<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO __________
Commission File Number 000-22761
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 665-5046
--------------
Securities to be registered pursuant to Section 12(b): None
Securities to be registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $5.00 PER SHARE
-----------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of February 28, 1999, was $263,158,213.
There were 13,504,816 shares outstanding of the registrant's Common Stock, $5
par value per share, and 9,895,360 shares outstanding of the registrant's Class
A Common Stock, $5 par value per share, as of the close of business on February
28, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Parts I and II of this Form 10-K incorporate by reference portions of the
Annual Report to Shareholders for the year ended December 31, 1998, as
indicated herein.
(2) Part III of this Form 10-K incorporates portions of the registrant's proxy
statement dated March 26, 1999 for the 1999 Annual Meeting of Shareholders.
<PAGE>
INDEX
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<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
Item 1. Business....................................................................... 1
Company Overview............................................................ 1
PMA Re...................................................................... 2
The PMA Insurance Group..................................................... 6
Caliber One................................................................. 12
Reinsurance and Retrocessional Protection................................... 12
Loss Reserves............................................................... 14
Investments................................................................. 20
Competition................................................................. 21
Regulatory Matters.......................................................... 22
Employees................................................................... 25
Glossary of Selected Insurance Terms........................................ 26
Item 2. Properties..................................................................... 30
Item 3. Legal Proceedings.............................................................. 30
Item 4. Submission of Matters to a Vote of Security Holders............................ 30
Executive Officers of the Registrant........................................... 30
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters...... 31
Item 6. Selected Financial Data........................................................ 31
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 32
Item 8. Financial Statements and Supplementary Data.................................... 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................ 32
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 32
Item 11. Executive Compensation......................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 32
Item 13. Certain Relationships and Related Transactions................................. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 33
Signatures.............................................................................. 34
Index to Financial Statement Schedules.................................................. FS-1
Index to Exhibits....................................................................... E-1
</TABLE>
<PAGE>
PART I
The Business Section and other parts of this Form 10-K contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the "Cautionary Statements" on page 49 of the
Company's Management's Discussion and Analysis ("MD&A") section of its 1998
Annual Report to Shareholders ("Annual Report") that has been incorporated by
reference into Part II, Item 7 of this Form 10-K.
ITEM 1. Business
COMPANY OVERVIEW
PMA Capital Corporation (the "Company" or "PMA Capital"), headquartered in
Philadelphia, Pennsylvania, is an insurance holding company with total assets of
approximately $3.5 billion and shareholders' equity of $511.5 million at
December 31, 1998. In 1998, the Company changed its name to PMA Capital
Corporation from Pennsylvania Manufacturers Corporation. The new name is more
representative of the full breadth of the Company's insurance operations and
underscores the diversity of its risk management services. The Company's
operating subsidiaries conduct business in the property and casualty insurance
industry.
The Company has three operating segments: (i) PMA Re, which provides property
and casualty reinsurance products and services; (ii) The PMA Insurance Group,
which writes workers' compensation and other standard lines of commercial
insurance; and (iii) Caliber One, which writes specialty insurance focusing on
excess and surplus lines. In addition, the Company's 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.
Financial information in the tables that follow is presented in conformity with
generally accepted accounting principles ("GAAP"), unless otherwise indicated.
Certain reclassifications have been made to prior periods' financial information
to conform with the 1998 presentation. Revenues, income (loss) before income
taxes and net realized investment gains, and assets attributable to each of the
Company's operating segments and its Corporate and Other segment for the last
three fiscal years are set forth in Note 17 to the Company's consolidated
financial statements for the year ended December 31, 1998 ("Financial
Statements") included in its Annual Report.
The composition of the Company's net premiums written for the year ended
December 31, 1998 was as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Net premiums
written % of total
-------------------- ------------------
<S> <C> <C>
PMA Re................................... $234,010 49.2 %
-------- -----
The PMA Insurance Group:
Workers' compensation.................. 187,033 39.4 %
Other commercial lines................. 57,204 12.0 %
Run-off Operations..................... (9,400) (2.0)%
-------- -----
Total.................................. 234,837 49.4 %
-------- -----
Caliber One............................. 6,436 1.4 %
Corporate and Other...................... (522) --
-------- -----
Total.................................... $474,761 100.0 %
======== =====
</TABLE>
1
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PMA RE
Background
PMA Re writes a broad range of property and casualty reinsurance products with
an emphasis on risk-exposed casualty excess of loss reinsurance within the
brokered market. PMA Re competes on the basis of its ability to offer
specialized products to its clients, its long-term relationships in the broker
and ceding company communities, and its prompt and responsive service. According
to data provided by the Reinsurance Association of America (the "RAA"), as of
December 31, 1998, PMA Reinsurance Corporation was the 22nd largest reinsurer in
the United States in terms of statutory capital and surplus and 17th largest in
terms of net premiums written.
In the broker reinsurance market, the products (reinsurance coverages) are
distributed to the ultimate customer (ceding companies) through reinsurance
intermediaries, known as brokers. In exchange for providing such distribution
services, the brokers are paid commissions, known as brokerage, which are
typically based upon a percentage of the premiums ceded under a particular
contract. The broker reinsurance market differs from the direct reinsurance
market in which direct reinsurers maintain their own sales forces and distribute
their products directly to their ceding company clients.
From 1993 to 1998, PMA Re reported premium volume growth that exceeded that of
the overall reinsurance industry. During such period, PMA Re's compound annual
growth rate for net premiums written was 18.0%, while the reinsurance industry's
compound annual growth rate was 4.1% for the same period based upon information
published by the RAA. PMA Re's premium volume increases have largely taken the
form of increased participation levels on ceding company clients' existing
programs, as well as the writing of additional layers and programs for current
ceding company clients. To a lesser extent, volume growth has been attributable
to business written with new ceding company clients.
PMA Re's volume was impacted by industry trends between 1992 and 1995 that
tended to increase the demand for reinsurance. Specifically, much of the growth
that occurred in the primary insurance market in those years was attributable to
regional and niche companies. Typically, these companies demand more reinsurance
than their larger counterparts. In addition, PMA Re has benefited from the
greater selectivity of ceding companies that have restricted the number of
reinsurers with which they will transact business. Finally, PMA Re has been able
to write business for customers that was formerly written by reinsurers that
have been acquired by other reinsurers.
These factors have more than offset the recent trends beginning in 1996 of
ceding companies retaining more of their business and highly competitive
conditions in the U.S. reinsurance market. The competitive conditions have
caused PMA Re to non-renew certain accounts amounting to $46.8 million of in-
force premium in the twelve months ended December 31, 1998 and to not accept
certain new business opportunities largely due to inadequate rates and/or other
underwriting concerns. In addition, PMA Re has attempted to offset these
competitive conditions through a target marketing program commenced in 1996,
under which certain existing accounts and new accounts identified as having
certain desirable characteristics, such as quality management and underwriting,
were pursued for additional or new business.
Products
PMA Re provides reinsurance coverage primarily under two arrangements: treaty
and facultative. Typically, in treaty reinsurance, the primary insurer or ceding
company is obligated to offer and the reinsurer is obligated to accept a
specified portion of all agreed upon types or categories of risks originally
written by the primary insurer or ceding company. Facultative reinsurance is a
form of reinsurance coverage that is placed on a risk-by-risk basis, and the
reinsurer retains the right to accept or reject each individual risk submitted
by the ceding company. Of PMA Re's total net premiums written in 1998, 98.8%
were treaty and 1.2% were facultative.
During 1998, PMA Re created four internal underwriting units to serve its
principal classes of business. Treaty reinsurance is provided through two of
these units: (1) Traditional, which consists of pro-rata and excess-of-loss
reinsurance treaties and (2) Specialty, which underwrites specialty risks such
as environmental, employment
2
<PAGE>
practices and professional liability writings. PMA Re also offers products
through two other units, Finite and Financial Products, which was formed in 1998
to provide reinsurance solutions to the more complex risk management issues; and
Facultative, which provides coverage on a risk-by-risk basis.
The following table indicates PMA Re's gross and net premiums written by major
category of business for the years ended December 31:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------- ------------- ------------- -------------- -------------
Gross premiums written (1)
<S> <C> <C> <C> <C> <C>
Casualty........................... $206,317 $151,901 $143,991 $128,736 $107,001
Property........................... 76,975 72,625 63,325 63,693 36,592
Other.............................. 1,044 795 842 (63) 837
-------- -------- -------- -------- --------
Total.............................. $284,336 $225,321 $208,158 $192,366 $144,430
======== ======== ======== ======== ========
Net premiums written (2)
Casualty........................... $168,452 $118,889 $122,008 $107,383 $ 88,585
Property........................... 64,497 58,257 41,240 45,440 23,929
Other.............................. 1,061 788 805 (63) 837
-------- -------- -------- -------- --------
Total.............................. $234,010 $177,934 $164,053 $152,760 $113,351
======== ======== ======== ======== ========
</TABLE>
(1) In 1998 and 1997, gross premiums written included $6.6 million and $5.8
million of facultative reinsurance, respectively, consisting of the
following: property, $2.8 million and $2.4 million, respectively, and
casualty, $3.8 million and $3.4 million, respectively.
(2) In 1998 and 1997, net premiums written included $2.7 million and $2.5
million of facultative reinsurance, respectively, consisting of the
following: property, $1.8 million and $1.7 million, respectively, and
casualty, $0.9 million and $0.8 million, respectively.
Casualty Business
In terms of net premiums written, casualty business has increased at a compound
annual growth rate of 15.5% in the five-year period ended December 31, 1998, and
accounted for 72.0% of net premiums written in 1998. PMA Re has generally
focused on general liability, professional liability and other more specialized
liability coverages. The following table indicates the mix of casualty business
by class on the basis of net premiums written:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Auto Liability................. $ 30,720 $ 22,268 $ 17,056 $ 13,032 $10,134
Miscellaneous Liability........ 28,422 16,431 12,811 10,350 6,006
Errors and Omissions........... 27,889 13,813 19,866 7,149 7,281
Umbrella (1)................... 25,056 30,967 40,307 51,559 38,743
General Liability.............. 23,234 15,174 11,702 7,460 8,936
Medical Malpractice............ 15,645 7,373 7,411 6,835 6,355
Other.......................... 17,486 12,863 12,855 10,998 11,130
-------- -------- -------- -------- -------
Total.......................... $168,452 $118,889 $122,008 $107,383 $88,585
======== ======== ======== ======== =======
</TABLE>
(1) Umbrella casualty business includes coverage above a specific dollar amount
set forth in the original policies issued by the ceding companies.
3
<PAGE>
Property Business
Property business accounted for 27.6% of net premiums written for the year ended
December 31, 1998. In the five-year period ended December 31, 1998, property
business has increased at a compound annual growth rate of 28.5%. The increases
in net property premiums written primarily reflect additional property
underwriting expertise that PMA Re added to its underwriting staff in late 1996
to broaden its product offerings. Such expertise enabled PMA Re to increase
cross-selling opportunities with its existing treaty reinsurance clients by
offering additional and expanded property coverages. No single line of property
business has contributed 10% or more of the Company's consolidated net premiums
written within the last three fiscal years.
PMA Re has generally de-emphasized catastrophe coverages. As of December 31,
1998, catastrophe business accounted for 3.9% of net property premiums written.
The property programs written by PMA Re generally contain per occurrence limits
or are not considered significantly catastrophe exposed, either because of the
locations of the insured values or the nature of the underlying properties
insured. However, as is common in property reinsurance, PMA Re is exposed to the
possibility of loss from catastrophes due to the aggregation of per occurrence
limits and similar issues. PMA Re actively manages this exposure through zonal
management, minimizing writings of catastrophe business, and the purchase of
retrocessional protection. As of December 31, 1998, PMA Re maintained
catastrophe retrocessional protection of $48 million excess of $2 million per
occurrence. Although the Company believes that it has adequate reinsurance to
protect against the estimated probable maximum gross loss from a catastrophe, an
especially severe catastrophe or series of catastrophes could exceed the
Company's reinsurance and/or retrocessional protection and may have a material
adverse impact on the Company's results of operations and financial condition.
Distribution
PMA Re operates primarily through the domestic broker reinsurance market in
which it has developed relationships with the major reinsurance brokers enabling
it to gain access to a wide range of ceding companies with varying reinsurance
and related service needs. PMA Re's brokers that accounted for more than 10% of
the gross premiums written in 1998 were as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Broker Gross premiums written % of total
- ------------------------------------- ------------------------------- -------------------------
<S> <C> <C>
Aon Reinsurance...................... $89,742 31.6%
Guy Carpenter & Company.............. 86,338 30.4%
E. W. Blanch......................... 39,052 13.7%
</TABLE>
In 1996, PMA Re reemphasized its marketing program and identified target
companies in the smaller and medium company segments with whom PMA Re had either
no or an insignificant relationship, but met desired risk profiles. After such
identification, marketing and underwriting, personnel worked with the ceding
company's broker to enable PMA Re to have an opportunity to participate in the
reinsurance coverage.
As of December 31, 1998, PMA Re had 225 unaffiliated clients, with no individual
client accounting for more than 6.1% of gross premiums written in 1998.
4
<PAGE>
Underwriting
In reinsurance, underwriting involves the selection of risks and determining an
adequate price given expected losses and estimated volatility of such losses.
Given the present soft-pricing environment, maintaining underwriting discipline
is critical to the maintenance of acceptable results of operations.
PMA Re's underwriting process has two principal aspects: underwriting the
specific program to be reinsured and underwriting the ceding company.
Underwriting the specific program to be reinsured involves, in addition to
pricing, a review of the type of program, the total risk and the ceding
company's policy forms. Underwriting the ceding company involves an evaluation
of the expected future performance of the ceding company through an examination
of that company's management, financial strength, claims handling and
underwriting abilities. PMA Re may conduct underwriting and claim reviews at the
offices of prospective ceding companies before entering into a major treaty, as
well as throughout the life of the reinsurance contract.
PMA Re's underwriters and actuaries work closely together to evaluate the
particular reinsurance program. Using the information provided by the broker,
the actuaries employ pricing models to estimate the ultimate exposure to the
treaty. The pricing models that are utilized employ various experience rating
and exposure rating techniques and are tailored in each case to the risk
exposures underlying each treaty. The underwriters then analyze the results of
the pricing models with the terms and conditions being offered to determine PMA
Re's selected price.
In underwriting excess-of-loss business, PMA Re has typically sought to write
treaties that are risk exposed within the original policy limits of the ceding
company. Management believes these layers generally lend themselves more
effectively to actuarial pricing techniques.
As noted above, PMA Re typically requires per occurrence limits for property
coverage. Also, PMA Re minimizes catastrophe reinsurance coverages and has
historically maintained sufficient retrocessional protection. Because of these
factors, recent catastrophes did not have a significant adverse impact on PMA
Re's combined ratio or results of operations. PMA Re has no significant
obligations to its reinsureds as a result of catastrophes reinsured within the
last five years.
Claims Administration
PMA Re's claims department analyzes reported claims, establishes individual
claim reserves, pays claims, provides claims-related services to clients, audits
the claims activities of selected current clients and assists in the
underwriting process by evaluating the claims departments of selected
prospective clients. The claims department's evaluation of claims activity
includes reviewing loss reports received from ceding companies to confirm that
claims are covered under the terms of the relevant reinsurance contract,
establishing reserves on an individual case basis and monitoring the adequacy of
those reserves. The claims department monitors the progress and ultimate outcome
of the claims to determine that subrogation, salvage and other cost recovery
opportunities have been adequately explored. The claims department performs
these functions in coordination with the actuarial and underwriting departments.
In addition to evaluating and adjusting claims, the claims department conducts
claims audits at the offices of selected prospective ceding companies.
Satisfactory audit results are required in order for reinsurance coverage to be
written or continued by PMA Re. Also, the claims department conducts annual
claims audits for many current and former client ceding companies.
In the area of claims administration, PMA Re has been among the first companies
to implement several claims service initiatives in the broker reinsurance
market, involving improved timeliness of claims remittances, including fastrack
claims and electronic data interchange. "Fastrack" claims involve the pre-
approval of payment of certain claims provided the claims meet predetermined
criteria and electronically disbursing funds to the clients. Electronic data
interchange involves the electronic transmission of data associated with
transactions between PMA Re and the client.
5
<PAGE>
THE PMA INSURANCE GROUP
Background
The PMA Insurance Group provides workers' compensation insurance, other
commercial property and casualty insurance coverages, including commercial
general liability, commercial automobile and commercial multi-peril, and related
services to entities located in its ten-state marketing territory concentrated
in the Mid-Atlantic and Southern regions of the United States. The domestic
insurance subsidiaries through which The PMA Insurance Group writes its
insurance products and who share results through an intercompany pooling
agreement are referred to herein as the "Pooled Companies."
The PMA Insurance Group's net premiums written declined from $352.2 million in
1994 to $234.8 million in 1998, primarily reflecting The PMA Insurance Group's
underwriting decisions, competition and the impact of workers' compensation rate
reductions and related benefit reform laws. The PMA Insurance Group restricted
its premium volume, rather than write business at rates that were not
commensurate with the risks assumed, and introduced loss-sensitive coverages and
large-deductible programs under which insureds pay less premium but bear a
greater portion of loss exposure. The PMA Insurance Group intends to continue
writing other lines of property and casualty insurance, but generally only if
such writings are supported by its core workers' compensation business.
The PMA Insurance Group continues to emphasize its traditional core business,
workers' compensation. The Company believes that it can capitalize on the recent
workers' compensation regulatory reforms, attract additional business based upon
its expertise in workers' compensation and reduce acquisition expenses, because
acquisition costs are lower for workers' compensation than for other lines of
commercial insurance. In addition, The PMA Insurance Group has aligned itself
with network health care providers in order to offer medical cost containment
practices to its insureds.
In Pennsylvania, The PMA Insurance Group seeks to expand and retain more of its
premium base in territories that meet The PMA Insurance Group's underwriting and
actuarial criteria. Regulatory reforms in Pennsylvania (Acts 44 and 57) have
made workers' compensation business more attractive from an underwriting
perspective than it had been in the early 1990's. The workers' compensation
systems in certain other states in which The PMA Insurance Group does business
(specifically, New Jersey, North Carolina and Virginia) have also improved in
recent years. The PMA Insurance Group is attempting to recapture a portion of
the workers' compensation market share in those states where it has relinquished
market share since the early 1990's. In addition, The PMA Insurance Group has
shifted its workers' compensation premiums towards lower hazard lines of
business such as health care, schools/colleges and retail which comprised 25.8%,
20.6% and 12.9% of total workers' compensation premiums written in 1998,1997 and
1996, respectively, while de-emphasizing its participation in higher hazard
lines of business, including construction and manufacturing which comprised
43.1%, 46.4% and 52.0% of total workers' compensation premiums written in 1998,
1997 and 1996, respectively.
Further, The PMA Insurance Group intends to expand into certain new territories.
In 1997, The PMA Insurance Group began writing business in Georgia, and, in
1996, in New York and South Carolina. In these territories, The PMA Insurance
Group has identified profiles of entities that it desired to insure. These
profiles were communicated to the key producers in these states. The PMA
Insurance Group is contemplating expanding its relationships with larger
national and regional brokerage operations in both its existing and new states.
However, no assurance can be given that The PMA Insurance Group will be able to
accomplish these marketing objectives.
In 1996, the Company restructured The PMA Insurance Group with the goal of
restoring its profitability after three previous years of operating losses. The
losses resulted primarily from unfavorable underwriting experience and adverse
reserve development related to accident years 1987 through 1991, when The PMA
Insurance Group wrote a much higher volume of business than its current volume.
The principal components of the restructuring were: (i) strengthening loss
reserves; (ii) initiating a commutation program to settle a significant number
of open workers' compensation claims from the 1987 to 1991 period; (iii)
designating PMA Insurance, Cayman Ltd. ("PMA Cayman"), and Mid-Atlantic States
Casualty Company ("MASCCO") as separate run-off companies to alleviate the SAP
impact on the Pooled Companies of the loss reserve strengthening and to manage
the capital deployed in running off pre-1992 workers' compensation claims; (iv)
initiating an expense reduction program and (v) implementing management changes,
including the appointment of a new Chief Operating Officer and the creation of
the position of, and appointment of, a Chief Underwriting Officer. Effective
July 1, 1998, the Company sold PMA Cayman. See "Run-off Operations" below for
additional discussion.
6
<PAGE>
Products
The following table sets forth certain information on The PMA Insurance Group's
net premiums written for the years ended December 31:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Workers' Compensation............. $187,033 $175,301 $187,698 $232,742 $266,033
Commercial Multi-Peril............ 28,043 41,713 35,108 40,659 31,123
Commercial Auto................... 23,288 28,938 35,224 39,834 38,984
Other............................. 5,873 9,018 14,449 19,881 16,011
Run-off Operations(1)............. (9,400) (51,622) -- -- --
-------- -------- -------- -------- --------
Total............................. $234,837 $203,348 $272,479 $333,116 $352,151
======== ======== ======== ======== ========
- --------------
</TABLE>
(1) Run-off Operations were classified by management and segregated from ongoing
operations effective December 31, 1996.
Workers' Compensation Insurance
All states require employers to provide workers' compensation benefits to their
employees and their employees' dependents for injuries and occupational diseases
arising out of employment, regardless of whether such injuries result from the
employer's or the employee's negligence. Employers may insure their workers'
compensation obligations or, subject to regulatory approval, self-insure such
liabilities. State workers' compensation statutes require that a policy cover
three types of benefits: medical expenses, disability (indemnity) benefits and
death benefits. The amounts of disability and death benefits payable for various
types of claims are established by statute, but no maximum dollar limitation
exists for medical benefits.
Workers' compensation benefits vary among states, and insurance rates are
subject to differing forms of state regulation. Based upon direct written
premium information published by A.M. Best for the most recently available year
(1997), The PMA Insurance Group is the 4th largest writer of workers'
compensation insurance in Pennsylvania and ranks between the 2nd and 12th
largest writer of workers' compensation insurance in the other jurisdictions in
which it does business, except for New York and North Carolina. The PMA
Insurance Group has focused on these jurisdictions based upon its knowledge of
their workers' compensation systems and The PMA Insurance Group's assessment of
their business, economic and regulatory climates. Rate adequacy, regulatory
climate, economic conditions and other factors in each state are closely
monitored and taken into consideration in the underwriting process. The PMA
Insurance Group intends to employ similar analyses in determining whether and to
what extent The PMA Insurance Group will offer its products in additional
jurisdictions. See "Underwriting."
The following table sets forth statutory direct workers' compensation business
written by jurisdiction for the five years ended December 31:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Pennsylvania.................. $ 85,923 $ 91,126 $134,171 $142,234 $169,448
New Jersey.................... 29,098 26,327 17,995 24,388 31,287
Virginia...................... 19,958 19,552 17,449 26,395 29,938
Maryland...................... 16,108 16,538 11,406 17,993 14,391
North Carolina................ 8,988 9,501 8,195 14,035 11,649
Delaware...................... 8,372 7,041 7,545 5,763 4,831
New York...................... 7,796 3,143 583 983 439
Other......................... 10,670 8,327 4,820 6,906 4,425
--------------- --------------- --------------- --------------- ---------------
Total......................... $186,913 $181,555 $202,164 $238,697 $266,408
=============== =============== =============== =============== ===============
</TABLE>
7
<PAGE>
The PMA Insurance Group believes that conditions in the workers' compensation
market have been improving in the last several years with respect to the ability
to manage and control loss costs, although pricing for workers' compensation
products continues to be competitive. In addition over the last five years,
several states, including Pennsylvania, have enacted reforms to the workers'
compensation benefit system.
In 1993, Pennsylvania enacted Act 44, which introduced medical cost containment
measures to the workers' compensation benefit system and expanded the period of
time during which the insurer may require an employee to accept medical
treatment from the employer's list of designated health care providers from 14
to 30 days. Act 44 also reduced the minimum wage replacement benefit to injured
workers, introduced a credit for unemployment compensation benefits, restored
the right of subrogation against tort recoveries in work-related automobile
accidents and created new anti-fraud measures. In June 1996, Pennsylvania
enacted Act 57, which further reformed the workers' compensation system in the
state. Among other provisions, Act 57: (i) imposes application of American
Medical Association Impairment Guidelines, which are uniform and stringent
guidelines for the assessment of permanent and total claims after the first two
years of total disability compensation payments and limits indemnity benefits to
an additional 500 weeks for workers who are not at least 50% disabled (as
measured by those guidelines); (ii) further increases the time frame for
directed medical treatment; and (iii) increases the ability of employers to
demonstrate that injured workers have earnings capacity.
To date, Act 44 has had a favorable impact on medical loss costs in
Pennsylvania, and Act 57 has had a favorable impact on indemnity loss costs. In
recognition of these developments, in 1994 and 1997, the first years following
the enactments of Act 44 and Act 57, the average manual rate level in
Pennsylvania decreased approximately 10% and approximately 25%, respectively.
Workers' compensation insurers doing business in certain states are required to
provide insurance for risks that are not otherwise written on a voluntary basis
by the private market ("residual market business"). This system exists in all of
the states in which The PMA Insurance Group does business, except Pennsylvania
and Maryland. In these two states, separate governmental entities write all of
the workers' compensation residual market business. In 1998, The PMA Insurance
Group wrote $3.7 million of residual market business, which constituted
approximately 2% of its net workers' compensation premiums written. Based upon
data for policy year 1997 reported by the National Council on Compensation
Insurance, the percentage for the industry as a whole, in all states, was 6.3%.
The PMA Insurance Group offers a variety of workers' compensation products to
its customers. Certain of these products are based on manual rates filed and
approved by state insurance departments ("rate-sensitive products"), while
others are priced to a certain extent on the basis of the insured's own loss
experience ("loss-sensitive products"). In the last five years, The PMA
Insurance Group has also developed and sold alternative market products, such as
large deductible products and other programs and services to customers who agree
to assume even greater exposure to loss than under more traditional loss-
sensitive products. The PMA Insurance Group decides which type of product to
offer a customer based upon the customer's needs and an underwriting review.
In 1997, The PMA Insurance Group developed PMA One, a new product that provides
for group intergated occupational and non-occupational disability coverages, and
began marketing PMA One in 1998. This product line utilizes The PMA Insurance
Group's expertise in managed care to reduce disability periods.
Set forth below is percentage information on the voluntary workers' compensation
direct premiums written by product type for the policy years indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Rate-sensitive products....... 63% 62% 57% 52% 50%
Loss-sensitive products....... 28% 27% 30% 34% 39%
Alternative market products... 9% 11% 13% 14% 11%
---------------- ---------------- ---------------- ---------------- ----------------
Total......................... 100% 100% 100% 100% 100%
================ ================ ================ ================ ================
</TABLE>
Rate-Sensitive Workers' Compensation Products
- ----------------------------------------------
Rate-sensitive products include fixed-cost policies and dividend paying
policies. The premium charged on a fixed-cost policy is based upon the manual
rates filed with and approved by the state insurance department and does not
increase or decrease based upon the losses incurred during the policy period.
Under policies that are subject to dividend plans, the customer may receive a
dividend based upon loss experience during the policy period. With the
8
<PAGE>
enactment of regulatory reform in several states in which The PMA Insurance
Group does business, The PMA Insurance Group believes that it is better able to
evaluate the expected losses on this type of business.
Loss-Sensitive Workers' Compensation Products
- ----------------------------------------------
The PMA Insurance Group's loss-sensitive products adjust the amount of the
insured's premiums after the policy period expires based upon the insured's
actual losses incurred during the policy period. These loss-sensitive products
are generally subject to less price regulation than rate-sensitive products and
reduce, but do not eliminate, risk to the insurer. Under these types of
policies, claims professionals and actuaries periodically evaluate the reserves
on losses after the policy period expires to determine whether additional
premiums or refunds are owed under the policy. Such policies are typically open
for adjustments for an average of five years after policy expiration. The PMA
Insurance Group generally restricts such loss-sensitive products to accounts
developing minimum annual premiums in excess of $100,000.
Alternative Market Workers' Compensation Products
- --------------------------------------------------
The PMA Insurance Group offers a variety of alternative market products for
larger accounts, including large deductible policies and off-shore captive
programs. Typically, The PMA Insurance Group receives a lower up-front premium
for these types of alternative market product plans. However, under this type of
business, the insured retains a greater share of the underwriting risk than
under rate-sensitive or loss-sensitive products, which reduces the potential for
unfavorable claim activity on the accounts and encourages loss control on the
part of the insured. For example, under a large deductible policy, the customer
is responsible for paying its own losses up to the amount of the deductible for
each occurrence. The deductibles under such policies generally range from
$250,000 to $1.0 million. In addition to these products, The PMA Insurance
Group offers certain workers' compensation services to its clients unbundled
from the insurance products. See "PMA Management Corp." for additional
discussion of such products.
The PMA Insurance Group offers a comprehensive array of workers' compensation
managed care services to reduce loss costs. Disability Management Coordinators,
who are all registered nurses, utilize an early intervention model to
proactively manage medical treatment and length of disability in concert with
the claim professional and employer. There are also case management nurses who
manage more serious claims via on-site visits with injured workers and medical
providers. In addition, The PMA Insurance Group utilizes the services of
Paradigm Corporation for certain catastrophic injuries. Paradigm adds a team of
catastrophic case management experts to assist in achieving enhanced clinical
and financial outcomes on these claims.
The PMA Insurance Group also established a partnership with First Health Corp.
for access to their workers' compensation preferred provider network. The First
Health/R/ Network includes doctors, hospitals, physical therapists, outpatient
clinics and imaging centers. The PMA Insurance Group's customers that utilize
the network generally recognize lower costs than those that do not utilize the
network.
Finally, an automated medical bill review system is used to detect duplicate
billings, unrelated charges and coding discrepancies. Complex bills are
forwarded to The PMA Insurance Group's cost containment unit, which is staffed
by registered nurses and other medical professionals, to resolve questions of
causal relationship and over-utilization.
Commercial Lines
The PMA Insurance Group writes property and liability coverages for larger and
middle market accounts that satisfy its underwriting standards. See
"Underwriting" below. These coverages feature multi-peril, general liability and
umbrella and commercial automobile business. The PMA Insurance Group intends to
continue offering these products, but generally only if they complement the core
workers' compensation business. In the present market, prices for commercial
coverages have been particularly competitive. As a result, The PMA Insurance
Group has been selectively non-renewing accounts that do not meet its
underwriting standards.
9
<PAGE>
PMA Management Corp.
PMA Management Corp. offers claims, risk management and related services
primarily to self-insureds on an unbundled basis. In addition, PMA Management
Corp. offers "rent-a-captive" products for certain insureds and associations.
The purpose of a rent-a-captive program is to offer a customer an alternative
method of managing its loss exposures by obtaining many of the benefits of a
captive insurer without establishing and capitalizing its own captive; in
effect, the insured is "renting" a captive facility that the Company has already
established.
Under this arrangement, the client purchases an insurance policy from the Pooled
Companies and chooses a participation level. The Pooled Companies then cede this
portion of the premium and loss exposures to a Bermuda subsidiary of the
Company. The client participates in the loss and investment experience of the
portion ceded to the Bermuda subsidiary through a dividend mechanism. The client
is responsible for any loss that may arise within its participation level, and
such potential obligation is typically secured through a letter of credit or
similar arrangement. The Company's principal sources of income from its rent-a-
captive program are the premium income on the risk retained by the Pooled
Companies and captive management fees earned by PMA Management Corp.
Distribution
The PMA Insurance Group distributes its products through approximately 15 direct
sales employees and approximately 235 independent brokers and agents. The direct
sales employees are generally responsible for certain business located in
Pennsylvania. For the year ended December 31, 1998, these employees produced
approximately $35 million in direct premiums written, constituting 12% of The
PMA Insurance Group's direct written business. The brokers and agents write
business throughout the marketing territory. In 1998, the top ten brokers and
agents accounted for 25.5% of The PMA Insurance Group's business, the largest of
which accounted for approximately 7.4% of its business. All business from
brokers and agents is reviewed by The PMA Insurance Group's underwriters before
it is accepted.
The PMA Insurance Group monitors several statistics with respect to its producer
force, including the number of years the producer has been associated with The
PMA Insurance Group, the percentage of the producer's business that is
underwritten by The PMA Insurance Group, the ranking of The PMA Insurance Group
within the producer's business, and the profitability of the producer's
business. The current distribution network generally consists of large regional
agents and brokers, local agents and national brokers that specialize in larger
to middle market accounts that require the variety of workers' compensation,
commercial lines and alternative market products offered by The PMA Insurance
Group.
The field organization currently consists of 17 regional or branch offices
throughout the ten-state marketing territory. These offices deliver a full range
of services directly to customers located in their service territory, and
smaller satellite offices primarily offer underwriting and claim adjustment
services.
Underwriting
The PMA Insurance Group's underwriters, in consultation with casualty actuaries,
determine the general types of business to be written using a number of
criteria, including past performance, relative exposure to hazard, premium size,
type of business and other indicators of potential loss. Specific types of
business are referred to underwriting specialists and actuaries for individual
pricing. The underwriting team also establishes classes of business that The PMA
Insurance Group generally will not write, such as certain property exposures,
certain hazardous products and activities and certain environmental coverages.
Underwriters and risk-control professionals in the field report functionally to
the Chief Underwriting Officer rather than to branch managers with marketing
responsibilities. Underwriters also work with the field marketing force to
identify business that meets prescribed underwriting standards and to develop
specific strategies to write the desired business. In performing this
assessment, the field office professionals also consult with actuaries who have
been assigned to the specific field office regarding loss trends and pricing and
utilize actuarial loss rating models to assess the projected underwriting
results of accounts.
The PMA Insurance Group also employs credit analysts. These employees review the
financial strength and stability of customers whose business is written on loss-
sensitive and alternative market products and specify the type and amount of
collateral that customers must provide under these arrangements.
10
<PAGE>
Claims Administration
Claims services are delivered to customers primarily through employees in the
field offices. Certain specialized matters, such as asbestos and environmental
claims, are referred to a special claims unit in the home office. The PMA
Insurance Group maintains a centralized call center for loss reporting and has
automated and centralized the processing of claims payments, which allows the
claims adjusters to substantially reduce the time that they spend with clerical
and repetitive functions. The PMA Insurance Group also employs in-house
attorneys who represent customers in workers' compensation cases and other
insurance matters. The PMA Insurance Group has a separate, anti-fraud unit that
investigates suspected false claims and other irregularities.
Run-off Operations
As a part of The PMA Insurance Group's 1996 restructuring plan, the Run-off
Operations were established principally to manage the capital supporting
workers' compensation loss reserves for accident years 1992 and prior. Such
reserves primarily relate to the period of time from 1987 to 1991 when The PMA
Insurance Group wrote a much higher volume of business and experienced poor
underwriting results. The reserves are mainly indemnity related and are
relatively mature. At December 31, 1998, the Run-off Operations had $95.1
million of total assets and $81.1 million in total reserves. See pages 37-38 of
the MD&A and Notes 17 and 19 to the Financial Statements in the Annual Report.
11
<PAGE>
CALIBER ONE
In January 1998, the Company's specialty insurance unit, Caliber One, commenced
writing business. Caliber One's gross and net premiums written for 1998 were
$11.8 million and $6.4 million, respectively. Caliber One writes business
through surplus lines brokers on a national basis. Caliber One Indemnity
Company, Caliber One's statutory insurance subsidiary, is presently authorized
as an excess and surplus lines carrier in 40 states, the District of Columbia
and Puerto Rico, with applications pending in the remaining states.
Products, Distribution and Underwriting
Caliber One's present focus is on excess and surplus lines of insurance for
difficult risks that are typically declined by the standard market. Caliber One
offers liability coverages for low frequency/high severity classes, including
pharmaceuticals, chemicals, machinery manufacturers, toy makers, medical product
manufacturers and other difficult-to-insure product liability risks. In
addition, Caliber One markets environmental impairment liability coverages,
clinical trials coverage for emerging biotechnology products and intellectual
property rights liability coverages, as well as property coverages for risks
declined by admitted insurers. Caliber One's policy forms contain appropriate
and flexible endorsements and exclusions, and in some cases, include defense
costs within the policy limits rather than offering such coverage on an
unlimited basis.
The underwriting of these specialty products involves a significant amount of
judgment. The underwriting process involves reviewing the claim experience of an
account, if any, the claim experience of the particular class or similar
classes, and responding to special risks that an account has through the use of
policy features that can be changed for the circumstances, such as retentions,
exclusions and endorsements.
Caliber One distributes its excess and surplus lines products on a nationwide
basis through 37 appointed surplus lines brokers. For most product offerings,
Caliber One does not grant underwriting or binding authority to its brokers.
Acquisition of Caliber One Indemnity Company
In December 1997, PMA Reinsurance Corporation acquired 100% of the outstanding
common stock of Caliber One Indemnity Company, domiciled in Delaware and
formerly known as Lincoln Insurance Company, for approximately $16.0 million and
made a capital contribution of approximately $11.3 million to Caliber One
Indemnity Company. All of Caliber One Indemnity Company's acquired loss reserves
were reinsured with an affiliate of its former parent for adverse development
and uncollectible reinsurance (the "Reserve Guarantee") in the amount of the
recorded reserves plus $68.5 million. Upon the purchase of Caliber One Indemnity
Company, management valued the amount of the Reserve Guarantee at approximately
$5.0 million in excess of the stated acquired reserves. Management believes that
the Reserve Guarantee will be adequate to cover any future adverse reserve
development or uncollectible reinsurance on the acquired reserves. PMA
Reinsurance Corporation intends to maintain Caliber One Indemnity Company's
surplus at not less than $25.0 million, the minimum capital and surplus required
by many states in order to be an eligible surplus lines carrier.
REINSURANCE AND RETROCESSIONAL PROTECTION
The Company follows the customary insurance practice of reinsuring with other
insurance companies a portion of the risks under the policies written by its
insurance subsidiaries. This reinsurance is maintained to protect the insurance
subsidiaries against the severity of losses on individual claims and unusually
serious occurrences in which a number of claims produce an aggregate
extraordinary loss. Although reinsurance does not discharge the insurance
subsidiaries from their primary liabilities to their policyholders for losses
insured under the insurance policies, it does make the assuming reinsurer liable
to the insurance subsidiaries for the reinsured portion of the risk.
The reinsurance ceded agreements of the Company's insurance subsidiaries
generally may be terminated at their
12
<PAGE>
annual anniversary by either party upon 30 to 90 days' notice. In general, the
reinsurance agreements are of the treaty variety, which cover all underwritten
risks of the types specified in the treaties.
At December 31, 1998, the Company's reinsurance and retrocessional protection
was as follows:
<TABLE>
<CAPTION>
Retention Limits(1)
---------------------------- -------------------------
<S> <C> <C>
PMA Re
Per Occurrence:
Casualty lines $ 2.8 million $ 17.5 million
Workers' compensation $ 2.0 million(2) $ 98.0 million
Property lines $ 2.0 million $ 48.0 million
Per Risk:
Property lines $ 800,000 $ 4.3 million
Casualty lines $ 1.5 million(3) $ 6.0 million
THE PMA INSURANCE GROUP(4)
Per Occurrence:
Workers' compensation $ 1.5 million(5) $ 103.5 million
Property lines $ 2.0 million $ 28.0 million(6)
Per Risk:
Property lines $ 500,000 $ 19.5 million(7)
Auto physical damage $ 500,000 $ 2.0 million
Other casualty lines $ 175,000 $ 4.8 million(8)
CALIBER ONE(9)
Per Occurrence and Per Risk:
Property lines $ 200,000 $ 4.8 million
Casualty lines $ 500,000 $ 4.5 million
</TABLE>
(1) Represents the amount of loss protection above the Company's level of loss
retention.
(2) This coverage also provides protection of $98.5 million in excess of $1.5
million per program per occurrence and $18.5 million in excess of $1.5
million per person per occurrence.
