UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 000-22761
PMA Capital Corporation
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2217932
-------------------------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Mellon Bank Center, Suite 2800
1735 Market Street
Philadelphia, Pennsylvania 19103-7590
--------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 665-5046
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
There were 21,769,397 shares outstanding of the registrant's Class A Common
Stock, $5 par value per share, as of the close of business on July 31, 2000.
<PAGE>
INDEX
--------------------------------------------------------------------------------
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated statements of operations for the three and
six months ended June 30, 2000 and 1999 (unaudited) 1
Consolidated balance sheets as of June 30, 2000 (unaudited)
and December 31, 1999 2
Consolidated statements of cash flows for the six months
ended June 30, 2000 and 1999 (unaudited) 3
Consolidated statements of comprehensive income (loss) for
the three and six months ended June 30, 2000 and 1999 (unaudited) 4
Notes to the consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II.Other Information
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit Index 27
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
PMA Capital Corporation
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands, except per share data) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $ 121,344 $ 101,931 $ 285,278 $ 270,448
Change in net unearned premiums 22,296 27,210 (15,816) (31,985)
--------- --------- --------- ---------
Net premiums earned 143,640 129,141 269,462 238,463
Net investment income 27,869 26,961 56,062 54,070
Net realized investment gains (losses) 3,532 (1,755) (1,929) (878)
Other revenues 3,274 2,821 6,661 5,959
--------- --------- --------- ---------
Total revenues 178,315 157,168 330,256 297,614
--------- --------- --------- ---------
Losses and expenses:
Losses and loss adjustment expenses 110,193 94,909 204,481 176,645
Acquisition expenses 27,494 32,103 54,191 52,501
Operating expenses 17,508 16,448 33,960 33,532
Dividends to policyholders 4,347 4,258 9,037 9,326
Interest expense 2,966 3,069 6,041 6,082
--------- --------- --------- ---------
Total losses and expenses 162,508 150,787 307,710 278,086
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of accounting change 15,807 6,381 22,546 19,528
Income tax expense (benefit):
Current 3,433 4,840 5,532 5,785
Deferred 2,234 (5,205) 2,496 (1,471)
--------- --------- --------- ---------
Total 5,667 (365) 8,028 4,314
--------- --------- --------- ---------
Income before cumulative effect of accounting change 10,140 6,746 14,518 15,214
Cumulative effect of accounting change (net of
income tax benefit of $1,485) -- -- -- (2,759)
--------- --------- --------- ---------
Net income $ 10,140 $ 6,746 $ 14,518 $ 12,455
========= ========= ========= =========
Income per share:
Basic:
Income before cumulative effect of
accounting change $ 0.46 $ 0.29 $ 0.66 $ 0.65
Cumulative effect of accounting change -- -- -- (0.12)
--------- --------- --------- ---------
Net income $ 0.46 $ 0.29 $ 0.66 $ 0.53
========= ========= ========= =========
Diluted:
Income before cumulative effect of
accounting change $ 0.45 $ 0.28 $ 0.64 $ 0.63
Cumulative effect of accounting change -- -- -- (0.11)
--------- --------- --------- ---------
Net income $ 0.45 $ 0.28 $ 0.64 $ 0.52
========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PMA Capital Corporation
Consolidated Balance Sheets
(Unaudited)
As of As of
June 30, December 31,
(dollar amounts in thousands) 2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: 2000 - $ 1,576,789; 1999 - $1,648,894) $ 1,514,585 $ 1,579,640
Equity securities, at fair value (cost: 2000 - $42,693; 1999 - $37,779) 39,935 34,966
Short-term investments, at amortized cost which approximates fair value 328,305 303,429
----------- -----------
Total investments 1,882,825 1,918,035
Cash 15,839 84,261
Accrued investment income 19,247 20,480
Premiums receivable (net of valuation allowance:
2000 - $18,394 ; 1999 - $18,088) 278,969 271,833
Reinsurance receivables (net of valuation allowance:
2000 - $3,896; 1999 - $5,528) 751,839 658,164
Deferred income taxes, net 100,381 105,363
Deferred acquisition costs 49,832 48,949
Other assets 178,156 138,002
----------- -----------
Total assets $ 3,277,088 $ 3,245,087
=========== ===========
Liabilities:
Unpaid losses and loss adjustment expenses $ 1,949,411 $ 1,932,601
Unearned premiums 281,269 260,352
Long-term debt 163,000 163,000
Accounts payable and accrued expenses 128,494 109,447
Funds held under reinsurance treaties 118,587 94,445
Dividends to policyholders 15,864 13,782
Payable under securities loan agreements 185,899 242,317
----------- -----------
Total liabilities 2,842,524 2,815,944
----------- -----------
Commitments and contingencies (Note 4)
Shareholders' Equity:
Common stock, $5 par value
(2000 - 0 shares authorized, issued and outstanding;
1999 - 40,000,000 shares authorized, 13,084,665 issued
and 12,648,658 outstanding) -- 65,423
Class A Common stock, $5 par value
(2000 - 40,000,000 shares authorized, 24,442,945 issued
and 21,850,917 outstanding)
1999 - 40,000,000 shares authorized, 11,358,280 issued 122,214 56,791
and 9,692,854 outstanding)
Additional paid-in capital - Class A Common stock 339 339
Retained earnings 402,027 391,981
Accumulated other comprehensive loss (42,225) (46,844)
Notes receivable from officers (56) (56)
Treasury stock, at cost:
Common stock (shares: 2000 - 0 and 1999 - 436,007) -- (5,582)
Class A Common stock (shares: 2000 - 2,592,028 and 1999 - 1,665,426) (47,735) (32,909)
----------- -----------
Total shareholders' equity 434,564 429,143
----------- -----------
Total liabilities and shareholders' equity $ 3,277,088 $ 3,245,087
=========== ===========
See accompanying notes to the consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PMA Capital Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
(dollar amounts in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,518 $ 12,455
Adjustments to reconcile net income to net cash flows provided by (used in)
operating activities:
Depreciation and amortization 2,920 3,763
Provision for deferred income taxes 2,496 (1,471)
Net realized investment losses 1,929 878
Cumulative effect of accounting change -- 2,759
Change in:
Premiums receivable and unearned premiums, net 13,781 32,737
Dividends to policyholders 2,082 1,921
Reinsurance receivables (93,675) (15,149)
Unpaid losses and loss adjustment expenses 16,810 (25,828)
Accrued investment income 1,233 1,583
Deferred acquisition costs (883) (2,955)
Other, net 8,556 (8,474)
--------- ---------
Net cash flows provided by (used in) operating activities (30,233) 2,219
--------- ---------
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (294,432) (739,603)
Maturities or calls 67,738 65,019
Sales 292,516 680,051
Equity securities:
Purchases (24,706) --
Sales 23,554 --
Net (purchases) sales of short-term investments (81,294) 13,811
Other, net (7,929) (2,239)
--------- ---------
Net cash flows provided by (used in) investing activities (24,553) 17,039
--------- ---------
Cash flows from financing activities:
Dividends paid to shareholders (3,775) (3,852)
Proceeds from exercise of stock options 1,815 4,546
Purchase of treasury stock (11,676) (12,254)
Net repayments of notes receivable from officers -- 274
--------- ---------
Net cash flows used in financing activities (13,636) (11,286)
--------- ---------
Net increase (decrease) in cash (68,422) 7,972
Cash - beginning of period 84,261 2,562
--------- ---------
Cash - end of period $ 15,839 $ 10,534
========= =========
Supplementary cash flow information:
Income taxes paid $ 4,500 $ 5,437
Interest paid $ 5,930 $ 5,994
See accompanying notes to the consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PMA Capital Corporation
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 10,140 $ 6,746 $ 14,518 $ 12,455
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during the period (4,742) (27,129) 3,365 (51,428)
Less: reclassification adjustment for (gains)
losses included in net income (net of tax
expense (benefit): $1,236 and $(614) for
three months ended June 30, 2000 and
1999; $(675) and $(307) for six months
ended June 30, 2000 and 1999) (2,296) 1,141 1,254 571
-------- -------- -------- --------
Other comprehensive income (loss), net of tax (7,038) (25,988) 4,619 (50,857)
-------- -------- -------- --------
Comprehensive income (loss) $ 3,102 $(19,242) $ 19,137 $(38,402)
======== ======== ======== ========
See accompanying notes to the consolidated financial statements.
