UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 22,119,667 shares outstanding of the registrant's Class A Common
Stock, $5 par value per share, as of the close of business on April 30, 2000.
INDEX
- --------------------------------------------------------------------------------
Page
Part I. Financial Information
Item 1. Financial statements
Consolidated statements of operations for the three months
ended March 31, 2000 and 1999 (unaudited) 1
Consolidated balance sheets as of March 31, 2000 (unaudited)
and December 31, 1999 2
Consolidated statements of cash flows for the three
months ended March 31, 2000 and 1999 (unaudited) 3
Consolidated statements of comprehensive income (loss)
for the three months ended March 31, 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 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
PMA Capital Corporation
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
(dollar amounts in thousands, except per share data) 2000 1999
- ----------------------------------------------------------------------------------------
Revenues:
Net premiums written $ 163,934 $ 168,517
Change in net unearned premiums (38,112) (59,195)
--------- ---------
Net premiums earned 125,822 109,322
Net investment income 28,193 27,109
Net realized investment gains (losses) (5,461) 877
Other revenues 3,387 3,138
--------- ---------
Total revenues 151,941 140,446
--------- ---------
Losses and expenses:
Losses and loss adjustment expenses 94,288 81,736
Acquisition expenses 26,697 20,398
Operating expenses 16,452 17,084
Dividends to policyholders 4,690 5,068
Interest expense 3,075 3,013
--------- ---------
Total losses and expenses 145,202 127,299
--------- ---------
Income before income taxes and cumulative
effect of accounting change 6,739 13,147
Income tax expense:
Current 2,099 945
Deferred 262 3,734
--------- ---------
Total 2,361 4,679
--------- ---------
Income before cumulative effect of accounting change 4,378 8,468
Cumulative effect of accounting change (net of
income tax benefit of $1,485) -- (2,759)
--------- ---------
Net income $ 4,378 $ 5,709
========= =========
Income per share:
Basic:
Income before cumulative effect of
accounting change $ 0.20 $ 0.36
Cumulative effect of accounting change -- (0.12)
--------- ---------
Net income $ 0.20 $ 0.24
========= =========
Diluted:
Income before cumulative effect of
accounting change $ 0.19 $ 0.35
Cumulative effect of accounting change -- (0.11)
--------- ---------
Net income $ 0.19 $ 0.24
========= =========
See accompanying notes to the consolidated financial statements.
1
PMA Capital Corporation
Consolidated Balance Sheets
(Unaudited)
As of As of
March 31, December 31,
(dollar amounts in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Assets:
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: 2000 - $1,607,414; 1999 - $1,648,894) $ 1,553,337 $ 1,579,640
Equity securities, at fair value (cost: 2000 - $46,925; 1999 - $37,779) 46,869 34,966
Short-term investments, at amortized cost which approximates fair value 349,495 303,429
----------- -----------
Total investments 1,949,701 1,918,035
Cash 11,040 84,261
Accrued investment income 20,905 20,480
Premiums receivable (net of valuation allowance:
2000 - $17,373; 1999 - $18,088) 280,779 271,833
Reinsurance receivables (net of valuation allowance:
2000 - $3,890; 1999 - $5,528) 702,875 658,164
Deferred income taxes, net 98,825 105,363
Deferred acquisition costs 53,658 48,949
Other assets 165,575 138,002
----------- -----------
Total assets $ 3,283,358 $ 3,245,087
=========== ===========
Liabilities:
Unpaid losses and loss adjustment expenses $ 1,927,755 $ 1,932,601
Unearned premiums 305,350 260,352
Long-term debt 163,000 163,000
Accounts payable and accrued expenses 109,686 109,447
Funds held under reinsurance treaties 108,343 94,445
Dividends to policyholders 14,636 13,782
Payable under securities loan agreements 215,964 242,317
----------- -----------
Total liabilities 2,844,734 2,815,944
----------- -----------
Commitments and contingencies (Note 4)
Shareholders' Equity:
Common stock, $5 par value (40,000,000 shares authorized;
2000 - 11,933,404 shares issued and 11,497,397 outstanding;
1999 - 13,084,665 shares issued and 12,648,658 outstanding) 59,667 65,423
Class A Common stock, $5 par value (40,000,000 shares authorized;
2000 - 12,509,541 shares issued and 10,618,990 outstanding;
1999 - 11,358,280 shares issued and 9,692,854 outstanding) 62,547 56,791
Additional paid-in capital - Class A Common stock 339 339
Retained earnings 394,069 391,981
Accumulated other comprehensive loss (35,187) (46,844)
Notes receivable from officers (56) (56)
Treasury stock, at cost:
Common stock (shares: 2000 - 436,007 and 1999 - 436,007) (5,582) (5,582)
Class A Common stock (shares: 2000 - 1,890,551 and 1999 - 1,665,426) (37,173) (32,909)
----------- -----------
Total shareholders' equity 438,624 429,143
----------- -----------
Total liabilities and shareholders' equity $ 3,283,358 $ 3,245,087
=========== ===========
See accompanying notes to the consolidated financial statements.
