PMA Capital Corporation Q4 2008 Earnings Call Transcript

PMA Capital Corporation (PMACA)

Q4 2008 Earnings Call Transcript

February 20, 2009 8:30 am ET

Executives

Bill Hitselberger – EVP and CFO

Vince Donnelly – President and CEO

Analysts

Robert Paun – Sidoti & Co.

Michael Nannizzi – Oppenheimer

Randy Binner – FBR Capital Markets

Presentation

Operator

Good morning ladies and gentlemen and welcome to the PMA Capital Fourth Quarter 2008 Earnings Conference Call. For those listening in via the webcast, you are in a listen-only mode. As a reminder, this call is being recorded today and a replay will be made available on PMA Capital Corporation’s website, www.pmacapital.com through March 20. Because of the time sensitive nature of the information that will be covered today, any rebroadcast of this call may not take place after March 20. The webcast of the conference call and its content, along with any tape, broadcast, or publication are the sole copyrighted property of PMA Capital Corporation and may not be copied, taped, rebroadcast, or published in the whole or in part without the express written consent of PMA Capital Corporation.

I would now like to turn the call over to William Hitselberger, Executive Vice President and CFO of PMA Capital Corporation. Mr. Hitselberger, you may begin.

Bill Hitselberger

Thanks, Josh. Good morning everyone and thank you for joining us for PMA Capital’s fourth quarter 2008 earnings conference call. Joining me on the call today is Vince Donnelly, PMA Capital’s President and Chief Executive Officer.

Before we begin, I have an important reminder for you about our earnings release. Our earnings release and statistical supplements, which are available under the Investor Information section of our website at www.pmacapital.com provides detailed reconciliations of our operating results by business segment to our net income computed under Generally Accepted Accounting Principles.

Although operating income does not replace GAAP net income, operating income is the financial measure that we use to evaluate and assess the performance of our businesses. As we define it, operating income is GAAP net income excluding net realized investment gains and losses and the results of our discontinued operations.

Today, Vince and I will be discussing PMA Capital’s fourth quarter and full-year 2008 financial results. All earnings per share amounts discussed will be on a diluted per-share basis. Following our prepared remarks, Vince and I will be available to answer any questions.

As a reminder, any comments we make regarding future expectations, trends and market conditions, including premiums, revenues, earnings, cash flow, pricing, loss cost trends, and return on equity are forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from our current expectations. These factors are described in the cautionary statement disclosures in our most recent reports on Form 8-K and Form 10-K filed and furnished with the Securities and Exchange Commission, including our Form 8-K dated February 19, 2009, which contains our fourth quarter 2008 earnings release.

I would also like to note that we have posted the details of our investment portfolio and more specific information about our commercial mortgage-backed securities at December 31, 2008 on the investor section of our company website.

With that, I would like to turn the call over to Vince.

Vince Donnelly

Thanks Bill, and good morning to everyone and thank you for joining us today. I would like to start by discussing the company's performance in 2008 and after that Bill will speak in more detail to our operating results and financial condition.

PMA Capital ended the year with another quarter of profitable growth from its core businesses. Despite the slowdown in the general economy, the PMA Insurance group workers compensation business continued to see payroll growth in 2008 in its customer base. Overall, we grew our customer base first by retaining a very large percentage of our existing clients and then by increasing our new business production, while maintaining our underwriting standards.

Our achievements in our ongoing operations included the following. At the PMA Insurance group, first we increased pretax operating earnings to $8.4 million in the quarter compared to $7.6 million for the same period last year; and by $8.7 million to $46.7 million for the full year 2008.

Our renewal retention ratio improved to 89% in the fourth quarter compared to 86% in the prior year quarter and remained strong at 87% for the full year period. New business written in 2008 excluding the fronting business increased $13 million to $36 million in the fourth quarter and increased $21 million to $136 million for the year compared to the same periods in 2007 due primarily to our increases in our larger account business. And the combined ratio improved by 1.6 points to 100% for the quarter and by 2.2 points to 97.5% for the full year 2008.

And in our fee-based businesses, revenues increased by $33 million to $72 million, which represented 14% of our total operating revenues for 2008 compared to 8% during 2007. We achieved an organic revenue growth of 28% for the fourth quarter and 26% for the full year of 2008 at PMA Management Corp. Our current year growth was also impacted by the inclusion of Midlands Management Corporation, which contributed revenue of $7 million for the fourth quarter and $28 million for the full year 2008 compared to $6 million in the fourth quarter of 2007. And PMA Management Corp. of New England, which we acquired in June of 2008, also added $4 million in revenues.

