PMA Capital Announces First Quarter 2005 Results

    Business Editors

    BLUE BELL, Pa.--(BUSINESS WIRE)--May 4, 2005--PMA Capital Corporation (NASDAQ:PMACA) today announced financial results for the first quarter of 2005. PMA Capital had a net loss of $20.6 million, or 65 cents per share, compared to net income of $12.2 million, or 35 cents per diluted share, for the same period last year. Total assets were $3.3 billion as of both March 31, 2005 and December 31, 2004. Shareholders' equity was $413.9 million as of March 31, 2005, compared with $445.5 million as of December 31, 2004. Book value per share was $13.00 as of March 31, 2005, compared to $14.06 at year-end 2004.
    The net loss for the first quarter of 2005 included an after-tax charge of $23 million ($30 million pre-tax), or 73 cents per share, for prior year loss development at the Run-off Operations. The charge is primarily related to construction defects business from accident years 1998 to 2001 written by our former excess and surplus lines operation and pro rata professional liability reinsurance business from accident years 1997 to 2001.
    Results for the first quarter of 2005 included after-tax net realized investment gains of $1.9 million, or six cents per share, compared to $5.6 million, or 15 cents per diluted share, for the same period last year. After-tax net realized investment gains for 2005 included $1.6 million for the decrease in the fair value of the derivative component of our 6.50% Convertible Debt. The dilutive effect of our convertible debt reduced net income by four cents per share in 2004, while not affecting 2005 results.
    Consolidated revenues were $107.4 million for the first quarter of 2005, compared to $237.4 million for the same period in 2004, primarily due to lower net premiums earned resulting from the run-off of our reinsurance business and, to a lesser extent, lower earned premiums at The PMA Insurance Group.
    The PMA Insurance Group's A.M. Best financial strength rating was restored to A- (Excellent) on November 15, 2004. We expect to see this ratings change result in increased written premiums as the year progresses, compared to 2004. We expect the increase in direct premiums written for the full year will be between 5% and 7%, compared to 2004.
    Vincent T. Donnelly, President and Chief Executive Officer, commented, "In the first quarter of 2005, we saw an increase in claim activity on construction defects business written by our former excess and surplus lines operation. We have reserved 100% of the policy liability limits plus an increased provision for defense costs for losses associated with a specific group of six policies that account for a majority of this higher than expected claim activity, and we have increased reserves on the other construction defects policies that have not had the same level of claim activity. We also saw an increase in reported losses and continued volatility in pro rata professional liability business written by our former reinsurance operation. The adverse development cover that we purchased in 2004 limited the effect of the reserve charge on our statutory capital to $6.7 million. We will recognize the benefit of this reinsurance on a GAAP basis in future periods as the losses are settled. We intend to seek to reduce our capital commitment to the Run-off Operations in 2006."
    Mr. Donnelly continued, "The PMA Insurance Group was profitable during the first quarter of 2005. We wrote more new business at The PMA Insurance Group, with new business increasing to $24.0 million in the first quarter of 2005 from $16.6 million in the first quarter of last year. Our renewal retention rate in the first quarter of 2005 was comparable to the rate for the same period last year. Our written premiums in the first quarter were affected by the loss of a large account in January and the fact that the November 15, 2004 restoration of the A- financial strength rating was relatively late for January 1 renewals. We were pleased to see, however, that our retention rates improved significantly as the first quarter progressed and such improvement continued through April, and we enter the second quarter with positive momentum in both new and renewal business."

    Financial Condition

    Total assets were $3.3 billion as of both March 31, 2005 and December 31, 2004. Shareholders' equity was $413.9 million as of March 31, 2005, compared with $445.5 million as of December 31, 2004. Book value per share was $13.00 as of March 31, 2005, compared to $14.06 at year-end 2004. The decreases in shareholders' equity and book value per share are primarily due to the net loss in the quarter and lower net unrealized gains on our investment portfolio. Net unrealized holding gains were $1.5 million, or five cents per share, as of March 31, 2005, compared to $13.6 million, or 43 cents per share, at year-end 2004, mainly due to higher market interest rates. At March 31, 2005, we had $20.6 million in cash and short-term investments at the holding company and its non-regulated subsidiaries.
    As of March 31, 2005, our total outstanding debt had decreased to $211.8 million, compared to $214.5 million at December 31, 2004, due to the change in the fair value of the derivative component of the convertible debt during 2005. The components of our debt as of March 31, 2005 were as follows:

(dollar amounts in thousands) Amount Maturity ------------------------------------------------ --------- ----------- 6.50% Convertible debt $99,140 2022(1) Derivative component of 6.50% Convertible debt 10,658 4.25% Convertible debt(2) 655 2022 8.50% Senior notes 57,500 2018 Trust preferred debt 43,816 2033 --------- Total long-term debt $211,769 =========

(1) Holders, at their option, may require us to repurchase all or a portion of their debentures on June 30, 2009 at 114% of the principal amount. This debt may be converted at any time, at the holder's option, at a current price of $16.368 per share for $84.1 million principal amount and $15.891 for $15.0 million principal amount.

