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, 1999
/ / 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
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(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
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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
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(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 29, 2000, was $230,352,954.
There were 12,425,268 shares outstanding of the registrant's Common Stock, $5
par value per share, and 9,846,499 shares outstanding of the registrant's Class
A Common Stock, $5 par value per share, as of the close of business on February
29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Parts I, II and IV of this Form 10-K incorporate by reference portions of
the Annual Report to Shareholders for the year ended December 31, 1999, as
indicated herein.
(2) Part III of this Form 10-K incorporates by reference portions of the
registrant's proxy statement dated March 23, 2000 for the 2000 Annual
Meeting of Shareholders.
<PAGE>
<TABLE>
<CAPTION>
INDEX
- ---------------------------------------------------------------------------------------------
<S> <C>
PART I Page
Item 1. Business...................................................................... 1
Company Overview............................................................ 1
PMA Re...................................................................... 3
The PMA Insurance Group..................................................... 7
Caliber One................................................................. 13
Reinsurance and Retrocessional Protection................................... 14
Loss Reserves............................................................... 15
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 Disclosure 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 43 of the
Company's Management's Discussion and Analysis ("MD&A") section of its 1999
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 $3.2 billion and shareholders' equity of $429.1 million at
December 31, 1999. The Company was organized under the laws of the Commonwealth
of Pennsylvania as Pennsylvania Manufacturers Corporation in 1982, and changed
its name to PMA Capital Corporation in 1998. 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, integrated disability and, to a lesser
extent, other standard lines of commercial property and casualty 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 and expenses, including debt service, 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 to the 1999 presentation. Revenues, pre-tax operating income and
assets attributable to each of the Company's operating segments and its
Corporate and Other segment for the last three years are set forth in Note 16 to
the Company's consolidated financial statements for the year ended December 31,
1999 ("Financial Statements") included in its Annual Report.
The Company's net premiums written by operating segment were as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 as
1999 1998 1997 % of total
---- ---- ---- ----------
<S> <C> <C> <C> <C>
PMA Re $ 278,998 $ 234,010 $ 177,934 49%
The PMA Insurance Group:
Excluding Run-off Operations 233,713 244,237 254,970 42%
Run-off Operations - (9,400) (51,622) -
-------------------------------------------------------------
Total 233,713 234,837 203,348 42%
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Caliber One 51,237 6,436 - 9%
Corporate and Other (438) (522) - -
-------------------------------------------------------------
Total $ 563,510 $ 474,761 $ 381,282 100%
=============================================================
</TABLE>
1
<PAGE>
Property and casualty insurance and reinsurance companies provide loss
protection to insureds in exchange for premiums. If earned premiums exceed the
sum of losses and loss adjustment expenses ("LAE"), commissions to agents or
brokers, premium taxes, other operating expenses and policyholders' dividends,
then underwriting profits are realized. When earned premiums do not exceed the
sum of these items, the result is an underwriting loss. Because time normally
elapses between the receipt of premiums and the payment of claims and certain
related expenses, the Company invests the available premiums. Underwriting
results do not reflect investment income from these funds, investment gains and
losses, results of non-insurance business or federal income taxes. These items,
when added to underwriting profits or losses, produce net income or loss. For
information concerning investment income, see pages 40 and 41 of the MD&A in the
Annual Report.
The "combined ratio" is a frequently used measure of property and casualty
underwriting performance. The combined ratio computed on a GAAP basis is equal
to losses and LAE, plus acquisition expenses, operating expenses and
policyholders' dividends, where applicable, all divided by net premiums earned.
Thus, a combined ratio of under 100% reflects an underwriting profit.
The combined ratios of the Company's operating segments were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
PMA Re 102.5% 103.7% 103.8%
The PMA Insurance Group:
Excluding Run-off Operations 113.3% 116.4% 122.2%
Including Run-off Operations 115.4% 122.6% 140.8%
Caliber One 109.6% - -
</TABLE>
(1) The results of operations of Caliber One for 1998 and 1997 are not material
to the underwriting ratios of the Company; accordingly, the ratios for Caliber
One are not presented for those years.
2
<PAGE>
PMA Re
Background
PMA Re writes a broad range of property and casualty reinsurance products within
the broker market, with an emphasis on risk-exposed casualty excess of loss
reinsurance. PMA Re competes on the basis of its ability to offer specialized
products to its clients, its long-term relationships with brokers and insurance
companies, and its prompt and responsive service. According to data provided by
the Reinsurance Association of America (the "RAA"), as of December 31, 1999, PMA
Reinsurance Corporation was the 17th largest broker market reinsurer in the
United States in terms of statutory capital and surplus and 13th 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 that direct reinsurers maintain their own sales forces and distribute
their products directly to their ceding company clients.
Products
Reinsurance is an arrangement in which an insurance company, the reinsurer,
agrees to indemnify another insurance company, the ceding company, against all
or a portion of the insurance risks underwritten by the ceding company under one
or more insurance contracts. Reinsurance provides ceding companies with several
benefits: reducing exposure on individual risks, protecting against catastrophic
losses, and stabilizing underwriting results and maintaining acceptable capital
ratios. 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 cede 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 1999, 99% were
treaty, and 1% was facultative.
To better serve its brokers and ceding companies, PMA Re has established four
distinct underwriting units, organized by class of business, which provide more
specialized expertise in each area. The Traditional, Specialty, and Finite Risk
and Financial Products units provide treaty reinsurance coverage. The fourth
unit, Facultative, provides reinsurance on a facultative basis.
o Traditional-Treaty: This underwriting unit writes general property and
casualty business and emphasizes risk-exposed programs where PMA Re can leverage
its actuarial and underwriting expertise. Included in the client base for the
Traditional unit are standard lines companies, some excess and surplus lines
companies, and, to a lesser extent, non-traditional sources of business. The
Traditional casualty portfolio includes umbrella, commercial automobile and
workers' compensation. In addition, there are more excess of loss contracts than
pro rata contracts.
o Specialty-Treaty: This unit's underwriters write business that falls outside
the confines of traditional property and casualty risks. These risks include
environmental impairment, directors and officers liability, and medical
malpractice, as well as all other forms of professional liability. Doctors and
lawyers constitute the two largest groups of insureds in the Specialty unit's
portfolio.
o Finite Risk and Financial Products: This unit was introduced in late 1998 as
an additional product line to provide PMA Re opportunity for growth. This
underwriting unit is charged with providing PMA Re's clients with creative
solutions to their complex financial and risk management needs. Many insurance
companies have some form of finite protection as a permanent part of their
reinsurance program. Examples of finite risk and financial risk products are
aggregate stop loss covers, spread loss mechanisms, funded catastrophe
coverages, financial quota shares and loss portfolio transfers. While those are
the general categories, virtually every contract is individually structured, and
PMA Re's approach to product design reflects the complicated nature of this line
of business. Although most of the Finite Risk and Financial Products unit's
business is related to domestic insurers, approximately 5% of the unit's
premiums were generated from international business.
3
<PAGE>
o Facultative: This unit writes property and casualty reinsurance on an
individual risk basis, and on a program/semi-automatic basis. In addition to
serving the facultative brokerage community, this unit strengthens PMA Re's
reputation as a full service reinsurer. The facultative property book has grown
as this unit leverages its capacity and emphasizes program/semi-automatic
business. The facultative casualty focus is on general liability, umbrella and
commercial automobile lines. Facultative's emphasis in commercial automobile
continues to be on manufacturing, contracting and service fleets. This unit
continues to underwrite a broad range of professional liability business, with
an emphasis in directors and officers liability, and medical
malpractice/hospital professional liability.
PMA Re's gross and net premiums written by business unit and major category of
business are as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Traditional - Treaty
<S> <C> <C> <C> <C> <C> <C>
Casualty $ 106,756 $ 80,762 $ 115,483 $ 95,900 $ 110,723 $ 84,208
Property 72,209 56,098 74,222 62,725 70,197 56,577
Other 1,510 1,488 1,044 1,061 795 788
------------ ------------ ------------ ------------ ----------- ------------
Total Traditional 180,475 138,348 190,749 159,686 181,715 141,573
------------ ------------ ------------ ------------ ----------- ------------
Specialty - Treaty
Casualty 88,433 68,818 79,711 64,625 37,838 33,846
------------ ------------ ------------ ------------ ----------- ------------
Total Specialty 88,433 68,818 79,711 64,625 37,838 33,846
------------ ------------ ------------ ------------ ----------- ------------
Finite Risk and Financial Products
Casualty 49,881 49,154 7,300 6,971 - -
Property 19,854 19,486 - - - -
Other 254 249 - - - -
------------ ------------ ------------ ------------ ----------- ------------
Total Finite Risk and Financial Products 69,989 68,889 7,300 6,971 - -
------------ ------------ ------------ ------------ ----------- ------------
Facultative
Casualty 1,590 380 3,823 956 3,339 835
Property 3,120 2,563 2,753 1,772 2,429 1,680
------------ ------------ ------------ ------------ ----------- ------------
Total Facultative 4,710 2,943 6,576 2,728 5,768 2,515
------------ ------------ ------------ ------------ ----------- ------------
Total Casualty 246,660 199,114 206,317 168,452 151,900 118,889
Total Property 95,183 78,147 76,975 64,497 72,626 58,257
Total Other 1,764 1,737 1,044 1,061 795 788
------------ ------------ ------------ ------------ ----------- ------------
Total Premiums Written $ 343,607 $ 278,998 $ 284,336 $ 234,010 $ 225,321 $ 177,934
============ ============ ============ ============ =========== ============
</TABLE>
In the three years ended December 31, 1999, PMA Re reported premium growth that
exceeded that of the overall reinsurance industry. During such period, PMA Re's
compound annual growth rate for net premiums written was 19%, while the
reinsurance industry's compound annual growth rate was 4% for the same period
based upon information published by the RAA. The increase in gross and net
premiums written in 1999 primarily reflects the expansion of the Finite Risk and
Financial Products unit, which was formed in late 1998. In 1999, PMA Re wrote
$122 million of new business with more than 70% of such new business generated
from existing ceding company relationships, and the balance attributable to
business written with new ceding company clients. PMA Re formed relationships
with 27 new ceding companies during 1999. In 1998 and 1997, PMA Re achieved its
premium growth through its Traditional and Specialty units, primarily reflecting
increased participation levels on ceding company clients' existing programs and
writing additional layers and programs for current ceding company clients.
PMA Re has pursued additional or new business from certain existing accounts and
new accounts as part of a targeted marketing program. PMA Re targets selected
ceding companies, primarily small- to medium-sized insurers (those with surplus
of up to $500 million), where PMA Re's level of service and experience will add
value to their operations. PMA Re then embarks on a broker visitation plan to
give PMA Re the opportunity to lead the reinsurance programs of the targeted
ceding companies.
4
<PAGE>
PMA Re's efforts to increase premium writings have more than offset the effects
of highly competitive conditions in the U.S. reinsurance market and certain
situations where ceding companies retain more of their business, and therefore
require less reinsurance. PMA Re has sought to maintain its underwriting and
pricing discipline, which has prompted PMA Re to decline to participate on
business rather than write it at inadequate rates or with terms and conditions
that do not meet PMA Re's underwriting standards. As a result, PMA Re did not
renew $51 million, $47 million and $40 million of existing business during 1999,
1998 and 1997, respectively.
Casualty business has contributed significantly to PMA Re's premium growth since
1997. Casualty business has increased at a compound annual growth rate of 18% in
the three-year period ended December 31, 1999, and casualty premiums accounted
for approximately 72%, 72% and 67% of net premiums written in 1999, 1998 and
1997, respectively. PMA Re has generally focused on umbrella, commercial
automobile, medical malpractice, professional liability and other more
specialized liability coverages.
Property business accounted for approximately 28%, 28% and 33% of net premiums
written for 1999, 1998 and 1997, respectively. In the three-year period ended
December 31, 1999, property business has increased at a compound annual growth
rate of 24%. Substantially all of the growth in the property business since 1997
has been derived from the recently formed Finite Risk and Financial Products
unit.
PMA Re has generally de-emphasized property catastrophe excess of loss
coverages. As of December 31, 1999, catastrophe business accounted for 3% of net
property premiums written. The property programs written by PMA Re generally
contain per occurrence limits or are not considered to be significantly exposed
to catastrophes, 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 losses with per occurrence limits. PMA Re actively manages
this exposure through zonal management, minimizing writings of catastrophe
business, and the purchase of retrocessional protection. As of December 31,
1999, 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 financial
condition, results of operations and liquidity.
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 1999 were as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Broker Gross premiums written % of total
- ------ ---------------------- ----------
<S> <C> <C>
AON Reinsurance $99,680 29%
Guy Carpenter & Company 86,003 25%
E.W. Blanch 66,351 19%
</TABLE>
As of December 31, 1999, PMA Re had approximately 200 unaffiliated clients, with
no individual client accounting for more than 10% of gross premiums written in
1999, except for one ceding company that accounts for 14% of gross premiums
written. Approximately 68% of PMA Re's gross premiums written in 1999 were from
small- to medium-sized insurers (those with surplus of up to $500 million).
5
<PAGE>
Underwriting
In reinsurance, underwriting involves the selection of risks and determining an
adequate price given expected losses and estimated volatility of such losses.
Maintaining underwriting and pricing discipline is critical to the maintenance
of acceptable operating results.
PMA Re's underwriting process has two principal aspects - underwriting the
specific program/risk submission and underwriting the ceding company.
Underwriting the specific program/risk to be reinsured involves, in addition to
pricing, a review of the type of account, 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.
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.
PMA Re's service initiatives in the area of claims administration, including
electronic data interchange, have improved the timeliness of claims remittances
and increased processing efficiency. Electronic data interchange involves the
electronic transmission of data associated with transactions between PMA Re and
the client.
6
<PAGE>
THE PMA INSURANCE GROUP
Background
The PMA Insurance Group provides workers' compensation and integrated disability
insurance coverages and related services in its ten-state marketing territory
concentrated in the Mid-Atlantic and Southern regions of the United States. In
addition, The PMA Insurance Group provides other commercial property and
casualty insurance coverages, including commercial general liability, commercial
automobile and commercial multi-peril, and related services. 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 emphasizes its traditional core business, workers'
compensation. The Company believes that it can attract additional business based
upon its expertise in workers' compensation and integrated disability, and its
reputation as a high quality service provider to middle market and risk
management clients. In addition, The PMA Insurance Group has aligned itself with
network health care providers to offer medical cost containment services to its
insureds. The PMA Insurance Group is one of the leading providers of integrated
disability with $23 million in combined workers' compensation and integrated
disability premium in 1999, and 88 accounts as of December 31, 1999. The PMA
Insurance Group has also enhanced its ability to handle multi-state clients
based in its operating territory through its initiative to license several of
its insurance companies in 50 states to write workers' compensation, integrated
disability and other commercial lines. As of February 29, 2000, The PMA
Insurance Group was operational in 39 states for workers' compensation, general
liability and commercial automobile. 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.
Products
The PMA Insurance Group's premiums written were as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gross premiums written:
Workers' Compensation $208,159 $198,099 $201,104
Commercial Multi-Peril 38,483 42,668 61,141
Commercial Automobile 33,372 36,568 43,703
Other 15,427 16,760 20,053
Run-off Operations - (9,400) (51,622)
------------ ------------ ------------
Total $295,441 $284,695 $274,379
============ ============ ============
Net premiums written:
Workers' Compensation $179,096 $187,033 $175,301
Commercial Multi-Peril 26,322 28,043 41,713
Commercial Automobile 21,610 23,288 28,938
Other 6,685 5,873 9,018
Run-off Operations - (9,400) (51,622)
------------ ------------ ------------
Total $233,713 $234,837 $203,348
============ ============ ============
</TABLE>
Workers' Compensation Insurance
All states require employers to provide workers' compensation benefits to their
employees 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
7
<PAGE>
benefits payable for various types of claims are set and limited 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.
Statutory direct workers' compensation business written by jurisdiction was as
follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pennsylvania $ 108,692 $ 85,923 $ 91,126
New Jersey 29,177 29,098 26,327
Virginia 17,382 19,958 19,552
New York 15,185 7,796 3,143
Maryland 11,787 16,108 16,538
North Carolina 10,711 8,988 9,501
Delaware 7,501 8,372 7,041
Georgia 4,174 353 -
Other 10,962 10,317 8,327
------------- ------------- -------------
Total $ 215,571 $ 186,913 $ 181,555
============= ============= =============
</TABLE>
Based upon direct written premium information published by A.M. Best for the
most recently available year (1998), The PMA Insurance Group is the 2nd largest
writer of workers' compensation insurance in Pennsylvania and ranks among the 12
largest writers of workers' compensation insurance in Delaware, Maryland,
Virginia, New Jersey and the District of Columbia. 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 each state's
respective 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.
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 have made workers' compensation
business more attractive from an underwriting perspective than it had been in
the early 1990's. To date, these reforms have had a favorable impact on medical
loss costs and indemnity loss costs in Pennsylvania. Accordingly, The PMA
Insurance Group has expanded its writings of workers' compensation in
Pennsylvania.
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. As a result, 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. Further, in 1999, The PMA Insurance Group achieved profitable business
growth in its most recent expansion states, New York and Georgia. The PMA
Insurance Group continues to evaluate expansion into other states.
The PMA Insurance Group has continued to balance its workers' compensation
portfolio by increasing writings in lower hazard classes of business and
reducing writings in higher hazard classes of business. For example, lower
hazard classes of business such as health care, educational institutions and
retail represented 33%, 26% and 21% of total direct workers' compensation
premiums written in 1999, 1998 and 1997, respectively, compared to higher hazard
classes of business such as construction, which represented 15%, 21% and 26% of
total direct workers' compensation premiums written in 1999, 1998 and 1997,
respectively.
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.
Workers' compensation insurers doing business in certain states are required to
provide insurance for risks that are
8
<PAGE>
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 1999, The PMA Insurance Group wrote $2.6 million of
residual market business, which constituted approximately 1.2% of its direct
workers' compensation premiums written. Based upon data for policy year 1998
reported by the National Council on Compensation Insurance, the percentage of
residual market business for the industry as a whole, in all states, was 5.5% of
direct workers' compensation premiums written.
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.
The PMA Insurance Group's voluntary workers' compensation direct premiums
written by product type were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Rate-sensitive products 59% 63% 62%
Loss-sensitive products 34% 28% 27%
Alternative market products 7% 9% 11%
------------- ------------- -------------
Total 100% 100% 100%
============= ============= =============
</TABLE>
o 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 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.
o 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. These policies are typically
subject to adjustment for an average of five years after policy expiration. The
PMA Insurance Group generally restricts loss-sensitive products to accounts
developing minimum annual premiums in excess of $100,000.
o 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 these policies generally range from
$250,000 to $1.0 million. In addition to these products, The PMA Insurance Group
offers its clients certain workers' compensation services such as claims, risk
management and other services. See "PMA Management Corp." below for an
additional discussion of such products.
The PMA Insurance Group has developed a product for group integrated
occupational and non-occupational disability coverages, named PMA One(R), which
it began marketing in 1998. PMA One leverages one of The PMA Insurance Group's
most important core competencies: managing employee disabilities. PMA One offers
employers the benefits of coordinated workers' compensation and disability
administration, reduced costs, faster return to work and heightened employee
productivity. In 1999, The PMA Insurance Group wrote 41 new PMA One clients,
9
<PAGE>
bringing the total of PMA One accounts to 88, and generated $23 million of
combined workers' compensation and integrated disability written premiums. PMA
One clients include health care systems, educational institutions, manufacturers
and financial institutions.
Through The PMA Insurance Group's workers' compensation product offerings, the
Company offers a comprehensive array of managed care services to control loss
costs. These include:
o Disability Management Coordinators, who are all registered nurses, employing
an early intervention model to proactively manage medical treatment and length
of disability in concert with the claims professional and employer. There are
also case management nurses who manage more serious claims via on-site visits
with injured workers and medical providers.
o Access to First Health Corp's 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.
o Utilization of an automated medical bill review system 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 overutilization.
o Use of Paradigm Corporation for the medical management of certain catastrophic
injuries. Paradigm adds a team of catastrophic case management experts to assist
in achieving enhanced clinical and financial outcomes on these catastrophic
injuries.
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 or Cayman based
subsidiary of the Company. The client participates in the loss and investment
experience of the portion ceded to the Bermuda or Cayman based 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.
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 commercial multi-peril, general
liability and umbrella, and commercial automobile business. The PMA Insurance
Group offers 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.
10
<PAGE>
Distribution
The PMA Insurance Group distributes its products through multiple channels,
including national, regional and local brokers and agents, as well as direct
sales representatives.
The PMA Insurance Group employs 14 direct sales representatives and uses
approximately 250 independent brokers and agents. The direct sales
representatives are generally responsible for certain business located in
Pennsylvania and Delaware. For the year ended December 31, 1999, these employees
produced approximately $39.1 million in direct premiums written, constituting
13% of The PMA Insurance Group's direct written premiums.
The brokers and agents write business throughout the marketing territory. 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. In
1999, brokers and agents accounted for 87% of The PMA Insurance Group's direct
written premiums. The top ten brokers and agents accounted for 26% of The PMA
Insurance Group's direct written premiums, the largest of which accounted for
approximately 7.5% of its direct written premiums. The PMA Insurance Group's
underwriters review all business from brokers and agents before it is accepted.
The PMA Insurance Group monitors several statistics with respect to its brokers
and agents, including a complete profile of the broker/agent, the number of
years the broker/agent has been associated with The PMA Insurance Group, the
percentage of the broker/agent's business that is underwritten by The PMA
Insurance Group, the ranking of The PMA Insurance Group within the
broker/agent's business and the profitability of the broker/agent's business.
The field organization currently consists of 16 branch and satellite 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 actuaries,
determine the general type 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 and locally to branch vice presidents that are
accountable for territorial operating results. 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.
Claims Administration
Claims services are delivered to customers primarily through employees in the
field offices. 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. Certain specialized matters, such as asbestos and environmental
claims, are referred to a special claims unit in the home office.
11
<PAGE>
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. The
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, 1999, the Run-off Operations had $79.0
million of total assets and $70.8 million in total reserves. See page 35 of the
MD&A and Notes 16 and 18 to the Financial Statements in the Annual Report.
12
<PAGE>
CALIBER ONE
Background
In January 1998, the Company's specialty insurance unit, Caliber One, commenced
writing business. Caliber One's gross and net premiums written for 1999 were
$93.4 million and $51.2 million, respectively. Caliber One writes business
through surplus lines brokers and managing general agents on a national basis.
Caliber One Indemnity Company, Caliber One's statutory insurance affiliate, is a
licensed carrier in Delaware, its state of domicile, and is presently eligible
as an excess and surplus lines carrier in 41 states, the District of Columbia
and Puerto Rico, with applications pending in two other states.
Products, Distribution and Underwriting
Caliber One currently focuses 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, auto parts, machinery manufacturers, toy makers,
medical product manufacturers and other difficult-to-insure product liability
risks, as well as property coverages for risks declined by admitted insurers. In
addition, Caliber One has written environmental impairment liability coverages,
clinical trials coverage for emerging biotechnology products, intellectual
property rights liability coverages, intermediate and skilled long-term care
coverages. Caliber One's policy forms contain various endorsements and
exclusions, and in some cases, include defense costs within the policy limits
rather than offering such coverage on an unlimited basis. Caliber One also
evaluates the diversity of its product offerings in an effort to obtain a
balance in coverages being offered.
For 1999, casualty business represented $68.9 million, or 74%, of Caliber One's
gross premiums written, while property business represented $24.5 million, or
26% of gross premiums written. For 1998, the mix of business on a percentage
basis was the same as that for 1999, with $8.7 million of gross premiums written
represented by casualty business and $3.1 million by property business. For
1999, casualty business represented $48.2 million, or 94%, of Caliber One's net
premiums written, while property business represented $3.0 million, or 6% of net
premiums written. For 1998, casualty business represented $5.9 million, or 92%,
of net premiums written and property business represented $0.5 million, or 8%,
of net premiums written.
Caliber One currently operates through three internal underwriting units based
on classes of business and distribution channels: casualty brokerage, property
brokerage and programs. Gross premiums written by the casualty brokerage unit
represented $57.1 million, or 61%, of total gross premiums written in 1999,
compared to $8.6 million, or 73%, of gross premiums written in 1998. Gross
premiums written by the property brokerage unit represented $16.7 million, or
18% of total gross premiums written in 1999 compared to $2.5 million, or 21%, of
gross premiums written in 1998. The programs unit represented $19.6 million, or
21%, of gross premiums written in 1999 compared to $0.7 million, or 6%, for the
programs unit in 1998.
The underwriting of excess and surplus lines involves a significant amount of
judgment. The underwriting process involves reviewing the claims experience of
an account, if any, and the claims experience of the particular class or similar
classes. The underwriters respond to any special risks of an account through the
use of policy features that can be changed in light of the circumstances, such
as different levels of retentions, exclusions and endorsements.
Caliber One distributes its excess and surplus lines products on a nationwide
basis through approximately 45 appointed surplus lines brokers, and, to a lesser
extent, through managing general agents for program business. For most product
offerings, Caliber One does not grant underwriting or binding authority to its
brokers. For its program business, Caliber One currently operates through
approximately six managing general agents. Managing general agents are selected
based on their specialized areas of expertise and typically have quoting,
underwriting and binding authority within pre-approved guidelines. Examples of
business written by Caliber One through managing general agents include mobile
homeowners, hazardous materials hauling, medical malpractice, excess
habitational, crane rental liability and loggers equipment.
13
<PAGE>
Acquisition of Caliber One Indemnity Company
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 in late 1997 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. 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.
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 ceded reinsurance agreements of the Company's insurance subsidiaries
generally may be terminated at their 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, 1999, the Company's reinsurance and retrocessional protections
were as follows:
<TABLE>
<CAPTION>
Retention Limits(1)
--------- ---------
PMA Re
Per Occurrence:
<S> <C> <C>
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 $ 750,000 $ 4.3 million
Casualty lines $ 1.5 million $ 6.0 million
The PMA Insurance Group
Per Occurrence:
Workers' compensation $ 150,000 $ 103.5 million
Per Risk:
Property lines $ 500,000 $ 19.5 million(2)
Auto physical damage $ 500,000 $ 2.0 million
Other casualty lines $ 175,000 $ 4.8 million(3)
Caliber One
Per Occurrence and Per Risk:
Property lines $ 500,000 $ 4.5 million
Casualty lines $ 500,000 $ 5.5 million
</TABLE>
(1) Represents the amount of loss protection above the Company's level of loss
retention.
(2) This coverage also provides protection of $48.5 million per occurrence over
the combined net retention of $500,000.
(3) This coverage also provides protection of $49.8 million per occurrence over
the combined net retention of $175,000.
14
<PAGE>
As of December 31, 1999, the maximum gross limits that PMA Re will write are
$7.5 million for casualty covers, $5.0 million for property covers and $1.0
million for property catastrophe covers.
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. 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 financial
condition, results of operations and liquidity.
The collectibility of reinsurance is largely a function of the solvency of
reinsurers. At December 31, 1999, the Company had reinsurance recoverables due
from the following unaffiliated reinsurers in excess of 5% of shareholders'
equity:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Reinsurance A.M. Best
Reinsurer Recoverables Rating (1)
- --------- ---------------- ----------
<S> <C> <C>
London Life & Casualty Reinsurance Corp. $ 240,753 A
United States Fidelity and Guaranty Company 98,940 A
American Re-Insurance Company 29,599 A++
Essex Insurance Company 26,554 A
SCOR Reinsurance Company 22,724 A+
Houston Casualty Company 22,574 A+
</TABLE>
(1) Ratings are as of March 21, 2000, at which time the rating for Essex
Insurance Company was under review. A.M. Best ratings are as follows: A++,
Superior, 1st of 15; A+, Superior, 2nd of 15; and A, Excellent, 3rd of 15.
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, 1999, approximately 98% of the
Company's reinsurance receivables related to unpaid reported claims and incurred
but not reported claims, and the remaining 2% 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 36-38
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 that have occurred, including events
that have not been reported to the insurer. Reserves are also established for
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
15
<PAGE>
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
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, regulatory trends on benefit levels for both medical and indemnity
payments, 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.
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 ten years prior to 1999. The first section of the table shows the
estimated net reserves that were recorded at the end of each respective year for
all current and prior year unpaid losses and LAE. 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 December 31, 1999; 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
1990 would be included in the cumulative deficiency amount for each of the years
1990 through 1996. However, 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.
16
<PAGE>
<TABLE>
<CAPTION>
Consolidated Loss and Loss Adjustment Expense Development
December 31,
(dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Initial estimated
liability for
unpaid losses
and LAE, net of
reinsurance $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 $1,284.4
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Amount of reserve
paid, net of
reinsurance,
through:
- - one year later $ 444.6 $ 470.8 $ 490.5 $ 442.4 $ 407.8 $ 398.9 $ 437.6 $ 398.8 $ 360.7 $ 351.5 --
- - two years later 771.5 842.0 848.8 779.1 746.1 763.7 780.0 669.6 646.0
- - three years later 1,042.6 1,133.8 1,127.0 1,066.8 1,055.9 1,072.9 999.0 894.8
- - four years later 1,258.0 1,353.1 1,364.9 1,329.2 1,330.6 1,252.2 1,183.5
- - five years later 1,421.4 1,539.4 1,585.4 1,573.8 1,472.7 1,405.9
- - six years later 1,553.1 1,715.1 1,788.9 1,688.7 1,605.4
- - seven years later 1,684.6 1,882.1 1,882.2 1,805.4
- - eight years later 1,817.3 1,962.6 1,986.5
- - nine years later 1,887.4 2,048.9
- - ten years later 1,956.4
Re-estimated
liability,
net of reinsurance,
as of:
- - one year later $1,696.0 $1,795.3 $1,966.8 $1,998.1 $1,932.3 $1,907.4 $1,964.6 $1,748.5 $1,624.3 $1,314.7
- - two years later 1,742.5 1,949.9 2,067.5 2,006.5 1,982.5 2,073.4 1,866.8 1,700.5 1,557.6
- - three years later 1,876.0 2,034.1 2,081.5 2,060.6 2,163.9 1,986.7 1,819.2 1,611.1
- - four years later 1,938.2 2,040.8 2,134.8 2,258.2 2,078.3 1,942.0 1,742.1
- - five years later 1,935.1 2,123.0 2,302.0 2,170.3 2,030.5 1,880.3
- - six years later 1,985.3 2,273.3 2,209.3 2,126.6 1,973.2
- - seven years later 2,098.2 2,205.4 2,169.5 2,079.9
- - eight years later 2,052.2 2,168.4 2,133.7
- - nine years later 2,020.1 2,138.6
- - ten years later 1,999.8
Indicated deficiency
(redundancy) $ 367.6 $ 404.0 $ 309.4 $ 138.9 $ 41.2 $ 24.4 $(66.4) $(223.4) $(113.3) $ (32.5)
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net liability $1,932.0 $1,855.9 $1,808.5 $1,834.5 $1,670.9 $1,347.2 $1,284.4
Reinsurance recoverables 218.7 247.9 261.5 256.6 332.3 593.7 648.2
-------- -------- -------- -------- -------- -------- --------
Gross liability $2,150.7 $2,103.8 $2,070.0 $2,091.1 $2,003.2 $1,940.9 $1,932.6
======== ======== ======== ======== ======== ======== ========
Re-estimated net liability $1,973.2 $1,880.3 $1,742.1 $1,611.1 $1,557.6 $1,314.7
Re-estimated reinsurance recoverables 197.6 241.9 274.5 271.3 353.0 606.6
-------- -------- -------- -------- -------- --------
Re-estimated gross liability $2,170.8 $2,122.2 $2,016.6 $1,882.4 $1,910.6 $1,921.3
======== ======== ======== ======== ======== ========
</TABLE>
17
<PAGE>
Unpaid losses and LAE on a GAAP basis were $1,932.6 million and $1,940.1 million
at December 31, 1999 and 1998, respectively. Unpaid losses and LAE on a
statutory basis were $1,282.0 million and $1,347.2 million at December 31, 1999
and 1998, respectively. Substantially all of the difference between GAAP and
statutory loss reserves is due to reinsurance recoverables on unpaid losses and
LAE, which are recorded as assets for GAAP but netted against statutory loss
reserves.
At December 31, 1999 and 1998, the Company's GAAP loss reserves were stated net
of discount of $180.4 million and $194.6 million, respectively, primarily
related to workers' compensation business. Pre-tax income is negatively impacted
by accretion of discount on prior year reserves and favorably impacted by
setting up discount for current year reserves. The net of these amounts is
referred to as net discount accretion. Net discount accretion decreased pre-tax
income by $2.7 million and $14.5 million in 1999 and 1998, respectively.
The components of the Company's (favorable) unfavorable development of reserves
for losses and LAE for prior accident years, excluding accretion of discount,
are as follows:
(dollar amounts in millions)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
PMA Re $ (23.5) $ (31.5) $ (32.1)
The PMA Insurance Group:
Workers' compensation (7.1) (17.3) (44.1)
Other (1.9) 2.3 (9.8)
------------ ------------ -------------
Total PMA Insurance Group (9.0) (15.0) (53.9)
------------ ------------ -------------
Total $ (32.5) $ (46.5) $ (86.0)
============ ============ =============
</TABLE>
During 1999, 1998 and 1997, PMA Re recorded favorable reserve development on
prior accident years ("prior year development") of $23.5 million, $31.5 million
and $32.1 million, respectively. The favorable reserve development reflects
development on prior accident years due to re-estimated loss trends for such
years that were lower than previous expectations.
