On November 15, 2004, A.M. Best restored The PMA Insurance Group's financial strength rating to A- (Excellent) after we changed our corporate structure and extended the first put date associated with our convertible debt. This rating restoration has enabled us to increase new business written and business retention rates in 2005 compared to 2004.
We had $73.4 million aggregate principal amount of 6.50% Convertible Debt outstanding at December 31, 2005. Holders, at their option, may require us to repurchase all or a portion of this debt on June 30, 2009 at 114% of the
Pre-tax operating income for The PMA Insurance Group was $22.0 million in 2005 compared to $13.2 million in 2004 and $21.5 million in 2003. The increased pre-tax operating income in 2005, compared to 2004, primarily reflects improved underwriting results. The lower pre-tax operating income in 2004, compared to 2003, primarily reflects lower underwriting results and lower net investment income.
In February 2006, the Pennsylvania Compensation Rating Bureau recommended a reduction in loss costs of 8.6%, which was approved by the PA Department of Insurance and will become effective on April 1, 2006. While this will result in lower filed loss costs in Pennsylvania, we will continue our practice of underwriting our business with a goal of achieving a reasonable level of profitability on each account, and we do not expect that the filed loss costs would result in a reduction in premiums in Pennsylvania at a level of the loss costs, based on our current views of the experience modification factors and potential future experience of our book of business. We can and will continue to determine our business pricing through schedule charges/credits that we file and can use to limit the effect of filed loss cost changes. We also believe that the loss cost change should not significantly affect the results or the profitability of our loss sensitive book of business, which represents approximately 40% of our Pennsylvania workers' compensation book of business.
Premiums ceded increased by $553,000 and decreased by $29.6 million in 2005 and 2004 respectively, compared to the immediately preceding years. Premiums ceded for workers’ compensation and integrated disability increased by $917,000 in 2005, compared to 2004, primarily because The PMA Insurance Group lowered its aggregate deductible for losses in excess of $250,000 to $12.6 million from $18.8 million on its workers’ compensation reinsurance program. Premiums ceded for workers’ compensation and integrated disability decreased by $24.4 million in 2004, compared to 2003, as a result of lower direct premiums written for those lines and because The PMA Insurance Group increased its aggregate annual deductible for losses in excess of $250,000 to $18.8 million from $5.0 million on its workers’ compensation reinsurance program. Premiums ceded for Commercial Lines were lower by $364,000 and $5.2 million in 2005 and 2004, respectively, compared to the immediately preceding years, primarily reflecting the decrease in direct premiums earned for commercial lines.
In November 2003, we announced our decision to withdraw from the reinsurance business previously served by our PMA Re operating segment and since that time, we have not written reinsurance. As a result of this decision, the results of PMA Re are reported as Run-off Operations. Run-off Operations also includes the results of our former excess and surplus lines business, which we withdrew from in May 2002.
Our consolidated unpaid losses and LAE, net of reinsurance, at December 31, 2005 and 2004 were $793.1 million and $998.8 million respectively, net of discount of $59.8 million and $70.5 million, respectively. Included in the consolidated unpaid losses and LAE are amounts related to our workers’ compensation claims of $428.9 million and $448.7 million, net of discount of $40.4 million and $48.2 million at December 31, 2005 and 2004, respectively. The discount rate used was approximately 5% at December 31, 2005 and 2004.
Estimating reserves for asbestos and environmental exposures continues to be difficult because of several factors, including: (i) evolving methodologies for the estimation of the liabilities; (ii) lack of reliable historical claim data; (iii) uncertainties with respect to insurance and reinsurance coverage related to these obligations; (iv) changing
Assumes holders of this debt require us to repurchase all of this debt on the June 30, 2009 put date at 114% of the principal amount. This debt may be converted at any time, at the holder's option, at a current price of $16.368 per share for $68.4 million principal amount and $15.891 per share for $5.0 million principal amount.
our ability to increase the amount of new and renewal business written by The PMA Insurance Group at adequate prices;
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and
The PMA Insurance Group has recorded reinsurance receivables of $13.9 million at December 31, 2005, related to certain umbrella policies covering years prior to 1977. The reinsurer has disputed the extent of coverage under these policies. The parties have commenced arbitration to resolve this dispute. The ultimate resolution of this dispute cannot be determined at this time. An unfavorable resolution of the dispute could have a material adverse effect on the Company’s financial condition and results of operations.
The Company has 2,000,000 shares of undesignated Preferred stock, $0.01 par value per share authorized. There are no shares of Preferred stock issued or outstanding.
In 2003, the Company established a valuation allowance in the amount of $49 million. This was based upon management’s assessment that it was more likely than not that a portion of the gross deferred tax assets related to the NOL carryforward and all of the deferred tax asset related to the AMT credit carryforward would not be realized. During 2004 and 2005, the Company reassessed the valuation allowance previously established against its net deferred tax assets. Factors considered by management in this reassessment included historical earnings, scheduled reversal of deferred tax liabilities and revised projections of future earnings. Based upon management’s consideration of these factors in conjunction with the current level of valuation allowance recorded, the Company increased the valuation allowance with respect to its net deferred tax asset by $8 million and $3.5 million in 2004 and 2005, respectively. The increases were primarily due to the future earnings projections for the Company’s Run-off Operations which were revised downward from previous projections.