2
PMA Capital Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,378 $ 5,709
Adjustments to reconcile net income to net cash flows provided by (used in)
operating activities:
Depreciation and amortization 1,468 2,002
Provision for deferred income taxes 262 3,734
Net realized investment (gains) losses 5,461 (877)
Cumulative effect of accounting change -- 2,759
Change in:
Premiums receivable and unearned premiums, net 36,052 31,331
Dividends to policyholders 854 315
Reinsurance receivables (44,711) 4,871
Unpaid losses and loss adjustment expenses (4,846) (26,158)
Accrued investment income (425) (3,071)
Deferred acquisition costs (4,709) (11,584)
Other, net (13,742) (1,863)
--------- ---------
Net cash flows provided by (used in) operating activities (19,958) 7,168
--------- ---------
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (247,036) (292,740)
Maturities or calls 45,187 30,955
Sales 236,789 278,168
Equity securities:
Purchases (14,539) --
Sales 6,142 --
Net (purchases) sales of short-term investments (72,420) 2,349
Other, net (813) (1,052)
--------- ---------
Net cash flows provided by (used in) investing activities (46,690) 17,680
--------- ---------
Cash flows from financing activities:
Dividends paid to shareholders (1,887) (1,909)
Proceeds from exercise of stock options 1,338 3,906
Purchase of treasury stock (6,024) (11,258)
Net repayments of notes receivable from officers -- 289
--------- ---------
Net cash flows used in financing activities (6,573) (8,972)
--------- ---------
Net increase (decrease) in cash (73,221) 15,876
Cash - beginning of period 84,261 2,562
--------- ---------
Cash - end of period $ 11,040 $ 18,438
========= =========
Supplementary cash flow information:
Income taxes paid $ 1,500 $ 2,997
Interest paid $ 3,014 $ 3,061
See accompanying notes to the consolidated financial statements.
3
PMA Capital Corporation
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- --------------------------------------------------------------------------------------------
Net income $ 4,378 $ 5,709
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during the period 8,107 (24,299)
Less: reclassification adjustment for (gains)
losses included in net income (net of tax
expense (benefit): 2000 - ($1,911);
1999 - $307) 3,550 (570)
-------- --------
Other comprehensive income (loss), net of tax 11,657 (24,869)
-------- --------
Comprehensive income (loss) $ 16,035 $(19,160)
======== ========
See accompanying notes to the consolidated financial statements.
4
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, and
emphasize risk-exposed, excess of loss reinsurance and operate in the brokered
market. PMA Re's business is predominantly in casualty lines of reinsurance.
Workers' Compensation and Primary Standard Insurance -- PMA Capital's property
and casualty insurance subsidiaries ("The PMA Insurance Group") include
Pennsylvania domiciled insurance companies as well as certain foreign
subsidiaries. The PMA Insurance Group primarily writes workers' compensation,
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 -- Caliber One writes business through surplus
lines brokers and managing general agents 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.