During 1999, 1998 and 1997, The PMA Insurance Group recorded favorable prior
year development of $9.0 million, $15.0 million and $53.9 million. The favorable
reserve development in 1999 reflects better than expected loss experience from
loss-sensitive and rent-a-captive workers' compensation business. This favorable
development has been substantially offset by premium adjustments for
loss-sensitive business and policyholders' dividends for rent-a-captive
business. Rent-a-captives are used by customers as an alternative method to
manage their loss exposure without establishing and capitalizing their own
captive insurance company. The favorable reserve development during 1998
primarily relates to the formal commutation programs, which resulted in early
liability settlements made during 1998 to reduce future claim payments.
Favorable loss development in 1997 is attributable 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 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 $38 million, $65 million and $113 million in
1999, 1998 and 1997, respectively, to commute workers' compensation
claims. The commutation programs resulted in payments that were less than the
corresponding carried reserves. Savings associated with these claims were
consistent with management's expectations.
At December 31, 1999, the Company's loss reserves were stated net of $43.8
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
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<PAGE>
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 historical paid data implicitly considers
realization and collectibility.
Asbestos and Environmental Reserves
The Company's asbestos-related losses were as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Gross of reinsurance:
<S> <C> <C> <C>
Beginning reserves $ 67,857 $ 76,726 $ 80,055
Incurred losses and LAE 1,910 (1,976) 2,435
Paid losses and LAE (8,490) (6,893) (5,764)
------------- ------------ ------------
Ending reserves $ 61,277 $ 67,857 $ 76,726
============= ============ ============
Net of reinsurance:
Beginning reserves $ 43,556 $ 48,578 $ 53,300
Incurred losses and LAE (341) (2,754) (36)
Paid losses and LAE (4,364) (2,268) (4,686)
------------- ------------ ------------
Ending reserves $ 38,851 $ 43,556 $ 48,578
============= ============ ============
</TABLE>
The Company's environmental-related losses were as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Gross of reinsurance:
<S> <C> <C> <C>
Beginning reserves $ 47,036 $ 45,108 $ 35,626
Incurred losses and LAE 5,081 11,895 1,130
Reserves acquired through purchase of Caliber
One Indemnity Company(1) - - 13,060
Paid losses and LAE (10,758) (9,967) (4,708)
------------ ------------ -------------
Ending reserves $ 41,359 $ 47,036 $ 45,108
============ ============ =============
Net of reinsurance:
Beginning reserves $ 29,356 $ 31,695 $ 34,592
Incurred losses and LAE 82 3,644 1,068
Paid losses and LAE (4,916) (5,983) (3,965)
------------ ------------ -------------
Ending reserves $ 24,522 $ 29,356 $ 31,695
============ ============ =============
</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 $32.0 million, $34.2 million
and $41.9 million related to IBNR losses at December 31, 1999, 1998 and 1997,
respectively. Of the total net environmental reserves, approximately $18.0
million, $20.3 million and $20.5 million related to IBNR losses at December 31,
1999, 1998 and 1997, 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
19
<PAGE>
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.
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
An important component of the financial results of the Company is the return on
invested assets. The Company's investment objectives are to (i) seek competitive
after-tax income and total return, (ii) maintain medium to high investment grade
asset quality and high 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 of loss reserve
payouts. 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 Executive and Finance Committees of the Company's Board of Directors are
responsible for the Company's investment 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 Executive and Finance Committees of the Company's Board of
Directors meet 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. Investments 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 40-41
of the MD&A as well as Notes 2(B) 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. PMA Re competes with other reinsurers in the
broker market as well as reinsurers that underwrite reinsurance business on a
direct basis. 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. 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. PMA Re, The PMA Insurance
Group 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 the Company's rate of return targets. The present soft
pricing environment has made competing solely on the basis of price increasingly
difficult. PMA Re, The PMA Insurance Group 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. PMA Re has expanded its product line in recent years to satisfy the
needs of its client base. Products introduced by PMA Re in the last four years
include finite risk and financial products reinsurance and facultative
reinsurance. See "PMA Re--Products" for additional discussion. In recent years,
The PMA Insurance Group has developed products that reflect the evolving nature
of the workers' compensation market. Specifically, it has developed PMA One, a
product that provides for group integrated occupational and non-occupational
disability coverages. The PMA Insurance Group has also increased its focus on
rehabilitation and managed care to control workers' compensation costs 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" 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 PMA Re, The PMA Insurance Group 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:
o A.M. Best Company, Inc. ("A.M. Best"), A++ to F ("Superior" to "In
Liquidation")
o Moody's Investors Service ("Moody's"), Aaa to C ("Exceptional" to "Lowest")
As of March 15, 2000, A.M. Best had assigned an A+ ("Superior," 2nd of 15)
rating to PMA Reinsurance Corporation, an A- ("Excellent," 4th of 15) rating to
the Pooled Companies and an A ("Excellent," 3rd of 15) 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, 44 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 41
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 that purpose. PMA Reinsurance Corporation and the Pooled Companies are
domiciled in Pennsylvania, and the Pennsylvania Insurance Department exercises
principal regulatory jurisdiction over them. Caliber One Indemnity Company is
domiciled in Delaware, and 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, including rate-sensitive workers' compensation, 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.
The U.S. federal government does not directly regulate the insurance industry;
however, federal initiatives from time to time can impact the insurance
industry. On November 12, 1999, the President of the United States signed into
law the "Gramm-Leach-Bliley Financial Modernization Act," which removed many of
the restrictions on affiliations among firms in different financial services
businesses, notably banking, securities and insurance. The Act also contains
provisions to protect the privacy of certain information on individuals held by
insurance companies and financial institutions. Several governmental agencies
are expected to propose standards to implement these privacy provisions.
Although it is too early to assess the effects of this legislation on the
Company, the Act could result in additional costs to the Company and additional
competition in one or more of the markets in which the Company sells its
products and services.
Further, although the Company does not write health insurance, federal and state
rules and regulations affecting health care services can affect the workers'
compensation and integrated disability services the Company provides. Pending
initiatives to increase health care regulation at the federal level include
managed care reform and a patient's bill of rights. The Company cannot predict
what health care reform legislation will be adopted by Congress or by state
legislatures where the Company does business or the effect, if any, that the
adoption of health care legislation or regulations at the federal or state level
will have on the Company's results of operations.
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 the Pooled Companies as of December 31, 1997. No
material 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 the Pooled
Companies. The Pennsylvania Department of Insurance recently completed
examinations of PMA Reinsurance Corporation 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 or
MASCCO. Caliber One Indemnity Company
22
<PAGE>
has not been subjected to an Insurance Department examination in the two years
that the company has been writing business as Caliber One Indemnity Company.
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.
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 borrowings.
The Company's domestic insurance subsidiaries' ability to pay dividends to PMA
Capital is regulated under the insurance laws and regulations of Pennsylvania
and Delaware (the laws of which are substantially similar with respect to
dividends). 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 laws and regulations, 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.
23
<PAGE>
Based upon this limitation, these companies have the legal capacity to pay
approximately $55 million in dividends to PMA Capital in 2000 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 1999, $41.9 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 2000, Caliber One Indemnity Company may pay
up to $3.3 million of dividends to PMA Reinsurance Corporation without the prior
approval of the Delaware Insurance Commissioner. During 1999, no dividends were
declared or paid by Caliber One Indemnity Company.
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 240% for the
Pooled Companies in 1999). As of December 31, 1999, the Company's insurance
subsidiaries reported combined statutory surplus of $552.8 million, and, as of
December 31, 1999, PMA Reinsurance Corporation's risk-based capital ratio was
323% and the Pooled Companies' ratios ranged from 380% to 521%. Under the most
restrictive debt covenant of the Facilities, PMA Capital would be able to pay
approximately $10 million in dividends in 2000.
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("RBC ratio"), also as defined by the NAIC.
Four levels of regulatory attention may be triggered if the RBC ratio is
insufficient:
o "Company action level" - If the RBC ratio is between 150% and 200%,
then the company must submit a plan to the regulator detailing
corrective action it proposes to undertake.
o "Regulatory action level" - If the RBC ratio is between 100% and 150%,
then 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.
o "Authorized control level" - If the RBC ratio is between 70% and 100%,
then 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.
o "Mandatory control level" - If the RBC ratio is less than 70%, then
the regulator must rehabilitate or liquidate the insurer.
24
<PAGE>
At December 31, 1999, the RBC ratios of the Pooled Companies ranged from 380% to
521%, and the RBC ratio of MASCCO, The PMA Insurance Group's domestic run-off
subsidiary was 275%. PMA Reinsurance Corporation's RBC ratio was 323% and
Caliber One Indemnity Company's RBC ratio was 732%.
The Company believes that it will be able to maintain the RBC ratios of its
insurance subsidiaries in excess of the "Company action level" through prudent
underwriting, 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 not cause the RBC ratios to fall below
required levels resulting in a corresponding regulatory response.
The NAIC has also 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 and
the insurer's state of domicile. In 1999, 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 1999, two of the Pooled
Companies reported an unusual value in one ratio, relating to reserve
development due to the paydown of loss reserves. In 1999, Caliber One Indemnity
Company reported three unusual values, relating to the change in net premiums
written, agent's balances to surplus, and surplus aid (i.e., reinsurance) to
surplus. The unusual value relating to the change in net premiums written was
attributable to the continued growth of Caliber One during its first full year
of operations. The unusual value relating to agent's balances to surplus was
also attributable to the continued growth of Caliber One. The third unusual
value for Caliber One, relating to surplus aid to surplus, is the result of
management's intentional strategy to purchase certain types and amounts of
reinsurance during the initial growth period of Caliber One to protect its
surplus.
EMPLOYEES
As of February 29, 2000, the Company had approximately 1000 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
Aggregate stop loss .................A form of excess of loss treaty reinsurance
whereby the reinsurer responds when a
ceding insurer incurs losses on a
particular line of business during a
specific period in excess of a stated
dollar amount.
Broker ..............................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.
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."
Combined ratio (GAAP)................The sum of losses and LAE, acquisition
expenses, operating expenses and
policyholders' dividends, where applicable,
all divided by net premiums earned.
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.
26
<PAGE>
Financial quota share
reinsurance.........................A form of finite risk reinsurance wherein
the cedent transfers some of its premiums
to a finite risk provider and achieves, by
virtue of an individual arrangement for
reinsurance commission, the required
financial effects, such as a stabilization
of net claims costs.
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 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.
Loss and LAE ratio (GAAP) ...........Loss and LAE ratio is equal to losses and
LAE divided by earned premiums.
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.
Manual rates.........................Insurance rates for lines and classes of
business that are approved and published by
state insurance departments.
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.
27
<PAGE>
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
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 policyholders'
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 expenses ...............The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.
28
<PAGE>
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 20,000
square feet of leased office space in Yardley, 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 financial condition, results of operations or liquidity. 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 Company's financial condition, results of operations or
liquidity.
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 1999.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
John W. Smithson .........54 President and Chief Executive Officer
Frederick W. Anton III....66 Chairman of the Board
Ronald S. Austin .........42 President and Chief Operating Officer
- Caliber One Management Company
Vincent T. Donnelly ......47 President and Chief Operating Officer -
The PMA Insurance Group
Francis W. McDonnell .....43 Senior Vice President, Chief Financial
Officer and Treasurer
Robert L. Pratter.........55 Senior Vice President, General Counsel
and Secretary
Stephen G. Tirney ........46 President and Chief Operating Officer - PMA
Reinsurance Corporation
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, as Chairman and Chief Executive Officer of The PMA
Insurance Group since April 1995, and as Chairman and Chief Executive Officer of
Caliber One Management Company since April 1997.
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.
30
<PAGE>
Ronald S. Austin has served as the President and Chief Operating Officer of
Caliber One Management 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 1995 to
1997.
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.
Robert L. Pratter has served as Senior Vice President, General Counsel and
Secretary since 1999. From 1969 to 1999, Mr. Pratter was an attorney and partner
in the law firm of Duane, Morris & Heckscher LLP.
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.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The "Class A Common Stock Prices" under the caption "Quarterly Financial
Information" and the last paragraph on page 69 of the Annual Report, as well as
the information under the captions "Securities Listing" and "Dividends" on page
72 of the Annual Report are incorporated herein by reference. Further, the
information in Note 14 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 year ended December 31, 1997, 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. 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 1999 or 1998.
Item 6. Selected Financial Data
The information under the caption "Selected Financial Data" on pages 26 and 27
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 43 of the Annual Report is incorporated herein by
reference.
31
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The information under the caption "Market Risk of Financial Instruments" on page
41 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 44 through 67 and the Report of Independent
Accountants on page 68 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 69 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 2000 Proxy Statement dated March 23, 2000
("Proxy Statement") is incorporated herein by reference, as is the information
under the caption "Section 16(a) Beneficial Reporting Compliance" on page 33 of
the Proxy Statement.
Item 11. Executive Compensation
The information under the caption "Compensation of Executive Officers" on pages
8 through 11 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 and
Class A 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 15 and 16 as
well as "Compensation Committee Interlocks and Insider Participation" on page 11
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 of Independent Accountants,
included on pages 44 through 68 of the Annual Report are incorporated
herein by reference:
o Consolidated Balance Sheets at December 31, 1999 and 1998
o Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
o Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
o Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
o Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 1999, 1998 and 1997
o Notes to Consolidated Financial Statements
o 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-4.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999:
During the quarterly period ended December 31, 1999, the Company filed
the following report on Form 8-K:
- dated November 3, 1999, Item 5 - containing a news release regarding
its third quarter 1999 results
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 29, 2000 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 29, 2000.
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
Schedule No. Description Page
II Condensed Financial Information of FS-2 to FS-4
Registrant as of December 31, 1999 and
1998 and for the years ended December 31,
1999, 1998 and 1997
III Supplementary Insurance Information for the FS-5
years ended December 31, 1999, 1998 and 1997
IV Reinsurance for the years ended December 31, FS-6
1999, 1998 and 1997
V Valuation and Qualifying Accounts for the FS-7
years ended December 31, 1999, 1998 and 1997
VI Supplemental Information Concerning FS-8
Property and Casualty Insurance Operations
for the years ended December 31, 1999, 1998 and 1997
Report of Independent Accountants on Financial FS-9
Statement Schedules
Certain financial statement schedules have been omitted because they are either
not applicable or the required financial information is contained in the
Company's 1999 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>
December 31,
(dollar amounts in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash $ 605 $ --
Investment in subsidiaries 620,788 700,772
Deferred income taxes, net 2,527 8,078
Other assets 316 420
------------------------
Total assets $ 624,236 $ 709,270
========================
Liabilities
Long-term debt $ 163,000 $ 163,000
Related party payables 15,294 14,354
Other liabilities 16,799 20,436
------------------------
Total liabilities 195,093 197,790
Stockholders' Equity
Common stock, $5 par value (40,000,000 shares authorized;
1999 - 13,084,665 shares issued and 12,648,658 outstanding
1998 - 13,956,268 shares issued and 13,520,261 outstanding) 65,423 69,781
Class A Common stock, $5 par value (40,000,000 shares authorized;
1999 - 11,358,280 shares issued and 9,692,854 outstanding
1998 - 10,486,677 shares issued and 9,837,963 outstanding) 56,791 52,433
Additional paid-in capital - Class A Common stock 339 339
Retained earnings 391,981 377,601
Accumulated other comprehensive income (loss) (46,844) 30,016
Notes receivable from officers (56) (498)
Treasury stock, at cost:
Common stock (1999 - 436,007 shares; 1998 - 436,007 shares) (5,582) (5,582)
Class A Common stock (1999 - 1,665,426 shares; 1998 - 648,714 shares) (32,909) (12,610)
------------------------
Total shareholders' equity 429,143 511,480
------------------------
Total liabilities and shareholders' equity $ 624,236 $ 709,270
========================
</TABLE>
These financial statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto.
FS-2
<PAGE>
<TABLE>
<CAPTION>
PMA Capital Corporation
Schedule II - Registrant Only Financial Statements
Statements of Operations
(Parent Company Only)
Years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Net investment income (expense) $ (14) $ (18) $ 70
Net realized investment loss - (1,740) -
Other revenues 98 1,089 193
--------------------------------------------------------
Total revenues 84 (669) 263
--------------------------------------------------------
Expenses:
General expenses 8,012 10,834 6,911
Interest expense 12,434 15,221 15,764
--------------------------------------------------------
Total expenses 20,446 26,055 22,675
--------------------------------------------------------
Loss before income taxes, equity in earnings of subsidiaries
and extraordinary loss (20,362) (26,724) (22,412)
Income tax expense (benefit) (6,426) 1,256 (14,271)
--------------------------------------------------------
Loss before equity in earnings of subsidiaries and
extraordinary loss (13,936) (27,980) (8,141)
Equity in earnings of subsidiaries 39,530 72,714 27,894
--------------------------------------------------------
Income before extraordinary loss 25,594 44,734 19,753
Extraordinary loss from early extinguishment of debt
(net of income tax benefit of $2,549) - - (4,734)
--------------------------------------------------------
Net income $ 25,594 $ 44,734 $ 15,019
========================================================
These financial statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto.
</TABLE>
FS-3
<PAGE>
<TABLE>
<CAPTION>
PMA Capital Corporation
Schedule II - Registrant Only Financial Statements
Statements of Cash Flows
(Parent Company Only)
Years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net income $ 25,594 $ 44,734 $ 15,019
Adjustments to reconcile net income to net cash flows provided
by operating activities:
Equity in earnings of subsidiaries (39,530) (72,714) (27,894)
Dividends received from subsidiaries 43,206 35,502 22,500
Net tax sharing payments received from subsidiaries 21,798 29,728 19,950
Net realized investment losses - 1,740 -
Deferred income tax expense 5,926 21,085 9,614
Extraordinary loss from early extinguishment of debt - - 4,734
Other, net (5,173) 17,771 (3,426)
----------------------------------------
Net cash flows provided by operating activities 51,821 77,846 40,497
Cash Flows From Investing Activities:
Cash contributions to subsidiaries (7,100) (480) (11,000)
----------------------------------------
Net cash flows used by investing activities (7,100) (480) (11,000)
----------------------------------------
Cash Flows From Financing Activities:
Dividends paid to shareholders (7,795) (7,939) (7,965)
Purchase of treasury stock (30,241) (18,850) (597)
Proceeds from exercised stock options and issuance of Class A
Common stock 6,035 4,283 1,442
Change in related party receivables and payables (12,557) (14,813) (21,389)
Repayments of long-term debt - (40,000) (211,699)
Proceeds from issuance of long-term debt - - 210,000
Net repayments (issuance) of notes receivable from officers 442 (300) 964
----------------------------------------
Net cash flows used by financing activities (44,116) (77,619) (29,244)
----------------------------------------
Net increase (decrease) in cash 605 (253) 253
Cash - beginning of year - 253 -
----------------------------------------
Cash - end of year $ 605 $ - $ 253
========================================
Supplementary cash flow information:
Income taxes paid (refunded) $ 12,352 $ (15,170) $ (19,112)
Interest paid $ 12,263 $ 15,107 $ 19,776
These financial statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto.
</TABLE>
FS-4
<PAGE>
<TABLE>
<CAPTION>
PMA Capital Corporation
Schedule III
Supplementary Insurance Information
Unpaid
Deferred losses Losses
policy and loss Net Net and loss Net
(dollar amounts acquisition adjustment Unearned premiums investment adjustment Acquisition Operating premiums
in thousands) costs expenses premiums earned income(1) expenses expenses expenses written
Year ended
December 31, 1999:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The PMA Insurance Group $20,558 $1,144,087 $120,928 $221,934 $50,282 $166,674 $39,378 $38,909 $233,713
PMA Re 23,446 743,528 88,183 293,862 57,686 206,891 80,749 13,589 278,998
Caliber One 4,945 54,809 51,241 24,729 2,459 18,908 4,241 3,956 51,237
Corporate and Other -- (9,823) -- (438) (370) -- -- 10,368 (438)
-----------------------------------------------------------------------------------------------------------
Total $48,949 $1,932,601 $260,352 $540,087 $110,057 $392,473 $124,368 $66,822 $563,510
===========================================================================================================
Year ended
December 31, 1998:
The PMA Insurance Group $18,660 $1,250,694 $109,766 $241,928 $64,580 $197,525 $45,190 $45,309 $234,837
PMA Re 30,446 668,604 109,675 223,559 54,734 154,062 64,689 13,134 234,010
Caliber One 2,009 33,147 8,504 1,750 1,453 1,402 958 2,449 6,436
Corporate and Other -- (11,550) -- (522) (642) (318) -- 11,267 (522)
-----------------------------------------------------------------------------------------------------------
Total $51,115 $1,940,895 $227,945 $466,715 $120,125 $352,671 $110,837 $72,159 $474,761
===========================================================================================================
Year ended
December 31, 1997:
The PMA Insurance Group $20,010 $1,353,917 $115,998 $212,348 $81,927 $193,530 $48,343 $51,848 $203,348
PMA Re 25,278 622,484 95,457 163,603 52,270 113,931 45,158 10,827 177,934
Corporate and Other -- 26,786 -- -- (805) (180) -- 12,464 --
-----------------------------------------------------------------------------------------------------------
Total $45,288 $2,003,187 $211,455 $375,951 $133,392 $307,281 $93,501 $75,139 $381,282
===========================================================================================================
</TABLE>
(1) Net investment income is based on each segment's invested assets.
FS-5
<PAGE>
PMA Capital Corporation
Schedule IV
Reinsurance
<TABLE>
<CAPTION>
Assumed
Ceded to from Percentage of
Direct other other amount assumed
(dollar amounts in thousands) amount companies companies Net amount to net
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999:
<S> <C> <C> <C> <C> <C>
Property and liability insurance premiums $328,590 $154,532 $366,029 $540,087 68%
======== ======== ======== ======== ========
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%
======== ======== ======== ======== ========
</TABLE>
FS-6
<PAGE>
PMA Capital Corporation
Schedule V
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Deductions -
Balance at Charged to write-offs of Balance at
(dollar amounts in thousands) beginning of costs and uncollectible end of
Description period expenses accounts period
Year ended December 31, 1999:
Allowance for uncollectible accounts:
<S> <C> <C> <C> <C>
Premiums receivable $19,874 $275 $2,061 $18,088
Reinsurance receivables 2,178 3,350 -- 5,528
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
</TABLE>
FS-7
<PAGE>
<TABLE>
<CAPTION>
PMA Capital Corporation
Schedule VI
Supplemental Information Concerning Property and Casualty Insurance Operations
Discount on
reserves for
Deferred Reserves for unpaid unpaid claims
(dollar amounts in thousands) policy claims and claim and claim
acquisition adjustment adjustment Unearned Earned
Affiliation with registrant costs expenses expenses (1) premiums premiums
Consolidated property-casualty
subsidiaries:
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999 $48,949 $1,932,601 $180,379 $260,352 $540,087
Year Ended December 31, 1998 51,115 1,940,895 194,624 227,945 466,715
Year Ended December 31, 1997 45,288 2,003,187 460,230 211,455 375,951
Claims and claim
adjustment expenses
incurred related to
(dollar amounts in thousands) Net ------------------------- Paid claims Net
investment Current Prior Acquisition and adjustment premiums
Affiliation with registrant income year years (2) expenses expenses written
Consolidated property-casualty
subsidiaries:
Year Ended December 31, 1999 $110,057 $409,554 $(32,514) $124,368 $455,293 $563,510
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
</TABLE>
(1) Workers' compensation reserves discounted at approximately 5%.
(2) Excludes accretion of loss reserve discount of $15,433, $26,088 and $51,407
in 1999, 1998 and 1997, respectively.
FS-8
<PAGE>
PricewaterhouseCoopers LLP [Letterhead]
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors and Shareholders
of PMA Capital Corporation:
Our audits of the consolidated financial statements referred to in our report
dated February 2, 2000 appearing in the 1999 Annual Report to Shareholders of
PMA Capital Corporations (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedules listed in Item 14(a)(2) of this Form
10-K. In our opinion, these financial statement schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
February 2, 2000
FS-9
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit Method of Filing
- ----------------------------------------------------- ----------------
<S> <C> <C>
(3) Articles of incorporation and bylaws:
3.1 Amended and Restated Articles of Filed herewith.
Incorporation of the Company as last amended
December 7, 1998.
3.2 Amended and Restated Bylaws of the Company. Filed herewith.
(10) Material Contracts: Exhibits 10.1 through 10.21 are management contracts
or compensatory plans.
10.1 Deferred Compensation Plan for Non-Employee Filed herewith.
Directors of the Company.
10.2 Amended and Restated Employment Agreement, Filed as Exhibit 10.6 to the Company's Quarterly Report on
dated May 1, 1999, between PMA Capital Form 10-Q/A, No. 1 for the quarter ended June 30, 1999 and
Corporation and Frederick W. Anton III. incorporated herein by reference.
10.3 Amended and Restated Split-Dollar Insurance Filed as Exhibit 10.7 to the Company's Quarterly Report on
Agreement, dated May 12, 1999, among PMA Form 10-Q/A, No. 1 for the quarter ended June 30, 1999 and
Capital Corporation, Frederick W. Anton III incorporated herein by reference.
and Irrevocable Deed and Trust of Frederick
W. Anton III.
10.4 Split-Dollar Insurance Agreement, dated May Filed as Exhibit 10.8 to the Company's Quarterly Report on
12, 1999, among PMA Capital Corporation, Form 10-Q/A, No. 1 for the quarter ended June 30, 1999 and
Frederick W. Anton III and Irrevocable Deed incorporated herein by reference.
of Trust of Frederick W. Anton III.
10.5 Split-Dollar Insurance Agreement, dated May Filed as Exhibit 10.9 to the Company's Quarterly Report on
12, 1999, among PMA Capital Corporation, Form 10-Q/A, No. 1 for the quarter ended June 30, 1999 and
Frederick W. Anton III and Irrevocable Deed incorporated herein by reference.
of Trust of Frederick W. Anton III.
10.6 Employment Agreement dated May 1, 1995 Filed as Exhibit 10.2 to the Company's Registration
between the Company and John W. Smithson. Statement on Form 10 dated June 26, 1997 and incorporated
herein by reference.
10.7 Company's EDC Plan Trust Agreement dated as Filed as Exhibit 10.3 to the Company's Registration
of 1994. Statement on Form 10 dated June 26, 1997 and incorporated
herein by reference.
10.8 Company's Amended and Restated Executive Filed as Exhibit 10.4 to the Company's Annual Report on Form
Deferred Compensation Plan. 10-K for the year ended December 31, 1998 and incorporated
herein by reference.
E-1
<PAGE>
10.9 Company's Supplemental Executive Retirement Filed as Exhibit 10.4 to the Company's Registration
Plan (SERP) dated July 1995. Statement on Form 10 dated June 26, 1997 and incorporated
herein by reference.
10.10 Company's Amended and Restated 1987 Filed as Exhibit 10.5 to the Company's Registration
Incentive Stock Option Plan. Statement on Form 10 dated June 26, 1997 and incorporated
herein by reference.
10.11 Company's Amended and Restated 1991 Equity Filed as Exhibit 10.6 to the Company's Registration
Incentive Plan. Statement on Form 10 dated June 26, 1997 and incorporated
herein by reference.
10.12 Amendment No. 1 to the Amended and Restated Filed as Exhibit 10.1 to the Company's Quarterly Report on
1991 Equity Incentive Plan dated May 5, Form 10-Q for the quarter ended June 30, 1999 and
1999. incorporated herein by reference.
10.13 Company's Amended and Restated 1993 Equity Filed as Exhibit 10.7 to the Company's Registration
Incentive Plan. Statement on Form 10 dated June 26, 1997 and incorporated
herein by reference.
10.14 Amendment No. 1 to the Amended and Restated Filed as Exhibit 10.2 to the Company's Quarterly Report on
1993 Equity Incentive Plan dated May 5, Form 10-Q for the quarter ended June 30, 1999 and
1999. incorporated herein by reference.
10.15 Company's Amended and Restated 1994 Equity Filed as Exhibit 10.8 to the Company's Registration
Incentive Plan. Statement on Form 10 dated June 26, 1997 and incorporated
herein by reference.
10.16 Amendment No. 1 to the Amended and Restated Filed as Exhibit 10.3 to the Company's Quarterly Report on
1994 Equity Incentive Plan dated May 5, Form 10-Q for the quarter ended June 30, 1999 and
1999. incorporated herein by reference.
10.17 Company's 1995 Equity Incentive Plan. Filed as Exhibit 10.9 to the Company's Registration
Statement on Form 10 dated June 26, 1997 and incorporated
herein by reference.
10.18 Amendment No. 1 to the 1995 Equity Incentive Filed as Exhibit 10.4 to the Company's Quarterly Report on
Plan dated May 5, 1999. Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference.
10.19 Company's 1996 Equity Incentive Plan. Filed as Exhibit 10.10 to the Company's Registration
Statement on Form 10 dated June 26, 1997 and incorporated
herein by reference.
10.20 Amendment No. 1 to the 1996 Equity Incentive Filed as Exhibit 10.5 to the Company's Quarterly Report on
Plan dated May 5, 1999. Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference.
10.21 Company's 1999 Equity Incentive Plan. Filed as Annex A to the Company's Definitive Proxy Statement
on Schedule 14A dated March 26, 1999 and incorporated
herein by reference.
E-2
<PAGE>
10.22 Credit Agreement dated as of March 14, 1997 Filed as Exhibit 10.13 to the Company's Registration
by and among the Company, The Bank of New Statement on Form 10 dated June 26, 1997 and incorporated
York, First Union National Bank of North herein by reference.
Carolina, 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.
10.23 Master Agreement dated as of February 7, Filed as Exhibit 10.14 to the Company's Registration
1997 between the Company and First Union Statement on Form 10 dated June 26, 1997 and incorporated
National Bank of North Carolina. herein by reference.
10.24 First Amended and Restated Letter of Credit Filed as Exhibit 10.15 to the Company's Registration
Agreement, dated March 14, 1997, by and Statement on Form 10 dated June 26, 1997 and incorporated
among the Company, the Bank of New York, herein by reference.
Mellon Bank, N.A., Fleet Bank, National
Association, PNC Bank, National Association
and First Union Bank of North Carolina.
10.25 Amendment No. 1 and Restatement, dated Filed as Exhibit 10.15 to the Company's Annual Report on
September 29, 1997, to the First Amended and Form 10-K for the year ended December 31, 1998 and
Restated Letter of Credit Agreement, dated incorporated herein by reference.
March 14, 1997.
10.26 Amendment No. 2, dated September 28, 1998, Filed as Exhibit 10.16 to the Company's Annual Report on
to the First Amended and Restated Letter of Form 10-K for the year ended December 31, 1998 and
Credit Agreement, dated March 14, 1997. incorporated herein by reference.
10.27 Amendment No. 3, dated October 2, 1998, to Filed as Exhibit 10.17 to the Company's Annual Report on
the First Amended and Restated Letter of Form 10-K for the year ended December 31, 1998 and
Credit Agreement, dated March 14, 1997. incorporated herein by reference.
10.28 Amended No. 4, dated as of September 27, Filed as Exhibit 10 to the Company's Quarterly Report on
1999, to First Amendment and Restated Letter Form 10-Q for the quarter ended September 30, 1999 and
of Credit Agreement, dated March 14, 1997. incorporated herein by reference.
10.29 Caliber One Indemnity Company Purchase Filed as Exhibit 10.17 to the Company's Annual Report on
Agreement dated December 15, 1997. 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 1999 Annual Report Filed herewith.
to 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.
E-3
<PAGE>
(24) Power of attorney.
24.1 Powers of attorney. Filed herewith.
24.2 Certified resolutions. Filed herewith.
(27) 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: Secretary
E-4
Commonwealth of Pennsylvania
Department of State
To All to Whom These Presents Shall Come, Greeting:
Whereas, In and by Article VIII of the Business Corporation Law, approved
the fifth day of May, Anno Domini one thousand nine hundred and thirty-three,
P.L. 364, as amended, the Department of State is authorized and required to
issue a
CERTIFICATE OF AMENDMENT
evidencing the amendment and restatement of the Articles of Incorporation in
their entirety of a business corporation organized under or subject to the
provisions of that Law; and
Whereas, The stipulations and conditions of that Law pertaining to the
amendment of Articles of Incorporation have been fully complied with by
PENNSYLVANIA MANUFACTURERS CORPORATION
Henceforth The "Articles," as defined in Article I of the Business
Corporation Law, shall not include any prior documents;
Therefore, Know Ye, That subject to the Constitution of this Commonwealth
and under authority of the Business Corporation Law, I do by these presents,
which I have caused to be Sealed with the Great Seal of the Commonwealth, extend
the rights and powers of the corporation named above, in accordance with the
terms and provisions of the Articles of Amendment presented by it to the
Department of State, with full power and authority to use and enjoy such rights
and powers, subject to all the provisions and restrictions of the Business
Corporation Law and all other applicable laws of this Commonwealth.
Given under my Hand and the Great Seal of the Commonwealth, at the City of
Harrisburg, this 7th day of May in the year of our Lord one thousand nine
hundred and eighty seven and of the Commonwealth the two hundred eleventh,
/s/ James J. Hagerty
- - -----------------------------
Secretary of the Commonwealth
<PAGE>
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
APPLICANT'S ACCT. NO. Filed this day of May 07 1987
DSCB: BCL-806 (REV. 8-72) Commonwealth of Pennsylvania
Department of State
/s/ James J. Hagerty
Secretary of the Commonwealth
(Box for Certification)
Articles of
Amendment--
Domestic Business Corporation
In compliance with the requirements of section 806 of the Business Corporation
Law, act of May 5, 1933 (P.L.364) (15 P.S. SS.1806), the undersigned
corporation, desiring to amend its Articles, does hereby certify that:
1. The name of the corporation is:
Pennsylvania Manufacturers Corporation
2. The location of its registered office in this Commonwealth is (the Department
of State is hereby authorized to correct the following statement to conform to
the records of the Department):
1021 West Eighth Avenue
-----------------------
(NUMBER) (STREET)
King of Prussia Pennsylvania 19406
--------------------------------------------------------------------
(CITY) (ZIP CODE)
3. The statute by or under which it was incorporated is:
Act of May 5, 1933, P.L. 364, as amended
4. The date of its incorporation is: February 23, 1982
5. (Check, and if appropriate, complete one of the following):
/X/ The meeting of the shareholders of the corporation at which the amendment
was adopted was held at the time and place and pursuant to the kind and period
of notice herein stated.