</TABLE>
4
<PAGE>
PMA Capital Corporation
Notes to the Consolidated Financial Statements
1. BUSINESS DESCRIPTION
The accompanying consolidated financial statements include the accounts of PMA
Capital Corporation and its wholly and majority owned subsidiaries (collectively
referred to as "PMA Capital" or the "Company"). PMA Capital is an insurance
holding company that operates three specialty risk management businesses, which
are more fully described below.
Reinsurance -- PMA Capital's reinsurance operations ("PMA Re") consist mainly of
PMA Reinsurance Corporation, a Pennsylvania domiciled insurance company, which
emphasizes risk-exposed, excess of loss reinsurance and operates in the brokered
market. PMA Re's business is predominantly in casualty lines of reinsurance.
Workers' Compensation and Primary Standard Insurance -- PMA Capital's property
and casualty insurance subsidiaries ("The PMA Insurance Group") include
Pennsylvania domiciled insurance companies as well as certain foreign
subsidiaries. The PMA Insurance Group primarily writes 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 - PMA Capital's specialty property and casualty
operations ("Caliber One") consist mainly of Caliber One Indemnity Company, a
Delaware domiciled insurance company, which writes business nationally on a
non-admitted basis through surplus lines brokers and managing general agents.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. It is management's opinion that all adjustments,
including normal recurring accruals, considered necessary for a fair
presentation have been included. Certain reclassifications of prior year amounts
have been made to conform to the 2000 presentation.
The preparation of consolidated financial statements in conformity with GAAP
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Due to this and certain other factors,
such as the seasonal nature of portions of the insurance business as well as
competitive and other market conditions, operating results for the three and six
months ended June 30, 2000 are not necessarily indicative of the results to be
expected for the full year.
The information included in this Form 10-Q should be read in conjunction with
the Company's audited consolidated financial statements and footnotes included
in its 1999 Annual Report to Shareholders and incorporated by reference in its
Form 10-K for the year ended December 31, 1999.
B. Recent Accounting Pronouncements - Effective January 1, 2000, the Company
adopted Statement of Position ("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. The adoption of SOP 98-7 did not have
a material impact on the Company's financial condition, results of operations or
liquidity.
5
<PAGE>
Effective January 1, 1999, the Company adopted SOP 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." SOP 97-3
provides guidance for determining when an insurance company should recognize a
liability for guaranty fund and other insurance related assessments and how to
measure that liability. As a result of adopting SOP 97-3, the Company recorded a
liability of $4.3 million pre-tax and a resulting charge to earnings of $2.8
million, net of income tax benefit of $1.5 million, which has been reported as a
cumulative effect of accounting change. This accounting change impacts The PMA
Insurance Group segment.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. SFAS No. 133 requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in the fair
value of a derivative (that is, gains and losses) depends on the intended use of
the derivative and the resulting designation. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. 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.
3. REINSURANCE
In the ordinary course of business, PMA Capital's reinsurance and insurance
subsidiaries assume premiums from and cede premiums to 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. The reinsurance and insurance subsidiaries remain primarily
liable to their clients in the event their reinsurers are unable to meet their
financial obligations.
The components of net premiums earned and losses and loss adjustment expenses
("LAE") incurred are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earned Premiums:
Direct $ 109,908 $ 78,801 $ 207,957 $ 154,126
Assumed 91,085 83,078 173,764 152,524
Ceded (57,353) (32,738) (112,259) (68,187)
--------- --------- --------- ---------
Net $ 143,640 $ 129,141 $ 269,462 $ 238,463
========= ========= ========= =========
Losses and LAE:
Direct $ 95,808 $ 64,669 $ 197,297 $ 125,029
Assumed 64,065 60,125 123,498 96,181
Ceded (49,680) (29,885) (116,314) (44,565)
--------- --------- --------- ---------
Net $ 110,193 $ 94,909 $ 204,481 $ 176,645
========= ========= ========= =========
</TABLE>
6
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
The Company's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Such changes
could include various legislative and regulatory changes which may affect the
pricing or profitability of the insurance products sold by the Company. In
addition, it is always possible that judicial reinterpretation of insurance
contracts after the policies were written may result in coverage unanticipated
by the Company at the time the policies were issued, such as coverage for Year
2000, tobacco and other claims. The eventual effect on the Company of the
changing environment in which it operates remains uncertain.
In the event a property and casualty insurer operating in a jurisdiction where
the Company's insurance subsidiaries also operate becomes or is declared
insolvent, state insurance regulations provide for the assessment of other
insurers to fund any capital deficiency of the insolvent insurer. Generally,
this assessment is based upon the ratio of an insurer's voluntary premiums
written to the total premiums written for all insurers in that particular
jurisdiction. The Company is not aware of any material potential assessments at
June 30, 2000 that have not been reflected in the accompanying financial
statements.
The Company has provided guarantees of approximately $7.8 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.