(2) We retired $270,000 of this debt through open market purchases in the first quarter of 2005. This debt may be converted at any time, at the holder's option, at a current price of $16.368 per share.

    The PMA Insurance Group had statutory surplus of $298.7 million at March 31, 2005, compared to $300.0 million at December 31, 2004. The PMA Insurance Group has the ability to pay $23.5 million in dividends during 2005 without the prior approval of the Pennsylvania Insurance Department. The statutory surplus of PMA Capital Insurance Company, PMA Capital Corporation's directly held reinsurance subsidiary, was $218.3 million at March 31, 2005, compared to $224.5 million at December 31, 2004.

    Segment Operating Results

    Operating income (loss), which we define as net income (loss) under accounting principles generally accepted in the United States of America (GAAP) excluding net realized investment gains and losses, is the financial performance measure used by our management and Board of Directors to evaluate and assess the results of our insurance businesses. Accordingly, we report operating results by segment in the disclosures required under SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." Our management and Board of Directors use operating results as the measure of financial performance for our insurance operations because (i) net realized investment gains and losses are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments and (ii) in many instances, decisions to buy and sell securities are made at the holding company level, and such decisions result in net realized gains and losses that do not relate to the operations of the individual segments. Operating income (loss) does not replace net income (loss) as the GAAP measure of our consolidated results of operations.

    A reconciliation of our segment operating results as discussed below to GAAP net income (loss) is provided below.

Three months ended March 31, (in thousands) 2005 2004 ----------------------------------------------- ----------- ---------- Pre-tax operating income (loss): The PMA Insurance Group $6,612 $6,559 Run-off Operations (29,646) 8,946 Corporate & Other (6,167) (5,312) Net realized investment gains 2,983 8,600 ----------- ---------- Pre-tax income (loss) (26,218) 18,793 Income tax expense (benefit) (5,667) 6,640 ----------- ---------- Net income (loss) $(20,551) $12,153 =========== ==========

    The PMA Insurance Group

    The PMA Insurance Group had pre-tax operating income of $6.6 million for the first quarters of both 2005 and 2004.
    Net premiums written were $105.5 million for the first quarter of 2005, compared to $135.3 million for the first quarter last year. We wrote $24.0 million of new business in the first quarter of 2005, up from $16.6 million for the same period last year. Our renewal retention rate on existing workers' compensation accounts was 62% for the first quarter of 2005, essentially flat compared to the first quarter of 2004. The flat retention rate was mainly due to the loss of a large account in January that switched brokers, which reduced the retention rate by approximately eight points. In addition, the restoration of our A- rating in mid-November 2004 occurred relatively late for January 1 renewals. However, retention rates improved significantly as the first quarter progressed and such improvement continued through April. The PMA Insurance Group continues to obtain price increases in all commercial lines of business, with average workers' compensation rate increases of approximately 6% so far in 2005.
    The combined ratio on a GAAP basis was 103.4% for the first quarter of 2005, up moderately from 102.9% for the first quarter last year. The increase in the combined ratio for the first quarter of 2005, compared to the first quarter last year, primarily reflects an increase in the total expense ratio, partially offset by an improved loss and LAE ratio.
    The increase in the total expense ratio in the first quarter of 2005, compared to the same period last year, is mainly due to the impact on the ratio of lower net premiums earned. The PMA Insurance Group has reduced overall expenses in the first quarter of 2005, compared to the first quarter last year. The improved loss and LAE ratio primarily reflects a better current accident year loss and LAE ratio. Price increases and payroll inflation have offset an increase in overall loss trends in workers' compensation. We estimate our medical cost inflation for 2005 to be approximately 11%. In addition, the loss ratio has benefited from our continued emphasis on managed care initiatives and a change in the geographic mix of our business.
    Net investment income was $7.5 million for the first quarter of 2005, compared to $8.0 million for the same period of 2004, reflecting lower yields and a lower average invested asset base.