Time: The 27th day of April, 1987
Place: 925 Chestnut Street, Philadelphia, PA
Kind and period of notice Written notice (Proxy Statement); 30 days
/ / The amendment was adopted by a consent in writing, setting forth the action
so taken, signed by all of the shareholders entitled to vote thereon and filed
with the Secretary of the corporation.
6. At the time of the action of shareholders:
(a) The total number of shares outstanding was:
797,476 shares
(b) The number of shares entitled to vote was:
797,476 shares
<PAGE>
7. In the action taken by the shareholders:
(a) The number of shares voted in favor of the amendment was:
699,557 shares
(b) The number of shares voted against the amendment was:
-0 against; 10,000 abstained
8. The amendment adopted by the shareholders, set forth in full, is as follows:
See Exhibit A attached and incorporated by reference herein for the text of the
Amended and Restated Articles of Incorporation of the Corporation.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of
Amendment to be signed by a duly authorized officer and its corporate seal, duly
attested by another such officer, to be hereunto affixed this 27th day of April,
1987.
PENNSYLVANIA MANUFACTURERS CORPORATION
--------------------------------------
(NAME OF CORPORATION)
Attest:
By: /s/ David L. Johnson By: /s/ Frederick W. Anton
------------------------------- ---------------------------------
(SIGNATURE) (SIGNATURE)
David L. Johnson, Secretary Frederick W. Anton, III, President
- - ----------------------------------- ----------------------------------
(TITLE; SECRETARY, (TITLE; PRESIDENT,
ASSISTANT SECRETARY, ETC.) VICE PRESIDENT, ETC.)
(CORPORATE SEAL)
INSTRUCTIONS FOR COMPLETION OF FORM
A. Any necessary copies of Form DSCB:17.2 (Consent to Appropriation of Name)
or Form DSCB: 17.3 (Consent to Use of Similar Name) shall accompany
Articles of Amendment effecting a change of name.
B. Any necessary governmental approvals shall accompany this form.
C. Where action is taken by partial written consent pursuant to the Articles,
the second alternate of Paragraph 5 should be modified accordingly.
D. If the shares of any class were entitled to vote as a class, the number of
shares of each class so entitled and the number of shares of all other
classes entitled to vote should be set forth in Paragraph 6(b).
E. If the shares of any class were entitled to vote as a class, the number of
shares of such class and the number of shares of all other classes voted
for and against such amendment respectively should be set forth in
Paragraphs 7(a) and 7(b).
F. BCL Section 807 (15 P.S. Section 1807) requires that the corporation shall
advertise its intention to file or the filing of Articles of Amendment.
Proof of publication of such advertising should not be delivered to the
Department, but should be filed with the minutes of the corporation.
<PAGE>
EXHIBIT A
RESOLVED that, the Articles of Incorporation of Pennsylvania Manufacturers
Corporation shall be amended and restated in their entirety as follows:
AMENDED AND RESTATED ARTICLES OF INCORPORATION
1. The name of the Corporation is Pennsylvania Manufacturers Corporation.
2. The location and post office address of the registered office of the
Corporation in this Commonwealth is 1021 West Eighth Avenue, King of Prussia,
Pennsylvania 19406.
3. The Corporation is incorporated under the Business Corporation Law of
the Commonwealth of Pennsylvania for the following purpose or purposes: The
Corporation shall have unlimited power to engage in and to do any or all lawful
business for which corporations may be incorporated under the Act of Assembly
approved May 5, 1933, P.S. 364, as amended, under which Act the Corporation is
incorporated, including, without limitation of the foregoing, the power to
manufacture, buy, sell, trade and generally deal in products, merchandise, goods
and articles of any kind and description whatsoever.
4. The term for which the Corporation is to exist is perpetual.
5. The aggregate number of shares which the Corporation shall have the
authority to issue is: Two Million (2,000,000) shares of Common Stock, $5.00 par
value per share (the "Common Stock"), and Two Million (2,000,000) shares of
Class A Common Stock, $5.00 par value per share (the "Class A Common Stock").
A. Voting Rights and Powers. Except as otherwise required by the
Pennsylvania Business Corporation Law or as otherwise provided in these Articles
of Incorporation or the By-laws of the Corporation, with respect to all matters
upon which shareholders are entitled to vote or to which shareholders are
entitled to give consent, the holders of the outstanding shares of the Common
Stock and the holders of any outstanding shares of the Class A Common Stock
shall vote together without regard to class, and every holder of the outstanding
shares of the Common Stock shall be entitled to cast thereon ten (10) votes in
person or by proxy for each share of the Common Stock standing in his name, and
every holder of any outstanding shares of the Class A Common Stock shall be
entitled to cast thereon one (1) vote in person or by proxy for each share of
the Class A Common Stock standing in his name. In all elections for directors,
each shareholder is entitled to cumulate his votes. With respect to any proposed
amendment to these Articles of Incorporation which would increase or decrease
the number of authorized shares of either the Common Stock or the Class A Common
Stock, increase or decrease the par value of the shares of the Common Stock or
the Class A Common Stock, or alter or change the powers, preferences, relative
voting power or special rights of the shares of the Common Stock or the Class A
Common Stock so as to affect it adversely, the approval of a majority of the
votes entitled to be cast by the holders of the class affected by the proposed
amendment, voting separately as a class, shall be obtained in addition to the
approval of a majority of the votes entitled to be cast by the holders of the
Common Stock and the Class A Common Stock voting together without regard to
class as hereinbefore provided.
<PAGE>
B. Dividends and Distributions.
(a) Cash Dividends. At any time shares of the Class A Common Stock are
outstanding, as and when cash dividends may be declared by the Board of
Directors, the cash dividend payable on shares of the Class A Common Stock shall
in all cases be at least ten percent (10%) higher on a per share basis than the
cash dividend payable on shares of the Common Stock.
(b) Other Dividends and Distributions. Each share of the Common Stock and
each share of the Class A Common Stock shall be equal in respect of rights to
dividends (other than cash) and distributions, when and as declared, in the form
of stock or other property of the Corporation, except that in the case of
dividends or other distributions payable in stock of the Corporation, including
distributions pursuant to stock split-ups or divisions, which occur after the
date shares of the Class A Common Stock are first issued by the Corporation,
only shares of the Common Stock shall be distributed with respect to the Common
Stock and only shares of Class A Common Stock shall be distributed with respect
to Class A Common Stock.
C. Other Rights. Except as otherwise required by the Pennsylvania Business
Corporation Law or as otherwise provided in these Articles of Incorporation,
each share of the Common Stock and each share of Class A Common Stock shall have
identical powers, preferences and rights, including rights in liquidation.
D. Conversion of the Common Stock. Each share of Common Stock may at any
time be converted at the election of the holder thereof into one fully paid and
nonassessable share of Class A Common Stock. Any holder of shares of Common
Stock may elect to convert any or all of such shares at one time or at various
times in such holder's discretion. Such right shall be exercised by the
surrender of the certificate representing each share of Common Stock to be
converted to the agent for the registration for transfer of shares of Common
Stock at its office, or to the Corporation at its principal executive offices,
accompanied by a written notice of the election by the holder thereof to convert
and (if so required by the transfer agent or by the Corporation) by instruments
of transfer, in form satisfactory to the transfer agent and to the Corporation,
duly executed by such holder of his duly authorized attorney. The issuance of a
certificate or certificates for shares of Class A Common Stock upon conversion
of shares of Common Stock shall be made without charge for any stamp or other
similar tax in respect of such issuance. However, if any such certificate or
certificates is or are to be issued in a name other than that of the holder of
the share or shares of Common Stock converted, the person or persons requesting
the issuance thereof shall pay to the transfer agent or to the Corporation the
amount of any tax which may be payable in respect of any such transfer, or shall
establish to the satisfaction of the transfer agent or of the Corporation that
such tax has been paid. As promptly as practicable after the surrender for
conversion of a certificate or certificates representing shares of Common Stock
and the payment of any tax as hereinbefore provided, the Corporation will
deliver or cause to be delivered at the office of the transfer agent to, or upon
the written order of, the holder of such certificate or certificates, a
certificate or certificates representing the number of shares of Class A Common
Stock issuable upon such conversion, issued in such name or names as such holder
may direct. Such conversion shall be irrevocable and shall be deemed to have
been made immediately prior to the close of business on the date of the
surrender of the certificate or certificates representing shares of Common Stock
(if on such date the transfer books of the Corporation shall be closed, then
immediately prior to the close of business on the first date thereafter that
said books shall be open), and all rights of
A-2
<PAGE>
such holder arising from ownership of such shares of Common Stock shall cease at
such time, and the person or persons in whose name or names the certificate or
certificates representing shares of Class A Common Stock are to be issued shall
be treated for all purposes as having become the record holder or holders of
such shares of Class A Common Stock at such time and shall have and may exercise
all the rights and powers appertaining thereto. No adjustments in respect of
past cash dividends shall be made upon the conversion of any share of Common
Stock; provided, however, that if any shares of Common Stock shall be converted
subsequent to the record date for the payment of a cash or stock dividend or
other distribution on shares of Common Stock but prior to such payment, the
registered holder of such shares at the close of business on such record date
shall be entitled to receive the cash or stock dividend or the distribution
payable to holders of the Common Stock. The Corporation shall at all times
reserve and keep available, solely for the purpose of issue upon conversion of
outstanding shares of Common Stock, such number of shares of Class A Common
Stock as may be issuable upon the conversion of all such outstanding shares of
Common Stock, provided, the Corporation may deliver shares of Class A Common
Stock which are held in the treasury of the Corporation for shares of Common
Stock to be converted. If any shares of Class A Common Stock require
registration with or approval of any governmental authority under any federal or
state law before such shares of Class A Common Stock may be issued upon
conversion, the Corporation will cause such shares to be duly registered or
approved, as the case may be. All shares of Class A Common Stock which may be
issued upon conversion of shares of Common Stock will, upon issue, be fully paid
and nonassessable.
6. Except with respect to shares, rights, options and other securities of
the Corporation that are issued or granted in connection with any stock purchase
plan, stock option plan or other similar benefit plan that has been approved by
the holders of a majority of the Corporation's outstanding Common Stock, the
holders of Common Stock of the Corporation shall be entitled, as such, as a
matter of right, to subscribe for and to purchase any part of any new or
additional issue of Common Stock, any rights or options to purchase Common
Stock, or any securities convertible into, exchangeable for or carrying rights
or options to purchase Common Stock, whether now or hereafter authorized, but
only in those instances in which such shares of Common Stock, rights or options
to purchase Common Stock are issued for a consideration consisting solely of
money. In the event of the issuance of such shares or other securities solely
for money, the preemptive right herein granted shall only be an opportunity to
acquire such shares or other securities under such terms and conditions as the
Board of Directors shall fix. The preemptive right herein granted shall not
apply in any respect to the Corporation's Class A Common Stock, and holders of
such Class A Common Stock, as such, shall have no preemptive rights.
A-3
<PAGE>
Commonwealth of Pennsylvania
Department of State
To All to Whom These Presents Shall Come, Greeting:
Whereas, In and by Article VIII of the Business Corporation Law,
approved the fifth day of May, Anno Domini one thousand nine hundred and
thirty-three, P.L. 364, as amended, the Department of State is authorized and
required to issue a
CERTIFICATE OF AMENDMENT
evidencing the amendment of the Articles of Incorporation of a business
corporation organized under or subject to the provisions of that Law; and
Whereas, The stipulations and conditions of that Law pertaining to the
amendment of Articles of Incorporation have been fully complied with by
PENNSYLVANIA MANUFACTURERS CORPORATION
Therefore, Know Ye, That subject to the Constitution of this
Commonwealth and under the authority of the Business Corporation Law, I do by
these presents, which I have caused to be sealed with the Great Seal of the
Commonwealth, extend the rights and powers of the corporation named above, in
accordance with the terms and provisions of the Articles of Amendment presented
by it to the Department of State, with full power and authority to use and enjoy
such rights and powers, subject to all the provisions and restrictions of the
Business Corporation Law and all other applicable laws of this Commonwealth.
Given under my Hand and the Great Seal of the Commonwealth, at the City
of Harrisburg, this 27th day of April in the year of our Lord one thousand nine
hundred and eighty eight and of the Commonwealth the two hundred twelfth.
/s/ James J. Hagerty
- - -----------------------------
Secretary of the Commonwealth
pjd
DSCB-21 (7-73)
<PAGE>
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
Filed this day of April 27 1988
Commonwealth of Pennsylvania
Department of State
/s/ James J. Hagerty
Secretary of the Commonwealth
(Box for Certification)
Articles of
Amendment--
Domestic Business Corporation
In compliance with the requirements of section 806 of the Business Corporation
Law, act of May 5, 1933 (P.L.364) (15 P.S. SS.1806), the undersigned
corporation, desiring to amend its Articles, does hereby certify that:
1. The name of the corporation is:
Pennsylvania Manufacturers Corporation
2. The location of its registered office in this Commonwealth is (the Department
of State is hereby authorized to correct the following statement to conform to
the records of the Department):
1021 West Eighth Avenue
-----------------------
(NUMBER) (STREET)
King of Prussia Pennsylvania 19406
--------------------------------------------------------------------
(CITY) (ZIP CODE)
3. The statute by or under which it was incorporated is:
Act of May 5, 1933, P.L. 364, as amended
4. The date of its incorporation is: February 23, 1982
5. (Check, and if appropriate, complete one of the following):
/X/ The meeting of the shareholders of the corporation at which the amendment
was adopted was held at the time and place and pursuant to the kind and period
of notice herein stated.
Time: The 25th day of April, 1988
Place: 925 Chestnut Street, Philadelphia, PA
Kind and period of notice Written notice (proxy statement); 30 days
/ / The amendment was adopted by a consent in writing, setting forth the
action so taken, signed by all of the shareholders entitled to vote thereon and
filed with the Secretary of the corporation.
6. At the time of the action of shareholders:
(a) The total number of shares outstanding was:
749,605 shares of Common Stock and 206,511 shares of Class A Common
Stock.
(b) The number of shares entitled to vote was:
749,605 shares of Common Stock (entitled to cast ten votes per share)
and 206,511 shares of Class A Common Stock (entitled to cast one vote
per share).
<PAGE>
7. In the action taken by the shareholders:
(a) The number of shares voted in favor of the amendment was: 652,403
shares of Common Stock and 184,675 shares of Class A Common Stock.
(b) The number of shares voted against the amendment was: 11,680 shares of
Common Stock and 2,336 shares of Class A Common Stock.
8. The amendment adopted by the shareholders, set forth in full, is as follows:
RESOLVED, that the first full paragraph of Article 5 of the Articles of
Incorporation of Pennsylvania Manufacturers Corporation shall be amended and
restated in its entirety as follows:
5. The aggregate number of shares which the Corporation shall have
authority to issue is: Ten Million (10,000,000) shares of Common Stock, $5.00
par value per share (the "Common Stock"), and Ten Million (10,000,000) shares of
Class A Common Stock, $5.00 par value per share (the "Class A Common Stock").
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of
Amendment to be signed by a duly authorized officer and its corporate seal, duly
attested by another such officer, to be hereunto affixed this 25th day of April,
1988.
PENNSYLVANIA MANUFACTURERS CORPORATION
--------------------------------------
(NAME OF CORPORATION)
Attest:
By: /s/ David L. Johnson By: /s/ Frederick W. Anton
------------------------------- ---------------------------------
(SIGNATURE) (SIGNATURE)
David L. Johnson, Secretary Frederick W. Anton, III, President
- - ----------------------------------- --------------------------------
(TITLE; SECRETARY, (TITLE; PRESIDENT,
ASSISTANT SECRETARY, ETC.) VICE PRESIDENT, ETC.)
(CORPORATE SEAL)
INSTRUCTIONS FOR COMPLETION OF FORM
A. Any necessary copies of Form DSCB:17.2 (Consent to Appropriation of Name)
or Form DSCB: 17.3 (Consent to Use of Similar Name) shall accompany
Articles of Amendment effecting a change of name.
B. Any necessary governmental approvals shall accompany this form.
C. Where action is taken by partial written consent pursuant to the Articles,
the second alternate of Paragraph 5 should be modified accordingly.
D. If the shares of any class were entitled to vote as a class, the number of
shares of each class so entitled and the number of shares of all other
classes entitled to vote should be set forth in Paragraph 6(b).
E. If the shares of any class were entitled to vote as a class, the number of
shares of such class and the number of shares of all other classes voted
for and against such amendment respectively should be set forth in
Paragraphs 7(a) and 7(b).
F. BCL Section 807 (15 P.S. Section 1807) requires that the corporation shall
advertise its intention to file or the filing of Articles of Amendment.
Proofs of publication of such advertising should not be delivered to the
Department, but should be filed with the minutes of the corporation.
<PAGE>
Commonwealth of Pennsylvania
Department of State
To All to Whom These Presents Shall Come, Greeting:
Whereas, In and by Article VIII of the Business Corporation Law,
approved the fifth day of May, Anno Domini one thousand nine hundred and
thirty-three, P.L. 364, as amended, the Department of State is authorized and
required to issue a
CERTIFICATE OF AMENDMENT
evidencing the amendment of the Articles of Incorporation of a business
corporation organized under or subject to the provisions of that Law; and
Whereas, The stipulations and conditions of that Law pertaining to the
amendment of Articles of Incorporation have been fully complied with by
PENNSYLVANIA MANUFACTURERS CORPORATION
Therefore, Know Ye, That subject to the Constitution of this
Commonwealth and under the authority of the Business Corporation Law, I do by
these presents, which I have caused to be sealed with the Great Seal of the
Commonwealth, extend the rights and powers of the corporation named above, in
accordance with the terms and provisions of the Articles of Amendment presented
by it to the Department of State, with full power and authority to use and enjoy
such rights and powers, subject to all the provisions and restrictions of the
Business Corporation Law and all other applicable laws of this Commonwealth.
Given under my Hand and the Great Seal of the Commonwealth, at the City
of Harrisburg, this 24th day of April in the year of our Lord one thousand nine
hundred and eighty-nine and of the Commonwealth the two hundred thirteenth.
/s/ James J. Hagerty
- ------------------------------
Secretary of the Commonwealth
cas
DSCB-21 (7-73)
<PAGE>
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
Filed this day of April 24 1989
Commonwealth of Pennsylvania
Department of State
/s/ James J. Hagerty
Secretary of the Commonwealth
(Box for Certification)
Articles of
Amendment--
Domestic Business Corporation
In compliance with the requirements of section 806 of the Business Corporation
Law, act of May 5, 1933 (P.L.364) (15 P.S. SS.1806), the undersigned
corporation, desiring to amend its Articles, does hereby certify that:
1. The name of the corporation is:
Pennsylvania Manufacturers Corporation
2. The location of its registered office in this Commonwealth is (the Department
of State is hereby authorized to correct the following statement to conform to
the records of the Department):
1021 West Eighth Avenue
-----------------------
(NUMBER) (STREET)
King of Prussia Pennsylvania 19406
--------------------------------------------------------------------
(CITY) (ZIP CODE)
3. The statute by or under which it was incorporated is:
Act of May 5, 1933, P.L. 364, as amended
4. The date of its incorporation is: February 23, 1982
5. (Check, and if appropriate, complete one of the following):
/X/ The meeting of the shareholders of the corporation at which the amendment
was adopted was held at the time and place and pursuant to the kind and period
of notice herein stated.
Time: The 17th day of April, 1989
Place: 925 Chestnut Street, Philadelphia, PA
Kind and period of notice Written notice (proxy statement); 31 days
/ / The amendment was adopted by a consent in writing, setting forth the
action so taken, signed by all of the shareholders entitled to vote thereon and
filed with the Secretary of the corporation.
6. At the time of the action of shareholders:
(a) The total number of shares outstanding was: 805,275 shares of Common
Stock and 220,725 shares of Class A common Stock.
(b) The number of shares entitled to vote was: 805,275 shares of Common
Stock (entitled to cast ten votes per share) and 220,725 shares of
Class A Common Stock (entitled to cast one vote per share).
<PAGE>
7. In the action taken by the shareholders:
(a) The number of shares voted in favor of the amendment was: 720,853
shares of Common Stock and 196,822 shares of Class A Common Stock.
(b) The number of shares voted against the amendment was: 10,000 shares of
Common Stock and 2,000 shares of Class A Common Stock.
8. The amendment adopted by the shareholders, set forth in full, is as follows:
RESOLVED, that the first full paragraph of Article 5 of the Articles of
Incorporation of Pennsylvania Manufacturers Corporation shall be amended and
restated in its entirety as follows:
5. The aggregate number of shares which the Corporation shall have
authority to issue is: Twenty Million (20,000,000) shares of Common Stock, $5.00
par value per share (the "Common Stock"), and Twenty Million (20,000,000) shares
of Class A Common Stock, $5.00 par value per share (the "Class A Common Stock").
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of
Amendment to be signed by a duly authorized officer and its corporate seal, duly
attested by another such officer, to be hereunto affixed this 17th day of April,
1989.
PENNSYLVANIA MANUFACTURERS CORPORATION
--------------------------------------
(NAME OF CORPORATION)
Attest:
By: /s/ David L. Johnson By: /s/ Frederick W. Anton
------------------------------- ---------------------------------
(SIGNATURE) (SIGNATURE)
David L. Johnson, Secretary Frederick W. Anton, III, President
- ------------------------------------ ----------------------------------
(TITLE; SECRETARY, (TITLE; PRESIDENT,
ASSISTANT SECRETARY, ETC.) VICE PRESIDENT, ETC.)
(CORPORATE SEAL)
INSTRUCTIONS FOR COMPLETION OF FORM
A. Any necessary copies of Form DSCB:17.2 (Consent to Appropriation of Name)
or Form DSCB: 17.3 (Consent to Use of Similar Name) shall accompany
Articles of Amendment effecting a change of name.
B. Any necessary governmental approvals shall accompany this form.
C. Where action is taken by partial written consent pursuant to the Articles,
the second alternate of Paragraph 5 should be modified accordingly.
D. If the shares of any class were entitled to vote as a class, the number of
shares of each class so entitled and the number of shares of all other
classes entitled to vote should be set forth in Paragraph 6(b).
E. If the shares of any class were entitled to vote as a class, the number of
shares of such class and the number of shares of all other classes voted
for and against such amendment respectively should be set forth in
Paragraphs 7(a) and 7(b).
F. BCL Section 807 (15 P.S. Section 1807) requires that the corporation shall
advertise its intention to file or the filing of Articles of Amendment.
Proofs of publication of such advertising should not be delivered to the
Department, but should be filed with the minutes of the corporation.
<PAGE>
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
In compliance with the requirements of 15 Pa. C.S. ss. 1915 (relating
to articles of amendment), the undersigned business corporation, desiring to
amend its Articles, hereby states that:
1. The name of the corporation is Pennsylvania Manufacturers Corporation
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and
the county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a) 1021 West Eighth Avenue King of Prussia Pennsylvania 19046 Montgomery
----------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o:
---------------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider, the
county in (b) shall be deemed the county in which the corporation is located for
venue and official publication purposes.
3. The statute by or under which it was incorporated is: Act of Assembly
approved May 5, 1933, P.S. 364
4. The date of its incorporation is: February 23, 1982
5. (Check, and if appropriate complete, one of the following):
X The amendment shall be effective upon filing these Articles of Amendment
in the Department of State.
__ The amendment shall be effective on _________________ at _______________
Date Hour
6. (Check one of the following):
X The amendment was adopted by the shareholders (or members) pursuant to 15
Pa.C.S. ss. 1914(a) and (b).
__ The amendment was adopted by the board of directors pursuant to 15 Pa.
C.S. ss. 1914(c).
7. (Check, and if appropriate complete, one of the following):
__ The amendment adopted by the corporation, set forth in full, as follows:
X The amendment adopted by the corporation as set forth in full in Exhibit A
attached hereto and made a part hereof.
<PAGE>
8. (Check if the amendment restates the Articles):
__ The restated Articles of Incorporation supersede the original Articles and
all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these
Articles of Amendment to be signed by a duly authorized officer thereof this
22nd day of April 1991.
PENNSYLVANIA MANUFACTURERS CORPORATION
---------------------------------------
(Name of Corporation)
BY: /s/ Frederick W. Anton, III
-------------------------------
Frederick W. Anton, III
TITLE: President
-----------------
<PAGE>
EXHIBIT A
TO ARTICLES OF AMENDMENT OF
PENNSYLVANIA MANUFACTURERS CORPORATION
The first full paragraph of Article 5 of the Articles of Incorporation
of Pennsylvania Manufacturers Corporation is amended and restated to read in its
entirety as follows:
"5. The aggregate number of shares which the Corporation shall
have authority to issue is: Forty Million (40,000,000) shares of Common
Stock, $5.00 par value per share (the "Common Stock"), and Forty
Million (40,000,000) shares of Class A Common Stock, $5.00 par value
per share (the "Class A Common Stock")."
<PAGE>
STATEMENT OF CHANGE OF REGISTERED OFFICE
Indicate type of entity (check one)
X Domestic Business Corporation (15 PA.C.S. ss. 1507)
- ---
Foreign Business Corporation (15 PA.C.S. ss. 4144)
- ---
Domestic Nonprofit Corporation (15 PA.C.S. ss. 5507)
- ---
Foreign Nonprofit Corporation (15 PA.C.S. ss. 6144)
- ---
Domestic Limited Partnership (15 PA.C.S. ss. 8506)
- ---
In compliance with the requirements of the applicable provisions of 15
Pa.C.S. (relating to corporations and unincorporated associations) the
undersigned corporation or limited partnership, desiring to effect a change of
registered office, hereby states that:
1. The name of the corporation or limited partnership is:
Pennsylvania Manufacturers Corporation
----------------------------------------------------------------------------
2. The (a) address of this corporation's or limited partnership's current
registered office in this Commonwealth or (b) name of its commercial
registered office provider and the county of venue is: (the Department is
hereby authorized to correct the following information to conform to the
records of the Department):
(a) 1021 W. Eighth Avenue, King of Prussia PA 19406 Montgomery
------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o:
--------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation or a limited partnership represented by a commercial
registered office provider, the county in (b) shall be deemed the county in
which the corporation or limited partnership is located for venue and
official publication purposes.
3. (Complete part (a) or (b)):
(a) The address to which the registered office of the corporation or limited
partnership in this Commonwealth is to be changed is:
380 Sentry Parkway Blue Bell PA 19422-0754 Montgomery
------------------------------------------------------------------------
Number and Street City State Zip County
(b) The registered office of the corporation or limited partnership shall be
provided by:
c/o:
--------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation or a limited partnership represented by a commercial
registered office provider, the count in (b) shall be deemed the county in
which the corporation or limited partnership is located for venue and
official publication purposes.
<PAGE>
4. (Strike out if a limited partnership): Such change was authorized by the
Board of Directors of the corporation.
IN TESTIMONY WHEREOF, the undersigned corporation or limited partnership has
caused this statement to be signed by a duly authorized officer thereof this
14 day of September, 1974.
--- --------- ----
Pennsylvania Manufacturers Corporation
----------------------------------------
(Name of Corporation/Limited Partnership)
BY: /s/ Robert Gaffney
------------------------------------
(Signature)
TITLE: Secretary
---------------------------------
<PAGE>
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
In compliance with the requirements of 15 Pa.C.S. (section) 1915 (relating
to articles of amendment), the undersigned business corporation, desiring to
amend its Articles, hereby states that:
1. The name of the corporation is: Pennsylvania Manufacturers Corporation
------------------------------------------
- --------------------------------------------------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and
the county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a) The PMA Building, 380 Sentry Parkway Blue Bell PA 19422 Montgomery
-----------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o N/A
-----------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is located
for venue and official publication purposes.
3. The statute by or under which it was incorporated is: Act of May 5, 1934,
P.L. 364, as amended
--------------------
4. The date of its incorporation is: February 23, 1982
---------------------------------------
5. (Check, and if appropriate complete, one of the following):
X The amendment shall be effective upon filing these Articles of
--- Amendment in the Department of State.
--- The amendment shall be effective on: at
-------------- ---------------
Date Hour
6. (Check one of the following):
X The amendment was adopted by the shareholders (or members) pursuant to
--- 15 Pa.C.S. (section) 1914(a) and (b).
--- The amendment was adopted by the board of directors pursuant to
15 Pa.C.S. (section) 1914(c).
7. (Check, and if appropriate, complete one of the following):
X The amendment adopted by the corporation, set forth in full,
--- as follows:
Article 7, the full text of which is set forth in its entirety
below, is hereby added to the Amended and Restated Articles of Incorporation of
the Corporation:
"7. Subchapters E, F, G, H, I and J of Chapter 25 and Sections 2538 and
2539 of Subchapter D of Chapter 25 of the Pennsylvania Business Corporation
Law of 1988, as amended, shall not be applicable to the Corporation."
--- The amendment adopted by the corporation is set forth in full in
Exhibit A attached hereto and made a part hereof.
<PAGE>
8. (Check if the amendment restates the Articles):
The restated articles of Incorporation supercede the original
--- Articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer thereof this
25th day of June , 1997.
---------- ----------- ----
Pennsylvania Manufacturers Corporation
--------------------------------------
(Name of Corporation)
BY: /s/ Francis W. McDonnell
-----------------------------------
(Signature)
Francis W. McDonnell, Senior Vice President,
TITLE: Chief Financial Officer and Treasurer
----------------------------------------------
<PAGE>
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 91)
In compliance with the requirements of 15 Pa.C.S. (S) 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
1. The name of the corporation is: PENNSYLVANIA MANUFACTURERS CORPORATION
--------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and the
county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a) The PMA Building, 380 Sentry Parkway,
Blue Bell, Pennsylvania 19422-2328 Montgomery
-------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o: N/A
-------------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider, the
county in (b) shall be deemed the county in which the corporation is located for
venue and official publication purposes.
3. The statute by or under which it was incorporated is:
Act of May 5, 1933, P.L. 364, as amended
----------------------------------------
4. The date of its incorporation is: February 23, 1982
-----------------
5. (Check, and if appropriate complete, one of the following):
The amendment shall be effective upon filing these Articles of Amendment in
the Department of State.
X The amendment shall be effective on: December 7, 1998 at 12:01 a.m.
---------------- ---------
Date Hour
6. (Check one of the following):
The amendment was adopted by the shareholders (or members) pursuant to 15
Pa.C.S. (S) 1914(a) and (b).
X The amendment was adopted by the board of directors pursuant to 15 Pa.C.S.
(S) 1914(c).
7. (Check, and if appropriate complete, one of the following):
X The amendment adopted by the corporation, set forth in full, is as follows:
Resolved, that Article I of the Articles of Incorporation of the
Corporation is hereby amended in its entirety, to read as follows:
"I. The name of the Corporation is: PMA Capital Corporation."
The amendment adopted by the corporation is set forth in full in Exhibit A
attached hereto and made a part hereof.
<PAGE>
DSCB:15-1915 (Rev 91)-2
8. (Check if the amendment restates the Articles):
The restated Articles of Incorporation supersede the original Articles and
all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer thereof this
1st day of December, 1998.
- -------------------------
Pennsylvania Manufacturers Corporation
--------------------------------------
(Name of Corporation)
BY: /s/ Francis W. McDonnell
----------------------------------
(Signature)
Francis W. McDonnell,
TITLE: Senior Vice President, Chief Financial
Officer and Treasurer
-------------------------------
AMENDED AND RESTATED BY-LAWS OF THE COMPANY
Exhibit 3.2
AMENDED AND RESTATED BYLAWS OF
PMA CAPITAL CORPORATION
ARTICLE 1
Corporate Office
----------------
Section 1.1 The Corporation shall have and continuously maintain in the
Commonwealth of Pennsylvania a registered office at an address to be designated
from time to time by the Board of Directors which may, but need not, be the same
as its place of business.
Section 1.2 The Corporation may also have offices at such other places as
the Board of Directors may from time to time designate or the business of the
Corporation may require.
ARTICLE 2
Shareholders; Share Certificates
--------------------------------
Section 2.1 No person, firm, association, corporation or other entity is
qualified to own any shares of Common Stock, $5.00 par value, ("Common Stock")
of the Corporation except:
(1) PMA Foundation.
(2) A member of PMA Foundation.
(3) A former member of PMA Foundation who resigned in good standing, but
only in respect to Common Stock of the Corporation owned by such
former member of PMA Foundation on the date of resignation.
(4) The Corporation or Pennsylvania Manufacturers' Association Insurance
Company.
(5) An officer, proprietor or partner of a member of PMA Foundation or a
retired officer, proprietor or partner of a member or former member of
PMA Foundation but only in respect to Common Stock of the Corporation
owned by such retired officer, proprietor or partner on the date of
retirement.
(6) A director or officer of the Corporation, Pennsylvania Manufacturers'
Association Insurance Company or PMA Foundation.
(7) A retired director or officer of the Corporation, Pennsylvania
Manufacturers' Association Insurance Company or PMA Foundation but
only in respect to Common Stock of the Corporation owned by such
retired director or officer on the date of retirement.
(8) The surviving spouse of a deceased person who, at the time of his or
her death, was qualified to own Common Stock of the Corporation, but
not a surviving spouse of a person who became qualified to own Common
Stock of the Corporation solely by reason of the provisions of this
Subsection (8).