5. EARNINGS PER SHARE
A reconciliation of the shares used as the denominator of the basic and diluted
earnings per share computations is presented below. For all periods presented,
there were no differences in the numerator (income before cumulative effect of
accounting change) for the basic and diluted earnings per share calculation:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Denominator:
Basic shares - weighted average
Common and Class A Common
shares outstanding 22,057,649 23,083,506 22,161,668 23,199,921
Effect of dilutive stock options 505,907 853,211 528,362 823,293
---------- ---------- ---------- ----------
Total diluted shares 22,563,556 23,936,717 22,690,030 24,023,214
========== ========== ========== ==========
</TABLE>
7
<PAGE>
6. SHAREHOLDERS' EQUITY
Effective on the close of business April 24, 2000, the Company eliminated its
class of Common stock from the Company's authorized capital and reclassified
each issued share of Common stock into one share of Class A Common stock. In
addition, the Company authorized 2,000,000 shares of undesignated Preferred
stock, $0.01 par value per share. There are no shares of Preferred stock issued
or outstanding.
7. BUSINESS SEGMENTS
The following table indicates the Company's revenues, all of which are generated
within the U.S., and pre-tax operating income (loss) by principal business
segment:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
PMA Re $ 85,595 $ 83,906 $ 163,586 $ 149,967
The PMA Insurance Group
Excluding Run-off Operations 80,885 69,140 151,755 137,975
Run-off Operations 1,078 1,097 2,164 2,223
--------- --------- --------- ---------
Total 81,963 70,237 153,919 140,198
Caliber One 7,263 4,493 14,238 7,539
Corporate and Other (38) 287 442 788
Net realized investment gains (losses) 3,532 (1,755) (1,929) (878)
--------- --------- --------- ---------
Total revenues $ 178,315 $ 157,168 $ 330,256 $ 297,614
========= ========= ========= =========
Components of pre-tax operating
income(1) and net income:
PMA Re $ 12,779 $ 10,367 $ 26,762 $ 23,116
The PMA Insurance Group:
Excluding Run-off Operations 5,960 4,755 11,343 9,674
Run-off Operations (344) (560) (125) (494)
--------- --------- --------- ---------
Total 5,616 4,195 11,218 9,180
Caliber One (518) (605) (2,791) (1,301)
Corporate and Other (5,602) (5,821) (10,714) (10,589)
--------- --------- --------- ---------
Pre-tax operating income 12,275 8,136 24,475 20,406
Net realized investment gains (losses) 3,532 (1,755) (1,929) (878)
--------- --------- --------- ---------
Income before income taxes and
cumulative effect of accounting change 15,807 6,381 22,546 19,528
Income tax expense (benefit) 5,667 (365) 8,028 4,314
--------- --------- --------- ---------
Income before cumulative effect of
accounting change 10,140 6,746 14,518 15,214
Cumulative effect of accounting change,
net of tax -- -- -- (2,759)
--------- --------- --------- ---------
Net income $ 10,140 $ 6,746 $ 14,518 $ 12,455
========= ========= ========= =========
<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>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion of PMA Capital's financial condition as of June
30, 2000, compared with December 31, 1999, and the results of operations of PMA
Capital for the three and six months ended June 30, 2000, compared with the same
periods last year. This discussion should be read in conjunction with
Management's Discussion and Analysis included in PMA Capital's 1999 Annual
Report to Shareholders (pages 28 through 43), to which the reader is directed
for additional information. The term "SAP" refers to the statutory accounting
practices prescribed or permitted by applicable state insurance departments and
the term "GAAP" refers to generally accepted accounting principles.
CONSOLIDATED RESULTS OF OPERATIONS
The major components of operating revenues, pre-tax operating income and net
income are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues:
Net premiums written $ 121,344 $ 101,931 $ 285,278 $ 270,448
========= ========= ========= =========
Net premiums earned $ 143,640 $ 129,141 $ 269,462 $ 238,463
Net investment income 27,869 26,961 56,062 54,070
Other revenues 3,274 2,821 6,661 5,959
--------- --------- --------- ---------
Total operating revenues $ 174,783 $ 158,923 $ 332,185 $ 298,492
========= ========= ========= =========
Components of pre-tax operating
income (1) and net income:
PMA Re $ 12,779 $ 10,367 $ 26,762 $ 23,116
The PMA Insurance Group:
Excluding Run-off Operations 5,960 4,755 11,343 9,674
Run-off Operations (344) (560) (125) (494)
--------- --------- --------- ---------
Total 5,616 4,195 11,218 9,180
Caliber One (518) (605) (2,791) (1,301)
Corporate and Other (5,602) (5,821) (10,714) (10,589)
--------- --------- --------- ---------
Pre-tax operating income 12,275 8,136 24,475 20,406
Net realized investment gains (losses) 3,532 (1,755) (1,929) (878)
--------- --------- --------- ---------
Income before income taxes and
cumulative effect of accounting change 15,807 6,381 22,546 19,528
Income tax expense (benefit) 5,667 (365) 8,028 4,314
--------- --------- --------- ---------
Income before cumulative effect of
accounting change 10,140 6,746 14,518 15,214
Cumulative effect of accounting change,
net of tax -- -- -- (2,759)
--------- --------- --------- ---------
Net income $ 10,140 $ 6,746 $ 14,518 $ 12,455
========= ========= ========= =========
<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>
9
<PAGE>
Consolidated operating revenues for the three and six months ended June 30,
2000, were $174.8 million and $332.2 million, respectively, compared to $158.9
million and $298.5 million for the same periods last year. The increases in
operating revenues primarily reflect higher net premiums earned at The PMA
Insurance Group, PMA Re and Caliber One.
Pre-tax operating income for the three and six months ended June 30, 2000 was
$12.3 million and $24.5 million, respectively, compared to pre-tax operating
income of $8.1 million and $20.4 million for the same periods in 1999. Pre-tax
operating income for PMA Re and The PMA Insurance Group improved for the three
and six months ended June 30, 2000, compared to the same periods last year.
These increases were partially offset by higher pre-tax operating losses at
Caliber One for the six months ended June 30, 2000, compared to the same period
last year. After-tax operating income was $7.8 million and $15.8 million for the
three and six months ended June 30, 2000, respectively, and was essentially
level with after-tax operating income of $7.9 million and $15.8 million for the
same periods in 1999. A higher effective tax rate in the three and six months
ended June 30, 2000, compared to the same periods last year, offset the
improvements in pre-tax operating income.
The Company currently expects operating earnings per share to improve in 2000.
This expectation may differ materially from actual results because of the risk
factors noted in the "Cautionary Statements" on page 22.
Net income was $10.1 million and $14.5 million for the three and six months
ended June 30, 2000, respectively, compared to net income of $6.7 million and
$12.5 million for the same periods last year. Net income for the six months
ended June 30, 1999 includes an after-tax charge of $2.8 million for the effect
of adopting Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." See Note 2-B to the Company's
Consolidated Financial Statements for additional information.