(3) This contract has clash limits for losses arising from two or more risks of
$1.3 million in excess of $1.5 million. The term of the contract is three
years, expiring in 2000, and the term aggregate limit is $25.0 million plus
the amount of funds withheld.
(4) The PMA Insurance Group also maintains reinsurance protection for its
umbrella risks at $9.0 million over a net retention of $1.0 million and
purchases facultative reinsurance for certain other risks.
(5) Effective January 1, 1999, The PMA Insurance Group's net retention on
workers' compensation has been reduced to $150,000.
(6) This coverage also includes coinsurance of 5%
(7) This coverage also provides a per occurrence limit of $48.5 million.
(8) This coverage also provides protection of $49.8 million per occurrence over
its net retention of $175,000.
(9) Caliber One Indemnity Company is 100% reinsured by an affiliate of its
former parent for all business written prior to its acquisition by PMA
Reinsurance Corporation in December, 1997. Caliber One Indemnity Company
has also entered into a surplus maintenance reinsurance agreement with its
parent, PMA Reinsurance Corporation, whereby PMA Reinsurance Corporation
will provide reinsurance if Caliber One Indemnity Company's statutory
combined ratio exceeds 105.0% or if its statutory net written premium to
surplus ratio exceeds 1:1. See "Caliber One - Acquisition of Caliber One
Indemnity Company" above for additional discussion.
13
<PAGE>
As of December 31, 1998, the maximum gross lines that PMA Re will write are $5.0
million for property covers, $1.0 million for property catastrophe covers and
$7.5 million for casualty covers.
The Company actively manages its exposure to catastrophes through its
underwriting process, where the Company monitors the accumulation of insurable
values in catastrophe prone regions. Also, in writing property reinsurance
coverages, PMA Re typically requires per occurrence loss limitations for
contracts that could have catastrophe exposure. Through per risk reinsurance,
the Company also manages its net retention in each exposure. As a result, the
Company's loss and LAE ratios have not been significantly impacted by
catastrophes in the past three years. Although the Company believes it has
adequate reinsurance to protect against the estimated probable maximum gross
loss from a catastrophe, an especially severe catastrophe or series of
catastrophes could exceed the Company's reinsurance and/or retrocessional
protection and may have a material adverse impact on the Company's results of
operations and financial position.
The collectibility of reinsurance is largely a function of the solvency of
reinsurers. The Company performs extensive credit reviews on its reinsurers,
focusing on, among other things, financial capacity, stability, trends and
commitment to the reinsurance business. Prospective and existing reinsurers
failing to meet the Company's standards are excluded from the Company's
reinsurance programs. In addition, the Company requires letters of credit or
other acceptable collateral to support balances due from reinsurers not
authorized to transact business in the applicable jurisdictions.
As of December 31, 1998, approximately 97.3% of the Company's reinsurance
receivables related to unpaid reported claims and incurred but not reported
claims, and the remaining 2.7% related to paid losses. The timing and
collectibility of reinsurance receivables have not had, and are not expected to
have, a material adverse effect on the Company's liquidity.
See pages 43-44 of the MD&A and Note 5 to the Financial Statements included in
the Annual Report for additional information on reinsurance.
LOSS RESERVES
Insurers establish reserves representing estimates of future amounts needed to
pay claims with respect to insured events which have occurred, including events
that have not been reported to the insurer. Reserves are also established for
loss adjustment expenses ("LAE") representing the estimated expenses of settling
claims, including legal and other fees, and general expenses of administering
the claims adjustment process.
After a claim is reported, claims personnel establish a "case reserve" for the
estimated amount of the ultimate payment. The estimate reflects the informed
judgment of management, based on reserving practices and management's experience
and knowledge regarding the nature and value of the specific type of claim.
Claims personnel review and update their estimates as additional information
becomes available and claims proceed towards resolution. In addition, "bulk
reserves" are also established on an aggregate basis (i) to provide for losses
incurred but not yet reported to the insurer; (ii) to provide for the estimated
expenses of settling claims, including legal and other fees and general expenses
of administering the claims adjustment process; and (iii) to adjust for the fact
that, in the aggregate, case reserves may not accurately estimate the ultimate
liability for reported claims. Reserves are estimated using various generally
accepted actuarial techniques.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as legal
developments, changes in social attitudes and economic conditions, including the
effects of inflation. This process relies on the basic assumption that past
experience, adjusted for the effect of current developments and likely trends,
is an appropriate basis for predicting future events. The reserving process
provides implicit recognition of the impact of inflation and other factors
affecting claims payments by taking into account changes in historic payment
patterns and perceived probable trends. There is generally no precise method,
however, for subsequently evaluating the adequacy of the consideration given to
inflation or to any other specific factor, since the eventual deficiency or
redundancy of reserves is affected by many factors, some of which are
interdependent.
In many cases significant periods of time, ranging up to several years or more,
may elapse between the occurrence of an insured loss, the reporting of the loss
to the insurer and the insurer's payment of that loss. Liabilities for
14
<PAGE>
reinsurers generally become known more slowly than for primary insurers and are
generally subject to more unforeseen development.
Estimating the Company's ultimate claims liability is necessarily a complex and
judgmental process as the amounts are based on management's informed estimates
and judgments using data currently available. As additional experience and data
become available regarding claims payment and reporting patterns, legislative
developments and economic conditions, the estimates are revised accordingly. If
the Company's ultimate net losses prove to be substantially greater than the
amounts recorded in the financial statements, the related adjustments could have
a material adverse impact on the Company's financial condition and results of
operations.
Estimating reserves for workers' compensation claims is difficult for several
reasons, including (i) the long payment "tail" associated with the business;
(ii) the impact of social, political, case law and regulatory trends on benefit
levels for both medical and indemnity payments; (iii) the impact of economic
trends and (iv) the impact of changes in the mix of business. At various times,
one or a combination of such factors can make the interpretation of actuarial
data associated with workers' compensation loss development more difficult, and
it can take additional time to recognize changes in loss development patterns.
If necessary, adjustments will be made to such reserves as they are identified
if loss patterns develop differently than forecasted or if new information
becomes available and such adjustments may be material to results of operations,
financial condition and liquidity.
The table on the next page presents the subsequent development of the estimated
year-end property and casualty reserves, net of reinsurance ("net reserves"),
for the 10 years prior to 1998. The first section of the table shows the
estimated net reserves that were recorded at the end of each of the indicated
years for all current and prior year unpaid losses and loss adjustment
expenses. The second section shows the cumulative amounts of such previously
recorded net reserves paid in succeeding years. The third section shows the re-
estimates of the net reserves made in each succeeding year.
The cumulative deficiency (redundancy) as shown in the table represents the
aggregate change in the reserve estimates from the original balance sheet dates
through 1998; an increase in a loss estimate that related to a prior year
occurrence generates a deficiency in each intervening year. For example, a
deficiency first recognized in 1997 relating to losses incurred in 1989 would be
included in the cumulative deficiency amount for each of the years 1989 through
1996. Yet, the deficiency would be reflected in operating results in 1997 only.
Conditions and trends that have affected the reserve development reflected in
the table may change, and care should be exercised in extrapolating future
reserve redundancies or deficiencies from such development.
15
<PAGE>
Consolidated Loss and Loss Adjustment Expense Development
December 31,
(dollar amounts in millions)
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial estimated
liability for
unpaid losses and
LAE net of $1,457.4 $1,632.2 $1,734.6 $1,824.3 $1,941.0 $1,932.0 $1,855.9 $1,808.5 $1,834.5 $1,670.9 $1,347.2
reinsurance......... ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Amount of reserve
paid, net of
reinsurance through
- - one year later.... $ 322.3 $ 444.6 $ 470.8 $ 490.5 $ 442.4 $ 407.8 $ 398.9 $ 437.6 $ 398.8 $ 360.7 --
- - two years later... 601.1 771.5 842.0 848.8 779.1 746.1 763.7 780.0 669.6
- - three years later. 825.9 1,042.6 1,133.8 1,127.0 1,066.8 1,055.9 1,072.9 999.0
- - four years later.. 1,011.4 1,258.0 1,353.1 1,364.9 1,329.2 1,330.6 1,252.2
- - five years later.. 1,165.8 1,421.4 1,539.4 1,585.4 1,573.8 1,472.7
- - six years later... 1,283.8 1,553.1 1,715.1 1,788.9 1,688.7
- - seven years later. 1,380.1 1,684.6 1,882.1 1,882.2
- - eight years later. 1,478.9 1,817.3 1,962.6
- - nine years later.. 1,584.2 1,887.4
- - ten years later... 1,642.0
Re-estimated
liability, net of
reinsurance as of:
- - one year later.... $1,468.3 $1,696.0 $1,795.3 $1,966.8 $1,998.1 $1,932.3 $1,907.4 $1,964.6 $1,748.5 $1,624.4 --
- - two years later... 1,511.9 1,742.5 1,949.9 2,067.5 2,006.5 1,982.5 2,073.4 1,866.8 1,700.5
- - three years later. 1,553.3 1,876.0 2,034.1 2,081.5 2,060.6 2,163.9 1,986.7 1,819.2
- - four years later.. 1,607.3 1,938.2 2,040.8 2,134.8 2,258.2 2,078.3 1,942.0
- - five years later.. 1,651.5 1,935.1 2,123.0 2,302.0 2,170.3 2,030.5
- - six years later... 1,648.7 1,985.3 2,273.3 2,209.3 2,126.6
- - seven years later. 1,684.2 2,098.2 2,205.4 2,169.5
- - eight years later. 1,783.6 2,052.2 2,168.4
- - nine years later.. 1,751.8 2,020.1
- - ten years later... 1,729.1
Indicated
deficiency
(redundancy) $ 271.7 $ 387.9 $ 433.8 $ 345.2 $ 185.6 $ 98.5 $ 86.1 $ 10.7 $ (134.0) $ (46.5)
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net
liability........... $1,932.0 $1,855.9 $1,808.5 $1,834.5 $1,670.9 $1,347.2
reinsurance
recoverables........ 218.7 247.9 261.5 256.6 332.3 593.7
-------- -------- -------- -------- -------- --------
Gross
liability........... $2,150.7 $2,103.8 $2,070.0 $2,091.1 $2,003.2 $1,940.9
======== ======== ======== ======== ======== ========
Re-estimated
net
liability........... $2,030.5 $1,942.0 $1,819.2 $1,700.5 $1,624.4
Re-estimated
reinsurance
recoverables........ 209.0 250.1 277.8 271.3 349.8
-------- -------- -------- -------- --------
Re-estimated
gross
liability........... $2,239.5 $2,192.1 $2,097.0 $1,971.8 $1,974.2
======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
The components of the Company's incurred losses and LAE for prior accident
years, excluding accretion of discount, are as follows (favorable loss
development is denoted by the bracketed figures):
(dollar amounts in millions)
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
PMA Re........................... $(31.5) $(32.1) $(35.3)
------------------ ------------------ ------------------
The PMA Insurance Group:
Workers' compensation.......... (17.3) (44.1) 110.0
Asbestos and environmental..... -- -- 60.4
Other losses and LAE........... 2.3 (9.8) 21.0
------------------ ------------------ ------------------
(15.0) (53.9) 191.4
------------------ ------------------ ------------------
Total............................ $(46.5) $(86.0) $156.1
================== ================== ==================
</TABLE>
During 1998, PMA Re and The PMA Insurance Group recorded favorable reserve
development on prior accident years of $31.5 million and $15.0 million,
respectively. PMA Re recorded favorable reserve development on prior accident
years due to re-estimated loss trends for such years that are lower than
previous expectations. The favorable reserve development at The PMA Insurance
Group primarily relates to the formal commutation programs, which resulted in
early liability settlements made during 1998 to reduce future claim payments.
During 1997, PMA Re and The PMA Insurance Group recorded favorable reserve
development of $32.1 million and $53.9 million, respectively. PMA Re recorded
favorable reserve development on prior accident years due to re-estimated loss
trends for such years that are lower than previous expectations. Favorable loss
development at The PMA Insurance Group in 1997 can be attributed to the
following: favorable reserve development of approximately $37.0 million related
to retrospectively rated policies for Run-off Operations; the cession of prior
year reserves of $14.8 million from Run-off Operations to a third party
reinsurer; and favorable reserve development of $7.1 million on guaranteed cost
workers' compensation reserves, partially offset by reserve strengthening of
$5.0 million in commercial multi-peril business.
The increase in incurred losses and LAE during 1996 is primarily due to a loss
reserve strengthening charge of $191.4 million. The 1996 aggregate workers'
compensation adverse development of $110.0 million was allocated $102.0 million
to Pennsylvania and $8.0 million to all other states in The PMA Insurance
Group's marketing territory. Of the $102.0 million, the allocation by year is
as follows: prior to 1987, $16.0 million; 1987 to 1991, $101.0 million; and 1992
and subsequent years, ($15.0) million.
These increases were the result of an analysis of increases in paid loss
development data started in 1995. In 1995, The PMA Insurance Group began to
accumulate additional data in order to determine whether there were additional
causes of the increase in the paid loss development data, including claim count
data that was far more detailed than had been historically utilized in the
reserve setting process. This data indicated that the paid loss development
factors were not only impacted by commutation activity, but also by a decline in
the claims closure rate in Pennsylvania.
The PMA Insurance Group believes that the decline of the closure rates was due
to several interrelated factors, including efforts to rehabilitate claimants and
return them to work at either full or modified duty, which were not as
successful as anticipated. In addition, the depressed economic conditions in The
PMA Insurance Group's major industry niches for worker's compensation insurance
(construction, heavy manufacturing) in Pennsylvania caused an increase in
indemnity periods for workers who suffered injuries in these industries.
The decline in claim closure rates combined with the fact that the benefits
period in Pennsylvania was unlimited, caused The PMA Insurance Group to believe
that a substantial portion of claimants from the pre-1992 period, who had
already been out of work five to nine years, would not return to work in any
capacity. In late 1995 and during 1996, The PMA Insurance Group undertook an
effort to quantify the impact of the declining closure rates versus the increase
in commutation activity. During the fourth quarter of 1995, workers'
compensation reserves were strengthened by $54.7 million; however, the
quantification of the effect of the claims closure rate was an extremely complex
process, and as such, the data was not fully understood at that time. As the
data under analysis was more
17
<PAGE>
mature and refined in 1996, The PMA Insurance Group determined that the workers'
compensation loss reserves for Pennsylvania in the pre-1992 accident years
needed to be increased by $110.0 million.
Benefit reforms enacted by states in which The PMA Insurance Group transacts
business, most significantly Pennsylvania, have had a beneficial impact on more
recent accident year loss and LAE ratios. Prior to 1996, the principal revisions
of the Pennsylvania system included medical cost containment measures and an
expansion of the period of time during which the insurer may require an employee
to accept medical treatment from the employer's list of designated health care
providers. In July 1996, Pennsylvania enacted Act 57, a workers' compensation
reform bill which is expected to substantially reduce indemnity benefit periods
in Pennsylvania. In addition to regulatory reforms, the loss and LAE ratios have
been favorably impacted by the conversion to loss sensitive and alternative
market products. Management believes that the reforms and more stringent
underwriting standards adopted since 1991 have had and continue to have a
beneficial effect on the Company's accident year loss and LAE ratios. For
further discussion of benefit reforms, see "The PMA Insurance Group--Workers'
Compensation Insurance" above.
In addition, management took several steps to reduce the outstanding claims
associated with the Pennsylvania workers' compensation business written through
1991. A formal commutation program was initiated in the fourth quarter of 1996
and continued into late 1997. Commutations are agreements whereby the claimants,
in exchange for a lump sum payment, release their rights to future indemnity
payments from The PMA Insurance Group. The PMA Insurance Group paid
approximately $64.9 million, $113.0 million and $17.8 million in 1998, 1997 and
1996, respectively, to commute workers' compensation indemnity claims. The
commutation program resulted in payments, which were less than the
corresponding carried reserves. Savings associated with these claims were
consistent with management's expectations. The number of open claims for
accident years 1991 and prior was substantially reduced as a result of the
commutation program. This reduction in open claims is expected to reduce the
possibility of any further adverse development on such reserves, although there
can be no assurance that the level of commutations will have a significant
impact on the future development of such reserves. As a result of the success of
this formal commutation program, The PMA Insurance Group has continued its
efforts to commute additional claims from accident years 1991 and prior and also
has started to commute claims for accident years 1992 through 1996.
In 1996, Commercial Lines reserves were strengthened by $21.0 million. The
reserve strengthening in 1996 was principally due to a re-estimation of loss
adjustment costs associated with general liability claims. Through 1991, The PMA
Insurance Group's mix of general liability insurance policies were weighted
towards the manufacturing classes of business. Subsequent to 1991, The PMA
Insurance Group's mix of general liability business became more heavily weighted
towards the construction and contracting classes of business. These particular
classes of business have experienced losses due to construction defects and
similar matters, that have taken longer to emerge than the classes of business
previously written by The PMA Insurance Group. Defense costs associated with
these claims have also exceeded the original estimate of The PMA Insurance
Group's management, which was based on the patterns of indemnification payments
associated with the earlier classes of business written. When this issue was
discovered, The PMA Insurance Group factored the increased defense costs and the
emergence pattern in determining a more appropriate reserve amount for loss
handling costs.
At December 31, 1998, the Company's loss reserves were stated net of $60.4
million of salvage and subrogation. The Company's policy with respect to
estimating the amounts and realizability of salvage and subrogation is to
develop accident year schedules of historic paid salvage and subrogation by line
of business, which are then projected to an ultimate basis using actuarial
projection techniques. The anticipated salvage and subrogation is the estimated
ultimate salvage and subrogation less any amounts received by the Company. The
realizability of anticipated salvage and subrogation is reflected in the
historical data that is used to complete the projection, as historic paid data
implicitly considers realization and collectibility.
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<PAGE>
Asbestos and Environmental Reserves
The Company's asbestos-related loss reserves for the years ended December 31,
were as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- --------------
Gross of reinsurance:
<S> <C> <C> <C>
Beginning reserves............................... $76,726 $80,055 $ 27,611
Incurred losses and LAE.......................... (1,976) 2,435 62,854
Calendar year payments for losses and LAE........ (6,893) (5,764) (10,410)
------- ------- --------
Ending reserves.................................. $67,857 $76,726 $ 80,055
======= ======= ========
Net of reinsurance:
Beginning reserves............................... $48,578 $53,300 $ 23,443
Incurred losses and LAE.......................... (2,754) (36) 39,427
Calendar year payments for losses and LAE....... (2,268) (4,686) (9,570)
------- ------- --------
Ending reserves.................................. $43,556 $48,578 $ 53,300
======= ======= ========
</TABLE>
The Company's environmental-related loss reserves for the years ended December
31, were as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- --------------
Gross of reinsurance:
<S> <C> <C> <C>
Beginning reserves............................... $45,108 $35,626 $20,134
Incurred losses and LAE.......................... 11,895 1,130 22,143
Reserves acquired through purchase of Caliber
One Indemnity Company(1).................. -- 13,060 --
Calendar year payments for losses and LAE........ (9,967) (4,708) (6,651)
------- ------- -------
Ending reserves.................................. $47,036 $45,108 $35,626
======= ======= =======
Net of reinsurance:
Beginning reserves............................... $31,695 $34,592 $20,134
Incurred losses and LAE.......................... 3,644 1,068 21,109
Calendar year payments for losses and LAE....... (5,983) (3,965) (6,651)
------- ------- -------
Ending reserves.................................. $29,356 $31,695 $34,592
======= ======= =======
</TABLE>
(1) Such acquired reserves have been reinsured by an affiliate of the former
parent (see "Caliber One" for further discussion).
Of the total net asbestos reserves, approximately $34.2 million, $41.9 million
and $46.5 million related to incurred but not reported losses at December 31,
1998, 1997 and 1996, respectively. Of the total net environmental reserves,
approximately $20.3 million, $20.5 million and $22.1 million related to incurred
but not reported losses at December 31, 1998, 1997 and 1996, respectively. All
incurred asbestos and environmental losses were for accident years 1986 and
prior.
Estimating reserves for asbestos and environmental exposures continues to be
difficult because of several factors, including: (i) evolving methodologies for
the estimation of the liabilities; (ii) lack of reliable historical claim data;
(iii) uncertainties with respect to insurance and reinsurance coverage related
to these obligations; (iv) changing judicial interpretations; and (v) changing
government standards. To reserve for environmental claims, the Company
currently utilizes a calendar year development technique known as aggregate loss
development. This technique focuses on the aggregate losses paid as of a
particular date and aggregate payment patterns associated with such claims.
Several elements including remediation studies, remediation, defense,
declaratory judgment and third party bodily injury claims were considered in
estimating the costs and payment patterns of the environmental and toxic
19
<PAGE>
tort losses. Prior to the development of these techniques, there was a
substantial range in the nature of reserving for environmental and toxic tort
liabilities.
In 1996, the Company performed a ground up analysis of loss reserves for direct
asbetos exposures using an actuarially accepted modeling technique. Using
historical information as a base and information obtained from a review of open
claims files, assumptions were made about future claims activity in order to
estimate ultimate losses. For each individual major account, projections were
made regarding new plaintiffs per year, the number of years in which new claims
will be reported, the average loss severity per plaintiff, and the ratio of LAE
to loss. In many cases involving larger asbestos claims, the Company reserved up
to the policy limits for the applicable loss coverage parts for the affected
accounts. Policy terms and reinsurance treaties were applied in the modeling of
future losses.
Management believes that its reserves for asbestos and environmental claims are
appropriately established based upon known facts, existing case law and
generally accepted actuarial methodologies. However, due to changing
interpretations by courts involving coverage issues, the potential for changes
in federal and state standards for clean-up and liability, as well as issues
involving policy provisions, allocation of liability among participating
insurers, proof of coverage and other factors, the Company's ultimate exposure
for these claims may vary significantly from the amounts currently recorded,
resulting in a potential future adjustment that could be material to the
Company's financial condition and results of operations.
INVESTMENTS
The Company's investment policy objectives are to (i) seek competitive after-tax
income and total return, (ii) maintain high investment grade asset quality and
marketability, (iii) maintain maturity distribution commensurate with the
Company's business objectives, (iv) provide portfolio flexibility for changing
business and investment climates and (v) provide liquidity to meet operating
objectives. The Company's investment strategy includes guidelines for asset
quality standards, asset allocations and other relevant criteria for its
portfolio. In addition, maturities are structured after projecting liability
cash flows with actuarial models. Property and casualty claim demands are
somewhat unpredictable in nature and require liquidity from the underlying
invested assets, which are structured to emphasize current investment income to
the extent consistent with maintaining appropriate portfolio quality and
diversity. The liquidity requirements are met primarily through publicly traded
fixed maturities as well as operating cash flows and short-term investments.
The Company's Board of Directors is responsible for the Company's investment
policy objectives. The Company retains outside investment advisers to provide
investment advice and guidance, supervise the Company's portfolio and arrange
securities transactions through brokers and dealers. The Company's Executive and
Finance Committee of the Board of Directors meets periodically with the
investment advisers to review the performance of the investment portfolio and to
determine what actions should be taken with respect to the Company's
investments. Investment by the Pooled Companies, MASCCO and PMA Reinsurance
Corporation must comply with the insurance laws and regulations of the
Commonwealth of Pennsylvania and investments for Caliber One Indemnity Company
must comply with the insurance laws and regulations of Delaware.
The Company currently has only one derivative financial instrument outstanding,
an interest rate swap on its Credit Facility, which is used as a hedge in
accordance with the Company's investment strategy. Derivatives are not used for
speculative purposes. The Company's portfolio does not contain any significant
concentrations in single issuers (other than U.S. treasury and agency
obligations), industry segments or geographic regions.
For additional information on the Company's investments, including carrying
values by category, quality ratings and net investment income, see pages 44-45
of the MD&A as well as Notes 2 and 3 to the Financial Statements in the Annual
Report.
20
<PAGE>
COMPETITION
The domestic property and casualty insurance and reinsurance industries are very
competitive and consist of many companies, with no one company dominating the
market. In addition, the degree and nature of competition varies from state to
state for a variety of reasons, including the regulatory climate and other
market participants in each state. In addition to competition from other
insurance companies, The PMA Insurance Group and Caliber One compete with
certain alternative market arrangements, such as captive insurers, risk-sharing
pools and associations, risk retention groups, and self-insurance programs. PMA
Re competes with other reinsurers in the broker market as well as reinsurers
that underwrite reinsurance business on a direct basis. Many of the Company's
competitors are larger and have greater financial resources than the Company.
The main factors upon which entities in the Company's markets compete are price,
service, product capabilities and financial security. The PMA Insurance Group,
PMA Re and Caliber One attempt to price their products in such a way that the
prices charged to their clients are commensurate with the overall marketplace
while still meeting rate of return targets. The present soft pricing
environment has made competing solely on the basis of price increasingly
difficult. The PMA Insurance Group, PMA Re and Caliber One have rejected and/or
non-renewed certain accounts in recent years, as the market rates for such risks
did not provide the opportunity to achieve an acceptable rate of return.
In terms of service, the Company maintains service standards concerning turn-
around time for underwriting submissions, information flow, claims handling and
the quality of other services. These standards help ensure that clients are
satisfied with the Company's products and services. The Company periodically
participates in surveys of intermediaries and clients to gain an understanding
of the perceptions of its service as compared to its competitors.
The Company attempts to design products that meet the needs of clients in its
markets. In recent years, The PMA Insurance Group has developed products that
reflect the evolving nature of the workers' compensation market. Specifically,
it has increased its focus on rehabilitation and managed care to keep workers'
compensation costs lower for the employers. In addition, The PMA Insurance
Group has introduced and refined alternative market products, as well as
unbundled risk management and claims administration services. See "The PMA
Insurance Group--Products." PMA Re has also expanded its product line in recent
years to satisfy the needs of its client base. Products introduced by PMA Re in
the last two years include facultative reinsurance and finite risk reinsurance.
See "PMA Re--Products" for additional discussion. Caliber One intends to design
products that meet the needs of new classes of business and that cover emerging
risks. The Company continually evaluates new product opportunities for The PMA
Insurance Group, PMA Re and Caliber One.
For many intermediaries and clients, financial security is measured by the
ratings assigned by independent rating agencies. Certain of the Company's
insurance subsidiaries are rated by independent rating agencies. The ratings
represent the opinions of the rating agencies on the insurance company's
financial strength and its ability to pay obligations to its policyholders.
Management believes that the ratings assigned by nationally recognized,
independent rating agencies, particularly A.M. Best, are material to the
Company's operations.
The rating scales of the principal agencies that rate the Company's insurance
subsidiaries are characterized as follows:
. A.M. Best Company, Inc. ("A.M. Best"), A++ to F ("Superior" to "In
Liquidation")
. Moody's Investors Service ("Moody's"), Aaa to C ("Exceptional" to
"Lowest")
As of March 15, 1999, A.M. Best had assigned an A+ ("Superior," 2nd of 16)
rating to PMA Reinsurance Corporation, an A- ("Excellent," 4th of 16) rating to
the Pooled Companies and an A ("Excellent," 3rd of 16) rating to Caliber One
Indemnity Company. In addition, Moody's had rated PMA Reinsurance Corporation
A3 ("Good," 7th of 21) and the Pooled Companies Baa2 ("Adequate," 9th of 21).
These ratings are subject to revision or withdrawal at any time by the rating
agencies, and therefore, no assurance can be given that PMA Reinsurance
21
<PAGE>
Corporation, the Pooled Companies and/or Caliber One Indemnity Company can
maintain these ratings. Each rating should be evaluated independently of any
other rating.
REGULATORY MATTERS
General
PMA Reinsurance Corporation is licensed or accredited to transact its
reinsurance business in, and is subject to regulation and supervision by, 50
states and the District of Columbia. The Pooled Companies are licensed to
transact insurance business in, and are subject to regulation and supervision
by, 43 states and the District of Columbia. Caliber One Indemnity Company is
licensed in one state and is an eligible excess and surplus lines carrier in 40
states, the District of Columbia and Puerto Rico. The Company's insurance
subsidiaries are authorized and regulated in all jurisdictions where they
conduct insurance business. In supervising and regulating insurance and
reinsurance companies, state insurance departments, charged primarily with
protecting policyholders and the public rather than investors, enjoy broad
authority and discretion in applying applicable insurance laws and regulations
for the protection of policyholders and the public. PMA Reinsurance Corporation
and the Pooled Companies are domiciled in Pennsylvania, therefore the
Pennsylvania Insurance Department exercises principal regulatory jurisdiction
over them. Caliber One Indemnity Company is domiciled in Delaware, therefore the
Delaware Insurance Department exercises principal jurisdiction over Caliber One
Indemnity Company. The extent of regulation by the states varies, but in
general, most jurisdictions have laws and regulations governing standards of
solvency, adequacy of reserves, reinsurance, capital adequacy and standards of
business conduct.
In addition, statutes and regulations usually require the licensing of insurers
and their agents, the approval of policy forms and related material and, for
certain lines of insurance, the approval of rates. Property and casualty
reinsurers and excess and surplus lines carriers are generally not subject to
filing or other regulatory requirements applicable to primary standard lines
insurers with respect to rates, policy forms or contract wording. The form and
content of statutory financial statements are regulated.
State insurance departments in jurisdictions in which the Company's insurance
subsidiaries do business also conduct periodic examinations of their respective
operations and accounts and require the filing of annual and other reports
relating to their financial condition. The Pennsylvania Department of Insurance
last conducted examinations of PMA Reinsurance Corporation and the Pooled
Companies as of December 31, 1992, and the Delaware Department of Insurance last
conducted an examination of Caliber One Indemnity Company as of December 31,
1996. No adjustments to previously filed statutory financial statements were
required as a result of such examinations. In addition, there were no material
qualitative matters indicated in the examination reports that had or are
expected to have a material adverse effect on the operations of PMA Reinsurance
Corporation, the Pooled Companies or Caliber One Indemnity Company. The
Pennsylvania Department of Insurance is currently conducting examinations of PMA
Reinsurance Corporation, the Pooled Companies and MASCCO as of December 31,
1997. Although the Company has not received the final reports of examination,
the Company does not expect the results of the examinations to have a material
adverse effect on results of operations of PMA Reinsurance Corporation, the
Pooled Companies or MASCCO.
Insurance Holding Company Regulation
The Company and its insurance subsidiaries are subject to regulation pursuant to
the insurance holding company laws of Pennsylvania and Delaware. These state
insurance holding company laws generally require an insurance holding company
and insurers and reinsurers that are members of such insurance holding company's
system to register with the state regulatory authorities, to file with those
authorities certain reports disclosing information including their capital
structure, ownership, management, financial condition, certain intercompany
transactions including material transfers of assets and intercompany business
agreements, and to report material changes in such information. These laws also
require that intercompany transactions be fair and reasonable and that an
insurer's policyholders' surplus following any dividends or distributions to
shareholder affiliates be reasonable in relation to the insurer's outstanding
liabilities and adequate for its financial needs.
22
<PAGE>
Under Pennsylvania and Delaware law, no person may acquire, directly or
indirectly, a controlling interest in the capital stock of the Company unless
such person, corporation or other entity has obtained prior approval from the
respective Commissioner for such acquisition of control. Pursuant to the
Pennsylvania and Delaware law, any person acquiring, controlling or holding the
power to vote, directly or indirectly, ten percent or more of the voting
securities of an insurance company, is presumed to have "control" of such
company. This presumption may be rebutted by a showing that control does not
exist in fact. The respective Commissioner, however, may find that "control"
exists in circumstances in which a person owns or controls a smaller amount of
voting securities. To obtain approval from the Commissioner of any acquisition
of control of an insurance company, the proposed acquirer must file with the
Commissioner an application containing information regarding: the identity and
background of the acquirer and its affiliates; the nature, source and amount of
funds to be used to carry out the acquisition; the financial statements of the
acquirer and its affiliates; any potential plans for disposition of the
securities or business of the insurer; the number and type of securities to be
acquired; any contracts with respect to the securities to be acquired; any
agreements with broker-dealers; and other matters.
Other jurisdictions in which the Company's insurance subsidiaries are licensed
to transact business may have requirements for prior approval of any acquisition
of control of an insurance or reinsurance company licensed or authorized to
transact business in those jurisdictions. Additional requirements in those
jurisdictions may include re-licensing or subsequent approval for renewal of
existing licenses upon an acquisition of control. As further described below,
laws that govern the holding company structure also govern payment of dividends
by the Company's insurance subsidiaries to the Company.
Restrictions on Subsidiaries' Dividends and Other Payments
PMA Capital is an insurance holding company whose assets consist principally of
all of the outstanding common stock of its insurance subsidiaries. PMA Capital's
ongoing ability to pay dividends to its shareholders and meet its other
obligations, including operating expenses and any principal and interest on
debt, is primarily dependent on the receipt of sufficient funds from its
insurance subsidiaries in the form of dividends, net payments under a tax-
sharing agreement between PMA Capital and its subsidiaries and loans. The
payment of dividends by the Company's insurance subsidiaries to PMA Capital is
regulated under the insurance laws of Pennsylvania and Delaware (such laws are
substantially similar). In addition, to the extent tax-sharing payments and
loans exceed certain threshold amounts, notice to and non-disapproval by the
Pennsylvania Insurance Commissioner would be required.
Under Pennsylvania law, PMA Capital's significant Pennsylvania-domiciled
insurance subsidiaries (PMA Reinsurance Corporation and the Pooled Companies)
may pay dividends only from unassigned surplus and future earnings arising from
their businesses and must receive prior approval of the Pennsylvania Insurance
Commissioner to pay a dividend if such dividend would exceed the statutory
limitation. The current statutory limitation is the greater of (i) 10% of the
insurer's policyholders' surplus, as shown on its last annual statement on file
with the Pennsylvania Insurance Commissioner or (ii) the insurer's statutory net
income for the previous calendar year. Pennsylvania law gives the Pennsylvania
Insurance Commissioner broad discretion to disapprove requests for dividends in
excess of these limits.
Based upon this limitation, these companies have the legal capacity to pay $51.8
million in dividends to PMA Capital in 1999 without obtaining the prior approval
of the Pennsylvania Insurance Commissioner. Pennsylvania law also provides that
following the payment of any dividend, the insurer's policyholders' surplus must
be reasonable in relation to its outstanding liabilities and adequate for its
financial needs, and permits the Pennsylvania Insurance Commissioner to bring an
action to rescind a dividend which violates these standards. During 1998, $35.5
million of dividends were paid by PMA Reinsurance Corporation and the Pooled
Companies to PMA Capital Corporation.
Caliber One Indemnity Company is a Delaware-domiciled insurance subsidiary of
PMA Reinsurance Corporation. As a subsidiary of PMA Reinsurance Corporation,
Caliber One Indemnity Company's dividends are not directly available to PMA
Capital. As noted above, the Delaware insurance law provisions restricting
dividends by insurers are substantially similar to such provisions under
Pennsylvania insurance laws. During 1999, Caliber One Indemnity Company may pay
up to $2.5 million of dividends to PMA Reinsurance Corporation without the prior
approval of the Delaware Insurance Commissioner. During 1998, no dividends were
declared or paid by Caliber One Indemnity Company.
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<PAGE>
In the event that the ability of either the Pooled Companies or PMA Reinsurance
Corporation to pay dividends or make other payments to PMA Capital in the future
is reduced or eliminated, PMA Capital's ability to pay dividends to its
shareholders and meet its other obligations, including operating expenses and
any principal and interest on debt could be materially and adversely affected,
depending upon the extent of such reduction. The Pennsylvania Insurance
Commissioner could use his or her broad discretionary authority to seek to
require PMA Capital to apply payments received from one insurance subsidiary for
the benefit of another insurance subsidiary of PMA Capital.
In addition to regulatory restrictions on dividends, the Company's Revolving
Credit Facility and Letter of Credit Facility also impose restrictions on the
ability of the Company's insurance subsidiaries to pay dividends. Under these
restrictions, the statutory surplus of PMA Capital's insurance subsidiaries (as
measured each calendar quarter) must not be less than $450 million and such
subsidiaries must annually maintain certain minimum ratios of adjusted surplus
to risk-based capital (300% for PMA Reinsurance Corporation and 230% for the
Pooled Companies in 1998, increasing to 240% thereafter). As of December 31,
1998, the Company's insurance subsidiaries reported combined statutory surplus
of $569.4 million, and, as of December 31, 1998, PMA Reinsurance Corporation's
risk-based capital ratio was 348% and the Pooled Companies' ratios ranged from
316% to 368%.
Risk-Based Capital
The National Association of Insurance Commissioners (the "NAIC") has adopted
risk-based capital ("RBC") requirements for property/casualty insurance
companies to evaluate the adequacy of statutory capital and surplus in relation
to investment and insurance risks such as asset quality, asset and liability
matching, loss reserve adequacy and other business factors. Under RBC
requirements, regulatory compliance is determined by the ratio of a Company's
total adjusted capital, as defined by the NAIC, to its authorized control level
of RBC, also as defined by the NAIC.
Four levels of regulatory attention may be triggered if the ratio of total
adjusted capital to RBC ("RBC ratio") is insufficient:
* If an insurance company's RBC ratio is between 150% and 200%, the "company
action level," the company must submit a plan to the regulator detailing
corrective action it proposes to undertake.
* If a company's RBC ratio is between 100% and 150%, the "regulatory action
level," the company must also submit a plan, but a regulator may also issue a
corrective order requiring the insurer to comply within a specified period.
* If a company's RBC ratio is between 70% and 100%, the "authorized control
level," the regulatory response is the same as at the "regulatory action
level," but in addition, the regulator may take action to rehabilitate or
liquidate the insurer.
* If the RBC ratio for a company is less than 70%, the "mandatory control
level," the regulator must rehabilitate or liquidate the insurer.
At December 31, 1998, the RBC ratios of the Pooled Companies ranged from 316% to
368%, and the ratio of MASCCO, The PMA Insurance Group's run-off subsidiary, was
270%. PMA Reinsurance Corporation's ratio was 348% and Caliber One Indemnity
Company's ratio was 1,389%.
The Company believes that it will be able to maintain the RBC ratios of its
insurance subsidiaries in excess of regulatory requirements through prudent
underwriting and claims handling, investing and capital management. However, no
assurances can be given that developments affecting the insurance subsidiaries,
many of which could be outside of management's control, including but not
limited to changes in the regulatory environment, economic conditions and
competitive conditions in the jurisdictions in which the insurance subsidiaries
write business, will cause the RBC ratios to fall below required levels
resulting in a corresponding regulatory response.
The NAIC has developed a series of twelve ratios (the "IRIS ratios") designed to
further assist regulators in assessing the financial condition of insurers.
These ratio results are computed annually and reported to the NAIC
24
<PAGE>
and the insurer's state of domicile. In 1998, PMA Reinsurance Corporation
reported an unusual value in one ratio, relating to reserve development due to
the change in mix of business and growth in earned premiums. In 1998, each of
the Pooled Companies reported an unusual value in one ratio, relating to reserve
development due to the paydown of loss reserves. In 1998, MASCCO reported
unusual values in two ratios due to its reinsurance treaty with PMA
International Insurance, Cayman Ltd. and a dividend paid to its parent. In
addition, Caliber One Indemnity Company reported one unusual value, relating to
the change in net premiums written.
EMPLOYEES
As of February 28, 1999, the Company had approximately 1,000 full-time
employees. None of the employees of the Company is represented by a labor union
and the Company is not a party to any collective bargaining agreements. The
Company considers its employee relations to be good.
25
<PAGE>
Glossary of Selected Insurance Terms
Actuarial analysis............ Evaluation of risks in order to attempt to assure
that premiums and loss reserves adequately
reflect expected future loss experience and
claims payments; in evaluating risks,
mathematical models are used to predict future
loss experience and claims payments based on past
loss ratios and loss development patterns and
other relevant data and assumptions.