<PAGE>
(9) A person, firm, association, corporation or other entity who was a
shareholder of record of Pennsylvania Manufacturers' Association
Insurance Company on April 1, 1982.
(10) Any child or grandchild of a shareholder of Pennsylvania
Manufacturers' Association Insurance Company of record on April 1,
1982.
(11) A trustee under a written trust solely for the benefit of a person
qualified under these Bylaws to own Common Stock of the Corporation or
a spouse, child or grandchild of such qualified person.
(12) Employees of the Corporation or any of its affiliates who are not
officers of any of these entities, but whose duties require the
exercise of executive and administrative responsibilities, shall be
deemed qualified to own Common Stock of the Corporation. By resolution
of the Board of Directors dated May 19, 1983 as amended by resolution
of the Board of Directors dated February 27, 1996.
(13) A spouse of a person who owned Common Stock of record on December 8,
1990 is qualified to own shares of the Corporation's Common Stock. By
resolution of the Board of Directors dated December 8, 1990.
(14) Such other classes of persons as are from time to time approved by the
Board of Directors of the Corporation.
Nothing set forth in this Section 2.1 shall prohibit any person from owning
any shares of Class A Common Stock, $5.00 par value, ("Class A Common Stock") of
the Corporation.
Section 2.2 All shares issued by the Corporation shall be represented by
certificates. The share certificates of the Corporation shall be numbered and
registered in a share register as they are issued; shall state that the
Corporation is incorporated under the laws of the Commonwealth of Pennsylvania;
shall bear the name of the registered holder, the number and class of shares and
the designation of the series, if any, represented thereby, the par value, if
any, of each share or a statement that the shares are without par value, as the
case may be; shall be signed by the President or a Vice President, and the
Secretary or the Treasurer or any other person properly authorized by the Board
of Directors, and shall bear the corporate seal, which seal may be facsimile
engraved or printed. Where the certificate is signed by a transfer agent or a
registrar, the signature of any corporate officer on such certificate may be a
facsimile engraved or printed. In case any officer who has signed, or whose
facsimile signature has been placed upon, any share certificate shall have
ceased to be such officer because of death, resignation or otherwise before the
certificate is issued, such share certificate may be issued by the Corporation
with the same effect as if the officer had not ceased to be such at the date of
its issue.
Section 2.3 Duplicate certificates may be issued for those lost or
destroyed, under such terms as may be prescribed by the Board of Directors.
Section 2.4 No person, firm, association, corporation or other entity,
except PMA Foundation shall at any time hold more than seven percent of the
outstanding Common Stock of the Corporation. Nothing set forth in this Section
2.4 shall limit in any respect any person's ownership of shares of Class A
Common Stock of the Corporation.
- 2 -
<PAGE>
Section 2.5 Upon surrender to the Corporation of a share certificate duly
endorsed by the person named in the certificate or by attorney duly appointed in
writing and accompanied where necessary by the proper evidence of succession,
assignment or authority to transfer, a new certificate shall be issued to the
person entitled thereto and the old certificate canceled and the transfer
recorded on the share register of the Corporation. A transferee of shares of the
Corporation shall not be a record holder of such shares entitled to the rights
and benefits associated therewith unless and until the share transfer has been
recorded on the share transfer books of the Corporation. No transfer shall be
made if it would be inconsistent with the provisions of (i) Article 8 of the
Pennsylvania Uniform Commercial Code or (ii) Article 2 of these Bylaws.
Section 2.6 The Common Stock of the Corporation shall be owned by and shall
be transferable only to a person, firm, association, corporation or other entity
qualified to own Common Stock under these Bylaws.
If any shareholders of the Corporation shall cease to be qualified to own
Common Stock under these Bylaws or if the executor or administrator of any
shareholder, or the grantee or assignee of any Common Stock sold on execution,
or for debt, or as the result of bankruptcy or insolvency proceedings, or if any
other person, firm, association, corporation or other entity who is not
qualified to own Common Stock under these Bylaws shall become the holder of
Common Stock, then in any such case, unless a transfer of such Common Stock
shall be made within six months to a person qualified, such holder shall be
required to offer to sell such Common Stock to PMA Foundation at a price to be
agreed upon by the holder and PMA Foundation. If the holder and PMA Foundation
are unable to agree upon a price, a committee of arbitrators shall be appointed
to appraise the fair market value of the Common Stock. The number of arbitrators
shall be three, and shall be appointed as follows: one member of the committee
shall be appointed by the Executive Committee of PMA Foundation, and one member
by the holder of the Common Stock. The two members so appointed shall appoint a
third member of the committee. The committee shall then, by a majority agreement
appraise the fair market value of the Common Stock. Thereafter, PMA Foundation
shall have the option to purchase such Common Stock at the fair market value as
appraised by the majority of the three appointees. If within 30 days after the
appraisal of the fair market value of the Common Stock and the presentment
thereof to PMA Foundation, PMA Foundation does not exercise its option to
purchase, then the Corporation shall have the option to purchase such Common
Stock at the appraised fair market value, and if within 30 days after the
presentment of such Common Stock to the Corporation for purchase, the
Corporation does not exercise its option to purchase, then the holder of such
Common Stock shall be deemed the qualified owner thereof until such time as the
holder transfers such Common Stock to a person, firm, association, corporation
or other entity who is qualified to own Common Stock under these Bylaws.
It shall be the duty of any unqualified holder of Common Stock to comply
with the provisions of this Section 2.6, and no dividends shall be paid on
account of such Common
- 3 -
<PAGE>
Stock held by any unqualified holder after a holding period of six months in the
absence of compliance with the provisions of this Section 2.6.
No transfer of any interest in Common Stock of the Corporation shall be
effective for any purpose unless such transfer is made in accordance with the
provisions of this Section 2.6. Nothing set forth in this Section 2.6 shall
limit the transfer of any shares of Class A Common Stock of the Corporation.
Section 2.7 Upon issuance of each certificate of Common Stock a receipt
shall be taken as follows:
"Received Certificate No. , subject to the conditions and
restrictions therein referred to and to the Bylaws of this Corporation
to which the undersigned agrees to conform. This agreement shall be
binding upon the heirs, executors, administrators and assigns of the
undersigned."
Section 2.8. All certificates of Common Stock, in addition to the usual and
necessary matters, shall contain the following printed thereon:
"The ownership and transfer of Common Stock in this Corporation is
limited by the Bylaws printed on the back of this certificate."
Upon the back of each certificate of Common Stock shall be printed Sections
2.1, 2.4 and 2.6 of Article 2 of these Bylaws.
ARTICLE 3
Shareholders Meetings
---------------------
Section 3.1 All meetings of the shareholders shall be held at such time and
place, within or without the Commonwealth of Pennsylvania, as may be determined
from time to time by the Board of Directors and need not be held at the
registered office of the Corporation.
Section 3.2 An annual meeting of the shareholders for the election of
directors and the transaction of such other business as may properly be brought
before the meeting shall be held in each calendar year at such time and place as
may be determined by the Board of Directors.
- 4 -
<PAGE>
Section 3.3 Special meetings of the shareholders may be called at any time
by (i) the Chairman or President (ii) the Board of Directors or (iii)
shareholders entitled to cast at least one-fifth of the votes that all
shareholders are entitled to cast at the particular meeting. The request of any
person who has called a special meeting of shareholders shall be addressed to
the Secretary of the Corporation, shall be signed by the persons making the
request and shall state the purpose or purposes of the meeting. Upon receipt of
any such request it shall be the duty of the Secretary to fix the time and
provide written notice of the special meeting of shareholders, which shall be
held not more than 60 days after the receipt of the request. If the Secretary
shall neglect or refuse to fix the time or provide written notice of the special
meeting, the person or persons making the request may fix the time and provide
written notice of the special meeting.
Section 3.4 Written notice of each meeting other than an adjourned meeting
of shareholders, stating the place and time, and, in the case of a special
meeting of shareholders, the general nature of the business to be transacted,
shall be provided to each shareholder of record entitled to vote at the meeting
at such address as appears on the books of the Corporation. Except as otherwise
required by Article 22 hereof, such notice shall be given, in accordance with
the provisions of Article 21 of these Bylaws, at least (i) ten days prior to the
day named for a meeting to consider a fundamental change under Chapter 19 of the
Pennsylvania Business Corporation Law of 1988 (the "BCL") or (ii) five days
prior to the day named for the meeting in any other case.
Section 3.5 Whenever the Corporation has been unable to communicate with a
shareholder for more than 24 consecutive months because communications to the
shareholder are returned unclaimed or the shareholder has otherwise failed to
provide the Corporation with a current address, the giving of notice to such
shareholder pursuant to Section 3.4 of these Bylaws shall not be required. Any
action or meeting that is taken or held without notice or communication to that
shareholder shall have the same validity as if the notice or communication had
been duly given. Whenever a shareholder provides the Corporation with a current
address this Section 3.5 shall cease to be applicable to such shareholder. The
Corporation shall not be required to give notice to any shareholder pursuant to
Section 3.4 hereof if and for as long as communication with such shareholder is
unlawful.
Section 3.6 The Board of Directors may provide by resolution with respect
to a specific meeting or with respect to a class of meetings that one or more
shareholders may participate in such meeting or meetings of shareholders by
means of conference telephone or other communications equipment by means of
which all persons participating in the meeting can hear one another.
Participation in the meeting by such means shall constitute presence in person
at the meeting. Any notice otherwise required to be given in
- 5 -
<PAGE>
connection with any meeting at which participation by conference telephone or
other communications equipment is permitted shall so specify.
ARTICLE 4
Quorum of Shareholders
----------------------
Section 4.1 A meeting of shareholders duly called shall not be organized
for the transaction of business unless a quorum is present.
Section 4.2 The holders of a majority of the outstanding voting power of
the shares of stock of the Corporation, appearing either in person or by proxy,
shall constitute a quorum for the transaction of business at any annual or
special meeting of the shareholders.
Section 4.3 The shareholders present at a duly organized meeting can
continue to do business until adjournment notwithstanding the withdrawal of
enough shareholders to leave less than a quorum.
Section 4.4 If a meeting of shareholders cannot be organized because a
quorum is not present those present in person or by proxy, may, except as
otherwise provided by statute, adjourn the meeting to such time and place as
they may determine, without notice other than an announcement at the meeting,
until the requisite number of shareholders for a quorum shall be present in
person or by proxy.
Section 4.5 Notwithstanding the provisions of Sections 4.1, 4.2, 4.3 and
4.4 of these Bylaws:
(1) Any meeting at which directors are to be elected may be adjourned
only from day to day, or for such longer periods not exceeding 15 days each
as the shareholders present and entitled to vote shall direct.
(2) Those shareholders entitled to vote who attend a meeting called
for election of directors that has been previously adjourned for lack of a
quorum, although less than a quorum as fixed in these Bylaws, shall
nevertheless constitute a quorum for the purpose of electing directors.
(3) Those shareholders entitled to vote who attend a meeting that has
been previously adjourned for one or more periods aggregating at least 15
days because of an absence of a quorum, although less than a quorum is
fixed in these Bylaws,
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shall nevertheless constitute a quorum for the purpose of acting upon any
matter set forth in the notice of the meeting if the notice states that
those shareholders who attend the adjourned meeting shall nevertheless
constitute a quorum for the purpose of acting upon the matter.
Section 4.6 Except as otherwise provided by statute, the Articles of
Incorporation or these Bylaws, at any duly organized meeting of shareholders the
vote of the holders of a majority of the votes cast shall decide any question
brought before such meeting.
ARTICLE 5
Proxies
-------
Section 5.1 Every shareholder entitled to vote at a meeting of
shareholders, or to express consent or dissent to corporate action in writing
without a meeting, may authorize another person or persons to act for him by
proxy. Every proxy shall be executed in writing by the shareholder or his duly
authorized attorney-in-fact and filed with the Secretary of the Corporation. A
proxy, unless coupled with an interest shall be revocable at will,
notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of a proxy shall not be effective until written
notice thereof has been given to the Secretary of the Corporation. An unrevoked
proxy shall not be valid after three years from the date of its execution unless
a longer time is expressly provided therein. A proxy shall not be revoked by the
death or incapacity of the maker, unless before the vote is counted or the
authority is exercised, written notice of such death or incapacity is given to
the Secretary of the Corporation.
Section 5.2 Where two or more proxies of a shareholder are present, the
Corporation shall, unless otherwise expressly provided in the proxy, accept as
the vote of all shares represented thereby the vote cast by a majority of them
and, if a majority of the proxies cannot agree whether the shares represented
shall be voted or upon the manner of voting the shares, the voting of the shares
shall be divided equally among those persons.
ARTICLE 6
Record Date
-----------
Section 6.1 The Board of Directors may fix a time prior to the date of any
meeting of shareholders as a record date for the determination of the
shareholders entitled to notice of, or to vote at, the meeting, which time,
except in the case of an adjourned
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meeting, shall not be more than 90 days prior to the date of the meeting of
shareholders. Only shareholders of record on the date so fixed shall be entitled
to notice of, or to vote at, such meeting, notwithstanding any transfer of
shares on the books of the Corporation after any record date fixed as aforesaid.
The Board of Directors may similarly fix a record date for the determination of
shareholders of record for any other purpose, such as the payment of a
distribution or conversion or exchange of shares.
ARTICLE 7
Record of Shareholders
----------------------
Section 7.1 The Treasurer shall have charge of the share transfer books of
the Corporation and shall maintain an alphabetical record of the shareholders
with their addresses and the number of shares held by each.
ARTICLE 8
Judges of Election
------------------
Section 8.1 Prior to any meeting of shareholders, the Board of Directors
may appoint judges of election, who may but need not be shareholders, to act at
such meeting or any adjournment thereof. If judges of election are not so
appointed, the presiding officer of any such meeting may, and on the request of
any shareholder or his proxy shall, make such appointment at the meeting. The
number of judges shall be one or three. No person who is a candidate for an
office to be filled at the meeting shall act as a judge of election.
Section 8.2 In case any person appointed as a judge of election fails to
appear or fails or refuses to act, the vacancy so created may be filled by
appointment made by the Board of Directors in advance of the convening of the
meeting or at the meeting by the presiding officer thereof.
Section 8.3 The judges of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of proxies.
The judges of election shall also receive votes or ballots, hear and determine
all challenges and questions in any way arising in connection with the right to
vote, count and tabulate all votes, determine the result and do such other acts
as may be proper to conduct the election or vote with fairness to all
shareholders. The judges of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as
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practicable. If there are three judges of election, the decision, act or
certificate of a majority shall be the decision, act or certificate of all.
Section 8.4 On request of the presiding officer of the meeting or of any
shareholder, the judges of election shall make a report in writing of any
challenge, question or matter determined by them and execute a certificate of
any fact found by them. Any report or certificate made by them shall be prima
facie evidence of the facts found by them.
ARTICLE 9
Consent of Shareholders in Lieu of Meeting
------------------------------------------
Section 9.1 Any action required or permitted to be taken at a meeting of
the shareholders may be taken without a meeting if, prior or subsequent to the
action, a written consent or consents thereto signed by all of the shareholders
who would be entitled to vote at a meeting for such purpose shall be filed with
the Secretary of the Corporation.
Section 9.2 Any action required or permitted to be taken at a meeting of
the shareholders or of a class of shareholders may be taken without a meeting
upon the written consent of shareholders who would have been entitled to cast
the minimum number of votes that would be necessary to authorize the action at a
meeting at which all the shareholders entitled to vote thereon were present and
voting. The consents shall be filed with the Secretary of the Corporation. If a
written consent or consents are signed by fewer than all of the shareholders who
would be entitled to vote at a meeting for such purpose, the action shall not
become effective until ten days after written notice of the action has been
given to each shareholder entitled to vote thereon who has not consented
thereto.
ARTICLE 10
Directors
---------
Section 10.1 The business and affairs of the Corporation shall be managed
under the direction of a Board of Directors of not less than 12 or more than 24
directors. The Board of Directors shall be divided into three classes, and
directors of each class shall be elected for a term of three years and until
their successors are elected and qualified or until their earlier death,
resignation or removal. A decrease in the number of directors
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shall not have the effect of shortening the term of any incumbent director.
Prior to each election of a class of directors, the Board of Directors shall fix
the size of that class of directors at a minimum of four and a maximum of eight
directors. The Board of Directors may exercise all such powers of the
Corporation and do all such lawful acts and things as are required or permitted
to be exercised and done by statute, the Articles of Incorporation or these
Bylaws.
Section 10.2 In all elections of directors, each shareholder, or his proxy,
shall be entitled to the number of votes to which the shares of stock owned by
him are entitled to cast under the Articles of Incorporation of the Corporation
and may cumulate his votes as provided in the Articles of Incorporation. All
elections shall be by ballot.
Section 10.3 Every director shall be a shareholder in the Corporation. When
first elected to the Board of Directors, each director shall be regularly
engaged in a business, trade, or profession and shall be a resident of a
jurisdiction in which the Corporation is transacting business. No person shall
be elected a director who is or becomes 70 years of age prior to or during his
first term in office as a director. No person shall be considered as a
candidate, nor shall any votes be counted for any person, unless written notice
of the nomination of the candidacy shall have been filed with the Secretary of
the Corporation for the information of the shareholders not less than 60 days
prior to the election; provided, however, that nominees selected by the then
existing Board of Directors, or by a Nominating Committee appointed by the Board
of Directors and consisting of four directors continuing in office, may be
candidates and voted for without such notice.
Section 10.4 A meeting of the Board of Directors may be held immediately
following the annual meeting of shareholders at which directors have been
elected without the necessity of notice to the directors. At the first regular
meeting of the Board of Directors after each annual meeting of shareholders, the
Board of Directors shall elect a Chairman of the Board of Directors, a
President, a Secretary, a Treasurer and such other officers as the Board of
Directors shall determine. The President and Secretary shall be natural persons
of full age. The Treasurer may be a corporation, but if a natural person shall
be of full age. The Chairman of the Board of Directors and the President shall
be, and each other officer may be, a director of the Corporation. The offices of
Secretary and Treasurer may be filled by one person.
Section 10.5 Regular meetings of the Board of Directors shall be held at
least four times each year at times and places within or without the
Commonwealth of Pennsylvania designated by the Board of Directors. One or more
directors may participate in any meeting of the Board of Directors, or of any
committee thereof, by means of a conference telephone or similar communications
equipment by means of which all persons
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participating in the meeting can hear one another. Participation in a meeting by
such means shall constitute presence in person at the meeting.
Section 10.6 A special meeting of the Board of Directors may be called at
any time by the Chairman of the Board on 24 hours' notice to each director,
either by telephone, or if in writing, in accordance with Article 21 of these
Bylaws and shall be called by him or, in his absence, by the Secretary, upon the
written request of three members of the Board of Directors. Such special meeting
of the Board of Directors shall be held at a time and place designated by the
Chairman of the Board, or, in his absence, the Secretary.
Section 10.7 A majority of the directors then in office shall constitute a
quorum at any regular or special meeting of the Board of Directors, and the acts
of a majority of the directors present and voting at a meeting at which a quorum
is present shall be the acts of the Board of Directors, except as may be
otherwise specifically provided by statute or by the Articles of Incorporation
or by these Bylaws.
ARTICLE 11
Removal of Directors
--------------------
Section 11.1 Unless otherwise provided in the Articles of Incorporation, or
in Article 11, Section 11. 3 of these Bylaws the entire Board of Directors, or
any class of the Board of Directors or any individual director, may be removed
from office by vote of the shareholders entitled to vote thereon only for cause.
Notwithstanding the foregoing, an individual director shall not be removed
(unless the entire Board of Directors or class of Directors is removed) from the
Board of Directors if sufficient votes are cast against the resolution for such
director's removal which, if cumulatively voted at an annual or other regular
election of directors, would be sufficient to elect one or more directors to the
Board of Directors or a class thereof. If any directors are so removed, new
directors may be elected at the same meeting.
Section 11.2 The Board of Directors may declare vacant the office of a
director who has been judicially declared of unsound mind or who has been
convicted of an offense punishable by imprisonment for a term of more than one
year.
Section 11.3 The Board of Directors may be removed at any time with or
without cause by the unanimous consent of shareholders entitled to vote thereon.
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ARTICLE 12
Vacancies in the Board of Directors
-----------------------------------
Section 12.1 Vacancies in the Board of Directors occurring for any reason,
including vacancies resulting from an increase in the number of directors, shall
be filled by a majority vote of the remaining members of the Board of Directors,
though less than a quorum, or by a sole remaining director, and each person so
elected shall be a director to serve for the balance of the unexpired term and
until his successor has been elected and qualified or until his earlier death,
resignation or removal.
Section 12.2 When one or more directors resign from the Board of Directors
effective at a future date, the directors then in office, including those who
have so resigned, shall have the power by a majority vote to fill the vacancies,
the vote thereon to take effect when the resignations become effective.
ARTICLE 13
Action by Written Consent
-------------------------
Section 13.1 Any action required or permitted to be taken at a meeting of
the Board of Directors may be taken without a meeting if, prior or subsequent to
the action, a consent or consents thereto signed by all of the directors is
filed with the Secretary of the Corporation.
ARTICLE 14
Compensation of Directors
-------------------------
Section 14.1 Directors, as such, may receive a stated salary for their
services or a fixed sum and expenses for attendance at regular and special
meetings, or any combination of the foregoing as may be determined from time to
time by resolution of the Board of Directors, and nothing contained herein shall
be construed to preclude any director from receiving compensation for services
rendered to the Corporation in any other capacity.
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ARTICLE 15
Committees
----------
Section 15.1 The Board of Directors may, by resolution adopted by a
majority of the directors in office, establish one or more committees consisting
of one or more directors as may be deemed appropriate or desirable by the Board
of Directors to serve at the pleasure of the Board. Any committee, to the extent
provided in the resolution of the Board of Directors pursuant to which it was
created, shall have and may exercise all of the powers and authority of the
Board of Directors, except that no committee shall have any power or authority
as to the following:
(1) The submission to shareholders of any action requiring approval of
shareholders;
(2) The creation or filling of vacancies in the Board of Directors; (3) The
adoption, amendment or repeal of these Bylaws; (4) The amendment or repeal
of any resolution of the Board of Directors
that by its terms is amendable or repealable only by the Board of
Directors; and
(5) Action on matters committed by the Bylaws or resolution of the Board
of Directors to another committee of the Board of Directors.
Section 15.2 At the first meeting following each annual meeting of
shareholders, the Board of Directors shall elect an Executive Committee of not
more than four (4) directors and not more than six (6) directors, a Finance
Committee of not less than four (4) directors and not more than six (6)
directors, an Audit Committee of a maximum of three (3) directors and a
Compensation and Stock Option Committee of a maximum of three (3) directors.
These committees shall meet at the call of the Chairman of each such committee.
A majority of the elected and, to the extent applicable ex officio, members of
the committees shall constitute a quorum. At least one third of the total number
of the members of each committee so appointed shall be persons who are not
officers or employees of the Corporation or any entity controlling, controlled
by or under common control with the Corporation and who are not the beneficial
owners of a controlling interest in the voting stock of the Corporation or any
such entity.
Section 15.3 The Executive Committee shall have supervision of all business
of the Corporation and shall have the authority in between the time of regular
meetings of the Board of Directors as specified in Article 10, Section 10.5
hereof, to exercise all powers of the Corporation and do all such lawful acts
and things as are required or permitted to be exercised and done by statute, the
Articles of Incorporation or these Bylaws. The Executive Committee shall have
the power to create offices and titles as deemed desirable or advisable. The
holders of such offices need not be directors of the Corporation.
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Section 15.4 The Finance Committee shall review the investment results of
the Corporation's assets and perform such other duties as the Board of Directors
or the Executive Committee may prescribe.
Section 15.5 The Audit Committee shall consist of a maximum of three (3)
members of the Board of Directors, none of whom shall be an officer or employee
of the Corporation or of any entity controlling, controlled by or under common
control with the Corporation and who are not beneficial owners of a controlling
interest in the voting stock of the Corporation or any such entity. The Audit
Committee shall recommend the selection of independent certified public
accountants and review the scope and results of the independent audit and the
management recommendations made by the independent certified public accountants.
Section 15.6 The Nominating Committee shall consist of no fewer than four
(4) members of the Board of Directors continuing in office, none of whom shall
be an officer or employee of the Corporation or of any entity controlling,
controlled by or under common control with the Corporation and who are not
beneficial owners of a controlling interest in the voting stock of the
Corporation or any such entity. The Nominating Committee shall nominate persons
for election for director by the shareholders and shall review and report on the
qualifications of candidates otherwise nominated for director.
Section 15.7 The Compensation and Stock Option Committee shall consist of a
maximum of three (3) members of the Board of Directors, none of whom shall be an
officer or employee of the Corporation or of any entity controlling, controlled
by or under common control with the Corporation and who are not beneficial
owners of a controlling interest in the voting stock of the Company or any such
entity. The Compensation and Stock Option Committee shall evaluate the
performance of officers deemed to be executive officers of the Corporation and
recommend to the Board of Directors compensation of the executive officers. The
Compensation and Stock Option Committee may invite the Chairman of the Board and
the President of the Corporation to attend its meetings and provide relevant
information for the Committee's review, provided however, that the Chairman of
the Board and the President may not vote on matters coming before the Committee.
ARTICLE 16
Liability of Directors
----------------------
Section 16.1 A director of the Corporation shall stand in a fiduciary
relation to the Corporation and shall perform his duties as a director,
including his duties as a member of
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any committee of the Board of Directors upon which he may serve, in good faith,
in a manner he reasonably believes to be in the best interests of the
Corporation, and with such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances. In performing his duties, a director shall be entitled to rely in
good faith on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented by any
of the following: (i) one or more officers or employees of the Corporation whom
the director reasonably believes to be reliable and competent in the matters
presented; (ii) legal counsel, public accountants or other persons as to matters
which the director reasonably believes to be within the professional or expert
competence of such persons; or (iii) a committee of the Board of Directors upon
which he does not serve, duly designated in accordance with law, as to matters
within its designated authority, which committee the director reasonably
believes to merit confidence. A director shall not be considered to be acting in
good faith if he has knowledge concerning the matter in question that would
cause his reliance to be unwarranted.
Section 16.2 In discharging the duties of their respective positions, the
Board of Directors, committees of the Board of Directors and individual
directors may, in considering the best interests of the Corporation, consider
the effects of any action upon employees, upon suppliers and customers of the
Corporation and upon communities in which offices or other establishments of the
Corporation are located, and all other pertinent factors. The consideration of
these factors shall not constitute a violation of Section 16. 1 of this Article
16.
Section 16.3 Absent breach of fiduciary duty, lack of good faith or self-
dealing, actions taken as a director or any failure to take any action shall be
presumed to be in the best interests of the Corporation.
Section 16.4 A director of the Corporation shall not be personally liable
for monetary damages as such for any action taken, or any failure to take any
action, unless: (i) the director has breached or failed to perform the duties of
his office under Sections 16.1 through 16.3 of this Article 16; and (ii) the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness.
Section 16.5 The provisions of Section 16.4 of this Article 16 shall not
apply to: (i) the responsibility or liability of a director pursuant to any
criminal statute; or (ii) the liability of a director for the payment of taxes
pursuant to local, state or federal law.
Section 16.6 Notwithstanding any other provisions of these Bylaws, the
approval by the affirmative vote of the holders of a majority of the outstanding
voting power of the shares of stock of the Corporation shall be required to
amend, repeal or adopt any
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provision as part of these Bylaws that is inconsistent with the purpose or
intent of Sections 16.1, 16.2, 16.3, 16.4, 16.5 or 16.6 of this Article 16, and,
if any such action shall be taken, it shall become effective only on a
prospective basis from and after the date of such shareholder approval. The
provisions of Section 16.1, 16.2, 16.3, 16.4 and 16.5 were originally adopted by
the shareholders of the Corporation on April 27, 1987.
ARTICLE 17
Officers
--------
Section 17.1 The Corporation shall have a Chairman of the Board, a
President, a Secretary and a Treasurer or persons who shall act as such,
regardless of the name or title by which they may be designated, elected or
appointed and may have such other officers and assistant officers as the Board
of Directors may authorize from time to time. The Chairman of the Board or the
President shall be the chief executive officer of the Corporation, as the Board
of Directors may determine from time to time. Each officer shall hold office at
the pleasure of the Board of Directors and until his successor has been elected
and qualified or until his earlier death, resignation or removal. Any officer
may resign at any time upon written notice to the Corporation. The resignation
shall be effective upon receipt thereof by the Corporation or at such subsequent
time as may be specified in the notice of resignation.
Section 17.2 Except as otherwise provided in the Articles of Incorporation,
an officer shall perform his duties as an officer in good faith, in a manner he
reasonably believes to be in the best interests of the Corporation and with such
care, including reasonable inquiry, skill and diligence, as a person of ordinary
prudence would use under similar circumstances. A person who so performs his
duties shall not be liable by reason of having been an officer of the
Corporation.
Section 17.3 Any officer or agent of the Corporation may be removed by the
Board of Directors with or without cause by a vote of not less than two- thirds
of the whole Board. The removal shall be without prejudice to the contract
rights, if any, of any person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights. If the office of any
officer becomes vacant for any reason, the vacancy may be filled by the Board of
Directors.
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ARTICLE 18
Duties of Officers
------------------
Section 18.1 The Chairman of the Board shall preside at all meetings of the
Board of Directors and at all meetings of the shareholders, appoint all
committees not otherwise provided for in the Bylaws and shall be ex officio a
member of all committees other than the Audit Committee, the Nominating
Committee, and the Compensation and Stock Option Committee.
Section 18.2 In the absence of the Chairman of the Board, the President
shall preside at all meetings of the Board of Directors and at all meetings of
the shareholders. Except as otherwise provided herein, the President shall have
general supervision and control of all the employees of the Corporation; shall
be responsible for the general and active management of the business of the
Corporation; shall see that all orders and resolutions of the Board of Directors
are put into effect, subject, however, to the right of the Board of Directors to
delegate any specific powers, except such as may be by statute exclusively
conferred on the President or on any other officer or officers of the
Corporation; shall have the authority to execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other office or agent of the Corporation; and shall
be ex officio a member of all committees other than the Audit Committee, the
Nominating Committee, and the Compensation and Stock Option Committee.
Section 18.3 In the absence of the President, the Executive Vice President,
if any, shall assume the duties of the President. The Executive Vice President,
if any, shall perform such duties as may be assigned to him by the Corporation's
chief executive officer, the Board of Directors or the Executive Committee of
the Board of Directors.
Section 18.4 The Vice Presidents shall perform such duties as may be
designated from time to time by the Corporation's chief executive officer, the
Board of Directors or the Executive Committee of the Board of Directors.
Section 18.5 The Secretary shall act under the direction and
superintendence of the Corporation chief executive officer; attend all the
meetings of shareholders, directors and committees, and keep in suitable books
the minutes thereof; superintend the keeping and have charge of the seal, books,
papers and records pertaining to his office, sign such documents as shall
require his attention, issue notices for all meetings; make or superintend the
making of monthly and annual statements to the Board of Directors,
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which shall fully show the current business and condition of the Corporation and
perform generally all the duties incident to the office of Secretary.
Section 18.6 The Treasurer or his designee shall receive and take care of
all moneys, securities and evidences of indebtedness belonging to the
Corporation; maintain day by day records of his transactions and deposit the
daily receipts in a General Account in the name of the Corporation in such bank
or banks or such depositories as the Board of Directors or the Executive
Committee may direct. All checks or other orders on such banks or depositories
for the payment or transfer of money shall be signed by the Treasurer or his
designee and by another officer of the Corporation.
In addition to the aforesaid General Account the Treasurer or his designee
shall maintain Special Accounts as the Board of Directors or the Executive
Committee may from time to time create in banks for current payments; such
deposits shall be made in the name of the Corporation and shall be replenished
from the General Account as may be necessary to maintain working balances in
such Special Accounts. All checks or drafts drawn against such Special Accounts
shall be signed by such officer or officers or employees as may from time to
time be authorized by the Board of Directors or the Executive Committee of the
Board of Directors.
Section 18.7 The Assistant Secretary shall, in the absence of the
Secretary, perform the duties of the Secretary and such other duties as may be
assigned to him by the Secretary.
Section 18.8 The Assistant Treasurer shall, in the absence of the
Treasurer, perform the duties of the Treasurer and such other duties as may be
assigned to him by the Treasurer.
Section 18.9 All officers and employees shall give bond for the faithful
performance of their duties in such amount as is required by the Board of
Directors or the Executive Committee of the Board of Directors.
ARTICLE 19
Indemnification of Officers, Directors, Employees, and Agents
-------------------------------------------------------------
Section 19.1 The Corporation shall indemnify any director or officer, and
may indemnify any other employee or agent who was or is a party to, or is
threatened to be made a party to or who is called as a witness in connection
with, any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or
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investigative, including an action by or in the right of the Corporation by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding unless the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness.
Section 19.2 The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article 19 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any Bylaw, agreement, contract, vote of shareholders or
disinterested directors or pursuant to the direction, howsoever embodied, of any
court of competent jurisdiction or otherwise, both as to action in their
official capacity and as to action in another capacity while holding such
office. It is the policy of the Corporation that indemnification of, and
advancement of expenses to, directors and officers of the Corporation shall be
made to the fullest extent permitted by law. To this end, the provisions of this
Article 19 shall be deemed to have been amended for the benefit of directors and
officers of the Corporation effective immediately upon any modification of the
BCL or the Directors' Liability Act of the Commonwealth of Pennsylvania (the
"DLA") which expands or enlarges the power or obligation of corporations
organized under the BCL or subject to the DLA to indemnify, or advance expenses
to, directors and officers of corporations.
Section 19.3 The Corporation shall pay expenses incurred by an officer or
director, and may pay expenses incurred by any other employee or agent in
defending a civil or criminal action, suit or proceeding in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such person to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation.
