-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V/O18pTt+AIFfiTf6eksoXJM/yGDUaBIg/nPc5kGCzN0ywmSPRoP3pkfIOOCLbOo X+hMgZtF++y3vX8A+xRe/A== 0000950159-99-000220.txt : 19990813 0000950159-99-000220.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950159-99-000220 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PMA CAPITAL CORP CENTRAL INDEX KEY: 0001041665 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 232217932 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22761 FILM NUMBER: 99685871 BUSINESS ADDRESS: STREET 1: 1735 MARKET STREET SUITE 2800 CITY: PHILADELPHIA STATE: PA ZIP: 19103-7590 BUSINESS PHONE: 2156655046 MAIL ADDRESS: STREET 1: 1735 MARKET STREET SUITE 2800 CITY: PHILADELPHIA STATE: PA ZIP: 19103-7590 FORMER COMPANY: FORMER CONFORMED NAME: PENNSYLVANIA MANUFACTURERS CORP DATE OF NAME CHANGE: 19970702 10-Q 1 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, 1999 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 12,918,466 shares outstanding of the registrant's Common Stock, $5 par value per share, and 10,005,482 shares outstanding of the registrant's Class A Common Stock, $5 par value per share, as of the close of business on July 31, 1999. INDEX - -------------------------------------------------------------------------------- Page Part I. Financial Information Item 1. Financial Statements Consolidated statements of operations for the three and six months ended June 30, 1999 and 1998 (unaudited) 1 Consolidated balance sheets as of June 30, 1999 (unaudited) and December 31, 1998 2 Consolidated statements of cash flows for the six months ended June 30, 1999 and 1998 (unaudited) 3 Consolidated statements of comprehensive income for the three and six months ended June 30, 1999 and 1998 (unaudited) 4 Notes to the consolidated financial statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 24 Item 6. Exhibits and reports on Form 8-K 24 Part1. Item 1. 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) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------- Revenues: Net premiums written $ 101,931 $ 94,908 $ 270,448 $ 248,481 Change in net unearned premiums 27,210 19,746 (31,985) (26,905) --------- --------- --------- --------- Net premiums earned 129,141 114,654 238,463 221,576 Net investment income 26,961 31,920 54,070 63,850 Net realized investment gains (losses) (1,755) 3,749 (878) 11,263 Other revenues 2,821 3,420 5,959 6,440 --------- --------- --------- --------- Total revenues 157,168 153,743 297,614 303,129 --------- --------- --------- --------- Losses and expenses: Losses and loss adjustment expenses 94,909 87,900 176,645 172,757 Acquisition expenses 32,103 29,060 52,501 51,763 Operating expenses 16,448 18,033 33,532 37,500 Dividends to policyholders 4,258 4,213 9,326 8,130 Interest expense 3,069 3,762 6,082 7,463 --------- --------- --------- --------- Total losses and expenses 150,787 142,968 278,086 277,613 --------- --------- --------- --------- Income before income taxes and cumulative effect of accounting change 6,381 10,775 19,528 25,516 Income tax expense (benefit): Current 4,840 481 5,785 691 Deferred (5,205) 937 (1,471) 3,380 --------- --------- --------- --------- Total (365) 1,418 4,314 4,071 --------- --------- --------- --------- Income before cumulative effect of accounting change 6,746 9,357 15,214 21,445 Cumulative effect of accounting change (net of income tax benefit of $1,458) -- -- (2,759) -- --------- --------- --------- --------- Net income $ 6,746 $ 9,357 $ 12,455 $ 21,445 ========= ========= ========= ========= Earnings per share: Basic: Income before cumulative effect of accounting change $ 0.29 $ 0.39 $ 0.65 $ 0.90 Cumulative effect of accounting change -- -- (0.12) -- --------- --------- --------- --------- Net income $ 0.29 $ 0.39 $ 0.53 $ 0.90 ========= ========= ========= ========= Diluted: Income before cumulative effect of accounting change $ 0.28 $ 0.38 $ 0.63 $ 0.87 Cumulative effect of accounting change -- -- (0.11) -- --------- --------- --------- --------- Net income $ 0.28 $ 0.38 $ 0.52 $ 0.87 ========= ========= ========= =========
See accompanying notes to the consolidated financial statements. 1 PMA Capital Corporation Consolidated Balance Sheets
(Unaudited) As of As of June 30, December 31, (dollar amounts in thousands, except share data) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Assets Investments: Fixed maturities available for sale, at fair value (amortized cost:1999 - $1,773,493; 1998 - $1,781,188) $ 1,741,420 $ 1,827,354 Equity securities, at fair value (cost: 1999 - $5; 1998 - $5) 14 17 Short-term investments, at amortized cost which approximates fair value 424,750 498,038 ----------- ----------- Total investments 2,166,184 2,325,409 Cash 10,534 2,562 Accrued investment income 18,317 19,900 Premiums receivable (net of valuation allowance:1999 - $20,563; 1998 - $19,874) 294,702 279,633 Reinsurance receivables (net of valuation allowance:1999 - $2,178; 1998 - $2,178) 625,440 610,291 Deferred income taxes, net 94,271 63,929 Deferred acquisition costs 54,070 51,115 Other assets 135,254 107,879 ----------- ----------- Total assets $ 3,398,772 $ 3,460,718 =========== =========== Liabilities: Unpaid losses and loss adjustment expenses $ 1,915,067 $ 1,940,895 Unearned premiums 275,751 227,945 Long-term debt 163,000 163,000 Accounts payable and accrued expenses 115,617 107,952 Funds held under reinsurance treaties 93,384 77,674 Dividends to policyholders 12,621 10,700 Payable under securities loan agreements 361,540 421,072 ----------- ----------- Total liabilities 2,936,980 2,949,238 ----------- ----------- Commitments and contingencies (Note 4) Shareholders' Equity: Common stock, $5 par value (40,000,000 shares authorized; 1999 - 13,354,473 shares issued and 12,918,466 outstanding; 1998 - 13,956,268 shares issued and 13,520,261 outstanding) 66,959 69,781 Class A common stock, $5 par value (40,000,000 shares authorized; 1999 - 11,088,472 shares issued and 10,200,982 outstanding; 1998 - 10,486,677 shares issued and 9,837,963 outstanding) 55,255 52,433 Additional paid-in capital - Class A common stock 339 339 Retained earnings 383,193 377,601 Accumulated other comprehensive income (loss) (20,841) 30,016 Notes receivable from officers (224) (498) Treasury stock, at cost: Common stock (1999 - 436,007 shares; 1998 - 436,007 shares) (5,582) (5,582) Class A common stock (1999 - 887,490 shares; 1998 - 648,714 shares) (17,307) (12,610) ----------- ----------- Total shareholders' equity 461,792 511,480 ----------- ----------- Total liabilities and shareholders' equity $ 3,398,772 $ 3,460,718 =========== ===========
