A.M. Best Co. has 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 their intention to exit the excess and surplus (E&S) lines business served by Caliber One, as well as A.M. Best’s follow up analysis of the implications of this strategic decision and a further review of 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 remove the uncertainty of this business segment by exiting 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.
PMA Capital’s first quarter results included a $28 million loss reserve charge related to Caliber One and the company has announced an additional $25-$30 million of exit charges to be taken in second quarter. These charges will almost certainly result in negative full-year earnings as well as a reduction in statutory surplus in a year when the company looks to benefit from a much improved pricing environment in both its remaining core business segments—workers’ compensation and reinsurance.
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.
Due to the charges and the impact of growth in the first half of 2002, PMA Capital Insurance Company’s capitalization has become marginal for its current rating.
In addition, given the negative earnings expected 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. Throughout 2001, cash needs caused management to upstream $28 million of dividends and, in addition, borrow $37 million from the subsidiaries, thereby depleting surplus. In December 2001, the company successfully issued $158 million of equity and, as a result of this transaction, increased surplus by $100 million at year-end. Similar to conditions in mid-year 2001, $62.5 million of bank debt matures in December 31, 2002 and the repayment is dependent upon successful capital raising activities of PMA Capital. 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.
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