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 months
ended March 31, 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
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. 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.
3. REINSURANCE
In the ordinary course of business, PMA Capital's reinsurance and insurance
subsidiaries assume and cede premiums with other insurance companies and are
members of various pools and associations. The reinsurance and insurance
subsidiaries cede business, primarily on an excess of loss basis, in order to
limit the maximum net loss from large risks and limit the accumulation of many
smaller losses. 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:
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- ------------------------------------------------------------------
Earned Premiums:
Direct $ 98,049 $ 75,326
Assumed 82,679 69,446
Ceded (54,906) (35,450)
--------- ---------
Net $ 125,822 $ 109,322
========= =========
Losses and LAE:
Direct $ 101,489 $ 62,643
Assumed 59,433 36,056
Ceded (66,634) (16,963)
--------- ---------
Net $ 94,288 $ 81,736
========= =========
6
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
March 31, 2000 (see Note 2-B regarding SOP 97-3).
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:
Three Months Ended
March 31,
2000 1999
- ----------------------------------------------------------------------------
Denominator:
Basic shares - weighted average
Common and Class A Common
shares outstanding 22,265,688 23,317,630
Effect of dilutive stock options 550,599 785,822
---------- ----------
Total diluted shares 22,816,287 24,103,452
========== ==========
7
6. BUSINESS SEGMENTS
The following table indicates the Company's revenues, all of which are generated
within the U.S., and pre-tax operating income (loss) by principal business
segment:
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- ------------------------------------------------------------------------------------
Revenues:
PMA Re $ 77,991 $ 66,061
The PMA Insurance Group
Excluding Run-off Operations 70,870 68,835
Run-off Operations 1,086 1,126
--------- ---------
Total 71,956 69,961
Caliber One 6,975 3,046
Corporate and Other 480 501
Net realized investment gains (losses) (5,461) 877
--------- ---------
Total revenues $ 151,941 $ 140,446
========= =========
Components of pre-tax operating
income(1) and net income:
PMA Re $ 13,983 $ 12,749
The PMA Insurance Group:
Excluding Run-off Operations 5,383 4,919
Run-off Operations 219 66
--------- ---------
Total 5,602 4,985
Caliber One (2,273) (696)
Corporate and Other (5,112) (4,768)
--------- ---------
Pre-tax operating income 12,200 12,270
Net realized investment gains (losses) (5,461) 877
--------- ---------
Income before income taxes and
cumulative effect of accounting change 6,739 13,147
Income tax expense 2,361 4,679
--------- ---------
Income before cumulative effect of
accounting change 4,378 8,468
Cumulative effect of accounting change,
net of tax -- (2,759)
--------- ---------
Net income $ 4,378 $ 5,709
========= =========
<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>
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is a discussion of the financial condition of PMA Capital as of
March 31, 2000, compared with December 31, 1999, and the results of operations
of PMA Capital for the quarter ended March 31, 2000, compared with the same
period last year. This discussion should be read in conjunction with
Management's Discussion and Analysis included in PMA Capital's 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
The major components of operating revenues, pre-tax operating income and net
income are as follows:
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- -----------------------------------------------------------------------------------
Operating revenues:
Net premiums written $ 163,934 $ 168,517
========= =========
Net premiums earned $ 125,822 $ 109,322
Net investment income 28,193 27,109
Other revenues 3,387 3,138
--------- ---------
Total operating revenues $ 157,402 $ 139,569
========= =========
Components of pre-tax operating
income (1) and net income:
PMA Re $ 13,983 $ 12,749
The PMA Insurance Group:
Excluding Run-off Operations 5,383 4,919
Run-off Operations 219 66
--------- ---------
Total 5,602 4,985
Caliber One (2,273) (696)
Corporate and Other (5,112) (4,768)
--------- ---------
Pre-tax operating income 12,200 12,270
Net realized investment gains (losses) (5,461) 877
--------- ---------
Income before income taxes and
cumulative effect of accounting change 6,739 13,147
Income tax expense 2,361 4,679
--------- ---------
Income before cumulative effect of
accounting change 4,378 8,468
Cumulative effect of accounting change,
net of tax -- (2,759)
--------- ---------
Net income $ 4,378 $ 5,709
========= =========
<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>
9
Pre-tax operating income was $12.2 million for the three months ended March 31,
2000, compared to $12.3 million for the three months ended March 31, 1999.