See accompanying notes to the consolidated financial statements. 2 PMA Capital Corporation Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, (dollar amounts in thousands) 1999 1998 - -------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 12,455 $ 21,445 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation and amortization 3,763 1,466 Provision (benefit) for deferred income taxes (1,471) 3,380 Net realized investment losses (gains) 878 (11,263) Cumulative effect of accounting change 2,759 -- Change in: Premiums receivable and unearned premiums, net 32,737 (9,321) Dividends to policyholders 1,921 579 Reinsurance receivables (15,149) (56,740) Unpaid losses and loss adjustment expenses (25,828) (27,346) Accrued investment income 1,583 3,010 Deferred acquisition costs (2,955) (8,075) Other, net (8,474) 9,326 --------- --------- Net cash flows provided by (used in) operating activities 2,219 (73,539) --------- --------- Cash flows from investing activities: Fixed maturity investments available for sale: Purchases (739,603) (927,342) Maturities or calls 65,019 84,915 Sales 680,051 802,825 Net sales of short-term investments 13,811 101,572 Other, net (2,239) (2,053) --------- --------- Net cash flows provided by investing activities 17,039 59,917 --------- --------- Cash flows from financing activities: Dividends paid to shareholders (3,852) (4,059) Proceeds from exercise of stock options 4,546 2,316 Purchase of treasury stock (12,254) (9,198) Net repayments of notes receivable from officers 274 -- --------- --------- Net cash flows used in financing activities (11,286) (10,941) --------- --------- Net increase (decrease) in cash 7,972 (24,563) Cash - beginning of period 2,562 32,148 --------- --------- Cash - end of period $ 10,534 $ 7,585 ========= ========= Supplementary cash flow information: Income taxes paid $ 5,437 $ -- Interest paid $ 5,994 $ 7,467
See accompanying notes to the consolidated financial statements. 3 PMA Capital Corporation Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, (dollar amounts in thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------- Net income $ 6,746 $ 9,357 $ 12,455 $ 21,445 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities: Holding gains (losses) arising during the period (27,129) 15,433 (51,428) 16,399 Less: reclassification adjustment for (gains) losses included in net income (net of tax expense (benefit): $(614) and $1,312 for three months ended June 30, 1999 and 1998; $(307) and $3,942 for six months ended June 30, 1999 and 1998) 1,141 (4,024) 571 (8,908) -------- -------- -------- -------- Other comprehensive income (loss) (25,988) 11,409 (50,857) 7,491 -------- -------- -------- -------- Comprehensive income (loss) $(19,242) $ 20,766 $(38,402) $ 28,936 ======== ======== ======== ========
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, 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, and to a lesser extent other standard lines of commercial insurance, primarily in the Mid-Atlantic and Southern regions of the U.S. Specialty Property and Casualty -- In January 1998, the Company's specialty insurance unit, Caliber One, commenced writing business. Caliber One writes business through surplus lines brokers throughout the United States. Caliber One's excess and surplus lines insurance affiliate, Caliber One Indemnity Company, is authorized as a surplus lines carrier in 40 states, the District of Columbia and Puerto Rico, with applications pending in seven other states. 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 1999 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, 1999 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 1998 Annual Report to Shareholders and incorporated by reference in its Form 10-K for the year ended December 31, 1998. B. Recent Accounting Pronouncements - Effective January 1, 1999, the Company adopted Statement of Position ("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. 5 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. In October 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued 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. SOP 98-7 is effective for financial statements for fiscal years beginning after June 15, 1999. While the Company is presently evaluating the impact of SOP 98-7, the adoption of SOP 98-7 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 underwriting 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 from a catastrophic event. 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") are as follows:
Three Months Ended Six Months Ended June 30, June 30, (dollar amounts in thousands) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------- Earned Premiums: Direct .............. $ 78,801 $ 69,629 $ 154,126 $ 143,020 Assumed ............. 83,078 66,172 152,524 128,064 Ceded ............... (32,738) (21,147) (68,187) (49,508) --------- --------- --------- --------- Net ................. $ 129,141 $ 114,654 $ 238,463 $ 221,576 ========= ========= ========= ========= Losses and LAE: Direct .............. $ 64,669 $ 63,640 $ 125,029 $ 126,818 Assumed ............. 60,125 46,994 96,181 79,522 Ceded ............... (29,885) (22,734) (44,565) (33,583) --------- --------- --------- --------- Net ................. $ 94,909 $ 87,900 $ 176,645 $ 172,757 ========= ========= ========= =========
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. Some of the changes include initiatives to restrict insurance pricing and the application of underwriting standards and reinterpretation of insurance contracts long after the policies were written to provide coverage unanticipated by the Company. 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, 1999 (see Note 2-B regarding SOP 97-3). The Company has provided guarantees of approximately $8.5 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 results of operations, liquidity or financial condition. 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 results of operations, liquidity or financial condition. 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 Six Months Ended June 30, June 30, 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------- Denominator: Basic shares - weighted average common and Class A common shares outstanding ............... 23,083,506 23,692,071 23,199,921 23,770,912 Effect of dilutive stock options.... 853,211 1,002,385 823,293 887,999 ---------- ---------- ---------- ---------- Total diluted shares ............... 23,936,717 24,694,456 24,023,214 24,658,911 ========== ========== ========== ==========
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 Six Months Ended June 30, June 30, (dollar amounts in thousands) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------- Revenues: PMA Re $ 83,906 $ 68,540 $ 149,967 $ 128,138 The PMA Insurance Group: Excluding Run-off Operations 69,140 75,103 137,975 151,046 Run-off Operations 1,097 5,464 2,223 11,303 --------- --------- --------- --------- Total 70,237 80,567 140,198 162,349 Caliber One 4,493 536 7,539 905 Corporate and Other 287 351 788 474 Net realized investment gains (losses) (1,755) 3,749 (878) 11,263 --------- --------- --------- --------- Total revenues $ 157,168 $ 153,743 $ 297,614 $ 303,129 ========= ========= ========= ========= Components of pre-tax operating income (1) and net income: PMA Re $ 10,367 $ 11,580 $ 23,116 $ 22,952 The PMA Insurance Group: Excluding Run-off Operations 4,755 2,353 9,674 4,954 Run-off Operations (560) 293 (494) 428 --------- --------- --------- --------- Total 4,195 2,646 9,180 5,382 Caliber One (605) (681) (1,301) (1,070) Corporate and Other (5,821) (6,519) (10,589) (13,011) --------- --------- --------- --------- Pre-tax operating income 8,136 7,026 20,406 14,253 Net realized investment gains (losses) (1,755) 3,749 (878) 11,263 --------- --------- --------- --------- Income before income taxes and cumulative effect of accounting change 6,381 10,775 19,528 25,516 Income tax expense (benefit) (365) 1,418 4,314 4,071 --------- --------- --------- --------- Income before cumulative effect of accounting change 6,746 9,357 15,214 21,445 Cumulative effect of accounting change, net of tax -- -- (2,759) -- --------- --------- --------- --------- Net income $ 6,746 $ 9,357 $ 12,455 $ 21,445 ========= ========= ========= ========= (1) The Company excludes net realized investment gains (losses) from the profit and loss measure it utilizes to assess the performance of its operating segments.
