S&P Lowers PMA Capital Rating to ‘BB’ Sr. Debt to ‘B’ – Company Responds

November 25, 2003

Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit and senior debt ratings on PMA Capital Corp. (PMACA) to ‘B’ from ‘BB-.’ It also said it has lowered its counterparty credit and financial strength ratings on reinsurer PMA Capital Insurance Co. (PMACIC) to ‘BB’ from ‘BBB-‘.

S&P further stated that it has “lowered its counterparty credit and financial strength ratings on primary writers Pennsylvania Manufacturers Assoc. Insurance Co., Pennsylvania Manufacturers Indemnity Co., and Manufacturers Alliance Insurance Co. (collectively referred to as PMAIG) to ‘BBB-‘ from ‘BBB’. ” All the ratings “remain on CreditWatch with negative implications, where they were placed on Nov. 4, 2003.”

PMA responded in a written statement: “While we appreciate any rating agency’s obligation to express its opinion, we believe that S&P’s most recent action neglects to mention several facts that we believe are important to investors and buyers of insurance.”

S&P credit analyst Laline Carvalho stated in the announcement: “These ratings actions reflect PMACA’s significantly diminished financial flexibility following its Nov. 6, 2003, announcement that it agreed with the Pennsylvania regulators not to make any further dividend payments to the holding company without prior regulatory approval. This follows PMACA’s Nov. 4, 2003, announcement of a $150 million pretax charge for reserve additions at reinsurance subsidiary PMACIC, which significantly weakened the capital adequacy at this entity, which is the primary provider of dividend payments to PMACA.”

S&P noted that since the announcement the group’s shares have been trading significantly below book value. “This materially constrains the holding company’s ability to raise additional funds in the financial markets and increases its reliance on gaining regulatory approval to service debt interest and principal payments over the medium term,” Carvalho added. S&P said it believes there is enough liquidity at the holding company to service interest payments in the next 12 months.

S&P’s bulletin expressed concern over the company’s future direction, especially following the departure of its Chairman and CEO, its decision to exit the reinsurance business, its ongoing negotiation with regulators and the future of its workers comp business, which S&P noted is strongly funded in comparison to the group.

The rating agency also cited its concerns about the adequacy of PMACA’s reserves, indicating that they “will be a key factor influencing PMACA’s ability to execute its strategic plan and to obtain regulatory approval for dividend payments to the holding company over the near and medium term.” The bulletin noted that outside actuaries are now reviewing the reserve adequacy.

S&P also noted that it was withdrawing the ratings on the operating units, PMA Capital Insurance Co., Pennsylvania Manufacturers Assoc. Insurance Co., Pennsylvania Manufacturers Indemnity Co., and Manufacturers Alliance Insurance Co. at the company’s request, “once the CreditWatch has been resolved.” It expects to do this within two months, and will continue to issue ratings on the outstanding debt.

PMA raised the following points in contesting the rating action:
— At December 31, 2002, The PMA Insurance Group had a combined risk-based capital ratio (RBC) of 510% of the “Authorized Control” level RBC. Based on an estimate of the factors at September 30, 2003, we believe The PMA Insurance Group’s combined RBC ratio would be 530%. An RBC level in excess of 200% of Authorized Control level RBC requires no action by the Company or the Pennsylvania Insurance Department.
— The reserves at The PMA Insurance Group were unaffected by the charge taken at our reinsurance operations in the third quarter, and accordingly, the charge did not affect The PMA Insurance Group’s statutory capital, which was $301.7 million at September 30, 2003. In the third quarter, our internal actuaries’ review of the loss reserves at The PMA Insurance Group indicated that no reserve adjustments were necessary.

“Although we are withdrawing from S&P’s ratings process, S&P may still issue further ratings announcements regarding our companies,” the bulletin concluded.

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