After-tax operating income was $7.9 million for both the three months ended
March 31, 2000 and 1999. PMA Re and The PMA Insurance Group reported
improvements in pre-tax operating income for the first quarter of 2000, compared
with the first quarter of 1999. These improvements were offset by higher pre-tax
operating losses at Caliber One and Corporate and Other. The Company currently
expects operating earnings per share to improve in 2000 primarily reflecting
higher operating income from PMA Re and The PMA Insurance Group, as well as the
favorable effects of the share repurchase activities. This expectation may
differ materially from actual results because of the risk factors noted in the
"Cautionary Statements" on page 22.
Net income was $4.4 million for the first quarter of 2000, compared to $5.7
million for the same period in 1999. Net income for 1999 includes an after-tax
charge of $2.8 million for the effect of adopting Statement of Position ("SOP")
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. After-tax net realized investment losses were $3.5 million
for the three months ended March 31, 2000, compared to after-tax net realized
investment gains of $600,000 for the same period in 1999. The net realized
investment losses in the first quarter of 2000 reflect sales of investments in
order to invest in yield enhancing investment opportunities.
PMA RE
Summarized financial results of PMA Re are as follows:
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- -----------------------------------------------------------------------------
Net premiums written $66,992 $78,327
======= =======
Net premiums earned $63,137 $52,433
Net investment income 14,854 13,628
------- -------
Operating revenues 77,991 66,061
------- -------
Losses and loss adjustment expenses ("LAE") 45,416 37,861
Acquisition and operating expenses 18,592 15,451
------- -------
Total losses and expenses 64,008 53,312
------- -------
Pre-tax operating income $13,983 $12,749
======= =======
- -----------------------------------------------------------------------------
PMA Re's pre-tax operating income increased to $14.0 million for the three
months ended March 31, 2000, compared to $12.7 million for the same period in
1999, primarily due to an increase in net investment income. Underwriting
results for the first quarter of 2000 were comparable to results for the first
quarter of 1999.
10
Premiums
PMA Re's gross and net premiums written by major category of business are as
follows:
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- ---------------------------------------------------------
Gross premiums written:
Casualty lines $61,311 $73,188
Property lines 25,712 25,765
Other lines 457 542
------- -------
Total $87,480 $99,495
======= =======
Net premiums written:
Casualty lines $45,365 $56,547
Property lines 21,176 21,252
Other lines 451 528
------- -------
Total $66,992 $78,327
======= =======
- ---------------------------------------------------------
Net premiums written were $67.0 million in the first quarter of 2000, compared
with $78.3 million for the same period last year. Absent a revision in 1999 to
PMA Re's estimation of unreported premiums on in-force contracts, gross and net
premiums written for the first quarter of 2000 would have been essentially flat,
compared to the first quarter of 1999. Expanded participations and improved rate
adequacy led to growth in premiums for PMA Re's Traditional and Finite Risk and
Financial Products units. However, this growth was substantially offset by lower
premiums from the Specialty unit reflecting the effects of the highly
competitive conditions in the professional liability reinsurance market.
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. However, due to a revision late in 1999 in PMA Re's
methodology used in estimating unearned premiums on in-force contracts, net
premiums earned increased $10.7 million, or 20%, in the first quarter of 2000,
compared to the first quarter of 1999.
