,695
<TOTAL-LIABILITY-AND-EQUITY> 3,295,410
366,882
<INVESTMENT-INCOME> 82,099
<INVESTMENT-GAINS> (4,161)
<OTHER-INCOME> 8,828
<BENEFITS> 268,136
<UNDERWRITING-AMORTIZATION> 80,487
<UNDERWRITING-OTHER> 65,994
<INCOME-PRETAX> 29,897
<INCOME-TAX> 8,171
<INCOME-CONTINUING> 21,726
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,759)
<NET-INCOME> 18,967
<EPS-BASIC> 0.82
<EPS-DILUTED> 0.79
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Represents reinsurance recoverable on paid and unpaid losses.
</FN>
</TABLE>