8 7. DISPOSITIONS Effective July 1, 1998, the Company sold PMA Insurance, Cayman Ltd. ("PMA Cayman"), one of the entities included in The PMA Insurance Group's Run-off Operations, which reinsured claims for certain policies written by other members of The PMA Insurance Group, to a third party for a purchase price of $1.8 million and recorded an after-tax loss of $1.6 million. This transaction included the transfer of $231.5 million in cash and invested assets to the buyer. At June 30, 1999, the Company has recorded $240.9 million in reinsurance receivables related to this transaction, all of which are secured by assets in trust or by letters of credit. If the actual claim payments in the aggregate exceed the estimated payments upon which the loss reserves have been established, the Company has agreed to indemnify the buyer, up to a maximum of $15.0 million. If the actual claim payments in the aggregate are less than the estimated payments upon which the loss reserves have been established, the Company will participate in such favorable loss reserve development. 9 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, 1999, compared with December 31, 1998, and its results of operations for the three and six months ended June 30, 1999, 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 1998 Annual Report to Shareholders (pages 28 through 49), 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 table below presents the major components of revenues, pre-tax operating income and net income:
Three Months Ended Six Months Ended June 30, June 30, (dollar amounts in thousands) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------- Operating revenues: Net premiums written $ 101,931 $ 94,908 $ 270,448 $ 248,481 ========= ========= ========= ========= Net premiums earned $ 129,141 $ 114,654 $ 238,463 $ 221,576 Net investment income 26,961 31,920 54,070 63,850 Other revenues 2,821 3,420 5,959 6,440 --------- --------- --------- --------- Total operating revenues $ 158,923 $ 149,994 $ 298,492 $ 291,866 ========= ========= ========= ========= Components of pre-tax operating income (1) and net income: PMA Re $ 10,367 $ 11,580 $ 23,116 $ 22,952 The PMA Insurance Group: Excluding Run-off Operations 4,755 2,353 9,674 4,954 Run-off Operations (560) 293 (494) 428 --------- --------- --------- --------- Total 4,195 2,646 9,180 5,382 Caliber One (605) (681) (1,301) (1,070) Corporate and Other (5,821) (6,519) (10,589) (13,011) --------- --------- --------- --------- Pre-tax operating income 8,136 7,026 20,406 14,253 Net realized investment gains (losses) (1,755) 3,749 (878) 11,263 --------- --------- --------- --------- Income before income taxes and cumulative effect of accounting change 6,381 10,775 19,528 25,516 Income tax expense (benefit) (365) 1,418 4,314 4,071 --------- --------- --------- --------- Income before cumulative effect of accounting change 6,746 9,357 15,214 21,445 Cumulative effect of accounting change, net of tax -- -- (2,759) -- --------- --------- --------- --------- Net income $ 6,746 $ 9,357 $ 12,455 $ 21,445 ========= ========= ========= ========= (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 measurement 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.
10 Pre-tax operating income for the three and six months ended June 30, 1999 was $8.1 million and $20.4 million, respectively, compared to pre-tax operating income of $7.0 million and $14.3 million for the same periods in 1998. After-tax operating income was $7.9 million and $15.8 million for the three and six months ended June 30, 1999, respectively, compared to after-tax operating income of $6.9 million and $14.1 million for the same periods in 1998. These increases were primarily due to improved underwriting results attributable to The PMA Insurance Group and lower interest expense, with after-tax operating income being partially offset by a higher effective tax rate in 1999. The Company currently expects operating income to continue to improve in 1999 reflecting higher operating income from The PMA Insurance Group and continued stable operating income from PMA Re. This expectation may differ materially from actual results because of the risk factors noted in the "Cautionary Statements" on page 23. Net income was $6.7 million and $12.5 million for the three and six months ended June 30, 1999, respectively, compared to net income of $9.4 million and $21.4 million for the three and six months ended June 30, 1998, respectively. 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 "Recent Accounting Pronouncements" below for additional information. Net income also includes gains and losses on the sale of investments. The timing and recognition of such gains and losses are unpredictable and are not indicative of future operating performance. After-tax net realized investment losses were $1.1 million and $570,000 for the three and six months ended June 30, 1999, compared to after-tax net realized investment gains of $2.4 million and $7.3 million for the comparable 1998 periods. The realized losses for 1999 reflect sales of investments in an interest rate environment when rates were rising in contrast to the realized gains in 1998 which reflect sales of investments in a time when rates were declining. Also, net realized investment gains for the three and six months ended June 30, 1998 include a $2.4 million pre-tax loss related to the sale of PMA Insurance, Cayman Ltd. ("PMA Cayman"). See Note 7 to the Company's Consolidated Financial Statements for additional information. 11 PMA RE Summarized financial results of PMA Re are as follows:
Three Months Ended Six Months Ended June 30, June 30, (dollar amounts in thousands) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------- Net premiums written $ 58,338 $ 47,089 $136,665 $117,908 ======== ======== ======== ======== Net premiums earned $ 69,915 $ 54,869 $122,348 $100,967 Net investment income 13,991 13,671 27,619 27,171 -------- -------- -------- -------- Operating revenues 83,906 68,540 149,967 128,138 Losses and loss adjustment expenses ("LAE") 49,382 36,864 87,243 69,678 Acquisition and operating expenses 24,157 20,096 39,608 35,508 -------- -------- -------- -------- Total losses and expenses 73,539 56,960 126,851 105,186 -------- -------- -------- -------- Pre-tax operating income $ 10,367 $ 11,580 $ 23,116 $ 22,952 ======== ======== ======== ======== GAAP loss and LAE ratio 70.6% 67.2% 71.3% 69.0% GAAP combined ratio 105.2% 103.8% 103.7% 104.2% - --------------------------------------------------------------------------------------------------------------
PMA Re's pre-tax operating income was $10.4 million and $23.1 million for the three and six months ended June 30, 1999, compared to $11.6 million and $23.0 million for the comparable periods in 1999. The decrease in operating results for the second quarter of 1999 reflects an increase in underwriting losses, due to a higher loss ratio, partially offset by a lower expense ratio. Premiums The following table indicates PMA Re's gross and net premiums written by major category of business:
Three Months Ended Six Months Ended June 30, June 30, (dollar amounts in thousands) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------- Gross premiums written: Casualty lines $ 49,774 $ 41,804 $122,962 $102,608 Property lines 20,368 15,402 46,133 41,313 Other lines 70 107 612 501 -------- -------- -------- -------- Total $ 70,212 $ 57,313 $169,707 $144,422 ======== ======== ======== ======== Net premiums written: Casualty lines $ 41,416 $ 35,122 $ 97,963 $ 83,535 Property lines 16,857 11,845 38,109 33,849 Other lines 65 122 593 524 -------- -------- -------- -------- Total $ 58,338 $ 47,089 $136,665 $117,908 ======== ======== ======== ======== - ----------------------------------------------------------------------------------------
Net premiums written increased $11.2 million, or 23.9%, and $18.8 million, or 15.9%, for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. These increases primarily reflect the successful expansion of finite and financial product offerings, expansion of relationships with PMA Re's existing clients, and 12 contracts with new clients. Partially offsetting these increases were the effects of highly competitive conditions in the U.S. reinsurance market, which has caused PMA Re to non-renew certain accounts largely due to inadequate rates and/or other underwriting issues. Net premiums earned increased $15.0 million, or 27.4%, and $21.4 million, or 21.2%, for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. 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. Losses and Expenses The following table reflects the components of PMA Re's GAAP combined ratios:
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------ Loss and LAE ratio 70.6% 67.2% 71.3% 69.0% Expense ratio: Amortization of deferred acquisition costs 29.8% 30.5% 27.0% 28.5% Operating expenses 4.8% 6.1% 5.4% 6.7% ----- ----- ----- ----- Total expense ratio 34.6% 36.6% 32.4% 35.2% ----- ----- ----- ----- Combined ratio - GAAP (1) 105.2% 103.8% 103.7% 104.2% ===== ===== ===== ===== - ------------------------------------------------------------------------------------------------------ (1) The combined ratio computed on a GAAP basis is equal to losses and LAE, plus the sum of acquisition expenses and operating expenses, all divided by net premiums earned.
