A.M. Best Changes Rating of PMA Capital (Formerly PMA Re).

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Nov. 3, 2000

A.M. Best Co. has changed the financial strength rating of PMA Capital Insurance Company, Philadelphia, Pennsylvania--formerly PMA Reinsurance Corporation--to A (Excellent) from A+ (Superior).

The rating change reflects the near-term financial implications of PMA's corporate realignment that directly exposes the reinsurance operation to greater operating leverage and reduced operating returns stemming from its consolidation with the group's primary insurance operations. Additionally, the action reflects the recent deterioration in the reinsurer's profitability, culminating in its reserve strengthening action in the third quarter, as well as its above-average premium growth over the past two years. However, A.M. Best does acknowledge the positive implications of the group's restructuring that has considerably boosted the reinsurer's surplus base above $500 million and will further strengthen its competitive market position in the reinsurance segment.

The action follows A.M. Best's evaluation of the combined entities based on management's decision to realign the insurance subsidiaries of PMA Capital Corporation, the holding company of PMA Reinsurance Corporation--subsequently renamed PMA Capital Insurance Company--PMA Insurance Group, and Caliber One Indemnity Company. The stock of PMA Insurance Group, which remains a separately rated entity, was contributed to PMA Capital Insurance Company, resulting in a reinsurance operation supported by over $500 million of statutory surplus.

Historically, PMA Reinsurance Corporation and PMA Insurance Group were sister affiliates under the ownership of PMA Capital Corporation. While both ratings considered the overall financial strength of PMA Capital Corporation, the ratings had been based on each entities statutory capital strength and operating performance. Under the new structure, PMA Capital Insurance Company is rated based on the consolidation with PMA Insurance Group and Caliber One Indemnity Company. These two subsidiaries will continue to be rated on their own capital strength and operating performance due to their autonomous operations.

The new rating of PMA Capital Insurance Company reflects the combined entities generally strong operating performance, conservative balance sheet and solid position in the domestic reinsurance marketplace, which will further benefit from the stronger capital base associated with the realignment. These strengths are derived from the group's disciplined underwriting approach, expansion of products and services, long-term client relationships and experienced management team. PMA Capital Insurance Company has positioned itself to record strong growth in a competitive market by focusing on the group's customer-oriented approach and superior service capabilities. Accordingly, the group has been able to gain market penetration in both new markets and with existing clients. Also, PMA Capital Insurance Company's predominant excess casualty focus, lower limit risk profile and minimal exposure to asbestos and environmental liabilities has largely insulated earnings from the volatility experienced by many of its peers.

Offsetting these strengths are the group's above average underwriting leverage, weakened cash flow position relative to its peers and the recent reserve action taken by PMA Capital Insurance Company. These factors are largely driven by the company's elevated loss reserve position--due to its casualty focus-- and its commitment to strong reserving practices, as evidenced by the strengthening action in 2000. While the third quarter reserve action increases the overall uncertainty in reserves, A.M. Best has confidence in management's commitment to maintaining a strong balance sheet.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.