A.M. Best Co. has downgraded the financial strength ratings of PMA Insurance Group (Blue Bell, Pa.) and PMA Capital Insurance Company (Philadelphia) to B++ (Very Good) from A- (Excellent). Concurrently, A.M. Best has downgraded the senior debt rating of PMA Capital Corp to “bb” from “bbb-“. All of the ratings will remain under review with negative implications pending A.M. Best’s full review of the operation and conclusion of the structure of the group going forward.
The rating actions follow PMA Capital Corporation’s announcement of a $150 million reserve charge at PMA Capital and its decision to explore strategic alternatives with respect to its reinsurance operation, PMA Capital Insurance Company.
According to A.M. Best, the rating of the PMA Capital Insurance Company reflects its weak stand-alone capital position following its third major reserve change in recent years and the uncertainty of the capital structure and future strategic direction of the company. Should the capitalization of the company be weakened through any potential restructuring of the group, the rating could be downgraded into the vulnerable rating category.
The rating of PMA Insurance Group reflects the increased pressure placed on the operation to service holding company obligations as the only ongoing business segment; any issues that may arise from the disposition of the reinsurance operations; and the run-off of the excess and surplus operation.
While PMA Insurance Group has produced a stable operating performance and maintained a capital position that supports an A- rating on a stand-alone basis, these pressures, along with minimal financial flexibility, senior management distraction and the execution risk in the alternatives being explored, result in the lower rating.
As the PMA Insurance Group’s pool members are currently subsidiaries of PMA Capital Insurance Company and that company’s stand-alone capitalization has been greatly weakened by the reserve charge, the pool members are directly exposed to supporting PMA Capital. While one option to address this issue is to restructure the group, this will not alleviate the indirect pressure on the PMA Insurance Group to service any ongoing financial obligations of the group.
The downgrade of the ratings also reflects the group’s holding company issues, including increased financial leverage and reduced future earnings, as well as its current organizational structure, which could limit holding company cash flow. Dividends from the PMA Insurance Group may not be permitted to flow through to the holding company as dividend capacity may be constrained at PMA Capital Insurance Company, which owns the pool members.
However, the company has revised its capital structure during the last several quarters to replace bank debt with longer term instruments, consequently reducing near-term principal repayment requirements and eliminating negative covenants. In addition, PMA Capital Corp has suspended its common dividend and maintains sufficient cash at the holding company to meet its near-term needs.
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