Best Downgrades PMA Capital Debt Ratings

February 9, 2004

A.M. Best Co. announced that it has downgraded the senior debt ratings to “bb-” from “bb” of Philadelphia-based PMA Capital Corporation (PMACA). It also downgraded the indicative debt ratings for securities issued under PMACA’s $250 million universal shelf registration.

Best noted, however, that “The current financial strength ratings of “B++” (Very Good) of PMA Capital Insurance Company (PMACIC) (Philadelphia, PA) and PMA Insurance Group (Blue Bell, PA) are unaffected.” However it has maintained its “under review with negative implications” status on all the ratings pending a “full review of the operation and conclusion of the structure of the group going forward.”

“This rating action follows PMACA’s recent announcement that it has voluntarily entered into an agreement with the Pennsylvania Insurance Department, which allows for increased regulatory oversight as the group runs off its reinsurance operation, PMACIC (formerly known as PMA Re),” said Best. “PMACIC has agreed to request the Pennsylvania Insurance Department’s prior approval for a number of actions, largely related to financial transactions involving PMACIC.

“The senior debt rating reflects the group’s holding company issues, including increased financial leverage and reduced future earnings, as well as its current organizational structure, which limits holding company cash flow. In light of the agreement with the Pennsylvania Insurance Department, dividends from the PMA Insurance Group under its current structure are not permitted to flow through to the holding company as there is no current dividend capacity at PMACIC, which owns the pool members. However, the holding 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, PMACA has suspended its common stock dividend and maintains sufficient cash at the holding company to meet its near-term needs.”

The announcement indicated that the “current financial strength rating of PMACIC reflects its weakened stand-alone capital position following three major reserve charges in recent years and the uncertainty of its capital structure and financial condition as the company winds down its reinsurance operation.” Best warned that “should the capitalization of PMACIC be weakened through any potential restructuring of the group, the financial strength rating could be downgraded into the vulnerable rating category.”

It also indicated the “current financial strength rating of PMA Insurance Group reflects the increased pressure placed on the operation to service holding company obligations as the only ongoing business segment, as well as any issues that may arise from the run-off of the reinsurance and excess and surplus lines operations. PMA Insurance Group has produced a stable operating performance and has maintained a strong capital position on a stand-alone basis. However, as PMA Insurance Group’s pool members are currently subsidiaries of PMACIC, whose stand-alone capitalization has been greatly weakened by the recent reserve charges, the pool members are directly exposed to supporting PMACA. While one option to address this issue is to restructure the group, there will still be indirect pressure on PMA Insurance Group to service any ongoing financial obligations of the group.”

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