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Rating Action:

MOODY'S CONFIRMS DEBT RATINGS OF PMA CAPITAL CORP. (SENIOR AT B3); INSURANCE FINANCIAL STRENGTH RATINGS OF SUBSIDIARIES AFFIRMED; OUTLOOK IS DEVELOPING

10 Sep 2004
MOODY'S CONFIRMS DEBT RATINGS OF PMA CAPITAL CORP. (SENIOR AT B3); INSURANCE FINANCIAL STRENGTH RATINGS OF SUBSIDIARIES AFFIRMED; OUTLOOK IS DEVELOPING

New York, September 10, 2004 -- Moody's Investors Service announced today that it has confirmed the long-term debt ratings of PMA Capital Corporation (PMACC) (senior unsecured debt at B3). The outlook for the ratings on PMACC's debt securities is developing. In the same rating action, Moody's affirmed the insurance financial strength rating of PMA Capital Insurance Company (PMA Re) at B1 and the insurance financial strength ratings of The PMA Insurance Group companies (PMAIG) at Ba1, with the outlooks changed to developing from negative.

Moody's stated that the rating action concludes a rating review with direction uncertain that was initiated on the long-term debt ratings of PMACC in February 2004 following a multi-notch downgrade of PMACC and its operating subsidiaries in connection with the reduced capitalization of PMA Re , which is currently in run-off, and liquidity constraints at the holding company, which had been precluded from receiving dividends from PMA Re through a letter agreement with the Pennsylvania Department of Insurance (PDI). On June 25, 2004, the PDI granted PMACC's request to modify its holding company structure so that its wholly-owned indirect PMAIG subsidiaries would become its direct subsidiaries. In its order, the PDI prohibits the payment of dividends by PMA Re in 2004 and 2005. In 2006, PMA Re may make dividends to the holding company provided that immediately after such dividend, PMA Re's NAIC risk-based capital ratio exceeds 225%. In 2007 and beyond, PMA Re may make dividends to the holding company provided that they are not considered extraordinary dividends (e.g. above statutory dividend limitations).

Importantly, the change in organizational structure restores adequate unrestricted dividend capacity from the PMAIG companies to the holding company, which may dividend up to $23.2 million to PMACC during 2004 without prior regulatory approval. Moody's estimates that PMACC now has unrestricted dividend capacity coverage of interest and fixed charges (interest payments and holding company expenses) of approximately 2.1 and 1.2 times, respectively.

From a capital perspective, Moody's notes that the PMAIG companies have reported relatively strong NAIC risk-based capital measures. However, Moody's remains concerned about the erosion in written premiums at the ongoing primary insurance operations at PMAIG. Renewal rates at PMAIG, which primarily writes workers' compensation and integrated disability coverages, have been approximately 60% (compared to historic norms of about 80%), with 2Q2004 NPW falling approximately 31% compared to 2Q2003, as some credit-sensitive business has migrated toward more highly rated carriers. Since approximately 85% of PMAIG's business is produced by independent agents and brokers, which typically have minimum financial security thresholds to place business, Moody's views PMAIG's ability to retain and produce adequately-priced business to be a key rating consideration going forward.

With respect to PMA Re, Moody's stated that the company's surplus position has improved since it was placed into run-off, and currently has $236 million in surplus. PMACC has purchased an adverse development reinsurance cover for its run-off operations, which includes business written by PMA Re and Caliber One, PMACC's excess and surplus lines business that was placed into run-off in 2002. The reinsurance cover provides for PMA Re to transfer $100 million of assets in exchange for coverage for adverse loss reserve development of up to $120 million. If needed, another $85 million of coverage is available for $35 million in additional premiums. Importantly, this agreement protects the level of statutory surplus at PMA Re, which could potentially be used in 2006 and beyond to service principal and interest payments on holding company debt.

Moody's notes that holders of PMACC's $86 million in convertible senior notes have the option to put the notes back to the company in September 2006. The company may pay for the notes in cash, stock or a combination thereof. To the extent the run-off of PMA Re's liabilities is manageable and does not exhaust the adverse development cover described previously, there should be sufficient policyholder surplus (and, importantly, unassigned surplus) at PMA Re to upstream dividends to the holding company to pay down the notes provided that regulatory approval for dividends in excess of statutory limitations can be obtained.

The rating agency stated that the developing outlook on PMACC and its subsidiaries reflects the potential for the ratings to move either up or down over the next 12 to 18 months. Specifically, the debt rating could be raised provided there was greater certainty regarding the sources of cash available to repurchase its convertible senior notes in 2006. Likewise, the continued orderly run-off of PMA Re's liabilities and a stabilization of the PMAIG operations could exert positive rating pressure on their respective insurance financial strength ratings. Conversely, significant adverse loss reserve development at PMA Re that exhausts the adverse development cover could negatively impact its financial strength rating. Moody's ratings on PMAIG carry an expectation that it will continue to remain profitable. To the extent PMAIG experiences a sustained period of poor operating performance, its insurance financial strength ratings could face negative pressure.

The following ratings have been confirmed and assigned a developing outlook:

PMA Capital Corporation - senior unsecured debt at B3, prospective senior unsecured debt at (P)B3, prospective subordinated debt at (P)Caa2 and prospective preferred stock at (P)Caa3;

PMA Capital Trust I - prospective preferred securities at (P)Caa2; and

PMA Capital Trust II - prospective preferred securities at (P)Caa2;

The following ratings have been affirmed, with the outlook changed to developing from negative:

PMA Capital Insurance Company - insurance financial strength at B1:

Manufacturers Alliance Insurance Company - insurance financial strength at Ba1;

Pennsylvania Manufacturers' Association Insurance Company - insurance financial strength at Ba1; and

Pennsylvania Manufacturers Indemnity Company - insurance financial strength at Ba1.

PMACC, headquartered in Philadelphia, Pennsylvania, is an insurance holding company whose operating subsidiaries provide specialty risk management products and services to its customers in the United States. As of June 30, 2004, PMACC had shareholders' equity of $444 million.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to punctually repay senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

New York
James Eck
Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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