Results for 2004 were also reduced by $3.9 million after-tax ($6.0 million pre-tax) which was attributable to our purchasing reinsurance that protects our statutory capital in the event of further adverse loss development at the Run-
For workers’ compensation coverages, the premium charged on fixed-cost policies is primarily based upon the manual rates filed with state insurance departments. Manual rates in The PMA Insurance Group’s principal marketing territories for workers’ compensation increased on average 4% in 2004, 8% in 2003 and 13% in 2002. These increases in manual rates generally reflect the effects of higher average medical and indemnity costs in recent years. Manual rate changes directly affect the prices that The PMA Insurance Group can charge for its rate sensitive workers’ compensation products, which comprise 55% of workers’ compensation premiums for 2004.
assigned on a lag based on its market share in terms of direct premiums in the voluntary market. These assignments are accomplished either by direct assignment or by assumption from pools of residual market business.
Premiums written and earned declined significantly in 2004, compared to 2003 and 2002 due to our exit from the reinsurance business. Additionally, as we have continued our runoff of the business, ceding companies have cancelled reinsurance contracts, which results in negative gross and net premiums written. Net premiums written and earned for 2004 also reflect a charge of $6.0 million for a reinsurance agreement covering potential adverse loss development. Net premiums written declined in 2003, compared to 2002, due primarily to lower reinsurance premiums written. Additionally, premiums written for 2002 included an additional $58.1 million of gross premiums written ($44.2 million of net premiums written) recorded in the second quarter of 2002 as a result of a change in our estimate of ultimate premiums written. Because premiums from ceding companies are typically reported on a delayed basis, we monitor and update, as appropriate, the estimated ultimate premiums written. Our periodic review of estimated ultimate premiums written, comparing actual reported premiums to originally estimated premiums based on ceding company estimates, indicated that premiums written in recent years, primarily for 2001 and 2000 were higher than originally estimated. The increase in net premiums earned of $39.9 million in 2002 caused by this adjustment was offset by corresponding losses and LAE and acquisition expenses.
At December 31, 2004 and 2003, we had amounts receivable from our reinsurers and retrocessionaires totaling $1,142.6 million and $1,220.3 million, respectively. As of December 31, 2004 and 2003, $58.7 million and $39.1 million, or 5% and 3%, respectively, of these amounts were due to us on losses we have already paid. The remainder of the reinsurance receivables related to unpaid claims.
Except for historical information provided in Management’s Discussion and Analysis and otherwise in this report, statements made throughout, are forward-looking and contain information about financial results, economic conditions, trends and known uncertainties. Words such as “believe,” “estimate,” “anticipate,” “expect” or similar words are intended to identify forward-looking statements. These forward-looking statements are based on currently available financial, competitive and economic data and our current operating plans based on assumptions regarding future events. Our actual results could differ materially from those expected by our management.
Diluted shares for 2004, 2003 and 2002 do not assume the conversion of the Company’s Convertible Debt into 6.1 million, 5.3 million and 5.3 million shares of Class A Common stock, respectively, because it would have been anti-dilutive. The dilutive effect of the Convertible Debt for 2004 represents the impact of the Put Premium feature on the 6.50% Convertible Debt. See Note 6 for additional information.
As of December 31, 2004, the carrying amounts for the Company’s financial instruments approximated their estimated fair value. As of December 31, 2003, the carrying amounts for the Company’s financial instruments approximated their estimated fair value, other than the 4.25% Convertible Debt, which had a fair value of approximately $65 million, compared to a carrying value of $86.3 million, and the 8.50% Senior Notes, which had a fair value of approximately $50 million,
In 2003 and 2002, the Company and certain of its subsidiaries provided certain administrative services to the PMA Foundation (the “Foundation”), for which the Company and its subsidiaries received reimbursement. The Foundation, a not-for-profit corporation qualified under Section 501(c)(6) of the Internal Revenue Code, whose purposes include the promotion of the common business interests of its members and the economic prosperity of the Commonwealth of Pennsylvania, owned 5,242,150 shares, or 16.7%, of the Company’s Class A Common stock as of December 31, 2003. As of December 31, 2004, the Foundation owns less than 5% of the Company’s Class A Common Stock. Total reimbursements amounted to $13,000 for both 2003 and 2002. The Foundation also leased its Harrisburg, Pennsylvania headquarters facility from a subsidiary of the Company under an operating lease which required rent payments of $25,000 per month, and reimbursed a subsidiary of the Company for its use of office space. Rent and related reimbursements paid to the Company’s affiliates by the Foundation was $304,000 in both 2003 and 2002. In 2004, the Company sold this building to the Foundation for gross proceeds of $1.6 million, resulting in a gain of $458,000, which is included in other revenues in the Statement of Operations.