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 not
necessarily indicative of current operating fundamentals or future operating
performance. Accordingly, such gains and losses are not included as a component
of operating income. Included in net income were after-tax net realized gains of
$2.3 million for the three months ended June 30, 2000 and after-tax net realized
losses of $1.3 million for the six months ended June 30, 2000, compared to
after-tax net realized investment losses of $1.1 million and $570,000 for the
same periods in 1999. Net realized investment losses in 2000 and 1999
principally resulted from sales of investments in order to capitalize on higher
yielding investment opportunities. During the second quarter of 2000, such
losses were more than offset by gains from the sale of equity securities, which
had reached the Company's targeted exit price level.
10
<PAGE>
PMA RE
Summarized financial results of PMA Re are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $ 73,853 $ 58,338 $140,845 $136,665
======== ======== ======== ========
Net premiums earned $ 70,608 $ 69,915 $133,745 $122,348
Net investment income 14,987 13,991 29,841 27,619
-------- -------- -------- --------
Operating revenues 85,595 83,906 163,586 149,967
-------- -------- -------- --------
Losses and loss adjustment expenses ("LAE") 52,506 49,382 97,922 87,243
Acquisition and operating expenses 20,310 24,157 38,902 39,608
-------- -------- -------- --------
Total losses and expenses 72,816 73,539 136,824 126,851
-------- -------- -------- --------
Pre-tax operating income $ 12,779 $ 10,367 $ 26,762 $ 23,116
======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------
</TABLE>
PMA Re's pre-tax operating income was $12.8 million and $26.8 million for the
three and six months ended June 30, 2000, respectively, compared to $10.4
million and $23.1 million for the same periods in 1999. These increases are
attributable to higher net investment income of $1.0 million and $2.2 million
for the three and six months ended June 30, 2000, respectively, compared to the
same periods in 1999, and an improvement in underwriting results of $1.4 million
for both the three and six months ended June 30, 2000, compared to the same
periods in 1999.
Premiums
PMA Re's gross and net premiums written by major category of business are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross premiums written:
Casualty lines $ 61,261 $ 49,774 $122,572 $122,962
Property lines 29,576 20,368 55,288 46,133
Other lines 864 70 1,321 612
-------- -------- -------- --------
Total $ 91,701 $ 70,212 $179,181 $169,707
======== ======== ======== ========
Net premiums written:
Casualty lines $ 46,545 $ 41,416 $ 91,913 $ 97,963
Property lines 26,466 16,857 47,639 38,109
Other lines 842 65 1,293 593
-------- -------- -------- --------
Total $ 73,853 $ 58,338 $140,845 $136,665
======== ======== ======== ========
---------------------------------------------------------------------------------------
</TABLE>
Net premiums written increased $15.5 million and $4.2 million for the three and
six months ended June 30, 2000, respectively, compared to the same periods in
1999. Expanded participations and improved rate adequacy led to growth in
premiums for PMA Re's Traditional and Finite Risk & Financial Products units.
However, this growth was partially offset by lower premiums from the Specialty
unit reflecting the effects of highly competitive conditions, particularly in
the professional liability reinsurance market where PMA Re has non-renewed pro
rata treaties when the proposed structures did not meet its underwriting
guidelines.
11
<PAGE>
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
term of the contracts. However, due to a revision late in 1999 to PMA Re's
methodology used in estimating unearned premiums on in-force contracts, net
premiums earned increased $693,000 and $11.4 million for the three and six
months ended June 30, 2000, respectively, compared to the same periods in 1999.
Losses and Expenses
The components of PMA Re's GAAP combined ratios are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss and LAE ratio 74.4% 70.6% 73.2% 71.3%
-------- -------- -------- --------
Expense ratio:
Acquisition expenses 23.6% 29.8% 23.7% 27.0%
Operating expenses 5.1% 4.8% 5.4% 5.4%
-------- -------- -------- --------
Total expense ratio 28.7% 34.6% 29.1% 32.4%
-------- -------- -------- --------
GAAP combined ratio(1) 103.1% 105.2% 102.3% 103.7%
======== ======== ======== ========
------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
PMA Re's loss and LAE ratio increased 3.8 points and 1.9 points for the three
and six months ended June 30, 2000, respectively, compared to the same periods
in 1999. These increases reflect an increase in the current accident year loss
and LAE ratio, partially offset by an increase in favorable prior accident year
loss development. The current accident year loss and LAE ratio increased by 6.4
points and 2.7 points for the three and six months ended June 30, 2000,
respectively, compared to the same periods in 1999. The acquisition expense
ratio decreased 6.2 points and 3.3 points for the three and six months ended
June 30, 2000, respectively, compared to the same periods in 1999. The increase
in the loss and LAE ratio and the decrease in the acquisition expense ratio are
primarily due to a change in the composition of business.
Net Investment Income
Net investment income increased $1.0 million and $2.2 million for the three and
six months ended June 30, 2000, respectively, compared to the same periods in
1999. The improvement in net investment income primarily reflects an increase in
investment yield resulting from a shift in invested assets towards higher
yielding securities.
12
<PAGE>
THE PMA INSURANCE GROUP
Summarized financial results of The PMA Insurance Group are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The PMA Insurance Group
Net premiums written $ 48,935 $ 36,162 $ 136,381 $ 119,183
========= ========= ========= =========
Net premiums earned $ 67,690 $ 55,326 $ 124,782 $ 109,725
Net investment income 11,699 12,600 23,932 25,733
Other revenues 2,574 2,311 5,205 4,740
--------- --------- --------- ---------
Operating revenues 81,963 70,237 153,919 140,198
--------- --------- --------- ---------
Losses and LAE 50,806 42,330 93,459 84,087
Acquisition and operating expenses 21,194 19,454 40,205 37,605
Dividends to policyholders 4,347 4,258 9,037 9,326
--------- --------- --------- ---------
Total losses and expenses 76,347 66,042 142,701 131,018
--------- --------- --------- ---------
Pre-tax operating income $ 5,616 $ 4,195 $ 11,218 $ 9,180
========= ========= ========= =========
The PMA Insurance Group
Excluding Run-off Operations
Net premiums written $ 48,935 $ 36,162 $ 136,381 $ 119,183
========= ========= ========= =========
Net premiums earned $ 67,690 $ 55,326 $ 124,782 $ 109,725
Net investment income 10,621 11,503 21,768 23,510
Other revenues 2,574 2,311 5,205 4,740
--------- --------- --------- ---------
Operating revenues 80,885 69,140 151,755 137,975
--------- --------- --------- ---------
Losses and LAE 50,118 40,919 92,068 82,128
Acquisition and operating expenses 20,460 19,208 39,307 36,847
Dividends to policyholders 4,347 4,258 9,037 9,326
--------- --------- --------- ---------
Total losses and expenses 74,925 64,385 140,412 128,301
--------- --------- --------- ---------
Pre-tax operating income $ 5,960 $ 4,755 $ 11,343 $ 9,674
========= ========= ========= =========
Run-off Operations (1)
Net investment income $ 1,078 $ 1,097 $ 2,164 $ 2,223
--------- --------- --------- ---------
Losses and LAE 688 1,411 1,391 1,959
Operating expenses 734 246 898 758
--------- --------- --------- ---------
Total losses and expenses 1,422 1,657 2,289 2,717
--------- --------- --------- ---------
Pre-tax operating loss $ (344) $ (560) $ (125) $ (494)
========= ========= ========= =========
---------------------------------------------------------------------------------------------------------
<FN>
(1) Run-off operations ("Run-off Operations") of The PMA Insurance Group
reinsure certain obligations primarily associated with workers'
compensation claims written by The PMA Insurance Group's Pooled Companies
for the years 1991 and prior.