PMA Re's loss and LAE ratio increased 3.4 points and 2.3 points for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. These increases primarily relate to a change in PMA Re's business mix, with finite and financial products representing an increasing percentage of earned premiums. Such products typically carry a higher loss and LAE ratio and a lower acquisition expense ratio than traditional reinsurance products. The acquisition expense ratio decreased 0.7 points and 1.5 points for the three and six months ended June 30, 1999, respectively, compared to the same periods last year. The decrease is primarily attributable to the change in business mix as described above, and to changes in PMA Re's retrocessional program in the first quarter of 1999, resulting in higher ceding commissions, which reduces the acquisition expense ratio. The operating expense ratio decreased 1.3 points for both the three and six months ended June 30, 1999, compared to the same periods last year, reflecting growth in earned premium and essentially flat operating expenses. 13 THE PMA INSURANCE GROUP Summarized financial results of The PMA Insurance Group are as follows:
Three Months Ended Six Months Ended June 30, June 30, (dollar amounts in thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------ Net premiums written $ 36,162 $ 47,285 $119,183 $129,827 ======== ======== ======== ======== Net premiums earned $ 55,326 $ 59,791 $109,725 $120,589 Net investment income: Excluding Run-off Operations 11,503 12,726 23,510 25,286 Run-off Operations(1) 1,097 5,464 2,223 11,303 -------- -------- -------- -------- Total 12,600 18,190 25,733 36,589 Other revenues 2,311 2,586 4,740 5,171 -------- -------- -------- -------- Operating revenues 70,237 80,567 140,198 162,349 Losses and LAE: Excluding Run-off Operations 40,919 46,478 82,128 93,684 Run-off Operations(1) 1,411 4,505 1,959 9,401 -------- -------- -------- -------- Total 42,330 50,983 84,087 103,085 Acquisition and operating expenses: Excluding Run-off Operations 19,208 22,059 36,847 44,278 Run-off Operations(1) 246 666 758 1,474 -------- -------- -------- -------- Total 19,454 22,725 37,605 45,752 Dividends to policyholders 4,258 4,213 9,326 8,130 -------- -------- -------- -------- Total losses and expenses 66,042 77,921 131,018 156,967 -------- -------- -------- -------- Pre-tax operating income $ 4,195 $ 2,646 $ 9,180 $ 5,382 ======== ======== ======== ======== GAAP loss and LAE ratio 76.5% 85.3% 76.6% 85.5% GAAP combined ratio(2) 115.3% 126.3% 115.7% 126.2% - ------------------------------------------------------------------------------------------------------ (1) Run-off operations ("Run-off Operations") of The PMA Insurance Group were established and segregated from ongoing operations effective December 31, 1996 to reinsure certain obligations primarily associated with workers' compensation claims written by The PMA Insurance Group's Pooled Companies for the years 1991 and prior. (2) The combined ratio for the six months ended June 30, 1999 excludes the impact of the cumulative effect of accounting change of $4.3 million ($2.8 million after-tax) for insurance-related assessments.
Operating Results Pre-tax operating income for The PMA Insurance Group was $4.2 million and $9.2 million for the three and six months ended June 30, 1999, compared to $2.6 million and $5.4 million for the same periods in 1998. The increases in operating income were primarily due to improved loss experience, a relatively lower level of risks underwritten and lower operating expenses resulting from ongoing cost reduction initiatives. 14 The PMA Insurance Group Excluding Run-off Operations Premiums
Three Months Ended Six Months Ended June 30, June 30, (dollar amounts in thousands) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------- Workers' compensation: Direct premiums written $ 34,806 $ 34,307 $ 106,096 $ 101,489 Premiums assumed 469 1,567 1,194 2,460 Premiums ceded (7,530) (2,368) (16,828) (5,555) --------- --------- --------- --------- Net premiums written $ 27,745 $ 33,506 $ 90,462 $ 98,394 ========= ========= ========= ========= Commercial Lines: Direct premiums written $ 16,185 $ 22,272 $ 44,454 $ 51,363 Premiums assumed 134 914 1,028 1,388 Premiums ceded (7,902) (9,407) (16,761) (21,318) --------- --------- --------- --------- Net premiums written $ 8,417 $ 13,779 $ 28,721 $ 31,433 ========= ========= ========= ========= Total: Direct premiums written $ 50,991 $ 56,579 $ 150,550 $ 152,852 Premiums assumed 603 2,481 2,222 3,848 Premiums ceded (15,432) (11,775) (33,589) (26,873) --------- --------- --------- --------- Net premiums written $ 36,162 $ 47,285 $ 119,183 $ 129,827 ========= ========= ========= ========= - ---------------------------------------------------------------------------------------------------
Net premiums written, which represent direct premiums written plus assumed premiums, less premiums ceded, decreased to $36.2 million for the three months ended June 30, 1999, compared to $47.3 million for the same period in 1998, and decreased to $119.2 million for the six months ended June 30, 1999, compared to $129.8 million for the same period in 1998. The decreases in net premiums written for 1999 were the result of lower direct premiums written for commercial lines of business other than workers' compensation, such as commercial auto, general liability, umbrella, multi-peril and commercial property lines (collectively, "Commercial Lines"), which decreased by $6.1 million and $6.9 million for the three and six months ended June 30, 1999, and increases in ceded premium of $3.7 million and $6.7 million for the three and six months ended June 30, 1999. These decreases were partially offset by increases in direct premiums written for workers' compensation of $499,000 and $4.6 million for the three and six months ended June 30, 1999, compared to the same periods in 1998. Direct workers' compensation premiums written were higher for the first six months of 1999 due to an increase in the level of risks underwritten. These increases were partially offset by manual rate reductions averaging approximately 3% in The PMA Insurance Group's principal marketing territories, continued intense price competition and lower additional audit premiums of $2.3 million for the six months ended June 30, 1999, compared to the same period in 1998. Direct writings of Commercial Lines decreased for the three and six months ended June 30, 1999, compared to the same periods in 1998 primarily due to planned reductions in such lines as well as continued competitive conditions. Rather than lower prices to what it believes are unacceptable levels, The PMA Insurance Group has chosen not to renew some of its business in the Commercial Lines. The increases in reinsurance premiums ceded of $3.7 million and $6.7 million in the three and six months ended June 30, 1999 primarily reflect higher ceded workers' compensation premiums of $5.2 million and $11.3 million for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. In 1999, a new reinsurance treaty reduced the net retention level on workers' compensation exposures from $1.5 million to $150,000 per occurrence. Partially offsetting such increase was a decrease of $1.5 million and $4.6 million in ceded premiums for Commercial Lines for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The 15 decrease in ceded Commercial Lines premiums is primarily due to the reduction in direct Commercial Lines business written and negotiated rate reductions for various treaties reinsuring certain Commercial Lines business. Net premiums earned decreased $4.5 million and $10.9 million for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. 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. Losses and Expenses The following table reflects the components of the PMA Insurance Group's combined ratios:
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------- Loss and LAE ratio 74.0% 77.7% 74.8% 77.7% Expense ratio: Amortization of deferred acquisition costs 18.5% 20.7% 16.2% 19.2% Operating expenses(1) (2) 12.1% 12.1% 13.7% 13.6% ----- ----- ----- ----- Total expense ratio 30.6% 32.8% 29.9% 32.8% Policyholders' dividends 7.7% 7.0% 8.5% 6.7% ----- ----- ----- ----- Combined ratio - GAAP (1) (2) (3) (4) 112.3% 117.5% 113.2% 117.2% ===== ===== ===== ===== - ------------------------------------------------------------------------------------------------------- (1) The expense ratio and the combined ratios 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 $2.2 million and $4.0 million for the three and six months ended June 30, 1999, respectively, and $2.4 million and $4.7 million for the three and six months ended June 30, 1998, respectively, for 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 the sum of 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 115.3% and 115.7% for the three and six months ended June 30, 1999, and 126.3% and 126.2% for the three and six months ended June 30, 1998, respectively.