We continue to be pleased with the performance of our ongoing operations as we maintain a disciplined approach in growing the insurance and fee-based businesses. Let me provide some additional details about that. The PMA Insurance group grew profitably and modestly increased premium production despite continuing competitive conditions in our marketing territories. The current environment certainly has a number of challenges. There is continued softness in the insurance marketplace, which is characterized by increased pricing pressure both from new and renewal business. Although pricing continues to trend downward in workers compensation and other commercial lines, the pace of pricing declines slowed in the fourth quarter. We continue to maintain our underwriting standards and differentiate ourselves from our competitors by delivering a high quality level of service. Our premium growth in 2008 reflected in the increase in renewal premiums and an increase in our larger account businesses.

For business written in 2008, our pricing on rate-sensitive workers compensation business decreased by 6%. Nationally, according to the Council of Agents & Brokers, workers compensation pricing in 2008 decreased by 10%. Approximately 60% of our workers compensation premiums are written on a rate-sensitive business. And as we have previously noted, the two states that have accounted for the bulk of our overall pricing decrease were New York and Florida. These two states collectively represented about 16% of our overall rate-sensitive workers compensation business written in 2008.

For business written in the year ended December 31, 2008, our pricing on rate-sensitive workers compensation business decreased by 22% in New York and by 18% in Florida. The pricing reductions in both New York and Florida were mainly driven by manual loss cost changes filed by each respective state’s rating bureau. And for both New York and Florida in 2008, we believe these manual rate changes are consistent with the loss trends. But in 2009, I will add, for Florida business, we believe that the manual rate reductions approved at the beginning of this year are slightly larger than our estimates of loss cost trends in that state going forward.

Our pricing on rate-sensitive workers compensation business written outside of New York and Florida decreased by 3% in 2008. Pricing on our rate sensitive workers comp business in Pennsylvania declined 5% for the full year 2008. In Pennsylvania, we were affected by a 10.2% reduction in loss cost, which was approved by the Pennsylvania Insurance Department and became effective April 1, 2008. While this resulted in lower filed loss cost in Pennsylvania, we have continued our practice of underwriting our business with a goal of achieving a reasonable level of profitability on each account. We continue to determine our business pricing through scheduled charges and credits that we file and use to limit the effect of filed loss cost changes and have not experienced a decrease in premiums equals of the reduction in the filed rates. We also believe the nature of our loss sensitive book of business, which represents about 41% of our Pennsylvania workers compensation business, mitigates the impact of reductions in filed loss cost.

Direct premiums written in 2008 increased modestly for the year compared to 2007. The increase was primarily due to an increase in direct premium production, which was tempered by lower funding premiums of $25 million, and higher return premium adjustments of $14 million, primarily from retrospectively rated policies that we write for loss sensitive accounts. We entered into two new fronting arrangements during the second half of 2008, which accounted for the increase in fronting premiums in the fourth quarter of this year.

On a full year basis, fronting premiums decreased primarily due to the termination of our agreement with Midwest Insurance companies in March of 2008, which was partially offset by the premiums produced under the two new fronting arrangements in 2008. The premium adjustments that I mentioned primarily reflect favorable loss experience on loss sensitive products, the return of premium represents capable loss experience in these accounts. Approximately 40% of our workers compensation business is written on a loss sensitive basis. And in these types of policies, the customer shares and the underwriting result of the policy, both favorable and unfavorable with us. These policies provide us with a greater degree of certainty in achieving our profit margin on an account by account basis.

The combined ratio at the PMA Insurance group improved 1.6 points in the quarter and 2.2 points for the year compared to the same periods last year. The improvement in the combined ratio for the quarter compared to the fourth quarter of last year primarily reflected a lower loss and loss adjustment expense ratio, partially offset by a higher policy holder dividend ratio. The full year improvement in the combined ratio from 2007 primarily reflected a lower acquisition expense ratio. The improved loss and loss adjustment expense ratio for the fourth quarter of 2008 was primarily due to a lower current loss and loss adjustment expense ratio compared to the fourth quarter in 2007.

Although pricing changes coupled with payroll inflation for rate-sensitive workers compensation business were below overall estimated loss trends, our current accident year loss adjustment expense ratio continued to benefit in 2008 from changes in the type of workers compensation products that were selected by our customers. We estimate our medical cost inflation to be 6.5% during 2008, compared to our estimate of 7% in 2007. This decline reflects a decrease in utilization as well as enhanced network and managed care initiatives. The full-year loss and loss adjustment expense ratio benefited from favorable development in our loss sensitive business, which resulted in the retrospective premium adjustments.

As I mentioned previously, we continue to focus on increasing utilization of our preferred provider networks, individualized case management, prescription drug costs and payment programs, and the control of charges incurred outside of our networks. We are pleased that these containment techniques have tempered the impact of the medical inflation and continue to contribute to an improved loss ratio.

In our fee-based businesses, we are seeing that a combination of new market entrants and the soft insurance market slowing the number of new self-insured clients. We are also seeing increased price competition, especially in the managed care arena. Despite these challenges, we have and expect to continue to organically grow our fee-based business.