Adverse loss development.......Increases in losses and ALAE exceeding
anticipated loss and ALAE experience over a given
period of time.
Allocated loss adjustment
expenses ("ALAE")..............Allocated loss adjustment expenses include all
legal expenses and other expenses incurred by a
company in connection with the investigation,
adjustment, settlement or litigation of claims or
losses under business covered. ALAE does not
include costs of a company's internal counsel,
claims staff or other overhead or general expense
of the company.
Attachment point...............The amount of losses above which excess of loss
reinsurance becomes operative.
Broker; intermediary...........One who negotiates contracts of reinsurance
between a primary insurer or other reinsured and
a reinsurer on behalf of the primary insurer or
other reinsured. The broker receives from the
reinsurer a commission for placement and other
services rendered.
Broker reinsurer...............A reinsurer that markets and sells reinsurance
through brokers rather than through its own
employees.
Bulk reserves..................Reserves established on an aggregate basis to
provide for losses incurred but not yet reported
to the insurer; to provide for the estimated
expenses of settling claims, including legal and
other fees and general expenses of administering
the claims adjustment process; and to adjust for
the fact that, in the aggregate, case reserves
may not accurately estimate the ultimate
liability for reported claims.
Case reserves..................Loss reserves established with respect to
individual reported claims.
Casualty insurance and/or
reinsurance....................Insurance and/or reinsurance that is concerned
primarily with the losses caused by injuries to
third persons (in other words, persons other than
the policyholder) and the legal liability imposed
on the insured resulting therefrom.
Catastrophe reinsurance........A form of excess of loss property reinsurance
that, subject to a specified limit, indemnifies
the ceding company for the amount of loss in
excess of a specified retention with respect to
an accumulation of losses resulting from a
catastrophic event. The actual reinsurance
document is called a "catastrophe cover."
Cede; ceding company;
cedent.........................When a company reinsures its risk with another,
it "cedes" business and is referred to as the
"ceding company" or the "cedent".
Claim closure rate.............The number of closed lost time workers'
compensation claims divided by total reported
lost time workers' compensation claims by
accident year as of a given evaluation date.
26
<PAGE>
Clash cover....................A form of excess of loss casualty reinsurance
policy covering losses arising from a single set
of circumstances covered by more than one primary
policy. For example, if an insurer covers both
motorists involved in an accident, a clash cover
would protect the insurer from suffering a net
loss in the full amount of both parties. The
clash cover would pay to the insurer a portion of
the loss in excess of the coverage of one of the
two parties.
Combined ratio.................The sum of the loss and LAE ratio, the
underwriting expense ratio, and the
policyholders' dividend ratio.
Direct reinsurer, direct
underwriter, direct writer.....A reinsurer that markets and sells reinsurance
directly to its reinsureds without the assistance
of brokers.
Excess and surplus lines.......Surplus lines risks are those risks not fitting
normal underwriting patterns, involving a degree
of risk that is not commensurate with standard
rates and/or policy forms, or that will not be
written by standard carriers because of general
market conditions. Excess insurance refers to
coverage that attaches for an insured over the
limits of a primary policy or a stipulated self-
insured retention. Policies are bound or accepted
by carriers not licensed in the jurisdiction
where the risk is located, and generally are not
subject to regulations governing premium rates or
policy language.
Excess of loss reinsurance.....The generic term describing reinsurance that
indemnifies the reinsured against all or a
specified portion of losses on underlying
insurance policies in excess of a specified
dollar amount, called a "layer" or "retention."
Also known as nonproportional reinsurance or stop
loss coverage.
Facultative reinsurance........The reinsurance of all or a portion of the
insurance provided by a single policy. Each
policy reinsured is separately negotiated.
Finite risk reinsurance........The reinsurance of potential losses in a
transaction in which the primary element of risk
is financial rather than underwriting.
Gross premiums written.........Total premiums for direct insurance and
reinsurance assumed during a given period.
Incurred but not reported
("IBNR") reserves..............Loss reserves for estimated losses that have been
incurred but not yet reported to the insurer or
reinsurer.
Incurred losses................The total losses sustained by an insurance
company under a policy or policies, whether paid
or unpaid. Incurred losses include a provision
for claims that have occurred but have not yet
been reported to the insurer ("IBNR").
IRIS ratios....................Financial ratios annually calculated by the NAIC
to assist state insurance departments in
monitoring the financial condition of insurance
companies.
Layers.........................The division of a particular reinsurance program
delineated by an attachment point and a maximum
limit. Often, a reinsurance program will be
divided into several layers, with the lower
layers (see "Low or working layer excess of loss
reinsurance") typically having higher premiums
and higher claim frequency and the higher layers
typically having lower premiums and claim
frequency.
Loss adjustment expenses
("LAE")........................The expenses of settling claims, including legal
and other fees and the portion of general
expenses allocated to claim settlement costs.
27
<PAGE>
Loss and LAE ratio (GAAP)......Loss and LAE ratio is equal to losses and LAE
divided by earned premiums. Undiscounted loss and
LAE ratios refer to loss and LAE ratios that do
not consider the net effect of discounting of
loss reserves.
Loss reserves..................Liabilities established by insurers and
reinsurers to reflect the estimated cost of
claims payments that the insurer or reinsurer
ultimately will be required to pay in respect of
insurance or reinsurance it has written. Reserves
are established for losses and for LAE and
consist of case reserves, bulk reserves and IBNR
reserves.
Low or working layer excess of
loss reinsurance...............Reinsurance that absorbs the losses immediately
above the reinsured's retention layer. A low
layer excess of loss reinsurer will pay up to a
certain dollar amount at which point a higher
layer reinsurer (or the ceding company) will be
liable for additional losses.
Manual rates...................Insurance rates for lines and classes of business
that are approved and published by state
insurance departments.
Manual rate level or average
manual rate level..............Manual rates for lines and classes of business
relative to a benchmark; within this document,
the term refers to the manual rates, as compared
to other periods, such as a prior policy year.
Net investment income ratio....The ratio of net investment income to net
premiums earned.
Net premiums earned............The portion of net premiums written that is
earned during a period and recognized for
accounting purposes as revenue.
Net premiums written...........Gross premiums written for a given period less
premiums ceded to reinsurers during such period.
Operating ratio................The combined ratio, reduced by the net investment
income ratio. The ratio measures a company's
operating profitability, exclusive of realized
gains and federal income taxes.
Per occurrence.................A form of insurance or reinsurance under which
the date of the loss event is deemed to be the
date of the occurrence, regardless of when
reported and permits all losses arising out of
one event to be aggregated instead of being
handled on a risk-by-risk basis.
Policyholders' dividend ratio..The ratio of policyholders' dividends to earned
premiums
Primary insurer................An insurance company that issues insurance
policies to the general public or to certain non-
insurance entities.
Pro rata reinsurance...........Forms of reinsurance in which the reinsurer
shares a proportional part of the original
premiums and losses of the reinsured. Pro rata
reinsurance also is known as proportional
reinsurance, quota share reinsurance and
participating reinsurance.
Property insurance
and/or reinsurance.............Insurance and/or reinsurance that indemnifies a
person with an insurable interest in tangible
property for his property loss, damage or loss of
use.
Reinsurance....................The practice whereby one party, called the
reinsurer, in consideration of a premium paid to
it, agrees to indemnify another party, called the
reinsured, for part or all of the liability
assumed by the reinsured under a policy or
policies of
28
<PAGE>
insurance that it has issued. The reinsured may
be referred to as the original or primary
insurer, the direct writing company or the ceding
company.
Retention, retention layer.....The amount or portion of risk that an insurer or
reinsurer retains for its own account. Losses in
excess of the retention layer are paid by the
reinsurer or retrocessionaire. In proportional
treaties, the retention may be a percentage of
the original policy's limit. In excess of loss
business, the retention is a dollar amount of
loss, a loss ratio or a percentage.
Retrocession;
retrocessionaire...............A transaction whereby a reinsurer cedes to
another reinsurer (the "retrocessionaire") all or
part of the reinsurance it has assumed.
Retrocession does not legally discharge the
ceding reinsurer from its liability with respect
to its obligations to the reinsured.
Statutory accounting
principles ("SAP").............Recording transactions and preparing financial
statements in accordance with the rules and
procedures prescribed or permitted by state
insurance regulatory authorities including the
NAIC.
Statutory or policyholder's
surplus; statutory capital
& surplus......................The excess of admitted assets over total
liabilities (including loss reserves), determined
in accordance with SAP.
Stop loss......................See "Excess of loss reinsurance".
Treaty reinsurance.............The reinsurance of a specified type or category
of risks defined in a reinsurance agreement (a
"treaty") between a primary insurer or other
reinsured and a reinsurer. Typically, in treaty
reinsurance, the primary insurer or reinsured is
obligated to offer and the reinsurer is obligated
to accept a specified portion of all agreed upon
types or categories of risks originally written
by the primary insurer or reinsured.
Underwriting...................The reinsurer's process of reviewing applications
submitted for insurance coverage, deciding
whether to accept all or part of the coverage
requested and determining the applicable
premiums.
Underwriting cycle.............An historical pattern in which property and
casualty insurance and reinsurance premiums,
profits and availability of coverage rise and
fall over time.
Underwriting expenses..........The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.
Underwriting expense ratio.....The ratio of underwriting expenses to earned
premiums.
Unearned premiums..............The portion of a premium representing the
unexpired portion of the exposure period as of a
certain date.
Unearned premium reserve.......Liabilities established by insurers and
reinsurers to reflect unearned premiums which are
refundable to policyholders if an insurance or
reinsurance contract is canceled prior to
expiration of the contract term.
29
<PAGE>
Item 2. Properties
The Company's and PMA Re's headquarters are located in 78,000 square feet of
leased space in center city Philadelphia, Pennsylvania. The PMA Insurance
Group's headquarters are located in a four story, 110,000 square foot building
in Blue Bell, Pennsylvania. Caliber One's headquarters are located in 10,000
square feet of leased office space in Langhorne, Pennsylvania.
Through various wholly owned subsidiaries, the Company also owns and occupies
additional office facilities in three other locations and rents additional
office space for its insurance operations in 15 other locations. The Company
believes that such owned properties are suitable and adequate for its current
business operations.
Item 3. Legal Proceedings
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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of 1998.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- -----------------------------------------------------
<S> <C> <C>
John W. Smithson........... 53 President and Chief Executive Officer
Frederick W. Anton III..... 65 Chairman of the Board
Ronald S. Austin........... 41 President and Chief Operating Officer - Caliber One
Indemnity Company
Vincent T. Donnelly........ 46 President and Chief Operating Officer -
The PMA Insurance Group
Stephen G. Tirney.......... 45 President and Chief Operating Officer - PMA
Reinsurance Corporation
Francis W. McDonnell....... 42 Senior Vice President, Chief Financial Officer
and Treasurer
</TABLE>
John W. Smithson has served as President and Chief Executive Officer of the
Company since May 1997, and as a director of the Company since 1987. Mr.
Smithson served as President and Chief Operating Officer of the Company from
1995 to May 1997, as Chairman and Chief Executive Officer of PMA Reinsurance
Corporation since 1984 and as Chairman and Chief Executive Officer of The PMA
Insurance Group since April 1995. Mr. Smithson started with the Company in
1972.
Frederick W. Anton III has served as Chairman of the Board since 1995 and as a
director of the Company since 1972. Mr. Anton served as Chairman of the Board
and Chief Executive Officer from 1995 to May 1997, and as President and Chief
Executive Officer from 1981 to 1995. Mr. Anton started with the Company in
1962.
30
<PAGE>
Ronald S. Austin has served as the President and Chief Operating Officer of
Caliber One Indemnity Company since 1997. From 1988 to 1997, Mr. Austin served
as an officer and director of General Star Management Company, a member of the
General Re Group.
Vincent T. Donnelly has served as President and Chief Operating Officer of The
PMA Insurance Group since February 1997. Mr. Donnelly served as Senior Vice
President - Finance and Chief Actuary of The PMA Insurance Group from 1992 to
1997.
Stephen G. Tirney has served as President and Chief Operating Officer of PMA
Reinsurance Corporation since 1997. Mr. Tirney served as Executive Vice
President of PMA Reinsurance Corporation from 1993 to 1997, as Senior Vice
President of PMA Reinsurance Corporation from 1989 to 1993 and has been an
employee of PMA Reinsurance Corporation since 1976.
Francis W. McDonnell has served as Senior Vice President and Chief Financial
Officer of the Company since 1995 and as Treasurer since 1997, and has served as
Senior Vice President and Chief Financial Officer of PMA Reinsurance Corporation
since 1995. From 1993 to 1995, Mr. McDonnell served as Vice President Finance
of PMA Reinsurance Corporation.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The "Class A Common Stock Prices" and "Class A Common Stock Bids" under the
caption "Quarterly Financial Information" and also in the last paragraph on page
80 of the Annual Report, as well as the information under the captions
"Securities Listing" and "Dividends" on the inside back cover of the Annual
Report are incorporated herein by reference. Further, the information in Note
15 to the Financial Statements in the Annual Report and under the caption
"Regulation--Restrictions on Subsidiaries' Dividends and Other Payments" in Item
1 of this Form 10-K is incorporated herein by reference.
Recent Sales of Unregistered Securities
During the years ended December 31, 1997 and 1996, the Company sold shares of
Class A Common Stock in connection with the exercise of employee stock options
pursuant to the terms of the Company's stock option plans. In 1997, an aggregate
of 162,248 shares were sold to fourteen officers and employees of the Company
pursuant to such options at exercise prices ranging from $8.00 to $15.00 per
share for an aggregate price of $1,424,349. Additionally, in 1997, the Company
sold 1,000 shares to employees at $18.00 per share. In 1996, an aggregate of
97,150 shares were sold to five officers of the Company pursuant to such options
at exercise prices ranging from $6.60 to $10.00 per share for an aggregate price
of $806,000. The Company believes that these sales were made pursuant to the
exemption afforded by Section 4(2) of the Securities Act inasmuch as the sales
were made to a limited number of sophisticated investors in transactions not
involving a public offering. No unregistered sales of Company securities were
made in 1998.
Item 6. Selected Financial Data
The information under the caption "Selected Financial Data" on page 26 of the
Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 28 through 49 of the Annual Report is incorporated herein by
reference.
31
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information under the caption "Market Risk of Financial Instruments" on
pages 45 and 46 of the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and Notes to Consolidated
Financial Statements on pages 50 through 78 and the Report of Independent
Accountants on page 79 of the Annual Report are incorporated herein by
reference, as is the unaudited "Income Statement Data" and "Per Share Data"
under the caption "Quarterly Financial Information" on page 80 of the Annual
Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
See "Executive Officers of the Registrant" under Item 4 above. The information
under the captions "Nominees For Election" and "Directors Continuing in Office"
on pages 5 and 6 of the Company's 1999 Proxy Statement dated March 26, 1999
("Proxy Statement") is incorporated herein by reference, as is the information
under the caption "Section 16(a) Beneficial Reporting Compliance" on page 23 of
the Proxy Statement.
Item 11. Executive Compensation
The information under the caption "Compensation of Executive Officers" on pages
8 through 12 and under the caption "Director Compensation" on page 7 of the
Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Beneficial Ownership of Common Stock" on
pages 2 through 4 of the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the captions "Certain Transactions" on pages 18 and 19 as
well as "Compensation Committee Interlocks and Insider Participation" on page 12
of the Proxy Statement is incorporated herein by reference.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
FINANCIAL STATEMENTS AND SCHEDULES
(a)(1) The following consolidated financial statements of PMA Capital and its
subsidiary companies and Report on Independent Accountants, included on
pages 50 through 79 of the Annual Report are incorporated herein by
reference:
. Consolidated Balance Sheets at December 31, 1998 and 1997.
. Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.
. Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
. Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
. Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996.
. Notes to the Consolidated Financial Statements
. Report of Independent Accountants
(a)(2) The Financial Statement Schedules are listed in the Index to Financial
Statement Schedules on page FS-1
All other schedules specified by Article 7 of Regulation S-X are not required
pursuant to the related instructions or are inapplicable and, therefore, have
been omitted.
(a)(3) The Exhibits are listed in the Index to Exhibits on pages E-1 through
E-3.
(b) Reports on Form 8-K filed in the fourth quarter of 1998
During the last quarter of the fiscal year ended December 31, 1998, the
registrant filed a Report under Item 5 on Form 8-K dated December 7,
1998, regarding (1) the change of its corporate name from "Pennsylvania
Manufacturers Corporation" to "PMA Capital Corporation"; (2) the change
of the trading symbol for the registrant's Class A Common Stock on the
Nasdaq National Market from "PMFRA" to "PMACA"; and (3) a change of the
address of its principal executive offices to 1735 Market Street, Suite
2800, Philadelphia, Pennsylvania 19103-7590.
33
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf, and in the capacities indicated, by the undersigned, thereunto duly
authorized.
PMA CAPITAL CORPORATION
Date: March 31, 1999 By: /s/ Francis W. McDonnell
-----------------------------------
Francis W. McDonnell,
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 31, 1999.
Signature* Title
- --------- -----
John W. Smithson President and Chief Executive Officer and
a Director (Principal Executive Officer)
Frederick W. Anton III Chairman of the Board and a Director
Paul I. Detwiler, Jr. Director
Joseph H. Foster Director
Anne S. Genter Director
James F. Malone III Director
A. John May Director
Louis N. McCarter III Director
John W. Miller, Jr. Director
Edward H. Owlett Director
Louis I. Pollock Director
Roderic H. Ross Director
L. J. Rowell, Jr. Director
By: /s/ Charles A. Brawley, III
----------------------------
Charles A. Brawley, III
Attorney-in-Fact
34
<PAGE>
PMA CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENT SCHEDULES
--------------------------------------
<TABLE>
<CAPTION>
Schedule No. Description Page
<S> <C> <C>
II Condensed Financial Information of FS-2 to FS-4
Registrant as of December 31, 1998 and
1997 and for the years ended December 31,
1998, 1997 and 1996
III Supplementary Insurance Information for the FS-5
years ended December 31, 1998, 1997 and 1996
IV Reinsurance for the years ended December 31, FS-6
1998, 1997 and 1996
V Valuation and Qualifying Accounts for the FS-7
years ended December 31, 1998, 1997 and 1996
VI Supplemental Information Concerning FS-8
Property and Casualty Insurance Operations
for the years ended December 31, 1998, 1997
and 1996
Report of Independent Accountants on Financial
Schedules Statement FS-9
</TABLE>
Certain financial statement schedules have been omitted because they are either
not applicable or the required financial information is contained in the
Company's 1998 consolidated financial statements and notes thereto.
FS-1
<PAGE>
PMA Capital Corporation
Schedule II - Registrant Only Financial Statements
Balance Sheets
(Parent Company Only)
<TABLE>
<CAPTION>
As of December 31,
(dollar amounts in thousands) 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ - $ 253
Investment in subsidiaries 700,772 639,193
Deferred income taxes, net 8,078 29,163
Related party receivables - 561
Other assets 420 22,545
------------------------------------
Total assets $ 709,270 $ 691,715
================= =================
Liabilities
Long-term debt $ 163,000 $ 203,000
Related party payables 14,354 -
Dividends payable to shareholders 2,013 2,008
Other liabilities 18,423 8,360
------------------------------------
Total liabilities 197,790 213,368
Shareholders' Equity
Common stock, convertible, $5 par value (40,000,000 shares authorized;
1998 - 13,956,268 shares issued and 13,520,261 outstanding;
1997 - 15,286,263 shares issued and 14,850,789 outstanding) 69,781 76,431
Class A common stock, $5 par value (40,000,000 shares authorized;
1998 - 10,486,677 shares issued and 9,837,963 outstanding;
1997 - 9,156,682 shares issued and 9,117,735 outstanding) 52,433 45,783
Additional Paid-in Capital - Class A common stock 339 339
Retained earnings 377,601 343,368
Accumulated other comprehensive income 30,016 18,806
Notes receivable from officers (498) (198)
Treasury stock, at cost:
Common stock (1998-436,007 shares; 1997-435,474 shares) (5,582) (5,572)
Class A common stock (1998-648,714 shares; 1997-38,947 shares) (12,610) (610)
------------------------------------
Total shareholders' equity 511,480 478,347
------------------------------------
Total liabilities and shareholders' equity $ 709,270 $ 691,715
================= =================
</TABLE>
These financial statements should be read in conjunction with the Consolidated
Financial Statements and the notes thereto.
FS-2
<PAGE>
PMA Capital Corporation
Schedule II
Statements of Operations - Registrant Only Financial Statements
(Parent Company Only)
<TABLE>
<CAPTION>
Years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net investment (expense) income $ (18) $ 70 $ 183
Net realized investment (losses) gains (1,740) - 35
Other revenues 1,089 193 434
-----------------------------------------------------
Total revenues (669) 263 652
-----------------------------------------------------
Expenses:
General expenses 10,834 6,911 7,347
Interest expense 15,221 15,764 16,774
-----------------------------------------------------
Total expenses 26,055 22,675 24,121
-----------------------------------------------------
Loss before income taxes and equity in earnings (losses) of subsidiaries (26,724) (22,412) (23,469)
Provision (benefit) for income taxes 1,256 (14,271) (60,345)
-----------------------------------------------------
(Loss) income before equity in earnings (losses) of subsidiaries and
extraordinary loss (27,980) (8,141) 36,876
Equity in earnings (losses) of subsidiaries 72,714 27,894 (172,210)
-----------------------------------------------------
Income (loss) before extraordinary loss 44,734 19,753 (135,334)
Extraordinary loss from early extinguishment of debt
(net of income tax benefit of $2,549) - (4,734) -
-----------------------------------------------------
Net income (loss) $ 44,734 $ 15,019 $ (135,334)
==================== =============== ================
</TABLE>
These financial statements should be read in conjunction with the Consolidated
Financial Statements and the notes thereto.
FS-3
<PAGE>
PMA Capital Corporation
Schedule II
Statement of Cash Flows - Registrant Only Financial Statements
(Parent Company Only)
<TABLE>
<CAPTION>
Years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $44,734 $15,019 $ (135,334)
Adjustments to reconcile net income (loss) to net cash flows provided
by operating activities:
Equity in (earnings) losses of subsidiaries (72,714) (27,894) 172,210
Net realized investment losses (gains) 1,740 - (35)
Provision (benefit) for deferred income taxes 21,085 9,614 (19,822)
Extraordinary loss from early extinguishment of debt - (4,734) -
Dividends received from subsidiaries 35,502 22,500 53,634
Net tax sharing payments received from subsidiaries 29,728 19,950 12,000
Other, net (11,957) (14,036) (42,283)
--------------------------------------------
Net cash flows provided by operating activities 48,118 20,419 40,370
--------------------------------------------
Cash Flows From Investing Activities:
Cash contributions to subsidiaries (480) (11,000) (50,000)
Other - - 115
--------------------------------------------
Net cash flows used by investing activities (480) (11,000) (49,885)
--------------------------------------------
Cash Flows From Financing Activities:
Change in related party receivables and payables 14,915 (1,439) 10,863
Proceeds from issuance of long-term debt - 210,000 26,000
Repayments of long-term debt (40,000) (211,571) (25,000)
Dividends paid to shareholders (7,939) (7,965) (7,926)
Proceeds from exercised stock options and issuance of Class A
common stock 4,283 1,442 1,577
Purchase of treasury stock (18,850) (597) (2,506)
Net (issuance) repayments of notes receivable from officers (300) 964 2,734
---------------------------------------------
Net cash flows (used) provided by financing activities (47,891) (9,166) 5,742
---------------------------------------------
Net (decrease) increase in cash (253) 253 (799)
Cash - beginning of year 253 - 799
-----------------------------------------------------
Cash - end of year $ - $ 253 $ -
====================================================
</TABLE>
These financial statements should be read in conjunction with the Consolidated
Financial Statements and the notes thereto.
FS-4
<PAGE>
PMA Capital Corporation
Schedule III
Supplementary Insurance Information
<TABLE>
<CAPTION>
Unpaid losses and Losses and loss
Deferred policy loss adjustment Unearned Net premiums Net investment adjustment
(dollar amounts in thousands) acquisiton costs expenses premiums earned income(1)(3) expenses
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
The PMA Insurance Group $18,660 $1,250,694 $109,766 $241,928 $ 64,580 $ 197,525
PMA Re 30,446 668,604 109,675 223,559 54,734 154,062
Caliber One 2,009 33,147 8,504 1,750 1,453 1,402
Corporate and Other - (11,550) - (522) (642) (318)
- -----------------------------------------------------------------------------------------------------------------------------
Total $51,115 $1,940,895 $227,945 $466,715 $120,125 $ 352,671
=============================================================================================================================
Year ended December 31, 1997:
The PMA Insurance Group $20,010 $1,353,917 $115,998 $212,348 $ 81,927 $ 193,530
PMA Re 25,278 622,484 95,457 163,603 52,270 113,931
Corporate and Other - 26,786 - - (805) (180)
- -----------------------------------------------------------------------------------------------------------------------------
Total $45,288 $2,003,187 $211,455 $375,951 $133,392 $ 307,281
=============================================================================================================================
Year ended December 31, 1996:
The PMA Insurance Group $23,488 $1,501,897 $127,986 $268,601 $ 82,364 $ 424,900
PMA Re 20,518 589,175 77,996 151,974 48,676 111,937
Corporate and Other - - - - (203) (214)
- -----------------------------------------------------------------------------------------------------------------------------
Total $44,006 $2,091,072 $205,982 $420,575 $130,837 $ 536,623
=============================================================================================================================
Acquisition Operating Net premiums
(dollar ammounts in thousands) expenses expenses(2) written(3)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998:
The PMA Insurance Group $ 45,190 $45,309 $234,837
PMA Re 64,689 13,134 234,010
Caliber One 958 2,449 6,436
Corporate and Other - 11,267 (522)
- -------------------------------------------------------------------------
Total $110,837 $72,159 $474,761
=========================================================================
Year ended December 31, 1997:
The PMA Insurance Group $ 48,343 $51,848 $203,348
PMA Re 45,158 10,827 177,934
Corporate and Other - 12,464 -
- -------------------------------------------------------------------------
Total $ 93,501 $75,139 $381,282
=========================================================================
Year ended December 31, 1996:
The PMA Insurance Group $ 52,706 $82,053 $272,479
PMA Re 37,586 6,320 164,053
Corporate and Other - 9,483 (3,557)
- -------------------------------------------------------------------------
Total $ 90,292 $97,856 $432,975
=========================================================================
</TABLE>
(1) Net investment income is based on each segment's invested assets.
(2) Other operating expenses are allocated primarily on the specific
identification basis. These amounts have been reclassified for 1997 and 1996
to reflect the changes related to the implementation of SFAS No. 131.
(3) Certain prior year amounts have been reclassified to conform to current year
presentation.
FS-5
<PAGE>
PMA Capital Corporation
Schedule IV
Reinsurance
<TABLE>
<CAPTION>
Ceded to Percentage of
Direct other Assumed from amount assumed
(dollar amounts in thousands) amount companies other companies Net amount to net
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Property and liability insurance premiums $ 286,987 $ 96,961 $276,689 $466,715 59%
========= ========== =========== ============ ==============
Year Ended December 31, 1997:
Property and liability insurance premiums $ 277,871 $118,277 $216,357 $375,951 58%
========= =========== =========== ============ ==============
Year Ended December 31, 1996:
Property and liability insurance premiums $299,386 $ 88,499 $209,688 $420,575 50%
======== =========== =========== ============ ==============
</TABLE>
FS-6
<PAGE>
PMA Capital Corporation
Schedule V
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
(dollar amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Deductions - write-offs Balance at end
Description beginning period costs and expenses of uncollectible accounts of period
====================================================================================================================================
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for uncollectible accounts:
Premiums receivable $18,406 1,488 20 $19,874
Reinsurance receivables 2,096 108 26 2,178
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Allowance for uncollectible accounts:
Premiums receivable $18,877 - 471 $18,406
Reinsurance receivables 2,603 - 507 2,096
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Allowance for uncollectible accounts:
Premiums receivable $16,330 19,532 16,985 $18,877
Reinsurance receivables 6,208 222 3,827 2,603
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FS-7
<PAGE>
PMA Capital Corporation
Schedule VI
Supplemental Information Concerning Property and Casualty Insurance Operations
<TABLE>
<CAPTION>
(dollar amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred Discount on reserves
policy Reserves for unpaid for unpaid claims
acquisition claims and claim and claim
Affiliation with registrant costs adjustment expenses adjustment expenses(1) Unearned premiums Earned premiums
- ------------------------------ ----------- ------------------- -------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Consolidated property-casualty subsidiaries:
Year Ended December 31, 1998 $51,115 $1,940,895 $194,327 $227,945 $466,715
Year Ended December 31, 1997 45,288 2,003,187 460,230 211,455 375,951
Year Ended December 31, 1996 44,006 2,091,072 514,248 205,982 420,575
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Claims and claim adjustment
expenses incurred related to
Net investment ---------------------------- Acquisition Paid claims and Net premiums
Affiliation with registrant income Current year Prior years(2) expenses adjustment expenses written
- ------------------------------ -------------- ------------ -------------- ----------- ------------------- ------------
Consolidated property-casualty subsidiaries:
Year Ended December 31, 1998 $120,125 $373,098 ($46,515) $110,837 $458,844 $474,761
Year Ended December 31, 1997 133,392 341,880 (86,006) 93,501 470,874 381,282
Year Ended December 31, 1996 130,837 323,069 156,074 90,292 510,621 432,975
====================================================================================================================================
</TABLE>
(1) - Workers' compensation reserves discounted at approximately 5%.
(2) - Excludes accretion of loss reserve discount of $26,088, $51,407 and
$57,480 in 1998, 1997 and 1996, respectively.
FS-8
<PAGE>
[Logo of PricewaterhouseCoopers LLP appears here]
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY. 10036
Telephone (212)596-8000
Facsimile (212)596-8910
REPORT OF INDEPENDENT ACCOUNTANTS
February 5, 1999
To the Board of Directors and Shareholders
PMA Capital Corporation
Our report on the consolidated financial statements of PMA Capital Corporation
has been incorporated by reference in this Form 10-K from page 79 of the 1998
Annual Report to Shareholders of PMA Capital Corporation. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed on the index on page FS-1 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/PricewaterhouseCoopers LLP
FS-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Method of Filing
- -------------- -------------------------------------------------
<S> <C> <C>
(3) Articles of incorporation and bylaws:
3.1 Amended and Restated Articles of Incorporation Filed as exhibit 3.1 to the Company's Registration
of the Company as last amended December 7, 1998. Statement on Form S-3/A, Amendment No. 2 (No.
333-63469) and incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company. Filed as exhibit 3.2 to the Company's Registration
Statement on Form S-3, (No. 333-63469) and
incorporated herein by reference.
(10) Material Contracts:
Exhibits 10.1 through 10.11 are management contracts or compensatory plans.
10.1 Employment Agreement dated April 1, 1995 between Filed as exhibit 10.1 to the Company's
the Company and Frederick W. Anton III. Registration Statement on Form 10 dated June 26,
1997.
10.2 Employment Agreement dated May 1, 1995 between Filed as exhibit 10.2 to the Company's
the Company and John W. Smithson. Registration Statement on Form 10 dated June 26,
1997
10.3 Company's EDC Plan Trust Agreement dated as of Filed as exhibit 10.3 to the Company's
1994. Registration Statement on Form 10 dated June 26,
1997
10.4 Company's Amended and Restated Executive Filed herewith.
Deferred Compensation Plan
10.5 Company's Supplemental Executive Retirement Plan Filed as exhibit 10.4 to the Company's
(SERP) dated July 1995. Registration Statement on Form 10 dated June 26,
1997
10.6 Company's Amended and Restated 1987 Incentive Filed as exhibit 10.5 to the Company's
Stock Option Plan Registration Statement on Form 10 dated June 26,
1997
10.7 Company's Amended and Restated 1991 Equity Filed as exhibit 10.6 to the Company's
Incentive Plan. Registration Statement on Form 10 dated June 26,
1997
10.8 Company's Amended and Restated 1993 Equity Filed as exhibit 10.7 to the Company's
Incentive Plan. Registration Statement on Form 10 dated June 26,
1997
10.9 Company's Amended and Restated 1994 Equity Filed as exhibit 10.8 to the Company's
Incentive Plan. Registration Statement on Form 10 dated June 26,
1997
10.10 Company's 1995 Equity Incentive Plan. Filed as exhibit 10.9 to the Company's
Registration Statement on Form 10 dated June 26,
1997
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Method of Filing
- -------------- -------------------------------------------------
<S> <C> <C>
10.11 Company's 1996 Equity Incentive Plan. Filed as exhibit 10.10 to the Company's
Registration Statement on Form 10 dated June 26,
1997
10.12 Credit Agreement dated as of March 14, 1997 by Filed as exhibit 10.13 to the Company's
and among the Company, The Bank of New York, Registration Statement on Form 10 dated June 26,
First Union National Bank of North Carolina, 1997
Fleet National Bank, PNC Bank, National
Association, Mellon Bank, N.A., CoreStates Bank,
N.A. and Dresdener Bank AG, New York Branch and
Grand Cayman Branch.
10.13 Master Agreement dated as of February 7, 1997 Filed as exhibit 10.14 to the Company's
between the Company and First Union National Registration Statement on Form 10 dated June 26,
Bank of North Carolina. 1997
10.14 First Amended and Restated Letter of Credit Filed as exhibit 10.15 to the Company's
Agreement, dated March 14, 1997, by and among Registration Statement on Form 10 dated June 26,
the Company, the Bank of New York, Mellon Bank, 1997
N.A., Fleet Bank, National Association, PNC
Bank, National Association and First Union Bank
of North Carolina.
10.15 Amendment No. 1 and Restatement, dated September Filed herewith.
29, 1997, to the First Amended and Restated
Letter of Credit Agreement, dated March 14, 1997
10.16 Amendment No. 2, dated September 28, 1998, to Filed herewith.
the First Amended and Restated Letter of Credit
Agreement, dated March 14, 1997
10.17 Amendment No. 3, dated October 2, 1998, to the Filed herewith.
First Amended and Restated Letter of Credit
Agreement, dated March 14, 1997
10.18 Caliber One Indemnity Company Purchase Agreement Filed as exhibit 10.17 to the Company's Annual
dated December 15, 1997. Report on Form 10-K, for the year ended December
31, 1997 and incorporated herein by reference.
(12) Computation of ratio of earnings to fixed Filed herewith.
charges.
(13) Portions of the Company's 1998 Annual Report to Filed herewith.
Shareholders, which are expressly incorporated
by reference in this Form 10-K, are "filed" as
part of this Form 10-K
(21) Subsidiaries of the Company. Filed herewith.
(23) Consent of independent accountant Filed herewith.
(24) Power of attorney
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Method of Filing
- -------------- -------------------------------------------------
<S> <C> <C>
24.1 Powers of attorney Filed herewith.
24.2 Certified resolutions Filed herewith.
(27) Financial Data Schedule
27.1 Financial Data Schedule Filed herewith (EDGAR version only).
27.2 Restated Financial Data Schedule Filed herewith (EDGAR version only).
27.3 Restated Financial Data Schedule Filed herewith (EDGAR version only).
</TABLE>
Shareholders may obtain copies of exhibits by writing to the Company at PMA
Capital Corporation, 1735 Market Street, Suite 2800, Philadelphia, PA. 19103-
7590, Attn: Corporate Secretary
E-3
<PAGE>
EXHIBIT 10.4
PMA CAPITAL CORPORATION (FORMERLY PMC) EXECUTIVE
DEFERRED COMPENSATION PLAN
(AMENDED AND RESTATED AS OF DECEMBER 7, 1998)
<PAGE>
PMA CAPITAL CORPORATION (FORMERLY PMC) EXECUTIVE
------------------------------------------------
DEFERRED COMPENSATION PLAN
--------------------------
TABLE OF CONTENTS
-----------------
PAGE
----
INTRODUCTION 1
ARTICLE I. - DEFINITIONS.................................................... 1
1.1 "Administrator"............................................... 1
1.2 "Beneficiary"................................................. 1
1.3 "Benefit Distribution Date"................................... 1
1.4 "Committee"................................................... 1
1.5 "Compensation"................................................ 1
1.6 "Code"........................................................ 2
1.7 "Deferral Agreement".......................................... 2
1.8 "Deferred Benefit Accounts"................................... 2
1.9 "Determination Date".......................................... 2
1.10 "Disability".................................................. 2
1.11 "Early Retirement Age"........................................ 2
1.12 "Education Account"........................................... 2
1.13 "Eligible Dependent".......................................... 2
1.14 "Eligible Employee"........................................... 3
1.15 "Employers"................................................... 3
1.16 "Enrollment Period"........................................... 3
1.17 "Executive Deferral Contribution"............................. 3
1.18 "Fixed Period Benefit Account"................................ 3
1.19 "Investment Fund" or "Fund"................................... 3
1.20 "Matching Contribution"....................................... 3
1.21 "Participant"................................................. 3
1.22 "Plan"........................................................ 3
1.23 "Plan Sponsor"................................................ 3
1.24 "Plan Year"................................................... 4
1.25 "Restatement Effective Date".................................. 4
1.26 "Retirement".................................................. 4
1.27 "Retirement Account".......................................... 4
1.28 "Retirement Age".............................................. 4
1.29 "Vested"...................................................... 4
ARTICLE II. - MEMBERSHIP IN THE PLAN........................................ 4
-i-
<PAGE>
2.1 Commencement of Participation................................ 4
2.2 Procedure For and Effect of Admission........................ 4
2.3 Cessation of Participation................................... 4
2.4 Recommencement of Participation.............................. 5
ARTICLE III. - PLAN CONTRIBUTIONS.......................................... 5
3.1 Executive Deferral Contribution.............................. 5
3.2 Rules Governing Executive Deferral Contributions............. 5
3.3 Matching Contribution........................................ 5
ARTICLE IV. - PARTICIPANTS' ACCOUNTS....................................... 6
4.1 Establishment of Accounts.................................... 6
4.2 Executive Benefit Allocation................................. 6
4.3 Irrevocable Allocation....................................... 6
4.4 Pre-1993 Directed Adjustment of Deferred Benefit Accounts.... 6
4.5 Post-1992 Directed Adjustment of Deferred Benefit Accounts... 7
4.6 Administration of Investments................................ 7
4.7 Valuation of Deferred Benefit Accounts....................... 7
4.8 Suballocation Within the Deferred Benefit Accounts........... 7
4.9 Investment Obligation of the Employer........................ 8
ARTICLE V. - VESTING....................................................... 8
5.1 Vesting Schedule............................................. 8
5.2 Forfeitures.................................................. 9
ARTICLE VI. - BENEFITS..................................................... 9
6.1 Retirement Account........................................... 9
6.2 Education Account............................................ 10
6.3 Fixed Period Benefit Account................................. 10
6.4 Restructuring of Deferred Benefit Accounts................... 11
6.5 Tax Withholding.............................................. 11
ARTICLE VII. - ADMINISTRATION.............................................. 11
7.1 Appointment of Administrator................................. 11
7.2 Administrator's Responsibilities............................. 11
7.3 Records and Accounts......................................... 12
7.4 Administrator's Specific Powers and Duties................... 12
7.5 Employer's Responsibility to Administrator................... 13
7.6 Expenses. 13
7.7 Liability.................................................... 13
7.8 Indemnification.............................................. 13
7.9 Procedure to Claim Benefits.................................. 13
-ii-
<PAGE>
ARTICLE VIII. - AMENDMENT AND TERMINATION.................................. 14
8.1 Plan Amendment............................................... 14
8.2 Termination of the Plan...................................... 14
8.3 Amendment or Termination Procedure........................... 14
ARTICLE IX. - MISCELLANEOUS................................................ 15
9.1 Funding...................................................... 15
9.2 No Assignment Permitted...................................... 15
9.3 Supplemental Benefits........................................ 15
9.4 Governing Law................................................ 15
9.5 Jurisdiction................................................. 15
9.6 Payments to Minors and Incompetents.......................... 15
9.7 Binding Terms................................................ 15
9.8 Status of Employment......................................... 16
9.9 Severability................................................. 16
9.10 Spendthrift Provision........................................ 16
9.11 Headings..................................................... 16
9.12 Rules of Interpretation...................................... 16
-iii-
<PAGE>
INTRODUCTION
PMA CAPITAL CORPORATION (formerly Pennsylvania Manufacturers Corporation),
a Pennsylvania corporation, maintains the PMC Deferred Compensation Plan (the
"PMC Plan") and is the Plan Sponsor of the PMC Plan.