For the three months and six months ended June 30, 1999, the GAAP loss and LAE ratio improved by 3.7 points and 2.9 points, respectively, compared to the same periods in 1998. These improvements were primarily due to favorable prior year reserve development and improved loss and LAE ratios in workers' compensation and Commercial Lines in 1999, partially offset by a decline in the level of reserve discount. The PMA Insurance Group has experienced $1.7 million of favorable development of prior accident year results ("prior year development") for the second quarter of 1999 compared to $1.5 million of favorable prior year development in 1998, which improved the overall loss and LAE ratio by 0.4 points in the second quarter of 1999. For the six months ended June 30, 1999, The PMA Insurance Group has experienced $2.6 million of favorable prior year development, compared to $1.4 million of favorable prior year development for the same period in 1998, which improved the overall loss and LAE ratio by 1.2 points for the six months ended June 30, 1999. The improvement in loss and LAE ratios in Commercial Lines has favorably impacted the overall loss and LAE ratio by 2.8 points and 2.2 points for the three months and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The improvements in the Commercial Lines loss and LAE ratio were primarily due to the continued 16 reduction in exposures underwritten reflecting the application of stricter underwriting standards and continued intense price competition. In addition, the improvement in the workers' compensation accident year loss and LAE ratio has favorably impacted the overall loss and LAE ratio by 1.7 points and 1.3 points for the three months and six months ended June 30, 1999, respectively, compared to the same periods in 1998. These improvements reflect the application of stricter underwriting standards and a relatively lower risk profile of business written. 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 $0.8 million of net discount accretion in the second quarter of 1999 compared with $0.1 million in the second quarter of 1998, which caused a 1.3 point increase in the loss and LAE ratio for the second quarter of 1999. The increase in net discount accretion reflects a reduction in the amount of discount recorded on current year's reserve as a result of higher ceded loss reserves due to the new reinsurance treaty for workers' compensation. The PMA Insurance Group experienced $1.8 million of net discount accretion for the first six months of 1999 compared to no net discount accretion for the same period in 1998. This resulted in a 1.7 point increase in the loss and LAE ratio for the six months ended June 30, 1999. The GAAP expense ratio decreased by 2.2 points and 2.9 points for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998, primarily due to a lower acquisition expense ratio. The decreases in the acquisition expense ratio of 2.2 points for the three months ended June 30, 1999 and 3.0 points for the six months ended June 30, 1999, compared to the same periods in 1998, were primarily due to higher ceded commissions received as a result of the new reinsurance treaty in 1999 and a reduction in certain state assessments. The policyholders' dividend ratio was 7.7% and 8.5% for the three and six months ended June 30, 1999, respectively, compared to 7.0% and 6.7% for the same periods last year. These increases are primarily due to selling more business under dividend plans and improved loss experience, which results in higher dividend payouts to policyholders. Net Investment Income Net investment income was $11.5 million and $23.5 million for the three and six months ended June 30, 1999, compared to $12.7 million and $25.3 million for the same periods in 1998. The decrease primarily reflects a lower asset base, due to the paydown of loss reserves from prior accident years. Run-off Operations Effective July 1, 1998, the Company sold PMA Cayman, one of the entities included in The PMA Insurance Group's Run-off Operations, which reinsured claims for certain policies written by other members of The PMA Insurance Group, to a third party for a purchase price of $1.8 million and recorded an after-tax loss of $1.6 million. See Note 7 to the Consolidated Financial Statements for additional information. This transaction included the transfer of $231.5 million in cash and invested assets to the buyer. Net investment income for the Run-off Operations decreased by $1.1 million and $5.8 million in the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The decrease in investment income was primarily due to the decrease in invested assets resulting from the sale, and to a lesser extent, from the paydown of losses by the remaining run-off entities. The sale of PMA Cayman also resulted in a reduction in losses and LAE, acquisition expenses and operating expenses of the Run-off Operations for the three and six months ended June 30, 1999, compared to the same periods in 1998. 17 CALIBER ONE Summarized financial results of Caliber One are as follows:
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------- Net premiums written $ 7,531 $ 705 $ 14,853 $ 917 ======== ======== ======== ======== Net premiums earned $ 4,000 $ 165 $ 6,643 $ 191 Net investment income 493 371 896 714 -------- -------- -------- -------- Operating revenues 4,493 536 7,539 905 Losses and LAE incurred 3,197 133 5,315 153 Acquisition and operating expenses 1,901 1,084 3,525 1,822 -------- -------- -------- -------- Total losses and expenses 5,098 1,217 8,840 1,975 -------- -------- -------- -------- Pre-tax operating loss $ (605) $ (681) $ (1,301) $ (1,070) ======== ======== ======== ======== - -----------------------------------------------------------------------------------------------------
Caliber One recorded pre-tax operating losses of $605,000 and $1.3 million for the three and six months ended June 30, 1999, respectively, compared to pre-tax operating losses of $681,000 and $1.1 million for the three and six months ended June 30, 1998. The increase in the pre-tax operating loss for the six months of 1999, compared to the same period in 1998, reflects the cost of expanding the scope of Caliber One's operations. Pre-tax operating loss for the three months ended June 30, 1999 improved compared with the same period last year, reflecting revenue growth mitigating a relatively larger portion of losses and start up costs. The growth in net premiums written and earned for the three and six months ended June 30, 1999, compared to the same periods in 1998, reflects Caliber One's rising market acceptance and expanded distribution network combined with increased staffing levels. CORPORATE AND OTHER The Corporate and Other segment includes unallocated investment income, expenses, including debt service, and taxes, as well as the results of certain of the Company's real estate properties. For the three and six months ended June 30, 1999, Corporate and Other recorded pre-tax operating losses of $5.8 million and $10.6 million, respectively, compared to pre-tax operating losses of $6.5 million and $13.0 million for the same periods in 1998. The decrease in the operating loss is primarily due to lower interest expense of $700,000 and $1.4 million for the second quarter and first six months of 1999, respectively, reflecting a $40 million paydown in outstanding debt in the fourth quarter of 1998. Operating losses also improved due to lower net expenses from non-core real estate properties. LIQUIDITY AND CAPITAL RESOURCES Liquidity Liquidity is a measure of an entity's ability to secure sufficient 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. 18 At June 30, 1999 and December 31, 1998, 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 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, 1999, the Company had $44.9 million outstanding in letters of credit under the Letter of Credit Facility, compared with $46.9 million as of December 31, 1998. The Company paid interest of $2.9 million and $6.0 million on both credit facilities for the three and six months ended June 30, 1999, respectively, compared to $4.2 million and $7.5 million for the same periods in 1998. 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 (such laws are substantially similar). Under Pennsylvania laws and regulations, without prior approval of the Pennsylvania Insurance Commissioner (the "Commissioner"), dividends may not be paid 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 unassigned funds. Under this standard, the Pooled Companies and PMA Reinsurance Corporation can pay an aggregate of $51.8 million of dividends without the prior approval of the Commissioner during 1999. 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 $2.5 million in dividends during 1999. Dividends received from subsidiaries were $8.0 million and $18.8 million for the three and six months ended June 30, 1999, respectively, compared to $6.0 million and $10.0 million for the comparable 1998 periods. Net tax payments received from subsidiaries were $8.2 million and $11.7 million for the three and six months ended June 30, 1999, respectively, compared to $8.7 million and $14.7 million for the same periods in 1998. 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 $15.6 million in 1999. The Company paid dividends to shareholders of $2.0 million and $3.9 million for the three and six months ended June 30, 1999 and 1998, respectively, compared to $2.1 million and $4.1 million for the three and six months ended June 30, 1998, respectively. 