    Run-off Operations

    Run-off Operations includes the results of our former reinsurance and excess and surplus lines businesses. The Run-off Operations had a pre-tax operating loss of $29.6 million for the first quarter of 2005, compared to pre-tax operating income of $8.9 million for the same period last year. Results for the first quarter of 2005 included a charge of $30 million for prior year loss development, primarily related to construction defects business from accident years 1998 to 2001 written by our former excess and surplus lines operation and pro rata professional liability business from accident years 1997 to 2001 written by our former reinsurance operation. Net premiums earned, losses and LAE, and acquisition and operating expenses decreased significantly in the first quarter of 2005, compared to 2004, due to our exit from the reinsurance business.

    Corporate and Other

    The Corporate and Other segment primarily includes corporate expenses, including debt service. Corporate and Other had a pre-tax operating loss of $6.2 million for the first quarter of 2005, compared to $5.3 million for the same period last year. Interest expense for the first quarter of 2005 increased by $1.0 million, compared to the same period last year, due to a higher average amount of debt outstanding and higher interest rates on our convertible debt.

    Quiet Period

    During the quarter, PMA Capital corporate representatives may reiterate the guidance provided in this release both publicly and in meetings with investors, analysts, the media and others. Beginning upon the close of business on July 15, 2005 until such time as PMA Capital releases its second quarter earnings release PMA Capital will observe a "quiet period." From and after commencement of the quiet period, the guidance contained in this release should be considered historical, speaking as of prior to the quiet period only and not subject to update by PMA Capital. During the quiet period, our spokespersons will not comment on our financial results or expectations other than through a press release or other publicly available document.

    Conference Call with Investors

    As a reminder, we will hold a conference call with investors from 8:00 a.m. until 8:45 a.m. Eastern Time on Thursday, May 5th to review our first quarter 2005 results. The conference call will be available via a live webcast over the Internet at www.pmacapital.com. To access the webcast, enter the Investor Information section, click on News Releases and then click on the microphone icon labeled "Q1 2005 PMA Capital Corporation Earnings Conference Call." Please note that by accessing the conference call via the Internet, you will be in a listen-only mode. The call-in numbers and passcodes for the conference call are as follows:

Live Call Replay ----------- -------- 800-299-7098 (Domestic) 888-286-8010 (Domestic) 617-801-9715 (International) 617-801-6888 (International) Passcode 97000283 Passcode 26451262

    A replay of the conference call will be available over the Internet or by dialing the call-in number for the replay and using the passcode. The replay will be available from approximately 12:00 p.m. Eastern Time on Thursday, May 5th until 11:59 p.m. Eastern Time on June 5th.

    Quarterly Statistical Supplement

    Our First Quarter Statistical Supplement, which provides more detailed historical information about us, is available on our website. Please see the Investor Information section of our website at www.pmacapital.com. You may also obtain a copy of this supplement by sending your request to:

PMA Capital Corporation 1735 Market Street Philadelphia, PA 19103 Attention: Investor Relations

    Alternatively, you may submit your request by telephone (215-665-5046) or by e-mail to InvestorRelations@pmacapital.com. We have also furnished a copy of this news release and the Statistical Supplement to the SEC under cover of Form 8-K dated May 4, 2005. A copy of the Form 8-K is available on the SEC's website at www.sec.gov.

    CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

    The statements contained in this press release, including those made by individuals authorized to speak on behalf of PMA Capital Corporation ("we", "our" or the "Company") that are not historical facts are forward-looking statements and are based on estimates, assumptions and projections. Actual results may differ materially from those projected in the forward-looking statements.

    These forward-looking statements are based on currently available financial, competitive and economic data and the Company's current operating plans based on assumptions regarding future events. The Company's actual results could differ materially from those expected by the Company's management. The factors that could cause actual results to vary materially, some of which are described with the forward-looking statements, include, but are not limited to:

PMA Capital Corporation Selected Financial Data (Unaudited)

Three months ended March 31, ---------------------------------------------- ----------------------- (dollars in thousands) 2005 2004 ---------------------------------------------- ----------- ----------- Net premiums written: The PMA Insurance Group $105,474 $135,286 Run-off Operations 4,929 23,362 Corporate and Other (194) (150) ----------- ----------- Consolidated net premiums written $110,209 $158,498 =========== ===========

Revenues: Net premiums earned: The PMA Insurance Group $84,700 $131,650 Run-off Operations 3,217 74,769 Corporate and Other (194) (150) ----------- ----------- Consolidated net premiums earned 87,723 206,269 Net investment income 11,712 16,758 Realized gains 2,983 8,600 Other revenues 4,954 5,738 ----------- ----------- Consolidated revenues $107,372 $237,365 =========== ===========