The PENNSYLVANIA MANUFACTURERS' ASSOCIATION INSURANCE COMPANY, PMA
REINSURANCE CORPORATION, PENNSYLVANIA MANUFACTURERS ASSOCIATION, CALIBER ONE
INDEMNITY COMPANY, AND CALIBER ONE MANAGEMENT CORPORATION have adopted the PMC
Plan with the consent of the Board of Directors of the Plan Sponsor.
The Employee Benefits Plan Committee of the Plan Sponsor has reserved the
right in Section 8.1 of the PMC Plan to amend the PMC Plan at any time subject
to certain inapplicable limitations.
The Employee Benefits Plan Committee now desires to amend and restate the
PMC Plan in order to change its name to the PMA CAPITAL CORPORATION EXECUTIVE
DEFERRED COMPENSATION PLAN effective December 7, 1998, to reflect the change of
Pennsylvania Manufacturers Corporation's name to PMA CAPITAL CORPORATION.
Accordingly, the Employee Benefits Committee hereby amends the PMC PLAN as
follows:
ARTICLE I. - DEFINITIONS
1.1 "Administrator" means the Committee unless some other individual or
individuals have been appointed in lieu thereof by the Plan Sponsor's Board of
Directors.
1.2 "Beneficiary" means the person, persons, trust or other entity,
designated by written revocable designation filed with the Administrator by a
Participant to receive payments in the event of the Participant's death.
1.3 "Benefit Distribution Date" means a future date selected by a
Participant, within guidelines established by the Administrator, on which the
Participant shall be entitled to a supplemental benefit pursuant to this Plan
equal to all or a designated portion of the balance of his Fixed Period Benefit
Account.
1.4 "Committee" means the Plan Sponsor's Employee Benefits Plan Committee,
as from time to time constituted.
1.5 "Compensation" means a Participant's rate of base pay or salary,
including Executive Deferral Contributions made hereunder and any pre-tax
elective deferrals to any Employer
-1-
<PAGE>
sponsored retirement savings plan or cafeteria plan, qualified pursuant to
Section 401(k) or 125 of the Code, but excluding bonuses and overtime, all other
Employer contributions to benefit plans and all other forms of remuneration or
reimbursement.
1.6 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
1.7 "Deferral Agreement" means a written agreement between a Participant
and the Employer, whereby a Participant agrees to defer a portion of his
Compensation and the Employer agrees to provide benefits pursuant to the
provisions of the Plan.
1.8 "Deferred Benefit Accounts" means the bookkeeping accounts which are
credited with a Participant's Executive Deferral and Matching Contributions and
which may take the form of one or more of the following: a Retirement Account,
an Education Account and a Fixed Period Benefit Account.
1.9 "Determination Date" shall mean March 31, June 30, September 30 and
December 31 of each calendar year and, for each Participant, his date of death,
Retirement, or other termination of employment.
1.10 "Disability" means for Plan Years prior to January 1, 1994 an illness
or injury which completely prevents a Participant from performing the
Participant's occupation. For Plan Years commencing on or after January 1,
1994, Disability means a medically determinable physical or mental impairment of
a Participant which is of such severity as to make him eligible for benefits
under the Employer's group long-term disability insurance policy. Disability
shall be determined in a uniform manner by the Administrator.
1.11 "Early Retirement Age" means for Plan Years prior to January 1, 1993
the date on which the Participant has attained age 55 and has completed at least
5 years of employment with the Employer. For Plan Years commencing on and after
January 1,1993, Early Retirement Age means a Participant's 50th birthday,
provided the Participant shall have completed at least 5 years of service (as
defined in Section 5.1 hereof) and further provided that the sum of the
Participant's age (at his last birthday) and years of service on the date of
retirement is at least 60. If the sum of a Participant's age and years of
service by the date of the Participant's 50th birthday is less than 60, the
Participant's Early Retirement Age shall be attained on the date on which the
sum of the Participant's age and years of service reaches 60.
1.12 "Education Account" means a Deferred Benefit Account established
pursuant to Section 4.1 hereof.
1.13 "Eligible Dependent" means an individual who is a child or stepchild
or who is otherwise identified as a dependent of a Participant for federal
income tax purposes who is living at any time throughout the Enrollment Period
and who is either (i) younger than the age of 14 or (ii) younger than the age of
18, but for whom a subaccount was initially established, pursuant to Section
-2-
<PAGE>
4.8 hereof, prior to said dependent attaining the age of 14. Notwithstanding the
foregoing, "age 16" shall be substituted for each reference to "age 14" in this
Section 1.13 with respect to Plan Years commencing after December 31, 1991.
1.14 "Eligible Employee" means such officers and other highly compensated
employees of the Employer who are identified and approved by the Committee.
1.15 "Employers" means the PLAN SPONSOR, PENNSYLVANIA MANUFACTURERS'
ASSOCIATION INSURANCE COMPANY, PMA REINSURANCE CORPORATION, PENNSYLVANIA
MANUFACTURERS ASSOCIATION, CALIBER ONE INDEMNITY COMPANY, AND CALIBER ONE
MANAGEMENT CORPORATION, as well as any other related employer which adopts this
Plan with the consent of the Plan Sponsor's Board of Directors. Each use of the
singular shall be deemed a reference to each of the Employers individually.
1.16 "Enrollment Period" means the 61 day period ending on each December
31st.
1.17 "Executive Deferral Contribution" means the Plan contribution
described in Section 3.1 hereof.
1.18 "Fixed Period Benefit Account" means a Deferred Benefit Account
established pursuant to Section 4.1 hereof.
1.19 "Investment Fund" or "Fund" means the investments described in
Section 4.4 hereof which shall serve as the means for measuring value increases
or decreases with respect to a Participant's Deferred Benefit Accounts, provided
that after December 31, 1992 Investment Fund or Fund means any of the mutual
funds which comprise The Vanguard Group of Investment Companies, other than any
such fund which is offered only to participants in tax-qualified retirement
plans.
1.20 "Matching Contribution" means the Plan contribution described in
Section 3.3 hereof.
1.21 "Participant" means an Eligible Employee who has met the conditions
for participation as set forth in Article II hereof.
1.22 "Plan" means the PMA CAPITAL CORPORATION (FORMERLY PMC) EXECUTIVE
DEFERRED COMPENSATION PLAN as amended and restated in this instrument and as it
may be further amended from time to time.
1.23 "Plan Sponsor" means PMA CAPITAL CORPORATION (formerly Pennsylvania
Manufacturers Corporation), a Pennsylvania corporation.
-3-
<PAGE>
1.24 "Plan Year" means the period from February 1, 1988 through December
31, 1988 and thereafter, the twelve (12) consecutive month period beginning on
each January 1 and ending on each December 31.
1.25 "Restatement Effective Date" means December 7, 1998.
1.26 "Retirement" means any severance from full-time employment by a
Participant after attaining his Retirement Age or Early Retirement Age.
1.27 "Retirement Account" means a Deferred Benefit Account established
pursuant to Section 4.1 hereof.
1.28 "Retirement Age" means that date on which a Participant attains age
65.
1.29 "Vested" means the balance in a Participant's Deferred Benefit
Accounts to which the Participant has a nonforfeitable right, as defined in
Section 5.1 hereof.
ARTICLE II. - MEMBERSHIP IN THE PLAN
2.1 Commencement of Participation. Each Eligible Employee who is an
-----------------------------
Eligible Employee at any time during the Enrollment Period for any Plan Year
shall be eligible to become a Participant in the Plan as of the first day of
such Plan Year. Notwithstanding the foregoing, each employee who first becomes
an Eligible Employee during the course of a Plan Year shall be eligible to
become a Participant with respect to said Plan Year during a thirty day period
commencing on the first day on which he is designated as an Eligible Employee.
2.2 Procedure For and Effect of Admission. Each individual who becomes
-------------------------------------
eligible to participate in this Plan shall complete such forms and provide such
data as are reasonably required by the Administrator as a condition of such
participation. By becoming a Participant, each Eligible Employee shall for all
purposes be deemed conclusively to have assented to the provisions of this Plan
and all amendments hereto.
2.3 Cessation of Participation. A Participant shall cease to be a
--------------------------
Participant the earlier of:
A. The date on which the Plan terminates, or
B. The date on which he ceases to be an Eligible Employee.
Notwithstanding the foregoing, a Participant who is absent by reason of an
authorized leave of absence shall remain a Participant for so long as such
authorized absence continues, but shall be ineligible for further contributions
to his Deferred Benefit Account, as described in Article III hereof. Moreover,
a former active Participant, including, without limitation, any individual who
is no longer
-4-
<PAGE>
an Eligible Employee, will be deemed a Participant, for all purposes with
respect to the Plan, except contributions as described in Article III hereof, as
long as such former active Participant retains a benefit pursuant to the terms
of Article VI hereof.
2.4 Recommencement of Participation. A former active Participant may
-------------------------------
recommence participation following his reemployment or upon his again becoming
an Eligible Employee during the thirty (30) day period commencing on the first
day after the Committee confirms his status as an Eligible Employee.
ARTICLE III - PLAN CONTRIBUTIONS
3.1 Executive Deferral Contribution. Subject to the provisions of Section
-------------------------------
3.2 hereof, each Eligible Employee may authorize the Employer to reduce his
Compensation by any fixed dollar amount and to have a corresponding amount
credited to his Deferred Benefit Accounts, in accordance with Section 4.2
hereof. Each Eligible Employee shall file a Deferral Agreement with the
Administrator prior to the date on which the Participant performs services with
respect to which the Compensation deferred hereunder is earned.
3.2 Rules Governing Executive Deferral Contributions
------------------------------------------------
A. Throughout any one Plan Year, a Participant may not defer less
than $1,000 (excepting Plan Years in which the Participant elects not to
defer any portion of his Compensation) or more than 25% of his
Compensation, provided that this percentage limitation shall no longer
apply to Plan Years beginning after December 31, 1993.
B. A Participant shall not elect a Benefit Distribution Date with
respect to a Fixed Period Benefit Account which occurs prior to the
beginning of the third Plan Year following the Enrollment Period in which
the Benefit Distribution Date is elected.
C. The amount of Compensation that a Participant elects to defer
shall be credited to the Participant's Deferred Benefit Accounts during
each Plan Year on or about that date on which the Participant is paid the
nondeferred portion of the Compensation which is the source of the
deferral.
D. An election to defer Compensation pursuant to this Plan is
irrevocable and shall continue until the earlier of the Employee's
termination of employment or the end of the Plan Year for which the
deferral is effective.
3.3 Matching Contribution. The Employer shall make a Matching
---------------------
Contribution for each Eligible Employee which shall equal $1.00 for each $1.00
of Executive Deferral Contribution. Notwithstanding the foregoing, no Matching
Contribution shall be made with respect to a Participant's Executive Deferral
Contribution in excess of 5% of his Compensation in effect on the
-5-
<PAGE>
December 31st immediately preceding the Plan Year for which the Matching
Contribution is being made and no Matching Contribution shall be made hereunder
to the extent that the sum of such Matching Contribution and the matching
contribution made on a Participant's behalf to the Employer's Section 401(k)
plan also would exceed 5% of the Participant's Compensation in effect on the
December 31st immediately preceding the Plan Year for which the Matching
Contribution is being made.
ARTICLE IV. - PARTICIPANTS' ACCOUNTS
4.1 Establishment of Accounts. One or more of the following Deferred
-------------------------
Benefit Accounts shall be established with respect to each Participant:
A. Retirement Account
B. Education Account
C. Fixed Period Benefit Account
All contributions on behalf of a Participant shall be deposited to the
appropriate Deferred Benefit Accounts, in accordance with Section 4.2 hereof.
4.2 Executive Benefit Allocation. Each Eligible Employee shall submit to
----------------------------
the Administrator before the close of the Enrollment Period for each Plan Year,
a written statement specifying the Eligible Employee's allocation of his
anticipated contributions with respect to his Deferred Benefit Accounts.
4.3 Irrevocable Allocation. Except as provided in Section 6.4 hereof,
----------------------
once an Eligible Employee has allocated anticipated contributions under the Plan
and the Plan Year has begun, he may not modify, alter, amend or revoke said
allocation. Notwithstanding the foregoing, a Participant may, prior to the
commencement of a new Plan Year, elect to modify, alter, amend or revoke his
future allocations to his Deferred Benefit Accounts, effective the first day of
such Plan Year.
4.4 Pre-1993 Directed Adjustment of Deferred Benefit Accounts. For Plan
---------------------------------------------------------
Years commencing prior to January 1, 1993 and except as provided herein, a
Participant may direct that his Deferred Benefit Accounts be valued, in
accordance with Section 4.7 hereof, as if the account were invested in one or
both of the following Investment Funds:
INVESTMENT FUND TYPE OF INVESTMENT
--------------- ------------------
Guaranteed Fund An income fund which offers a
guaranteed rate of return on an
annual basis.
-6-
<PAGE>
Equity Fund A common stock fund with an objective
of long-term growth of capital and
income through investment in a
portfolio of "blue chip" stocks.
A Participant shall submit to the Administrator in writing his investment
selection. The Participant may select one or both of the Investment Funds in
multiples of 25%. A Participant may make a separate selection with respect to
each of his Deferred Benefit Accounts.
4.5 Post-1992 Directed Adjustment of Deferred Benefit Accounts. For Plan
----------------------------------------------------------
Years commencing on and after January 1, 1993 and except as provided herein, a
Participant may direct that his Deferred Benefit Accounts be valued, in
accordance with Section 4.7 hereof, as if the balance in the account were
invested in one or more of the Investment Funds. The Participant may select to
invest in one or more Investment Funds, but not more than four (4) (or such
greater number as the Administrator may determine from time to time) in
multiples of 25% (or such smaller percentage as the Administrator may determine
from time to time). A Participant may make a separate selection with respect to
each of his Deferred Benefit Accounts, but overall the Participant may not have
investments in more than four (4) (or such greater number as the Administrator
may determine from time to time) Investment Funds.
4.6 Administration of Investments. The investment gain or loss with
-----------------------------
respect to contributions made to the Deferred Benefit Accounts on behalf of a
Participation shall continue to be determined in the manner selected by the
Participant, pursuant to Section 4.4 or 4.5 hereof (whichever is applicable),
until a new designation is filed with the Administrator. If any Participant
fails to file a designation, he shall be deemed to have elected to continue to
follow the investment designation, if any, in effect for the immediately
preceding Plan Year. A designation filed by a Participant changing his
Investment Funds shall apply to future contributions and/or amounts already
accumulated in his Deferred Benefit Accounts. A Participant may change his
investment selection two (2) times throughout the course of each Plan Year
beginning before January 1, 1994 and may change his investment selection on a
quarterly basis during each Plan Year commencing on or after January 1, 1994.
4.7 Valuation of Deferred Benefit Accounts. The Deferred Benefit Accounts
--------------------------------------
of each Participant shall be valued daily based upon the performance of the
Investment Fund or Funds selected by the Participant. Such valuation shall
reflect the net asset value expressed per share of each designated Investment
Fund. The fair market value of an Investment Fund shall be determined by the
Administrator. Each Deferred Benefit Account shall be valued separately. A
valuation summary shall be prepared on each Determination Date.
4.8 Suballocation Within the Deferred Benefit Accounts.
--------------------------------------------------
A. In the event a Participant shall allocate a portion of his
anticipated contributions to an Education Account, the Participant may
further allocate amongst subaccounts on behalf of any Eligible Dependent.
In the absence of such suballocation, all contributions to the
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<PAGE>
Participant's Education Account shall be equally allocated to the
Participant's Eligible Dependents.
B. In the event a Participant shall allocate a portion of his
anticipated contributions to a Fixed Period Benefit Account, the
Participant may further allocate amongst subaccounts differentiated by
Benefit Distribution Dates.
C. Notwithstanding the foregoing, at any point in time, a Participant
may not have more than a total of five (5) Accounts and subaccounts.
D. A Participant's election pursuant to Section 4.4 or 4.5 hereof,
whichever is applicable, shall apply uniformly to each subaccount
established pursuant to this Section 4.8.
4.9 Investment Obligation of the Employer. Benefits are payable as they
-------------------------------------
become due irrespective of any actual investments the Employer may make to meet
its obligations. Neither the Employer, nor any trustee (in the event the
Employer elects to use a grantor trust to accumulate funds) shall be obligated
to purchase or maintain any asset, and any reference to investments or
Investment Funds is solely for the purpose of computing the value of benefits.
To the extent a Participant or any person acquires a right to receive payments
from the Employer under this Plan, such right shall be no greater than the right
of any unsecured creditor of the Employer. Neither this Plan nor any action
taken pursuant to the terms of this Plan shall be considered to create a
fiduciary relationship between the Employer and the Participants or any other
persons or to establish a trust in which the assets are beyond the claims of any
unsecured creditor of the Employer.
ARTICLE V. - VESTING
5.1 Vesting Schedule. A Participant shall have a fully Vested interest
----------------
with respect to the Executive Deferral Contributions to his Deferred Benefit
Accounts, in all instances. A Participant's Vested interest in the Matching
Contributions to his Deferred Benefit Accounts shall be determined by the
occurrence of the following events:
A. 100% Vested upon death or Disability;
B. 100% Vested upon the attainment of his Retirement Age or Early
Retirement Age;
C. 100% Vested upon Plan termination pursuant to Section 8.3 hereof;
or
D. Except as otherwise stated above, the Participant's Vested
interest in the Matching Contributions made to his Deferred Benefit
Accounts shall be 100% after the completion of one year of service. As
used herein, year of service means a consecutive 12-
-8-
<PAGE>
month period for which the Participant has been employed as a full-time
Employee of the Employer.
5.2 Forfeitures. The Vested portion of the Matching Contributions
-----------
allocated to the Participant's Deferred Benefit Accounts shall be determined in
accordance with Section 5.1 hereof. The non-Vested portion shall be forfeited
and shall be used to reduce future Matching Contributions to the Plan.
ARTICLE VI. - BENEFITS
6.1 Retirement Account.
------------------
A. If a Participant remains continuously employed by the Employer
until the earlier of his termination on or after his Retirement Age, Early
Retirement Age, death, or Disability, the Employer shall pay to the
Participant or to the Participant's Beneficiary, if applicable, a
supplemental benefit equal to the balance in the Participant's Retirement
Account, determined pursuant to Section 4.7 hereof.
B. If a Participant should terminate employment for any reason other
than one of those described in Paragraph A., above, the Employer shall pay
to the Participant or to the Participant's Beneficiary, if applicable, a
supplemental benefit equal to the Vested balance in the Participant's
Retirement Account, determined pursuant to Section 4.7 hereof.
C. In the event of a Participant's termination of employment for any
reason, including, but not limited to, Retirement or death, the benefit to
be paid to the Participant or Beneficiary, if applicable, shall take the
form of a lump sum payment, installment payments or any combination of
those two forms, as the Participant or Beneficiary, if applicable, may
elect, provided that all payments hereunder must be completed by no later
than the third January 1st following the end of the calendar year in which
the Participant's termination of employment occurs (the "Maximum Deferral
Date"). If a Participant dies prior to receiving all of the payments to
which the Participant is entitled pursuant to the payment schedule he
elected, the remaining payments shall be made to the Participant's
Beneficiary.
D. In addition to electing the form of payment, the Participant shall
also elect the date on which the payments shall commence, provided that the
payment of the balance, if any, in a Fixed Period Benefit Account may
continue to commence on its scheduled Benefit Distribution Date.
Notwithstanding the foregoing, in no event shall any payment of the
Participant's supplemental benefit commence on any date which follows the
Maximum Deferral Date.
E. Notwithstanding any provision hereof to the contrary, if at the
time benefits are to be paid, the Participant's Retirement Account has a
Vested balance of less than $10,000,
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<PAGE>
the Administrator has the option of directing that the Participant's
benefit hereunder shall be paid to the Participant as a lump sum on the
first day of the first month following the Participant's date of
termination.
6.2 Education Account.
-----------------
A. If a Participant remains continuously employed by the Employer
until January 1 of the calendar year in which an Eligible Dependent of the
Participant attains a Determination Age, the Employer shall pay to the
Participant a supplemental benefit, as soon as administratively possible,
determined as follows:
ELIGIBLE DEPENDENT'S PERCENTAGE OF ELIGIBLE
DETERMINATION AGE DEPENDENT'S SUBACCOUNT
----------------- ----------------------
18 25%
19 33%
20 50%
21 100%
B. If a Participant should terminate his employment for any reason
while having a balance in his Education Account, the Vested portion of the
balance either shall be distributed in accordance with any pre-existing
distribution schedule or shall be transferred to an existing or new
Retirement Account and distributed to the Participant or Beneficiary, if
applicable, in accordance with Section 6.1 hereof, as the Participant may
elect, but regardless of which option the Participant elects, all
distributions must be completed by the Maximum Deferral Date.
6.3 Fixed Period Benefit Account.
----------------------------
A. If a Participant remains continuously employed by the Employer
until a designated Benefit Distribution Date, the Employer shall pay to the
Participant a supplemental benefit equal to the Vested balance of the
Participant's subaccount which has been earmarked with respect to said
Benefit Distribution Date.
B. If a Participant should terminate his employment for any reason
while having a Vested balance in his Fixed Period Benefit Account, the
Vested balance either shall be distributed in accordance with any pre-
existing distribution schedule or shall be transferred to an existing or
new Retirement Account and distributed to the Participant or Beneficiary,
if applicable, in accordance with Section 6.1 hereof, as the Participant
may elect, but regardless of which option the Participant elects, all
distributions must be completed by the Maximum Deferral Date.
-10-
<PAGE>
6.4 Restructuring of Deferred Benefit Accounts. In accordance with
------------------------------------------
whatever rules and regulations may be adopted by the Administrator and subject
to the restrictions set forth hereafter, a Participant may elect to restructure
the Deferred Benefit Accounts to which Executive Deferral and Matching
Contributions have been credited. A Participant restructures any of his
Deferred Benefit Accounts by transferring all or any portion of the balance in
one or more of the Deferred Benefit Accounts to one or more of the other
Deferred Benefit Accounts. The following restrictions shall apply to any such
transfers:
A. Each election to restructure must be made during an Enrollment
Period, but no later than during the Enrollment Period for the Plan Year in
which a Benefit Distribution Date, Determination Date or any other payment
date is scheduled to occur, provided that a restructuring election for the
Plan Year beginning on January 1, 1994 may be made at any time during the
annual Enrollment Period.
B. In the event a restructuring will result in a further deferral of
the Vested balance in one or more of the Participant's Deferred Benefit
Accounts, the initial payment date for such further deferral may be no
earlier than the second January 1st following the January 1st of the Plan
Year in which the distribution would otherwise have been made.
C. In the event a restructuring will result in an acceleration of the
distribution of the Vested balance in one or more Deferred Benefit
Accounts, the initial payment date for such accelerated deferral must occur
no earlier than the third January 1st following the Enrollment Period in
which the restructuring is elected.
6.5 Tax Withholding. To the extent required by the law in effect at the
---------------
time benefits are distributed pursuant to this Article VI, the Employer or its
agents shall withhold any taxes required by the federal or any state or local
government from payments made hereunder.
ARTICLE VII - ADMINISTRATION
7.1 Appointment of Administrator. The Administrator shall be the person
----------------------------
designated pursuant to Section 1.1 hereof. The Administrator may be removed by
the Plan Sponsor's Board of Directors at any time and he may resign at any time
by submitting his resignation in writing to the Plan Sponsor. Moreover, if the
Administrator is an employee of the Employer, such individual shall be deemed to
have resigned on the date his employment is terminated should he not have
resigned or been removed prior to that date. A new Administrator shall be
appointed as soon as possible in the event that the Administrator is removed or
resigns from his position. Any person so appointed shall signify his acceptance
by filing a written acceptance with the Plan Sponsor.
7.2 Administrator's Responsibilities. The Administrator is responsible
--------------------------------
for the day to day operation and administration of the Plan. He may appoint
other persons or entitles to perform any of his discretionary or ministerial
functions. Such appointment shall be made and accepted by
-11-
<PAGE>
the appointee in writing. The Administrator and any such appointee may employ
advisors and other persons necessary or convenient to help him carry out his
duties including, but not limited to, his discretionary duties. The
Administrator shall have the right to remove any such appointee from his
position. Any person, group of persons, or entity may serve in more than one
fiduciary capacity.
7.3 Records and Accounts. The Administrator shall maintain or shall cause
--------------------
to be maintained accurate and detailed records and accounts of Participants and
of their rights under the Plan and of all investments, receipts, disbursements
and other transactions. Such accounts, books and records relating thereto shall
be open at all reasonable times to inspection and audit by the Employer and by
persons designated thereby.
7.4 Administrator's Specific Powers and Duties. In addition to other
------------------------------------------
powers, rights and duties set forth elsewhere in the Plan, the Administrator
shall have the following powers and duties:
A. To appoint, retain, and terminate such persons as it deems
necessary or advisable to assist in the administration of the Plan or to
render advice with respect to the responsibilities of the Administrator
under the Plan, including accountants, actuaries, attorneys and physicians;
B. To make use of the services of the employees of the Employer in
administrative matters;
C. To obtain and act on the basis of all tables, valuations,
certificates, opinions, and reports furnished by the persons described in
Paragraph A. or B., above. Any determination of Actuarially Equivalent
benefits by the actuary selected by the Administrator shall be conclusive
and binding on the Employer, the Administrator and all Participants;
D. To determine all benefits and resolve all questions pertaining to
the administration and interpretation of the Plan provisions, either by
rules of general applicability or by particular decisions. To the maximum
extent permitted by law, all interpretations of the Plan and other
decisions of the Administrator shall be conclusive and binding on all
parties;
E. To adopt such forms, rules and regulations as it shall deem
necessary or appropriate for the administration of the Plan and the conduct
of its affairs, provided that any such forms, rules and regulations shall
not be inconsistent with the provisions of the Plan;
F. To remedy any inequity from incorrect information received or
communicated or from administrative error;
G. To commence or defend any litigation arising from the operation of
the Plan in any legal or administrative proceeding;
-12-
<PAGE>
H. To direct the Employer to pay benefits under the Plan, and to give
such other directions and instructions as may be necessary for the proper
administration of the Plan; and
I. To be responsible for the preparation, filing and disclosure on
behalf of the Plan of such documents and reports as are required by any
applicable federal or state law.
7.5 Employer's Responsibility to Administrator. The Employer shall
------------------------------------------
furnish the Administrator such data and information as he may require. The
records of the Employer shall be determinative of each Participant's period of
employment, termination of employment and the reason therefor, leave of absence,
reemployment, years of service, personal data, and compensation reductions.
Participants and their Beneficiaries shall furnish to the Administrator such
evidence, data, or information, and execute such documents as the Administrator
requests.
7.6 Expenses. All expenses incident to the operation and administration
--------
of the Plan reasonably incurred, including, without limitation by way of
specification, the fees and expenses of attorneys and advisors, and for such
other professional, technical and clerical assistance as may be required, shall
be paid by each Employer.
7.7 Liability. Neither the Administrator nor the Employer shall be liable
---------
to any person for any action taken or omitted in connection with the
administration of this Plan unless attributable to his own fraud or willful
misconduct; nor shall the Employer be liable to any person for such action
unless attributable to fraud or willful misconduct on the part of the director,
officer or employee of the Employer.
7.8 Indemnification. To the extent coverage is not provided by any
---------------
applicable insurance policy, the Plan Sponsor hereby agrees to indemnify the
Administrator and each of its members, and to hold them harmless against any and
all liability for their acts, omissions and conduct and for the acts, omissions
and conduct of their duly appointed agents made in good faith pursuant to the
provisions of the Plan, including, without limitation, any out-of-pocket
expenses reasonably incurred in the defense of any claim relating thereto;
provided, however, that no person or entity so indemnified shall voluntarily
assume or admit any liability, nor, except at its or his own cost, shall any of
the foregoing make any payment, assume any obligations or incur any expense
without the prior written consent of the Plan Sponsor. The Plan Sponsor may
purchase, at its expense, liability insurance to protect each Employer and the
persons indemnified hereunder from liability incurred in the good faith
administration of this Plan.
7.9 Procedure to Claim Benefits. Each Participant or Beneficiary must
---------------------------
claim any benefit to which he is entitled under this Plan by a written
notification to the Administrator. If a claim is denied, it must be denied
within a reasonable period of time, and be contained in a written notice stating
the following:
A. The specific reason for the denial.
-13-
<PAGE>
B. Specific reference to the Plan provision on which the denial is
based.
C. Description of additional information necessary for the claimant
to present his claim, if any, and an explanation of why such material is
necessary.
D. An explanation of the Plan's claim review procedure.
The claimant will have 60 days to request a review of the denial by the
Administrator, who will provide a full and fair review. The request for review
must be written and submitted to the same person who handles initial claims.
The claimant may review pertinent documents, and he may submit issues and
comments in writing.
The decision by the Administrator with respect to the review must be given
within 60 days after receipt of the request, unless special circumstances
require an extension (such as the need for a hearing). In no event shall the
decision be delayed beyond 120 days after receipt of the request for review.
The decision shall be written in a manner calculated to be understood by the
claimant, and it shall include specific reasons and refer to specific Plan
provisions as to its effect.
ARTICLE VIII - AMENDMENT AND TERMINATION
8.1 Plan Amendment. The Plan may be amended in whole or in part by the
--------------
Committee at any time, provided, however, that no such action by the Committee
shall reduce the amount of a Participant's benefit accrued as of the time
thereof. Notice of any such amendment shall be given in writing to each
Participant and each Beneficiary of a deceased Participant.
8.2 Termination of the Plan. The Committee shall have the right to
-----------------------
terminate the Plan and/or the Deferral Agreement pertaining to a Participant at
any time prior to the commencement of benefits, but only in the event that the
Committee, in its sole discretion, shall determine that the economics of the
Plan have been adversely and materially affected by a change in the tax laws, by
any other government action or by any other event beyond the control of the
Participant and the Committee or that the termination of the Plan is otherwise
in the best interest of each Employer. In the event of any such termination,
the Employer shall pay a benefit to the Participant or to the Beneficiary of any
deceased Participant, in lieu of other benefits hereunder, equal to the full
value of Participant's Deferred Benefit Accounts determined pursuant to Section
4.7 hereof. Moreover, in the event of any such termination, earnings shall
continue to be credited in accordance with Section 4.7 hereof to the balance in
the Participant's Deferred Benefit Accounts as of the Plan termination date.
8.3 Amendment or Termination Procedure. Each amendment shall be set forth
----------------------------------
in a written instrument and shall be authorized and approved by a resolution of
the Committee. Similarly, the termination of the Plan shall be authorized and
approved by a resolution of the Committee.
-14-
<PAGE>
ARTICLE IX. - MISCELLANEOUS
9.1 Funding. Benefits payable under this Plan to a Participant or
-------
Beneficiary, if applicable, shall be paid directly by each Employer from a so-
called "rabbi trust", to the extent that such benefits are not paid from the
general assets of the Employer. The rabbi trust is an irrevocable grantor
trust, the assets of which are subject to the claims of the general creditors of
each Employer in the event of its insolvency. Except as to any amounts paid or
payable to the rabbi trust, the Employer shall not be obligated to set aside,
earmark or escrow any funds or other assets to satisfy its obligations under
this Plan, and the Participant and his Beneficiary shall not have any property
interest in any specific assets of the Employer other than an unsecured right to
receive payments from the Employer as provided herein. In the event that the
amounts accumulated in the rabbi trust are not sufficient to pay the benefits
payable under this Plan, such benefits shall be paid directly from the general
assets of each Employer.
9.2 No Assignment Permitted. No Participant, Beneficiary or heir shall
-----------------------
have any right to commute, sell, transfer, assign, alienate or otherwise convey
the right to receive any payment under the terms of this Plan. Any such
attempted assignment or alienation shall be considered null and void.
9.3 Supplemental Benefits. The benefits provided for the Participants
---------------------
under this Plan are in addition to benefits provided by any other plan or
program of the Employer and, except as otherwise expressly provided for herein,
the benefits of this Plan shall supplement and shall not supersede any plan or
agreement between the Employer and any Participant or any provisions contained
therein.
9.4 Governing Law. The Plan shall be governed and construed under the
-------------
internal laws of the Commonwealth of Pennsylvania, except to the extent
preempted by Federal law.
9.5 Jurisdiction. The courts of the Commonwealth of Pennsylvania shall
------------
have exclusive jurisdiction in any and all actions arising under this Plan.
9.6 Payments to Minors and Incompetents. If a Participant or Beneficiary
-----------------------------------
entitled to receive any benefits hereunder is a minor or is deemed by the
Administrator or is adjudged to be legally incapable of giving a valid receipt
and discharge for such benefits, they will be paid to the duly appointed
guardian of such minor or incompetent or to such other legally appointed person
as the Administrator may designate. Such payment shall, to the extent made, be
deemed a complete discharge of any liability for such payment under the Plan.
9.7 Binding Terms. The terms of this Plan shall be binding upon and inure
-------------
to the benefit of the Participants, Beneficiaries and Employer, their respective
heirs, executors, administrators, successors and assigns.
-15-
<PAGE>
9.8 Status of Employment. Nothing herein contained shall be deemed: (1)
--------------------
to give any Participant the right to be retained in the employ of the Employer
or a subsidiary or affiliate; (2) to affect the right of the Employer to
discipline or discharge any Participant at any time; (3) to give the Employer or
a subsidiary or affiliate the right to require any Participant to remain in its
employ; or (4) to affect any Participant's right to terminate his employment at
any time.
9.9 Severability. In case any provision of this Plan shall be held
------------
illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining provisions of the Plan, and the Plan shall be construed and
enforced as if such illegal and invalid provisions had never been set forth.
9.1 Spendthrift Provision. The interest of any Participant or any
---------------------
Beneficiary receiving payments hereunder shall not be subject to anticipation or
assignment, nor to voluntary or involuntary alienation until distribution is
actually made.
9.1 Headings. All headings preceding the text of the several Articles and
--------
Sections hereof are inserted solely for convenience of reference and shall not
constitute a part of this Plan, nor affect its meaning, construction or effect.
9.1 Rules of Interpretation. Where the context admits, words in the
-----------------------
masculine gender shall include the feminine and neuter genders, and the singular
shall mean the plural.
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<PAGE>
EXHIBIT 10.15
AMENDMENT NO. 1 AND RESTATEMENT
AMENDMENT NO. 1 AND RESTATEMENT, dated as of September 29, 1997 (this
"Amendment and Restatement"), to the First Amended and Restated Letter of Credit
-------------------------
Agreement, dated as of March 14, 1997 (the "Letter of Credit Agreement"), by and
--------------------------
among PENNSYLVANIA MANUFACTURERS CORPORATION, a Pennsylvania corporation (the
"Applicant") the Banks party thereto, CORESTATES BANK, N.A., as Co-Agent and THE
---------
BANK OF NEW YORK, in its capacity as Agent and as Issuing Bank.
RECITALS
--------
A. Capitalized terms used herein which are not otherwise defined
herein shall have the respective meanings ascribed thereto in the Letter of
Credit Agreement.
B. Prior to giving effect to this Amendment and Restatement, the
Termination Date is October 27, 1997.
C. The Applicant has requested that the Agent and the Banks agree to
amend and restate the Letter of Credit Agreement upon the terms and conditions
contained herein, and the Agent and the each of the Banks (other than Mellon
Bank, N.A.) is willing so to agree (such Banks being referred to herein as the
"Consenting Banks"). In addition, the Consenting Banks desire to assume a
----------------
portion of the Commitment of Mellon Bank, N.A. and each of the Consenting Banks
to reallocate its rights and obligations under the Credit Documents upon the
terms, and subject to the conditions, herein contained.
Accordingly, in consideration of the Recitals and the covenants and
conditions hereinafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, each of the
Applicant, the Agent and each of the Consenting Banks hereby agrees that the
Letter of Credit Agreement is hereby amended in accordance with the following
and, immediately thereafter, shall be deemed to be restated in its entirety:
1. The Applicant hereby represents and warrants to the Agent, the Co-Agent,
the Issuing Bank and each Bank that no Default or Event of Default exists and is
continuing.
2. Prior to giving effect to this Amendment and Restatement, the Commitment
Percentage of each Bank is as set forth in Exhibit A to the Letter of Credit
Agreement and there have been no drawings under Letters of Credit which have not
been reimbursed.
<PAGE>
3. By signing below, (i) each Consenting Bank consents to this Amendment
and Restatement and (ii) each Consenting Bank agrees to assume a portion of the
Commitment of Mellon Bank, N.A. to the extent and at the time set forth in
paragraph 5 hereof.
4. Subject to receipt by the Agent during the Extension Consent Period of a
counterpart of this Amendment and Restatement signed by the Applicant, each
Consenting Bank and Mellon Bank, N.A., and provided that the Applicant shall
have fully reimbursed the Issuing Bank and/or the Banks for all drafts drawn on
any Letter of Credit on or before the first day of such Extension Consent Period
(the "Restatement Effective Date"), then, effective on the Restatement Effective
--------------------------
Date:
(a) the Termination Date shall be the date which is 364 days after the
Restatement Effective Date, or such earlier date on which the Commitment is
terminated, or if the Commitment is extended with the consent of the Banks
pursuant to Section 2.6, such later date; and
(b) each Consenting Bank hereby assumes from Mellon Bank, N.A. such
rights, and Mellon Bank, N.A. hereby assigns to each Consenting Bank such
obligations, as shall cause the Commitment Percentage of each Consenting Bank to
be as set forth in Exhibit A to the Letter of Credit Agreement in the form
attached hereto, which form shall be substituted for Exhibit A annexed to the
Letter of Credit Agreement.
5. From and after the Restatement Effective Date, the Agent shall make all
payments in respect of the interests assigned hereby to each Consenting Bank in
proportion to their respective Commitment Percentages as set forth on such
revised Exhibit A.
6. Mellon Bank, N.A. hereby represents and warrants to each Consenting
Bank, which representations and warranties shall survive the consummation of the
assignment provided for herein, that on and as of the date hereof and on the
Restatement Effective Date, it is and shall be the legal and beneficial owner of
the interests being assigned by it hereunder.
7. On the date hereof the Applicant hereby (i) reaffirms and admits the
validity and enforceability of the Credit Documents and all of its obligations
thereunder, (ii) agrees and admits that it has no defenses to or offsets against
any such obligation, (ii) represents and warrants that no Event of Default, or
event or condition which, with the giving of notice, the lapse of time, or any
other condition, would, unless cured or waived, become an Event of Default, has
occurred and is continuing, and that each of the representations and warranties
made by it in the Credit Documents is true and correct with the same effect as
though such representation and warranty had been made on such date, and (iv)
certifies that no amendment, supplement, or modification to the certificate of
incorporation or by-laws of the Applicant has been made since March 14, 1997.
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<PAGE>
8. In all other respects, the Credit Documents shall remain in full force
and effect, and no amendment in respect of any term or condition of any Credit
Document contained herein shall be deemed to be an amendment in respect of any
other term or condition contained in any Credit Document.
9. This Amendment and Restatement may be executed in any number of
counterparts all of which, taken together, shall constitute one agreement. In
making proof of this Amendment and Restatement, it shall only be necessary to
produce the counterpart executed and delivered by the party to be charged.