Section 19.4 The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article 19 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
Section 19.5 The Corporation shall have the authority to create a fund of
any nature, which may, but need not, be under the control of an independent
trustee, or otherwise secure or insure in any manner, its indemnification
obligations, whether arising under these Bylaws or otherwise. The authority
shall include, without limitation, the
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authority to: (i) deposit funds in trust or in escrow, (ii) establish any form
of self-insurance, (iii) secure its indemnity obligation by grant of a security
interest, mortgage or other lien on the assets of the Corporation or (iv)
establish a letter of credit, guaranty or surety arrangement for the benefit of
such persons in connection with the anticipated indemnification or advancement
of expenses contemplated by this Article 19. The provisions of this Article 19
shall not be deemed to preclude the indemnification of, or advancement of
expenses to, any person who is not specified in Section 19.1 of this Article 19
but whom the Corporation has the power or obligation to indemnify, or to advance
expenses for, under the provisions of the BCL or the DLA or otherwise. The
authority granted by this Section 19.5 shall be exercised by the Board of
Directors of the Corporation.
Section 19.6 The Corporation shall have the authority to enter into a
separate indemnification agreement with any officer, director, employee or agent
of the Corporation or any subsidiary providing for such indemnification of such
person as the Board of Directors shall determine up to the fullest extent
permitted by law.
Section 19.7 As soon as practicable after receipt by any person specified
in Section 19.1 of this Article 19 of notice of the commencement of any action,
suit or proceeding specified in Section 19.1 of this Article 19, such person
shall, if a claim with respect thereto may be made against the Corporation under
Article 19 of these Bylaws, notify the Corporation in writing of the
commencement or threat thereof; however, the omission so to notify the
Corporation shall not relieve the Corporation for any liability under Article 19
of the Bylaws unless the Corporation shall have been prejudiced thereby or from
any other liability which it may have to such person other than under Article 19
of these Bylaws. With respect to any such action as to which such person
notifies the Corporation of the commencement or threat thereof, the Corporation
may participate therein at its own expense, and except as otherwise provided
below, to the extent that it desires, the Corporation jointly with any other
indemnifying party similarly notified, shall be entitled to assume the defense
thereof, with counsel selected by the Corporation to the reasonable satisfaction
of such person. After notice from the Corporation to such person of its election
to assume the defense thereof, the Corporation shall not be liable to such
person under Article 19 of these Bylaws for any legal or other expenses
subsequently incurred by such person in connection with the defense thereof
other than as otherwise provided below. Such person shall have the right to
employ his own legal counsel in such action, but the fees and expenses of such
legal counsel incurred after notice from the Corporation of its assumption of
the defense thereof shall be at the expense of such person unless: (i) the
employment of legal counsel by such person shall have been authorized by the
Corporation; (ii) such person shall have reasonably concluded that there may be
a conflict of interest between the Corporation and such person in the conduct of
the defense of such proceeding; or (iii) the Corporation shall not in fact have
employed
- 20 -
<PAGE>
legal counsel to assume the defense of such action. The Corporation shall not be
entitled to assume the defense of any proceeding brought by or on behalf of the
Corporation or as to which such person shall have reasonably concluded that
there may be a conflict of interest. If indemnification under Article 19 of
these Bylaws or advancement of expenses are not paid or made by the Corporation,
or on its behalf, within 90 days after a written claim for indemnification or a
request for an advancement of expenses has been received by the Corporation,
such person may, at any time thereafter, bring suit against the Corporation to
recover the unpaid amount of the claim or the advancement of expenses. The right
to indemnification and advancement of expenses provided hereunder shall be
enforceable by such person in any court of competent jurisdiction. The burden of
proving that indemnification is not appropriate shall be on the Corporation.
Expenses reasonably incurred by such person in connection with successfully
establishing the right to indemnification or advancement of expenses, in whole
or in part, shall also be indemnified by the Corporation.
Section 19.8 The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article 19.
Section 19.9 Notwithstanding any other provisions of these Bylaws, the
approval by (i) the affirmative vote of the holders of a majority of the
outstanding voting power of the shares of stock of the Corporation or (ii) a
majority vote of the members of the Board of Directors shall be required to
amend, repeal or adopt any provision as part of these Bylaws which is
inconsistent with the purpose or intent of this Article 19, and, if any such
action shall be taken, it shall become effective only on a prospective basis
from and after the date of such approval. The provisions of Sections 19.1, 19.2,
19.3, 19.4, 19.5, 19.6, 19.7 and 19.8 were originally adopted by the
shareholders of the Corporation on April 27, 1987.
ARTICLE 20
Fiscal Year
-----------
Section 20.1 The fiscal year of the Corporation shall be determined by the
Board of Directors.
- 21 -
<PAGE>
ARTICLE 21
Manner of Giving Written Notice; Waivers of Notice
--------------------------------------------------
Section 21.1 Whenever written notice is required to be given to any person
under the provisions of these Bylaws, it may be given to the person either
personally or by sending a copy thereof by first class or express mail, postage
prepaid, or by telegram (with messenger service specified), telex or TWX (with
answer back received) or courier service, charges prepaid, or by telecopier, to
his address (or to his telex, TWX, telecopier or telephone number) appearing on
the books of the Corporation or, in the case of written notice to directors,
supplied by each director to the Corporation for the purpose of the notice. If
the notice is sent by mail, telegraph or courier service, it shall be deemed to
have been given to the person entitled thereto when deposited in the United
States mail or with a telegraph office or courier service for delivery to that
person or, in the case of telex or TWX, when dispatched.
Section 21.2 Any written notice required to be given to any person under
the provisions of statute, the Corporation's Articles of Incorporation or these
Bylaws may be waived in a writing signed by the person entitled to such notice
whether before or after the time stated therein. Except as otherwise required by
statute, and except in the case of a special meeting, neither the business to be
transacted at, nor the purpose of, a meeting need be specified in the waiver of
notice. In the case of a special meeting of shareholders, the waiver of notice
shall specify the general nature of the business to be transacted. Attendance of
any person, whether in person or by proxy, at any meeting shall constitute a
waiver of notice of such meeting, except where a person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened.
ARTICLE 22
Amendments
----------
Section 22.1 Neither this Section 22.1 nor Article 2 of these Bylaws may be
altered, amended or repealed unless approved by the affirmative vote of the
holders of two-thirds of the outstanding Common Stock of the Corporation, voting
as a separate class, at any annual meeting of shareholders or at a special
meeting of shareholders called for that purpose, provided that 30 days' notice
of the proposed amendments shall have been mailed to the last recorded address
of each shareholder as furnished to the Corporation, and that the same shall
have been submitted to the Board of Directors at least 30 days prior to such
meeting.
- 22 -
<PAGE>
Section 22.2 Neither this Section 22.2 nor Article 16 of these Bylaws may
be altered, amended or repealed unless approved by the affirmative vote of the
holders of a majority of the outstanding voting power of the shares of stock of
the Corporation at a duly organized meeting of shareholders called for that
purpose, provided that 30 days' notice of the proposed amendments shall have
been mailed to the last recorded address of each shareholder as furnished to the
Corporation, and that the same shall have been submitted to the Board of
Directors at least 30 days prior to such meeting.
Section 22.3 Neither this Section 22.3 nor Article 19 of these Bylaws may
be altered, amended or repealed unless approved by: (i) the affirmative vote of
the holders of a majority of the outstanding voting power of the shares of stock
of the Corporation at a duly organized meeting called for that purpose, provided
that 30 days' notice of the proposed amendments shall have been mailed to the
last recorded address of each shareholder as furnished to the Corporation, and
that the same shall have been submitted to the Board of Directors at least 30
days prior to such meeting, or (ii) a majority vote of the members of the Board
of Directors at any regular meeting or any special meeting duly convened after
notice to the directors of that purpose, subject to the power of the
shareholders to change such action by the affirmative vote of the holders of a
majority of the outstanding voting power of the shares of stock of the
Corporation at any duly organized meeting called for that purpose.
Section 22.4 All provisions of these Bylaws other than Articles 2, 16 and
19 and Sections 22.1, 22.2 and 22.3 may be altered, amended or repealed: (i) by
the affirmative vote of the holders of a majority of the outstanding voting
power of the shares of stock of the Corporation at a duly organized meeting
called for that purpose, or (ii) by a majority vote of the members of the Board
of Directors at any regular meeting or any special meeting duly convened after
notice to the directors of that purpose, subject to the power of the
shareholders to change such action by the affirmative vote of the holders of a
majority of the outstanding voting power of the shares of stock of the
Corporation at any duly organized meeting called for that purpose.
- 23 -
Exhibit 10.1
DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS OF
PMA CAPITAL CORPORATION
ARTICLE I. DEFINITIONS
--------- -----------
The following are defined terms wherever they appear in the Plan.
1.1 "Administrator" shall mean the person, or committee, appointed by
the President and Chief Executive Officer of PMA Capital, and charged with
responsibility for administration of the Plan.
1.2 "Board of Directors" or "Board" shall mean the Board of Directors
of PMA Capital.
1.3 "Business Day" shall mean any day during which trades occur on the
Nasdaq Stock Market.
1.4 "Change of Control" shall mean a change of control of PMA Capital
of a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") whether or not PMA Capital is then subject to such
reporting requirements; provided that, without limitation, such a Change of
Control shall be deemed to occur if,
(a) Any "person" (as such term is used in Section 13(d) and
14(d) of the Exchange Act) is or first becomes the "beneficial owner" (as
determined for purposes of Regulation 13D-G under the Exchange Act as currently
in effect), directly or indirectly, in a transaction or series of transaction,
of securities of PMA Capital representing more than 50% of the combined voting
power of PMA Capital's Common Stock and Class A Common Stock (collectively, the
"Voting Capital Stock"), or
(b) The consummation of a merger, or other business
combination after which the holders of the Voting Capital Stock do not
collectively own 50% or more of the voting capital stock of the entity surviving
such merger or other business combination, or the sale, lease, exchange or other
transfer in a transaction or series of transactions of all or substantially all
of the assets of PMA Capital, or
(c) As a result or in connection with any cash tender offer or
exchange offer, merger or other business combination, sale of assets or
contested election of directors or any combination of the foregoing transactions
(a "Transaction"), the persons who constituted a majority of the members of the
Board of Directors of PMA Capital effective before the event that constitutes a
Change of Control, no longer constitutes such a majority of the members of the
Board of Directors of PMA Capital then in office. A Transaction constituting a
Change in Control shall only be deemed to have occurred upon the closing of the
Transaction.
1.5 "PMA Capital Common Stock" or "Common Stock" or "Stock" shall mean
the Class A Common Stock of PMA Capital, par value of five dollars ($5.00) per
share.
1
<PAGE>
1.6 "Committee" shall mean the Compensation Committee of the Board of
Directors of PMA Capital, or the successor to such committee.
1.7 "Deferral Election" shall mean the instrument executed by a
Participant which specifies amounts and items of compensation to be deferred
into the Deferred Compensation Account.
1.8 "Deferred Compensation Account" shall mean the separate bookkeeping
account established under the Plan for each Participant, as described in Section
3.1.
1.9 "Director" shall mean any individual serving on the Board who is
not an employee of PMA Capital or any of its subsidiaries or affiliates.
1.10 "Participant" shall mean each individual who as a Director of PMA
Capital participates in the Plan in accordance with the terms and conditions of
the Plan.
1.11 "Payment Election" shall mean the instrument executed by a
Participant which specifies the method of payment of deferred compensation.
1.12 "PMA Capital" shall mean PMA Capital Corporation.
1.13 "Plan" shall mean the Deferred Compensation Plan for Non-Employee
Directors of PMA Capital, as it may be amended or restated from time to time by
the Board of Directors.
1.14 "Termination of Service" shall mean termination of services as a
Director of PMA Capital, including but not limited to termination by retirement,
death or disability.
1.15 "Unforeseeable Emergency" shall mean a severe financial hardship
to the Participant resulting from a sudden and unexpected illness or accident of
the Participant or of a dependent (as defined in section 152(a) of the Internal
Revenue Code of 1986, as amended) of the Participant, loss of the Participant's
property due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
Participant.
1.16 "Valuation Date" shall mean the close of business on the last
business day of each month.
2
<PAGE>
ARTICLE II. PARTICIPATION
2.1 Eligibility to Participate in the Plan.
--------------------------------------
The individuals who are eligible to participate in the Plan are those
persons who serve as Directors of PMA Capital and who are not also employees of
PMA Capital.
2.2 Participation in the Plan.
-------------------------
(a) A Participant may elect to defer receipt of all or a
portion of the annual Board retainer fee and Board and Board committee
attendance fees, and such other compensation for services as a Director as are
specified by the Administrator.
(b) The election to defer is made by delivering a properly
executed Deferral Election to the Administrator. The Deferral Election shall
specify the item or items of compensation to be deferred, and the amount of such
compensation to be deferred. The election for payment of compensation deferred
is made by delivering a properly executed Payment Election to the Administrator.
The Payment Election shall specify the method by which such deferred
compensation is to be paid, and the date or dates for payment of such deferred
compensation.
(c) An election to defer compensation must be filed by the
Participant prior to the commencement of a calendar year during which such
compensation will be paid.
(d) Notwithstanding Section 2.2(c), an election to defer
compensation made by an individual who subsequently begins active service as a
Director of PMA Capital that is filed prior to the date upon which such active
service begins, shall be effective according to Section 2.2(e)(2), below.
(e) An election to defer compensation is effective: (1) for
the calendar year beginning after the election, and for subsequent calendar
years, unless modified or revoked; or, (2) if Section 2.2(d) applies, for the
remainder of the first year of active service, as of the first day of active
service, and for subsequent calendar years, unless modified or revoked.
2.3 Elections Pertaining to Payments.
--------------------------------
(a) No payments may be made or commence under the Plan until
the later of (1) at least six (6) months elapses after a Termination of Service
occurs or (2) the first day of the first calendar year following the date the
Payment Election is filed with the Administrator, except as provided in Sections
4.2, 4.3 and 4.4 below.
(b) In executing a Payment Election, the Participant shall
elect among the following methods of payment:
(1) Lump sum payment, or
3
<PAGE>
(2) Periodic Payments - the payments shall be made at
least annually, (but no more frequently than monthly) over a period not to
exceed fifteen (15) years.
(c) The balance of a Participant's Deferred Compensation
Account shall be paid, in all events, no later than January of the fifteenth
year following Termination of Service.
(d) If there is not in effect as of Participant's Termination
of Service a valid Payment Election, the Participant's Deferred Compensation
Account shall be paid in a lump sum.
All payments under the Plan shall be in cash only and no Participant
shall have any right to obtain payment in any other form.
2.4 Modification of Elections Pertaining to Payments.
-------------------------------------------------
A Participant may request modification of his existing Payment Election
at any time before a Termination of Service. The Board shall consider any such
modification request and may grant or deny the request, in its discretion, which
decision shall be final and binding on the Participant. In determining whether
the request should be allowed, the Board may consider the Participant's
financial needs, including any changed circumstances, as well as the projected
financial needs of PMA Capital. If the Board determines that the request should
be allowed, the requested modifications shall be made. The Participant shall
effect the modifications through execution of a new Payment Election, which
shall constitute the only Payment Election which is outstanding and effective.
2.5 Reduction or Termination of Future Deferral.
--------------------------------------------
(a) A Participant may elect to reduce or to revoke his
deferral of compensation into his Deferred Compensation Account, but such
election shall have effect only prospectively. A Participant shall effect an
election to reduce his deferral of compensation by execution of a new Deferral
Election, which shall constitute the only Deferral Election which is outstanding
and effective on a prospective basis. A Participant shall effect an election to
revoke his deferral of compensation into his Deferred Compensation Account by
informing the Administrator in writing. Only one election to reduce and one
election to revoke may be made under this Section 2.5 by each Participant in a
calendar year.
(b) An election to reduce or to revoke deferral of
compensation under Section 2.5(a) above shall become effective on the later of
(1) the first day of the first calendar year following the date on which the
election to reduce or revoke is made or (2) on the first day of the calendar
month following receipt of such election by the Administrator except in the case
of an Unforeseeable Emergency under the circumstances described below in Section
4.2.
4
<PAGE>
ARTICLE III. COMPENSATION DEFERRED
----------- ---------------------
3.1 Deferred Compensation Account.
-----------------------------
A Deferred Compensation Account shall be established as a bookkeeping
account for each Director when the Director becomes a Participant.
Compensation deferred by a Participant under the Plan shall be credited to
the Deferred Compensation Account on the date such compensation would
otherwise have been paid to the Participant. Hypothetical income on deferred
compensation shall be credited to the Deferred Compensation Account as
provided in Section 3.3, below.
3.2 Balance of Deferred Compensation Account.
----------------------------------------
The balance credited to each Participant's Deferred Compensation
Account shall include compensation deferred by the Participant, plus
hypothetical income, dividends and gains credited with respect to hypothetical
investments. Losses from hypothetical investments shall reduce the amount
credited to the Participant's Deferred Compensation Account balance. The
balance credited to each Participant's Deferred Compensation Account shall be
determined as of each Valuation Date.
3.3 Hypothetical Investment.
-----------------------
(a) Compensation deferred under the Plan which would have been
paid in cash shall be assumed to be invested, without charge, in one or more
hypothetical investment vehicles. The hypothetical investment vehicles shall
be specified from time to time by the Administrator, except that a
hypothetical Common Stock investment vehicle shall be available. With respect
to such hypothetical investments other than the hypothetical Common Stock
investment vehicle, which is discussed in Section 3.3(b) below:
(1) Cash compensation deferred shall be deemed to
earn investment returns under the hypothetical investment vehicle. The
Administrator shall credit such income to the Participant's Deferred
Compensation Account, pursuant to Section 3.4 below.
(2) The Committee, in its sole discretion, may
provide Plan Participants with options for one or more additional hypothetical
investment vehicles for investment of cash compensation deferred under the
Plan, with respect to which:
(A) A Participant may modify his election of
hypothetical investment and may make any transfers between and among
hypothetical investments, through a written request to the Administrator,
provided that,
(B) Only one such modification or transfer shall
be allowed during any calendar quarter;
(C) Any such modification or transfer shall be
effective in the second calendar month following receipt of the request by the
Administrator; and
5
<PAGE>
(D) Such modifications and transfers will be in
accordance with rules and procedures adopted by the Administrator.
(b) Compensation deferred under the Plan and credited as a
bookkeeping entry to the Participant's Deferred Compensation Account may be
deemed to be invested, hypothetically and without charge, in shares of
hypothetical Common Stock. Shares of hypothetical Common Stock shall be
subject to adjustment in order to reflect Common Stock dividends, splits, and
reclassifications. Except in the event of a Change of Control, amounts
credited to the Participant's Deferred Compensation Account and deemed
invested in hypothetical Common Stock must remain so invested, and no other
hypothetical investment vehicle available hereunder may be substituted
therefor until the January following the Participant's Termination of Service.
Thereafter, changes to the deemed hypothetical investment in Common Stock may
be made only in accordance with Section 3.3(a) above; provided that all such
changes occurring within six months after the Participant's Termination of
Service shall be subject to approval by the Administrator to ensure compliance
with Section 16 of the Securities Exchange Act of 1934.
(c) Amounts equal to cash dividends which would have been
paid on shares of Common Stock shall be deemed paid on whole shares of
hypothetical Common Stock in the Participant's Deferred Compensation Account.
Such amounts shall be deemed reinvested in shares of hypothetical Common Stock
in the Participant's Deferred Compensation Account.
(d) In the event of a Change of Control, the Committee shall
provide Participants with the option for investment in at least one
hypothetical investment vehicle, the annual income earned on which must be not
less than 50 basis points over the Ten-Year Constant Treasury Maturity Yield
as reported by the Federal Reserve Board, based upon the November averages for
the preceding year.
3.4 Time of Hypothetical Investment.
-------------------------------
(a) The balance of each Participant's Deferred Compensation
Account shall be deemed hypothetically invested on each Valuation Date, and
income shall accrue on such balance upon such date, from the previous
Valuation Date.
(b) Compensation which would have been paid in cash shall be
deemed invested in the Participant's Deferred Compensation Account on the
Valuation Date next following such hypothetical investment or credit.
(c) Compensation hypothetically invested in Common Stock
shall be deemed invested in shares of Common Stock as of the date such
compensation otherwise would have been payable to the Participant. The number
of shares of Common Stock in which compensation is deemed hypothetically
invested in the Deferred Compensation Account shall be determined by
reference to the average of the high and low price as reported on the Nasdaq
Stock Market for the day that the said compensation otherwise would have been
payable to the Participant (or the next Business Day, if such day is not a
Business Day) provided, that in absence of such information, the Common Stock
value shall be determined by the Committee.
6
<PAGE>
3.5 Statement of Account.
--------------------
The Administrator shall provide each Participant a statement of his
Deferred Compensation Account at least annually.
ARTICLE IV. PAYMENT OF DEFERRED COMPENSATION
----------- --------------------------------
4.1 Payment of Deferred Compensation.
--------------------------------
(a) The Administrator shall make payments measured by the
hypothetical amounts credited to the Participant's Deferred Compensation
Account in accordance with the Participant's Payment Election.
(b) Compensation deferred under the Plan shall be paid to
the Participant in cash pursuant to Section 4.1(a).
4.2. Unforeseeable Emergency Payment.
-------------------------------
Notwithstanding any other provision of the Plan, if the Board, after
consideration of a Participant's application, determines that the Participant
has an Unforeseeable Emergency of such a substantial nature that immediate
payment of compensation deferred under the Plan is warranted, the Board in its
sole and absolute discretion may direct that a payment equal to all or a
portion of the balance of the Participant's Deferred Compensation Account be
paid to the Participant in cash. The amount of any such distribution shall be
limited to the amount deemed necessary by the Board to alleviate or remedy the
Unforeseeable Emergency. The payment shall be made in a manner and at the time
specified by the Board. A Participant receiving an Unforeseeable Emergency
payment is deemed to have revoked his election for deferral of compensation
under the Plan, as of the time of Unforeseeable Emergency payment. Any
subsequent deferral of compensation under the Plan shall require that the
Participant execute a new Deferral Election, subject to terms of Section
2.2(e)(1) hereof. The circumstances that will constitute an Unforeseeable
Emergency will depend upon the facts of each case, but, in any case, payment
may not be made to the extent that such hardship is or may be relieved:
(a) Through reimbursement or compensation by insurance or
otherwise;
(b) By liquidation of the Participant's assets, to the extent the
liquidation of such assets would not itself cause severe financial hardship;
or
(c) By cessation of deferrals under the Plan.
Examples of what are not considered to be Unforeseeable Emergencies
include the need to send a Participant's child to college or the desire to
purchase a home.
4.3 Certain Accelerated Payments.
----------------------------
(a) If a Participant terminates service as a Director under
circumstances which are such that the Board deems it in the best interest of
PMA Capital that payment of the Participant's Deferred Compensation Account be
accelerated, then the Board, upon its own motion and in its sole discretion,
7
<PAGE>
may direct that the Participant's Deferred Compensation Account be paid to him
immediately in a lump sum.
(b) If, as a result of substantial and unforeseen changes
affecting (1) the business of PMA Capital, or (2) the operation or
administration of the Plan, the Board, upon its own motion and sole
discretion, determines that the interests of the Participant and of PMA
Capital are best served through accelerated payment of the Participant's
Deferred Compensation Account, the Board on its own motion and in its sole
discretion may direct that the Participant's Deferred Compensation Account
balances be paid to him immediately in a lump sum.
(c) A Participant who is not entitled to payment of his
Deferred Compensation Account under any other provision of Article IV may make
a written request to the Board for an accelerated payment of his entire
Deferred Compensation Account balance. If the Board receives such a request,
it shall make a final valuation of the Participant's Deferred Compensation
Account and pay ninety percent (90%) of the Deferred Compensation Account
balance to the Participant. The Participant shall forfeit the remaining ten
percent (10%) of his Deferred Compensation Account balance to PMA Capital.
4.4 Payments of a Deceased Participant's Account
--------------------------------------------
(a) If a Participant dies before his entire Deferred
Compensation Account has been paid to him, the Administrator shall pay an
amount equal to the amount credited to the Deferred Compensation Account in a
single lump sum payment to the person(s) or trust(s) designated in writing by
the Participant as his beneficiary(ies) under the Plan. The Administrator is
authorized to establish rules and procedures for designations of beneficiaries
and shall have the sole discretion to make determinations regarding the
existence and identity of beneficiaries and the validity of beneficiary
designations.
(b) Notwithstanding Section 4.4(a), the Administrator shall
make payment pursuant to Section 4.4(a), as soon as administratively feasible,
in a single lump sum payment to the Participant's estate if:
(1) The Participant dies without having a valid
beneficiary designation in effect;
(2) The Participant's designated beneficiary has
predeceased him;
(3) The Participant's designated beneficiary cannot
be found after what the Administrator determines, in his sole discretion, has
been a reasonably diligent search; or
(4) The Administrator determines, in his sole
discretion, that a payment in such form is in the best interest of PMA
Capital.
8
<PAGE>
ARTICLE V. GENERAL PROVISIONS
- --------- ------------------
5.1 Participant Requests
--------------------
A Participant shall take no part in any decision pertaining to a
request by such Participant under Sections 2.4, 4.2, and 4.3 hereof.
5.2 Participant's Rights Unsecured.
-------------------------------
This Plan is intended to be an unfunded plan for the benefit of
Participants. No Participant shall have any property interest whatsoever in any
specific assets of PMA Capital. No action taken pursuant to the provisions of
this Plan shall create or be construed to create a trust of any kind or a
fiduciary relationship between PMA Capital and the Participant, the
Participant's designated beneficiaries, or any other person. To the extent that
any person acquires a right to receive payments from PMA Capital under this
Plan, such right shall be no greater than the right of any unsecured general
creditor of PMA Capital or of any successor company which assumes the
liabilities of PMA Capital. The Board may, however, in the event of a Change of
Control of PMA Capital or for administrative reasons, fully fund the Plan by
means of a contribution to a "rabbi" trust selected by the Administrator.
5.3 Assignability.
--------------
(a) No right to receive payments hereunder shall be
transferable or assignable by a Participant. Any attempted assignment or
alienation of payments hereunder shall be void and of no force or effect. No
such payment, prior to receipt thereof pursuant to the provisions of the Plan,
shall be in any manner liable for, or subject to, the debts, contracts,
liabilities, engagements or torts of the Participant.
(b) Notwithstanding Section 5.3(a), if a Participant is
indebted to PMA Capital at any time when payments are to be made by PMA Capital
to the Participant under the provisions of the Plan, PMA Capital shall have the
right to reduce the amount of payment to be made to the Participant (or the
Participant's beneficiary) to the extent of such indebtedness. Any election by
PMA Capital not to reduce such payment shall not constitute a waiver of its
claim for such indebtedness.
5.4 Administration.
---------------
Except as otherwise provided herein, the Plan shall be administered by
the Administrator who shall have the authority to adopt rules and regulations
for carrying out the Plan, and who shall interpret, construe and implement the
provisions of the Plan.
5.5 Amendment.
----------
The Plan may be amended, restated, modified, or terminated by the Board
of Directors, except that Section 3.3(d) of the Plan may not be amended or
modified following a Change of Control without the consent of the Participant.
No amendment, restatement, modification, or termination shall reduce the dollar
value of a Participant's Deferred Compensation Account balance as of the
Valuation Date immediately preceding such action.
9
<PAGE>
5.6 Correction of Errors and Inconsistencies.
-----------------------------------------
The Committee upon its own motion, or at the request of the
Administrator or of a Participant, shall have the authority to effect
consistency among deferral elections, payment elections, or hypothetical
investment with respect to amounts deferred by a Participant under the Plan, so
as to avoid or rectify difficulties in Plan administration. In no event shall
such action by the Committee reduce the dollar value of a Participant's Deferred
Compensation Account balance as of the Valuation Date immediately preceding such
action, nor shall the Committee take any action inconsistent with Section 3.3(b)
hereof. The Committee may take such action with respect to a Participant's
Deferred Compensation Account, regardless of whether such Participant may
continue as a Director of PMA Capital, or whether he may have terminated service
as a Director of PMA Capital.
5.7 Compliance with Section 16.
---------------------------
If the Administrator determines that, in order to comply with Section
16 of the Securities Exchange Act of 1934, as amended, it is necessary for the
Board rather than the Committee to take any action which the Plan authorizes the
Committee to take, the Administrator shall request the Board to do so.
5.8 Withholding/Employment Taxes.
-----------------------------
As required by applicable tax law, PMA Capital may withhold, deduct
and adjust a Participant's Deferred Compensation Account for all amounts
necessary to satisfy any federal, state or other governmental withholding taxes
arising directly or indirectly in connection with the Plan or any deferral
hereunder whether under current or future tax laws.
5.9 No Liability for Interpretation and Administration of Plan.
-----------------------------------------------------------
No officer, director, or member of PMA Capital shall be liable to any
person for any action taken or omitted in connection with the interpretation and
administration of this Plan unless attributable to willful misconduct or fraud.
To the extent coverage is not provided by any applicable insurance policy, PMA
Capital hereby agrees to indemnify the Administrator and to hold him harmless
against any and all liability for his acts, omissions and conduct and for the
acts, omissions and conduct of his 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 he shall not voluntarily assume or admit any
liability, nor, except at his own cost, shall he make any payment, assume any
obligations or incur any expense without the prior written consent of PMA
Capital.
5.10 Incapacity of Recipient.
-----------------------
If PMA Capital finds that any person to whom any payment is payable
under this Plan is unable to take care of his or her affairs because of illness
or accident, any payment due (unless a prior claim therefor has been made by a
duly appointed guardian, committee or other legal representative) may be paid to
the intended recipient's spouse, child, parent, brother or sister, or any other
person deemed by PMA Capital to have incurred expense for the person otherwise
entitled to payment, in such manner and proportions as PMA Capital may
determine. Any such payments, to the extent thereof, shall be a complete
discharge of PMA Capital's obligation under this Plan.
10
<PAGE>
5.11 Construction.
-------------
The masculine gender where appearing in the Plan shall be deemed to
include the feminine gender. The singular shall be deemed to include the plural
and the plural the singular.
5.12 Successors and Heirs.
--------------------
The Plan and any properly executed elections hereunder shall be
binding upon PMA Capital and the Participants, and upon any assignee or
successor in interest to PMA Capital and upon the heirs, legal representatives
and beneficiaries of any Participant
5.13 Governing Law.
-------------
This Plan shall be governed by the laws of the Commonwealth of
Pennsylvania and by applicable Federal law.
Adopted by Board of Directors: November 3, 1999
11
<TABLE>
<CAPTION>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(1)
($ In Thousands)
1999 1998 1997 1996 1995
------------ ------------ ----------- -------------- ------------
EARNINGS
<S> <C> <C> <C> <C> <C>
Pre-tax income (loss) $40,092 $55,069 $25,153 $(191,394) $34,913
Fixed charges 13,109 15,865 16,683 17,913 19,594
------------ ------------ ----------- -------------- ------------
Total (a) $53,201 $70,934 $41,836 $(173,481) $54,507
============ ============ =========== ============== ============
FIXED CHARGES
Interest expense and amortization of
debt discount and premium on all
indebtedness $12,221 $15,009 $15,768 $ 17,052 $18,734
Interest portion of rental expense 888 856 915 861 860
------------ ------------ ----------- -------------- ------------
Total fixed charges (b) $13,109 $15,865 $16,683 $ 17,913 $19,594
============ ============ =========== ============== ============
Ratio of earnings to fixed
charges (a)/(b) 4.1x 4.5x 2.5x (2) 2.8x
<FN>
(1) For purposes of determining this ratio, pre-tax income (loss) consists
of income before income taxes, cumulative effect of accounting change
(1999) and extraordinary loss (1997), plus fixed charges. Fixed
charges consist of interest expense and the portion of operating
leases that management believes are representive of the interest
factor.
(2) Earnings were insufficient to cover fixed charges by $191.4 million in
1996.
</FN>
</TABLE>
Selected Financial Data
<TABLE>
<CAPTION>
For the year ended December 31,
(dollar amounts in thousands,
except share and per share data) 1999 1998 1997 (1) 1996 (1) 1995 (1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premiums written $ 563,510 $ 474,761 $ 381,282 $ 432,975 $ 485,876
=====================================================================
Consolidated Results of Operations:
Net premiums earned $ 540,087 $ 466,715 $ 375,951 $ 420,575 $ 484,952
Net investment income 110,057 120,125 133,392 130,837 138,111
Net realized investment gains (losses) (7,745) 21,745 8,598 2,984 31,923
Other revenues 12,718 14,896 13,617 12,288 6,350
---------------------------------------------------------------------
Total consolidated revenues $ 655,117 $ 623,481 $ 531,558 $ 566,684 $ 661,336
=====================================================================
Income (loss) before extraordinary loss and
cumulative effect of accounting change $ 28,353 $ 44,734 $ 19,753 $(135,334) $ 24,130
Extraordinary loss from early extinguishment
of debt, net of related tax effect(2) -- -- (4,734) -- --
Cumulative effect of accounting change,
net of related tax effect (3) (2,759) -- -- -- --
---------------------------------------------------------------------
Net income (loss) $ 25,594 $ 44,734 $ 15,019 $(135,334) $ 24,130
=====================================================================
Per Share Data:
Weighted average shares:
Basic(4) 22,976,326 23,608,618 23,855,031 23,800,791 23,816,088
Diluted(4), (5) 23,785,916 24,524,888 24,567,378 23,800,791 24,781,949
Income (loss) before extraordinary loss and
cumulative effect of accounting change
Basic(4) $ 1.23 $ 1.89 $ 0.83 $ (5.68) $ 1.01
Diluted(4), (5) 1.19 1.82 0.80 (5.68) 0.97
Net income (loss) per share:
Basic(4) 1.11 1.89 0.63 (5.68) 1.01
Diluted(4), (5) 1.08 1.82 0.61 (5.68) 0.97
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 19.21 21.90 19.96 17.86 25.53
Consolidated Financial Position:
Total investments $1,918,035 $2,325,409 $2,194,738 $2,261,353 $2,455,949
Total assets 3,245,087 3,460,718 3,057,258 3,117,516 3,258,572
Reserves for unpaid losses and LAE 1,932,601 1,940,895 2,003,187 2,091,072 2,069,986
Long-term debt 163,000 163,000 203,000 204,699 203,848
Shareholders' equity(5) 429,143 511,480 478,347 425,828 609,668
</TABLE>
(1) Operating results in 1997, 1996 and 1995 were impacted by approximately
$12.1 million, $223.1 million and $8.4 million, respectively, of
restructuring, reserve strengthening and other special charges. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(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 1999, the Company adopted SOP 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." As a result of adopting SOP
97-3, the Company recorded a liability of $4.3 million pre-tax and a
resulting charge to earnings of $2.8 million, net of tax effect.
