Our discontinued operations lease approximately 22,500 square feet in Philadelphia, Pennsylvania, of which approximately 6,000 square feet are subleased to an unaffiliated third party. We also lease approximately 63,000 square feet of office space in Yardley, Pennsylvania, which previously housed our excess and surplus lines business and now is subleased to an unaffiliated third party.
We recorded a net loss of $42.5 million in 2007, compared to net income of $4.1 million in 2006 and a net loss of $21.0 million in 2005. The net loss in 2007 included an after-tax impairment charge of $40.0 million ($61.5 million pre-tax) related to the anticipated sale of our Run-off Operations. It also included an after-tax charge of $14.3 million ($22 million pre-tax) for prior year loss development at our discontinued operations. The net loss in 2005 included an after-tax charge of $23 million ($30 million pre-tax) for prior year loss development at our discontinued operations. These charges recorded in 2007 and 2005 are reflected in our loss from discontinued operations.
Net investment income increased by $303,000 and $294,000 in 2007 and 2006, respectively, compared to the immediately preceding year. The improvements in 2007 and 2006 were primarily attributable to increased average invested asset bases, which mainly resulted from increased claims service revenues. The increase in 2007 also reflected the inclusion of Midlands’ net investment income.
Discontinued operations recorded after-tax losses of $57.3 million in 2007, $1.3 million in 2006 and $16.1 million in 2005. The results for 2007 included an after-tax impairment loss of $40.0 million related to the expected sale of these operations and an after-tax charge of $14.3 million for prior year loss development. The results for 2005 included an after-tax charge of $23 million for prior year loss development. Net investment income and acquisition and operating expenses decreased significantly in 2007, 2006 and 2005 due to our exit from the reinsurance business.
company normally retains premiums in an experience account. Losses are offset against these amounts and interest is normally credited to the experience account based upon the account balance and a predetermined credited interest rate.
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.
Our Consolidated Financial Statements have been prepared in accordance with GAAP. Some of the accounting policies permitted by GAAP require us to make estimates of the amounts of assets and liabilities to be reported in our Consolidated Financial Statements. We have provided a summary of all of our significant accounting policies in Note 2 to our Consolidated Financial Statements. We recommend that you read all of these policies.
Goodwill and indefinite-lived intangible assets will remain on the balance sheet and will be tested for impairment on an annual basis, or when there is a reason to suspect that their values may have been diminished or impaired. Other intangible assets that are not deemed to have an indefinite useful life will be amortized over their estimated useful lives.
our ability to effect an efficient withdrawal from and divestiture of the reinsurance business, including the sale of the entity and commutation of reinsurance business with certain large ceding companies, without incurring any significant additional liabilities;
Reinsurance receivables (net of valuation allowance: 2007 - $4,608; 2006 - $8,630)
J. Claims Service Revenues - Claims service revenues primarily include revenues related to claims administration, risk management and related services primarily to self-insured clients provided by the Company’s Fee-based Business, which are earned over the term of the related contracts in proportion to the actual services rendered.
During 2007, the discontinued operations recorded unfavorable prior year loss development of $21.6 million, which included a $22 million charge taken in the third quarter. In the third quarter of 2007, the Company’s actuaries conducted their periodic comprehensive reserve review. Based on the actuarial work performed, the Company’s actuaries observed increased loss development from a limited number of ceding companies on its claims-made general liability business, primarily related to professional liability claims. This increase in 2007 loss trends caused management to determine that reserve levels, primarily for accident years 2001 to 2003, needed to be increased by $22 million. The claims-made book of business represented approximately 25% of the discontinued operations’ gross reserves at December 31, 2007. Information regarding applicable reinsurance coverage is discussed below.
The Company’s investment portfolio is diversified and does not contain any significant concentrations in single issuers other than U.S. Treasury and agency obligations. In addition, the Company does not have a significant concentration of investments in any single industry segment other than finance companies, which comprise 10% of invested assets at December 31, 2007. Included in this industry segment are diverse financial institutions, including banks and insurance
Unpaid losses and LAE for the Company’s workers’ compensation claims, net of reinsurance, at December 31, 2007 and 2006 were $379.5 million and $362.8 million, net of discount of $21.4 million and $17.8 million, respectively. The discount rate used was approximately 5% at December 31, 2007 and 2006.
In June 2006, the Company completed the redemption of $35 million principal amount of its 6.50% Convertible Debt. This redemption reduced the outstanding principal amount of the Company’s consolidated debt by $25.4 million as it included $9.6 million of 6.50% Convertible Debt held by the Company’s consolidated operating companies. The mandatory redemption was triggered by the extraordinary dividend the Company received from PMA Capital Insurance Company (“PMACIC”), the Company’s wholly-owned run-off reinsurance subsidiary which is reported as discontinued operations. Under the terms of the indenture, the Company was required to redeem the debt at par plus a premium of $100 per $1,000 of principal amount. The premium was due in cash, or at the election of the holder, in shares of the Company’s Class A Common Stock, valued at $8 per share. In conjunction with the redemption, the Company paid $36.0 million, including $10.6 million to its consolidated operating companies, and issued 307,990 shares of its Class A Common Stock, with a fair value of $3.1 million, from its treasury. As a result of the redemption, the Company recognized a pre-tax loss of $231,000, which was included in net realized investment gains for the year ended December 31, 2006.
The Company uses a January 1 measurement date for its Plans. Under SFAS 158, the Company will be required to change its measurement date to December 31, effective in 2008. The impact of this change will be recorded through Shareholders’ equity.
Beginning in the fourth quarter of 2007, the results of The PMA Insurance Group no longer include those of PMA Management Corp. The results of PMA Management Corp. are currently included within the segment results of the Company’s Fee-based Business. 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.