Over the past two years, we reduced our outstanding debt by $64.9 million, or 33%. During this period, we retired $72.2 million principal amount of our 6.50% Senior Secured Convertible Debt (“6.50% Convertible Debt”) which could have been put to us on June 30, 2009 at 114% of the principal amount. This debt also contained restrictive covenants regarding
In this MD&A, in addition to providing consolidated net income (loss), we also provide segment operating income (loss) because we believe that it is a meaningful measure of the profit or loss generated by our operating segments. Operating income (loss), which is GAAP net income (loss) excluding net realized investment gains (losses) and results from discontinued operations, is the financial performance measure used by our management and Board of Directors to evaluate and assess the results of our businesses. Net realized investment activity is excluded because (i) net realized investment gains and losses are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments 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 and losses that do not relate to the operations of the individual segments. Operating income (loss) does not replace net income (loss) as the GAAP measure of our consolidated results of operations.
interest expense in 2006, compared to 2005, was partially offset by higher stock-based compensation expense. The lower interest expense for both periods resulted from a lower average level of debt outstanding.
Estimated sales proceeds are based on a non-binding letter of intent received from an interested third party. This estimate reflects amounts anticipated at closing, subject to adjustments following the third party’s review of the final purchase price calculation, but excludes future contingent payments that may be received from the third party.
Our unpaid losses and LAE, net of reinsurance, at December 31, 2007 and 2006 were $444.8 million and $456.8 million, respectively, net of discount of $21.5 million and $29.7 million, respectively. Included in unpaid losses and LAE were amounts related to our workers’ compensation claims of $379.5 million and $362.8 million, net of discount of $21.4 million and $17.8 million at December 31, 2007 and 2006, respectively. The discount rate used was approximately 5% at December 31, 2007 and 2006.
At December 31, 2007 and 2006, we had amounts receivable from our reinsurers and retrocessionaires for our continuing operations totaling $795.9 million and $720.1 million, respectively. As of December 31, 2007, $29.9 million, or 4%, of these amounts were due to us on losses we have already paid, compared to $32.9 million, or 5%, at December 31, 2006. The remainder of the reinsurance receivables related to unpaid claims.
Workers’ compensation insurers were not permitted to exclude terrorism from coverage prior to the enactment of TRIA, and continue to be subject to this prohibition. When underwriting new and renewal commercial insurance business, The PMA Insurance Group considers the added potential risk of loss due to terrorist activity, and this has lead us to decline to write or renew certain business. Additional rates may be charged for terrorism coverage, and as of January 1, 2004, The PMA Insurance Group had adopted such premium charges for terrorism coverage under workers’ compensation insurance in all states. The PMA Insurance Group has also refined its underwriting procedures in consideration of terrorism risks.
In the ordinary course of the claims review process, we independently verify that reported claims are covered under the terms of the reinsurance policy or treaty purchased by the ceding company. In the event that we do not believe coverage has been provided, we will deny payment for such claims. Most contracts contain a dispute resolution process that relies on arbitration to resolve any contractual differences. At December 31, 2007, our discontinued operations did not have any material claims that were in the process of arbitration that have not been recorded as liabilities on the accompanying consolidated financial statements.
Unpaid losses and LAE of our discontinued operations are presented with the gross liabilities of discontinued operations in a separate line on the Balance Sheet. Based on historical payment patterns, we have included an estimate, gross of discount of $22.1 million, of when we expect these unpaid losses and LAE (without the benefit of reinsurance recoveries) to be paid.
The fair value of the investment portfolio at our discontinued operations at December 31, 2007 and 2006 was $219.7 million and $178.4 million, respectively, and had an amortized cost of $219.2 million and $184.4 million, respectively. The investment portfolio consisted of 85% and 14% in short-term investments at December 31, 2007 and 2006, respectively.
Effective January 1, 2007, we reclassified securities, which are currently reported as part of our assets of discontinued operations on the Balance Sheet, from fixed maturities available for sale to the trading category in conjunction with our adoption of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). The securities selected had gross unrealized gains of $530,000 and gross unrealized losses of $6.6 million at the time of our adoption.
Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). See Note 14 to our Consolidated Financial Statements for the impact of this adoption.
Based on our evaluation of securities with an unrealized loss at December 31, 2007, we do not believe that any additional other-than-temporary impairment losses, other than those already reflected in the consolidated financial statements, are necessary at the balance sheet date. However, if we were to have determined that all securities that were in an unrealized loss position at December 31, 2007 should have been written-down to their fair value, then we would have recorded an additional other-than-temporary impairment loss of $3.6 million pre-tax at our continuing operations.
For additional information about reinsurance receivables, see Notes 4 and 7 to the Consolidated Financial Statements as well as “Reinsurance” beginning on page 43.
companies, with no single issuer exceeding 2% of the total investment portfolio. The Company does not believe that there are credit related risks associated with its U.S. Treasury and agency securities.
On December 31, 2007, the Company had securities with a total amortized cost and fair value of $41.2 million and $42.6 million, respectively, on deposit with various governmental authorities, as required by law. The securities held on deposit are included in total investments on the Balance Sheet.
The PMA Insurance Group recorded favorable prior year loss development of $1.7 million, $2.3 million and $2.0 million in 2007, 2006 and 2005, respectively, primarily reflecting better than expected loss experience from rent-a-captive workers’ compensation business. Dividends to policyholders offset this favorable development. Rent-a-captives are used by customers as an alternative method to manage their loss exposure without establishing and capitalizing their own captive insurance company.
The Company used the $20.0 million net proceeds from the recently issued junior subordinated debt to purchase, in the open market, its 6.50% Convertible Debt. In 2007, the Company retired $18.1 million principal amount of its 6.50% Convertible Debt for which it paid $21.2 million, exclusive of accrued interest. As the derivative component of the debt was already reflected in the debt balance, the purchase activity did not result in any significant realized gain or loss.
The Company’s domestic insurance subsidiaries’ ability to pay dividends to PMA Capital Corporation is limited by the insurance laws and regulations of the Commonwealth of Pennsylvania.
The Company currently has stock-based compensation plans in place for directors, officers and other key employees of the Company. Pursuant to the terms of these plans, under which 4,349,729 shares of Class A Common Stock are reserved for issuance at December 31, 2007, the Company grants restricted shares of its Class A Common Stock and options to purchase the Company’s Class A Common Stock. Stock-based compensation is granted under terms and conditions determined by the Compensation Committee of the Board of Directors (“Compensation Committee”). Stock options have a maximum term of ten years, generally vest over periods ranging between one and four years, and are typically granted with an exercise price at least equal to the market value of the Class A Common Stock on the date of grant. Restricted stock is valued at the market value of the Class A Common Stock on the date of grant and generally vests (restrictions lapse) between one and three years.
The following table illustrates the effect on net income (loss) if the fair value based method had been applied:
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the Qualified Pension Plan were $79.0 million, $79.0 million and $74.1 million, respectively, at December 31, 2007, and $83.5 million, $83.5 million and $72.7 million, respectively, at December 31, 2006.
Effective in the fourth quarter of 2007, the Company reported the results of its former Run-off Operations segment as discontinued operations. As a result of this change, the Corporate and Other segment was impacted by investment income previously eliminated in the Corporate and Other segment. For comparative purposes, all prior periods have been reclassified to reflect this change.
Effective in the fourth quarter of 2007, the Company reported the results of its former Run-off Operations segment as discontinued operations. For comparative purposes, all prior periods have been reclassified to reflect this change.