(4) In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the presentation of basic and diluted earnings per share. See Note
15 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.
(5) 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.
(6) Pre-tax operating income (loss) excludes net realized investment gains
(losses). 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 16
to the Company's Consolidated Financial Statements. The Company excludes
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 holding company level, and such decisions result
in net realized gains (losses) that do not relate to the operations of the
individual segments.
(7) Run-off Operations of The PMA Insurance Group were established in December
1996 to reinsure certain obligations primarily associated with workers'
compensation claims written by the Pooled Companies for accident years 1991
and prior. The Run-off Operations are 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. Effective July 1, 1998 the Company
sold PMA Cayman. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(8) The combined ratio computed on a GAAP basis is equal to losses and loss
adjustment expenses plus acquisition expenses, operating expenses and
policyholders' dividends (where applicable), all divided by net premiums
earned.
26
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
(dollar amounts in thousands,
except share and per share data) 1999 1998 1997 (1) 1996 (1) 1995 (1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pre-tax operating income (loss)(6):
PMA Re $ 50,319 $ 46,408 $ 45,957 $ 44,807 $ 39,793
---------------------------------------------------------------------
The PMA Insurance Group(7):
Excluding Run-off Operations 18,389 10,018 (3,607) (215,669) (3,885)
Run-off Operations (189) 452 (73) -- --
---------------------------------------------------------------------
Total PMA Insurance Group 18,200 10,470 (3,680) (215,669) (3,885)
Caliber One 83 (1,606) -- -- --
Corporate and Other (8,544) (6,939) (9,954) (6,464) (14,184)
---------------------------------------------------------------------
Total pre-tax operating income (loss)
before interest expense 60,058 48,333 32,323 (177,326) 21,724
Interest expense 12,221 15,009 15,768 17,052 18,734
---------------------------------------------------------------------
Pre-tax operating income (loss) 47,837 33,324 16,555 (194,378) 2,990
Net realized investment gains (losses) (7,745) 21,745 8,598 2,984 31,923
---------------------------------------------------------------------
Income (loss) before income taxes,
extraordinary loss and cumulative
effect of accounting change 40,092 55,069 25,153 (191,394) 34,913
Income tax expense (benefit) 11,739 10,335 5,400 (56,060) 10,783
---------------------------------------------------------------------
Income (loss) before extraordinary loss and
cumulative effect of accounting change 28,353 44,734 19,753 (135,334) 24,130
Extraordinary loss from early extinguishment
of debt, net of related tax effect(2) -- -- (4,734) -- --
Cumulative effect of accounting change,
net of related tax effect (3) (2,759) -- -- -- --
---------------------------------------------------------------------
Net income (loss) $ 25,594 $ 44,734 $ 15,019 $(135,334) $ 24,130
=====================================================================
GAAP Ratios for Insurance Subsidiaries:
PMA Re:
Loss and LAE ratio 70.4% 68.9% 69.6% 73.7% 74.6%
Expense ratio 32.1% 34.8% 34.2% 28.9% 29.3%
---------------------------------------------------------------------
Combined ratio(8) 102.5% 103.7% 103.8% 102.6% 103.9%
=====================================================================
The PMA Insurance Group, including
Run-off Operations(7):
Loss and LAE ratio 75.1% 81.6% 91.1% 158.2% 92.5%
Expense ratio(9) 31.7% 33.7% 42.8% 47.1% 30.4%
Policyholders' dividend ratio 8.6% 7.3% 6.9% 6.1% 4.8%
---------------------------------------------------------------------
Combined ratio(8) 115.4% 122.6% 140.8% 211.4% 127.7%
=====================================================================
The PMA Insurance Group, excluding
Run-off Operations(7):
Loss and LAE ratio 73.6% 78.0% 83.7% -- --
Expense ratio(9) 31.1% 31.3% 32.9% -- --
Policyholders' dividend ratio 8.6% 7.1% 5.6% -- --
---------------------------------------------------------------------
Combined ratio(8) 113.3% 116.4% 122.2% -- --
=====================================================================
Caliber One (10):
Loss and LAE ratio 76.5% -- -- -- --
Expense ratio 33.1% -- -- -- --
---------------------------------------------------------------------
Combined ratio(8) 109.6% -- -- -- --
=====================================================================
</TABLE>
(9) The GAAP operating expense ratios exclude $7.9 million, $9.0 million, $9.3
million, $8.2 million and $5.3 million for the years ended December 31,
1999, 1998, 1997, 1996 and 1995, respectively, of PMA Management Corp.
direct expenses related to service revenues, which are not included in
premiums earned. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(10) The results of operations of Caliber One for the years ended 1998 and 1997
are not material to the underwriting ratios of the Company; accordingly,
the ratios for Caliber One have not been presented for those years.
27
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following is a discussion of the financial condition of PMA Capital
Corporation and its consolidated subsidiaries ("PMA Capital" or the "Company")
as of December 31, 1999, compared with December 31, 1998, and the results of
operations of PMA Capital for 1999 and 1998, compared with the immediately
preceding year. The balance sheet information presented below is as of December
31 for each respective year. The statement of operations information is for the
year 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.
CONSOLIDATED RESULTS
The major components of operating revenues, pre-tax operating income and net
income are as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $ 563,510 $ 474,761 $ 381,282
==============================================
Net premiums earned $ 540,087 $ 466,715 $ 375,951
Net investment income 110,057 120,125 133,392
Other revenues 12,718 14,896 13,617
----------------------------------------------
Total operating revenues $ 662,862 $ 601,736 $ 522,960
==============================================
Components of pre-tax operating income(1) and net income:
PMA Re $ 50,319 $ 46,408 $ 45,957
The PMA Insurance Group:
Excluding Run-off Operations 18,389 10,018 (3,607)
Run-off Operations (189) 452 (73)
----------------------------------------------
Total 18,200 10,470 (3,680)
Caliber One 83 (1,606) --
Corporate and Other (20,765) (21,948) (25,722)
----------------------------------------------
Pre-tax operating income 47,837 33,324 16,555
Net realized investment gains (losses) (7,745) 21,745 8,598
----------------------------------------------
Income before income taxes, extraordinary loss and cumulative
effect of accounting change 40,092 55,069 25,153
Income tax expense 11,739 10,335 5,400
----------------------------------------------
Income before extraordinary loss and cumulative
effect of accounting change 28,353 44,734 19,753
Extraordinary loss, net of tax -- -- (4,734)
Cumulative effect of accounting change, net of tax (2,759) -- --
----------------------------------------------
Net income $ 25,594 $ 44,734 $ 15,019
==============================================
<FN>
(1)Pre-tax operating income is defined as income from continuing operations
before income taxes, excluding net realized investment gains (losses). The
Company excludes net realized investment gains (losses) from the profit and
loss 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 holding company level, and such decisions result in net
realized gains (losses) that do not relate to the operations of the
individual segments.
</FN>
</TABLE>
28
<PAGE>
In 1999, pre-tax operating income and after-tax operating income were $47.8
million and $33.4 million, respectively, compared to $33.3 million and $30.6
million in 1998. The increase in pre-tax and after-tax operating income was
primarily due to higher pre-tax operating income for The PMA Insurance Group and
PMA Re and lower interest expense. The increase in after-tax operating income in
1999 was partially offset by a higher effective tax rate in 1999.
In 1998, pre-tax operating income and after-tax operating income were $33.3
million and $30.6 million, respectively, compared to $16.6 million and $14.2
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 $9.2 million in charges related to The PMA
Insurance Group's restructuring and cost reduction initiatives in 1997.
The Company currently expects operating income to continue to improve in 2000
primarily reflecting higher pre-tax operating income 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 43.
Net income was $25.6 million, $44.7 million and $15.0 million in 1999, 1998
and 1997, respectively. Net income for 1999 includes an after-tax charge of $2.8
million for the effect of adopting Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." See "Recent
Accounting Pronouncements" for additional information. Net income for 1997
includes an extraordinary loss of $4.7 million, net of tax, reflecting the early
extinguishment of debt in March 1997 when the Company refinanced substantially
all of its outstanding credit agreements not already maturing in 1997 with a new
revolving credit facility (the "Credit Facility").
Net income also includes after-tax gains and losses on the sale of
investments. The timing and recognition of such gains and losses are
unpredictable and are not indicative of future operating performance. After-tax
net realized investment losses were $5.0 million for 1999, compared to after-tax
net realized investment gains of $14.1 million in 1998 and $5.6 million for
1997. The realized losses for 1999 reflect sales of investments in a rising
interest rate environment in order to invest in yield enhancing investment
opportunities. This is in contrast to the realized gains in 1998 and 1997, which
reflect sales of investments in a declining interest rate environment. Net
realized investment gains for 1998 also include a $2.4 million pre-tax loss
related to the sale of PMA Insurance, Cayman Ltd. ("PMA Cayman"). See Note 18 to
the Company's Consolidated Financial Statements for additional information.
In connection with the adoption of SFAS No. 131 in 1998, the Company
identified four reportable segments: (i) PMA Re, which provides property and
casualty reinsurance products and services; (ii) The PMA Insurance Group, which
writes managed care workers' compensation, integrated disability and to a lesser
extent, 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, as well as the results of certain of the Company's real
estate properties. 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.
PMA RE
Summarized financial results of PMA Re are as follows:
(dollar amounts
in thousands) 1999 1998 1997
- --------------------------------------------------------
Net premiums written $278,998 $234,010 $177,934
==============================
Net premiums earned $293,862 $223,559 $163,603
Net investment income 57,686 54,734 52,270
------------------------------
Operating revenues 351,548 278,293 215,873
------------------------------
Losses and loss adjustment
expenses incurred 206,891 154,062 113,931
Acquisition and
operating expenses 94,338 77,823 55,985
------------------------------
Total losses and expenses 301,229 231,885 169,916
------------------------------
Pre-tax operating income $50,319 $46,408 $45,957
==============================
GAAP loss and LAE ratio 70.4% 68.9% 69.6%
GAAP combined ratio 102.5% 103.7% 103.8%
------------------------------
PMA Re's pre-tax operating income increased to $50.3 million in 1999, compared
to $46.4 million in 1998. The increase in operating results reflects an increase
in net investment income, and to a lesser extent, slower growth in operating
expenses relative to premium growth, partially offset by increased losses and
loss adjustment expenses ("LAE"). The increase in PMA Re's pre-tax operating
income to $46.4 million in 1998, compared to $46.0 million in 1997, was
primarily due to higher investment income, as well as higher premium volume,
which was partially offset by increased losses and LAE and acquisition costs.
29
<PAGE>
Premium Revenues
PMA Re's gross premiums written by business unit and major category of business
are as follows:
<TABLE>
<CAPTION>
(dollar amounts 1999 1998
in thousands) 1999 1998 1997 Change % Change %
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Business Unit:
Traditional - Treaty $ 180,475 $ 190,749 $ 181,715 (5)% 5%
Specialty - Treaty 88,433 79,711 37,838 11% 111%
Finite Risk and Financial Products 69,989 7,300 -- 859% N/A
Facultative 4,710 6,576 5,768 (28)% 14%
----------------------------------------------------------------
Total $ 343,607 $ 284,336 $ 225,321 21% 26%
================================================================
Major Category of Business:
Casualty lines $ 246,660 $ 206,317 $ 151,901 20% 36%
Property lines 95,183 76,975 72,625 24% 6%
Other lines 1,764 1,044 795 69% 31%
----------------------------------------------------------------
Total $ 343,607 $ 284,336 $ 225,321 21% 26%
================================================================
</TABLE>
NA - Not applicable
PMA Re's net premiums written by business unit and major category of business
are as follows:
<TABLE>
<CAPTION>
1999 1998
(dollar amounts in thousands) 1999 1998 1997 Change % Change %
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Business Unit:
Traditional - Treaty $ 137,686 $ 159,686 $ 141,573 (14)% 13%
Specialty - Treaty 68,818 64,625 33,846 6% 91%
Finite Risk and Financial Products 69,551 6,971 -- 898% N/A
Facultative 2,943 2,728 2,515 8% 8%
----------------------------------------------------------------
Total $ 278,998 $ 234,010 $ 177,934 19% 32%
================================================================
Major Category of Business:
Casualty lines $ 199,113 $ 168,452 $ 118,889 18% 42%
Property lines 78,148 64,497 58,257 21% 11%
Other lines 1,737 1,061 788 64% 35%
----------------------------------------------------------------
Total $ 278,998 $ 234,010 $ 177,934 19% 32%
================================================================
</TABLE>
NA - Not applicable
In 1999, net premiums written increased 19%, primarily reflecting the successful
expansion of finite risk and financial product offerings, which resulted in
$49.2 million of casualty writings and $20.1 million of property writings. In
1998, net premiums written increased 32%, primarily reflecting the expansion of
relationships with PMA Re's existing clients, which accounted for approximately
$33 million of the growth in casualty premiums in 1998, and contracts with new
clients, which accounted for approximately $17 million of the growth in casualty
premiums in 1998. 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 1998. Partially offsetting these factors were the
effects of highly competitive conditions in the U.S. reinsurance market,
particularly in
30
<PAGE>
the traditional market during 1999, which has caused PMA Re to
non-renew certain accounts largely due to inadequate rates and/or other
underwriting issues.
Net premiums earned increased 31% in 1999, compared to 1998, and 37% in 1998,
compared to 1997. 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. In 1999, PMA Re's earned premiums
include approximately $32 million related to a revision in the methodology used
in estimating unearned premiums on in-force contracts.
Losses and Expenses
The components of PMA Re's GAAP combined ratios are as follows:
1999 1998 1997
- --------------------------------------------------------
Loss and LAE ratio 70.4% 68.9% 69.6%
----------------------------
Expense ratio:
Acquisition expenses 27.5% 28.9% 27.6%
Operating expenses 4.6% 5.9% 6.6%
----------------------------
Total expense ratio 32.1% 34.8% 34.2%
----------------------------
GAAP combined ratio(1) 102.5% 103.7% 103.8%
============================
(1)The combined ratio computed on a GAAP basis is equal to losses and LAE, plus
acquisition expenses and operating expenses, all divided by net premiums
earned.
In 1999, PMA Re's combined ratio decreased slightly to 102.5%, compared with a
combined ratio of 103.7% in 1998 and 103.8% in 1997. Since 1997, the 1.3 point
decline in the combined ratio is primarily attributable to a 2.0 point
improvement in the operating expense ratio.
The operating expense ratio decreased 1.3 points in 1999, compared to 1998
and 0.7 points in 1998, compared to 1997. These improvements in the operating
expense ratio primarily reflect faster growth in earned premiums than in
operating expenses.
Net Investment Income
Net investment income was $57.7 million, $54.7 million and $52.3 million in
1999, 1998 and 1997, respectively. These improvements primarily reflect an
increase in investment yield and, to a lesser extent, higher average invested
assets. During 1999 and 1998, PMA Re shifted some of its investment holdings out
of U.S. Government securities and into corporate and asset-backed securities,
which generally yield higher levels of investment income. At amortized cost, PMA
Re's cash and invested assets increased approximately $35 million, or 4%, and
approximately $55 million, or 6%, during 1999 and 1998, respectively.
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, PMA Insurance SPC, Cayman 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. The Run-off Operations have been established 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.
31
<PAGE>
Summarized financial results of The PMA Insurance Group are as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
The PMA Insurance Group
Net premiums written $ 233,713 $ 234,837 $ 203,348
===========================================
Net premiums earned $ 221,934 $ 241,928 $ 212,348
Net investment income 50,282 64,580 81,927
Other revenues 10,086 9,722 10,482
-------------------------------------------
Operating revenues 282,302 316,230 304,757
-------------------------------------------
Losses and LAE 166,674 197,525 193,530
Acquisition and operating
expenses 78,287 90,499 100,191
Dividends to policyholders 19,141 17,736 14,716
-------------------------------------------
Total losses and expenses 264,102 305,760 308,437
-------------------------------------------
Pre-tax operating income (loss) $ 18,200 $ 10,470 $ (3,680)
===========================================
The PMA Insurance Group
Excluding Run-off Operations
Net premiums written $ 233,713 $ 244,237 $ 254,970
===========================================
Net premiums earned $ 221,934 $ 251,328 $ 263,970
Net investment income 45,870 50,419 53,796
Other revenues 10,086 9,722 10,482
-------------------------------------------
Operating revenues 277,890 311,469 328,248
-------------------------------------------
Losses and LAE 163,375 196,018 220,990
Acquisition and operating expenses 76,985 87,697 96,149
Dividends to policyholders 19,141 17,736 14,716
-------------------------------------------
Total losses and expenses 259,501 301,451 331,855
-------------------------------------------
Pre-tax operating income (loss) $ 18,389 $ 10,018 $ (3,607)
===========================================
Run-off Operations
Net premiums written $ -- $ (9,400) $ (51,622)
===========================================
Net premiums earned $ -- $ (9,400) $ (51,622)
Net investment income 4,412 14,161 28,131
-------------------------------------------
Operating revenues 4,412 4,761 (23,491)
-------------------------------------------
Losses and LAE 3,299 1,507 (27,460)
Acquisition and operating expenses 1,302 2,802 4,042
-------------------------------------------
Total losses and expenses 4,601 4,309 (23,418)
-------------------------------------------
Pre-tax operating income (loss) $ (189) $ 452 $ (73)
===========================================
</TABLE>
Pre-tax operating income for The PMA Insurance Group increased in 1999 to
$18.2 million, compared with pre-tax operating income of $10.5 million in 1998,
and a pre-tax operating loss of $3.7 million in 1997. The increases in operating
income since 1997 were primarily due to improved loss experience and lower
operating expenses resulting from ongoing cost reduction initiatives. In
addition, the improvements in operating income reflect a reduction in the level
of net exposures underwritten due to disciplined and focused under-writing as
well as an increase in the use of reinsurance.
The PMA Insurance Group Excluding Run-off Operations
- ----------------------------------------------------
Premiums
(dollar amounts in thousands) 1999 1998 1997
- -----------------------------------------------------------------------
Workers' compensation:
Direct premiums written $203,571 $183,913 $181,556
Premiums assumed 4,588 4,786 4,112
Premiums ceded 29,063 1,666 10,367
--------------------------------------
Net premiums written 179,096 187,033 175,301
--------------------------------------
Commercial Lines:
Direct premiums written 85,500 93,628 122,003
Premiums assumed 1,782 2,368 2,894
Premiums ceded 32,665 38,792 45,228
--------------------------------------
Net premiums written 54,617 57,204 79,669
--------------------------------------
Total:
Direct premiums written 289,071 277,541 303,559
Premiums assumed 6,370 7,154 7,006
Premiums ceded 61,728 40,458 55,595
--------------------------------------
Net premiums written $233,713 $244,237 $254,970
======================================
Direct workers' compensation premiums written increased in the three-year period
ended December 31, 1999, due to an increase in the volume of risks underwritten.
However, manual rate reductions in The PMA Insurance Group's principal marketing
territories have constrained the growth in direct workers' compensation premiums
written in 1998 and 1997, and to a much lesser extent in 1999. In addition,
continued intense price competition and selected non-renewal of non-profitable
accounts tempered increases in direct premiums written.
In recent years, the PMA Insurance Group increased its writings of workers'
compensation premiums through focused marketing efforts and has continued to
balance its workers' compensation portfolio by increasing writings in relatively
lower hazard classes of business and reducing writings in higher hazard classes
of business.
32
<PAGE>
For example, lower hazard classes of business such as healthcare, educational
institutions and retail represented 33%, 26% and 21% of total direct workers'
compensation premiums written in 1999, 1998 and 1997, respectively, whereas
higher hazard classes of business, such as construction, represented 15%, 21%
and 26% of total direct workers' compensation premiums written in 1999, 1998 and
1997, respectively.
The enactment of workers' compensation benefit reform laws in The PMA
Insurance Group's principal marketing territories has caused manual rates for
workers' compensation to decline in the past three years. These benefit reform
laws also have had a favorable impact on losses and LAE for business written on
policies subject to such reform laws. Because manual rate reductions directly
affect the prices that The PMA Insurance Group can charge for its rate sensitive
workers' compensation products, which include fixed cost and dividend policies,
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. In 1999, 1998
and 1997, manual rate levels have declined on average approximately 3%, 13% and
25%, respectively. As a result, the impact of decreasing manual rate levels has
declined over the last three years.
During 1999, direct writings of commercial lines of business other than
workers' compensation, such as commercial auto, general liability, umbrella,
multi-peril and commercial property lines (collectively, "Commercial Lines")
decreased $8.1 million, compared to 1998. During 1998, direct writings of
Commercial Lines decreased $28.4 million, compared to 1997. These decreases are
primarily due to planned reductions in such lines and continued competitive
conditions. Rather than lower prices to what it believes are unacceptable
levels, The PMA Insurance Group has chosen not to renew some of its business in
the Commercial Lines.
The increase in premiums ceded for 1999, compared to 1998, primarily reflects
a new reinsurance treaty that reduced the net retention level on workers'
compensation exposures from $1.5 million to $150,000 per occurrence, beginning
in 1999. Partially offsetting such increase in premiums ceded was a decrease of
$6.1 million in ceded premiums for Commercial Lines, which is primarily due to
the reduction in direct Commercial Lines business written and negotiated rate
reductions for various treaties reinsuring certain Commercial Lines business.
Premiums ceded for 1998 decreased $15.1 million, compared to 1997, reflecting
lower ceded premiums for workers' compensation business of $8.7 million due
primarily to the effect of a $9.4 million profit commission between the Pooled
Companies and the Run-off Operations. In addition, ceded premiums on Commercial
Lines for 1998 decreased $6.4 million, compared to 1997, due to the reduction in
direct Commercial Lines business written.
Net premiums earned decreased 12% in 1999, compared to 1998, and 5% in 1998,
compared to 1997. 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 adjusted for the customary lag related to the
timing of premium writings within the year. Direct premiums are earned
principally on a pro rata basis over the terms of the policies.
Losses and Expenses
The components of The PMA Insurance Group's GAAP combined ratios, excluding
Run-off Operations are as follows:
1999 1998 1997
- -------------------------------------------------------------
Loss and LAE ratio 73.6% 78.0% 83.7%
---------------------------
Expense ratio:
Acquisition expenses 17.7% 18.0% 18.3%
Operating expenses(1) (2) 13.4% 13.3% 14.6%
---------------------------
Total expense ratio 31.1% 31.3% 32.9%
Policyholders' dividend ratio 8.6% 7.1% 5.6%
---------------------------
GAAP combined
ratio- (1) (2) (3) (4) 113.3% 116.4% 122.2%
===========================
(1)The expense ratio and the combined ratio for 1999 exclude the impact of the
cumulative effect of accounting change of $4.3 million ($2.8 million
after-tax) for insurance-related assessments.
(2)The expense ratio and the combined ratio exclude $7.9 million, $9.0 million
and $9.3 million in 1999, 1998 and 1997, respectively, for direct expenses
related to service revenues, which are not included in premiums earned.
(3)The combined ratio computed on a GAAP basis is equal to losses and LAE, plus
acquisition expenses, operating expenses and policyholders' dividends, all
divided by net premiums earned.
(4)The GAAP combined ratios for The PMA Insurance Group including the Run-off
Operations were 115.4%, 122.6% and 140.8% for 1999, 1998 and 1997,
respectively.
33
<PAGE>
The components of the loss and LAE ratio are as follows:
1999 1998 1997
- -------------------------------------------------------------------------
Current accident year - undiscounted(1) 76.8% 80.0% 81.0%
Prior year reserve development(2) (4.2)% (1.8)% (0.4)%
Net discount accretion 1.0% (0.2)% 3.1%
-----------------------------
Loss and LAE ratio 73.6% 78.0% 83.7%
=============================
(1)Returned premiums of $5.7 million, $3.0 million and $0 associated with older
years reduced reported premiums in 1999, 1998 and 1997, respectively. The
current accident year undiscounted loss and LAE ratios excluding such
adjustments were 74.8%, 79.0% and 81.0% in 1999, 1998 and 1997, respectively.
(2)The prior year reserve development excluding the aforementioned premium
adjustments and amounts returned to the policyholders for rent-a-captive
business were 0.4%, 0% and 0.3% in 1999, 1998 and 1997, respectively.
The loss and LAE ratio improved 4.4 points in 1999, compared to 1998, primarily
due to an improved current accident year loss and LAE ratio, and more favorable
prior accident year reserve development, partially offset by a decline in the
level of reserve discount. The loss and LAE ratio improved 5.7 points for 1998,
compared to 1997, primarily due to a more favorable impact on the loss and LAE
ratio from the lower level of reserve discount and more favorable prior accident
year reserve development.
In 1999, The PMA Insurance Group experienced $9.2 million of favorable
development of prior accident year reserves, excluding the accretion of discount
("prior year development"). The favorable prior year development primarily
reflects better than expected loss experience from loss-sensitive and
rent-a-captive workers' compensation business. Premium adjustments for
loss-sensitive business and policyholders' dividends for rent-a-captive business
have substantially offset this favorable development. Rent-a-captives are used
by customers as an alternative method to manage their loss exposure without
establishing and capitalizing their own captive insurance company. In 1998,
favorable prior year development was $4.6 million, comprised of $6.9 million of
favorable prior year development for workers' compensation, partially offset by
$2.3 million of adverse prior year development in Commercial Lines. In 1997,
favorable prior year development was $1.0 million, reflecting favorable prior
year development of $6.0 million on workers' compensation, partially offset by
reserve strengthening of $5.0 million in commercial multi-peril business (see
Note 4 to the Company's Consolidated Financial Statements for additional
information).
The loss and LAE ratio is negatively impacted by accretion of discount on
prior year reserves and favorably impacted by setting up discount for current
year reserves. The net of these amounts is referred to as net discount
accretion. Accretion of prior year discounted reserves exceeded the setting up
of discount for 1999 and 1997, whereas the setting up of discount exceeded the
accretion of prior year discounted reserves in 1998. Net discount accretion in
1999 reflects a reduction in the amount of discount recorded on current year's
reserves as a result of higher ceded loss reserves due to the new reinsurance
treaty for workers' compensation.
In 1999, 1998 and 1997, the impact on the loss and LAE ratio from the effects
of discounting loss reserves has generally 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 payments. The
PMA Insurance Group paid approximately $38 million, $65 million and $113 million
in 1999, 1998 and 1997, respectively, to commute workers' compensation claims.
The commutation programs resulted in payments that were less than the
corresponding carried reserves. Savings associated with these claims were
consistent with management's expectations. Because 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.
Measures to control medical costs and LAE on workers' compensation claims
have also 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 late in 1997. This affiliation has
enabled The PMA Insurance Group to control its cost of providing medical
benefits to injured workers. In addition to this improvement in loss costs, LAE
costs 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.
34
<PAGE>
The loss and LAE ratio for Commercial Lines has improved due to stricter
underwriting standards and measures to control LAE. As mentioned above, The PMA
Insurance Group has chosen not to renew some of its Commercial Lines business
rather than lower prices to what it believes are unacceptable levels. In
addition, LAE costs have been reduced due to improved efficiency in claims
resolution and use of in-house legal services.
In 1999, the expense ratio decreased by 0.2 points, compared to 1998, due to
a decrease in the acquisition expense ratio of 0.3 points, partially offset by
an increase in the operating expense ratio of 0.1 points. The decrease in the
acquisition expense ratio for 1999 is a result of higher ceded commissions
received as a result of the new reinsurance treaty in 1999 and a reduction in
certain state assessments, compared to 1998. The 1998 operating expense ratio
declined 1.6 points, compared to 1997, due to decreases of 0.3 points in the
acquisition expense ratio and 1.3 points in the operating expense ratio,
compared to 1997. The 1998 acquisition expense ratio decreased slightly,
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 1998 operating expense ratio decreased 1.3 points, compared to 1997, due to
continued cost cutting measures.
The policyholders' dividend ratio was 8.6%, 7.1% and 5.6% in 1999, 1998 and
1997, respectively. Under policies that are subject to dividend plans, the
customer may receive a dividend based upon loss experience during the policy
period. The increases in the policyholders' dividend ratios are primarily due to
improved loss experience related to rent-a-captive business and selling more
business under dividend plans, which resulted in higher dividend payout to
policyholders.
Net Investment Income
Net investment income was $4.5 million lower in 1999, compared to 1998, and $3.4
million lower in 1998, compared to 1997. The decrease in net investment income
over the three years is primarily due to a lower asset base resulting from the
paydown of loss reserves from prior accident years. The paydown of loss reserves
in 1998 reflects payments under the commutation programs. The decrease was
partially offset by higher investment yields associated with a shift in invested
assets towards higher yielding invested assets, such as asset-backed securities.
Run-off Operations
- ------------------
Net investment income for the Run-off Operations decreased $9.7 million in 1999,
compared to 1998, primarily due to the sale of PMA Cayman in mid-1998, which
decreased invested assets. To a lesser extent, the decline in net investment
income also reflects lower invested assets due to the paydown of losses by the
remaining run-off entities. Net investment income for 1998 decreased $14.0
million, compared with 1997, due to the sale of PMA Cayman in mid-1998.
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, 1999, the Company had recorded $240.8 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 18 to the
Company's Consolidated Financial Statements for additional discussion).
Losses and LAE of the Run-off Operations consist of discount accretion on
established loss reserves within the Run-off Operations. In 1998, favorable loss
development was $10.3 million, and included $9.4 million that was returned to
the Pooled Companies as a profit commission. Accordingly, Run-off Operations
recorded a $9.4 million premium adjustment in 1998. In 1997, favorable loss
development was $51.8 million, which included $37.0 million related to
retrospectively rated policies. Losses and LAE of the Run-off Operations for
1997 were favorably impacted 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.
35
<PAGE>
CALIBER ONE
Summarized financial results of Caliber One are as follows:
(dollar amounts in thousands) 1999 1998
- -------------------------------------------------------------
Net premiums written $51,237 $ 6,436
==================
Net premiums earned $24,729 $ 1,750
Net investment income 2,459 1,453
------------------
Operating revenues 27,188 3,203
------------------
Losses and LAE 18,908 1,402
Acquisition and operating expenses 8,197 3,407
------------------
Total losses and expenses 27,105 4,809
------------------
Pre-tax operating income (loss) $ 83 $(1,606)
==================
Caliber One recorded pre-tax operating income of $83,000 in 1999, compared to a
pre-tax operating loss of $1.6 million in 1998. The improvement in operating
results reflects the significant growth in premiums and stabilization of Caliber
One's expenses relative to their premiums, along with a commensurate increase in
net investment income.
Gross and net premiums written for Caliber One for 1999 were $93.4 million
and $51.2 million, respectively, compared to $11.8 million and $6.4 million,
respectively, for 1998. Earned premiums also increased significantly in 1999,
compared to 1998. The growth in premiums written and earned in 1999, compared to
the prior year, reflects Caliber One's rising market acceptance and penetration,
and expanded product offerings and distribution network.
The increase in losses and LAE, and acquisition expenses, comparing 1999 to
1998, results from the increase in business written from year to year. Operating
expenses increased in 1999, compared to 1998, primarily due to the increasing
employee base and the expected, continued investment into the infrastructure of
Caliber One. Caliber One's combined ratio in 1999 was 109.6%, consisting of a
loss and LAE ratio of 76.5% and an expense ratio of 33.1%.
Net investment income increased 69.2% to $2.5 million in 1999, compared to
$1.5 million in 1998. This increase primarily reflects a larger average invested
asset base, due primarily to premium collections in excess of paid losses and
expenses in 1999.
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. 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.
LOSS RESERVES AND REINSURANCE
The Company's consolidated unpaid losses and LAE, net of reinsurance, at
December 31, 1999 and 1998 were $1,284.4 million and $1,347.2 million, net of
discount of $180.4 million and $194.6 million, respectively. 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 that 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 and uncertainty. As part of the process for
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, 1999 and 1998 were $527.9 million and $628.5
million, net of discount of $173.1 million and $194.3 million, respectively. The
approximate discount rate used was 5% at December 31, 1999 and 1998.
Management believes that its unpaid losses and LAE are fairly stated at
December 31, 1999. 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, regulatory trends on benefit
levels for both medical and indemnity payments, and economic conditions, the
estimates are revised accordingly. If the Company's ultimate net losses prove to
differ substantially from the amounts
36
<PAGE>
recorded at December 31, 1999, the related adjustments could have a material
adverse effect on the Company's financial condition, results of operations and
liquidity.
At December 31, 1999, 1998 and 1997, the Company's gross reserves for
asbestos-related losses were $61.3 million, $67.9 million and $76.7 million,
respectively ($38.9 million, $43.6 million and $48.6 million, net of
reinsurance, respectively). At December 31, 1999, 1998 and 1997, the Company's
gross reserves for environmental-related losses were $41.4 million, $47.0
million and $45.1 million, respectively ($24.5 million, $29.4 million and $31.7
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.