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 1998. In February 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 February 1999, an additional $20.0 million of share repurchase authority was approved by the Company's Board of Directors. During the first six months of 1999, the Company repurchased 627,000 shares at a total cost of $12.3 million (average per share price was $19.54). In addition, PMA Capital repurchased 200,000 shares in July 1999 for a total cost of $4.0 million (average per share price was approximately $20.00). Since the inception of its share repurchase program in February 1998, PMA Capital has repurchased a total of 1.8 million shares at a total cost of $35.1 million (average per share price was $19.25). As of August 4, 1999, PMA Capital has remaining share repurchase authorization of $9.9 million. Decisions regarding share repurchases are subject to the costs and benefits associated with alternative uses of capital and prevailing market conditions. Management believes that the Company's sources of funds will provide sufficient liquidity to meet its short-term and long-term obligations. 19 Capital Resources The Company's total assets decreased to $3,398.8 million at June 30, 1999, compared to $3,460.7 million at December 31, 1998. Total investments decreased $159.2 million to $2,166.2 million at June 30, 1999. The decrease in investments is primarily attributable to declines in market value due to rising interest rates as well as a decrease of $59.5 million in securities on loan under the Company's securities lending program. All other assets increased $97.3 million at June 30, 1999 compared to December 31, 1998. 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. OTHER MATTERS The Company's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to restrict insurance pricing and the application of underwriting standards and reinterpretation of insurance contracts long after the policies were written to provide coverage unanticipated by the Company. The eventual effect on the Company of the changing environment in which it operates remains uncertain. Year 2000 Issue As a consequence of the programming convention which utilized a two-digit field rather than a four-digit field, certain information technology ("IT") systems and non-IT systems, such as equipment with embedded chips or microprocessors, require reprogramming or replacement to enable them to perform correctly date operations involving year 2000 or later ("Year 2000 Issue"). With the assistance of outside consulting groups, the Company began evaluating and reprogramming its IT systems to address the Year 2000 Issue in late 1995. The Company's Year 2000 systems' program consists of four phases: (i) identifying systems requiring remediation; (ii) assessing the requirements to remediate those systems; (iii) remediating those systems to make them Year 2000 ready by either modifying or replacing them; and (iv) testing the systems for Year 2000 readiness, including, where applicable, that they properly interface with third parties. The Company has completed the identification and assessment phases with respect to its IT systems that are critical to maintaining operations or the failure of which would result in significant costs or disruption of operations ("mission critical systems"). As of February 28, 1999, the Company had remediated and tested all of its mission critical systems. In addition, the Company will continue to test its mission critical systems under varying testing scenarios throughout 1999. The Company has identified all of its non-IT systems that may require Year 2000 remediation, including office equipment and physical facilities, which contain microprocessors or other embedded technology over which it has control. As of April 30, 1999, substantially all of these non-IT systems are believed to be Year 2000 ready to the extent reasonably necessary to conduct the Company's day-to-day operations. Because the Company is not materially dependent upon non-IT systems, the effect of a failure of these systems is not expected to be material to the Company's financial condition or results of operations. The cost of the Company's Year 2000 readiness work through June 30, 1999 has been approximately $5.4 million. No material costs were incurred in the second quarter of 1999. The Company does not expect to incur material costs through the rest of 1999 in connection with the Year 2000 Issue. The Company also is continuing to evaluate its relationships with certain third parties with which the Company has a direct and material relationship to determine whether they are Year 2000 ready, such as banks, brokers, reinsurers, third party service providers, software and other service vendors, and agents and other intermediaries. As of July 31, 1999, the responses received from such third parties to inquiries made by the Company indicate that these third parties either are or expect to be Year 2000 ready by December 31, 1999. 20 Even assuming that all material third parties provide a timely representation concerning their Year 2000 readiness, it is not possible to state with certainty that such representations will turn out to have been accurate, or that the operations of such third parties will not be materially impacted in turn by other parties with whom they themselves have a material relationship, and who fail to timely become Year 2000 ready. Consequently, the effect, if any, on the Company's results of operations from the failure of such third parties to be Year 2000 ready is not reasonably estimable. However, the failure of one or more third parties with whom the Company has a material relationship to be Year 2000 ready could cause significant disruptions in the Company's ability to pay claims, receive and deposit funds and make investments, which could have a material adverse effect on the Company's financial condition and results of operations. The Company's contingency plans in the event of failure of such third parties to be Year 2000 ready include replacing the third party, performing directly the services performed by the third party and maintaining liquidity under the Company's Credit Facility. Although the Company believes that Year 2000 Issues related to its hardware and internal software programs are not likely to result in any material adverse disruptions in the Company's computer systems or its other business operations, it has begun, but not yet completed, an analysis of the operational problems that the Company believes would be reasonably likely to result from the failure by the Company and certain third parties to successfully complete efforts necessary to achieve Year 2000 readiness on a timely basis. The Company expects to complete this analysis in the third quarter of 1999. The Company is also developing contingency plans to provide for the resumption of its computer systems and its other business operations in the event such Year 2000 problems occur. These plans are expected to be completed in the third quarter of 1999; however, the Company intends throughout 1999 to review and modify such plans on an ongoing basis as new information becomes available or circumstances materially change. The costs of the Company's Year 2000 efforts and the dates on which the Company believes it will complete such efforts are based on management's best estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans, and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and costs of personnel trained in Year 2000 Issues; the Company's ability to identify, assess, remediate and test all relevant computer codes and embedded technology; the risk that reasonable testing will not uncover all Year 2000 problems; and similar uncertainties. In addition to the costs and risks associated with internal systems and third parties, the Company may have underwriting exposure related to the Year 2000 Issue. Businesses materially damaged as a result of the Year 2000 Issue may attempt to recoup their losses by claiming coverage under various types of insurance policies underwritten by the Company and by ceding companies to whom the Company provides reinsurance. The Company is attempting, whenever possible, to avoid or otherwise limit its potential Year 2000 exposure through its underwriting process. In the event that claims for Year 2000 Issues are asserted against the Company, it is not possible to predict whether or to what extent any such coverage could ultimately be found to exist by courts in various jurisdictions, or, if found, the effect thereof on the Company. In addition, even if such coverage were found not to exist, which cannot be predicted, the costs of litigation could be material. In the absence of any claims experience at this time, such losses and costs are not currently reasonably estimable. 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") 21 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 Pennsylvania Insurance Department has adopted Codification, effective January 1, 2001. The Company is in the process of estimating the impact that Codification will have on its statutory surplus. Recent Accounting Pronouncements Effective January 1, 1999, the Company adopted Statement of Position ("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. In October 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued 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. SOP 98-7 is effective for financial statements for fiscal years beginning after June 15, 1999. While the Company is presently evaluating the impact of SOP 98-7, the adoption of SOP 98-7 is not expected to have a material impact on the Company's financial condition, results of operations or liquidity. 22 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; 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. 23 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders The Company's 1999 Annual Meeting of Shareholders ("Annual Meeting") was held on April 26, 1999. At the Annual Meeting, the shareholders elected nominees to the Board of Directors and approved the 1999 Equity Incentive Plan. The following nominees were elected as members of the Company's Board of Directors to serve for terms expiring at the 2002 Annual Meeting and until their successors are elected: Name of Nominee Votes Cast For Votes Withheld - --------------- -------------- -------------- Paul I. Detwiler, Jr 117,739,338 21,934 Anne S. Genter 117,749,035 12,237 A. John May 113,648,772 4,112,500 Roderic H. Ross 117,749,035 12,237 John W. Smithson 117,724,333 36,939 The shareholders voted to approve the Company's 1999 Equity Incentive Plan: Votes Cast For Votes Cast Against Abstentions Broker Non-Votes - -------------- ------------------ ----------- ---------------- 114,402,725 341,043 1,307,339 1,710,165 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The Exhibits are listed in the Index to Exhibits on page 26. (b) Reports on Form 8-K filed during the quarter ended June 30, 1999: During the quarterly period ended June 30, 1999, the Company filed the following Reports on Form 8-K: - - dated May 5, 1999, Item 5 - containing a news release regarding its first quarter 1999 results. 24 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: 8/12/99 By: /s/ Francis W. McDonnell ---------- ------------------------------------- Francis W. McDonnell, Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) 25 Exhibit Index
