Moody's Downgrades PMA Capital Ratings

The New York-based Moody's said ratings of PMA Capital's debt securities remain on review. Meanwhile, the downgraded financial strength ratings for PMA's reinsurance unit and PMA insurance operations now concludes reviews started in the 2003 fourth quarter. But Moody's noted the outlook for these ratings will be negative.

Moody's ratings reviews were initiated last November, after PMA Capital surprised rating agencies by announcing that it would take a $150 million pre-tax charge for the 2003 third quarter at its reinsurance unit to bolster loss and loss-adjustment-expense reserves for casualty reinsurance written during the 1997-2000 period.

That addition followed an earlier $45 million pre-tax charge taken for the reinsurance unit in late 2002 for adverse loss-reserve development on excess liability and professional liability lines for accident years 1998 to 2000.

PMA Capital followed up that surprise statement by announcing a few days later that it would immediately exit from its reinsurance business and focus on its primary insurance unit. And in Dec. 2003, PMA said it signed a definitive agreement to sell renewal rights to its finite business to Imagine Insurance Company, a specialty reinsurer headquartered in Bermuda. Barring additional asset sales or transfers, PMA's reinsurance unit intends to run off or commute its existing liabilities.

Moody's also noted that PMA Capital has recently filed an 8-K with the Securities and Exchange Commission, disclosing a letter agreement between PMA's reinsurance unit and the Pennsylvania Department of Insurance. The agreement requires the reinsurance unit to provide the insurance department with information on an ongoing basis and seek written approval from the department prior to making any payments, dividends, or other distributions to or engage in any transactions with affiliates.

The rating agency observed that while PMA Capital has sufficient cash to pay debt and fund ongoing operating expenses of the holding company through 2004, these restrictions with the insurance department have "meaningful implications" for PMA Capital's medium-term liquidity.

Moody's also commented that the continuing review of PMA Capital's debt securities reflects the fact that the position of holding-company creditors could be materially affected by decisions made by the Pennsylvania Department of Insurance.

Separately, Moody's also took a ratings action on the Chubb Corporation, placing debt ratings of the Warren, N.J.-based insurer on review for possible downgrade. Additionally, Moody's has also assigned a negative outlook to its "Aa2″ insurance financial strength ratings for Chubb's insurance operating units.

These actions followed Chubb's 2003 fourth-quarter earnings announcement, which included asbestos-reserve charges and credit default swaps written by the Chubb Financial Solutions unit. Chubb's quarterly results also showed "the continuing poor performance" of its financial institutions insurance segment, Moody's said.

The rating agency went on to say that its negative outlook for the insurance financial strength ratings of Chubb's operating units shows Moody's concerns over potential future volatility from the insurer's professional liability lines, as well as continued drag from asbestos losses.