10. This Amendment and Restatement embodies the entire agreement and
understanding among the parties hereto with respect to the subject matter hereof
and supersedes all other prior arrangements and understandings among the parties
hereto with respect to the subject matter hereof.
11. This Amendment and Restatement is being delivered in and is intended to
be performed in the State of New York and shall be construed and enforceable in
accordance with, and be governed by, the internal laws of the State of New York
without regard to principles of conflict of laws.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment No.
1 and Restatement to be executed by its duly authorized officer as of the date
and year first written above.
PENNSYLVANIA MANUFACTURERS CORPORATION
By: /s/Edward Hochberg
________________________________
Name: Edward Hochberg
Title:Vice President-Finance
THE BANK OF NEW YORK,
Individually and as Agent
and Issuing Bank
By: /s/Lizanne T. Eberle
________________________________
Name: Lizanne T. Eberle
Title:Vice President
CORESTATES BANK, N.A.
Individually and as Co-Agent
By: /s/ H.P. Tamimie
________________________________
Name: H.P. Tamimie
Title: Vice President
MELLON BANK, N.A.
By: /s/ Joanna Patterson
________________________________
Name: Joanna Patterson
Title: Officer
-4-
<PAGE>
FLEET NATIONAL BANK
By: /s/ Michael M. Sinisgalli
________________________________
Name: Michael M. Sinisgalli
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Kirk Seagers
________________________________
Name: Kirk Seagers
Title: Vice President
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: /s/ Gail M. Golightly
________________________________
Name: Gail M. Golightly
Title: Senior Vice President
-5-
<PAGE>
EXHIBIT 10.16
AMENDMENT NO.2 TO LETTER OF CREDIT AGREEMENT
--------------------------------------------
AMENDMENT NO. 2 (this "Amendment"), dated as of September 28, 1998, under
---------
the First Amended and Restated Letter of Credit Agreement, dated as of March 14,
1997, among 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 Amendment No. 1, dated September 29, 1997 (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, 0.325% 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>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CAPITALIZATION APPLICABLE FEE PERCENTAGE FOR COMMITMENT FEE
RATIO UNSECURED LETTERS OF CREDIT PERCENTAGE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
less than 0.20:1.00 0.350% 0.125%
- -----------------------------------------------------------------------------------------------
greater than or equal to 0.20:1.00 and
less than 0.25:1.00 0.450% 0.150%
- -----------------------------------------------------------------------------------------------
greater than or equal to 0.25:1.00 and
less than 0.30:1.00 0.550% 0.200%
- -----------------------------------------------------------------------------------------------
greater than or equal to 0.30:1.00 0.650% 0.225%
- -----------------------------------------------------------------------------------------------
</TABLE>
From the Amendment Effective Date (as defined in Amendment No. 2 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, 1998. 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, 1998) 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 0.650% and
0.225%, 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. Section 2.16 of the Agreement is amended by substituting the phrase
"Applicable Fee Percentage" for "0.1875%" in the third line thereof.
3. 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.
4. Paragraphs 1-3 of this Amendment shall not be effective until the
prior or simultaneous fulfillment of the following conditions: (the "Amendment
---------
Effective Date"):
- --------------
-2-
<PAGE>
(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
copy of the resolutions of its board of directors authorizing this
Amendment, in form and substance satisfactory to the Agent, (ii)
certifying that its certificate of incorporation and by-laws have not
been amended since March 14, 1997, or, if so, 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 Duane, Morris & Hecksher, 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.
5. 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.
6. In all other respects, the Agreement and the other Credit Documents
shall remain in full force and effect.
7. 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.
-3-
<PAGE>
8. 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]
-4-
<PAGE>
AS EVIDENCE of the agreement by the parties hereto to the terms and
conditions herein contained, each such party has caused the Amendment No. 2 to
the Letter of Credit Agreement to be executed on its behalf.
PENNSYLVANIA MANUFACTURERS
CORPORATION
By:/s/Edward Hochberg
_________________________________
Name:Edward Hochberg
_______________________________
Title:Vice President
______________________________
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
AMENDMENT NO. 2 TO LETTER OF CREDIT AGREEMENT
THE BANK OF NEW YORK, Individually
and as Agent and as Issuing Bank
By:/s/Lizanne T. Eberle
__________________________________
Name:Lizanne T. Eberle
________________________________
Title:Vice President
_______________________________
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
AMENDMENT NO. 2 TO LETTER OF CREDIT AGREEMENT
FIRST UNION NATIONAL BANK,
Individually and as Co-Agent
By:/s/Thomas L. Stitchberg
__________________________________
Name:Thomas L. Stitchberg
________________________________
Title:Senior Vice President
_______________________________
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
AMENDMENT NO. 2 TO LETTER OF CREDIT AGREEMENT
FLEET NATIONAL BANK
By:/s/William A. Bagley
__________________________________
Name:William A. Bagley
________________________________
Title:Senior Vice President
_______________________________
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
AMENDMENT NO. 2 TO LETTER OF CREDIT AGREEMENT
PNC BANK, NATIONAL ASSOCIATION
By:/s/Kirk Seagers
__________________________________
Name:Kirk Seagers
________________________________
Title:Vice President
_______________________________
<PAGE>
EXHIBIT 10.17
AMENDMENT NO. 3 TO LETTER OF CREDIT AGREEMENT
---------------------------------------------
AMENDMENT NO. 3 (this "Amendment"), dated as of October 2, 1998, under
---------
the First Amended and Restated Letter of Credit Agreement, dated as of March 14,
1997, among 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 Amendment No. 1, dated September 29, 1997 and Amendment No. 2, dated
September 28, 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. Pursuant to Consent No. 1, dated as of September 24, 1998, to the
Agreement, Required Banks consented to the PMA Cayman Sale (as defined below).
C. The Applicant has requested that the Agreement be amended to
permit it to issue the Capital Securities referred to below and the Banks
signing below are willing to approve such request 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. Section 1.1 of the Agreement is amended by adding the following
definitions in their appropriate alphabetical order:
"Capital Securities" shall mean preferred securities in an aggregate
------------------
face amount of up to $150,000,000 (i) to be issued by a Delaware business
trust to be formed by the Applicant and (ii) guaranteed by the Applicant,
the proceeds from the original issuance of which shall be used to purchase
the Applicant's subordinated debentures issued under a subordinated
debenture indenture.
"Capital Securities Program Documents" shall mean, collectively,
------------------------------------
all documents executed and delivered in connection
<PAGE>
with the issuance of the Capital Securities and the subordinated
debentures referred to in the definition of Capital Securities.
"PMA Cayman Sale" shall mean the sale by Mid-Atlantic States
---------------
Investment Company of all of its capital stock in PMA Cayman.
"Subordinated Debentures" shall have the meaning set forth in
-----------------------
Section 7.2(x).
"Subordinated Guaranty" shall have the meaning set forth in
---------------------
Section 7.2(x).
2. The definition of "Material Subsidiary" contained in Section 1.1 of
the Agreement is amended by adding "provided, however, that on and after the
consummation of the PMA Cayman Sale, PMA Cayman shall cease to be a Material
Subsidiary" prior to the "." at the end of such definition.
3. The proviso contained in the definition of "Contingent Obligation" in
Section 1.1 of the Agreement is amended to read as follows:
provided, however, that, with respect to the Applicant and its
-------- -------
Subsidiaries, the term Contingent Obligation shall not include (x) the
Subordinated Guaranty, (y) endorsements for collection or deposit in
the ordinary course of business or (z) obligations entered into by an
Insurance Subsidiary in the ordinary course of its business under
insurance policies or contracts issued by it or to which it is a
party, including reinsurance agreements (and security posted by any
such Insurance Subsidiary in the ordinary course of its business to
secure obligations thereunder).
4. The definition of "Consolidated Net Worth" contained in Section 1.1
of the Agreement is amended in its entirety to read as follows:
"Consolidated Net Worth" shall mean, at any time, the net worth
----------------------
of the Applicant and its Subsidiaries at such time, determined on a
consolidated basis in accordance with Generally Accepted Accounting
Principles plus the redemption value or liquidation preference (or, if
----
less, the original issuance price) of the Capital Securities but (i)
excluding any preferred stock or other class of equity
-2-
<PAGE>
securities (other than the Capital Securities) that, by its stated
terms (or by the terms of any class of equity securities issuable upon
conversion thereof or in exchange therefor), or upon the occurrence of
any event, matures or is mandatorily redeemable, or is redeemable at
the option of the holders thereof, in whole or in part, and (ii)
without regard to the requirements of Statement of Financial
Accounting Standards No. 115 issued by the Financial Accounting
Standards Board.
5. Clauses (i) and (ii) of the definition of "Indebtedness" contained in
Section 1.1 of the Agreement are amended to read as follows:
(i) all indebtedness of such Person for borrowed money or in respect of
loans or advances (other than indebtedness in respect of the Subordinated
Debentures), (ii) all obligations of such Person evidenced by notes, bonds,
debentures (other than the Subordinated Debentures) or similar instruments,
6. Section 7.2 of the Agreement is hereby amended by deleting the word
"and" at the end of section 7.2(viii), by substituting "; and" for the period at
the end of 7.2(ix) and adding the following clause at the end thereof:
(x) the Applicant may issue subordinated debentures (the "Subordinated
------------
Debentures") to the trust issuing the Capital Securities in an aggregate
----------
principal amount not to exceed $150,000,000 and, without duplication, may
guaranty the payment of the Capital Securities on a subordinated basis (the
"Subordinated Guaranty"), in each case in connection with the issuance of
---------------------
the Capital Securities, provided that:
(A) no Default or Event of Default would exist before and after
giving effect thereto, the representations and warranties set forth in
Section 4 and in the other Credit Documents shall be true and correct
(except to the extent that any such representation and warranty is
expressly stated to have been made as of a specific date in which case such
representation and warranty shall be true and correct as of such date) and
the Agent shall have received a certificate of a financial officer of the
Applicant, in form and substance satisfactory to the Agent, to the
foregoing effects;
(B) the terms of the Capital Securities, Subordinated Debentures
and the Subordinated Guaranty shall be in all material respects
substantially as described in Appendix A to Amendment No. 3 to this
-3-
<PAGE>
Agreement or no less favorable to the Banks than as set forth in such
Appendix A and in any event, shall contain the following features: (i)
neither the Capital Securities nor the Subordinated Debentures shall by
their terms mature or become mandatorily redeemable, or be redeemable or
subject to any mandatory prepayment or repurchase requirement at the option
of the holder, at any time on or prior to ten years after issuance of such
securities, (ii) the Applicant shall have the right (so long as no event of
default exists with respect to such securities) to defer the payment of
interest on the Subordinated Debentures from time to time for a deferral
period comprised of consecutive payment periods aggregating at least five
years and, upon such election by the Applicant, the trust issuing the
Capital Securities shall have a corresponding obligation to defer
distributions with respect to the Capital Securities, and (iii) the Capital
Securities, the Subordinated Debentures and the Subordinated Guaranty shall
be fully subordinate and junior in right and time of payment to the
Indebtedness evidenced by this Agreement and shall have other terms of
subordination consistent with those prevailing in the market for similar
subordinated securities as of the date of Amendment No. 3 to this
Agreement; and
(C) the Agent and each Bank shall have received a certificate of an
executive officer of the Applicant attaching true and complete copies of
all Capital Securities Program Documents.
7. Section 8.1 of the Agreement is amended by substituting "; or" for the
period at the end of subsection (n) thereof and by adding a new subsection (o)
to read as follows:
(o) The occurrence of an event of default in respect of the Capital
Securities or any other event shall occur or condition exist in respect
thereof, the effect of which is to cause, or permit the holder of any
Capital Security (or a trustee or agent on its or their behalf) to cause
(with the giving of notice, lapse of time, or both), such Capital Security
to become due, or to be prepaid, redeemed, purchased or defeased, prior to
its stated maturity.
8. Section 5.1(b) of the Agreement is amended by adding the phrase "for
each fiscal year prior to the fiscal year in which the PMA Cayman Sale is
consummated," at the beginning of clause (iii) thereof.
9. Attachment A to Exhibit E-2 (Form of Covenant Compliance Certificate
(Statutory Financial Statements) is amended by adding to the end of Item 1(h)
thereof "(enter zero after the consummation of the PMA Cayman Sale)".
-4-
<PAGE>
10. Paragraphs 1-9 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
Required Banks;
(b) the Agent shall have received a certificate of the Secretary or
Assistant Secretary of the Applicant (i) attaching a true and complete 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 and by-
laws have not been amended since March 14, 1997, or, if so, 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) the Agent shall have received a copy of an amendment to the
Revolving Credit Agreement, in form and substance satisfactory to it, which
amendment shall have been executed by the Agents and Required Banks (as
defined therein);
(d) the reasonable fees and expenses of Special Counsel incurred to
date, shall have been paid; and
(e) the Agent shall have received such other documents as it shall
reasonably request.
11. 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-
<PAGE>
12. In all other respects, the Agreement and the other Credit Documents
shall remain in full force and effect.
13. 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.
14. 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]
-6-
<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. 3 to
the Letter of Credit Agreement to be executed on its behalf.
PENNSYLVANIA MANUFACTURERS
CORPORATION
By:/s/Edward Hochberg
_______________________
Name:Edward Hochberg
_____________________
Title:Vice Presdent- Finance
______________________
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
AMENDMENT NO. 3 TO LETTER OF CREDIT AGREEMENT
THE BANK OF NEW YORK, Individually
and as Agent and as Issuing Bank
By:/s/Lizanne T. Eberle
_________________________________
Name:Lizanne T. Eberle
_______________________________
Title:Vice President
______________________________
-2-
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
AMENDMENT NO. 3 TO LETTER OF CREDIT AGREEMENT
FIRST UNION NATIONAL BANK,
Individually and as Co-Agent
By:/s/Thomas L. Stitchberg
________________________________
Name:Thomas L. Stitchberg
______________________________
Title:Senior Vice President
_____________________________
-3-
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
AMENDMENT NO. 3 TO LETTER OF CREDIT AGREEMENT
FLEET NATIONAL BANK
By:/s/William A. Bagley
________________________________
Name:William A. Bagley
______________________________
Title:Senior Vice President
_____________________________
-4-
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
AMENDMENT NO. 3 TO LETTER OF CREDIT AGREEMENT
PNC BANK, NATIONAL ASSOCIATION
By:/s/Kirk Seagers
________________________________
Name:Kirk Seagers
______________________________
Title:Vice President
_____________________________
-5-
<PAGE>
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (1)
(In Thousands, except ratio)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
EARNINGS
Pre-tax income (loss) $55,069 $25,153 $(191,394) $34,913 $65,380
Fixed charges 15,865 16,683 17,913 19,594 13,911
------------------------------------------------------------------
Total(a) $70,934 $41,836 $(173,481) $54,507 $79,291
==================================================================
FIXED CHARGES
Interest expense and amortization of
debt discount and premium on all
indebtedness $15,009 $15,768 $ 17,052 $18,734 $13,051
Interest portion of rental expense 856 915 861 860 860
------------------------------------------------------------------
Total fixed charges (b) $15,865 $16,683 $ 17,913 $19,594 $13,911
==================================================================
Ratio of earnings to fixed
charges(a)/(b) 4.5x 2.5x (2) 2.8x 5.7x
</TABLE>
(1) For purposes of determining this ratio, earnings (loss) consist of income
before income taxes and extraordinary loss (1997), plus fixed charges.
Fixed charges consist of interest expense and the portion of operating
leases that management believes are representative of the interest factor.
(2) Earnings were insufficient to cover fixed charges by $191.4 million in
1996.
<PAGE>
<TABLE>
<CAPTION>
Exhibit 13
P M A C A P I T A L
Selected Financial Data
For the years ended December 31,
(dollar amounts in thousands, except
share and per share data) 1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premiums written $ 474,761 $ 381,282 $ 432,975 $ 485,876 $ 465,502
======================================================================================
Consolidated Results of Operations:
Net premiums earned $ 466,715 $ 375,951 $ 420,575 $ 484,952 $ 466,534
Net investment income 120,125 133,392 130,837 138,111 138,719
Net realized investment gains 21,745 8,598 2,984 31,923 47,521
Other revenues 14,896 13,617 12,288 6,350 3,380
--------------------------------------------------------------------------------------
Total consolidated revenues $ 623,481 $ 531,558 $ 566,684 $ 661,336 $ 656,154
======================================================================================
Income (loss) before extraordinary loss $ 44,734 $ 19,753 $ (135,334) $ 24,130 $ 57,250
Extraordinary loss from early extinguishment
of debt, net of related tax effect(2) -- (4,734) -- -- --
--------------------------------------------------------------------------------------
Net income (loss) $ 44,734 $ 15,019 $ (135,334) $ 24,130 $ 57,250
======================================================================================
Per Share Data:
Weighted average shares:
Basic(3) 23,608,618 23,855,031 23,800,791 23,816,088 23,897,263
Diluted(3),(4) 24,524,888 24,567,378 23,800,791 24,781,949 24,650,741
Income (loss) before extraordinary loss,
net of related tax effect
Basic(3) $ 1.89 $ 0.83 $ (5.68) $ 1.01 $ 2.40
Diluted(3),(4) 1.82 0.80 (5.68) 0.97 2.32
Net income (loss) per share:
Basic(3) 1.89 0.63 (5.68) 1.01 2.40
Diluted(3),(4) 1.82 0.61 (5.68) 0.97 2.32
Dividends paid per common share 0.32 0.32 0.32 0.32 0.32
Dividends paid per Class A common share 0.36 0.36 0.36 0.36 0.36
Shareholders' equity per share 21.90 19.96 17.86 25.53 22.10
Consolidated Financial Position:
Total investments $ 2,325,409 $ 2,194,738 $ 2,261,353 $ 2,455,949 $ 2,313,261
Total assets 3,460,718 3,057,258 3,117,516 3,258,572 3,181,979
Reserves for unpaid losses and LAE 1,940,895 2,003,187 2,091,072 2,069,986 2,103,714
Long-term debt 163,000 203,000 204,699 203,848 203,975
Shareholders' equity(5) 511,480 478,347 425,828 609,668 524,862
</TABLE>
(1) Operating results in 1998, 1997, 1996 and 1995 were impacted by
approximately $2.1 million, $12.1 million, $223.1 million and $8.4
million,respectively, of restructuring and other special charges. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further information. In addition, 1994 operating results
included a charge of approximately $4.9 million to write down the value of
the Company's former headquarters building.
(2) In 1997, the Company refinanced substantially all of its long-term debt
resulting in a $4.7 million extraordinary loss, net of tax effect. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the presentation of basic and diluted earnings per share. See
Notes 2-H and 16 to the Company's Consolidated Financial Statements for
additional information. All prior periods' presentation of earnings per
share data has been restated to conform to SFAS No. 128.
(4) For the year ended December 31, 1996 common stock equivalents were not
taken into consideration in the computation of weighted-average diluted
shares as these common stock equivalents would have an anti-dilutive effect
on the net loss per share.
(5) In 1994, shareholders' equity increased $45.3 million related to the
adoption of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
(6) Pre-tax operating income (loss) excludes net realized investment gains.
Pre-tax operating income by business segment for all periods is unaudited
and has been presented in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which the Company
adopted on January 1, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 17 to the Company's
Consolidated Financial Statements. The Company has excluded net realized
investment gains (losses) from the profit and loss measurement it utilizes
to assess the performance of its operating segments because (i) net
realized investment gains (losses) are unpredictable and not necessarily
indicative of 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.
26
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following section provides a discussion of the financial results and
material changes in financial position for PMA Capital Corporation and its
consolidated subsidiaries ("PMA Capital" or the "Company") for the years ended
December 31, 1998, 1997 and 1996. The balance sheet information presented below
is as of December 31 for each respective year. The statement of operations
information is for the years ended December 31 for each respective year. 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.
In the discussion below, pre-tax operating income (loss) is defined as
income (loss) before extra-ordinary loss and before income taxes, but excluding
net realized investment gains. Operating revenues consist of all of the
Company's revenues, except net realized investment gains.
Consolidated Results
The table below presents the major components of net income (loss):
<TABLE>
<CAPTION>
(dollar amounts in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax operating income (loss) $ 33,324 $ 16,555 $(194,378)
Net realized investment gains 21,745 8,598 2,984
-----------------------------------
Income (loss) before income taxes 55,069 25,153 (191,394)
Provision (benefit) for income taxes 10,335 5,400 (56,060)
-----------------------------------
Income (loss) before extraordinary loss 44,734 19,753 (135,334)
Extraordinary loss, net of related taxes -- (4,734) --
-----------------------------------
Net income (loss) $ 44,734 $ 15,019 $(135,334)
===================================
Per basic share:
Income (loss) before extraordinary loss $ 1.89 $ 0.83 $ (5.68)
Extraordinary loss -- (0.20) --
-----------------------------------
Net income (loss) $ 1.89 $ 0.63 $ (5.68)
===================================
Per diluted share:
Income (loss) before extraordinary loss $ 1.82 $ 0.80 $ (5.68)
Extraordinary loss -- (0.19) --
-----------------------------------
Net income (loss) $ 1.82 $ 0.61 $ (5.68)
===================================
</TABLE>
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes standards for the reporting of
information about operating segments. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and major
customers. In connection with the adoption of SFAS No. 131, the Company has
identified four reportable segments: (i) PMA Re, which provides property and
casualty reinsurance products and services; (ii) The PMA Insurance Group, which
writes workers' compensation and other standard lines of commercial insurance;
(iii) Caliber One, which writes specialty insurance focusing on excess and
surplus lines; and (iv) Corporate and Other, which includes unallocated
investment income; expenses, including debt service; and taxes, as well as the
results of certain of the Company's real estate properties. SFAS No. 131
requires only additional disclosures and does not affect the Company's financial
position or results of operations. Because Caliber One's operating results were
not significant in 1997, Caliber One's financial information was included within
the Corporate and Other segment in 1997.
28
<PAGE>
P M A C A P I T A L
The Company has excluded net realized investment gains (losses) from the
profit and loss measurement it utilizes to assess the performance of its
operating segments because (i) net realized investment gains (losses) are
unpredictable and not necessarily indicative of 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 investment gains (losses) that do not relate to the
operations of the individual segments (see "Net Realized Investment Gains" below
for additional discussion). Pursuant to the adoption of SFAS No. 131, the
Company has restated the corresponding information for 1997 and 1996 for
comparability, primarily related to certain corporate expenses that were
previously allocated to the operating segments that are now reported in the
Corporate and Other segment (see Note 17 to the Company's Consolidated Financial
Statements for additional information).
The Company's pre-tax operating income (loss) by principal business segment
is as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PMA Re $ 46,408 $ 45,957 $ 44,807
The PMA Insurance Group:
Excluding Run-off Operations 10,018 (3,607) (215,669)
Run-off Operations(1) 452 (73) --
-----------------------------------
Total 10,470 (3,680) (215,669)
Caliber One (1,606) -- --
Corporate and Other (6,939) (9,954) (6,464)
-----------------------------------
Pre-tax operating income (loss) before interest expense 48,333 32,323 (177,326)
Interest expense 15,009 15,768 17,052
-----------------------------------
Pre-tax operating income (loss) $ 33,324 $ 16,555 $(194,378)
===================================
</TABLE>
(1) Run-off Operations of The PMA Insurance Group were classified by management
and segregated from ongoing operations effective December 31, 1996. See
"The PMA Insurance Group" for additional discussion of Run-off Operations.
In 1998, the Company reported consolidated pre-tax operating income of $33.3
million compared to $16.6 million in 1997. The improvement in the 1998 results
was due primarily to increased pre-tax operating income generated by The PMA
Insurance Group and PMA Re, as well as the absence of charges related to The PMA
Insurance Group's continued restructuring and cost reduction initiatives of $9.2
million in 1997.
The Company reported consolidated pre-tax operating income of $16.6 million
in 1997 compared to a $194.4 million pre-tax operating loss for 1996. The
improvement in 1997 was primarily due to increased pre-tax operating income
generated by PMA Re and the absence of pre-tax charges totalling $221.3 million
for The PMA Insurance Group primarily related to reserve strengthening and
restructuring and cost reduction activities.
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 49.
Consolidated net income (loss) was $44.7 million in 1998, $15.0 million in
1997 and ($135.0) million in 1996. On March 14, 1997, the Company refinanced
substantially all of its outstanding credit agreements not already maturing in
1997 with the revolving credit facility (the "Credit Facility"). In connection
with this refinancing, the Company recognized an extraordinary loss, net of tax,
from the early extinguishment of debt of $4.7 million in 1997.
29
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
PMA Re
Summarized financial results of PMA Re are as follows:
(dollar amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Net premiums written $234,010 $177,934 $164,053
=================================
Net premiums earned $223,559 $163,603 $151,974
Net investment income 54,734 52,270 48,676
---------------------------------
Operating revenues 278,293 215,873 200,650
---------------------------------
Losses and Loss Adjustment Expenses incurred 154,062 113,931 111,937
Acquisition and operating expenses 77,823 55,985 43,906
---------------------------------
Total losses and expenses 231,885 169,916 155,843
---------------------------------
Pre-tax operating income $ 46,408 $ 45,957 $ 44,807
=================================
GAAP loss and LAE ratio 68.9% 69.6% 73.7%
GAAP combined ratio 103.7% 103.8% 102.6%
SAP loss and LAE ratio 68.6% 69.5% 73.7%
SAP combined ratio 104.3% 103.8% 104.4%
Operating Results
PMA Re's pre-tax operating income increased to $46.4 million in 1998 compared to
$46.0 million in 1997, primarily due to higher premium volume and higher
investment income, partially offset by increased acquisition costs. The increase
in PMA Re's pre-tax operating income to $46.0 million in 1997 compared to $44.8
million in 1996 was due to higher premium volume, improved underwriting results
and higher investment income, partially offset by increased acquisition costs.
Premium Revenues
The following table indicates PMA Re's gross and net premiums written by major
category of business:
1998 1997
(dollar amounts in thousands) 1998 1997 1996 Change % Change %
- --------------------------------------------------------------------------------
Gross premiums written:
Casualty lines $206,317 $151,901 $143,991 35.8% 5.5%
Property lines 76,975 72,625 63,325 6.0% 14.7%
Other lines 1,044 795 842 31.3% (5.6)%
--------------------------------------------------
Total $284,336 $225,321 $208,158 26.2% 8.2%
==================================================
Net premiums written:
Casualty lines $168,452 $118,889 $122,008 41.7% (2.6)%
Property lines 64,497 58,257 41,240 10.7% 41.3%
Other lines 1,061 788 805 34.6% (2.1)%
--------------------------------------------------
Total $234,010 $177,934 $164,053 31.5% 8.5%
==================================================
30
<PAGE>
P M A C A P I T A L
In 1998 and 1997, net premiums written increased 31.5% and 8.5%, respectively.
The increases in 1998 and 1997 primarily reflect expanding relationships with
PMA Re's existing clients, as well as new contracts with targeted clients. In
addition, as a result of the increased business flow generated by these
activities, estimated net premiums written and not received increased by $16.6
million in the fourth quarter of 1998. Partially offsetting these increases in
1998 and 1997 were the effects of highly competitive conditions in the U.S.
reinsurance market, which has caused PMA Re not to renew certain accounts
largely due to inadequate rates and/or other underwriting concerns.
PMA Re's net casualty premiums written increased $49.6 million, or 41.7%,
in 1998 compared to 1997 and decreased $3.1 million, or 2.6%, in 1997 compared
to 1996. The growth in 1998 was due to the generation of new business resulting
from the expansion of relationships with existing clients, which accounted for
approximately $33 million of net casualty premiums written in 1998, as well as
the development of relationships with new clients, which accounted for
approximately $17 million of net casualty premiums written in 1998. The decrease
in 1997 was primarily attributable to increased retrocessional protection
purchased, which offset increases in gross casualty premiums relating to new
business with existing clients and larger participation on existing programs.
PMA Re's net property premiums written increased 10.7% in 1998 compared to
1997 and 41.3% during 1997 compared to 1996. The growth in 1998 was primarily
attributable to the addition of new programs covering allied lines. The increase
in net property premiums written in 1997 was primarily the result of lower
property premiums ceded in 1997.
Net premiums earned increased 36.6% in 1998 compared to 1997 and 7.7% in
1997 compared to 1996. Each year's increase 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 indicates the components of PMA Re's combined ratios, as
computed on a GAAP basis (1):
1998 1997 1996
- ------------------------------------------------------------------------------
Loss and LAE ratio 68.9% 69.6% 73.7%
-------------------------------------
Expense ratio:
Acquisition expenses 28.9% 27.6% 24.7%
Operating expenses 5.9% 6.6% 4.2%
-------------------------------------
Total expense ratio 34.8% 34.2% 28.9%
-------------------------------------
Combined ratio-GAAP 103.7% 103.8% 102.6%
=====================================
(1) The combined ratio computed on a GAAP basis is equal to losses and loss
adjustment expenses ("LAE"), plus the sum of acquisition expenses,
operating expenses and policyholders' dividends (where applicable), all
divided by net premiums earned.
PMA Re's loss and LAE ratio decreased 0.7 points to 68.9% in 1998 compared to
69.6% in 1997. This decrease was primarily attributable to net favorable
development on prior years' unpaid losses and LAE of $25.0 million. Net
favorable development on prior years' unpaid losses and LAE was $23.3 million
and $28.6 million in 1997 and 1996, respectively. In 1997, PMA Re's loss and LAE
ratio declined 4.1 points to 69.6% compared to 73.7% in 1996, largely due to
increased retrocessional protection purchased for the 1997 accident year.
31
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
The ratio of acquisition expenses to net premiums earned (the "Acquisition
Expense Ratio") increased to 28.9% in 1998 from 27.6% and 24.7% in 1997 and
1996, respectively, primarily reflecting the increasingly competitive conditions
in the U.S. reinsurance market. Additionally, the ceding commissions that PMA Re
received related to its retrocessional catastrophe cover were lower in 1997 than
in 1996, which also contributed to the higher Acquisition Expense Ratio in 1997.
The ratio of operating expenses to net premiums earned (the "Operating
Expense Ratio") decreased 0.7 points to 5.9% in 1998 compared to 6.6% in 1997.
The improvement in the Operating Expense Ratio primarily reflects faster growth
in premiums than in operating expenses. The Operating Expense Ratio increased
2.4 points in 1997 to 6.6% compared to 4.2% in 1996. This increase reflects
higher expenses, such as salary and facility expenses, in connection with the
addition of staff and expansion of office facilities during 1997. During the
three-year period ended December 31, 1998, PMA Re has continued to add staff in
response to increased premium volume and to increase the level of specialized
services provided to customers.
Net Investment Income
Net investment income increased 4.7% to $54.7 million in 1998 from $52.3 million
in 1997, which represented a 7.4% increase from $48.7 million in 1996. Such
increases were primarily attributable to the overall increase in PMA Re's
invested assets, as well as changes in portfolio holdings. At amortized cost,
PMA Re's cash and invested assets increased $52.5 million, or 6.0%, and $49.0
million, or 5.9%, during 1998 and 1997, respectively. During 1998 and 1997, PMA
Re shifted some of its holdings from government securities to corporate and
asset-backed securities, which generally yield higher levels of investment
income.
The PMA Insurance Group
The PMA Insurance Group is comprised of Pennsylvania Manufacturers' Association
Insurance Company, Manufacturers Alliance Insurance Company and Pennsylvania
Manufacturers Indemnity Company (collectively, the "Pooled Companies"), as well
as PMA Management Corp., Pennsylvania Manufacturers International Insurance,
Limited and Run-off Operations. Run-off operations ("Run-off Operations") of The
PMA Insurance Group were classified by management and segregated from ongoing
operations effective December 31, 1996 and include Mid-Atlantic States Casualty
Company, PMA Life Insurance Company, PMA International Insurance, Cayman Limited
and PMA Insurance, Cayman Limited, which was sold effective July 1, 1998 (see
discussion below for further details). The Run-off Operations have been
established internally to reinsure certain obligations primarily associated with
workers' compensation claims written by the Pooled Companies for the years 1991
and prior. The Run-off Operations have been segregated into separate legal
entities and substantially all of the assets of the Run-off Operations are held
in trust for the benefit of the Pooled Companies.
32
<PAGE>
P M A C A P I T A L
Summarized financial results of The PMA Insurance Group are as follows:
(dollar amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Net premiums written:
Workers' compensation $ 187,033 $ 175,301 $ 187,698
Commercial Lines 57,204 79,669 84,781
Run-off Operations(1) (9,400) (51,622) --
--------------------------------------
Total $ 234,837 $ 203,348 $ 272,479
======================================
Net premiums earned:
Workers' compensation $ 185,132 $ 189,773 $ 176,380
Commercial Lines 66,196 74,197 92,221
Run-off Operations(1) (9,400) (51,622) --
--------------------------------------
Total 241,928 212,348 268,601
--------------------------------------
Net investment income:
Excluding Run-off Operations 50,419 53,796 82,364
Run-off Operations(1) 14,161 28,131 --
--------------------------------------
Total 64,580 81,927 82,364
--------------------------------------
Other revenues 9,722 10,482 9,280
--------------------------------------
Operating revenues 316,230 304,757 360,245
--------------------------------------
Losses and LAE incurred:
Excluding Run-off Operations 196,018 220,990 424,900
Run-off Operations(1) 1,507 (27,460) --
--------------------------------------
Total 197,525 193,530 424,900
--------------------------------------
Acquisition and operating expenses:
Excluding Run-off Operations 87,697 96,149 134,759
Run-off Operations(1) 2,802 4,042 --
--------------------------------------
Total 90,499 100,191 134,759
--------------------------------------
Dividends to policyholders 17,736 14,716 16,255
--------------------------------------
Total losses and expenses 305,760 308,437 575,914
--------------------------------------
Pre-tax operating income (loss) $ 10,470 $ (3,680) $(215,669)
======================================
GAAP loss and LAE ratio 81.6% 91.1% 158.2%
GAAP combined ratio 122.6% 140.8% 211.4%
SAP loss and LAE ratio(2) 78.2% 84.0% 125.7%
SAP combined ratio(2) 113.7% 119.0% 175.6%
(1) Run-off Operations were classified by management and segregated from
ongoing operations effective December 31, 1996.
(2) The SAP loss and LAE and combined ratios above relate to the operations of
the Pooled Companies.
Operating Results
The PMA Insurance Group increased its pre-tax operating income in 1998 to $10.5
million, compared to a pre-tax operating loss of $3.7 million in 1997, primarily
due to improved loss experience in workers' compensation business, reduced
exposures in other commercial lines of business and lower operating expenses
resulting from ongoing cost reduction initiatives. The PMA Insurance Group
decreased its pre-tax operating loss in 1997 to $3.7 million, compared to a
pre-tax operating loss of $215.7 million in 1996, primarily due to the absence
of a pre-tax charge of $221.3 million ($143.8 million after-tax) to strengthen
loss and LAE reserves, to recognize restructuring costs in connection with staff
reductions and to write-off certain accounts receivable, as well as lower
operating expenses reflecting the impact of cost savings initiatives implemented
in late 1996 and in 1997.
33
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
The PMA Insurance Group Excluding Run-off Operations
Premium Revenues
Net premiums written, which represent direct premiums written plus premiums
assumed, less premiums ceded, decreased in the three-year period ended December
31, 1998. Between 1998 and 1997, net premiums written decreased 4.2%, and
between 1997 and 1996, net premiums written decreased 6.4%. The decline in 1998
primarily reflects a decrease of $28.4 million in direct premiums written for
commercial lines of business other than workers' compensation, such as
commercial auto, general liability, umbrella, multi-peril and commercial
property lines (collectively, "Commercial Lines"), partially offset by a
decrease of $15.1 million in reinsurance premiums ceded and an increase of $2.4
million in direct premiums written for workers' compensation.
The decline in 1997 primarily reflects decreases of $10.1 million in direct
premiums written for workers' compensation and $4.4 million in reinsurance
premiums assumed, as well as an increase of $13.9 million in reinsurance
premiums ceded, partially offset by an increase of $10.9 million in direct
premiums written for Commercial Lines.
Direct workers' compensation premiums written were higher in 1998 compared
to 1997 due to an increase in risks underwritten during 1998, partially offset
by manual rate reductions averaging approximately 13% in its principal marketing
territories and continued intense price competition. The decline in direct
workers' compensation written premiums in 1997 compared to 1996 was due
primarily to rate reductions associated with workers' compensation benefit
reform laws and continued intense price competition, partially offset by an
increase in risks underwritten.
The enactment of workers' compensation benefit reform laws in The PMA
Insurance Group's marketing territory has caused manual rates for workers'
compensation to decline in the past three years. Because manual rate reductions
directly affect the prices that The PMA Insurance Group can charge for its rate
sensitive workers' compensation products, such declines in manual rate levels
have had a significant effect on workers' compensation premium volume. The
premium charged on a fixed-cost policy is based upon the manual rates filed with
the state insurance department and does not increase or decrease prospectively
based upon the losses incurred during the policy period. In terms of manual
rates, average rate levels declined approximately 13%, 25% and 7% in 1998, 1997
and 1996, respectively. The decline in rate levels for workers' compensation has
been most pronounced in Pennsylvania, where the most significant benefit reforms
have occurred. These benefit reform laws also have had a favorable impact on
losses and LAE for business written on policies subject to such reform laws (see
"Losses and Expenses" below).
The PMA Insurance Group has shifted its workers' compensation premiums
towards lower hazard lines of business such as health care, schools/colleges and
retail which comprised 25.8%, 20.6% and 12.9% of total workers' compensation
premiums written in 1998, 1997 and 1996, respectively, away from higher hazard
lines of business, including construction and manufacturing which comprised
43.1%, 46.4% and 52.0% of total workers' compensation premiums written in 1998,
1997 and 1996, respectively.
Direct workers' compensation premiums were also impacted by changes in the
level of premium adjustments, primarily related to audit premiums and
retrospective policies. Under retrospectively rated policies, The PMA Insurance
Group receives an up-front provisional premium, which is adjusted based upon the
actual loss experience of the insured. In 1998, such adjustments decreased
premiums written by $4.7 million ($13.2 million in audit premiums billed and
$17.9 million in retrospective premiums
34
<PAGE>
P M A C A P I T A L
returned). In 1997, such adjustments decreased premiums written by $4.4 million
($15.8 million in audit premiums billed and $20.2 million in retrospective
premiums returned), while in 1996, such adjustments reduced premiums written by
$6.1 million ($17.1 million in audit premiums billed and $23.2 million in
retrospective premiums returned). Changes in actuarial estimates of future
premium adjustments on retrospective policies are recorded directly in net
premiums written and net premiums earned in the period they are identified (see
the Company's 1998 Form 10-K and Note 2-L to the Company's Consolidated
Financial Statements for further discussion).
During 1998, direct writings of Commercial Lines decreased $28.4 million
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. In 1998, ceded Commercial Lines premiums
decreased $6.4 million compared to 1997 due to the reduction in direct
Commercial Lines business written.
During 1997, direct writings of Commercial Lines increased $10.9 million
due primarily to rate increases on existing business, as well as additional
companion commercial business associated with new workers' compensation
customers.
The $12.8 million increase in ceded Commercial Lines premiums in 1997
reflects the reduction in the per risk attachment point to $175,000 from
$500,000 on a reinsurance treaty that covers substantially all of the Commercial
Lines casualty business.
Net premiums earned decreased 4.8% in 1998 compared to 1997 and 1.7% in
1997 compared to 1996. Each year's decrease corresponds to the decrease 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 policies.