Losses and Expenses
The components of PMA Re's GAAP combined ratios are as follows:
Three Months Ended
March 31,
2000 1999
- --------------------------------------------------------
Loss and LAE ratio 71.9% 72.2%
-------- --------
Expense ratio:
Acquisition expenses 23.7% 23.2%
Operating expenses 5.7% 6.3%
-------- --------
Total expense ratio 29.4% 29.5%
-------- --------
GAAP combined ratio(1) 101.3% 101.7%
======== ========
- --------------------------------------------------------
<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>
11
The loss and LAE ratio declined modestly in the first quarter of 2000, compared
with the same period last year primarily reflecting a decline in the current
accident year loss and LAE ratio partially offset by a reduction in favorable
prior accident year loss development. The current accident year loss and LAE
ratio improved by 1.9 points, reflecting improved rate adequacy on business
written in 2000 and non-renewal of business that did not meet desired
profitability targets.
The acquisition expense ratio increased 0.5 points for the three months ended
March 31, 2000, compared to the same period in 1999, primarily due to a change
in the business mix in the quarter. The operating expense ratio decreased 0.6
points for the three months ended March 31, 2000, compared to the same period in
1999, primarily reflecting a 20% increase in earned premiums that outpaced a 10%
increase in operating expenses.
Net Investment Income
Net investment income was $14.9 million for the first quarter of 2000, compared
to $13.6 million for the same period last year. The improvement in net
investment income primarily reflects higher average invested assets and an
increase in investment yield resulting from a shift in invested assets towards
higher yielding securities.
12
THE PMA INSURANCE GROUP
Summarized financial results of The PMA Insurance Group are as follows:
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- ----------------------------------------------------------------
The PMA Insurance Group
Net premiums written $87,446 $83,021
======= =======
Net premiums earned $57,092 $54,399
Net investment income 12,233 13,133
Other revenues 2,631 2,429
------- -------
Operating revenues 71,956 69,961
------- -------
Losses and LAE 42,653 41,757
Acquisition and operating expenses 19,011 18,151
Dividends to policyholders 4,690 5,068
------- -------
Total losses and expenses 66,354 64,976
------- -------
Pre-tax operating income $ 5,602 $ 4,985
======= =======
The PMA Insurance Group
Excluding Run-off Operations
Net premiums written $87,446 $83,021
======= =======
Net premiums earned $57,092 $54,399
Net investment income 11,147 12,007
Other revenues 2,631 2,429
------- -------
Operating revenues 70,870 68,835
------- -------
Losses and LAE 41,950 41,209
Acquisition and operating expenses 18,847 17,639
Dividends to policyholders 4,690 5,068
------- -------
Total losses and expenses 65,487 63,916
------- -------
Pre-tax operating income $ 5,383 $ 4,919
======= =======
Run-off Operations (1)
Net investment income $ 1,086 $ 1,126
------- -------
Losses and LAE 703 548
Acquisition and operating expenses 164 512
------- -------
Total losses and expenses 867 1,060
------- -------
Pre-tax operating income $ 219 $ 66
======= =======
- ----------------------------------------------------------------
<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>
13
Operating Results
Pre-tax operating income for The PMA Insurance Group increased 12.4% to $5.6
million for the three months ended March 31, 2000, compared to $5.0 million for
the same period in 1999. The increase in operating income for The PMA Insurance
Group was primarily due to improved loss experience, partially offset by lower
net investment income.
