As a result of our acquisition of Midlands in 2007, the combined operating results of PMA Management Corp. and Midlands have been reported in a new reporting segment, Fee-based Business. The results of PMA Management Corp. were previously included with the results of The PMA Insurance Group. For comparative purposes, the financial results of The PMA Insurance Group and PMA Management Corp. have been reclassified in all prior periods to reflect this change. The combined operating results for Fee-based Business also include those of PMA Management Corp. of New England, Inc., which we acquired in June 2008.
us. The decline in direct workers’ compensation premiums written for 2008, compared to 2007, was due to a reduction in fronting premiums and higher return premium adjustments, which were largely offset by an increase in workers’ compensation direct premium production of $36.5 million. The premium adjustments, which increased by $13.7 million for workers’ compensation business in 2008, primarily reflected favorable loss experience on loss-sensitive products.
Other revenues reflected gains of $166,000 in 2009 and $2.1 million in 2008 for the sales of properties that previously housed our branch offices. We currently lease new, more modern facilities for these branch offices.
Estimated sales proceeds were based on a non-binding letter of intent received in February 2008.
Except as noted in the preceding paragraph, our treaties with respect to the workers’ compensation reinsurance and retrocessional protection shown in the table above do not cover us for losses sustained from terrorist activities. Therefore, if future terrorist attacks occur, they may result in losses that have a material adverse effect on our financial condition, results of operations and liquidity. See “Item 1 Business - Regulatory Matters” for a discussion of terrorism coverage and legislation.
In 2007, the Pennsylvania Insurance Department approved our request for an additional “extraordinary” dividend in the amount of $37.5 million from PMA Capital Insurance Company. We used the proceeds to purchase Midlands, to repurchase shares of our Class A Common Stock and to maintain liquidity at the holding company. We did not receive any dividends from PMA Capital Insurance Company in 2009 or 2008.
The 2009 other than temporary impairments of $5.9 million included $4.4 million related to the write-down of a portion of our CMBS portfolio and $931,000 related to write-downs of five privately placed distressed construction bridge loans, as previously discussed. The 2008 other than temporary impairments of $9.2 million related to write-downs of our investments in the Lehman Brothers securities and Fannie Mae preferred stock, as previously discussed. The change in fair value of trading securities in 2007 related to a security that was previously held at the discontinued operations and transferred to our holding company as part of a $37.5 million dividend in April 2007. The gross realized gains and losses during 2009, 2008 and 2007 primarily related to general duration management trades, which focused on maintaining our bias towards shorter duration and higher credit quality securities in the investment portfolio. The gross realized gains during 2009 also were generated in order to minimize the statutory capital charge associated with the reduction of our CMBS exposure.
See “Item 1 - Business - Investments” and Notes 2-B and 3 to our Consolidated Financial Statements for additional discussion about our investment portfolio.
For additional information about reinsurance receivables, see Note 6 to the Consolidated Financial Statements as well as “Reinsurance” beginning on page 43.
severity of natural disasters and other catastrophes, including the impact of future acts of terrorism, in connection with insurance and reinsurance policies;
our ability to repay our indebtedness and meet our other contractual and financial obligations;
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2009, 2008 and 2007
Reinsurance receivables (net of valuation allowance: 2009 - $4,719; 2008 - $4,608)
L. Recent Accounting Guidance - In March 2008, the Financial Accounting Standards Board (“FASB”) issued guidance on “Disclosures about Derivative Instruments and Hedging Activities,” which requires additional disclosures about an entity’s derivative instruments and hedging activities. Entities are required to provide additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under the guidance for “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company’s adoption of this guidance did not impact its financial condition, results of operations or liquidity.
In instances when a determination is made that an other than temporary impairment exists but management does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, this guidance changes the presentation and amount of the other than temporary impairment recognized in the income statement. The other than temporary impairment is separated into (a) the amount of the total other than temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other than temporary impairment related to all other factors. The amount of the total other than temporary impairment related to the credit loss is recognized in earnings. The amount of the total other than temporary impairment related to all other factors is recognized in other comprehensive income.
The PMA Insurance Group had favorable prior year loss development of $1.7 million in 2007, primarily reflecting better than expected loss experience from rent-a-captive workers’ compensation business. Dividends to policyholders offset this favorable development.
In August 2008, the Company entered into two fronting arrangements. The workers’ compensation business produced under these arrangements is primarily located in the southeastern part of the United States and California. The Company is retaining approximately 10% of the underwriting results on one of the arrangements and approximately 20% of the underwriting results on the other. The Company also earns an administrative fee based upon the direct premiums earned under each agreement as well as fees for providing claims services on the business placed under one of the arrangements. All of the participating reinsurers have current A.M. Best Company, Inc. (“A.M. Best”) financial strength ratings of “A-” (Excellent) or higher.
The Company’s federal income tax returns are subject to audit by the Internal Revenue Service (“IRS”). No tax years are currently under audit by the IRS.
Estimated sales proceeds were based on a non-binding letter of intent received from Armour Re in February 2008.
See Note 14 for information regarding shares reissued under stock-based compensation plans.
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 Pooled Companies did not pay dividends to PMA Capital Corporation in 2009 or 2007, but did pay dividends of $4.0 million to PMA Capital Corporation in 2008. As of December 31, 2009, the Pooled Companies can pay up to $46.1 million in dividends to PMA Capital Corporation during 2010 without the prior approval of the Pennsylvania Insurance Department. The Pooled Companies must report all dividends to the Department within five business days of declaration and at least ten days prior to payment. The Pooled Companies had statutory surplus of $417.3 million as of December 31, 2009. In 2007, the Department approved the Company’s request for an additional “extraordinary” dividend in the amount of $37.5 million from PMA Capital Insurance Company.
The Company’s total revenues, substantially all of which are generated within the U.S., and pre-tax operating income (loss) by principal business segment are presented in the table below. In 2008, the Fee-based Business segment included the operating results of PMA Management Corp. of New England, Inc., which was acquired by the Company in June 2008.
We have audited PMA Capital Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
Includes reversal of deferred tax asset valuation allowance of $20.0 million, or $0.62 per share.