Losses and Expenses
The following table reflects the components of the GAAP combined ratios for The
PMA Insurance Group, excluding Run-off Operations:
1998 1997 1996(1)
- ----------------------------------------------------------------------------
Loss and LAE ratio 78.0% 83.7% 158.2%
------------------------------
Expense ratio:
Acquisition expenses 18.0% 18.3% 19.7%
Operating expenses(2) 13.3% 14.6% 27.4%
------------------------------
Total expense ratio 31.3% 32.9% 47.1%
------------------------------
Policyholders' dividend ratio 7.1% 5.6% 6.1%
------------------------------
Combined ratio-GAAP 116.4% 122.2% 211.4%
==============================
The components of the loss and LAE
ratio are as follows:
1998 1997 1996(1)
- ----------------------------------------------------------------------------
Current accident year - undiscounted 80.0% 81.0% 81.4%
Accretion of discount for prior accident
years greater than (less than)
discounting of current accident year (0.2)% 3.1% 5.5%
Prior year reserve (redundancy) deficiency (1.8)% (0.4)% 71.3%
------------------------------
Loss and LAE ratio 78.0% 83.7% 158.2%
==============================
(1) Ratios for 1996 include the results of operations that were classified as
Run-off Operations effective December 31, 1996.
(2) The GAAP Operating Expense Ratio excludes $9.0 million, $9.3 million and
$8.2 million in 1998, 1997 and 1996, respectively, of PMA Management Corp.
direct expenses related to service revenues, which are not included in
premiums earned.
35
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
The shift in the mix of business toward workers' compensation premiums had
a favorable impact on the loss and LAE ratio in 1998, as workers' compensation
business has had better loss experience than other Commercial Lines in The PMA
Insurance Group's marketing territory. In addition, measures to control medical
costs and LAE in workers' compensation have improved the overall loss and LAE
ratio. Medical costs have improved primarily due to The PMA Insurance Group's
affiliation with a national preferred provider organization, which became
effective in the fourth quarter of 1997. This affiliation has enabled The PMA
Insurance Group to lower its cost in providing medical benefits to injured
workers. In addition to this improvement in loss costs, LAE have decreased as
well, primarily due to continued use of certain claims resolution practices. By
using techniques such as managed care and commutations, The PMA Insurance Group
has reduced the amount and number of outstanding claims and the amount of time
that a claim remains open. This in turn has lowered costs associated with
managing open claims.
Benefit reforms enacted by states in which The PMA Insurance Group
transacts business, most significantly Pennsylvania, have had a beneficial
impact on more recent accident year loss and LAE ratios. The principal revisions
of the Pennsylvania system included medical cost containment measures and an
expansion of the period of time during which the insurer may require an employee
to accept medical treatment from the employer's list of designated health care
providers as well as a substantial reduction in the indemnity benefit periods in
Pennsylvania.
Since 1996, the impact on the loss and LAE ratio from the effects of
discounting loss reserves has declined due mainly to the effect of commutations
and lower business writings. The PMA Insurance Group has been executing programs
under which it commuted, or settled, a large number of workers' compensation
claims. Commutations are agreements whereby the claimants, in exchange for a
lump sum payment, release their rights to future indemnity payments from The PMA
Insurance Group. The PMA Insurance Group paid approximately $64.9 million,
$113.0 million and $17.8 million in 1998, 1997 and 1996, respectively, to
commute workers' compensation indemnity claims. The commutation programs
resulted in payments, which were less than the corresponding carried reserves.
Savings associated with these claims were consistent with management's
expectations. As substantially all of these reserves were carried on a
discounted basis, the ultimate level of discount on The PMA Insurance Group's
carried reserves decreased.
As stated above, during the past five years, direct premiums written for
workers' compensation have declined significantly and benefit reforms in The PMA
Insurance Group's marketing territory have reduced loss costs in more recent
years. As a result, loss reserve levels have declined and the level of discount
on such reserves has also declined.
In 1998, The PMA Insurance Group recorded favorable prior year reserve
development of $4.6 million (excluding the accretion of discount), $6.9 million
of favorable loss development for workers' compensation reserves, partially
offset by $2.3 million of adverse development in Commercial Lines and LAE. In
1997, The PMA Insurance Group recorded favorable prior year development of $1.0
million (excluding the accretion of discount), reflecting favorable development
of $6.0 million on workers' compensation reserves, partially offset by reserve
strengthening of $5.0 million in commercial multi-peril business. In 1996,
adverse prior year development was $191.4 million associated with the following
lines of business: workers' compensation, $110.0 million; asbestos and
environmental, $60.4 million; and other lines of business, $21.0 million (see
Note 4 to the Company's Consolidated Financial Statements for additional
information).
36
<PAGE>
P M A C A P I T A L
The 1998 expense ratio declined 1.6 points compared to 1997, which declined
14.2 points compared to 1996, due to reductions in both the Acquisition Expense
Ratio and the Operating Expense Ratio. The 1998 Acquisition Expense Ratio
decreased 0.3 points compared to 1997, primarily due to a change in the mix of
business to workers' compensation business, which has a lower acquisition rate
than Commercial Lines. The 1997 Acquisition Expense Ratio decreased 1.4 points
compared to 1996, primarily due to ceding commissions received by The PMA
Insurance Group on its reinsurance arrangement for commercial lines casualty
business, which are recorded as a reduction of acquisition expenses.
The 1998 Operating Expense Ratio decreased 1.3 points to 13.3% from 14.6%
in 1997. The 1997 Operating Expense Ratio decreased 12.8 points to 14.6%
compared to 27.4% in 1996. Each year's lower Operating Expense Ratio is
primarily attributable to cost reduction programs begun in 1996 at The PMA
Insurance Group. Such programs have resulted in lower payroll and related
expenses of approximately $5.0 million in 1998 and $4.9 million in 1997. In
addition, in 1997, operating expenses decreased $22.5 million compared to 1996
due to the absence of expenses in 1996 such as $7.6 million for a voluntary
early retirement program, $4.8 million associated with a change in depreciable
lives of computer equipment and $10.1 million in premium balances written off.
The policyholders' dividend ratios was 7.1%, 5.6% and 6.1% for the years
ended December 31, 1998, 1997 and 1996, respectively, primarily reflecting more
favorable loss experience. Under policies that are subject to dividend plans,
the customer may receive a dividend based upon loss experience during the policy
period.
Net Investment Income
Net investment income was $3.4 million lower in 1998 compared to 1997, as lower
average investment balances resulting from the pay-down of loss reserves from
prior accident years primarily related to the commutation programs and
decreasing premium volume were offset by higher investment yields associated
with a shift in invested assets towards higher yielding invested assets, such as
asset-backed securities. Investment income in 1997 was $28.6 million lower than
in 1996, primarily due to the fact that Run-off Operations were not segregated
in 1996. In 1997, Run-off Operations had $28.1 million of net investment income.
Run-off Operations
The following table reflects the components of The PMA Insurance Group - Run-off
Operations' operating results. The operating results for 1996 are not displayed,
as Run-off Operations were not segregated until December 31, 1996.
(dollar amounts in thousands) 1998 1997
- -----------------------------------------------------------------------------
Net premiums earned $ (9,400) $(51,622)
Net investment income 14,161 28,131
-------------------------
Operating revenues 4,761 (23,491)
Losses and LAE incurred 1,507 (27,460)
Operating expenses 2,802 4,042
-------------------------
Total losses and expenses 4,309 (23,418)
-------------------------
Pre-tax operating income (loss) $ 452 $ (73)
=========================
37
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
Losses and LAE of the Run-off Operations consist of discount accretion on
established loss reserves within the Run-off Operations, partially offset in
1998 by favorable loss development of $10.3 million (of which $9.4 million was
returned to the Pooled Companies as a profit commission and recorded as a
premium adjustment by the Run-off Operations) and more than offset in 1997 by
$51.8 million of favorable loss development. Favorable loss development in 1997
included $37.0 million related to retrospectively rated policies. Furthermore,
incurred losses on prior accident years were also favorably affected by the
cession of prior year reserves of $14.8 million to a third party reinsurer in
1997. The favorable loss development in 1997 was offset by reductions in earned
premiums for the Run-off Operations.
Net investment income for the Run-off Operations decreased $14.0 million in
1998 compared to 1997, primarily due to the sale of PMA Insurance, Cayman Ltd.
("PMA Cayman"), which decreased invested assets. Effective July 1, 1998, the
Company sold PMA Cayman 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 December 31, 1998, the
Company had recorded $248.6 million in reinsurance receivables from the buyer
related to this transaction, all of which are secured by assets in a trust and
by letters of credit (see Note 19 to the Company's Consolidated Financial
Statements for additional discussion).
See "The PMA Insurance Group - Run-off Operations" in the Company's 1998
Form 10-K for additional discussion of Run-off Operations.
Loss Reserves
Unpaid losses and LAE reflect management's best estimate of future amounts
needed to pay claims and related settlement costs with respect to insured events
which have occurred, including events that have not been reported to the
Company. In many cases, significant periods of time, ranging up to several years
or more, may elapse between the occurrence of an insured loss, the reporting of
the loss to the Company and the Company's payment of that loss. In general,
liabilities for reinsurers become known more slowly than for primary insurers
and are subject to more unforeseen development. As part of the process in
determining these amounts, historical data is reviewed and consideration is
given to the impact of various factors, such as legal developments, changes in
social attitudes and economic conditions.
Unpaid losses for the Company's workers' compensation claims, net of
reinsurance, at December 31, 1998 and 1997 were $515.6 million and $816.1
million, net of discount of $194.3 million and $460.2 million, respectively. The
approximate discount rate used was 5% at December 31, 1998 and 1997.
Estimating reserves for workers' compensation claims is difficult for
several reasons, including (i) the long payment "tail" associated with the
business; (ii) the impact of social, political, case law and regulatory trends
on benefit levels for both medical and indemnity payments; (iii) the impact of
economic trends; and (iv) the impact of changes in the mix of business. At
various times, one or a combination of such factors can make the interpretation
of actuarial data associated with workers' compensation loss development more
difficult, and it can take additional time to recognize changes in loss
development patterns. If necessary, adjustments will be made to such reserves as
they are identified if loss patterns develop differently than forecasted or if
new information becomes available and such adjustments may be material to
results of operations, financial condition and liquidity.
38
<PAGE>
P M A C A P I T A L
Management believes that its unpaid losses and LAE are fairly stated at
December 31, 1998. However, estimating the ultimate claims liability is
necessarily a complex and judgmental process inasmuch as the amounts are based
on management's informed estimates and judgments using data currently available.
As additional experience and data become available regarding claims payment and
reporting patterns, legislative developments and economic conditions, the
estimates are revised accordingly. If the Company's ultimate net losses prove to
differ substantially from the amounts recorded at December 31, 1998, the related
adjustments could have a material adverse impact on the Company's financial
condition and results of operations.
At December 31, 1998, 1997 and 1996, the Company's gross reserves for
asbestos-related losses were $67.9 million, $76.7 million and $80.1 million,
respectively ($43.6 million, $48.6 million and $53.3 million, net of
reinsurance, respectively). At December 31, 1998, 1997 and 1996, the Company's
gross reserves for environmental-related losses were $47.0 million, $45.1
million and $35.6 million, respectively ($29.4 million, $31.7 million and $34.6
million, net of reinsurance, respectively).
Estimating reserves for asbestos and environmental exposures continues to
be difficult because of several factors, including: (i) evolving methodologies
for the estimation of the liabilities; (ii) lack of reliable historical claim
data; (iii) uncertainties with respect to insurance and reinsurance coverage
related to these obligations; (iv) changing judicial interpretations; and (v)
changing government standards. To reserve for environmental claims, the Company
currently utilizes a calendar year development technique known as aggregate loss
development. This technique focuses on the aggregate losses paid as of a
particular date and aggregate payment patterns associated with such claims.
Several elements including remediation studies, remediation, defense,
declaratory judgment and third party bodily injury claims were considered in
estimating the costs and payment patterns of the environmental and toxic tort
losses. Prior to the development of these techniques, there was a substantial
range in the nature of reserving for environmental and toxic tort liabilities.
In 1996, the Company performed a ground up analysis of loss reserves for
direct asbestos exposures using an actuarially accepted modeling technique.
Using historical information as a base and information obtained from a review of
open claims files, assumptions were made about future claims activity in order
to estimate ultimate losses. For each individual major account, projections were
made regarding new plaintiffs per year, the number of years new claims will be
reported, the average loss severity per plaintiff and the ratio of LAE to loss.
In many cases involving larger asbestos claims, the Company reserved up to the
policy limits for the applicable loss coverage parts for the affected accounts.
Policy terms and reinsurance treaties were applied in the modeling of future
losses.
Management believes that its reserves for asbestos and environmental claims
are appropriately established based upon known facts, existing case law and
generally accepted actuarial methodologies. However, due to changing
interpretations by courts involving coverage issues, the potential for changes
in federal and state standards for clean-up and liability as well as issues
involving policy provisions, allocation of liability among participating
insurers, proof of coverage and other factors, the Company's ultimate exposure
for these claims may vary significantly from the amounts currently recorded,
resulting in a potential future adjustment that could be material to the
Company's financial condition and results of operations (see "Loss Reserves" in
the Company's 1998 Form 10-K and Note 4 to the Company's Consolidated Financial
Statements for additional discussion).
39
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
Caliber One
Summarized financial results of Caliber One for the year ended December 31, 1998
are as follows:
(dollar amounts in thousands)
- ------------------------------------------------------------------------------
Net premiums written $ 6,436
=======
Net premiums earned $ 1,750
Net investment income 1,453
-------
Operating revenues 3,203
-------
Losses and LAE incurred 1,402
Acquisition and operating expenses 3,407
-------
Total losses and expenses 4,809
-------
Pre-tax operating loss $(1,606)
=======
In December 1997, PMA Reinsurance Corporation acquired 100% of the outstanding
common stock of Caliber One Indemnity Company, domiciled in Delaware and
formerly known as Lincoln Insurance Company, for approximately $16.0 million and
made a capital contribution of approximately $11.3 million to Caliber One
Indemnity Company. All of Caliber One Indemnity Company's acquired loss reserves
were reinsured with an affiliate of its former parent for adverse development
and uncollectible reinsurance (the "Reserve Guarantee") in the amount of the
recorded reserves plus $68.5 million (see Note 1 to the Consolidated Financial
Statements for additional discussion). Upon the purchase of Caliber One
Indemnity Company, management valued the amount of the Reserve Guarantee at
approximately $5.0 million in excess of the stated acquired reserves. Management
believes that the Reserve Guarantee will be adequate to cover any future adverse
reserve development or uncollectible reinsurance on the acquired reserves.
Management believes that the reinsurance obtained as part of the purchase will
be adequate to cover any future reserve development or uncollectible reinsurance
on the acquired reserves. PMA Reinsurance Corporation intends to maintain
Caliber One Indemnity Company's surplus at not less than $25.0 million, the
minimum capital and surplus required by many states in order to be an eligible
surplus lines carrier.
In 1998, Caliber One recorded a pre-tax operating loss of $1.6 million,
primarily related to start-up costs. Gross premiums written and net premiums
written for Caliber One for the year ended December 31, 1998 were $11.8 million
and $6.4 million, respectively. As expected, operating expenses, which include
start-up costs, were high in 1998 relative to operating revenues.
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 year ended December 31, 1998,
Corporate and Other recorded a pre-tax operating loss before interest expense of
$6.9 million compared to $10.0 million in 1997. The decrease in the operating
loss in 1998 compared to 1997 was primarily due to lower net expenses from
non-core real estate properties in 1998. Additionally, during 1997, the Company
incurred $1.8 million of severance and related restructuring costs and
pre-operating charges of approximately $900,000 in establishing Caliber One.
In 1997, Corporate and Other's pre-tax operating loss was $10.0 million
compared to $6.5 million in 1996. The decline in the operating results of
Corporate and Other operations in 1997 was due mainly to a $2.2 million increase
in operating costs related to certain corporate properties disposed of during
1997, as well as $1.8 million of expenses incurred for severance and related
restructuring costs. In addition, pre-operating charges of approximately
$900,000 associated with establishing Caliber One were reported in Corporate and
Other in 1997.
40
<PAGE>
P M A C A P I T A L
Interest expense decreased to $15.0 million in 1998 from $15.8 million in
1997 and $17.1 million in 1996, primarily due to the refinancing of the
Company's debt with the Credit Facility in March of 1997(see "Liquidity" below
for further discussion).
Net Realized Investment Gains
Net realized investment gains amounted to $21.7 million, $8.6 million and $3.0
million in 1998, 1997 and 1996, respectively. During the three-year period ended
December 31, 1998, the Company realized gains from investment sales related to
the following: (i) transactions to move holdings between taxable and tax-exempt
fixed maturity investments in order to maximize after-tax yields; (ii)
transactions to expand the asset classes in which the Company invests to
capitalize on favorable yield spreads between such instruments and U.S. Treasury
securities; and (iii) transactions based upon an assessment of the interest rate
environment. Gains and losses on the sale of investments are recognized as a
component of net income, but the timing and recognition of such gains and losses
are unpredictable and are not indicative of current or future results.
Accordingly, such gains and losses are not included as a component of operating
income.
In 1998, the Company diversified its investment portfolio by increasing its
holdings of mortgage-backed and other asset-backed securities, while reducing
holdings in government securities. In 1997, the Company repositioned its
investment portfolio to improve its pre-tax investment yield, while maintaining
the maturity matching structure between investments and liability cash flow
projections. During 1996, most of the investment sales activity resulted from
reducing the Company's holdings of tax-advantaged securities based upon an
assessment of the Company's projected tax position.
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. At the holding company level, the
Company requires cash to pay debt obligations, 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 December 31, 1998, the Company had $163.0 million outstanding under its
existing Credit Facility compared to $203.0 million outstanding at December 31,
1997. In 1998, the Company made an unscheduled debt repayment of $40.0 million
to reduce the outstanding debt to $163.0 million and increase the amount
available under the Credit Facility to $72.0 million. In 1997, the Company made
scheduled debt payments of $7.3 million as well as an additional debt repayment
of $8.0 million before refinancing all of its credit agreements not already
maturing in 1997. During 1996, the Company made scheduled repayments on its
senior note facilities of $25.1 million through drawdowns on its revolving
Credit Facility. The final expiration of the Credit Facility will be December
31, 2002, maturing in an installment of $38.0 million in 2000 and installments
of $62.5 million in 2001 and 2002. The Company paid interest of $14.9 million,
$19.8 million and $16.6 million in 1998, 1997 and 1996, respectively.
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 December
31, 1998, the Company had $46.9 million outstanding in letters of credit under
the Letter of Credit Facility.
41
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
The Company's domestic insurance subsidiaries' ability to pay dividends to
the holding company is limited by the insurance laws and regulations of
Pennsylvania. Under such laws and regulations, dividends may not be paid without
prior approval of the Commissioner in excess of the greater of (i) 10% of
surplus as regards to policyholders as of the end of the preceding year or (ii)
SAP net income for the preceding year, but in no event to exceed unassigned
funds. Under this standard, the Pooled Companies and PMA Re can pay an aggregate
of $51.8 million of dividends without the prior approval of the Commissioner
during 1999. Caliber One Indemnity Company is directly owned by PMA Reinsurance
Corporation and, as such, its dividends may not be paid directly to PMA Capital.
Dividends from subsidiaries were $35.5 million, $22.5 million and $53.6 million
in 1998, 1997 and 1996, respectively.
Net tax payments received from subsidiaries were $29.7 million, $20.0
million and $12.0 million in 1998, 1997 and 1996, respectively. In December
1998, the Company received a refund from the Internal Revenue Service ("IRS") of
approximately $15.0 million relating to Federal income taxes paid by the
Company. The refund relates to a claim for refund filed by the Company with
regard to its 1992 U.S. Federal income tax return. In 1997, the Company received
a refund from the IRS of approximately $16.8 million as a result of a net
operating loss, which was generated in 1996 and carried back to 1993, 1994 and
1995 (see Note 8 to the Company's Consolidated Financial Statements for
additional discussion of income taxes).
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 $7.9 million, $8.0 million and $7.9 million in 1998, 1997 and
1996, respectively.
In December 1997, PMA Reinsurance Corporation acquired 100% of the
outstanding common stock of Caliber One Indemnity Company for approximately
$16.0 million and made a capital contribution of approximately $11.3 million to
Caliber One Indemnity Company (see "Caliber One" herein for additional
discussion).
PMA Capital also made cash capital contributions to its subsidiaries
totaling $480,000, $11.0 million and $50.0 million in 1998, 1997 and 1996,
respectively.
In February of 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. During 1998, the Company repurchased a total of 996,442
shares at a total cost of $18.9 million (average per share price was $18.92),
leaving $6.1 million of share repurchase authorization under its February 1998
repurchase program. In February 1999, PMA Capital's Board of Directors
authorized an additional $20.0 million of share repurchase authority. 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 $3,460.7 million at December
31, 1998 from $3,057.3 million at December 31, 1997. Total investments increased
$130.7 million to $2,325.4 million at December 31, 1998. The increase in
investments is primarily attributable to the Company's securities lending
program, which increased invested assets by $421.1 million (see Note 3 to the
Company's Consolidated Financial Statements for additional discussion),
partially offset by the sale of PMA Cayman (see "The PMA Insurance Group -
Run-off Operations" herein and Note 19 to the
42
<PAGE>
P M A C A P I T A L
Company's Consolidated Financial Statements for additional discussion). All
other assets increased $272.8 million at December 31, 1998 compared to December
31, 1997, primarily due to an increase of $277.9 million in reinsurance
receivables. The increase in reinsurance receivables primarily relates to the
sale of PMA Cayman, which resulted in the recording of reinsurance receivables
of $248.6 million.
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.
The Company actively manages its exposure to catastrophes through its
underwriting process, where the Company generally monitors the accumulation of
insurable values in catastrophe prone regions. Also, in writing property
reinsurance coverages, PMA Re typically requires per occurrence loss limitations
for contracts that could have catastrophe exposure. Through per risk
reinsurance, the Company also manages its net retention in each exposure. In
addition, PMA Re maintains retrocessional protection of $48.0 million in excess
of $2.0 million per occurrence and The PMA Insurance Group maintains catastrophe
reinsurance protection of $27.7 million excess of $850,000. As a result, the
Company's loss and LAE ratios have not been significantly impacted by
catastrophes in 1998, 1997 or 1996. Although the Company believes that it has
adequate reinsurance to protect against the estimated probable maximum gross
loss from a catastrophe, an especially severe catastrophe or series of
catastrophes could exceed the Company's reinsurance and/or retrocessional
protection and may have a material adverse impact on the Company's results of
operations and financial condition.
At December 31, 1998, the Company's reinsurance and retrocessional protection
was as follows:
Retention Limits (1)
- -------------------------------------------------------------------------
PMA Re
Per Occurrence:
Casualty lines $ 2.8 million $ 17.5 million
Workers' compensation $ 2.0 million $ 98.0 million
Property lines $ 2.0 million $ 48.0 million
Per Risk:
Property lines $ 800,000 $ 4.3 million
Casualty lines $ 1.5 million $ 6.0 million
The PMA Insurance Group
Per Occurrence:
Workers' compensation $ 1.5 million(2) $103.5 million
Per Risk:
Property lines $ 500,000(3) $ 19.5 million
Auto physical damage $ 500,000 $ 2.0 million
Other casualty lines $ 175,000(4) $ 4.8 million
Caliber One
Per Occurrence and Per Risk:
Property lines $ 200,000 $ 4.8 million
Casualty lines $ 500,000 $ 4.5 million
(1) Represents the amount of loss protection above the Company's level of loss
retention.
(2) Effective January 1, 1999, The PMA Insurance Group's net retention on
workers' compensation has been reduced to $150,000.
(3) This coverage also provides protection of $48.5 million per occurrence over
its combined net retention of $500,000.
(4) This coverage also provides protection of $49.8 million per occurrence over
its combined net retention of $175,000.
43
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
The Company performs extensive credit reviews on its reinsurers, focusing on,
among other things, financial capacity, stability, trends and commitment to the
reinsurance business. Prospective and existing reinsurers failing to meet the
Company's standards are excluded from the Company's reinsurance programs. In
addition, the Company requires letters of credit or other acceptable collateral
to support balances due from reinsurers not authorized to transact business in
the applicable jurisdictions (see Note 5 to the Company's Consolidated Financial
Statements for a listing of reinsurance recoverables due from unaffiliated
single reinsurers in excess of 3% of shareholders' equity as of December 31,
1998).
Investments
The Company's investment policy objectives are to (i) seek competitive after-tax
income and total return, (ii) maintain high investment grade asset quality and
marketability, (iii) maintain maturity distribution commensurate with the
Company's business objectives, (iv) provide portfolio flexibility for changing
business and investment climates and (v) provide liquidity to meet operating
objectives. The Company's investment strategy includes guidelines for asset
quality standards, asset allocations and other relevant criteria for its
portfolio. In addition, maturities are structured after projecting liability
cash flows with actuarial models. The Company's portfolio does not contain any
significant concentrations in single issuers (other than U.S. treasury and
agency obligations), industry segments or geographic regions.The Company has no
investments which are not dollar denominated as of December 31, 1998.
The following table summarizes the Company's investments by fair value as of
December 31:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------
(dollar amounts in millions) Fair Value Percent Fair Value Percent
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government agencies $ 827.2 35.5% $ 1,134.9 51.7%
Obligations of states, political
subdivisions and foreign governments 24.9 1.1% -- --
Corporate debt securities 420.3 18.1% 477.0 21.7%
Mortgage-backed and other asset-backed securities 555.0 23.9% 317.6 14.5%
Short-term investments 498.0 21.4% 265.2 12.1%
-----------------------------------------
Total $ 2,325.4 100.0% $ 2,194.7 100.0%
=========================================
</TABLE>
Mortgage-backed and other asset-backed securities include collateralized
mortgage obligations ("CMOs") of $100.0 million and $4.2 million carried at fair
value as of December 31, 1998 and 1997, respectively. CMO holdings are
concentrated in securities with limited prepayment, extension and default risk,
such as planned amortization class bonds.
44
<PAGE>
P M A C A P I T A L
The following table indicates the composition of the Company's fixed maturities
portfolio at fair value, excluding short-term investments, by rating as of
December 31:
(dollar amounts in millions)
1998 1997
------------------------------------------
Ratings (1) Fair Value Percent Fair Value Percent
- -------------------------------------------------------------------------------
U.S. Treasury securities and AAA $ 1,355.2 74.2% $ 1,449.0 75.1%
AA 100.5 5.5% 150.0 7.8%
A 266.4 14.6% 282.2 14.6%
BBB 105.3 5.7% 48.3 2.5%
------------------------------------------
Total $ 1,827.4 100.0% $ 1,929.5 100.0%
==========================================
(1) Ratings as assigned by Standard and Poor's. Such ratings are generally
assigned at the time of the issuance of the securities, subject to revision
on the basis of ongoing evaluations.
The following table reflects the Company's investment results:
(dollar amounts in millions) 1998 1997 1996
- -----------------------------------------------------------------------------
Average invested assets(1) $ 2,048.5 $ 2,236.0 $ 2,371.6
Net investment income(2) $ 119.1 $ 132.8 $ 130.8
Net effective yield(3) 5.82% 5.94% 5.52%
(1) Average invested assets throughout the year, at amortized cost, excluding
amounts related to securities lending activities.
(2) Gross investment income less investment expenses. Excludes net realized
investment gains and amounts related to securities lending activities.
(3) Net investment income for the period divided by average invested assets for
the same period.
As of December 31, 1998, the duration of the Company's investments was 5.1 years
and the duration of its insurance reserves was 4.9 years.
See "Business - Investments" in the Company's 1998 Form 10-K and Notes 2-B
and 3 to the Company's Consolidated Financial Statements for additional
discussion.
Market Risk of Financial Instruments
A significant portion of PMA Capital's assets and liabilities are financial
instruments, which are subject to the market risk of potential losses from
adverse changes in market rates and prices. The Company's primary market risk
exposures relate to interest rate risk on fixed rate domestic medium-term
instruments and, to a lesser extent, domestic short- and long-term instruments.
The Company has established strategies, asset quality standards, asset
allocations and other relevant criteria for its portfolio to manage its exposure
to market risk. In addition, maturities are structured after projecting
liability cash flows with actuarial models. The Company currently has only one
derivative instrument outstanding, an interest rate swap on its Credit Facility,
which is used as a hedge. All of the Company's financial instruments are held
for purposes other than trading. The Company's portfolio does not contain any
significant concentrations in single issuers (other than U.S. treasury and
agency obligations), industry segments or geographic regions (see Notes 3, 6 and
10 to the Company's Consolidated Financial Statements for additional
discussion).
Caution should be used in evaluating PMA Capital's overall market risk from
the information below, since actual results could differ materially because the
information was developed using estimates and assumptions as described below,
and because insurance liabilities and reinsurance receivables are excluded in
the hypothetical effects (insurance liabilities represent 73.5% of total
liabilities and reinsurance receivables on unpaid losses represent 17.2% of
total assets).
45
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments as of December 31, 1998, excluding insurance
liabilities and reinsurance receivables on unpaid losses because such insurance
related assets and liabilities are not carried at fair value, would have been as
follows:
. If interest rates had increased by 100 basis points, there would have been
no significant change in the fair value of the Company's long-term debt or
the related swap agreement. The change in fair values was determined by
estimating the present value of future cash flows using models that measure
the change in net present values arising from selected hypothetical changes
in market interest rates.
. If interest rates had increased by 100 basis points, there would have been
an approximate $106.8 million net decrease in the fair value of the
Company's investment portfolio. The change in fair values was determined by
estimating the present value of future cash flows using various models,
primarily duration modeling.
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 reinterpret 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 (see Notes 4, 8, 11 and 13 to the Company's Consolidated
Financial Statements for additional discussion).
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 February 28, 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.
46
<PAGE>
P M A C A P I T A L
The cost of the Company's Year 2000 readiness work through December 31,
1998 has been approximately $5.4 million, including approximately $1.5 million
incurred during 1998. 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 February 28, 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,
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.
47
<PAGE>
P M A C A P I T A L
Management's Discussion and Analysis (continued)
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 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, which will be recorded under Codification.
The Insurance Department of Pennsylvania 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 (see Note 18 to the
Company's Consolidated Financial Statements for additional discussion).
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125, which is effective for transfers and extinguishments occurring after
December 31, 1996, provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. In
December 1996, FASB issued SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," which deferred for one year
certain provisions of SFAS No. 125.
As of January 1, 1998, the Company adopted SFAS No. 130, "Comprehensive
Income," which establishes standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses).
SFAS No. 130 requires that all items required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
As of January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (see "Results of Operations"
above for additional discussion).
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises employers'
disclosures about pensions and other post-retirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans and was effective
for fiscal years beginning after December 15, 1997.
48
<PAGE>
P M A C A P I T A L
In January 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" ("SOP 97-3"). SOP 97-3, which is effective for fiscal years
beginning after December 15, 1998, provides guidance for determining when an
insurance company should recognize a liability for guaranty fund and other
insurance-related assessments and how to measure that liability. The impact of
adopting SOP 97-3 will be reflected as a cumulative effect of an accounting
change in the first quarter of 1999 and is not expected to exceed $5.0 million
on a pre-tax basis.
In June 1998, the FASB issued 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. While the Company is presently
evaluating the impact of SFAS No. 133, the adoption of SFAS No. 133 is not
expected to have a material impact on the Company's financial condition or
results of operations.
See Note 2-K to the Company's Consolidated Financial Statements for
additional discussion.
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.
49
<PAGE>
P M A C A P I T A L
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands, except share data) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale, at fair value (amortized cost:
1998 - $1,781,188; 1997 - $1,900,594) $ 1,827,354 $ 1,929,518
Equity securities, at fair value (cost: 1998 - $5; 1997 - $5) 17 13
Short-term investments, at cost which approximates fair value 498,038 265,207
------------------------------
Total investments 2,325,409 2,194,738
Cash 2,562 32,148
Accrued investment income 19,900 23,818
Premiums receivable (net of valuation allowance: 1998 - $19,874; 1997 - $18,406) 279,633 252,425
Reinsurance receivables (net of valuation allowance: 1998 - $2,178; 1997 - $2,096) 610,291 332,406
Deferred income taxes, net 63,929 70,391
Deferred acquisition costs 51,115 45,288
Other assets 107,879 106,044
------------------------------
Total assets $ 3,460,718 $ 3,057,258
==============================
Liabilities:
Unpaid losses and loss adjustment expenses $ 1,940,895 $ 2,003,187
Unearned premiums 227,945 211,455
Long-term debt 163,000 203,000
Accounts payable and accrued expenses 107,952 81,524
Funds held under reinsurance treaties 77,674 69,545
Dividends to policyholders 10,700 10,200
Payable under securities loan agreements 421,072 --
------------------------------
Total liabilities 2,949,238 2,578,911
------------------------------
Commitments and contingencies (Note 13)
Shareholders' Equity:
Common stock, $5 par value (40,000,000 shares authorized;
1998 - 13,956,268 shares issued and 13,520,261 outstanding;
1997 - 15,286,263 shares issued and 14,850,789 outstanding) 69,781 76,431
Class A common stock, $5 par value (40,000,000 shares authorized;
1998 - 10,486,677 shares issued and 9,837,963 outstanding;
1997 - 9,156,682 shares issued and 9,117,735 outstanding) 52,433 45,783
Additional paid-in capital - Class A common stock 339 339
Retained earnings 377,601 343,368
Accumulated other comprehensive income 30,016 18,806
Notes receivable from officers (498) (198)
Treasury stock, at cost:
Common stock (1998 - 436,007 shares; 1997 - 435,474 shares) (5,582) (5,572)
Class A common stock (1998 - 648,714 shares; 1997 - 38,947 shares) (12,610) (610)
------------------------------
Total shareholders' equity 511,480 478,347
------------------------------
Total liabilities and shareholders' equity $ 3,460,718 $ 3,057,258
==============================
</TABLE>
See accompanying notes to the consolidated financial statements.
50
<PAGE>
P M A C A P I T A L
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net premiums written $ 474,761 $ 381,282 $ 432,975
Change in net unearned premiums (8,046) (5,331) (12,400)
-----------------------------------------------
Net premiums earned 466,715 375,951 420,575
Net investment income 120,125 133,392 130,837
Net realized investment gains 21,745 8,598 2,984
Other revenues 14,896 13,617 12,288
-----------------------------------------------
Total revenues 623,481 531,558 566,684
-----------------------------------------------
Losses and Expenses:
Losses and loss adjustment expenses 352,671 307,281 536,623
Acquisition expenses 110,837 93,501 90,292
Operating expenses 72,159 75,139 97,856
Dividends to policyholders 17,736 14,716 16,255
Interest expense 15,009 15,768 17,052
-----------------------------------------------
Total losses and expenses 568,412 506,405 758,078
-----------------------------------------------
Income (loss) before income taxes and extraordinary loss 55,069 25,153 (191,394)
-----------------------------------------------
Provision (benefit) for income taxes:
Current 9,910 (4,506) (44,572)
Deferred 425 9,906 (11,488)
-----------------------------------------------
Total 10,335 5,400 (56,060)
-----------------------------------------------
Income (loss) before extraordinary loss 44,734 19,753 (135,334)
Extraordinary loss from early extinguishment
of debt (net of income tax benefit of $2,549) -- (4,734) --
-----------------------------------------------
Net income (loss) $ 44,734 $ 15,019 $(135,334)
===============================================
Income (loss) per share:
Basic:
Income (loss) before extraordinary loss $ 1.89 $ 0.83 $ (5.68)
Extraordinary loss -- (0.20) --
-----------------------------------------------
Net income (loss) $ 1.89 $ 0.63 $ (5.68)
===============================================
Diluted:
Income (loss) before extraordinary loss $ 1.82 $ 0.80 $ (5.68)
Extraordinary loss -- (0.19) --
-----------------------------------------------
Net income (loss) $ 1.82 $ 0.61 $ (5.68)
===============================================
</TABLE>
See accompanying notes to the consolidated financial statements.
51
<PAGE>
P M A C A P I T A L
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 76,431 $ 80,477 $ 85,223
Conversion of Common stock into Class A common stock (6,650) (4,046) (4,746)
-----------------------------------------------
Balance at end of year 69,781 76,431 80,477
-----------------------------------------------
Class A common stock:
Balance at beginning of year 45,783 41,239 36,493
Conversion of Common stock into Class A common stock 6,650 4,046 4,746
Issuance of shares -- 498 --
-----------------------------------------------
Balance at end of year 52,433 45,783 41,239
-----------------------------------------------
Additional paid-in capital - Class A common stock:
Balance at beginning of year 339 -- --
Issuance of shares -- 339 --
-----------------------------------------------
Balance at end of year 339 339 --
-----------------------------------------------
Retained earnings:
Balance at beginning of year 343,368 336,921 480,181
Net income 44,734 15,019 (135,334)
Common stock dividends declared (4,527) (4,842) (5,138)
Class A common stock dividends declared (3,417) (3,147) (2,788)
Reissuance of treasury shares under employee benefit plans (2,557) (583) --
-----------------------------------------------
Balance at end of year 377,601 343,368 336,921
-----------------------------------------------
Accumulated other comprehensive income (loss):
Balance at beginning of year 18,806 (24,874) 17,511
Other comprehensive income (loss) (net of tax effect:
1998 - ($6,036); 1997 - ($23,520); 1996 - $22,823) 11,210 43,680 (42,385)
-----------------------------------------------
Balance at end of year 30,016 18,806 (24,874)
-----------------------------------------------
Notes receivable from officers:
Balance at beginning of year (198) (1,162) (3,896)
(Issuance) repayment of notes receivable from officers (300) 964 2,734
-----------------------------------------------
Balance at end of year (498) (198) (1,162)
-----------------------------------------------
Treasury stock - Common:
Balance at beginning of year (5,572) (5,408) (4,769)
Purchase of treasury shares (10) (164) (639)
-----------------------------------------------
Balance at end of year (5,582) (5,572) (5,408)
-----------------------------------------------
Treasury stock - Class A common:
Balance at beginning of year (610) (1,365) (1,075)
Purchase of treasury shares (18,840) (433) (1,867)
Reissuance of treasury shares under employee benefit plans 6,840 1,188 1,577
-----------------------------------------------
Balance at end of year (12,610) (610) (1,365)
-----------------------------------------------
Total shareholders' equity:
Balance at beginning of year 478,347 425,828 609,668
Issuance of shares -- 837 --
Net income (loss) 44,734 15,019 (135,334)
Common stock dividends declared (4,527) (4,842) (5,138)
Class A common stock dividends declared (3,417) (3,147) (2,788)
Other comprehensive income (loss) 11,210 43,680 (42,385)
(Issuance) repayment of notes receivable from officers (300) 964 2,734
Purchase of treasury shares (18,850) (597) (2,506)
Reissuance of treasury shares under employee benefit plans 4,283 605 1,577
-----------------------------------------------
Balance at end of year $ 511,480 $ 478,347 $ 425,828
===============================================
</TABLE>
See accompanying notes to the consolidated financial statements.