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 and proof of coverage, 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 1999
Form 10-K and Note 4 to the Company's Consolidated Financial Statements for
additional discussion).
At December 31, 1999, 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 $ 750,000 $4.3 million
Casualty lines $1.5 million $6.0 million
The PMA
Insurance Group
Per Occurrence:
Workers' compensation $ 150,000 $103.5 million
Per Risk:
Property lines $ 500,000(2) $19.5 million
Auto physical damage $ 500,000 $2.0 million
Other casualty lines $ 175,000(3) $4.8 million
Caliber One
Per Occurrence
and Per Risk:
Property lines $ 500,000 $4.5 million
Casualty lines $ 500,000 $5.5 million
------------------------------
(1) Represents the amount of loss protection above the Company's level of loss
retention.
(2) This coverage also provides protection of $48.5 million per occurrence over
its combined net retention of $500,000.
(3) This coverage also provides protection of $49.8 million per occurrence over
its combined net retention of $175,000.
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. The PMA Insurance Group maintains catastrophe
reinsurance protection of $27.7 million in excess of $850,000 and Caliber One
maintains catastrophe reinsurance protection of $19.3 million in excess of
$750,000. As a result, the Company's loss and LAE ratios have not been
significantly impacted by catastrophes in 1999, 1998 or 1997. 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
37
<PAGE>
reinsurance and/or retrocessional protection and may have a material adverse
impact on the Company's financial condition, results of operations and
liquidity.
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. The timing and collectibility of reinsurance
recoverables have not had, and are not expected to have, a material adverse
effect on the Company's liquidity (see Note 5 to the Company's Consolidated
Financial Statements for additional discussion).
CORPORATE AND OTHER
The Corporate and Other segment includes unallocated investment income,
expenses, including debt service, as well as the results of certain of the
Company's real estate properties. For 1999, Corporate and Other recorded a
pre-tax operating loss of $20.8 million, compared to $21.9 million in 1998. The
decrease in pre-tax operating loss was due to lower interest expense of $2.8
million for 1999, compared to 1998, reflecting a $40.0 million paydown in
outstanding debt in the fourth quarter of 1998 (see "Liquidity and Capital
Resources" below for further discussion), partially offset by higher net
revenues from non-core real estate properties in 1998.
In 1998, Corporate and Other recorded a pre-tax operating loss of $21.9
million, compared to $25.7 million in 1997. The decrease in the operating loss
in 1998, compared to 1997, was primarily due to higher net revenues 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.
NET REALIZED INVESTMENT GAINS/LOSSES
The Company recorded net pre-tax realized investment losses of $7.7 million in
1999, compared with net pre-tax realized investment gains of $21.7 million in
1998 and $8.6 million in 1997. 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.
During the three-year period ended December 31, 1999, the Company realized
gains and losses from investment sales related to the following: (i)
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 (ii) transactions based upon an assessment of the interest rate
environment.
The realized losses for 1999 primarily reflect sales of investments in a
rising interest rate environment in order to invest in yield enhancing
investment opportunities. This is in contrast to the realized gains in 1998 and
1997, which reflect sales of investments in a declining interest rate
environment. In 1999 and 1998, the Company diversified its investment portfolio
by increasing its holdings of corporate bonds, 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.
LIQUIDITY AND CAPITAL RESOURCES
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, cash
is needed 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, 1999 and 1998, the Company had $163.0 million outstanding
under its existing Credit Facility. Throughout much of 1998, the Company had
$203.0 million outstanding under the Credit Facility. In late 1998, the Company
made an unscheduled debt repayment of $40.0 million to reduce the outstanding
debt to $163.0 million. At December 31, 1999, $24.5 million is available under
the Credit Facility. 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.
The final expiration of the Credit Facility is December 31, 2002, and the
Credit Facility matures in an installment of $38.0 million in 2000 and
installments of $62.5 million in 2001 and 2002.
38
<PAGE>
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, 1999, the Company had $45.9 million outstanding in letters of credit under
the Letter of Credit Facility.
The Company's domestic insurance subsidiaries' ability to pay dividends to
the holding company is limited by the insurance laws and regulations of
Pennsylvania and Delaware (the laws of which are substantially similar with
respect to dividends). Under Pennsylvania laws and regulations, dividends may
not be paid without prior approval of the Pennsylvania Insurance Commissioner
(the "Commissioner") in excess of the greater of (i) 10% of policyholders'
surplus as of the end of the preceding year or (ii) SAP net income for the
preceding year, but in no event to exceed SAP unassigned surplus. Under this
standard, the Pooled Companies and PMA Reinsurance Corporation can pay an
aggregate of approximately $55 million of dividends without the prior approval
of the Commissioner during 2000. Caliber One Indemnity Company, a
Delaware-domiciled company, is directly owned by PMA Reinsurance Corporation
and, as such, its dividends may not be paid directly to PMA Capital. As stated
above, Delaware's insurance laws as they apply to restricting the payment of
dividends are substantially similar to Pennsylvania's insurance laws. Under
Delaware insurance laws, Caliber One Indemnity Company can pay $3.3 million in
dividends during 2000. Dividends received from subsidiaries were $43.2 million,
$35.5 million and $22.5 million in 1999, 1998 and 1997, respectively.
Net tax payments received from subsidiaries were $21.8 million, $29.7 million
and $20.0 million in 1999, 1998 and 1997, respectively. In December 1998, the
Company received a refund from the Internal Revenue Service ("IRS") of
approximately $15 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 $10 million in 2000. The Company paid dividends
to shareholders of $7.8 million, $7.9 million and $8.0 million in 1999, 1998 and
1997, 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 $7.1 million, $480,000 and $11.0 million in 1999, 1998 and
1997, respectively.
In 1998, the Company's Board of Directors authorized a plan to repurchase
shares of Common stock and Class A Common stock in an amount not to exceed $25.0
million. In 1999, an additional $50.0 million of share repurchase authority was
approved by the Company's Board of Directors. During 1999, the Company
repurchased a total of approximately 1.5 million Class A shares at a total cost
of $30.2 million (average per share price was $19.81). During 1998, the Company
repurchased a total of approximately 1.0 million shares at a total cost of $18.9
million (average per share price was $18.92). Since the inception of its share
repurchase program in February 1998, PMA Capital has repurchased a total of
approximately 2.5 million Class A shares at a total cost of $49.1 million
(average per share price was $19.46), leaving $25.9 million of share repurchase
authorization. Decisions regarding share repurchases are subject to the costs
and benefits associated with alternative uses of capital and prevailing market
conditions.
The Company's total assets decreased to $3,245.1 million at December 31, 1999
from $3,460.7 million at December 31, 1998. Total investments decreased $407.4
million to $1,918.0 million at December 31, 1999. The decrease in investments is
primarily attributable to declines in market values of $118.2 million due to
rising interest rates as well as a decrease of $178.8 million in securities on
loan under the Company's securities lending program.
Management believes that the Company's sources of funds will provide
sufficient liquidity to meet short-term and long-term obligations. In addition,
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.
39
<PAGE>
INVESTMENTS
The Company's investment objectives are to (i) seek competitive after-tax income
and total return, (ii) maintain medium to high investment grade asset quality
and high 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 of loss reserve payouts. 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 that are not dollar
denominated as of December 31, 1999.
The Company's investments at fair value were as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------
(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 $ 419.4 22% $ 827.2 36%
Obligations of states, political
subdivisions and foreign governments 30.6 1% 24.9 1%
Corporate debt securities 555.1 29% 420.3 18%
Mortgage-backed and other asset-backed securities 574.5 30% 555.0 24%
Equity securities 35.0 2% -- --
Short-term investments 303.4 16% 498.0 21%
------------------------------------------------
Total $1,918.0 100% $2,325.4 100%
================================================
</TABLE>
Mortgage-backed and other asset-backed securities include collateralized
mortgage obligations ("CMOs") of $168.2 million and $100.0 million carried at
fair value as of December 31, 1999 and 1998, respectively. CMO holdings are
concentrated in securities with limited prepayment, extension and default risk,
such as planned amortization class bonds.
The composition of the Company's fixed maturities at fair value, excluding
short-term investments, by rating was as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------
(dollar amounts in millions) Fair Value Percent Fair Value Percent
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and AAA $1,018.1 64% $1,355.2 74%
AA 86.7 5% 100.5 5%
A 325.9 21% 266.4 15%
BBB 124.0 8% 105.3 6%
BB 21.9 1% -- --
B 3.0 1% -- --
--------------------------------------------------
Total $1,579.6 100% $1,827.4 100%
==================================================
</TABLE>
Ratings as assigned by Standard and Poor's Corp. Such ratings are generally
assigned at the time of the issuance of the securities, subject to revision on
the basis of ongoing evaluations.
40
<PAGE>
The following table reflects the Company's investment results:
(dollar amounts in millions) 1999 1998 1997
- --------------------------------------------------------------------------
Average invested assets(1) $ 1,818.0 $ 2,038.0 $ 2,207.0
Net investment income(2) $ 108.7 $ 119.1 $ 132.8
Net effective yield(3) 5.98% 5.84% 6.02%
---------------------------------------
(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, 1999, the duration of the Company's investments that support
the insurance reserves was approximately 4 years, which generally approximates
the duration of the insurance reserves.
See "Business - Investments" in the Company's 1999 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 information
about financial instruments.
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 78% of total
liabilities and reinsurance receivables on unpaid losses represent 20% of total
assets).
The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments as of December 31, 1999, 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:
o 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.
o If interest rates had increased by 100 basis points, there would have been a
net decrease of approximately $75 million 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 reinterpretations of insurance contracts long after
the policies were written in an effort 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 and 12 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,
required reprogramming or replacement to enable them to perform correctly date
operations involving year 2000 or later ("Year 2000 Issue").
41
<PAGE>
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 consisted 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. Prior to the end of 1999, the Company remediated
and tested its IT systems that the Company determined were critical to
maintaining operations or the failure of which would result in significant costs
or disruption of operations ("mission critical systems") and its non-IT systems.
As of February 29, 2000, the Company has not experienced any material
disruptions to its business due to Year 2000 Issues with its mission critical
systems or non-IT systems. The cost of the Company's Year 2000 readiness work
through December 31, 1999 was approximately $5.4 million.
As of February 29, 2000, the Company was not aware of any Year 2000 problems
with third parties with which the Company has a direct and material
relationship.
It is possible that the Company's computerized systems could be affected in
the future by the Year 2000 Issue. The Company has numerous computerized
interfaces with third parties that are possibly vulnerable to failure if those
third parties have not adequately addressed their Year 2000 Issues. Systems
failures resulting from these issues could cause significant disruptions to the
Company's operations. As of February 29, 2000, there do not appear to have been
any such failures.
Although there have been no apparent Year 2000 problems related to 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 has attempted, whenever
possible, to avoid or otherwise limit its potential Year 2000 exposure through
its underwriting process. In the event that claims for Year 2000 Issues are
asserted against the Company, it is not possible to predict whether or to what
extent coverage could ultimately be found to exist by courts in various
jurisdictions, or, if found, the effect thereof on the Company. In addition,
even if such coverage were found not to exist, which cannot be predicted, the
costs of litigation could be material. In the absence of any claims experience
at this time, such losses and costs are not currently reasonably estimable. As
of February 29, 2000, the Company has not received notice of any material claims
from insureds based on the Year 2000 Issue.
Comparison of SAP and GAAP Results
Results presented in accordance with GAAP vary in certain respects from
statutory accounting practices prescribed or permitted by the Pennsylvania
Insurance Department and the Delaware Insurance Department, (collectively
"SAP"). Prescribed SAP includes state laws, regulations and general
administrative rules, as well as a variety of National Association of Insurance
Commissioners ("NAIC") publications. Permitted SAP encompasses all accounting
practices that are not prescribed. In 1998, the NAIC adopted the Codification of
Statutory Accounting Principles ("Codification") guidance, which will replace
the current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas, such as deferred income taxes.
The Company's insurance subsidiaries will implement the Codification
guidelines effective January 1, 2001. The Company is in the process of assessing
the impact that Codification will have on its statutory surplus and currently
expects that the impact of adopting Codification will not be material to
statutory surplus.
Recent Accounting Pronouncements
- --------------------------------
Effective January 1, 1999, the Company adopted Statement of Position ("SOP")
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance for determining when an insurance
company should recognize a liability for guaranty fund and other insurance
related assessments and how to measure that liability. As a result of adopting
SOP 97-3, the Company recorded a liability of $4.3 million pre-tax and a
resulting charge to earnings of $2.8 million, net of income tax benefit of $1.5
million, which has been reported as a cumulative effect of accounting change in
1999. This accounting change impacts The PMA Insurance Group segment.
42
<PAGE>
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting designation. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No.
133," which defers the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. While the Company is presently evaluating the impact of
SFAS No. 133, the adoption of SFAS No. 133 is not expected to have a material
impact on the Company's financial condition, results of operations or liquidity.
In October 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." This statement identifies several methods of deposit accounting
and provides guidance on the application of each method. This statement
classifies insurance and reinsurance contracts for which the deposit method is
appropriate as contracts that (i) transfer only significant timing risk, (ii)
transfer only significant underwriting risk, (iii) transfer neither significant
timing nor underwriting risk and (iv) have an indeterminate risk. SOP 98-7 is
effective for financial statements for fiscal years beginning after June 15,
1999. The adoption of SOP 98-7 is not expected to have a material impact on the
Company's financial condition, results of operations or liquidity.
See Note 2-J 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. The Company
disclaims any obligation to update forward-looking statements.
43
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(in thousands, except share data) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale, at fair value (amortized cost:
1999 - $1,648,894; 1998 - $1,781,188) $1,579,640 $ 1,827,354
Equity securities, at fair value (cost: 1999 - $37,779; 1998 - $5) 34,966 17
Short-term investments, at cost which approximates fair value 303,429 498,038
----------------------------
Total investments 1,918,035 2,325,409
Cash 84,261 2,562
Accrued investment income 20,480 19,900
Premiums receivable (net of valuation allowance: 1999 -$18,088; 1998 - $19,874) 271,833 279,633
Reinsurance receivables (net of valuation allowance: 1999 -$5,528; 1998 - $2,178) 658,164 610,291
Deferred income taxes, net 105,363 63,929
Deferred acquisition costs 48,949 51,115
Other assets 138,002 107,879
----------------------------
Total assets $3,245,087 $ 3,460,718
============================
Liabilities:
Unpaid losses and loss adjustment expenses $1,932,601 $ 1,940,895
Unearned premiums 260,352 227,945
Long-term debt 163,000 163,000
Accounts payable and accrued expenses 109,447 107,952
Funds held under reinsurance treaties 94,445 77,674
Dividends to policyholders 13,782 10,700
Payable under securities loan agreements 242,317 421,072
----------------------------
Total liabilities 2,815,944 2,949,238
----------------------------
Commitments and contingencies (Note 12)
Shareholders' Equity:
Common stock, $5 par value (40,000,000 shares authorized; 1999 - 13,084,665
shares issued and 12,648,658 outstanding;
1998 - 13,956,268 shares issued and 13,520,261 outstanding) 65,423 69,781
Class A common stock, $5 par value (40,000,000 shares authorized;
1999 - 11,358,280 shares issued and 9,692,854 outstanding;
1998 - 10,486,677 shares issued and 9,837,963 outstanding) 56,791 52,433
Additional paid-in capital - Class A common stock 339 339
Retained earnings 391,981 377,601
Accumulated other comprehensive income (loss) (46,844) 30,016
Notes receivable from officers (56) (498)
Treasury stock, at cost:
Common stock (1999 - 436,007 shares; 1998 - 436,007 shares) (5,582) (5,582)
Class A common stock (1999-1,665,426 shares; 1998 - 648,714 shares) (32,909) (12,610)
----------------------------
Total shareholders' equity 429,143 511,480
----------------------------
Total liabilities and shareholders' equity $3,245,087 $ 3,460,718
============================
</TABLE>
See accompanying notes to the consolidated financial statements.
44
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net premiums written $ 563,510 $ 474,761 $ 381,282
Change in net unearned premiums (23,423) (8,046) (5,331)
----------------------------------------------
Net premiums earned 540,087 466,715 375,951
Net investment income 110,057 120,125 133,392
Net realized investment gains (losses) (7,745) 21,745 8,598
Other revenues 12,718 14,896 13,617
----------------------------------------------
Total revenues 655,117 623,481 531,558
----------------------------------------------
Losses and Expenses:
Losses and loss adjustment expenses 392,473 352,671 307,281
Acquisition expenses 124,368 110,837 93,501
Operating expenses 66,822 72,159 75,139
Dividends to policyholders 19,141 17,736 14,716
Interest expense 12,221 15,009 15,768
----------------------------------------------
Total losses and expenses 615,025 568,412 506,405
----------------------------------------------
Income before income taxes, extraordinary loss
and cumulative effect of accounting change 40,092 55,069 25,153
Income tax expense 11,739 10,335 5,400
----------------------------------------------
Income before extraordinary loss and cumulative
effect of accounting change 28,353 44,734 19,753
Extraordinary loss from early extinguishment
of debt (net of income tax benefit of $2,549) -- -- (4,734)
Cumulative effect of accounting change (net of income tax
benefit of $1,485) (2,759) -- --
----------------------------------------------
Net income $ 25,594 $ 44,734 $ 15,019
==============================================
Income (loss) per share:
Basic:
Income before extraordinary loss and cumulative
effect of accounting change $ 1.23 $ 1.89 $ 0.83
Extraordinary loss -- -- (0.20)
Cumulative effect of accounting change (0.12) -- --
----------------------------------------------
Net income $ 1.11 $ 1.89 $ 0.63
==============================================
Diluted:
Income before extraordinary loss and cumulative
effect of accounting change $ 1.19 $ 1.82 $ 0.80
Extraordinary loss -- -- (0.19)
Cumulative effect of accounting change (0.11) -- --
----------------------------------------------
Net income $ 1.08 $ 1.82 $ 0.61
==============================================
</TABLE>
See accompanying notes to the consolidated financial statements.
45
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 25,594 $ 44,734 $ 15,019
Adjustments to reconcile net income to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 7,403 7,109 12,744
Provision for deferred income taxes 1,813 425 9,906
Extraordinary loss from early extinguishment of debt -- -- 4,734
Cumulative effect of accounting change 2,759 -- --
Net realized investment (gains) losses 7,745 (21,745) (8,598)
Change in:
Premiums receivable and unearned premiums, net 40,207 (10,718) 39,030
Dividends to policyholders 3,082 500 (2,324)
Reinsurance receivables (47,873) (60,348) (74,423)
Unpaid losses and loss adjustment expenses (8,294) (62,292) (87,885)
Accrued investment income (580) 3,918 6,577
Deferred acquisition costs 2,166 (5,827) (1,282)
Other, net (16,625) 24,592 (20,275)
----------------------------------------------
Net cash flows provided by (used in) operating activities 17,397 (79,652) (106,777)
----------------------------------------------
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (1,198,557) (1,741,790) (1,963,492)
Maturities or calls 171,091 207,285 168,304
Sales 1,149,951 1,468,231 2,072,842
Equity securities:
Purchases (37,779) -- --
Sales 6 -- 254
Net (purchases) sales of short-term investments 15,887 176,658 (130,391)
Proceeds from sale of PMA Insurance, Cayman Ltd. -- 2,902 --
Purchase of Caliber One Indemnity Company,
net of acquired cash -- -- (11,481)
Other, net (4,738) (414) 3,568
----------------------------------------------
Net cash flows provided by investing activities 95,861 112,872 139,604
----------------------------------------------
Cash flows from financing activities:
Dividends paid to shareholders (7,795) (7,939) (7,965)
Proceeds from exercised stock options and issuance
of Class A Common stock 6,035 4,283 1,442
Purchase of treasury stock (30,241) (18,850) (597)
Repayments of long-term debt -- (40,000) (211,699)
Proceeds from issuance of long-term debt -- -- 210,000
Net repayments (issuance) of notes receivable from officers 442 (300) 964
----------------------------------------------
Net cash flows used in financing activities (31,559) (62,806) (7,855)
----------------------------------------------
Net increase (decrease) in cash 81,699 (29,586) 24,972
Cash - beginning of year 2,562 32,148 7,176
----------------------------------------------
Cash - end of year $ 84,261 $ 2,562 $ 32,148
==============================================
Supplementary cash flow information:
Income tax paid (refunded) $ 12,352 $ (15,170) $ (19,112)
Interest paid $ 12,050 $ 14,895 $ 19,776
</TABLE>
See accompanying notes to the consolidated financial statements.
46
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 69,781 $ 76,431 $ 80,477
Conversion of Common stock into Class A Common stock (4,358) (6,650) (4,046)
---------------------------------------------
Balance at end of year 65,423 69,781 76,431
---------------------------------------------
Class A Common stock:
Balance at beginning of year 52,433 45,783 41,239
Conversion of Common stock into Class A Common stock 4,358 6,650 4,046
Issuance of shares -- -- 498
---------------------------------------------
Balance at end of year 56,791 52,433 45,783
---------------------------------------------
Additional paid-in capital - Class A Common stock:
Balance at beginning of year 339 339 --
Issuance of shares -- -- 339
---------------------------------------------
Balance at end of year 339 339 339
---------------------------------------------
Retained earnings:
Balance at beginning of year 377,601 343,368 336,921
Net income 25,594 44,734 15,019
Common stock dividends declared (4,139) (4,527) (4,842)
Class A Common stock dividends declared (3,543) (3,417) (3,147)
Reissuance of treasury shares under employee benefit plans (3,532) (2,557) (583)
---------------------------------------------
Balance at end of year 391,981 377,601 343,368
---------------------------------------------
Accumulated other comprehensive income (loss):
Balance at beginning of year 30,016 18,806 (24,874)
Other comprehensive income (loss), net of tax (expense) benefit:
1999 - $41,386; 1998 - ($6,036); 1997 - ($23,520) (76,860) 11,210 43,680
---------------------------------------------
Balance at end of year (46,844) 30,016 18,806
---------------------------------------------
Notes receivable from officers:
Balance at beginning of year (498) (198) (1,162)
Repayment (issuance) of notes receivable from officers 442 (300) 964
---------------------------------------------
Balance at end of year (56) (498) (198)
---------------------------------------------
Treasury stock - Common:
Balance at beginning of year (5,582) (5,572) (5,408)
Purchase of treasury shares -- (10) (164)
---------------------------------------------
Balance at end of year (5,582) (5,582) (5,572)
---------------------------------------------
Treasury stock - Class A Common:
Balance at beginning of year (12,610) (610) (1,365)
Purchase of treasury shares (30,241) (18,840) (433)
Reissuance of treasury shares under employee benefit plans 9,942 6,840 1,188
---------------------------------------------
Balance at end of year (32,909) (12,610) (610)
---------------------------------------------
Total shareholders' equity:
Balance at beginning of year 511,480 478,347 425,828
Net income 25,594 44,734 15,019
Common stock dividends declared (4,139) (4,527) (4,842)
Class A Common stock dividends declared (3,543) (3,417) (3,147)
Purchase of treasury shares (30,241) (18,850) (597)
Reissuance of treasury shares under employee benefit plans 6,410 4,283 605
Other comprehensive income (loss) (76,860) 11,210 43,680
Repayment (issuance) of notes receivable from officers 442 (300) 964
Issuance of shares -- -- 837
---------------------------------------------
Balance at end of year $ 429,143 $511,480 $ 478,347
=============================================
</TABLE>
See accompanying notes to the consolidated financial statements.
47
<PAGE>
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 25,594 $ 44,734 $ 15,019
--------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Holding gain (loss) arising during the period (81,894) 25,344 49,269
Less: reclassification adjustment for (gains) losses included in net
income, net of tax expense (benefit): 1999 - ($2,711);
1998 - $7,611; 1997 - $3,009 5,034 (14,134) (5,589)
--------------------------------------------
Other comprehensive income (loss), net of tax (76,860) 11,210 43,680
--------------------------------------------
Comprehensive income (loss) $(51,266) $ 55,944 $ 58,699
============================================
</TABLE>
See accompanying notes to the consolidated financial statements.
48
<PAGE>
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 (collectively
referred to as "PMA Capital" or the "Company"). PMA Capital is an insurance
holding company that operates three specialty risk management businesses, which
are more fully described below.
Reinsurance -- PMA Capital's reinsurance operations ("PMA Re") consist mainly of
PMA Reinsurance Corporation, a Pennsylvania domiciled insurance company, 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 managed care workers'
compensation, integrated disability and to a lesser extent, other standard lines
of commercial insurance, primarily in the Mid-Atlantic and Southern regions of
the U.S. The majority of The PMA Insurance Group's business is produced by
independent agents and brokers.
Specialty Property and Casualty -- The Company established a separate specialty
insurance operation focusing on excess and surplus lines ("Caliber One") in
1997, and Caliber One commenced writing business in 1998. Caliber One writes
business through surplus lines brokers on a national basis. Caliber One's excess
and surplus lines insurance affiliate, Caliber One Indemnity Company, is an
eligible surplus lines insurer in 41 states, the District of Columbia and Puerto
Rico, with applications pending in two other states. 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.
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 in late 1997 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. 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.
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 (loss).
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 (loss). 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.
49
<PAGE>
C. Premiums -- Premiums, including estimates of additional premiums resulting
from audits of insureds' records, and premiums from ceding companies which are
typically reported on a delayed basis, 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-K).
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 (collectively "SAP"). 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 (see Note 4).
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 in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS No. 109 the Company
records deferred income taxes, which reflect the net tax effect of the temporary
difference between the carrying amounts of the assets and liabilities for
financial reporting purposes and their respective tax bases. 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.
H. 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.
I. 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.
J. Recent Accounting Pronouncements -- Effective January 1, 1999, the Company
adopted Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance for
determining when an insurance company should recognize a liability for guaranty
fund and other insurance-related assessments and how to measure that liability.
As a result of adopting SOP 97-3, the Company recorded a liability of $4.3
million pre-tax and a resulting charge to earnings of $2.8 million, net of
income tax benefit of $1.5 million, which has been reported as a cumulative
effect of accounting change. This accounting change impacts The PMA Insurance
Group segment.
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 condition or results of operations.
50
<PAGE>
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 managed care workers' compensation, integrated
disability, and to a lesser extent, 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 and expenses, including debt service, as well as
the results of certain of the Company's real estate properties. SFAS No. 131
requires only additional disclosures (see Note 16) and does not affect the
Company's financial condition, results of operations or liquidity.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which revises employers' disclosures about pensions and other
postretirement 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 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. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. While the
Company is presently evaluating the impact of SFAS No. 133, the adoption of SFAS
No. 133 is not expected to have a material impact on the Company's financial
condition, results of operations or liquidity.
In October 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." This statement identifies several methods of deposit accounting
and provides guidance on the application of each method. This statement
classifies insurance and reinsurance contracts for which the deposit method is
appropriate as contracts that (i) transfer only significant timing risk, (ii)
transfer only significant underwriting risk, (iii) transfer neither significant
timing nor underwriting risk and (iv) have an indeterminate risk. SOP 98-7 is
effective for financial statements for fiscal years beginning after June 15,
1999. The adoption of SOP 98-7 is not expected to have a material impact on the
Company's financial condition, results of operations or liquidity.
K. 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 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 based upon retrospective policy adjustments paid and decreased based
on billings. The change in accrued retrospective premiums is a component of net
premiums written and net premiums earned.
The components of the change in accrued retrospective premiums are as
follows:
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------
Estimated retrospective
policy adjustments related
to current accident year $(20,061) $ (9,204) $(12,460)
Revision of estimate of
retrospective policy
adjustments related to
prior accident years (10,743) (11,684) (44,719)
Retrospective policy
adjustments paid 13,804 17,888 20,179
Write-off of uncollectible
amounts (4,000) -- --
-------- -------- --------
Net decrease in accrued
retrospective premiums $(21,000) $ (3,000) $(37,000)
======== ======== ========
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<PAGE>
For 1999 and 1998, the net decrease in accrued retrospective premiums of $21
million and $3 million respectively, primarily reflects favorable development of
claims liabilities at The PMA Insurance Group. The net decrease in accrued
retrospective premiums of $37 million for 1997 is due primarily to the $44.7
million revision of the estimate of retrospective policy adjustments related to
prior years. This revision related to the favorable development of claims
liabilities for accident years 1992 through 1996, and the commutation of claims
for accident years 1991 and prior. As a result, management recognized a
reduction in losses and loss adjustment expenses under retrospectively rated
policies and also reduced its estimate of amounts recoverable associated with
such policies. Management believes that it has made a reasonable estimate of the
Company's accrued retrospective premiums. While the ultimate amount receivable
may differ from the current estimates, management does not believe that the
difference will have a material effect on the Company's financial condition,
results of operations or liquidity.
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, 1999 Fixed maturities available for sale:
U.S. Treasury securities and obligations
of U.S. Government agencies $ 438,412 $ 841 $ 19,797 $ 419,456
States, political subdivisions and foreign
government securities 32,164 18 1,602 30,580
Corporate debt securities 580,710 380 25,964 555,126
Mortgage-backed and other asset-backed securities 597,608 204 23,334 574,478
-------------------------------------------------------
Total fixed maturities available for sale 1,648,894 1,443 70,697 1,579,640
-------------------------------------------------------
Equity securities 37,779 614 3,427 34,966
Short-term investments 303,429 -- -- 303,429
-------------------------------------------------------
Total investments $1,990,102 $ 2,057 $ 74,124 $1,918,035
=======================================================
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
=======================================================
</TABLE>
52
<PAGE>
The amortized cost and fair value of fixed maturities at December 31, 1999, by
contractual maturity, are as follows:
Amortized Fair
(dollar amounts in thousands) Cost Value
- ----------------------------------------------------------------------
2000 $ 69,240 $69,159
2001-2004 445,238 435,980
2005-2009 205,228 195,166
2010 and thereafter 331,580 304,857
Mortgage-backed and other
asset-backed securities 597,608 574,478
----------------------------------
$1,648,894 $1,579,640
==================================
Net investment income consists of the following:
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- -------------------------------------------------------------------------
Fixed maturities $106,058 $115,414 $128,400
Equity securities 131 -- --
Short-term investments 5,126 7,959 7,282
Other 2,887 1,590 1,116
-----------------------------------
Total investment income 114,202 124,963 136,798
Investment expenses 4,145 4,838 3,406
-----------------------------------
Net investment income $110,057 $120,125 $133,392
===================================
Net realized investment gains (losses) consist of the following:
<TABLE>
<CAPTION>
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------
Realized gains:
<S> <C> <C> <C>
Fixed maturities $ 6,839 $ 28,140 $ 20,899
Equity securities 2 -- --
-------------------------------------
6,841 28,140 20,899
Realized losses:
Fixed maturities (14,585) (6,070) (12,203)
Equity securities (1) -- --
-------------------------------------
(14,586) (6,070) (12,203)
Other realized losses, net -- (325) (98)
-------------------------------------
Total net realized investment gains (losses) $ (7,745) $ 21,745 $ 8,598
=====================================
</TABLE>
The change in unrealized appreciation (depreciation) of investments for 1999,
1998 and 1997 was ($118.2) million, $17.2 million and $67.2 million,
respectively, primarily attributable to fixed maturities.
On December 31, 1999, the Company had securities with a total amortized cost
of $31.5 million and fair value of $30.1 million on deposit with various
governmental authorities, as required by law. In addition, at December 31, 1999,
securities with a total amortized cost of $13.2 million and fair value of $12.7
million, were pledged as collateral for letters of credit issued on behalf of
the Company.
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 $1.3 million, $1.0
million and $524,000 in 1999, 1998 and 1997, respectively, net of lending fees,
which was included in net investment income. At December 31, 1999, the Company
had approximately $248.5 million of collateral related to securities on loan of
which $242.3 million was cash received and subsequently reinvested in short-term
investments.
53
<PAGE>
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) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 1,940,895 $ 2,003,187 $ 2,091,072
Less: reinsurance
recoverable on unpaid
losses and LAE 593,701 332,284 256,576
----------------------------------------------
Net balance at January 1 1,347,194 1,670,903 1,834,496
----------------------------------------------
Losses and LAE incurred, net:
Current year, net
of discount 409,554 373,098 341,880
Prior years (32,514) (46,515) (86,006)
Accretion of prior
years' discount 15,433 26,088 51,407
----------------------------------------------
Total losses and LAE incurred, net 392,473 352,671 307,281
----------------------------------------------
Losses and LAE paid, net:
Current year (103,798) (96,658) (72,399)
Prior years (351,495) (362,186) (398,475)
----------------------------------------------
Total losses and LAE paid, net (455,293) (458,844) (470,874)
----------------------------------------------
Reserves transferred
upon sale of subsidiary -- (217,536) --
----------------------------------------------
Net balance at December 31 1,284,374 1,347,194 1,670,903
Reinsurance recoverable
on unpaid losses and LAE 648,227 593,701 332,284
----------------------------------------------
Balance at December 31 $ 1,932,601 $ 1,940,895 $ 2,003,187
==============================================
</TABLE>
The Company's results of operations benefited from a decrease in estimated
incurred losses and LAE related to prior accident years of $32.5 million, $46.5
million and $86.0 million in 1999, 1998 and 1997, respectively, which was
partially offset by adjustments to premiums for retrospectively rated business
and by dividends on captive workers' compensation business of $13.4 million,
$4.5 million and $51.8 million in 1999, 1998 and 1997, respectively.
During 1999, 1998 and 1997, PMA Re recorded favorable reserve development on
prior accident years ("prior year development") of $23.5 million, $31.5 million
and $32.1 million, respectively. The favorable reserve development reflects
development on prior accident years due to re-estimated loss trends for such
years that were lower than previous expectations. This is largely due to
favorable development on casualty excess of loss business.