Components of net income (loss): Pre-tax operating income (loss)(1): The PMA Insurance Group $6,612 $6,559 Run-off Operations (29,646) 8,946 Corporate and Other (6,167) (5,312) Realized gains 2,983 8,600 ----------- ----------- Pre-tax income (loss) (26,218) 18,793 Income tax expense (benefit) (5,667) 6,640 ----------- ----------- Net income (loss) $(20,551) $12,153 =========== ===========

Weighted average common shares outstanding: Basic 31,561,069 31,334,403 Diluted 31,561,069 36,644,561

(1) Operating income (loss), which is GAAP net income(loss) excluding net realized investments gains and losses, is the financial performance measure used by our management and our Board of Directors to evaluate and assess the results of our insurance businesses. As a result, we report operating income by segment in our segment footnote disclosures as required by SFAS No. 131 "Disclosure About Segments of and Enterprise and Related Information." We use operating income (loss) as the measure of financial performance because (i) net realized investment gains (losses) are unpredictable and not necessarily indicative of current operating fundamentals or future performance and (ii) in many instances, decisions to buy and sell securities are made at the holding company level, and such decisions result in net realized gains (losses) that do not relate to the operations of the individual segments. Operating income (loss) does not replace net income (loss) as the GAAP measure of our consolidated results of operations.

PMA Capital Corporation GAAP Condensed Consolidated Balance Sheets (Unaudited)

March 31, December 31, --------------------------------------------- ----------- ------------ (in thousands, except per share data) 2005 2004 --------------------------------------------- ----------- ------------ Assets: Investments: Fixed maturities available for sale $1,283,406 $1,304,086 Short-term investments 60,325 123,746 Short-term investments, loaned securities collateral 102,620 - ----------- ------------ Total investments 1,446,351 1,427,832

Cash 49,921 35,537 Accrued investment income 15,188 15,517 Premiums receivable 208,748 197,831 Reinsurance receivables 1,129,507 1,142,552 Deferred income taxes 98,714 86,501 Deferred acquisition costs 35,138 31,426 Funds held by reinsureds 146,674 142,064 Other assets 167,200 174,725 ----------- ------------ Total assets $3,297,441 $3,253,985 =========== ============

Liabilities: Unpaid losses and loss adjustment expenses $2,077,599 $2,111,598 Unearned premiums 177,415 158,489 Debt 211,769 214,467 Accounts payable, accrued expenses and other liabilities 196,875 196,744 Funds held under reinsurance treaties 112,712 121,234 Dividends to policyholders 4,580 5,977 Payable under securities loan agreements 102,603 25 ----------- ------------ Total liabilities 2,883,553 2,808,534 ----------- ------------

Shareholders' Equity: Class A Common stock 171,090 171,090 Additional paid-in capital 109,331 109,331 Retained earnings 189,787 213,313 Accumulated other comprehensive loss (14,116) (1,959) Treasury stock, at cost (41,752) (45,573) Unearned restricted stock compensation (452) (751) ----------- ------------ Total shareholders' equity 413,888 445,451 ----------- ------------ Total liabilities and shareholders' equity $3,297,441 $3,253,985 =========== ============

Shareholders' equity per share $13.00 $14.06 =========== ============

PMA Capital Corporation GAAP Condensed Consolidated Statements of Operations (Unaudited)

Three months ended March 31, ---------------------- (in thousands, except per share data) 2005 2004 ----------------------------------------------- ----------- ---------- Gross premiums written $121,313 $157,860 =========== ========== Net premiums written $110,209 $158,498 =========== ========== Revenues: Net premiums earned $87,723 $206,269 Net investment income 11,712 16,758 Net realized investment gains 2,983 8,600 Other revenues 4,954 5,738 ----------- ---------- Total revenues 107,372 237,365 ----------- ----------

Expenses: Losses and loss adjustment expenses 93,988 142,190 Acquisition expenses 18,671 47,235 Operating expenses 16,460 24,779 Dividends to policyholders 502 1,429 Interest expense 3,969 2,939 ----------- ---------- Total losses and expenses 133,590 218,572 ----------- ---------- Pre-tax income (loss) (26,218) 18,793 ----------- ----------

Income tax expense (benefit): Current - 325 Deferred (5,667) 6,315 ----------- ---------- Total income tax expense (benefit) (5,667) 6,640 ----------- ---------- Net income (loss) $(20,551) $12,153 =========== ========== Net income (loss) per share:

Basic $(0.65) $0.39 =========== ========== Diluted $(0.65) $0.35 =========== ==========

--30--JM/ph*

CONTACT: PMA Capital Corporation William Hitselberger, (215) 665-5046

KEYWORD: PENNSYLVANIA INDUSTRY KEYWORD: BANKING EARNINGS CONFERENCE CALLS SOURCE: PMA Capital Corporation

Copyright Business Wire 2005