52
<PAGE>
P M A C A P I T A L
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 44,734 $ 15,019 $ (135,334)
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities:
Depreciation and amortization 5,895 8,690 12,511
Provision (benefit) for deferred income taxes 425 9,906 (11,488)
Extraordinary loss from early extinguishment of debt -- (4,734) --
Net realized investment gains (21,745) (8,598) (2,984)
Change in:
Premiums receivable and unearned premiums, net (10,718) 39,030 17,983
Dividends to policyholders 500 (2,324) (632)
Reinsurance receivables (60,348) (74,423) 6,664
Unpaid losses and loss adjustment expenses (62,292) (87,885) 21,086
Accrued investment income 3,918 6,577 5,188
Deferred acquisition costs (5,827) (1,282) (6,105)
Other, net 25,806 (6,753) (22,834)
-------------------------------------------------
Net cash flows used in operating activities (79,652) (106,777) (115,945)
-------------------------------------------------
Cash flows from investing activities:
Fixed maturity investments available for sale:
Purchases (1,741,790) (1,963,492) (1,227,173)
Maturities or calls 207,285 168,304 52,280
Sales 1,468,231 2,072,842 1,210,114
Equity securities:
Purchases -- -- (5,196)
Sales -- 254 16,984
Net sales (purchases) of short-term investments 176,658 (130,391) 78,935
Proceeds from sale of PMA Insurance, Cayman Ltd. 2,902 -- --
Purchase of Caliber One Indemnity Company,
net of acquired cash -- (11,481) --
Other, net (414) 3,568 (6,723)
-------------------------------------------------
Net cash flows provided by investing activities 112,872 139,604 119,221
-------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 210,000 26,000
Repayments of long-term debt (40,000) (211,699) (25,149)
Dividends paid to shareholders (7,939) (7,965) (7,926)
Proceeds from exercised stock options and issuance
of Class A common stock 4,283 1,442 1,577
Purchase of treasury stock (18,850) (597) (2,506)
Net (issuance) repayments of notes receivable from officers (300) 964 2,734
-------------------------------------------------
Net cash flows used in financing activities (62,806) (7,855) (5,270)
-------------------------------------------------
Net (decrease) increase in cash (29,586) 24,972 (1,994)
Cash - beginning of year 32,148 7,176 9,170
-------------------------------------------------
Cash - end of year $ 2,562 $ 32,148 $ 7,176
=================================================
Supplementary cash flow information:
Income tax (refunds) paid $ (15,170) $ (19,112) $ 5,525
Interest paid $ 14,895 $ 19,776 $ 16,622
</TABLE>
See accompanying notes to the consolidated financial statements.
53
<PAGE>
P M A C A P I T A L
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 44,734 $ 15,019 $(135,334)
-----------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Holding gain (loss) arising during the period 25,344 49,269 (40,445)
Less: reclassification adjustment for gains included in net
income (net of tax effect: 1998 - $7,611; 1997 - $3,009;
1996 - $1,044) (14,134) (5,589) (1,940)
-----------------------------------------------
Other comprehensive income (loss), net of tax 11,210 43,680 (42,385)
-----------------------------------------------
Comprehensive income (loss) $ 55,944 $ 58,699 $(177,719)
===============================================
</TABLE>
See accompanying notes to the consolidated financial statements.
54
<PAGE>
P M A C A P I T A L
Notes to 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, and
emphasize risk-exposed, excess of loss reinsurance and operate in the brokered
market. PMA Re's business is predominantly in casualty lines of reinsurance.
Workers' Compensation and Primary Standard Insurance -- 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 -- During 1997, the Company established a
separate specialty insurance operation focusing on excess and surplus lines,
Caliber One Management Company ("Caliber One"). In December 1997, PMA
Reinsurance Corporation acquired 100% of the outstanding common stock of Caliber
One Indemnity Company, domiciled in Delaware and formerly known as Lincoln
Insurance Company, for approximately $16.0 million and made a capital
contribution of approximately $11.3 million to Caliber One Indemnity Company.
All of Caliber One Indemnity Company's acquired loss reserves were reinsured
with an affiliate of its former parent for adverse development and uncollectible
reinsurance (the "Reserve Guarantee") in the amount of the recorded reserves
plus $68.5 million. Upon the purchase of Caliber One Indemnity Company,
management valued the amount of the Reserve Guarantee at approximately $5.0
million in excess of the stated acquired reserves. Management believes that the
Reserve Guarantee will be adequate to cover any future adverse reserve
development or uncollectible reinsurance on the acquired reserves. PMA
Reinsurance Corporation intends to maintain Caliber One Indemnity Company's
surplus at not less than $25.0 million, the minimum capital and surplus required
for many states in order to be an eligible surplus lines carrier. During 1998,
Caliber One primarily wrote primary and excess products liability, other
commercial liability and certain property exposures. Because Caliber One's
results were not significant in 1997, its financial information was included
within the Corporate and Other segment in 1997, including pre-opening costs of
approximately $900,000, which were expensed as incurred.
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").
All significant intercompany accounts and transactions have been eliminated in
consolidation. 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.
Actual results could differ from those estimates. In addition, certain prior
year amounts have been restated to conform to the current year classification.
B. Investments -- Fixed maturity investments include U.S. Treasury securities
and obligations of U.S. Government agencies; obligations of states, political
subdivisions and foreign governments; corporate debt securities; and
mortgage-backed and other asset-backed securities. All fixed maturity
investments are classified as available-for-sale and, accordingly, are carried
at fair value with changes in fair value, net of income tax effects, reflected
in accumulated other comprehensive income.
55
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
Equity securities for all periods are stated at fair value with changes in
fair value, net of income tax effects, reflected in accumulated other
comprehensive income. Short-term investments, which have an original maturity of
one year or less, are carried at cost, which approximates fair value.
Realized gains and losses, determined by specific identification where
possible and the first-in, first-out method in other instances, are reflected in
income in the period in which the sale transaction occurs.
C. Premiums -- Premiums, including estimates of additional premiums resulting
from audits of insureds' records, are earned principally on a pro rata basis
over the terms of the policies. Premiums applicable to the unexpired terms of
policies in force are reported as unearned premiums. The estimated premiums
receivable on retrospectively rated policies are reported as a component of
premiums receivable (see Note 2-L).
The Company follows Emerging Issues Task Force Consensus Position No. 93-6,
"Accounting for Multiple Year Retrospectively Rated Contracts by Ceding and
Assuming Enterprises" ("EITF 93-6"). EITF 93-6 requires that the Company reflect
adjustments to future premiums, as the result of past experience under multiple
year reinsurance contracts, in earnings currently. The impact of EITF 93-6 has
not been material.
D. Unpaid Losses and Loss Adjustment Expenses -- Unpaid losses and loss
adjustment expenses, which are stated net of estimated salvage and subrogation,
are estimates of losses and loss adjustment expenses on known claims, and
estimates of losses and loss adjustment expenses incurred but not reported
("IBNR"). IBNR reserves are calculated utilizing various actuarial methods.
Unpaid losses on certain workers' compensation claims are discounted to present
value using the Company's payment experience and mortality and interest
assumptions in accordance with statutory accounting practices prescribed or
permitted by the Pennsylvania Insurance Department and the Delaware Insurance
Department (collectively "SAP") (see Note 4). The methods of making such
estimates and establishing the resulting reserves are continually reviewed and
updated and any adjustments resulting therefrom are reflected in earnings
currently.
E. Deferred Acquisition Costs -- Costs that directly relate to and vary with
acquisition of new and renewal business are deferred and amortized over the
period during which the related premiums are earned. Such direct costs include
commissions, brokerage and premium taxes, as well as other policy issuance costs
and underwriting expenses. The Company determines whether deferred acquisition
costs are recoverable considering future losses and loss adjustment expenses,
maintenance costs and anticipated investment income. To the extent that deferred
acquisition costs are not recoverable, the deficiency is charged to income
currently.
F. Dividends to Policyholders -- The PMA Insurance Group issues certain workers'
compensation insurance policies with dividend payment features. These
policyholders share in the operating results of their respective policies in the
form of dividends declared at the discretion of the Board of Directors of The
PMA Insurance Group's operating companies. Dividends to policyholders are
accrued during the period in which the related premiums are earned and are
determined based on the terms of the individual policies.
G. Income Taxes -- The Company records deferred tax assets and liabilities to
the extent of the tax effect of differences between the financial statement
carrying values and tax bases of assets and liabilities. A valuation allowance
is recorded for deferred tax assets where it appears more likely than not that
the Company will not be able to recover the deferred tax asset. In addition, PMA
Capital and a majority of its subsidiaries have a tax-sharing agreement which
allocates to each entity subject to the agreement its Federal income taxes on a
separate return basis. The benefit of any net operating losses is retained by
PMA Capital.
56
<PAGE>
P M A C A P I T A L
H. Per Share Data -- Earnings per share data for all periods is presented in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share."
Basic earnings per share: For years 1998, 1997 and 1996, basic earnings per
share was based upon the weighted average number of common and Class A common
shares outstanding during the year.
Diluted earnings per share: For years 1998 and 1997, diluted earnings per
share was based upon the weighted average number of common and Class A common
shares outstanding during the year and common stock equivalents. In 1996,
diluted earnings per share was based upon the weighted average common and Class
A common shares outstanding during the year. Common stock equivalents were
excluded because they would have had an anti-dilutive effect on the net loss per
share (see Note 16).
I. Stock-Based Compensation -- The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's Class A common
stock at grant date or other measurement date over the amount an employee must
pay to acquire the Class A common stock.
J. Other Revenues -- Other revenues include service revenues related to
unbundled claims, risk management and related services provided by The PMA
Insurance Group, which are earned over the term of the related contracts in
proportion to the actual services rendered, and other miscellaneous revenues.
K. Recent Accounting Pronouncements -- In June 1996, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125,
which is effective for transfers and extinguishments occurring after December
31, 1996, provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. In
December 1996, FASB issued SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," which deferred for one year
certain provisions of SFAS No. 125. As a result of adopting SFAS No. 125 and
SFAS No. 127 during 1998, the Company recorded short-term investments, and a
corresponding liability representing cash collateral received in conjunction
with the Company's securities lending program, of $421.1 million as of December
31, 1998 (see Note 3).
As of January 1, 1998, the Company adopted SFAS No. 130, "Comprehensive
Income," which establishes standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses).
SFAS No. 130 requires that all items required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires only additional disclosures and does not
affect the Company's financial position or results of operations.
As of January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes standards
for the reporting of information about operating segments. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. In connection with the adoption of SFAS
No. 131, the Company has identified four reportable segments: (i) PMA Re, which
provides property and casualty reinsurance products and services; (ii) The PMA
Insurance Group, which writes workers' compensation and other standard lines of
commercial insurance; (iii) Caliber One, which writes specialty insurance
focusing on excess and surplus lines; and (iv) Corporate and Other, which
includes unallocated investment income; expenses, including debt service; and
taxes, as well as the results of certain of the Company's real estate
properties. SFAS No. 131 requires only additional disclosures (see Note 17) and
does not affect the Company's financial position or results of operations.
57
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises employers'
disclosures about pensions and other post-retirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans and was effective
for fiscal years beginning after December 15, 1997. The Company has applied the
guidelines of SFAS No. 132 in its pension and other postretirement related
disclosures (see Note 9).
In January 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" ("SOP 97-3"). SOP 97-3, which is effective for fiscal years
beginning after December 15, 1998, provides guidance for determining when an
insurance company should recognize a liability for guaranty fund and other
insurance-related assessments and how to measure that liability. The impact of
adopting SOP 97-3 will be reflected as a cumulative effect of an accounting
change in the first quarter of 1999 and is not expected to exceed $5.0 million
on a pre-tax basis.
In June 1998, the FASB issued 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
or results of operations.
L. Accrued Retrospective Premiums -- Accrued retrospective premiums, which are a
component of premiums receivable, are based upon actuarial estimates of expected
ultimate losses and resulting estimated premium adjustments relating to
retrospectively rated policies. The change in accrued retrospective premiums is
a component of net premiums written and net premiums earned. The estimated
ultimate premium adjustments under retrospectively rated policies are recorded
in the initial accident year based upon estimated loss experience on the
underlying policies and adjusted in subsequent periods in conjunction with
revisions of the underlying estimated losses on such policies. In addition,
accrued retrospective premiums are increased (decreased) based upon
retrospective policy adjustments paid (billed).
The following sets forth the components of the change in accrued
retrospective premiums for each of the past three years:
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Estimated retrospective policy adjustments
related to current accident year $ (9,204) $(12,460) $(18,767)
Revision of estimate of retrospective policy
adjustments related to prior accident years (11,684) (44,719) (9,888)
Retrospective policy adjustments paid 17,888 20,179 23,155
Uncollectible write-off -- -- (5,000)
--------------------------------
Total $ (3,000) $(37,000) $(10,500)
================================
The $44.7 million revision of estimate of accrued retrospective premiums in 1997
related to the favorable development of claims liabilities for more recent
accident years ($35.7 million) and the commutation of claims for accident years
1991 and prior ($9.0 million). The reduction for accident years 1991 and prior
primarily relates to the commutation program for such years initiated in late
1996. As a result of the differences between the current commutation payments to
claimants and carried reserves on such claims, management reduced its estimate
of amounts recoverable under retrospectively rated policies and also recognized
a reduction in losses and loss adjustment expenses associated with such
58
<PAGE>
P M A C A P I T A L
policies. The reduction related to 1992 through 1996 policy years was primarily
related to a corresponding amount of favorable development on underlying loss
reserves for such years (see Note 4). The effects of the commutations on these
prior loss reserves, as well as the intent of The PMA Insurance Group to
continue utilizing early intervention techniques such as commutations on claims
from more recent accident years, have led to a re-estimation of policy
liabilities and amounts due under retrospectively rated policies for these more
recent accident years.
Management believes that it has made a reasonable estimate of the Company's
accrued retrospective premiums. While the eventual ultimate receivable may
differ from the current estimates, management does not believe that the
difference will have a material effect, either adversely or favorably, on the
Company's financial position or results of operations.
3. Investments
The Company's investment portfolio is diversified and contains no significant
concentrations in any specific industry, business segment or individual issuer.
The amortized cost and fair value of the Company's investment portfolio are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(dollar amounts in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
Fixed maturities available for sale:
U.S. Treasury securities and obligations
of U.S. Government agencies $ 801,174 $ 27,112 $ 1,097 $ 827,189
States, political subdivisions and foreign
government securities 24,634 236 9 24,861
Corporate debt securities 406,707 14,267 632 420,342
Mortgage-backed and other asset-
backed securities 548,673 7,263 974 554,962
-------------------------------------------------------------
Total fixed maturities available for sale 1,781,188 48,878 2,712 1,827,354
Equity securities 5 12 -- 17
Short-term investments 498,038 -- -- 498,038
-------------------------------------------------------------
Total investments $2,279,231 $ 48,890 $ 2,712 $2,325,409
=============================================================
December 31, 1997
Fixed maturities available for sale:
U.S. Treasury securities and obligations
of U.S. Government agencies $1,121,112 $ 17,267 $ 3,564 $1,134,815
States, political subdivisions and foreign
government securities 100 -- -- 100
Corporate debt securities 464,925 12,197 115 477,007
Mortgage-backed and other asset-
backed securities 314,457 3,305 166 317,596
-------------------------------------------------------------
Total fixed maturities available for sale 1,900,594 32,769 3,845 1,929,518
Equity securities 5 8 -- 13
Short-term investments 265,207 -- -- 265,207
-------------------------------------------------------------
Total investments $2,165,806 $ 32,777 $ 3,845 $2,194,738
=============================================================
</TABLE>
59
<PAGE>
P M A C A P I T A L
The amortized cost and fair value of fixed maturities at December 31, 1998, by
contractual maturity are as follows.
<TABLE>
<CAPTION>
Amortized Fair
(dollar amounts in thousands) Cost Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 167,448 $ 168,648
2000-2003 526,127 532,894
2004-2008 192,348 198,097
2009 and thereafter 346,592 372,753
Mortgage-backed and other asset-backed securities 548,673 554,962
--------------------------------
$ 1,781,188 $ 1,827,354
================================
<CAPTION>
Net investment income consists of the following:
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 115,414 $ 128,400 $ 131,530
Short-term investments 7,959 7,282 7,711
Other 1,590 1,116 300
-----------------------------------------------------
Total investment income 124,963 136,798 139,541
Investment expenses 4,838 3,406 8,704
-----------------------------------------------------
Net investment income $ 120,125 $ 133,392 $ 130,837
=====================================================
<CAPTION>
Net realized investment gains consist of the following:
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gains:
Fixed maturities $ 28,140 $ 20,899 $ 12,762
Equity securities -- -- 4,351
-----------------------------------------------------
28,140 20,899 17,113
Realized losses:
Fixed maturities (6,070) (12,203) (12,861)
Equity securities -- -- (436)
-----------------------------------------------------
(6,070) (12,203) (13,297)
Other realized losses, net (325) (98) (832)
-----------------------------------------------------
Total net realized investment gains $ 21,745 $ 8,598 $ 2,984
=====================================================
</TABLE>
The change in unrealized appreciation (depreciation) of investments for 1998,
1997 and 1996 was $17.2 million, $67.2 million and ($65.2) million,
respectively, primarily attributable to fixed maturities.
On December 31, 1998, the Company had securities with a total amortized
cost of $30.0 million and fair value of $30.4 million on deposit with various
governmental authorities, as required by law. In addition, at December 31, 1998,
securities with a total amortized cost of $12.2 million and fair value of $12.9
million, were pledged as collateral for letters of credit issued on behalf of
the Company.
60
<PAGE>
P M A C A PI T A L
During 1997, the Company established a securities lending program through
which securities are lent from the Company's portfolio to qualifying third
parties, subject to certain limits, via a lending agent for short periods of
time. Borrowers of these securities must provide collateral equal to a minimum
of 102% of the market value and accrued interest of the lent securities.
Acceptable collateral may be in the form of either cash or securities. Cash
received as collateral is invested in short-term investments, and all securities
received as collateral are of similar quality to those securities lent by the
Company. The Company is not permitted by contract to sell or repledge the
securities received as collateral. Additionally, the Company limits securities
lending to 40% of SAP admitted assets of its insurance subsidiaries, with a 2%
limit on SAP admitted assets to any individual borrower. The Company receives
either a fee from the borrower or retains a portion of the income earned on the
collateral. Under the terms of the securities lending program, the Company is
indemnified against borrower default, with the lending agent responsible to the
Company for any deficiency between the cost of replacing a security that was not
returned and the amount of collateral held by the Company. The Company
recognized income from securities lending transactions of $1.0 million and
$524,000 in 1998 and 1997, respectively, net of lending fees, which was included
in investment income. At December 31, 1998, the Company had approximately $424.1
million of collateral related to securities on loan of which $421.1 million was
cash received and subsequently reinvested in short-term investments.
4. Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses ("LAE")
is summarized as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 2,003,187 $ 2,091,072 $ 2,069,986
Less: reinsurance recoverable on unpaid losses and LAE 332,284 256,576 261,492
-----------------------------------------------------
Net balance at January 1 1,670,903 1,834,496 1,808,494
-----------------------------------------------------
Losses and LAE incurred, net:
Current year, net of discount 373,098 341,880 323,069
Prior years (46,515) (86,006) 156,074
Accretion of prior years' discount 26,088 51,407 57,480
-----------------------------------------------------
Total losses and LAE incurred, net 352,671 307,281 536,623
-----------------------------------------------------
Losses and LAE paid, net:
Current year (96,658) (72,399) (72,194)
Prior years (362,186) (398,475) (438,427)
-----------------------------------------------------
Total losses and LAE paid, net (458,844) (470,874) (510,621)
-----------------------------------------------------
Reserves transferred in sale of subsidiary (217,536) -- --
-----------------------------------------------------
Net balance at December 31 1,347,194 1,670,903 1,834,496
Reinsurance recoverable on unpaid losses and LAE 593,701 332,284 256,576
-----------------------------------------------------
Balance at December 31 $ 1,940,895 $ 2,003,187 $ 2,091,072
=====================================================
</TABLE>
The Company's results of operations included a decrease in estimated incurred
losses and LAE related to prior accident years of $46.5 million and $86.0
million in 1998 and 1997, respectively, and an increase of $156.1 million in
1996.
During 1998, PMA Re and The PMA Insurance Group recorded favorable reserve
development on prior accident years of $31.5 million and $15.0 million,
respectively. PMA Re recorded favorable reserve development on prior accident
years due to re-estimated loss trends for such years that are lower than
previous expectations. The favorable reserve development at The PMA Insurance
Group primarily relates to the formal commutation programs, which resulted in
early liability settlements made during 1998 to reduce future claim payments.
61
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
During 1997, PMA Re and The PMA Insurance Group recorded favorable reserve
development of $32.1 million and $53.9 million, respectively. Favorable loss
development at The PMA Insurance Group in 1997 can be attributed to the
following: favorable reserve development of approximately $37.0 million related
to retrospectively rated policies for Run-off Operations; the cession of prior
year reserves of $14.8 million from Run-off Operations to a third party
reinsurer; and favorable reserve development of $7.1 million on guaranteed cost
workers' compensation reserves, partially offset by reserve strengthening of
$5.0 million in commercial multi-peril business.
The increase in estimated incurred losses and LAE during 1996 is primarily
due to a loss reserve strengthening charge of $191.4 million. This loss reserve
strengthening was associated with the following lines of business: workers'
compensation, $110.0 million; asbestos and environmental, $60.4 million; and
other commercial lines of business, primarily general liability claims, $21.0
million.
Unpaid losses and LAE reflect management's best estimate of future amounts
needed to pay claims and related settlement costs with respect to insured events
which have occurred, including events that have not been reported to the
Company. In many cases, significant periods of time, ranging up to several years
or more, may elapse between the occurrence of an insured loss, the reporting of
the loss to the Company and the Company's payment of that loss. In general,
liabilities for reinsurers become known more slowly than for primary insurers
and are subject to more unforeseen development. As part of the process in
determining these amounts, historical data is reviewed and consideration is
given to the impact of various factors, such as legal developments, changes in
social attitudes and economic conditions.
Unpaid losses for the Company's workers' compensation claims, net of
reinsurance, at December 31, 1998 and 1997 were $515.6 million and $816.1
million, net of discount of $194.3 million and $460.2 million, respectively. The
approximate discount rate used was 5% at December 31, 1998 and 1997.
Since 1996, the impact on losses from the effects of discounting loss
reserves at The PMA Insurance Group has declined due mainly to the effect of
commutations and lower business writings. The PMA Insurance Group has been
executing programs under which it commuted, or settled, a large number of
workers' compensation claims. Commutations are agreements whereby the claimants,
in exchange for a lump sum payment, release their rights to future indemnity
payments from The PMA Insurance Group. The PMA Insurance Group paid
approximately $64.9 million, $113.0 million and $17.8 million in 1998, 1997 and
1996, respectively, to commute workers' compensation indemnity claims. The
commutation program resulted in payments, which were less than the corresponding
carried reserves. Savings associated with these claims were consistent with
management's expectations. As substantially all of these reserves were carried
on a discounted basis, the ultimate level of discount on The PMA Insurance
Group's carried reserves decreased.
Estimating reserves for workers' compensation claims is difficult for
several reasons, including (i) the long payment "tail" associated with the
business; (ii) the impact of social, political, case law and regulatory trends
on benefit levels for both medical and indemnity payments; (iii) the impact of
economic trends; and (iv) the impact of changes in the mix of business. At
various times, one or a combination of such factors can make the interpretation
of actuarial data associated with workers' compensation loss development more
difficult, and it can take additional time to recognize changes in loss
development patterns. If necessary, adjustments will be made to such reserves as
they are identified if loss patterns develop differently than forecasted or if
new information becomes available and such adjustments may be material to
results of operations, financial condition and liquidity.
62
<PAGE>
P M A C A P I T A L
Management believes that its unpaid losses and LAE are fairly stated at
December 31, 1998. However, estimating the ultimate claims liability is
necessarily a complex and judgmental process inasmuch as the amounts are based
on management's informed estimates and judgments using data currently available.
As additional experience and data become available regarding claims payment and
reporting patterns, legislative developments and economic conditions, the
estimates are revised accordingly. If the Company's ultimate net losses prove to
differ substantially from the amounts recorded at December 31, 1998, the related
adjustments could have a material adverse impact on the Company's results of
operations, financial condition and liquidity.
The Company's asbestos-related losses were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross of reinsurance:
Beginning reserves $ 76,726 $ 80,055 $ 27,611
Incurred losses and LAE (1,976) 2,435 62,854
Calendar year payments for losses and LAE (6,893) (5,764) (10,410)
--------------------------------------------
Ending reserves $ 67,857 $ 76,726 $ 80,055
============================================
Net of reinsurance:
Beginning reserves $ 48,578 $ 53,300 $ 23,443
Incurred losses and LAE (2,754) (36) 39,427
Calendar year payments for losses and LAE (2,268) (4,686) (9,570)
--------------------------------------------
Ending reserves $ 43,556 $ 48,578 $ 53,300
============================================
<CAPTION>
The Company's environmental-related losses were as follows:
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross of reinsurance:
Beginning reserves $ 45,108 $ 35,626 $ 20,134
Incurred losses and LAE 11,895 1,130 22,143
Reserves acquired through purchase of Caliber
One Indemnity Company(1) -- 13,060 --
Calendar year payments for losses and LAE (9,967) (4,708) (6,651)
--------------------------------------------
Ending reserves $ 47,036 $ 45,108 $ 35,626
============================================
Net of reinsurance:
Beginning reserves $ 31,695 $ 34,592 $ 20,134
Incurred losses and LAE 3,644 1,068 21,109
Calendar year payments for losses and LAE (5,983) (3,965) (6,651)
--------------------------------------------
Ending reserves $ 29,356 $ 31,695 $ 34,592
============================================
</TABLE>
(1) Such acquired reserves have been reinsured by an affiliate of the former
parent (see Note 5).
63
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
Of the total net asbestos reserves, approximately $34.2 million, $41.9
million and $46.5 million related to IBNR losses at December 31, 1998, 1997 and
1996, respectively. Of the total net environmental reserves, approximately $20.3
million, $20.5 million and $22.1 million related to IBNR losses at December 31,
1998, 1997 and 1996, respectively. All incurred asbestos and environmental
losses were for accident years 1986 and prior.
Estimating reserves for asbestos and environmental exposures continues to
be difficult because of several factors, including: (i) evolving methodologies
for the estimation of the liabilities; (ii) lack of reliable historical claim
data; (iii) uncertainties with respect to insurance and reinsurance coverage
related to these obligations; (iv) changing judicial interpretations; and (v)
changing government standards. To reserve for environmental claims, the Company
currently utilizes a calendar year development technique known as aggregate loss
development. This technique focuses on the aggregate losses paid as of a
particular date and aggregate payment patterns associated with such claims.
Several elements including remediation studies, remediation, defense,
declaratory judgment and third party bodily injury claims were considered in
estimating the costs and payment patterns of the environ-mental and toxic tort
losses. Prior to the development of these techniques, there was a substantial
range in the nature of reserving for environmental and toxic tort liabilities.
In 1996, the Company performed a ground up analysis of loss reserves for
direct asbestos exposures using an actuarially accepted modeling technique.
Using historical information as a base and information obtained from a review of
open claims files, assumptions were made about future claims activity in order
to estimate ultimate losses. For each individual major account, projections were
made regarding new plaintiffs per year, the number of years new claims will be
reported, the average loss severity per plaintiff and the ratio of LAE to loss.
In many cases involving larger asbestos claims, the Company reserved up to the
policy limits for the applicable loss coverage parts for the affected accounts.
Policy terms and reinsurance treaties were applied in the modeling of future
losses.
Management believes that its reserves for asbestos and environmental claims
are appropriately established based upon known facts, existing case law and
generally accepted actuarial methodologies. However, due to changing
interpretations by courts involving coverage issues, the potential for changes
in federal and state standards for clean-up and liability, as well as issues
involving policy provisions, allocation of liability among participating
insurers, proof of coverage and other factors, the Company's ultimate exposure
for these claims may vary significantly from the amounts currently recorded,
resulting in a potential future adjustment that could be material to the
Company's financial condition and results of operations.
The Company's loss reserves were stated net of salvage and subrogation of
approximately $60.4 million and $59.9 million at December 31, 1998 and 1997,
respectively.
5. 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.
64
<PAGE>
P M A C A P I T A L
The components of net premiums earned and losses and LAE incurred are as
follows:
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Earned premiums:
Direct $ 286,987 $ 277,871 $ 299,386
Assumed 276,689 216,357 209,688
Ceded (96,961) (118,277) (88,499)
---------------------------------------
Net $ 466,715 $ 375,951 $ 420,575
=======================================
Losses and LAE incurred:
Direct $ 250,641 $ 244,429 $ 420,157
Assumed 184,309 166,202 163,799
Ceded (82,279) (103,350) (47,333)
---------------------------------------
Net $ 352,671 $ 307,281 $ 536,623
=======================================
At December 31, 1998, the Company had reinsurance receivables due from the
following unaffiliated single reinsurers in excess of 3% of shareholders'
equity:
(dollar amounts in thousands) Gross amount due
Reinsurer to the Company
- ---------------------------------------------------------------------------
London Life Reinsurance Group $264,166
United States Fidelity and Guaranty Company 85,724
American Re-Insurance Corporation 33,652
Essex Insurance Company 30,143
Kemper Reinsurance Corporation 21,714
Continental Casualty Company 16,326
The Company performs extensive credit reviews of its reinsurers focusing on,
among other things, financial capacity, stability, trends and commitment to the
reinsurance business. Prospective and existing reinsurers failing to meet the
Company's standards are excluded from the Company's reinsurance programs. In
addition, the Company requires letters of credit or other acceptable collateral
to support balances due from reinsurers not authorized to transact business in
the applicable jurisdictions.
The Company maintained funds held to collateralize the above balances in
the amount of $74.9 million at December 31, 1998. In addition, the entire
receivable from the London Life Reinsurance Group is secured by assets in trust
($240.8 million) and by letters of credit ($23.4 million).
6. Long-Term Debt
Long-term debt consisted of $163.0 million and $203.0 million outstanding under
the Company's revolving credit facility as of December 31, 1998 and 1997,
respectively. The revolving credit facility matures as follows: $38.0 million in
2000, $62.5 million in 2001 and $62.5 million in 2002.
On March 14, 1997, the Company refinanced substantially all of its existing
credit agreements not already maturing in 1997 through the completion of a new
$235.0 million revolving credit facility (the "Credit Facility"). The early
extinguishment of the senior note agreements resulted in an extraordinary loss
of $4.7 million ($7.3 million pre-tax). The Credit Facility bears interest at
the London InterBank Offered Rate ("LIBOR") plus 0.70% on the utilized portion
and carries a 0.275% facility fee on the unutilized portion. The spread over
LIBOR and the facility fee are adjustable downward in the future based upon the
Company's debt-to-capitalization ratios. As of December 31, 1998, the interest
rate on the utilized portion of the Credit Facility was 5.95%.
The Company has entered into an interest rate swap agreement in its
management of its existing interest rate exposures with a notional principal
balance of $150.0 million at December 31, 1998. The rate on the swap resets
every three months such that it effectively converts the Company's interest rate
exposure on $150.0 million of the Credit Facility, which has a floating rate, to
a fixed obligation (7.24% at December 31, 1998). The swap involves the exchange
of interest payment obligation without
65
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
the exchange of underlying principal. The differential to be paid or received is
recognized as an adjustment of interest expense. In the event that a
counterparty fails to meet the terms of the swap, the Company's exposure is
limited to the interest rate differential on the notional principal amount
($150.0 million). Management believes such credit risk is minimal and any loss
would not be significant.
Effective March 14, 1997, the Company modified its letter of credit
agreement with a group of banks (the "Letter of Credit Agreement") to reduce its
aggregate outstanding face amount to $50.0 million. The agreement requires the
Company to pay a commitment fee, which is adjustable downward in the future
based upon the Company's debt-to-capitalization ratios. At December 31, 1998,
the commitment fee was 0.225% per annum. At December 31, 1998 and 1997, the
aggregate outstanding face amount of letters of credit issued was $46.9 million.
The Letter of Credit Agreement primarily secures reinsurance liabilities of the
insurance subsidiaries of the Company.
The debt covenants supporting the Credit Facility and the Letter of Credit
Agreement contain provisions that, among other matters, limit the Company's
ability to incur additional indebtedness, merge, consolidate and acquire or sell
assets. The debt covenants also require the Company to satisfy certain ratios
related to net worth, debt-to-capitalization and interest coverage.
Additionally, the debt covenants place restrictions on dividends to shareholders
(see Note 15).
7. Stock Options
The Company currently has six stock option plans in place for stock options
granted to officers and other key employees for the purchase of the Company's
Class A common stock, under which 3,478,761 Class A common shares were reserved
for issuance at December 31, 1998. The stock options are granted under terms and
conditions determined by the Stock Option Committee of the Board of Directors.
Stock options granted have a maximum term of ten years, vest over periods
ranging between zero and five years, and are typically granted with an exercise
price approximating the fair market value of the Class A common stock on the
date the options are granted. Information regarding these option plans are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 3,117,612 $ 13.18 3,242,160 $ 12.43 3,087,260 $ 11.80
Options granted 826,500 17.12 324,500 17.00 325,000 17.00
Options exercised (386,142) (11.07) (162,248) (8.78) (99,150) (8.33)
Options forfeited or expired (111,800) (12.26) (286,800) (11.53) (70,950) (11.55)
-------------------------------------------------------------------------------------
Options outstanding,
end of year(1) 3,446,170 $ 14.39 3,117,612 $ 13.18 3,242,160 $ 12.43
=====================================================================================
Options exercisable,
end of year 2,468,233 $ 13.32 2,556,087 $ 12.42 2,642,085 $ 11.75
=====================================================================================
Option price range at
end of year $8.00 to $19.00 $8.00 to $17.00 $8.00 to $17.00
Option price range for
exercised shares $8.00 to $17.00 $8.00 to $15.00 $6.60 to $10.00
Options available for
grant at end of year 7,591 747,291 921,566
</TABLE>
(1) Included in the options outstanding at the end of 1998 are 420,000 options
with an exercise price of $17.00 which become exercisable based on the
Company's Class A common stock achieving certain target prices, with
one-half of those options becoming exercisable at $28.00 and the remaining
one-half becoming exercisable at $32.00.
66
<PAGE>
P M A C A P I T A L
Of the total options granted in 1998, 96% were granted with an exercise
price that exceeded the market value on the grant date ("out-of-the-money"), and
such options had a weighted average exercise price of $17.03 per share and a
weighted average fair value of $3.65 per share. The remaining 4% were granted
with an exercise price that was lower than the market value on the grant date
("in-the-money"), and such options had a weighted average exercise price of
$19.00 per share and a weighted average fair value of $7.59 per share. In 1997,
all options were granted out-of-the-money at an exercise price of $17.00 per
share and a fair value of $5.79 per share. In 1996, all options were granted at
market value equal to $17.00 per share and a fair value of $6.40 per share.
Stock options outstanding at December 31, 1998 and related exercise price
and weighted average remaining life information is as follows:
<TABLE>
<CAPTION>
Weighted Average
Options Options Remaining Life
Exercise Prices Outstanding Exercisable (in years)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 8.00 to $12.00 1,141,205 1,141,205 4.11
$12.01 to $16.00 849,765 849,765 6.08
$16.01 to $19.00 1,455,200 477,263 7.08
-------------------------
3,446,170 2,468,233 5.50
=========================
</TABLE>
The fair value of options at date of grant was estimated using a binomial option
pricing model with the following weighted average assumptions:
1998 1997 1996
- ----------------------------------------------------
Expected life (years) 7.5 10 10
Risk-free interest rate 5.5% 6.3% 6.3%
Expected volatility 26% 18% 18%
Expected dividend yield 1.9% 2.3% 2.3%
The Company has adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, compensation cost that
was recognized in 1998 for the stock option plans was not significant. Had
compensation costs for the Company's stock option plans been determined based on
the fair value at the grant date for awards granted during the year, pre-tax
income would have been reduced by $3.2 million, $1.9 million and $2.1 million in
1998, 1997 and 1996, respectively. After-tax income would have been reduced by
$2.1 million, $1.2 million and $1.4 million or $0.09, $0.05 and $0.06 per basic
share and $0.08, $0.05 and $0.06 per diluted share in 1998, 1997 and 1996,
respectively.
8. Income Taxes The components of the Federal income tax provision (benefit)
from continuing operations are as follows:
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current $ 9,910 $ (4,506) $(44,572)
Deferred 425 9,906 (11,488)
---------------------------------
Provision (benefit) for income taxes $ 10,335 $ 5,400 $(56,060)
=================================
In addition, the Company recognized current and deferred Federal income tax
benefits of $374,000 and $2.2 million, respectively, related to the
extraordinary loss recorded in 1997.
67
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
A reconciliation between the total provision (benefit) for income taxes and the
amounts computed at the Statutory Federal income tax rate of 35% is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed at the Statutory Federal income tax rate $ 19,274 $ 8,804 $(66,988)
(Decrease) increase in taxes resulting from:
Tax-exempt interest -- (61) (4,547)
Losses of foreign reinsurance affiliate -- -- 16,060
Reversal of income tax accruals (12,637) (3,703) --
Other 3,698 360 (585)
--------------------------------
Provision (benefit) for income taxes $ 10,335 $ 5,400 $(56,060)
================================
</TABLE>
The tax effects of significant temporary differences between the financial
statement carrying amounts and tax bases of assets and liabilities that
represent the net deferred tax asset are as follows:
December 31,
(dollar amounts in thousands) 1998 1997
- -----------------------------------------------------------------------------
Discounting of unpaid losses and LAE $ 55,945 $ 63,743
Operating loss carryforwards 29,039 46,088
Unearned premiums 14,305 13,756
Allowance for uncollectible accounts 6,822 6,839
Postretirement benefit obligation 5,160 5,139
Other 12,823 18,919
-------------------------
Gross deferred tax asset 124,094 154,484
-------------------------
Deferred acquisition costs (17,377) (15,723)
Unrealized appreciation of investments (16,163) (10,126)
Losses of foreign reinsurance affiliate (24,542) (55,087)
Other (2,083) (3,157)
-------------------------
Gross deferred tax liability (60,165) (84,093)
-------------------------
Net deferred tax asset $ 63,929 $ 70,391
=========================
At December 31, 1998, the Company had approximately $48.1 million of net
operating loss carryforwards ($40.1 million expiring in 2011 and $8.0 million
expiring in 2012) and approximately $11.9 million of alternative minimum tax
credit carryforwards, which do not expire.
Management believes that it is more likely than not that the benefit of its
deferred tax asset will be fully realized, and therefore has not recorded a
valuation allowance.
The Company's Federal income tax returns are subject to audit by the
Internal Revenue Service ("IRS"), and provisions are made in the financial
statements in anticipation of the results of these audits. In December 1998, the
IRS completed their examination of the 1994 and 1995 U.S. Federal tax returns.
In management's opinion, adequate liabilities have been established for all
years.
In December 1998, the Company received a refund from the IRS of approximately
$15.0 million. The refund relates to a claim for refund filed by the Company
with regard to its 1992 income tax return. In 1997, the Company received a
refund from the IRS of approximately $16.8 million as a result of a net
operating loss, which was generated in 1996 and carried back to 1993, 1994 and
1995.
68
<PAGE>
P M A C A P I T A L
9. Employee Retirement, Postretirement and Postemployment benefits
A. Pension and Other Postretirement Benefits:
Pension Benefits - The Company sponsors a qualified non-contributory defined
benefit pension plan (the "Qualified Pension Plan") covering substantially all
employees. After meeting certain qualifications, an employee acquires a vested
right to future benefits. The benefits payable under the plan are generally
determined on the basis of an employee's length of employment and career average
salary. The Company's policy is to fund pension costs in accordance with the
Employee Retirement Income Security Act of 1974. The Company also maintains a
non-qualified unfunded supplemental defined benefit pension plan (the
"Non-qualified Pension Plan") for the benefit of certain key employees. The
projected benefit obligation and accumulated benefit obligation for the
Nonqualified Pension Plan were $2.8 million and $1.8 million, respectively, as
of December 31, 1998.