</FN>
</TABLE>
13
<PAGE>
Operating Results
Pre-tax operating income for The PMA Insurance Group was $5.6 million and $11.2
million for the three and six months ended June 30, 2000, compared to $4.2
million and $9.2 million for the same periods in 1999. The increases in
operating income were primarily due to improved underwriting results reflecting
firming prices on both new and renewal business, partially offset by lower net
investment income.
The PMA Insurance Group Excluding Run-off Operations
Premiums
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Workers' compensation and integrated disability:
Direct premiums written $ 43,180 $ 36,999 $ 120,655 $ 108,917
Premiums assumed 1,277 469 1,633 1,194
Premiums ceded (8,277) (7,964) (19,060) (17,588)
--------- --------- --------- ---------
Net premiums written $ 36,180 $ 29,504 $ 103,228 $ 92,523
========= ========= ========= =========
Commercial Lines:
Direct premiums written $ 18,588 $ 13,992 $ 45,340 $ 41,633
Premiums assumed 193 134 743 1,028
Premiums ceded (6,026) (7,468) (12,930) (16,001)
--------- --------- --------- ---------
Net premiums written $ 12,755 $ 6,658 $ 33,153 $ 26,660
========= ========= ========= =========
Total:
Direct premiums written $ 61,768 $ 50,991 $ 165,995 $ 150,550
Premiums assumed 1,470 603 2,376 2,222
Premiums ceded (14,303) (15,432) (31,990) (33,589)
--------- --------- --------- ---------
Net premiums written $ 48,935 $ 36,162 $ 136,381 $ 119,183
========= ========= ========= =========
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Direct workers' compensation and integrated disability premiums written
increased by $6.2 million and $11.7 million for the three and six months ended
June 30, 2000 due to an increase in the level of workers' compensation and
integrated disability risks underwritten and due to increased rates on workers'
compensation business. 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"), increased by $4.6 million and $3.7 million for the three and six months
ended June 30, 2000, compared to the same periods in 1999, primarily due to rate
increases for commercial auto and commercial package lines and an increase in
the level of risks underwritten.
The decreases in reinsurance premiums ceded of $1.1 million and $1.6 million for
the three and six months ended June 30, 2000, compared to the same periods in
1999, reflect a decrease of $1.4 million and $3.1 million in ceded premiums for
Commercial Lines for the three and six months ended June 30, 2000, respectively,
compared to the same periods in 1999. The decrease in ceded Commercial Lines
premiums is primarily due to an increase in the reinsurance retention for the
commercial casualty lines of business from $175,000 to $250,000 effective
January 1, 2000. Partially offsetting this decrease was an increase in ceded
premiums for workers' compensation and integrated disability for the three and
six months ended June 30, 2000, compared to the same periods in 1999, as a
result of the increase in direct premiums written for these products.
Net premiums earned increased $12.4 million and $15.1 million for the three and
six months ended June 30, 2000, respectively, compared to the same periods in
1999. 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.
14
<PAGE>
Losses and Expenses
The components of The PMA Insurance Group's GAAP combined ratios, excluding
Run-off Operations are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss and LAE ratio 74.0% 74.0% 73.8% 74.8%
-------- -------- -------- --------
Expense ratio:
Acquisition expenses 18.0% 18.5% 18.4% 16.2%
Operating expenses(1)(2) 9.6% 12.1% 10.3% 13.7%
-------- -------- -------- --------
Total expense ratio 27.6% 30.6% 28.7% 29.9%
Policyholders' dividend ratio 6.4% 7.7% 7.2% 8.5%
-------- -------- -------- --------
GAAP combined ratio (1)(2)(3)(4) 108.0% 112.3% 109.7% 113.2%
======== ======== ======== ========
------------------------------------------------------------------------------------------
<FN>
(1) The expense ratio and the combined ratio for the six months ended June 30,
1999 exclude the impact of the cumulative effect of accounting change of
$4.3 million ($2.8 million after-tax) for insurance-related assessments.
(2) The expense ratio and the combined ratio exclude $1.8 million and $3.5
million for the three and six months ended June 30, 2000, respectively, and
$2.2 million and $4.0 million for the three and six months ended June 30,
1999, 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 110.2% and 111.5% for the three and six months ended June
30, 2000, and 115.3% and 115.7% for the three and six months ended June 30,
1999, respectively.
</FN>
</TABLE>
For the six months ended June 30, 2000, the GAAP loss and LAE ratio improved by
1.0 point, compared to the same period in 1999, primarily due to a decline in
net discount accretion. The loss and LAE ratio was unchanged for the second
quarter of 2000, compared to the second quarter of 1999.
The loss and LAE ratio is negatively impacted by accretion of prior year
discounted reserves and favorably impacted by setting up discount for current
year reserves. The net of these is referred to as net discount accretion. The
PMA Insurance Group experienced $556,000 of net discount accretion for the first
six months of 2000, compared to $1.8 million of net discount accretion for the
same period in 1999, primarily due to a reduction in discount accretion
attributable to loss reserves for prior accident years.
The PMA Insurance Group has experienced $2.7 million of favorable development of
prior accident year results ("prior year development") for the six months ended
June 30, 2000, compared to $2.6 million of favorable prior year development for
the same period in 1999. The favorable prior year development in both years
reflects better than expected loss experience from rent-a-captive workers'
compensation business and loss-sensitive workers' compensation business.
Policyholders' dividends for rent-a-captive business and premium adjustments for
loss-sensitive business substantially offset this favorable prior year
development.
Overall, the GAAP expense ratio decreased by 3.0 points and 1.2 points for the
three and six months ended June 30, 2000, respectively, compared to the same
periods in 1999, due to growth in net premiums earned that outpaced the increase
in expenses.
The policyholders' dividend ratio was 6.4% and 7.2% for the three and six months
ended June 30, 2000, respectively, compared to 7.7% and 8.5% for the same
periods last year. These decreases occurred primarily because The PMA
15
<PAGE>
Insurance Group has sold less business under dividend plans in the three and six
months ended June 30, 2000, compared to the same periods in 1999, and because
estimated payouts under dividend plans have been reduced in 2000.
