PMA Capital Corp. Under Review

A.M. Best Co. placed the “A” (Excellent) financial strength rating of PMA Capital Insurance Company and the “A-” (Excellent) rating of PMA Insurance Group under review with negative implications. Additionally, the “A” (Excellent) financial strength rating of Caliber One Indemnity Company has been changed to “NR-3” and the under review negative status has been removed.

The actions follow PMA Capital Corporation’s (PMA Capital) first quarter announcement of its intention to exit the excess and surplus (E&S) lines business served by Caliber One, as well as A.M. Best’s review of that decision and the company’s overall capitalization. PMA Capital’s earnings and surplus levels have been severely impacted by Caliber One’s losses since 1998, prompting the decision to exit the E&S market altogether. Additionally, significant reserve actions in its operating units over the past six years have weakened PMA Capital’s long-term capital generation and current financial flexibility.

In 2000 management restructured PMA Capital’s subsidiaries so that PMA Capital Insurance Company owns all of the insurance entities. Due to this stacked structure, Caliber One’s underwriting losses have negatively affected the financial strength of PMA Capital Insurance Company. Given negative earnings expectations for this year coupled with a pressing need to upstream dividends to PMA Capital, the insurance subsidiaries will be challenged to accumulate sufficient surplus to support double-digit growth expectations. Assuming no curtailment of premium growth, PMA Capital Insurance Company will need a significant surplus infusion to support the current rating.

While PMA Capital’s financial leverage is low at 10 percent, the issue of liquidity is a key concern. As PMA Capital maintains minimal liquid assets, there has been and will continue to be a conflict between surplus levels of the subsidiaries and holding company cash needs.

PMA Capital is currently implementing its capital-raising plan to provide the financial flexibility to pay down its bank debt as well as improve the capitalization of the insurance operations. SEC approval of a universal shelf for $250 million, filed in May 2002, is expected shortly. The capital-raising efforts are expected to conclude by the end of third quarter 2002 at which time A.M. Best will re-evaluate the financial strength ratings.

Topics Excess Surplus