Exhibit No. Description of Exhibit Method of Filing - ----------- ---------------------- ---------------- (10) Material Contracts Exhibits 10.1 to 10.5 are compensatory plans. 10.1 Amendment No. 1 to the Amended and Restated 1991 Filed herewith Equity Incentive Plan dated May 5, 1999 10.2 Amendment No. 1 to the Amended and Restated 1993 Filed herewith Equity Incentive Plan dated May 5, 1999 10.3 Amendment No. 1 to the Amended and Restated 1994 Filed herewith Equity Incentive Plan dated May 5, 1999 10.4 Amendment No. 1 to the 1995 Equity Incentive Plan Filed herewith dated May 5, 1999 10.5 Amendment No. 1 to the 1996 Equity Incentive Plan Filed herewith dated May 5, 1999 (12) Computation of Ratio of Earnings to Fixed Charges Filed herewith (27) Financial Data Schedule Filed herewith (EDGAR version only)
26 EX-10.1 2 Amendment No. 1 to the Amended and Restated 1991 Equity Incentive Plan 1. Section 13 of the 1991 Equity Incentive Plan (the "Plan") is hereby amended in its entirety to read as follows: 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, the Committee may require an optionee or permit an optionee, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 2. Section 14 of the Plan is hereby amended in its entirety to read as follows: 14. Non-Assignability. (a) Incentive Stock Options. No Option which is an Incentive Stock Option shall be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution and during the lifetime of the optionee, such Incentive Stock Option shall be exercisable only by the optionee or by his guardian or legal representative. (b) Nonqualified Stock Options. No Option which is a Nonqualified Stock Option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the optionee such Nonqualified Stock Option shall be exercisable only by such person or by such person's guardian or legal representative. Notwithstanding the restrictions set forth above in this Section 14(b), the Committee or its designee shall have the authority, in its sole discretion, to grant (or to sanction by way of amendment of an existing grant) Nonqualified Stock Options that may be transferred by the optionee during his lifetime to any "family member" of the optionee, which shall include a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, siblings, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships, any person sharing the optionee's household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the optionee) control the management of assets, and any other entity in which these persons (or the optionee) own more than 50% of the voting interests. No Nonqualified Stock Option may be transferred for value. The following transfers are not prohibited transfers for value: (i) a transfer under a domestic relations order in settlement of marital property rights; and (ii) a transfer to an entity in which more than 50% of the voting interests are owned by family members (or the optionee) in exchange for an interest in that entity. In the case of a grant, the written documentation containing the terms and conditions of such Nonqualified Stock Option shall state that it is transferable, and in the case of an amendment to an existing grant, such amendment shall be in writing. A Nonqualified Stock Option transferred as contemplated in this Section 14(b) may not be subsequently transferred by the transferee (except for transfers back to the original optionee) except by will or the laws of descent and distribution and shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant grant. However, the Committee or its designee, in its sole discretion at the time that the transfer is approved, may alter the terms and limitations of the relevant grant and establish such additional terms and conditions as it shall deem appropriate. Date of Adoption by the Board of Directors - December 14, 1991 Date of Approval of Shareholders - May 4, 1992 Date of Amendment and Restatement by Stock Option Committee - April 12, 1995 Date of Amendment No. 1 by Stock Option Committee -- May 5, 1999 EX-10.2 3 Amendment No. 1 to the Amended and Restated 1993 Equity Incentive Plan 1. Section 13 of the 1993 Equity Incentive Plan (the "Plan") is hereby amended in its entirety to read as follows: 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, the Committee may require an optionee or permit an optionee, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 2. Section 14 of the Plan is hereby amended in its entirety to read as follows: 14. Non-Assignability. (a) Incentive Stock Options. No Option which is an Incentive Stock Option shall be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution and during the lifetime of the optionee, such Incentive Stock Option shall be exercisable only by the optionee or by his guardian or legal representative. (b) Nonqualified Stock Options. No Option which is a Nonqualified Stock Option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the optionee such Nonqualified Stock Option shall be exercisable only by such person or by such person's guardian or legal representative. Notwithstanding the restrictions set forth above in this Section 14(b), the Committee or its designee shall have the authority, in its sole discretion, to grant (or to sanction by way of amendment of an existing grant) Nonqualified Stock Options that may be transferred by the optionee during his lifetime to any "family member" of the optionee, which shall include a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, siblings, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships, any person sharing the optionee's household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the optionee) control the management of assets, and any other entity in which these persons (or the optionee) own more than 50% of the voting interests. No Nonqualified Stock Option may be transferred for value. The following transfers are not prohibited transfers for value: (i) a transfer under a domestic relations order in settlement of marital property rights; and (ii) a transfer to an entity in which more than 50% of the voting interests are owned by family members (or the optionee) in exchange for an interest in that entity. In the case of a grant, the written documentation containing the terms and conditions of such Nonqualified Stock Option shall state that it is transferable, and in the case of an amendment to an existing grant, such amendment shall be in writing. A Nonqualified Stock Option transferred as contemplated in this Section 14(b) may not be subsequently transferred by the transferee (except for transfers back to the original optionee) except by will or the laws of descent and distribution and shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant grant. However, the Committee or its designee, in its sole discretion at the time that the transfer is approved, may alter the terms and limitations of the relevant grant and establish such additional terms and conditions as it shall deem appropriate. Date of Adoption by the Board of Directors - February 23, 1993 Date of Approval of Shareholders - April 26, 1993 Date of Amendment and Restatement by Stock Option Committee - April 12, 1995 Date of Amendment No. 1 by Stock Option Committee -- May 5, 1999 EX-10.3 4 Amendment No. 1 to the Amended and Restated 1994 Equity Incentive Plan 1. Section 13 of the 1994 Equity Incentive Plan (the "Plan") is hereby amended in its entirety to read as follows: 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, the Committee may require an optionee or permit an optionee, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 2. Section 14 of the Plan is hereby amended in its entirety to read as follows: 14. Non-Assignability. (a) Incentive Stock Options. No Option which is an Incentive Stock Option shall be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution and during the lifetime of the optionee, such Incentive Stock Option shall be exercisable only by the optionee or by his guardian or legal representative. (b) Nonqualified Stock Options. No Option which is a Nonqualified Stock Option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the optionee such Nonqualified Stock Option shall be exercisable only by such person or by such person's guardian or legal representative. Notwithstanding the restrictions set forth above in this Section 14(b), the Committee or its designee shall have the authority, in its sole discretion, to grant (or to sanction by way of amendment of an existing grant) Nonqualified Stock Options that may be transferred by the optionee during his lifetime to any "family member" of the optionee, which shall include a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, siblings, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships, any