PMA Withdraws Rating After Downgrade

Standard & Poor's has further downgraded its ratings on PMACapital Corp., citing the insurers decreased financial flexibility,additional reserve concerns and uncertain strategic directions forits future. But PMA issued a statement protesting the ratingagencys assessment and said it is immediately withdrawing fromS&P rating process.

Its been a turbulent November for PMA Capital. The company hadalready suffered a round of ratings cuts from major ratingsagencies after it surprised the marketplace with a $150 millionpre-tax 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 NU, Nov. 17, page 31)

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.” All ratings are onCredit Watch with “negative” implications.

These ratings actions reflect PMA Capitals “significantlydiminished financial flexibility,” said S&P credit analystLaline Carvalho. She also observed that since the reserve-boostannouncement in early November, the companys stock has been trading“significantly below book value,” which hurts the insurers abilityto 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 Capitals “future strategicdirection and organizational structure” remain unclear, citing therecent departure of the companys CEO and chairman, as well as theinsurers 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 has recently announced thatit has engaged an outside actuarial firm to review reserve adequacyat its primary writers in the fourth quarter of 2003.”

But PMA took a different view of its financial health,announcing that it disagrees 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 alsosaid the risk-based capital ratio at its insurance operationsremains healthy. The company did not return calls seeking furthercomment.

S&P noted that at PMAs request, it will withdraw its ratingson operating units once the Credit Watch status has been resolved,which it expects will happen in the next two months. The ratingagency said the resolution of the Credit Watch issue depends oncompletion of the insurers independent actuarial review onreserves. But S&P said it will continue to maintain ratings onPMAs outstanding debt.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, November 26, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.