• A.M. Best announced that it lowered the insurer financial strength ratings of PMA Capital Insurance Company, our reinsurance subsidiary, from A- (4th of 16) to B++ (5th of 16), and The PMA Insurance Group (Pennsylvania Manufacturers' Association Insurance Company, Pennsylvania Manufacturers Indemnity Company and Manufacturers Alliance Insurance Company), or the Pooled Companies, our primary insurance subsidiaries, from A- (4th of 16) to B++ (5th of 16). All of these ratings are under review with negative implications.
In the fourth quarter of 2003, our internal actuaries completed a comprehensive year-end actuarial analysis of loss reserves. Based on the actuarial work performed, we noticed higher than expected claims severity in our workers’ compensation business written for accident years 2001 and 2002, primarily from loss-sensitive and participating workers’ compensation business. As a result, The PMA Insurance Group increased loss reserves for prior years by $50 million. An independent actuarial firm also conducted a comprehensive review of The PMA Insurance Group's loss reserves as of December 31, 2003 and concluded that such carried loss reserves were reasonable as of December 31, 2003. Under The PMA Insurance Group’s loss-sensitive rating plans we adjust the amount of the insured’s premiums after the policy period expires based, to a large extent, upon the insured’s actual losses incurred during the policy period. Under policies that are subject to dividend plans, the ultimate amount of the dividend that the insured may receive is also based, to a large extent, upon loss experience during the policy period. Accordingly, offsetting the effects of this unfavorable prior year loss development were premium adjustments of $35 million under loss-sensitive plans and reduced policyholder dividends of $8 million, resulting in a net fourth quarter pre-tax charge of $7 million.
The Run-off Operations recorded a pre-tax operating loss of $818,000 for 2003. The sale of the capital stock of Caliber One Indemnity Company generated gross proceeds of approximately $31 million and resulted in a pre-tax gain of $2.5 million, which is included in other revenues in the Statement of Operations for 2003. During 2003, the Run-off Operations recognized an additional $2.5 million writedown of assets, made up of approximately $2 million for reinsurance receivables and $500,000 for premiums receivable, reflecting an assessment of their estimated net realizable value. The writedown is included in operating expenses in the Statement of Operations for 2003.
The Run-off Operations recorded a pre-tax operating loss of $26.2 million for 2001. The results for 2001 include net unfavorable prior year loss development of $22.2 million, reflecting higher than expected claim frequency and severity that emerged in 2001 on certain casualty lines of business, primarily professional liability policies for the nursing homes class of business and, to a lesser extent, property lines of business.
At December 31, 2003, our reinsurance and retrocessional protection for major lines of business that we write was as follows:
During 2003, 2002 and 2001 we paid dividends to shareholders of $9.9 million, $12.1 million and $9.0 million, respectively. We did not declare a dividend in the fourth quarter of 2003 and we have suspended common stock dividends at the current time. The increase in dividends paid in 2002, compared to 2001, was due to the additional shares outstanding resulting from our December 2001 issuance of 9,775,000 shares of Class A Common stock.
Under the terms of the sale of one of our insurance subsidiaries, PMA Insurance Cayman, Ltd. (renamed Trabaja Reinsurance Company), to London Life and Casualty Reinsurance Corporation in 1998, we have agreed to indemnify the buyer, up to a maximum of $15.0 million if the actual claim payments in the aggregate exceed the estimated payments upon which the loss reserves of the former subsidiary were established. If the actual claim payments in the aggregate are less than the estimated payments upon which the loss reserves have been established, we will participate in such favorable loss reserve development. Trabaja Reinsurance Company is our largest reinsurer. See Note 6 to the Consolidated Financial Statements for additional information.
recorded amounts, we would have to increase our reserves. Any increase in reserves would result in a charge to earnings in the period recorded. For example, in 2003 we increased PMA Re’s net reserves by $169 million and took earnings charges as a result. Accordingly, any reserve adjustment could have a material adverse effect on our financial condition, results of operations and liquidity.
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 “believes,” “estimates,” “anticipates,” “expects,” 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.
• the lowering or loss of one or more of the Company's debt ratings, and the adverse impact that any such downgrade may have on our ability to raise capital and our liquidity and financial condition;
Balance at end of year (65 ) (62 ) (158 )
Realized gains and losses, determined by the first-in, first-out method, are reflected in income in the period in which the sale transaction occurs. For all securities that are in an unrealized loss position for an extended period of time and for all securities whose fair value is significantly below amortized cost, the Company performs an evaluation of the specific events attributable to the market decline of the security. The Company considers the length of time and extent to which the security’s market value has been below cost as well as the general market conditions, industry characteristics and the fundamental operating results of the issuer to determine if the decline is due to changes in interest rates or general market conditions, or changes relating to a decline in credit quality of the issuer. The Company also considers as part of the evaluation its intent and ability to hold the security until its market value has recovered to a level at least equal to the amortized cost. Where the Company determines that a security’s unrealized loss is other than temporary, a realized loss is recognized in the period in which the decline in value is determined to be other than temporary. The write-downs are measured based on public market prices and the Company’s expectation of the future realizable value for the security at the time the Company determines the decline in value was other than temporary.
Total losses and LAE paid, net (836,383 ) (732,469 ) (602,355 )
During 2002, PMA Re recorded unfavorable prior year development of $106.9 million. In the fourth quarter, PMA Re’s actuarial department conducted its routine year-end reserve study to determine the impact of any emerging data on anticipated loss development trends and recorded unpaid losses and LAE reserves. During the fourth quarter, the Company’s actuaries observed a higher than expected increase in the frequency and, to a lesser extent, severity of reported claims by PMA Re’s ceding companies. Based on the actuarial work performed, an updated selection of actuarially determined loss reserve estimates was developed by accident year for each major line of business written by PMA Re. Management’s selection of the ultimate losses indicated that net loss and LAE reserves for prior accident years needed to be increased by approximately $64 million in the fourth quarter of 2002, primarily for excess of loss and pro rata general liability occurrence contracts and, to a lesser extent, excess of loss general liability claims-made contracts, from accident years 1998, 1999 and 2000.
The Company’s loss reserves were stated net of salvage and subrogation of $33.2 million and $41.1 million at December 31, 2003 and 2002, respectively.
In May 2003, we issued $18.0 million (“Trust Preferred 1”) and $15.5 million (“Trust Preferred 2”) of 30-year floating rate subordinated debentures to two wholly owned statutory trust subsidiaries. The Company used all of the $31.5 million of net proceeds to pay down a portion of its then outstanding bank credit facility. During September 2003, the Company issued $10.3 million (“Trust Preferred 3”) of 30-year floating rate subordinated debentures to a third wholly owned statutory trust subsidiary. The Company realized net proceeds of $9.7 million, which it used for general corporate purposes. Each of Trust Preferred 1, 2 and 3 has a 30-year maturity and is redeemable, in whole or in part, after five years from issuance at its stated liquidation amount plus accrued and unpaid interest. The interest rates on Trust Preferred 1, 2 and 3 equal the three-month London InterBank Offered Rate (“LIBOR”) plus 4.10%, 4.20% and 4.05%, respectively, and are payable on a quarterly basis. At December 31, 2003, the interest rates on Trust Preferred 1, 2 and 3 were 5.28%, 5.37% and 5.21%, respectively.
The asset allocation for the Company’s Qualified Pension Plan at the end of 2003 and 2002, and the target allocation for 2004, by asset category, are as follows:
On November 6, 2003, the Company announced its decision to withdraw from the reinsurance business previously served by PMA Re. This segment is currently in run-off and will be included in the Run-off Operations segment beginning in 2004.