The PMA Insurance Group Excluding Run-off Operations
Premiums
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- -----------------------------------------------------------------------------------
Workers' compensation and integrated disability:
Direct premiums written $ 77,475 $ 71,917
Premiums assumed 357 725
Premiums ceded (10,783) (9,624)
--------- ---------
Net premiums written $ 67,049 $ 63,018
========= =========
Commercial Lines:
Direct premiums written $ 26,752 $ 27,642
Premiums assumed 549 894
Premiums ceded (6,904) (8,533)
--------- ---------
Net premiums written $ 20,397 $ 20,003
========= =========
Total:
Direct premiums written $ 104,227 $ 99,559
Premiums assumed 906 1,619
Premiums ceded (17,687) (18,157)
--------- ---------
Net premiums written $ 87,446 $ 83,021
========= =========
- -----------------------------------------------------------------------------------
Direct workers' compensation and integrated disability premiums written
increased by $5.6 million for the three months ended March 31, 2000, compared to
the same period in 1999, primarily due to an increase of $4.2 million in
integrated disability premiums written and, to a lesser extent, an increase in
the level of workers' compensation risks underwritten. Continued price
competition and selected non-renewal of non-profitable accounts tempered
increases in direct workers' compensation premiums written. Direct writings of
commercial lines of business other than workers' compensation, such as
commercial auto, general liability, umbrella, multi-peril and commercial
property lines (collectively, "Commercial Lines") decreased by $890,000 for the
three months ended March 31, 2000, compared to the same period in 1999.
The decrease in reinsurance premiums ceded reflects a decrease in ceded premiums
for Commercial Lines for the three months ended March 31, 2000, compared to the
same period in 1999, 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 and the reduction in direct premiums written for Commercial
Lines. Partially offsetting this decrease was an increase in ceded premiums for
workers' compensation for the three months ended March 31, 2000, compared to the
same period in 1999 as a result of the increase in direct premiums written for
this line.
Net premiums earned increased $2.7 million for the three months ended March 31,
2000, compared to the same period 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
Losses and Expenses
The components of The PMA Insurance Group's GAAP combined ratios, excluding
Run-off Operations, are as follows:
Three Months Ended
March 31,
2000 1999
- ---------------------------------------------------------------
Loss and LAE ratio 73.5% 75.8%
-------- --------
Expense ratio:
Acquisition expenses 18.9% 13.8%
Operating expenses(1)(2) 11.0% 15.4%
-------- --------
Total expense ratio 29.9% 29.2%
Policyholders' dividend ratio 8.2% 9.3%
-------- --------
GAAP combined ratio(1)(2)(3)(4) 111.6% 114.3%
======== ========
- ---------------------------------------------------------------
<FN>
(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 $1.8 million for both 2000
and 1999 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 113.1% and 116.2% in the first quarter of 2000 and 1999,
respectively.
</FN>
The loss and LAE ratio improved 2.3 points in the first quarter of 2000,
compared to the first quarter of 1999, primarily due to an improved current
accident year loss and LAE ratio and a decline in net discount accretion,
partially offset by less favorable development of prior accident year reserves,
excluding the accretion of discount ("prior year development"). The improvement
in the current accident year loss and LAE ratio for the first quarter of 2000,
compared to the same period in 1999, is due to pricing increases on renewal
business and continued improved loss trends.
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
by $384,000 and $936,000 for the three months ended March 31, 2000 and 1999,
respectively. The decline in net discount accretion is due to the increase in
workers' compensation writings during the first quarter of 2000, compared to the
first quarter of 1999.
The PMA Insurance Group experienced $475,000 of favorable prior year development
for the first quarter of 2000, compared to $905,000 of favorable prior year
development for the same period in 1999. The favorable prior year development in
2000 reflects better than expected loss experience from rent-a-captive workers'
compensation business and the favorable prior year development in 1999 reflects
better than expected loss experience from loss-sensitive workers' compensation
business. Policyholders' dividends for rent-a-captive business substantially
offset the favorable prior year development in 2000, and premium adjustments for
loss-sensitive business substantially offset the favorable prior year
development in 1999.
Overall, the GAAP expense ratio increased by 0.7 points for the three months
ended March 31, 2000, compared to the same period in 1999.
The policyholders' dividend ratio was 8.2% for the three months ended March 31,
2000, compared to 9.3% for the same period in 1999. Under policies that are
subject to dividend plans, the customer may receive a dividend based upon loss
experience during the policy period. The decrease in the policyholders' dividend
ratio occurred primarily because The
15
PMA Insurance Group sold less business under dividend plans in the first quarter
of 2000 than in the first quarter of 1999 and has shifted its participating
business towards lower paying dividend plans. This decrease has been partially
offset by higher dividends resulting from the favorable prior year development
from rent-a-captive workers' compensation business.