During 1999, 1998 and 1997, The PMA Insurance Group recorded favorable prior
year development of $9.0 million, $15.0 million and $53.9 million, respectively.
The favorable reserve development in 1999 reflects better than expected loss
experience from loss-sensitive and rent-a-captive workers' compensation
business. This favorable development has been substantially offset by premium
adjustments for loss-sensitive business and policyholders' dividends for
rent-a-captive business. Rent-a-captives are used by customers as an alternative
method to manage their loss exposure without establishing and capitalizing their
own captive insurance company. The favorable reserve development during 1998
primarily relates to the formal commutation programs, which resulted in early
liability settlements made during 1998 to reduce future claim payments.
Favorable loss development in 1997 is attributable 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.
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 and uncertainty. 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, 1999 and 1998 were $527.9 million and $628.5
million, net of discount of $173.1 million and $194.3 million, respectively. The
approximate discount rate used was 5% at December 31, 1999 and 1998.
54
<PAGE>
Since 1996, the impact on losses from the effects of discounting loss
reserves at The PMA Insurance Group has generally 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 payments from
The PMA Insurance Group. The PMA Insurance Group paid approximately $38 million,
$65 million and $113 million in 1999, 1998 and 1997, respectively, to commute
workers' compensation 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.
Management believes that its unpaid losses and LAE are fairly stated at
December 31, 1999. 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, regulatory trends on benefit
levels for both medical and indemnity payments, 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, 1999, the related
adjustments could have a material adverse impact on the Company's financial
condition, results of operations and liquidity.
The Company's asbestos-related losses were as follows:
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- --------------------------------------------------------------------
Gross of reinsurance:
Beginning reserves $ 67,857 $ 76,726 $ 80,055
Incurred losses and LAE 1,910 (1,976) 2,435
Paid losses and LAE (8,490) (6,893) (5,764)
--------------------------------------
Ending reserves $ 61,277 $ 67,857 $ 76,726
======================================
Net of reinsurance:
Beginning reserves $ 43,556 $ 48,578 $ 53,300
Incurred losses and LAE (341) (2,754) (36)
Paid losses and LAE (4,364) (2,268) (4,686)
--------------------------------------
Ending reserves $ 38,851 $ 43,556 $ 48,578
======================================
The Company's environmental-related losses were as follows:
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- ---------------------------------------------------------------------
Gross of reinsurance:
Beginning reserves $ 47,036 $ 45,108 $ 35,626
Incurred losses and LAE 5,081 11,895 1,130
Reserves acquired through
purchase of Caliber One
Indemnity Company(1) -- -- 13,060
Paid losses and LAE (10,758) (9,967) (4,708)
------------------------------------
Ending reserves $ 41,359 $ 47,036 $ 45,108
====================================
Net of reinsurance:
Beginning reserves $ 29,356 $ 31,695 $ 34,592
Incurred losses and LAE 82 3,644 1,068
Paid losses and LAE (4,916) (5,983) (3,965)
------------------------------------
Ending reserves $ 24,522 $ 29,356 $ 31,695
====================================
(1) Such acquired reserves have been reinsured by an affiliate of the former
parent (see Note 1).
Of the total net asbestos reserves, approximately $32.0 million, $34.2 million
and $41.9 million related to IBNR losses at December 31, 1999, 1998 and 1997,
respectively. Of the total net environmental reserves, approximately $18.0
million, $20.3 million and $20.5 million related to IBNR losses at December 31,
1999, 1998 and 1997, 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 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.
55
<PAGE>
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 and proof of coverage, 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 $43.8 million and $60.4 million at December 31, 1999 and 1998,
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.
The components of net premiums earned and losses and LAE incurred are as
follows:
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- -----------------------------------------------------------------------
Earned premiums:
Direct $ 328,590 $ 286,987 $ 277,871
Assumed 366,029 276,689 216,357
Ceded (154,532) (96,961) (118,277)
-----------------------------------------
Net $ 540,087 $ 466,715 $ 375,951
=========================================
Losses and LAE incurred:
Direct $ 262,340 $ 250,641 $ 244,429
Assumed 243,200 184,309 166,202
Ceded (113,067) (82,279) (103,350)
-----------------------------------------
Net $ 392,473 $ 352,671 $ 307,281
=========================================
At December 31, 1999, 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
- -----------------------------------------------------------------
London Life Reinsurance Group $ 240,753
United States Fidelity and Guaranty Company 98,940
American Reinsurance Corporation 29,599
Essex Insurance Company 26,554
SCOR Reinsurance Company 22,724
Houston Casualty Company 22,574
GE Reinsurance Corporation 20,051
Continental Casualty Company 16,062
Odyssey Reinsurance Corporation 15,279
Signet Star Reinsurance Company 14,132
FolksAmerica Reinsurance Company 14,003
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 $91.1 million at December 31, 1999. In addition, the entire receivable
from the London Life Reinsurance Group is secured by assets in trust and letters
of credit.
6. Long-Term Debt
Long-term debt consisted of $163.0 million outstanding under the Company's
revolving credit facility (the "Credit Facility") as of December 31, 1999 and
1998. The Credit Facility matures as follows: $38.0 million in 2000, $62.5
million in 2001 and $62.5 million in 2002. The Credit Facility bears interest at
the London InterBank Offered Rate ("LIBOR") plus 0.375% on the utilized portion
and carries a 0.225% 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, 1999, the interest
rate on the utilized portion of the Credit Facility was 6.56%.
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, 1999. The rate on the swap
56
<PAGE>
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 (7.14% at December 31, 1999). The swap
involves the exchange of interest payment obligations without the exchange of
underlying principal. The differential to be paid or received is recognized as
an adjustment of interest expense. In the event that a counterparty fails to
meet the terms of the 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 material to
financial condition, results of operations and liquidity.
On March 14, 1997, the Company refinanced substantially all of its existing
credit agreements not already maturing in 1997 through the completion of 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).
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, 1999, the commitment
fee was 0.225% per annum. At December 31, 1999 and 1998, the aggregate
outstanding face amount of letters of credit issued was $45.9 million and $46.9
million, respectively. 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 14).
7. Stock Options
The Company currently has seven 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 3,787,897 Class A Common shares were reserved
for issuance at December 31, 1999. 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, generally vest over
periods ranging between zero and five years, and are typically granted with an
exercise price at least equal to the fair market value of the Class A Common
stock on the date the options are granted. Information regarding these option
plans is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 3,446,170 $ 14.39 3,117,612 $ 13.18 3,242,160 $ 12.43
Options granted 427,000 19.53 826,500 17.12 324,500 17.00
Options exercised (515,864) 11.94 (386,142) 11.07 (162,248) 8.78
Options forfeited or expired (36,750) 16.53 (111,800) 12.26 (286,800) 11.53
-----------------------------------------------------------------------
Options outstanding, end of year(1) 3,320,556 $ 15.40 3,446,170 $ 14.39 3,117,612 $ 13.18
=======================================================================
Options exercisable, end of year 2,160,486 $ 14.03 2,468,233 $ 13.32 2,556,087 $ 12.42
=======================================================================
Option price range at end of year $8.00 to $20.44 $8.00 to $19.00 $8.00 to $17.00
Option price range for exercised shares $8.00 to $17.00 $8.00 to $17.00 $8.00 to $15.00
Options available for grant at end of year 467,341 7,591 747,291
</TABLE>
(1) Included in the options outstanding at the end of 1999 and 1998 are 420,000
options ("Target Price 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. In
1998, the Company recorded approximately $1 million in compensation expense
related to such options.
57
<PAGE>
In 1999, all options 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 $19.53 per share and a fair value of $9.61
per share. Of the total options granted in 1998, 96% were granted
out-of-the-money at an 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.
Stock options outstanding at December 31, 1999 and related exercise price and
weighted average remaining life information is as follows:
Weighted Average
Options Options Remaining Life
Exercise Prices Outstanding Exercisable (in years)
- ----------------------------------------------------------------------
$ 8.00 to $11.00 290,916 290,916 2.21
$11.01 to $14.00 684,200 684,200 3.81
$14.01 to $17.00 1,868,440 1,157,120 5.95
$17.01 to $21.00 477,000 28,250 9.05
---------------------------
3,320,556 2,160,486 5.63
===========================
The fair value of options at date of grant was estimated using a binomial
option-pricing model with the following weighted average assumptions:
1999 1998 1997
- ----------------------------------------------------------
Expected life (years) 10 7.5 10
Risk-free interest rate 4.9% 5.5% 6.3%
Expected volatility 17% 26% 18%
Expected dividend yield 2.0% 1.9% 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 1999, 1998 and 1997 for stock options, other than Target Price
Options, 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 $4.1
million, $3.2 million and $1.9 million in 1999, 1998 and 1997, respectively.
After-tax income would have been reduced by $2.7 million, $2.1 million and $1.2
million or $0.12, $0.09 and $0.05 per basic share and $0.11, $0.08 and $0.05 per
diluted share in 1999, 1998 and 1997, respectively.
8. Income Taxes
The components of the Federal income tax expense from continuing operations are
as follows:
(dollar amounts For the years ended December 31,
in thousands) 1999 1998 1997
- ---------------------------------------------------------
Current $ 9,926 $9,910 $(4,506)
Deferred 1,813 425 9,906
------------------------------
Income tax expense $11,739 $10,335 $ 5,400
==============================
In addition, the Company recognized a deferred Federal income tax benefit of
$1.5 million related to the cumulative effect of accounting change recorded in
1999. The Company also recognized current and deferred Federal income tax
benefits of $374,000 and $2.2 million, respectively, related to the
extraordinary loss recorded in 1997.
A reconciliation between the total income tax expense and the amounts
computed at the Statutory Federal income tax rate of 35% is as follows:
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- ----------------------------------------------------------------------
Computed at the Statutory
Federal income tax rate $ 14,032 $ 19,274 $ 8,804
Increase (decrease) in
taxes resulting from:
Reversal of income
tax accruals (2,672) (12,637) (3,703)
Tax-exempt interest -- -- (61)
Other 379 3,698 360
--------------------------------------
Income tax expense $ 11,739 $ 10,335 $ 5,400
======================================
58
<PAGE>
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) 1999 1998
- --------------------------------------------------------------------
Discounting of unpaid losses and LAE $ 56,817 $ 55,945
Unrealized depreciation of investments 25,223 --
Tax credit carryforwards 21,705 29,039
Unearned premiums 15,612 14,305
Allowance for uncollectible accounts 6,188 6,822
Postretirement benefit obligation 5,179 5,160
Other 14,489 12,823
-------------------------
Gross deferred tax asset 145,213 124,094
-------------------------
Deferred acquisition costs (17,021) (17,377)
Unrealized appreciation of investments -- (16,163)
Losses of foreign reinsurance affiliate (21,130) (24,542)
Other (1,699) (2,083)
-------------------------
Gross deferred tax liability (39,850) (60,165)
-------------------------
Net deferred tax asset $ 105,363 $ 63,929
=========================
At December 31, 1999, the Company had approximately $21.3 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. The Company's 1996 Federal income
tax return is currently under examination by the IRS. In 1998, the IRS completed
their examination of the 1994 and 1995 U.S. Federal tax returns. In 1997, the
IRS completed their examinations of the 1992 and 1993 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.
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 modified
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 non-qualified unfunded supplemental defined benefit pension plans
(the "Non-qualified Pension Plans") for the benefit of certain key employees.
The projected benefit obligation and accumulated benefit obligation for the
Non-qualified Pension Plans were $3.9 million and $3.6 million, respectively, as
of December 31, 1999.
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 meet the requirements for early retirement under the
Pension Plan and have a minimum of 10 years employment with 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.
59
<PAGE>
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) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 50,280 $ 47,125 $ 9,169 $ 9,673
Service cost 1,597 1,780 286 271
Interest cost 3,372 3,201 622 594
Plan amendments 1,177 310 -- --
Actuarial (gain) loss (7,335) 168 (975) (870)
Benefits paid (2,209) (2,304) (411) (499)
-------------------------------------------------------------
Benefit obligation at end of year $ 46,882 $ 50,280 $ 8,691 $ 9,169
-------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 42,816 $ 40,600 $ -- $ --
Actual return on plan assets 6,931 2,660 -- --
Employer contributions 1,689 1,860 -- --
Benefits paid (2,209) (2,304) -- --
-------------------------------------------------------------
Fair value of plan assets at end of year $ 49,227 $ 42,816 $ -- $ --
-------------------------------------------------------------
Benefit obligation (greater) less than the
fair value of plan assets $ 2,345 $ (7,464) $ (8,691) $ (9,169)
Unrecognized actuarial (gain) loss (4,722) 5,894 (4,957) (4,137)
Unrecognized prior service (cost) benefit 507 (700) (1,079) (1,198)
Unrecognized net transition obligation 321 316 -- --
-------------------------------------------------------------
Accrued benefit at end of year $ (1,549) $ (1,954) $(14,727) $(14,504)
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
For the years ended December 31, For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 1,597 $ 1,780 $ 1,468 $ 286 $ 271 $ 237
Interest cost 3,372 3,201 3,200 622 594 655
Expected return on plan assets (3,619) (3,496) (3,159) -- -- --
Amortization of transition obligation (5) (3) (23) -- -- --
Amortization of prior service cost (30) (91) (99) (119) (119) (119)
Recognized actuarial (gain) loss 4 (11) -- (155) (188) (123)
Settlement charge -- -- 115 -- -- --
-------------------------------------------------------------------
Net periodic benefit cost $ 1,319 $ 1,380 $ 1,502 $ 634 $ 558 $ 650
===================================================================
Weighted average assumptions:
Discount rate 7.75% 6.75% 7.00% 7.75% 6.75% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00% -- -- --
Rate of compensation increase 5.00% 4.50% 4.50% -- -- --
</TABLE>
60
<PAGE>
For the measurement of Other Postretirement Benefits, a 6.50% annual rate of
increase in the per capita cost of covered health care benefits was assumed for
1999. 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. The Pension Plan owned approximately
249,000 shares of the Company's common stock at December 31, 1998. All 249,000
shares were sold during 1999.
During 1997, an annuity contract with a third party was terminated, resulting
in a one-time settlement charge of approximately $115,000.
B. Defined Contribution Savings Plan -- The Company also maintains a voluntary
defined contribution savings plan covering substantially all employees. The
Company matches employee contributions up to 5% of compensation. Contributions
under such plans charged to income were $2.3 million, $2.0 million and $1.7
million in 1999, 1998 and 1997, 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.
10. Fair Value of Financial Instruments
As of December 31, 1999 and 1998, 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
$305,000 and ($5.8) million at December 31, 1999 and 1998, 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. 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, 1999, the Foundation owned 4,561,225 shares of
Common stock (36.1% of the class) and 912,225 shares of Class A Common stock
(9.4% of the class), which constitutes 34.2% 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 $13,000, $14,000 and $34,000 for
the years ended December 31, 1999, 1998 and 1997, 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
$304,000, $262,000 and $250,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
61
<PAGE>
The Company incurred legal and consulting fees aggregating approximately $5.3
million, $6.5 million and $6.5 million in 1999, 1998 and 1997, respectively,
from firms in which directors of the Company are partners or principals.
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 $56,000 and $498,000 as of December 31, 1999 and
1998, respectively. The interest rates on the notes range between 6% and 8%.
The Company has arranged an executive loan program with a financial
institution. The institution provides personal demand loans to officers of the
Company at a floating interest rate equal to the financial institution's prime
rate minus 1/2%. Such loans are collateralized by Common Stock and Class A
Common Stock beneficially owned by the officer and a Company treasury security.
The Company has agreed to purchase any loan made to an officer (including
accrued interest and related expenses) from the financial institution in the
event that the borrower defaults on the loan. The amount of loans outstanding to
current employees as of December 31,1999 under this program was $729,847.
12. Commitments and Contingencies
For the years ended December 31, 1999, 1998 and 1997, total rent expense was
$2.7 million, $2.6 million and $2.8 million, respectively. At December 31, 1999,
the Company was obligated under noncancelable operating leases for office space
with aggregate minimum annual rentals of $3.8 million in 2000, $4.1 million in
2001, $3.9 million in 2002, $3.6 million in 2003, $3.2 million in 2004 and $4.3
million 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 (see Note 2-J regarding SOP 97-3).
The Company has provided guarantees of approximately $7.7 million, primarily
related to loans on properties in which the Company has an interest.
The Company is continuously involved in numerous lawsuits arising, for the
most part, in the ordinary course of business, either as a liability insurer
defending third party claims brought against its insureds, or as an insurer
defending coverage claims brought against it by its policyholders or other
insurers. While the outcome of all litigation involving the Company, including
insurance-related litigation, cannot be determined, litigation is not expected
to result in losses that differ from recorded reserves by amounts that would be
material to the Company's financial condition, results of operations or
liquidity. 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 Company's financial condition, results of operations or
liquidity.
13. 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, 1999, approximately $1.5 million of such charges
remained in accounts payable and accrued expenses on the balance sheet.
14. 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.
The Company declared dividends on its Common stock and Class A Common stock of
$0.32 per share and $0.36 per share, respectively, in 1999, 1998 and 1997.
62
<PAGE>
Changes in Common stock and Class A Common stock shares were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year 13,956,268 15,286,263 16,095,416
Conversion of Common stock into Class A Common stock (871,603) (1,329,995) (809,153)
-----------------------------------------------
Balance at end of year 13,084,665 13,956,268 15,286,263
===============================================
Class A Common stock:
Balance at beginning of year 10,486,677 9,156,682 8,247,804
Conversion of Common stock into Class A Common stock 871,603 1,329,995 809,153
Issuance of shares -- -- 99,725
-----------------------------------------------
Balance at end of year 11,358,280 10,486,677 9,156,682
===============================================
Treasury stock - Common stock:
Balance at beginning of year 436,007 435,474 425,364
Purchase of treasury shares -- 533 10,110
-----------------------------------------------
Balance at end of year 436,007 436,007 435,474
===============================================
Treasury stock - Class A Common stock:
Balance at beginning of year 648,714 38,947 74,781
Purchase of treasury shares 1,526,500 995,909 27,689
Reissuance of treasury shares under employee benefit plans (509,788) (386,142) (63,523)
-----------------------------------------------
Balance at end of year 1,665,426 648,714 38,947
===============================================
</TABLE>
In 1998, the Company's Board of Directors authorized a plan to repurchase shares
of Common stock and Class A Common stock in an amount not to exceed $25.0
million. In 1999, an additional $50.0 million of share repurchase authority was
approved by the Company's Board of Directors. During 1999, the Company
repurchased a total of approximately 1.5 million Class A shares at a total cost
of $30.2 million (average per share price was $19.81). During 1998, the Company
repurchased a total of approximately 1.0 million shares at a total cost of $18.9
million (average per share price was $18.92). Since the inception of its share
repurchase program in February 1998, PMA Capital has repurchased a total of
approximately 2.5 million Class A shares at a total cost of $49.1 million
(average per share price was $19.46), leaving $25.9 million of share repurchase
authorization. Decisions regarding share repurchases are subject to the costs
and benefits associated with alternative uses of capital and prevailing market
conditions.
The Company's domestic insurance subsidiaries' ability to pay dividends to
the holding company is limited by the insurance laws and regulations of
Pennsylvania and Delaware (the laws of which are substantially similar with
respect to dividends). Under Pennsylvania laws and regulations, without prior
approval of the Pennsylvania Insurance Commissioner (the "Commissioner"),
dividends may not be paid in excess of the greater of (i) 10% of policyholders'
surplus as of the end of the preceding year or (ii) SAP net income for the
preceding year, but in no event to exceed SAP unassigned surplus. At December
31, 1999, 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 approximately $55 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 $10 million in 2000.
63
<PAGE>
15. Earnings Per Share
A reconciliation of the shares used as the denominator of the basic and diluted
earnings per share computations is presented below.
1999 1998 1997
- --------------------------------------------------------------------
Basic shares - weighted
average Common
and Class A Common
shares outstanding 22,976,326 23,608,618 23,855,031
Effect of dilutive
stock options 809,590 916,270 712,347
-----------------------------------------
Total diluted shares 23,785,916 24,524,888 24,567,378
=========================================
For all years presented, there were no differences in the numerator (income
before extraordinary item and cumulative effect of accounting change) for the
basic and diluted earnings per share calculation.
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 1999, 1998 and 1997, such anti-dilutive options were 12,500, 42,000 and
646,000, respectively.
16. Business Segments
The Company's pre-tax operating income by principal business segment were as
follows:
<TABLE>
<CAPTION>
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of pre-tax operating income and net income(1):
PMA Re $ 50,319 $ 46,408 $ 45,957
The PMA Insurance Group:
Excluding Run-off Operations 18,389 10,018 (3,607)
Run-off Operations (189) 452 (73)
----------------------------------------
Total 18,200 10,470 (3,680)
Caliber One 83 (1,606) --
Corporate and Other (20,765) (21,948) (25,722)
----------------------------------------
Pre-tax operating income 47,837 33,324 16,555
Net realized investment gains (losses) (7,745) 21,745 8,598
----------------------------------------
Income before income taxes, extraordinary loss and cumulative
effect of accounting change 40,092 55,069 25,153
Income tax expense 11,739 10,335 5,400
----------------------------------------
Income before extraordinary loss and cumulative effect of accounting change 28,353 44,734 19,753
Extraordinary loss, net of tax -- -- (4,734)
Cumulative effect of accounting change, net of tax (2,759) -- --
----------------------------------------
Net income $ 25,594 $ 44,734 $ 15,019
========================================
</TABLE>
(1) Pre-tax operating income is defined as income from continuing operations
before income taxes, excluding net realized investment gains (losses). The
Company excludes net realized investment gains (losses) from the profit and
loss 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 holding company level, and such
decisions result in net realized gains (losses) that do not relate to the
operations of the individual segments.
64
<PAGE>
The Company's revenues, all of which are generated within the U.S., by principal
business segment were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
Revenues:
<S> <C> <C> <C>
PMA Re $ 351,548 $ 278,293 $ 215,873
The PMA Insurance Group:
Excluding Run-off Operations 277,890 311,469 328,248
Run-off Operations 4,412 4,761 (23,491)
---------------------------------------
Total 282,302 316,230 304,757
Caliber One 27,188 3,203 --
Corporate and Other 1,824 4,010 2,330
Net realized investment gains (losses) (7,745) 21,745 8,598
---------------------------------------
Total revenues $ 655,117 $ 623,481 $ 531,558
=======================================
</TABLE>
The Company recorded amortization and depreciation expense of $7.4 million, $7.1
million and $12.7 million in 1999, 1998 and 1997, respectively. PMA Re and The
PMA Insurance Group recorded amortization and depreciation expense of $2.8
million and $3.0 million, respectively, in 1999; $2.0 million and $4.2 million,
respectively, in 1998; and $2.5 million and $7.6 million, respectively, in 1997.
The Company's total assets by principal business segment were as follows:
<TABLE>
<CAPTION>
December 31,
(dollar amounts in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Assets(1):
<S> <C> <C> <C>
PMA Re $ 1,351,962 $ 1,417,901 $ 1,102,242
The PMA Insurance
Group:
Excluding Run-off Operations 1,667,673 1,883,575 1,452,469
Run-off Operations 79,003 95,110 398,959
----------------------------------------------
Total 1,746,676 1,978,685 1,851,428
Caliber One 160,194 69,083 64,302
Corporate and Other (13,745) (4,951) 39,286
----------------------------------------------
Total assets $ 3,245,087 $ 3,460,718 $ 3,057,258
==============================================
</TABLE>
(1) Equity investments in subsidiaries, which eliminate in consolidation, are
excluded from total assets for each segment.
PMA Re distributes its products through major reinsurance brokers, and PMA Re's
top four such brokers accounted for approximately 83% of PMA Re's gross premiums
in force at December 31, 1999. During 1999, 1998 and 1997, total revenues
amounting to $158.8 million, $70.6 million and $54.8 million, respectively, were
placed through brokers which individually exceeded 10% of the Company's total
revenue. In 1999, 1998 and 1997, casualty reinsurance lines at PMA Re
represented 35.3%, 35.5% and 31.2%, 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
65
<PAGE>
and results of operations. In 1999, 1998 and 1997, workers' compensation net
premiums at The PMA Insurance Group represented 31.8%, 39.4% and 46.0%,
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 in excess
of $2.0 million per occurrence, The PMA Insurance Group maintains catastrophe
reinsurance protection of $27.7 million in excess of $850,000 and Caliber One
maintains catastrophe reinsurance protection of $19.3 million in excess of
$750,000. As a result, the Company's loss and LAE ratios have not been
significantly impacted by catastrophes in 1999, 1998 or 1997. 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 financial condition, results of operations and liquidity.
17. 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.
Effective January 1, 2001 the Company's insurance subsidiaries will implement
the Codification guidelines. The Company is in the process of assessing the
impact that Codification will have on its statutory surplus and currently
expects that the impact of adopting Codification will not be material.
SAP net income (loss) and capital and surplus for PMA Capital's domestic
insurance subsidiaries are as follows:
(dollar amounts in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
SAP net income (loss):
PMA Reinsurance Corporation $ 34,412 $ 29,746 $ 25,752
The PMA Insurance Group
(domestic insurance subsidiaries) 6,963 23,034 10,785
Caliber One Indemnity Company (5,453) (90) --
----------------------------------------
Total $ 35,922 $ 52,690 $ 36,537
========================================
SAP capital and surplus:
PMA Reinsurance Corporation(1) $ 287,635 $ 287,466 $ 271,154
The PMA Insurance Group
(domestic insurance subsidiaries) 265,162 281,947 281,071
----------------------------------------
Total $ 552,797 $ 569,413 $ 552,225
========================================
(1)The SAP capital and surplus of PMA Reinsurance Corporation includes PMA
Reinsurance Corporation's investment in Caliber One Indemnity Company of
$32.8 million in 1999 and $25.0 million in 1998 and 1997.
66
<PAGE>
A reconciliation of PMA Capital's domestic insurance subsidiaries' SAP net
income to the Company's GAAP net income is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
(dollar amounts in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SAP net income - domestic insurance subsidiaries $ 35,922 $ 52,690 $ 36,537
GAAP adjustments:
Change in deferred acquisition costs (1,159) 4,504 1,282
Benefit for deferred income taxes 3,937 14,012 4,725
Cumulative effect of accounting change (2,759) -- --
Allowance for doubtful accounts 1,750 -- --
Guaranty fund and loss based assessments 1,306 -- --
Other 4,700 4,366 1,131
--------------------------------------
GAAP net income - domestic insurance subsidiaries 43,697 75,572 43,675
Other entities and eliminations (18,103) (30,838) (23,922)
Extraordinary loss -- -- (4,734)
--------------------------------------
GAAP net income $ 25,594 $ 44,734 $ 15,019
======================================
</TABLE>
A reconciliation of PMA Capital's domestic insurance subsidiaries' SAP capital
and surplus to the Company's GAAP shareholders' equity is as follows:
<TABLE>
<CAPTION>
December 31,
(dollar amounts in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SAP capital and surplus - domestic insurance subsidiaries $ 552,797 $ 569,413 $ 552,225
GAAP adjustments:
Deferred acquisition costs 47,946 49,118 45,288
Deferred income taxes 78,371 71,443 52,571
Allowance for doubtful accounts (21,550) (19,650) (19,700)
Retirement accruals (9,965) (10,244) (10,653)
Reversal of non-admitted assets 21,136 22,711 21,330
Unrealized gain (loss) on fixed maturities available for sale (40,654) 27,506 19,380
Other 15,000 13,569 3,254
----------------------------------------
GAAP shareholders' equity - domestic insurance subsidiaries 643,081 723,866 663,695
Other entities and eliminations (213,938) (212,386) (185,348)
----------------------------------------
GAAP shareholders' equity $ 429,143 $ 511,480 $ 478,347
========================================
</TABLE>
18. 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, 1999, the Company has recorded $240.8 million in
reinsurance receivables related to this transaction, all of which are secured by
assets in trust or by letters of credit. If the actual claim payments in the
aggregate exceed the estimated payments upon which the loss reserves have been
established, the Company has agreed to indemnify the buyer, up to a maximum of
$15.0 million. If the actual claim payments in the aggregate are less than the
estimated payments upon which the loss reserves have been established, the
Company will participate in such favorable loss reserve development.
67
<PAGE>
[PricewaterhouseCoopers LLP LOGO]
Report of Independent Accountants
To the Board of Directors and Shareholders of
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 (loss) present fairly, in all material respects, the
financial position of PMA Capital Corporation and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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 2, 2000
68
<PAGE>
Quarterly Financial Information (Unaudited)
The following unaudited quarterly financial data are presented on a consolidated
basis for each of the years ended December 31, 1999 and 1998. 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>
1999
Income Statement Data:
Total revenues $140,446 $157,168 $156,034 $201,469
Income before income taxes 13,147 6,381 10,369 10,195
Income before cumulative effect of accounting change 8,468 6,746 6,512 6,627
Net income 5,709 6,746 6,512 6,627
Per Share Data:
Basic:
Income before cumulative effect of accounting change $ 0.37 $ 0.29 $ 0.28 $ 0.29
Net income 0.25 0.29 0.28 0.29
Diluted:
Income before cumulative effect of accounting change 0.35 0.28 0.27 0.28
Net income 0.24 0.28 0.27 0.28
Class A Common Stock Prices:
High $ 20.31 $ 21.00 $ 21.00 $ 20.38
Low 17.63 19.00 19.38 19.38
Close 20.13 20.56 20.00 19.88
1998
Income Statement Data:
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:
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
</TABLE>
The Company had 326 recordholders of Class A Common stock and 142 recordholders
of Common stock at January 31, 2000. For each of the quarters in the two years
ended December 31, 1999, the Company declared a quarterly dividend of $0.08 and
$0.09 per share for its Common stock and Class A Common stock, respectively.
69
<PAGE>
Securities Listing
The Corporation's Class A Common stock is listed on The Nasdaq Stock Market(R).
It trades under the stock symbol: PMACA
[PMACA LOGO]
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.
72
EXHIBIT 21
PMA Capital Corporation
Significant Subsidiaries of Registrant
As of December 31, 1999
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. (Cayman)
PMA International Insurance Cayman, Ltd. (Cayman)
High Mountain Reinsurance, Ltd. (Cayman)
PMA Insurance SPC (Cayman)
Caliber One Management Company, Inc. (Delaware)
PMA Holdings Limited (Bermuda)
Pennsylvania Manufacturers International Insurance, Ltd. (Bermuda)
PMA Life Insurance Company (Pennsylvania)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File No. 333-45949, File No. 333-68855 and File No.
333-77111) of PMA Capital Corporation of our report dated February 2, 2000
relating to the financial statements, which appears in the 1999 Annual Report to
Shareholders, which is incorporated in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report dated February 2, 2000
relating to the financial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 29, 2000
Exhibit 24.1
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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/s/ Frederick W. Anton III
----------------------------------
Frederick W. Anton 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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/s/ Edward H. Owlett
----------------------------------
Edward H. Owlett
<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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/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 Robert L. Pratter, 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, 1999
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, amendments to PMA's registration statements on Form
S-8 (Registration Numbers 333-77111, 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, 2001.
IN WITNESS WHEREOF, the undersigned has executed this document as of the
2nd day of February 2000.
/s/ John W. Smithson
----------------------------------
John W. Smithson
Exhibit 24.2
SECRETARY'S CERTIFICATE
I, Robert L. Pratter, Senior Vice President, General Counsel and
Secretary of PMA Capital Corporation, a corporation organized and existing under
the laws of the Commonwealth of Pennsylvania, hereby certify that the following
resolutions were adopted at the February 2, 2000 meeting of the Board of
Directors:
RESOLVED, that the Officers of the Corporation, and each of them, are
hereby authorized to sign the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1999, and any amendments thereto, (the "Form
10-K") in the name and on behalf the Corporation and as attorneys for each
of its Directors and Officers.
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 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 the Form 10-K
and to file any such power of attorney together with the Form 10-K with the
Securities and Exchange Commission.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed
the seal of the Corporation, this 10th day of March, 2000.
/s/ Robert L. Pratter
----------------------------------
Senior Vice President,
General Counsel and
Secretary
(SEAL)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in Form 10-K for the year ended December 31, 1999
for PMA Capital Corporation and is qualified in its entirety by reference to
such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 1,579,640
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 34,966
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,918,035
<CASH> 84,261
<RECOVER-REINSURE> 658,164<F1>
<DEFERRED-ACQUISITION> 48,949
<TOTAL-ASSETS> 3,245,087
<POLICY-LOSSES> 1,932,601
<UNEARNED-PREMIUMS> 260,352
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 13,782
<NOTES-PAYABLE> 163,000
0
0
<COMMON> 122,214
<OTHER-SE> 306,929
<TOTAL-LIABILITY-AND-EQUITY> 3,245,087
540,087
<INVESTMENT-INCOME> 110,057
<INVESTMENT-GAINS> (7,745)
<OTHER-INCOME> 12,718
<BENEFITS> 392,473
<UNDERWRITING-AMORTIZATION> 124,368
<UNDERWRITING-OTHER> 85,963
<INCOME-PRETAX> 40,092
<INCOME-TAX> 11,739
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,759)
<NET-INCOME> 25,594
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.08
<RESERVE-OPEN> 1,347,194 <F2>
<PROVISION-CURRENT> 409,554
<PROVISION-PRIOR> (32,514)<F3>
<PAYMENTS-CURRENT> 103,798
<PAYMENTS-PRIOR> 351,495
<RESERVE-CLOSE> 1,284,374 <F2>
<CUMULATIVE-DEFICIENCY> (32,514)
<FN>
<F1> Represents reinsurance recoverable on paid and unpaid losses.
<F2> Reserve balance is shown net of reinsurance receivables on unpaid
losses and LAE.
<F3> Excludes impact of accretion of prior years' discount of $15,433.
</FN>
</TABLE>