Other Postretirement Benefits - In addition to providing pension benefits, the
Company provides certain health care benefits for retired employees and their
spouses. Substantially all of the Company's employees may become eligible for
those benefits if they have worked 15 or more years with the Company and have
attained the age of 50 while in the service of the Company. For employees who
retired on or subsequent to January 1, 1993, the Company will pay a fixed
portion of medical insurance premiums. Retirees will absorb future increases in
medical premiums. The Company also provides Medicare Part B reimbursement for
certain retirees as well as retiree life insurance. The following tables set
forth the amounts recognized in the Company's financial statements with respect
to Pension Benefits and Other Postretirement Benefits:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
December 31, December 31,
(dollar amounts in thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 47,125 $ 51,464 $ 9,673 $ 9,754
Service cost 1,780 1,468 271 237
Interest cost 3,201 3,200 594 655
Plan amendments 310 -- -- --
Actuarial gain (loss) 168 (605) (870) (522)
Settlements -- (5,451) -- --
Benefits paid (2,304) (2,951) (499) (451)
-----------------------------------------------------------
Benefit obligation at end of year $ 50,280 $ 47,125 $ 9,169 $ 9,673
-----------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 40,600 $ 46,739 $ -- $ --
Actual return on plan assets 2,660 3,412 -- --
Employer contributions 1,860 -- -- --
Divestitures -- (6,600) -- --
Benefits paid (2,304) (2,951) -- --
-----------------------------------------------------------
Fair value of plan assets at end of year $ 42,816 $ 40,600 $ -- $ --
-----------------------------------------------------------
Benefit obligation in excess of the fair
value of plan assets $ (7,464) $ (6,525) $ (9,169) $ (9,673)
-----------------------------------------------------------
Unrecognized actuarial loss (gain) 5,894 4,859 (4,137) (3,455)
Unrecognized prior service cost (700) (1,101) (1,198) (1,317)
Unrecognized net transition obligation 316 313 -- --
-----------------------------------------------------------
Accrued benefit at end of year $ (1,954) $ (2,454) $(14,504) $(14,445)
===========================================================
</TABLE>
69
<PAGE>
PMA CAPITAL
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
December 31, December 31,
(dollar amounts in thousands) 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 1,780 $ 1,468 $ 1,763 $ 271 $ 237 $ 248
Interest cost 3,201 3,200 3,098 594 655 561
Expected return on plan assets (3,496) (3,159) (3,458) -- -- --
Amortization of transition obligation (3) (23) (23) -- -- --
Amortization of prior service cost (91) (99) (97) (119) (119) (119)
Recognized actuarial gain (11) -- -- (188) (123) (132)
Settlement charge -- 115 4,300 -- -- 975
------------------------------------------------------------------------
Net periodic benefit cost $ 1,380 $ 1,502 $ 5,583 $ 558 $ 650 $ 1,533
========================================================================
Weighted average assumptions:
Discount rate 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
Expected return on plan assets 9.00% 9.00% 8.00% -- -- --
Rate of compensation increase 4.50% 4.50% 5.00% -- -- --
</TABLE>
For the measurement of Other Postretirement Benefits, a 7.00% annual rate of
increase in the per capita cost of covered health care benefits was assumed for
1998. The rate was assumed to decrease gradually to 5.50% for 2002 and remain at
that level thereafter.
A one-percentage point change in assumed health care cost trend rates would
have an immaterial impact on the total service and interest cost components of
the net periodic benefit cost and the postretirement benefit obligation.
Qualified Pension Plan assets consist of equity securities, fixed maturity
securities and fixed income contracts. In addition, the Pension Plan owned
approximately 249,000 shares of the Company's common stock at December 31, 1998
and 1997.
During 1997, an annuity contract with a third party was terminated,
resulting in a one-time settlement charge of approximately $115,000, as well as
a decrease in the benefit obligation of $5.5 million and a decrease in plan
assets of $6.6 million.
B. Defined Contribution Savings Plan -- The Company also maintains a voluntary
defined contribution savings plan covering all employees who work a minimum of
20 hours per week. The Company matches employee contributions up to 5% of
compensation. Contributions under such plans charged to income were $2.0
million, $1.7 million and $2.2 million in 1998, 1997 and 1996, respectively.
C. Postemployment Benefits -- The Company provides certain benefits to employees
subsequent to their employment, but prior to retirement including severance,
long-term and short-term disability payments, salary continuation,
postemployment health benefits, supplemental unemployment benefits and other
related payments. Postemployment benefits attributable to prior service and/or
that relate to benefits that vest or accumulate are accrued presently if the
payments are probable and reasonably estimable. Postemployment benefits that do
not meet such criteria are accrued when payments are probable and reasonably
estimable.
During 1996, The PMA Insurance Group initiated a Voluntary Early Retirement
Program ("VERIP"). Eligibility to participate in the VERIP was contingent upon
an employee's age and years of service with the Company. Of the approximately 85
employees eligible to participate in the VERIP, approximately 50 employees opted
to participate. At December 31, 1996, the Company accrued $7.6 million in
connection with the VERIP. The components of this accrual are as follows:
pension costs, $4.3 million; postemployment costs, $2.4 million; and
postretirement costs, $975,000.
The Company did not offer a VERIP in 1998 or 1997, and as such, did not incur
any VERIP expenses. The Company did, however, incur certain restructuring and
other charges during 1997 (see Note 14).
70
<PAGE>
P M A C A P I T A L
10. Fair Value of Financial Instruments
As of December 31, 1998 and 1997, the carrying amounts for the Company's
financial instruments approximated their estimated fair value, except for
interest rate swaps which had a carrying value of zero and a fair value of
($5.8) million and ($3.4) million at December 31, 1998 and 1997, respectively.
The Company measures the fair value of fixed maturities and interest rate swaps
based upon quoted market prices or by obtaining quotes from dealers. The fair
value of long-term debt is estimated using discounted cash flow calculations
based upon the Company's current incremental borrowing rate for similar types of
borrowing facilities or the rate utilized to prepay obligations, where
applicable. For other financial instruments, the carrying values approximate
their fair values. Certain financial instruments, specifically amounts relating
to insurance contracts, are excluded from this disclosure.
11. Disclosure of Certain Risks and Uncertainties
As stated in Note 1, PMA Capital is an insurance holding company that sells
property and casualty reinsurance and insurance through its insurance
subsidiaries.
The following summarizes the relative significance of the segments and
lines of insurance in terms of net premiums written:
Percent of the Company's
Net Premiums Written
1998 1997 1996
- ----------------------------------------------------------------------------
PMA Re 49.2% 46.7% 37.6%
The PMA Insurance Group 49.4 53.3 62.4
Caliber One 1.4 -- --
----------------------------------
Total 100.0% 100.0% 100.0%
==================================
PMA Re distributes its products through major reinsurance brokers, and PMA Re's
top four such brokers accounted for approximately 90% of PMA Re's gross premiums
in force at December 31, 1998. In 1998, 1997 and 1996, casualty reinsurance
lines at PMA Re represented 35.5%, 31.2% and 28.2%, respectively, of the
Company's total net premiums written.
The PMA Insurance Group's operations are concentrated in seven contiguous
states in the Mid-Atlantic and Southern regions of the U.S. As such, economic
trends in individual states may not be independent of one another. Also, The PMA
Insurance Group's products are highly regulated by each of these states. For
many of The PMA Insurance Group's products, the insurance departments of the
states in which it conducts business must approve rates and policy forms. In
addition, workers' compensation benefits are determined by statutes and
regulations in each of these states. While The PMA Insurance Group considers
factors such as rate adequacy, regulatory climate and economic factors in its
underwriting process, unfavorable developments in these factors could have an
adverse impact on the Company's financial condition and results of operations.
In 1998, 1997 and 1996, workers' compensation net premiums at The PMA Insurance
Group represented 39.4%, 46.0% and 43.4%, respectively, of the Company's total
net premiums written.
The Company actively manages its exposure to catastrophes through its
underwriting process, where the Company generally monitors the accumulation of
insurable values in catastrophe prone regions. Also, in writing property
reinsurance coverages, PMA Re typically requires per occurrence loss limitations
for contracts that could have catastrophe exposure. Through per risk
reinsurance, the Company also manages its net retention in each exposure. In
addition, PMA Re maintains retrocessional protection of $48.0 million excess of
$2.0 million per occurrence and The PMA Insurance Group maintains catastrophe
reinsurance protection of $27.7 million excess of $850,000. As a result, the
Company's loss and LAE ratios have not been significantly impacted by
catastrophes in 1998, 1997 and 1996. Although the Company believes that it has
adequate reinsurance to protect against the estimated probable maximum gross
loss from a catastrophe, an especially severe catastrophe or series of
catastrophes could exceed the Company's reinsurance and/or retrocessional
protection, and may have a material adverse impact on the Company's results of
operations and financial condition.
71
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
12. Transactions With Related Parties
The Company's largest shareholder is PMA Foundation (the "Foundation"), a
not-for-profit corporation qualified under Section 501(c)(6) of the Internal
Revenue Code, whose purposes include the promotion of the common business
interests of its members and the economic prosperity of the Commonwealth of
Pennsylvania. As of December 31, 1998, the Foundation owned 4,561,225 shares of
common stock (33.7% of the class) and 912,225 shares of Class A common stock
(9.3% of the class), which constitutes 32.1% of the total number of votes
available to be cast in matters brought before the Company's shareholders. All
of the members of the Company's Board of Directors currently serve as members of
the Foundation's Board of Trustees. Also, Frederick W. Anton III, Chairman of
the Company, serves as President and Chief Executive Officer of the Foundation.
The Company and certain of its subsidiaries provide certain administrative
services to the Foundation for which the Company and its subsidiaries receive
reimbursement. Total reimbursements amounted to $14,000, $34,000 and $82,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The Foundation
also leases its Harrisburg, Pennsylvania headquarters facility from a subsidiary
of the Company under an operating lease presently requiring rent payments of
$25,000 per month, and reimburses a subsidiary of the Company for its use of
office space in the Blue Bell, Pennsylvania facility. Rent and related
reimbursements paid to the Company's affiliates by the Foundation amounted to
$262,000, $250,000 and $247,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company incurred legal and consulting fees aggregating approximately
$6.5 million in 1998 and 1997 and $7.9 million in 1996 from firms in which
directors of the Company are partners or principals.
In addition, the Company has arranged an executive loan program with a
financial institution whereby such institution will provide prime rate personal
loans to officers of the Company and its subsidiaries collateralized by common
stock and Class A common stock generally at a maximum 50% loan to value ratio.
The Company has agreed to purchase loans made under this program from the
financial institution in the event that the borrower defaults on such loan while
employed by the Company. The amount of loans outstanding to current employees at
December 31, 1998 under this program was $3.6 million.
The Company has notes receivable from officers that are accounted for as a
reduction of shareholders' equity in the accompanying balance sheets. Such notes
receivable had balances of $498,000 and $198,000 as of December 31, 1998 and
1997, respectively. The interest rates on the notes range between 6.0% and 8.0%.
13. Commitments and Contingencies
For the years ended December 31, 1998, 1997 and 1996, total rent expense was
$2.6 million, $2.8 million and $2.6 million, respectively. At December 31, 1998,
the Company was obligated under noncancelable operating leases for office space
with aggregate minimum annual rentals of $2.8 million in 1999, $2.7 million in
2000, $2.8 million in 2001, $2.6 million in 2002, $2.1 million in 2003 and
$163,000 thereafter.
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
December 31, 1998 (see Note 2-K regarding SOP 97-3).
The Company has provided guarantees of approximately $11.5 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
72
<PAGE>
P M A C A P I T A L
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.
14. Cost Reduction Initiatives
During 1997, the Company recorded a $7.0 million pre-tax charge ($4.6 million
after-tax) in operating expenses for costs associated with nonvoluntary
terminations of approximately 60 employees in various operational and management
positions. As of December 31, 1998, approximately $1.8 million of such charges
remained in accounts payable and accrued expenses on the balance sheet.
15. Shareholders' Equity
The Company has two classes of common stock, Class A common stock and common
stock. The Company's bylaws limit the classes of persons who may own the common
stock. Holders of common stock may elect to convert any or all such shares into
Class A common stock on a share-for-share basis. The Company's Class A common
stock and common stock generally vote without regard to class on matters
submitted to shareholders, with the Class A common stock having one vote per
share and the common stock having ten votes per share.
With respect to dividend rights, the Class A common stock is entitled to
cash dividends at least 10% higher than those declared and paid on the common
stock. In 1998, 1997 and 1996, the Company declared dividends on its common
stock and Class A common stock of $0.32 per share and $0.36 per share,
respectively.
Changes in common stock and Class A common stock shares were as follows:
December 31,
1998 1997 1996
- -------------------------------------------------------------------------------
Common stock:
Balance at beginning of year 15,286,263 16,095,416 17,044,580
Conversion of common stock into
Class A common stock (1,329,995) (809,153) (949,164)
----------------------------------------
Balance at end of year 13,956,268 15,286,263 16,095,416
========================================
Class A common stock:
Balance at beginning of year 9,156,682 8,247,804 7,298,640
Conversion of common stock into
Class A common stock 1,329,995 809,153 949,164
Issuance of shares -- 99,725 --
----------------------------------------
Balance at end of year 10,486,677 9,156,682 8,247,804
========================================
Treasury stock - Common:
Balance at beginning of year 435,474 425,364 392,564
Purchase of treasury shares 533 10,110 32,800
----------------------------------------
Balance at end of year 436,007 435,474 425,364
========================================
Treasury stock - Class A common:
Balance at beginning of year 38,947 74,781 73,408
Purchase of treasury shares 995,909 27,689 100,523
Reissuance of treasury shares under
employee benefit plans (386,142) (63,523) (99,150)
----------------------------------------
Balance at end of year 648,714 38,947 74,781
========================================
73
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
Under the insurance laws and regulations of Pennsylvania, PMA Capital's
insurance subsidiaries may not pay dividends to PMA Capital without prior
regulatory approval over a twelve-month period in excess of the greater of (a)
10% of the preceding year-end's policyholders surplus or (b) the preceding
year's SAP net income, but in no event to exceed unassigned funds. At December
31, 1998, the maximum amount available to be paid as dividends from the
Company's insurance subsidiaries to PMA Capital, without the prior consent of
the Pennsylvania Insurance Department, was $51.8 million.
PMA Capital's dividends to shareholders are restricted by its debt
agreements. Under the terms of the Credit Facility and the Letter of Credit
Agreement under the most restrictive debt covenant, the Company could pay
dividends of approximately $15.6 million in 1999.
In February of 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. During 1998, the Company repurchased a total of 996,442
shares at a total cost of $18.9 million (average per share price was $18.92),
leaving $6.1 million of share repurchase authorization under its February 1998
repurchase program. In February 1999, PMA Capital's Board of Directors
authorized an additional $20.0 million of share repurchase authority. Decisions
regarding share repurchases are subject to prevailing market conditions and the
costs and benefits associated with alternative uses of capital.
16. 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 years presented,
there were no differences in the numerator (income before extraordinary item)
for the basic and diluted earnings per share calculation.
1998 1997 1996
- -------------------------------------------------------------------------------
Basic shares - weighted average common and
Class A common shares outstanding 23,608,618 23,855,031 23,800,791
Dilutive stock options 916,270 712,347 --
------------------------------------
Total diluted shares 24,524,888 24,567,378 23,800,791
====================================
Options to purchase shares of Class A common stock are excluded from the
computation of diluted earnings per share if they would have been anti-dilutive,
and for 1998, 1997 and 1996, such anti-dilutive options were 42,000, 646,000 and
3.2 million, respectively.
74
<PAGE>
17. 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 for the years ended December 31:
<TABLE>
<CAPTION>
(dollar amounts in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
PMA Re $ 278,293 $ 215,873 $ 200,650
The PMA Insurance Group:
Excluding Run-off Operations 311,469 328,248 360,245
Run-off Operations 4,761 (23,491) --
-----------------------------------------------
Total 316,230 304,757 360,245
Caliber One 3,203 -- --
Corporate and Other 4,010 2,330 2,805
Net realized investment gains 21,745 8,598 2,984
-----------------------------------------------
Total revenues $ 623,481 $ 531,558 $ 566,684
===============================================
Pre-tax operating income (loss)(1):
PMA Re $ 46,408 $ 45,957 $ 44,807
The PMA Insurance Group:
Excluding Run-off Operations 10,018 (3,607) (215,669)
Run-off Operations 452 (73) --
-----------------------------------------------
Total 10,470 (3,680) (215,669)
Caliber One (1,606) -- --
Corporate and Other (6,939) (9,954) (6,464)
-----------------------------------------------
Pre-tax operating income (loss) before interest expense 48,333 32,323 (177,326)
Interest expense 15,009 15,768 17,052
-----------------------------------------------
Pre-tax operating income (loss) 33,324 16,555 (194,378)
Net realized investment gains 21,745 8,598 2,984
-----------------------------------------------
Income (loss) before income taxes and extraordinary loss 55,069 25,153 (191,394)
Provision (benefit) for income taxes 10,335 5,400 (56,060)
-----------------------------------------------
Income (loss) before extraordinary loss 44,734 19,753 (135,334)
Extraordinary loss -- (4,734) --
-----------------------------------------------
Net income (loss) $ 44,734 $ 15,019 $(135,334)
===============================================
</TABLE>
(1) The Company has excluded net realized investment gains (losses) from the
profit and loss measure 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.
The Company recorded amortization and depreciation expense of $5.9 million, $8.7
million and $12.5 million in 1998, 1997 and 1996, respectively. PMA Re and The
PMA Insurance Group recorded amortization and depreciation expense of $1.1
million and $3.9 million, respectively, in 1998; $1.0 million and $5.1 million,
respectively, in 1997; and $900,000 and $10.9 million, respectively, in 1996.
75
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
The following table indicates the Company's total assets by principal business
segment at December 31:
(dollar amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Assets(1):
PMA Re $ 1,417,901 $ 1,102,242 $ 1,031,149
The PMA Insurance Group:
Excluding Run-off Operations 1,883,575 1,452,469 1,533,142
Run-off Operations 95,110 398,959 505,347
----------------------------------------
Total 1,978,685 1,851,428 2,038,489
Caliber One 69,083 64,302 --
Corporate and Other (4,951) 39,286 47,878
----------------------------------------
Total assets $ 3,460,718 $ 3,057,258 $ 3,117,516
========================================
(1) Equity investments in subsidiaries, which eliminate in consolidation, are
excluded from total assets for each segment.
During 1998 and 1997, the Company had one broker that represented more than 10%
of the Company's total revenues amounting to $70.6 million and $54.8 million,
respectively. There were no brokers or customers that represented more than 10%
of the Company's total revenues in 1996.
18. Statutory Financial Information
These consolidated financial statements vary in certain respects from those
prepared using 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 beginning in 2001. Codification
provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in some areas, such as deferred income
taxes, which will be recorded under Codification.
The Insurance Department of Pennsylvania has adopted Codification guidance,
effective January 1, 2001. The Company is in the process of estimating the
impact that Codification will have on its statutory surplus.
76
<PAGE>
P M A C A P I T A L
SAP net income (loss) and capital and surplus for PMA Capital's domestic
insurance subsidiaries are as follows:
(dollar amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
SAP net income (loss):
PMA Reinsurance Corporation $ 29,746 $ 25,752 $ 26,338
The PMA Insurance Group (domestic
insurance subsidiaries) 23,034 10,785 (191,640)
Caliber One Indemnity Company (90) -- --
------------------------------------
Total $ 52,690 $ 36,537 $(165,302)
====================================
SAP capital and surplus:
PMA Reinsurance Corporation(1) $ 287,466 $ 271,154 $ 260,853
The PMA Insurance Group (domestic
insurance subsidiaries) 281,947 281,071 279,764
------------------------------------
Total $ 569,413 $ 552,225 $ 540,617
====================================
(1) The SAP capital and surplus of PMA Reinsurance Corporation includes PMA
Reinsurance Corporation's investment in Caliber One Indemnity Company of
$25.0 million in 1998 and 1997.
A reconciliation of PMA Capital's domestic insurance subsidiaries' SAP net
income (loss) to the Company's GAAP net income (loss) is as follows:
For the years ended December 31,
(dollar amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Net income (loss):
SAP net income (loss) - domestic
insurance subsidiaries $ 52,690 $ 36,537 $(165,302)
GAAP adjustments:
Change in deferred acquisition costs 4,504 1,282 6,105
Benefit for deferred income taxes 14,012 4,725 11,488
Other 4,366 1,131 (6,331)
-----------------------------------
GAAP net income (loss) - domestic
insurance subsidiaries 75,572 43,675 (154,040)
Other entities and eliminations (30,838) (23,922) 18,706
Extraordinary loss -- (4,734) --
-----------------------------------
GAAP net income (loss) $ 44,734 $ 15,019 $(135,334)
===================================
77
<PAGE>
P M A C A P I T A L
Notes to Consolidated Financial Statements (continued)
A reconciliation of PMA Capital's domestic insurance subsidiaries' SAP capital
and surplus to the Company's GAAP shareholders' equity is as follows:
December 31,
(dollar amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Shareholders' equity
SAP capital and surplus - domestic
insurance subsidiaries $ 569,413 $ 552,225 $ 540,617
GAAP adjustments:
Deferred acquisition costs 49,118 45,288 44,006
Deferred income taxes 71,443 52,571 101,642
Allowance for doubtful accounts (19,650) (19,700) (26,214)
Retirement accruals (10,244) (10,653) (14,571)
Reversal of non-admitted assets 22,711 21,330 25,599
Unrealized gain (loss) on fixed maturity
investments available for sale 27,506 19,380 (38,271)
Other 13,569 3,254 (338)
-----------------------------------
GAAP shareholders' equity - domestic
insurance subsidiaries 723,866 663,695 632,470
Other entities and eliminations (212,386) (185,348) (206,642)
-----------------------------------
GAAP shareholders' equity $ 511,480 $ 478,347 $ 425,828
===================================
19. 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 reinsures 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 December 31, 1998, the Company has recorded $248.6 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.
78
<PAGE>
P M A C A P I T A L
Report of Independent Accountants
To the Board of Directors and Shareholders
PMA Capital Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity, cash flows and
comprehensive income present fairly, in all material respects, the financial
position of PMA Capital Corporation and its subsidiaries at December 31, 1998
and 1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
conducted our audits of these consolidated financial statements in accordance
with generally accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 5, 1999
79
<PAGE>
P M A C A P I T A L
Quarterly Financial Information (Unaudited)
The following unaudited quarterly financial data are presented on a consolidated
basis for each of the years ended December 31, 1998 and 1997. Quarterly
financial results necessarily rely on estimates and caution is required in
drawing specific conclusions from quarterly consolidated results.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Income Statement Data(1):
Total revenues $ 149,386 $ 153,743 $ 149,471 $ 170,881
Income before income taxes 14,741 10,775 12,584 16,969
Net income 12,088 9,357 10,552 12,737
Per Share Data:
Net income (Basic) $ 0.51 $ 0.39 $ 0.45 $ 0.54
Net income (Diluted) 0.49 0.38 0.43 0.52
Class A Common Stock Prices(2):
High $ 19.38 $ 23.00 $ 22.69 $ 19.63
Low 15.75 17.63 17.25 16.75
Close 18.00 23.00 19.50 19.56
1997
Income Statement Data(1):
Total revenues $ 145,094 $ 148,873 $ 105,528 $ 132,063
Income (loss) before income taxes 7,318 (4,698) 11,516 11,017
Income before extraordinary loss 4,757 520 7,344 7,132
Net income 23 520 7,344 7,132
Per Share Data:
Basic:
Income before extraordinary loss $ 0.20 $ 0.02 $ 0.31 $ 0.30
Net income -- 0.02 0.31 0.30
Diluted:
Income before extraordinary loss 0.19 0.02 0.30 0.29
Net income -- 0.02 0.30 0.29
Class A Common Stock Bids(2):
High $ 16.13 $ 16.00 $ 16.75 $ 18.00
Low 15.63 14.00 15.00 16.00
Close 16.00 15.00 16.75 16.00
</TABLE>
(1) Over the past two years, the Company's results have been impacted by
restructuring charges and other special items. During 1998, the Company
incurred restructuring and other charges of approximately $814,000, $1.3
million, $54,000 and $2,000 for the first, second, third and fourth
quarter, respectively. During 1997, the Company incurred restructuring and
other charges of approximately $775,000, $3.5 million, $2.7 million and
$5.2 million for the first, second, third and fourth quarter, respectively.
(2) The Company's Class A common stock began trading on the NASDAQ National
Market System effective February 5, 1998. Prior to that date, the Class A
common stock was not traded on an established exchange, but on the OTC
Bulletin Board through approximately ten broker/dealers who voluntarily
made a market in the Class A common stock. The stock price data presented
for 1997 for the Class A common stock is based upon over-the-counter market
bid quotations, which reflect interdealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
Transactions in the common stock were conducted privately among persons
qualified to own the common stock. No price information was available for
such transactions.
The Company had 378 record holders of Class A common stock and 177 record
holders of common stock at January 31, 1999. For each of the quarters in the two
years ended December 31, 1998, the Company declared a quarterly dividend of
$0.08 and $0.09 per share for its common stock and Class A common stock,
respectively.
80
<PAGE>
(back cover)
Securities Listing
The Corporation's Class A Common stock is listed on the Nasdaq National Market
System. It trades under the stock symbol:PMACA
Dividends
PMA Capital Corporation's quarterly dividends on Common Stock and Class A Common
Stock are paid on or about the first day of January, April, July and October.
Each share of Class A Common Stock is entitled to a cash dividend at least 10%
higher than any cash dividend paid on the Common Stock.
<PAGE>
EXHIBIT 21
PMA CAPITAL CORPORATION
SIGNIFICANT SUBSIDIARIES OF REGISTRANT
AS OF DECEMBER 31, 1998
PMA Capital Corporation (Pennsylvania)
PMA Reinsurance Corporation (Pennsylvania)
Caliber One Indemnity Company (Delaware)
Pennsylvania Manufacturers' Association Insurance Company (Pennsylvania)
PMA Management Corporation (Pennsylvania)
PMA Services Incorporated (Pennsylvania)
Presque Enterprises Incorporated (Pennsylvania)
Pennsylvania Manufacturers Indemnity Company (Pennsylvania)
Manufacturers Alliance Insurance Company (Pennsylvania)
Mid Atlantic States Investment Company (Delaware)
Mid-Atlantic States Casualty Company (Pennsylvania)
PMA Holdings Cayman, Ltd.
PMA International Insurance Cayman, Ltd.
High Mountain Reinsurance, Ltd. (Cayman)
Caliber One Management Company, Inc. (Delaware)
PMA Holdings Limited (Bermuda)
Pennsylvania Manufacturers International Insurance, Ltd. (Bermuda)
PMA Life Insurance Company (Pennsylvania)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
PMA Capital Corporation on Form S-3(File No. 333-63469) and on Form S-8(File No.
333-45949 and File No. 333-68855) of our reports dated February 5, 1999, on our
audits of the consolidated financial statements and financial statement
schedules of PMA Capital Corporation as of December 31, 1998 and 1997, and for
the years ended December 31, 1998, 1997, and 1996, which reports are included or
incorporated by reference in this Annual Report on Form 10-K.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
March 26, 1999
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, the Chairman of the
Board of PMA Capital Corporation, a Pennsylvania corporation ("PMA"), hereby
makes, designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 17th
day of March 1999.
/s/ Frederick W. Anton III
--------------------------
Frederick W. Anton III
<PAGE>
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 17th
day of March 1999.
/s/ Paul I. Detwiler, Jr.
-------------------------
Paul I. Detwiler, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 17th
day of March 1999.
/s/ Joseph H. Foster
--------------------
Joseph H. Foster
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 17th
day of March 1999.
/s/ Anne S. Genter
------------------
Anne S. Genter
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 17th
day of March 1999.
/s/ James F. Malone, III
------------------------
James F. Malone, III
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd
day of March 1999.
/s/ A. John May
---------------
A. John May
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 17th
day of March 1999.
/s/ Louis N. McCarter, III
--------------------------
Louis N. McCarter, III
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 19th
day of March 1999.
/s/ John W. Miller, Jr.
-----------------------
John W. Miller, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 18th
day of March 1999.
/s/ Edward H. Owlett
--------------------
Edward H. Owlett
POWER OF ATTORNEY
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 22nd
day of March 1999.
/s/ Louis I. Pollock
--------------------
Louis I. Pollock
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 17th
day of March 1999.
/s/ Roderic H. Ross
-------------------
Roderic H. Ross
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA
Capital Corporation, a Pennsylvania corporation ("PMA"), hereby makes,
designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the
23rd day of March 1999.
/s/ L.J. Rowell, Jr.
--------------------
L.J. Rowell, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director and
officer of PMA Capital Corporation, a Pennsylvania corporation ("PMA"), hereby
makes, designates, constitutes and appoints Francis W. McDonnell and Charles A.
Brawley, III, and each of them (with full power to act without the other), as
the undersigned's true and lawful attorneys-in-fact and agents, with full power
and authority to act in any and all capacities for and in the name, place and
stead of the undersigned
(A) in connection with the filing with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934,
both as amended, of:
(i) PMA's Annual Report on Form 10-K for the year ended December 31, 1998
and all amendments thereto;
(ii) any and all registration statements pertaining to employee benefit plans
of PMA or its subsidiaries, and all amendments thereto, including,
without limitation, a registration statement on Form S-8 for the
offering of shares of PMA Class A Common Stock under PMA's 1999 Equity
Incentive Plan and amendments to PMA's registration statements on
Form S-8 (Registration Numbers 333-68855 and 333-45949); and
(B) in connection with the preparation, delivery and filing of any and all
registrations, amendments, qualifications or notifications under the applicable
securities laws of any and all states and other jurisdictions with respect to
securities of PMA, of whatever class or series, offered, sold, issued,
distributed, placed or resold by PMA, any of its subsidiaries, or any other
person or entity.
Such attorneys-in-fact and agents, or any of them, are also hereby granted full
power and authority, on behalf of and in the name, place and stead of the
undersigned, to execute and deliver all such registration statements, reports,
registrations, amendments, qualifications and notifications to execute and
deliver any and all such other documents, and to take further action as they, or
any of them, deem appropriate. The powers and authorities granted herein to
such attorneys-in-fact and agents, and each of them, also include the full
right, power and authority to effect necessary or appropriate substitutions or
revocations. The undersigned hereby ratifies, confirms, and adopts, as his own
act and deed, all action lawfully taken by such attorneys-in-fact and agents, or
any of them, or by their respective substitutes, pursuant to the powers and
authorities herein granted. This Power of Attorney expires by its terms and
shall be of no further force and effect on May 15, 2000.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this document as of the 16th
day of March 1999.
/s/ John W. Smithson
--------------------
John W. Smithson
<PAGE>
Exhibit 24.2
SECRETARY'S CERTIFICATE
I, ROBERT L. PRATTER, Secretary of PMA CAPITAL CORPORATION, a corporation
organized and existing under the laws of the COMMONWEALTH OF PENNSYLVANIA,
hereby certify that the following resolution was adopted at the March 3, 1999
meeting of the Executive Committee:
RESOLVED, that each Officer and Director of the Corporation who may be
required to execute (whether on behalf of the Corporation or as an Officer or
Director thereof) the Corporation's Annual Report on form 10-K for the year
ended December 31, 1998, and any amendments thereto, (the "Form 10-K") is hereby
authorized to execute and deliver a power of attorney appointing such person or
persons named therein as true and lawful attorneys and agents to execute in the
name, place and stead (in any such capacity) of any such Officer or Director and
to file any such power of attorney together with the Form 10-K with the
Securities and Exchange Commission.
RESOLVED, that the Officers of the Corporation, and each of them, are
hereby authorized to sign the Form 10-K in the name and on behalf of the
Corporation and as attorneys for each of its Directors and Officers who execute
and deliver the aforesaid powers of attorney.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal
of the Corporation, this 24th day of March, 1999.
/s/Robert L. Pratter
--------------------
Secretary
(SEAL)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in Form 10-K for the fiscal year ended December
31, 1998 for PMA Capital Corporation and is qualified in its entirety by
reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,827,354
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 17
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,325,409
<CASH> 2,562
<RECOVER-REINSURE> 610,291
<DEFERRED-ACQUISITION> 51,115
<TOTAL-ASSETS> 3,460,718
<POLICY-LOSSES> 1,940,895
<UNEARNED-PREMIUMS> 227,945
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 10,700
<NOTES-PAYABLE> 163,000
0
0
<COMMON> 122,214
<OTHER-SE> 389,266
<TOTAL-LIABILITY-AND-EQUITY> 3,460,718
466,715
<INVESTMENT-INCOME> 120,125
<INVESTMENT-GAINS> 21,745
<OTHER-INCOME> 14,896
<BENEFITS> 352,671
<UNDERWRITING-AMORTIZATION> 110,837
<UNDERWRITING-OTHER> 89,895
<INCOME-PRETAX> 55,069
<INCOME-TAX> 10,335
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,734
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.82
<RESERVE-OPEN> 1,670,903<F1>
<PROVISION-CURRENT> 373,098
<PROVISION-PRIOR> (46,515)<F2>
<PAYMENTS-CURRENT> 96,658
<PAYMENTS-PRIOR> 362,186
<RESERVE-CLOSE> 1,347,194 <F1><F3>
<CUMULATIVE-DEFICIENCY> (46,515)
<FN>
<F1> Reserve balance is shown net of reinsurance receivables on unpaid losses
and LAE
<F2> Excludes impact of accretion of prior years discount of $26,088.
<F3> Reserves of $217,536 were transferred to a third party as the result of a
sale of a subsidiary.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained on Form 10-K for the fiscal year ended December
31, 1998 and Forms 10-Q for the quarters ended March 31, 1998, June 30, 1998 and
September 30, 1998 for PMA Capital Corporation and is qualified in its entirety
by reference to such statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 JUN-30-1998 MAR-31-1998 DEC-31-1997
<DEBT-HELD-FOR-SALE> 1,875,910 1,995,653 1,984,800 1,929,518
<DEBT-CARRYING-VALUE> 0 0 0 0
<DEBT-MARKET-VALUE> 0 0 0 0
<EQUITIES> 15 15 14 13
<MORTGAGE> 0 0 0 0
<REAL-ESTATE> 0 0 0 0
<TOTAL-INVEST> 2,432,154<F1> 2,686,599<F1> 2,725,500<F1> 2,194,738
<CASH> 7,595 7,585 2,267 32,148
<RECOVER-REINSURE> 604,108 347,821 354,113 332,406
<DEFERRED-ACQUISITION> 55,958 53,363 56,562 45,288
<TOTAL-ASSETS> 3,598,926<F1> 3,604,228<F1> 3,655,309<F1> 3,057,258
<POLICY-LOSSES> 1,951,497 1,939,568 1,989,115 2,003,187
<UNEARNED-PREMIUMS> 253,216 243,012 261,045 211,455
<POLICY-OTHER> 0 0 0 0
<POLICY-HOLDER-FUNDS> 9,605 10,779 9,317 10,200
<NOTES-PAYABLE> 203,000 203,000 203,000 203,000
0 0 0 0
0 0 0 0
<COMMON> 122,214 122,214 122,214 122,214
<OTHER-SE> 395,366 374,169 357,279 356,133
<TOTAL-LIABILITY-AND-EQUITY> 3,598,926<F1> 3,604,228<F1> 3,655,309<F1> 3,057,258
335,593 221,576 106,922 375,951
<INVESTMENT-INCOME> 92,260<F2> 63,850<F2> 31,930<F2> 133,392<F2>
<INVESTMENT-GAINS> 15,362 11,263 7,514 8,598
<OTHER-INCOME> 9,385<F2> 6,440<F2> 3,020<F2> 13,617<F2>
<BENEFITS> 256,230 172,757 84,857 307,281
<UNDERWRITING-AMORTIZATION> 77,748 51,763 22,703 93,501
<UNDERWRITING-OTHER> 69,291 45,630 23,384 89,855
<INCOME-PRETAX> 38,100 25,516 14,741 25,153
<INCOME-TAX> 6,103 4,071 2,653 5,400
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 (4,734)
<CHANGES> 0 0 0 0
<NET-INCOME> 31,997 21,445 12,088 15,019
<EPS-PRIMARY> 1.35 0.90 0.51 0.63
<EPS-DILUTED> 1.30 0.87 0.49 0.61
<RESERVE-OPEN> 0 0 0 1,834,496<F3>
<PROVISION-CURRENT> 0 0 0 341,880
<PROVISION-PRIOR> 0 0 0 (86,006)<F4>
<PAYMENTS-CURRENT> 0 0 0 72,399
<PAYMENTS-PRIOR> 0 0 0 398,475
<RESERVE-CLOSE> 0 0 0 1,670,903<F3>
<CUMULATIVE-DEFICIENCY> 0 0 0 (86,006)
<FN>
<F1>Amounts have been restated to reflect the adoption of SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities."
<F2>Amounts have been restated to conform to year end 1998 classification.
<F3>Reserve balance is shown net of reinsurance receivables on unpaid losses and
LAE.
<F4>Excludes impact of accretion of prior years' discount of $51,407.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained on Forms 10-Q for the quarters ended March 31,
1997, June 30, 1997 and September 30, 1997 for PMA Capital Corporation and is
qualified in its entirety by reference to such statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 2,060,521 2,014,684 2,101,914 2,126,120
<DEBT-CARRYING-VALUE> 0 0 0 0
<DEBT-MARKET-VALUE> 0 0 0 0
<EQUITIES> 261 264 262 262
<MORTGAGE> 0 0 0 0
<REAL-ESTATE> 0 0 0 0
<TOTAL-INVEST> 2,202,645 2,067,828 2,143,426 2,261,353
<CASH> 1,895 87,738 13,986 7,176
<RECOVER-REINSURE> 294,506 284,465 277,977 257,983
<DEFERRED-ACQUISITION> 49,033 47,829 53,980 44,006
<TOTAL-ASSETS> 3,066,361 3,085,640 3,114,205 3,117,516
<POLICY-LOSSES> 1,989,160 2,052,791 2,085,732 2,091,072
<UNEARNED-PREMIUMS> 239,112 236,169 258,434 205,982
<POLICY-OTHER> 0 0 0 0
<POLICY-HOLDER-FUNDS> 10,704 13,407 12,100 12,524
<NOTES-PAYABLE> 203,000 203,049 203,232 204,699
0 0 0 0
0 0 0 0
<COMMON> 121,716 121,716 121,716 121,716
<OTHER-SE> 324,548 293,404 263,250 304,112
<TOTAL-LIABILITY-AND-EQUITY> 3,066,361 3,085,640 3,114,205 3,117,516
285,371 222,401 107,950 420,575
<INVESTMENT-INCOME> 99,802<F1> 68,459<F1> 35,847<F1> 130,837<F1>
<INVESTMENT-GAINS> 3,600 (1,931) (1,251) 2,984
<OTHER-INCOME> 10,722<F1> 5,038<F1> 2,548<F1> 12,288<F1>
<BENEFITS> 240,919 193,134 94,904 536,623
<UNDERWRITING-AMORTIZATION> 66,562 46,469 18,339 90,292
<UNDERWRITING-OTHER> 65,853 43,522 20,199 114,111
<INCOME-PRETAX> 14,136 2,620 7,318 (191,394)
<INCOME-TAX> 1,515 (2,657) 2,561 (56,060)
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> (4,734) (4,734) (4,734) 0
<CHANGES> 0 0 0 0
<NET-INCOME> 7,887 543 23 135,334
<EPS-PRIMARY> 0.33 0.02 0.00 (5.68)
<EPS-DILUTED> 0.32 0.02 0.00 (5.68)
<RESERVE-OPEN> 0 0 0 1,808,494<F2>
<PROVISION-CURRENT> 0 0 0 323,069
<PROVISION-PRIOR> 0 0 0 156,074<F3>
<PAYMENTS-CURRENT> 0 0 0 72,194
<PAYMENTS-PRIOR> 0 0 0 438,427
<RESERVE-CLOSE> 0 0 0 1,834,496<F2>
<CUMULATIVE-DEFICIENCY> 0 0 0 156,074
<FN>
<F1> Amounts have been restated to conform to year end 1998 classification.
<F2> Reserve balance is shown net of reinsurance receivables on unpaid losses and lae.
<F3> Excludes impact of accretion of prior year's discount of $57,480.
</FN>
</TABLE>