Net Investment Income
Net investment income was $11.1 million for the three months ended March 31,
2000, compared to $12.0 million for the same period 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
Pre-tax operating income for the Run-off Operations was $219,000 and $66,000 for
the three months ended March 31, 2000 and 1999, respectively. The increase in
pre-tax operating income primarily reflects lower operating expenses, partially
offset by higher losses and LAE.
16
CALIBER ONE
Summarized financial results of Caliber One are as follows:
Three Months Ended
March 31,
2000 1999
- -----------------------------------------------------------------
Net premiums written $ 9,590 $ 7,322
======= =======
Net premiums earned $ 5,687 $ 2,643
Net investment income 1,288 403
------- -------
Operating revenues 6,975 3,046
------- -------
Losses and LAE 6,219 2,118
Acquisition and operating expenses 3,029 1,624
------- -------
Total losses and expenses 9,248 3,742
------- -------
Pre-tax operating loss $(2,273) $ (696)
======= =======
- -----------------------------------------------------------------
Caliber One recorded a pre-tax operating loss of $2.3 million, for the three
months ended March 31, 2000, compared to a pre-tax operating loss of $696,000
for the same period in 1999. The increase in pre-tax operating losses primarily
reflects higher than expected net losses and LAE in professional liability and
commercial automobile lines of business and an increase in acquisition and
operating expenses associated with a growing operation.
Premiums
Caliber One's gross and net premiums written are as follows:
Three Months Ended
March 31,
(dollar amounts in thousands) 2000 1999
- ----------------------------------------------------------
Gross premiums written:
Products Liability $ 5,462 $ 2,435
Professional Liability 10,617 2,197
Other Liability 6,482 4,564
Property 10,647 3,595
------- -------
Total $33,208 $12,791
======= =======
Net premiums written:
Products Liability $ 4,001 $ 1,770
Professional Liability 809 1,729
Other Liability 1,379 3,293
Property 3,401 530
------- -------
Total $ 9,590 $ 7,322
======= =======
- ----------------------------------------------------------
Gross premiums written increased $20.4 million for the three months ended March
31, 2000, compared to the same period last year. The increase in gross premiums
written reflects Caliber One's market acceptance and penetration as well as
expanded product offerings. Net premiums written increased $2.3 million, or 31%,
in the first quarter of 2000, compared to the first quarter of 1999, reflecting
the increase in gross premiums written, partially offset by increased
reinsurance premiums ceded pertaining primarily to the professional liability
and commercial automobile (included in "other liability" in the table above)
lines of business.
17
Net premiums earned increased $3.0 million for the three months ended March 31,
2000, compared to the same period 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 is greater than the increase in
net premiums written primarily due to the increase in net premiums written in
the latter half of 1999, compared to the latter half of 1998.
Losses and Expenses
The components of Caliber One's GAAP combined ratios are as follows:
Three Months Ended
March 31,
2000 1999
- --------------------------------------------------------
Loss and LAE ratio 109.4% 80.1%
-------- --------
Expense ratio:
Acquisition expenses 16.2% 27.2%
Operating expenses 37.0% 34.2%
-------- --------
Total expense ratio 53.2% 61.4%
-------- --------
GAAP combined ratio 162.6% 141.5%
======== ========
- --------------------------------------------------------
Caliber One's loss and LAE ratio increased 29.3 points for the three months
ended March 31, 2000, compared to the same period last year. This increase was
primarily due to higher than expected losses and LAE in the professional
liability and commercial automobile lines of business. A substantial amount of
the losses and LAE was covered by reinsurance treaties. Additionally, other
steps were taken in the first quarter to minimize the impact of these lines,
including de-emphasizing certain segments of the professional liability and
commercial automobile lines, as well as refocusing 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 11.0 points for the three months ended
March 31, 2000, compared to the same period last year. The decrease in the
acquisition expense ratio is primarily due to higher ceding commissions as a
result of reinsurance purchases in the first quarter of 2000.