person sharing the optionee's household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the optionee) control the management of assets, and any other entity in which these persons (or the optionee) own more than 50% of the voting interests. No Nonqualified Stock Option may be transferred for value. The following transfers are not prohibited transfers for value: (i) a transfer under a domestic relations order in settlement of marital property rights; and (ii) a transfer to an entity in which more than 50% of the voting interests are owned by family members (or the optionee) in exchange for an interest in that entity. In the case of a grant, the written documentation containing the terms and conditions of such Nonqualified Stock Option shall state that it is transferable, and in the case of an amendment to an existing grant, such amendment shall be in writing. A Nonqualified Stock Option transferred as contemplated in this Section 14(b) may not be subsequently transferred by the transferee (except for transfers back to the original optionee) except by will or the laws of descent and distribution and shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant grant. However, the Committee or its designee, in its sole discretion at the time that the transfer is approved, may alter the terms and limitations of the relevant grant and establish such additional terms and conditions as it shall deem appropriate. Date of Adoption by the Board of Directors - January 25, 1994 Date of Approval of Shareholders - April 25, 1994 Date of Amendment and Restatement by Stock Option Committee - April 12, 1995 Date of Amendment No. 1 by Stock Option Committee -- May 5, 1999 EX-10.4 5 Amendment No. 1 to the 1995 Equity Incentive Plan 1. Section 13 of the 1995 Equity Incentive Plan (the "Plan") is hereby amended in its entirety to read as follows: 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, the Committee may require an optionee or permit an optionee, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 2. Section 14 of the Plan is hereby amended in its entirety to read as follows: 14. Non-Assignability. (a) Incentive Stock Options. No Option which is an Incentive Stock Option shall be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution and during the lifetime of the optionee, such Incentive Stock Option shall be exercisable only by the optionee or by his guardian or legal representative. (b) Nonqualified Stock Options. No Option which is a Nonqualified Stock Option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the optionee such Nonqualified Stock Option shall be exercisable only by such person or by such person's guardian or legal representative. Notwithstanding the restrictions set forth above in this Section 14(b), the Committee or its designee shall have the authority, in its sole discretion, to grant (or to sanction by way of amendment of an existing grant) Nonqualified Stock Options that may be transferred by the optionee during his lifetime to any "family member" of the optionee, which shall include a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, siblings, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships, any person sharing the optionee's household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the optionee) control the management of assets, and any other entity in which these persons (or the optionee) own more than 50% of the voting interests. No Nonqualified Stock Option may be transferred for value. The following transfers are not prohibited transfers for value: (i) a transfer under a domestic relations order in settlement of marital property rights; and (ii) a transfer to an entity in which more than 50% of the voting interests are owned by family members (or the optionee) in exchange for an interest in that entity. In the case of a grant, the written documentation containing the terms and conditions of such Nonqualified Stock Option shall state that it is transferable, and in the case of an amendment to an existing grant, such amendment shall be in writing. A Nonqualified Stock Option transferred as contemplated in this Section 14(b) may not be subsequently transferred by the transferee (except for transfers back to the original optionee) except by will or the laws of descent and distribution and shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant grant. However, the Committee or its designee, in its sole discretion at the time that the transfer is approved, may alter the terms and limitations of the relevant grant and establish such additional terms and conditions as it shall deem appropriate. Date of Adoption by the Board of Directors - February 28, 1995 Date of Approval of Shareholders - April 24, 1995 Date of Amendment by Stock Option Committee - May 5, 1999 EX-10.5 6 Amendment No. 1 to the 1996 Equity Incentive Plan 1. Section 13 of the 1996 Equity Incentive Plan (the "Plan") is hereby amended in its entirety to read as follows: 13. Withholding. Whenever the Company proposes or is required to issue or transfer shares of Class A Stock under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate for such shares. If and to the extent authorized by the Committee, in its sole discretion, the Committee may require an optionee or permit an optionee, by means of a form of election to be prescribed by the Committee, to have shares of Class A Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Class A Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 2. Section 14 of the Plan is hereby amended in its entirety to read as follows: 14. Non-Assignability. (a) Incentive Stock Options. No Option which is an Incentive Stock Option shall be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution and during the lifetime of the optionee, such Incentive Stock Option shall be exercisable only by the optionee or by his guardian or legal representative. (b) Nonqualified Stock Options. No Option which is a Nonqualified Stock Option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution or by such other means as the Committee may approve, unless such means would be prohibited by Rule 16b-3 under the Exchange Act. During the life of the optionee such Nonqualified Stock Option shall be exercisable only by such person or by such person's guardian or legal representative. Notwithstanding the restrictions set forth above in this Section 14(b), the Committee or its designee shall have the authority, in its sole discretion, to grant (or to sanction by way of amendment of an existing grant) Nonqualified Stock Options that may be transferred by the optionee during his lifetime to any "family member" of the optionee, which shall include a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, siblings, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships, any person sharing the optionee's household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the optionee) control the management of assets, and any other entity in which these persons (or the optionee) own more than 50% of the voting interests. No Nonqualified Stock Option may be transferred for value. The following transfers are not prohibited transfers for value: (i) a transfer under a domestic relations order in settlement of marital property rights; and (ii) a transfer to an entity in which more than 50% of the voting interests are owned by family members (or the optionee) in exchange for an interest in that entity. In the case of a grant, the written documentation containing the terms and conditions of such Nonqualified Stock Option shall state that it is transferable, and in the case of an amendment to an existing grant, such amendment shall be in writing. A Nonqualified Stock Option transferred as contemplated in this Section 14(b) may not be subsequently transferred by the transferee (except for transfers back to the original optionee) except by will or the laws of descent and distribution and shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant grant. However, the Committee or its designee, in its sole discretion at the time that the transfer is approved, may alter the terms and limitations of the relevant grant and establish such additional terms and conditions as it shall deem appropriate. Date of Adoption by the Board of Directors - February 27, 1996 Date of Approval of Shareholders - April 22, 1996 Date of Amendment by Stock Option Committee - May 5, 1999 EX-12 7 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In Thousands, except ratio)
For the six months ended June 30, 1999 1998 - ------------------------------------------------------------------------------------------------------------- EARNINGS Pre-tax income $19,528 $25,516 Fixed charges 6,492 7,900 ---------------------------------------------- Total(a) $26,020 $33,416 ============================================== FIXED CHARGES Interest expense and amortization of debt discount and premium on all indebtedness $6,082 $7,463 Interest portion of rental expense 410 437 ---------------------------------------------- Total fixed charges (b) $6,492 $7,900 ============================================== Ratio of earnings to fixed charges(a)/(b) 4.0x 4.2x ==============================================
EX-27 8
7 This schedule contains summary financial information extracted from the financial statements contained in Form 10-Q for the quarter ended June 30, 1999 for PMA Capital Corporation and is qualified in its entirety by reference to such statements. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,741,420 0 0 14 0 0 2,166,184 10,534 625,440 54,070 3,398,772 1,915,067 275,751 0 12,621 163,000 0 0 122,214 339,578 3,398,772 238,463 54,070 (878) 5,959 176,645 52,501 42,858 19,528 4,314 15,214 0 0 (2,759) 12,455 0.53 0.52 0 0 0 0 0 0 0 Represents reinsurance recoverable on paid and unpaid losses.
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