PMA Exits Re; Chair, CEO Resign

Regarding management change, the Philadelphia-based PMA said Chief Executive Officer John Smithson and Chairman Frederick Anton had both resigned. In their place, PMA's board of directors appointed lead director Neal Schneider as non-executive chairman and named Vincent Donnelly, president of PMA Insurance Group, to the newly created position of interim president.

The news of management shuffling came as the company reported its third-quarter earnings loss. PMA said it had a net loss of $96.4 million for the quarter, which includes a $150 million pre-tax, $97.5 million after-tax, reserve charge for its reinsurance unit, PMA Re. In contrast, the company had posted net profit of $9.4 million during the corresponding period last year.

In today's conference call with analysts, new management assured industry participants that the company's financials are still strong despite the unexpectedly high reserve charge, sudden management departure and the restructuring of the corporation to exit reinsurance.

"I assure you, we will do everything possible to develop and implement a plan which will be responsive to all constituencies," said Neal Schneider, the new non-executive chairman during the conference call.

Mr. Schneider told analysts that "We will work on an orderly transition of the reinsurance business to another carrier, and we are diligently working on this process with our advisors. We are confident the company will survive."

PMA is currently evaluating strategic alternatives and has hired Banc of America Securities, in Charlotte, N.C., to assist in this process, Mr. Schneider also said. "In the interim, we are working to facilitate the transition of businesses previously written by PMA Re."

Offering more details on the reserving charge, Mr. Schneider said, "During the third quarter, we conducted a comprehensive reserve study under the direction of Vincent Donnelly," PMA Insurance Group president and the newly appointed interim president of PMA Capital.

Additionally, he said, an independent actuarial firm and PMA's newly appointed auditors each performed their own reviews: "Results of these reviews indicated that a reserve increase of $150 million was necessary. And this was recorded as of Sept. 30, 2003."

Mr. Schneider assured analysts that the $150 million charge was attributable only to PMA's reinsurance subsidiary, PMA Re. He emphasized that, "It's important to know that no increase in reserves was required at the PMA Insurance Group."

He also remarked on some of the ratings downgrades that followed the reserve charge, and said that A.M. Best lowered its ratings from ?A-minus' to ?B-double-plus' for PMA Re and PMA Insurance Group. "However," he said, "this downgrade was entirely attributable to PMA Re and A.M. Best indicated that on a standalone basis, PMA Insurance Group has the capital position that supports the previous ?A-minus' rating."

Mr. Schneider stressed that even after the $150 million charge, "PMA Capital and each of the operating subsidiaries have adequate liquidity" and resources.

"Our objectives are very clear," he said. "They are to ensure we maintain the stable financial position of our primary insurance operation and seek to address the concerns raised by A.M. Best to allow us to regain our ?A-minus' rating."

But PMA may have to overcome a number of other hurdles in coming days. In addition to a barrage of ratings downgrades?not just from A.M. Best but also from New York-based ratings firms, Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings?the company also got battered at the stock market. PMA shares, traded on the NASDAQ, went through a freefall to lose more than 60 percent of their values this week and are currently trading at below $5.

Furthermore, PMA is also facing legal troubles?a Philadelphia-based law firm Berger & Montague, P.C. has filed a class action lawsuit against PMA and some of its officers on behalf of investors who bought company shares this year. The complaint alleges that the company's public statements regarding its loss reserves were "materially false and misleading."

The complaint stated, "As a consequence of the understatement of loss reserves, PMA's earnings and assets were materially overstated at all relevant times. If you purchased PMA securities [between May 7 and Nov. 3, 2003], you may, no later than Jan. 5, 2004, move to be appointed at a lead plaintiff," the complaint said.

The company's new management also didn't help much in clearing up concerns regarding the circumstances behind the departure of its chief executive and chairman. Without offering further details, Mr. Schneider reiterated during the conference call that "effective immediately, Frederick Anton and John Smithson, chairman and C.E.O. respectively, have resigned."

But analysts inquired about how much blame the departed management should get for the unexpected magnitude of the reserve charge?"Was this their fault? Did they miss something? Sixty percent of the stock value was eliminated, and a lot of shareholders would like to know why. We all want to know what's going on," said one conference call participant.