PMA Capital Exits E&S Business

In the quarter, Caliber One increased its estimated loss and loss adjustment expense reserves by approximately $40 million before taxes.

Caliber One had also recorded an operating loss of $22.3 million in first-quarter 2001, attributing that result to prior year loss development on casualty business, primarily professional liability policies for nursing homes.

In a statement, John W. Smithson, PMA Capital's president and chief executive officer, said that, "Despite the currently desirable market conditions in the excess and surplus lines market, we have decided to withdraw from this business to remove the uncertainty associated with Caliber One's operations from our future operating results."

He continued that the decision "will enable us to devote all of our financial resources and managerial attention to our most significant and best-performing businesses, PMA Re and The PMA Insurance Group."

Mr. Smithson noted that PMA Capital's reinsurance and traditional property-casualty businesses, which comprise more than 90 percent of its net premium writings, are currently meeting underwriting and operating profit targets.

Including the $28.0 million after-tax operating loss attributable to Caliber One in first-quarter 2002, PMA Capital reported an overall after-tax loss of $18.2 million, compared to an operating profit of $5.7 million in last year's first quarter.

Excluding the Caliber One results, after-tax operating income for the first quarter of 2002 was $9.8 million, or 32 cents per share.

PMA Capital expects its second-quarter 2002 results to include an after-tax charge in the range of $25 million to $30 million (80 cents to 95 cents per share) related to its exit from the E&S segment. Components of that charge will include expenses associated with reinsurance costs for the exited business, long-term lease costs and severance.

Vincent T. Donnelly, president and chief operating officer of The PMA Insurance Group, assumed responsibility for managing Caliber One's runoff operations.

During a conference call Mr. Smithson noted that PMA Capital entered the E&S business in 1997 with the objective of diversifying its companies earnings base beyond earnings generated from its core businesses of workers' compensation, integrated disability management and p-c reinsurance.

"That hasn't happened, but we also didn't anticipate the dramatic opportunities available to us in our mature businesses," he said. "It is simply better for us to focus our capital on those businesses and to support their growth more fully."

He also said that PMA Capital would explore the possibility of selling the Caliber One business, but that the estimated second-quarter charge does not include any costs that might be associated with such a sale.

Ronald Austin, who served as president and chief operating officer of Caliber One prior to the exit announcement, said a possible sale would include Caliber One's e-commerce solution, which was launched in February.

A story which appears in the National Underwriter print edition, profiling Caliber One and its e-commerce initiative for excess and umbrella business, went to press before PMA Capital announced its intention to runoff Caliber One.

During the conference call, Mr. Smithson said reported claims activity was $6 million to $8 million higher than expected for business written prior to 2001. The claims activity, he said, came from a "handful of sub-lines of business," including a trucking program and some miscellaneous casualty classes, but that none had experienced any particularly dramatic spike in claims.

He added that the nursing home business, which was problematic last year, had lower than expected reported claims in first-quarter 2002.

Still, he said, the activity led management to conclude that PMA Capital "would be subject to subsequent quarters of uncertainty," prompting the reserve adjustment, which he believes will put an end to the need for future adjustments and remove future uncertainty.

"The decision to exit the market was made easier by the strength of the market in our two main businesses," he said.

In its earnings statement, PMA Capital reported pre-tax operating income for each those businesses individually?$12.9 million for PMA Re and $6.4 million for PMA Insurance Group.

Net written premiums for PMA Re increased 41 percent to $90.3 million and the combined ratio improved to 101 from 108.4 for first-quarter 2001.

For PMA Insurance Group, net written premiums jumped 38 percent to $6.4 million, and the combined ratio was 103.5.

In response to the earnings report, Standard & Poor's placed its "single-A" credit and financial strength ratings on four subsidiaries of PMA Capital on CreditWatch with negative implications. The subsidiaries are PMA Capital Insurance Company, Pennsylvania Manufacturers Association Insurance Company, Pennsylvania Manufacturers Indemnity Company, and Manufacturers Alliance Insurance Company.

"The charges" for Caliber One "will result in significantly lower than expected operating performance for the group in 2002, despite the expectation that [the] other operating divisions will post strong premium growth and good operating results for the year," said credit analyst Laline Carvalho.

She added that 2002 is the "third consecutive year in which the group's earnings are below Standard & Poor's expectations for the rating level," in a statement explaining the rating action.