Net Investment Income
Net investment income was $10.6 million and $21.8 million for the three and six
months ended June 30, 2000, compared to $11.5 million and $23.5 million for the
same periods in 1999. The decrease in net investment income primarily reflects a
lower asset base resulting from the paydown of loss reserves from prior accident
years.
Run-off Operations
Run-off Operations recorded pre-tax operating losses of $344,000 and $125,000
for the three and six months ended June 30, 2000, respectively, compared to
pre-tax operating losses of $560,000 and $494,000 for the same periods in 1999.
The improvements in pre-tax operating results primarily reflect lower losses and
LAE.
16
<PAGE>
CALIBER ONE
Summarized financial results of Caliber One are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $ (1,047) $ 7,531 $ 8,543 $ 14,853
======== ======== ======== ========
Net premiums earned $ 5,739 $ 4,000 $ 11,426 $ 6,643
Net investment income 1,524 493 2,812 896
-------- -------- -------- --------
Operating revenues 7,263 4,493 14,238 7,539
-------- -------- -------- --------
Losses and LAE 6,881 3,197 13,100 5,315
Acquisition and operating expenses 900 1,901 3,929 3,525
-------- -------- -------- --------
Total losses and expenses 7,781 5,098 17,029 8,840
-------- -------- -------- --------
Pre-tax operating loss $ (518) $ (605) $ (2,791) $ (1,301)
======== ======== ======== ========
-----------------------------------------------------------------------------------------------------
</TABLE>
Caliber One recorded pre-tax operating losses of $518,000 and $2.8 million for
the three and six months ended June 30, 2000, respectively, compared to pre-tax
operating losses of $605,000 and $1.3 million for the same periods in 1999. The
improvement in the pre-tax operating loss for the three months ended June 30,
2000, compared to the same period last year, reflects higher net investment
income, partially offset by higher underwriting losses. The increase in pre-tax
operating losses for the six months ended June 30, 2000, compared to the same
period in 1999, reflects higher underwriting losses, partially offset by higher
net investment income.
Premiums
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(dollar amounts in thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross premiums written:
Products liability $ 7,031 $ 3,113 $ 12,493 $ 5,548
Professional liability (2,163) 2,194 8,454 4,391
Other liability 8,202 6,860 14,684 11,424
Property 10,898 7,273 21,545 10,868
-------- -------- -------- --------
Total $ 23,968 $ 19,440 $ 57,176 $ 32,231
======== ======== ======== ========
Net premiums written:
Products liability $ 1,791 $ 1,027 $ 5,792 $ 2,797
Professional liability (5,066) 1,961 (4,257) 3,690
Other liability 1,868 3,438 3,247 6,731
Property 360 1,105 3,761 1,635
-------- -------- -------- --------
Total $ (1,047) $ 7,531 $ 8,543 $ 14,853
======== ======== ======== ========
----------------------------------------------------------------------------------------------
</TABLE>
Gross premiums written increased $4.5 million and $24.9 million for the three
and six months ended June 30, 2000, respectively, compared to the same periods
in 1999. The overall increase in gross premiums written reflects Caliber One's
market acceptance and penetration as well as expanded product offerings. Net
premiums written decreased $8.6 million and $6.3 million for the three and six
months ended June 30, 2000, compared to the same periods last year, due to
increased ceded premiums related primarily to professional liability, commercial
automobile (included in "other liability" in the table above) and property
catastrophe exposures, partially offset by the increase associated with the
overall growth
17
<PAGE>
in gross premiums written. The decline in gross and net premiums written for the
professional liability line of business in the three months ended June 30, 2000
is primarily due to mid-term policy cancellations for the intermediate and
long-term care (nursing homes) class of business.
Net premiums earned increased $1.7 million and $4.8 million for the three and
six months ended June 30, 2000, compared to the same periods in 1999. 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. The increase in Caliber One's net premiums earned primarily reflects
the increase in net premiums written in the first quarter of 2000 and the last
six months of 1999, compared to the same periods in 1999 and 1998, respectively.
This was partially offset by increased ceded premiums related primarily to
professional liability, commercial automobile and property catastrophe
exposures.
Losses and Expenses
The components of Caliber One's GAAP combined ratios are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss and LAE ratio 119.9% 79.9% 114.7% 80.0%
-------- -------- -------- --------
Expense ratio:
Acquisition expenses -23.2% 25.0% -3.6% 25.9%
Operating expenses 38.9% 22.5% 38.0% 27.2%
-------- -------- -------- --------
Total expense ratio 15.7% 47.5% 34.4% 53.1%
-------- -------- -------- --------
GAAP combined ratio 135.6% 127.4% 149.1% 133.1%
======== ======== ======== ========
------------------------------------------------------------------------------------
</TABLE>
Caliber One's loss and LAE ratio increased significantly for the three and six
months ended June 30, 2000, respectively, compared to the same periods last
year. The increases were primarily due to higher than expected losses and LAE in
the professional liability, commercial automobile and general liability lines of
business. A substantial amount of the losses and LAE from the professional
liability and commercial automobile lines of business was ceded to reinsurers.
Additionally, other steps were taken in the first six months of 2000 to minimize
the impact of these lines, including de-emphasizing certain segments of the
commercial automobile and professional liability lines, including the
intermediate and long-term care (nursing homes) class of business. Accordingly,
Caliber One has refocused its underwriting emphasis on other lines and classes
of business.
As of December 31, 1999, Caliber One's reinsurance protection was $5.5 million
in excess of $500,000 for casualty lines and $4.5 million in excess of $500,000
for property lines. In the first quarter of 2000, additional reinsurance with
limits of at least $42 million was purchased on the professional liability and
commercial automobile lines of business.
The acquisition expense ratio decreased significantly for the three and six
months ended June 30, 2000, respectively, compared to the same periods in 1999.
The decrease in the acquisition expense ratio is primarily due to ceding
commissions associated with the reinsurance purchased for the professional
liability and commercial automobile lines of business, which more than offset
acquisition expenses relating to other lines of business.
The operating expense ratio increased 16.4 points and 10.8 points for the three
and six months ended June 30, 2000, respectively, compared to the same periods
last year. These increases primarily reflect increases in operating expenses
associated with Caliber One's continuing growth and infrastructure development
and the effect on net premiums earned of the increased use of reinsurance in
2000.
18
<PAGE>
Net Investment Income
Net investment income was $1.5 million and $2.8 million for the three and six
months ended June 30, 2000, respectively, compared to $493,000 and $896,000 for
the same periods in 1999, primarily reflecting a larger average invested asset
base, due mainly to premium collections in excess of paid losses and expenses
and, to a lesser extent, capital contributions received in late 1999.
LOSS RESERVES
Unpaid losses and LAE reflect management's best estimate of future amounts
needed to pay claims and related settlement costs with respect to insured events
which have occurred, including events that have not been reported to the
Company. In many cases, significant periods of time, ranging up to several years
or more, may elapse between the occurrence of an insured loss, the reporting of
the loss to the Company and the Company's payment of that loss. In general,
liabilities for reinsurers become known more slowly than for primary insurers
and are subject to more unforeseen development 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.
