PMA Withdraws From S&P Ratings

By Michael Ha

NU Online News Service, Nov. 25, 2:25 p.m.EST?Standard & Poor's has further downgraded itsratings on PMA Capital Corp., citing the insurer's decreasedfinancial flexibility, additional reserve concerns and uncertainstrategic directions for its future. PMA responded by issuing astatement protesting the ratings agency's assessment and saying itis immediately withdrawing from the S&P rating process.[@@]

It's been a turbulent November for PMA Capital?the insureralready had suffered a round of ratings cuts from major ratingsagencies, after it surprised the marketplace with a $150 millionpretax charge to boost reinsurance operation reserves.

The company then followed it up with a sudden management shakeupinvolving the departure of its chief executive John Smithson andchairman Frederick Anton. (See the Nov. 17 issue of NationalUnderwriter.)

In its latest ratings downgrade, S&P cut counterparty-creditand financial-strength ratings for PMA's reinsurance unit?calledPMA Capital Insurance?to "double-B" from "triple-B," while loweringcounterparty-credit and financial-strength ratings for PMA primarywriters to "triple-B-minus" from "triple-B," with all ratings onCredit Watch with "negative" implications.

These ratings actions reflect PMA Capital's "significantlydiminished financial flexibility," said S&P credit analystLaline Carvalho. She also observed that since the reserve-boostannouncement in early November, the company's stock has beentrading "significantly below book value," which hurts the insurer'sability to raise funds in financial markets.

Currently, she said, S&P believes PMA Capital has enoughliquidity at the holding company to service interest paymentsduring "the next 12 months."

Ms. Carvalho also worried that PMA Capital's "future strategicdirection and organizational structure" remain unclear, citing therecent departure of the company's CEO and chairman, as well as theinsurer's decision to exit the reinsurance business.

Furthermore, reserve adequacy is still a concern?"PMA Capitalremains exposed to further reserve development at its operatingsubsidiaries," she said.

PMA Capital, she noted, recently announced it has engaged anoutside actuarial firm to review reserve adequacy at its primarywriters in the fourth quarter of 2003.

But PMA took a different view of its financial health,announcing its disagreement with S&P findings. "While weappreciate any rating agency's obligation to express its opinion,"the company said, "we believe S&P's most recent action neglectsto mention several facts that we believe are important."

The company noted, for example, that reserves at its insuranceoperations?known as PMA Insurance Group companies?were unaffectedby the $150 million charge and that, accordingly, the charge didnot affect insurance operations' statutory capital.

The company also said the risk-based capital ratio at itsinsurance operations remain healthy. PMA did not return callsseeking further comment.

S&P noted that at PMA's request, it will withdraw itsratings on operating units once the Credit Watch status has beenresolved, which it expects will happen in the next two months.

The ratings agency said resolution of the Credit Watch issuedepends on completion of the insurer's independent actuarial reviewon reserves. But S&P said it will continue to maintain ratingson PMA's outstanding debt.