The operating expense ratio increased 2.8 points for the quarter ended March 31,
2000, compared to the same period in 1999. This increase primarily reflects
increases in operating expenses associated with Caliber's continuing growth, and
net premiums earned that were reduced significantly in the first quarter of 2000
due to an increased use of reinsurance.
Net Investment Income
Net investment income increased to $1.3 million in the first quarter of 2000,
compared to $403,000 in the first quarter of 1999. This increase primarily
reflects 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.
18
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 March
31, 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 March 31, 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 months ended March 31, 2000,
Corporate and Other recorded a pre-tax operating loss of $5.1 million, compared
to a pre-tax operating loss of $4.8 million for the three months ended March 31,
1999. The increase in pre-tax operating loss primarily reflects higher operating
expenses in the first quarter of 2000, compared to the same period 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 March 31, 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 March 31, 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.
The Company paid interest of $3.0 million and $3.1 million on both credit
facilities for the three months ended March 31, 2000 and 1999, respectively.
The Company's domestic insurance subsidiaries' ability to pay dividends to the
holding company is limited by the insurance laws and regulations of Pennsylvania
and Delaware (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
19
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 $4.8 million and $10.8 million for the
first quarter of 2000 and 1999, respectively.
Net tax payments received from subsidiaries were $4.4 million and $3.5 million
for the three months ended March 31, 2000 and 1999, respectively.
PMA Capital's dividends to shareholders are restricted by its debt agreements.
Based upon the terms of the Credit Facility and the Letter of Credit Facility,
under the most restrictive debt covenant, PMA Capital would be able to pay
dividends of approximately $10 million in 2000. The Company paid dividends to
shareholders of $1.9 million for both the three months ended March 31, 2000 and
1999.
PMA Capital also made capital contributions in the form of cash to its
subsidiaries totaling $2.6 million during the first quarter of 1999. No cash
capital contributions were made to subsidiaries during the first quarter of
2000.
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 the first quarter of 2000,
the Company repurchased 318,000 shares of Class A Common stock at a total cost
of $6.0 million. Since the inception of its share repurchase program in February
1998, PMA Capital has repurchased a total of 2.8 million Class A shares at a
total cost of $55.1 million, leaving $19.9 million of share repurchase
authorization remaining. Decisions regarding share repurchases are subject to
prevailing market conditions and the costs and benefits associated with
alternative uses of capital.
Management believes that the Company's sources of funds will provide sufficient
liquidity to meet short-term and long-term obligations.
The Company's total assets increased to $3,283.4 million at March 31, 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.
20
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 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. 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.
21
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
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits are listed in the Index to Exhibits on page 25.
(b) Reports on Form 8-K filed during the quarter ended March 31, 2000:
During the quarterly period ended March 31, 2000, the Company filed the
following Report on Form 8-K:
- dated February 2, 2000, Item 5 - containing news releases regarding its
1999 results and 2000 Annual Meeting of Shareholders.
23
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: 5/12/00 By: /s/ Francis W. McDonnell
------- -------------------------------------
Francis W. McDonnell
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
24
Exhibit Index
Exhibit No. Description of Exhibit Method of Filing
- ----------- ---------------------- ----------------
(3) Articles of Incorporation and Bylaws
3.1 Amended and Restated Articles of Incorporation Filed herewith
of the Company as last amended on May 3, 2000
3.2 Amended and Restated Bylaws of the Company Filed herewith
(10) Company's Annual Incentive Plan Filed as Annex C to the registrant's Definitive
Proxy Statement on Schedule 14A dated March 23, 2000
and incorporated herein by reference
(12) Computation of Ratio of Earnings to Fixed Charges Filed herewith
(27) Financial Data Schedule Filed herewith (EDGAR version only)
25