Management believes that its unpaid losses and LAE are fairly stated at June 30,
2000. 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 losses, net of reinsurance, prove
to differ substantially from the amounts recorded at June 30, 2000, the related
adjustments could have a material adverse effect on the Company's financial
condition, results of operations and liquidity.
For additional discussion of loss reserves and reinsurance, see pages 36 to 38
of the Management's Discussion and Analysis included in the Company's 1999
Annual Report to Shareholders, as well as pages 15 to 20 of the Company's Form
10-K for the year ended December 31, 1999.
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 the three and six months ended June 30,
2000, Corporate and Other recorded pre-tax operating losses of $5.6 million and
$10.7 million, respectively, compared to pre-tax operating losses of $5.8
million and $10.6 million for the same periods in 1999.
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, the
Company requires cash to pay debt obligations, dividends to shareholders and
taxes to the Federal government, as well as to capitalize subsidiaries from time
to time. PMA Capital's primary sources of liquidity are dividends from
subsidiaries, net tax payments received from subsidiaries and borrowings.
At June 30, 2000 and December 31, 1999, the Company had $163.0 million of
outstanding debt under its Revolving Credit Facility (the "Credit Facility").
The final expiration of the Credit Facility is December 31, 2002, and the Credit
Facility matures in an installment of $38.0 million in December 2000 and
installments of $62.5 million in 2001 and 2002.
In addition to the Credit Facility, the Company maintains a committed facility
of $50.0 million for letters of credit (the "Letter of Credit Facility"). The
Letter of Credit Facility is utilized primarily for securing reinsurance
obligations of the Company's insurance subsidiaries. As of June 30, 2000, the
Company had $45.8 million outstanding in letters of credit under the Letter of
Credit Facility, compared with $45.9 million as of December 31, 1999.
19
<PAGE>
The Company paid interest of $2.9 million and $5.9 million on both credit
facilities for the three and six months ended June 30, 2000, respectively,
compared to $2.9 million and $6.0 million for the same periods in 1999.
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 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 Pennsylvania Insurance 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 up to $3.3 million in dividends during 2000, without
the prior approval of the Delaware Insurance Commissioner. Dividends received
from subsidiaries were $8.1 million and $12.8 million for the three and six
months ended June 30, 2000, respectively, compared to $8.0 million and $18.8
million for the comparable 1999 periods.
Net tax payments received from subsidiaries were $6.8 million and $11.2 million
for the three and six months ended June 30, 2000, respectively, compared to $8.2
million and $11.7 million for the same periods in 1999.
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 $1.9 million and $3.8 million for the three and six months ended
June 30, 2000, respectively, compared to $2.0 million and $3.9 million for the
same periods last year.
PMA Capital also made capital contributions in the form of cash to its
subsidiaries totaling $1.5 million and $4.1 million for the three and six months
ended June 30, 1999, respectively. No cash capital contributions were made to
subsidiaries during the first six months of 2000.
In 1998, the Company's Board of Directors authorized a plan to repurchase shares
of 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 the first six months of 2000, the Company
repurchased 618,000 shares of Class A Common stock at a total cost of $11.7
million. Since the inception of its share repurchase program in February 1998,
PMA Capital has repurchased a total of 3.3 million shares at a total cost of
$63.1 million. On August 9, 2000, the Company's Board of Directors approved an
additional $15 million in share repurchasing authority, which brings PMA
Capital's remaining share repurchase authorization to $26.9 million. Decisions
regarding share repurchases are subject to prevailing market conditions and the
costs and benefits associated with alternative uses of capital.
Management believes that the Company's sources of funds will provide sufficient
liquidity to meet its short-term and long-term obligations.
The Company's total assets increased to $3,277.1 million at June 30, 2000,
compared to $3,245.1 million at December 31, 1999. The increase in total assets
is primarily attributable to increased reinsurance receivables related to the
purchase of reinsurance for Caliber One's professional liability and commercial
automobile lines of business.
Presently, management believes that the existing capital structure is
appropriate. However, management continually monitors the capital structure in
light of developments in the business, and the present assessment could change
as management becomes aware of new opportunities and challenges in the Company's
business.
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<PAGE>
OTHER MATTERS
The Company's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Such changes
could include various legislative and regulatory changes which may affect the
pricing or profitability of the insurance products sold by the Company. In
addition, it is always possible that judicial reinterpretation of insurance
contracts after the policies were written may result in coverage unanticipated
by the Company at the time the policies were issued, such as coverage for Year
2000, tobacco and other claims. The eventual effect on the Company of the
changing environment in which it operates remains uncertain.
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 consolidated
statutory surplus.
Recent Accounting Pronouncements
Effective January 1, 2000, the Company adopted 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. The adoption
of SOP 98-7 did not have a material impact on the Company's financial condition,
results of operations or liquidity.
Effective January 1, 1999, the Company adopted 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.
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. 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.
21
<PAGE>
CAUTIONARY STATEMENTS
Except for historical information provided in this Management's Discussion and
Analysis and otherwise in this report, statements made throughout this report
are forward-looking and contain information about financial results, economic
conditions, trends and known uncertainties. These forward-looking statements are
based on currently available financial, competitive and economic data and the
Company's current operating plans based on assumptions regarding future events.
The Company's actual results could differ materially from those expected by the
Company's management. The factors that could cause actual results to vary
materially, some of which are described with the forward-looking statements,
include, but are not limited to, changes in general economic conditions,
including the performance of financial markets and interest rates; regulatory or
tax changes, including changes in risk-based capital or other regulatory
standards that affect the ability of the Company to conduct its business;
competitive or regulatory changes that affect the cost of or demand for the
Company's products; the Company's ability to meet its marketing objectives; the
effect of changes in workers' compensation statutes and their administration;
the Company's ability to predict and effectively manage claims related to
insurance and reinsurance policies; reliance on key management; adequacy of
reserves for claim liabilities; adverse property and casualty loss development
for events the Company insured in prior years; adequacy and collectibility of
reinsurance purchased by the Company; severity of natural disasters and other
catastrophes; the effect of claims related to Year 2000 systems problems ("Y2K
Problems") asserted against the Company by insureds in which coverage is found
to exist by courts in various jurisdictions, and the costs of any litigation
with respect to Y2K Problems regardless of whether coverage is found; 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.
22
<PAGE>
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
At the April 24, 2000 Annual Meeting of Shareholders, the shareholders of the
Company approved amendments to the Company's Amended and Restated Articles of
Incorporation to:
1. eliminate the current class of Common Stock from the Company's authorized
capital and to provide for the conversion and reclassification of each
share of the issued Common Stock, $5.00 par value per share, into one share
of Class A Common Stock, $5.00 par value per share;
2. delete Article 6 of the Articles of Incorporation, which provided certain
preemptive rights to the holders of Common Stock; and
3. eliminate the cumulative voting rights of holders of both the Company's
Common Stock and Class A Common Stock.
Holders of the Class A Common Stock do not have preemptive or cumulative voting
rights and are entitled to cast one vote per share on all matters to properly
come before a meeting of shareholders. The Company's proxy statement for the
April 24, 2000 Annual Meeting fully describes the effects of the amendments.
The amendments were adopted primarily to effectuate the reclassification of each
issued share of Common Stock into one share of Class A Common Stock and resulted
in the Company having only one class of common stock outstanding, the Class A
Common Stock, effective on the close of business on April 24, 2000 ("Effective
Time"). Prior to the Effective Time, the Common Stock was convertible into Class
A Common Stock on a one-for-one basis, and there was no public trading market
for the Common Stock. Approximately, 12 million shares of Class A Common Stock
were issued in connection with the reclassification and conversion. Holders of
the Common Stock were not required to give consideration in connection with the
reclassification and conversion, and the Company did not pay any commission or
other remuneration, directly or indirectly, for the solicitation of proxies in
connection with reclassification and conversion. Therefore, the Company believes
that Section 3(a)(9) of the Securities Act of 1933 (the "Act") provided an
exemption from registration under the Act for the shares of Class A Common Stock
issued in connection with the reclassification and conversion.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 2000 Annual Meeting of Shareholders ("Annual Meeting") was held on
April 24, 2000. At the Annual Meeting, the shareholders acted upon the following
matters:
1. Proposal to elect four nominees as members of the Company's Board of
Directors to serve for terms expiring at the 2003 Annual Meeting and until
their successors are elected:
Name of Nominee Votes Cast For Votes Withheld
--------------- -------------- --------------
Frederick W. Anton III 116,364,214 4,674,213
Joseph H. Foster 116,364,214 4,674,213
James F. Malone III 116,364,214 4,674,213
L.J. Rowell Jr. 116,364,214 4,674,213
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<PAGE>
2. Proposal to approve a reclassification amendment to the Company's Amended
and Restated Articles of Incorporation was approved as follows:
Common Stock Class A Common Stock
------------ --------------------
Votes in favor 109,075,650 7,384,016
Votes against 100,000 52,836
Votes abstaining -- 8,340
Broker non-votes 3,856,400 561,185
3. Proposal to approve an amendment to the Company's Amended and Restated
Articles of Incorporation to authorize 2,000,0000 shares of undesignated
Preferred Stock was approved as follows:
Common Stock Class A Common Stock
------------ --------------------
Votes in favor 106,555,650 6,336,618
Votes against 2,620,000 1,091,778
Votes abstaining -- 16,796
Broker non-votes 3,856,400 561,185
4. Proposal to approve an amendment to the Amended and Restated Articles of
Incorporation to eliminate cumulative voting was approved as follows:
Common Stock Class A Common Stock
------------ --------------------
Votes in favor 106,555,650 6,440,420
Votes against 2,620,000 996,337
Votes abstaining -- 8,435
Broker non-votes 3,856,400 561,185
5. Proposal to approve the PMA Capital Corporation Annual Incentive Plan was
approved as follows:
Total Votes
-----------
Votes in favor 118,611,669
Votes against 2,408,664
Votes abstaining 18,094
Broker non-votes --
6. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the
Independent Accountants was approved as follows:
Total Votes
-----------
Votes in favor 120,999,326
Votes against 31,118
Votes abstaining 7,983
Broker non-votes --
24
<PAGE>
Item 5. Other Information
(a) At the May 3, 2000 meeting of PMA Capital's Board of Directors, the Board
amended the Company's Bylaws to adopt, among other things, advance notice
provisions relating to director nominees and shareholder business to be brought
before an annual meeting of shareholders. As a result of these new provisions,
shareholders can now nominate any individual for a position on the Board of
Directors at the 2001 Annual Meeting of Shareholders only if the shareholder
notifies the Secretary of the Company of their nomination not later than the
close of business on February 23, 2001, and not earlier than the close of
business on January 24, 2001. The notice must include certain information about
the nominating-shareholder and the nominee as specified in the Bylaws. Each
nominee must also provide the Secretary with a written consent to serve if
elected.
Similarly, if a shareholder wishes to present a proposal from the floor of the
2001 Annual Meeting of Shareholders, the shareholder must notify the Secretary
of the Company in writing of the proposal not later than the close of business
on February 23, 2001, and not earlier than the close of business on January 24,
2001. The notice must also include the other information specified in the
Company's Bylaws.
Any shareholder that wishes to nominate a director or propose business from the
floor of the 2001 Annual Meeting of Shareholders should consult the Company's
Bylaws and the applicable proxy rules of the Securities and Exchange Commission.
The advance notice bylaws do not affect shareholder's rights to submit proposals
for inclusion in the proxy statement relating to the 2001 Annual Meeting
pursuant to Rule 14a-8 of the Securities Exchange Act of 1934. A copy of a news
release announcing the advance notice bylaws is attached hereto as Exhibit 99.1.
(b) A copy of a news release announcing the quarterly dividend and additional
share repurchase authority is attached hereto as Exhibit 99.2 and is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits are listed in the Index to Exhibits on page 27.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000:
During the quarterly period ended June 30, 2000, the Company filed the following
Reports on Form 8-K:
- dated April 24, 2000, Item 5 - containing a news release announcing
shareholder approval of a Board of Directors' proposal to reclassify each
issued share of Common Stock into one share of Class A Common Stock.
- dated May 4, 2000, Item 5 - containing news releases regarding its first
quarter 2000 results and announcing the adoption of its Shareholders'
Rights Plan.
- dated May 22, 2000, Item 5 - updating the Company's registration statements
on Forms S-8 (File No. 333-45949, File No. 333-68855 and File No.
333-77111) to cover Rights to Purchase Series A Junior Participating
Preferred Stock, which will attach to the shares of Class A Common Stock
registered under the above - referenced Registration Statements, and
containing, as an exhibit, the President's letter to shareholders and
Summary of Rights to Purchase Preferred Shares.
25
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PMA CAPITAL CORPORATION
Date: August 10, 2000 By: /s/ Francis W. McDonnell
--------------- --------------------------
Francis W. McDonnell,
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
26
<PAGE>
Exhibit Index
-------------
Exhibit No. Description of Exhibit Method of Filing
----------- ---------------------- ----------------
(12) Computation of Ratio of Earnings to Fixed Filed herewith
Charges
(27) Financial Data Schedule Filed herewith
(EDGAR version only)
(99.1) PMA Capital Corporation news release dated Filed herewith
August 10, 2000
(99.2) PMA Capital Corporation news release dated Filed herewith
August 9, 2000
27