We previously announced the execution of a definitive stock purchase agreement to sell our run off operations and the filing of the Form A with the Pennsylvania Insurance Department. The closing of the sale and transfer of ownership are pending approval by the Insurance Department. As we have previously reported, we made a $13 million capital contribution to increase the statutory capital of our run off operations in order to comply with the commitment made to an independent rating agency. We recorded an $8.5 million after-tax charge in our discontinued operations in the fourth quarter to write off the capital contribution, as we believe that the additional capital will not result in an increase to the cash we expect to receive at the closing of the sale. We continue to work with the buyer to ensure that the Pennsylvania Insurance Department had the information it needs to approve the transaction.

Before I turn the discussion over to Bill, let me say that we believe the progress made over the past year will carry over into 2009 and will enable us to continue to improve our results and our return on shareholder’s equity. A worsening in the economy in the second half of 2009 compared to current economic conditions or a significant decline in the payrolls of our insurers, we expect our ongoing businesses to generate an operating return on equity of between 6% and 7% in 2009, which is a continued improvement over the 5.8% return that we delivered in 2008. We believe that our focus on service sectors such as healthcare and education and away from sectors such as construction has somewhat mitigated our workers compensation customer base from some of the payroll volatility.

With that, I will turn the discussion over to Bill for a more detailed look at our operating results as well as a review of our capital position. Bill?

Bill Hitselberger

Thanks Vince. The fourth quarter of 2008, we reported a net loss of $4.1 million or $0.13 a share compared to a net loss of $37.6 million or $1.17 per share for the fourth quarter of 2007. Operating income increased to $3.6 million or $0.11 per share for the fourth quarter of 2008 compared to $2.8 million or $0.9 a share for the same period last year. For the year ended December 31, 2008, we reported net income of $5.7 million or $0.18 a share compared to a net loss of $42.5 million dollars or $1.31 a share in 2007.

Operating income in 2008 increased to $21.5 million or $0.67 a share compared to $14.4 million or $0.44 per share in 2007. In my discussions in segment performance, I will focus on operating results. You should see page four of our earnings release for the reconciliation of segment operating results to GAAP net income.

Now let me turn to the specific results of the PMA Insurance group. The PMA Insurance group reported pre-tax operating income of $8.4 million for the fourth quarter of 2008 compared to $7.6 million for the same period last year. For 2008, pretax operating income increased to $46.7 million compared to $38 million in 2007.

Direct written premiums were $130 million for the fourth quarter of 2008 compared to $92 million for the fourth quarter of 2007. For 2008, direct written premiums were $518 million compared to $510 million in 2007. The increases for both periods primarily reflected increases in direct premium production which increased 10% to $506 million for the year.

Net premiums written increased to $97 million for the fourth quarter of 2008 compared to $71 million in the fourth quarter of last year, an increase of $450 million for the year, up from $395 million in 2007. The increases in net written premiums for both periods primarily reflected the increases in direct production. The full-year increase in direct production was partially offset by return premium adjustments. These premium adjustments primarily reflect favorable loss experience on loss sensitive products or the insured shares in the underwriting results of the policy. The combined ratio for the fourth quarter of 2008 was 100 compared to 101.6 for the fourth quarter last year. The full-year combined ratio of 2008 was 97.5 compared to 99.7 in 2007. The lower loss ratio for the fourth quarter of 2008 was related to and partially offset by the increase in policy holder dividends ratio for the quarter. Policy holder dividends ratio was higher in the fourth quarter of 2008 compared to the fourth quarter of 2007. The current year period reflected better loss experience, which results in larger dividends on participating policies, where policyholders may receive a dividend based to a large extent on their loss experience.

Commissions earned under our fronting arrangements reduce the current year acquisition expense ratios by 0.5 for the quarter and 0.7 points for the full-year compared to 9/10 of a point and 0.7 points for the same periods in 2007, as the seating commissions earned on this business reduce our commission expense.

Full year acquisition expense ratio in 2008 also benefited about two points from reductions in premium-based pay assessments. Net investment income decreased to $8.6 million in the fourth quarter of 2008 compared to $9.4 million for the prior year quarter. For the year ended December 31, 2008, net investment income decreased by $2.5 million to $35.4 million compared to the same period in 2007. The decreases were due primarily to lower yields of approximately 60 basis points in the fourth quarter and 40 basis points for full year 2008.

I would like to make a few comments on the results of our fee-based businesses. For the fourth quarter of 2008, our fee-based business reported pretax operating income of $1.9 million, up from $1.7 million for the same quarter last year. Pretax operating income for full-year 2008 was $7.2 million, compared to $3.7 million for 2007. The full-year increase reflected primarily the inclusion of the results of Midlands, which we acquired in October 2007.

For the fourth quarter 2008, total revenues increased to $20 million compared to $15 million for the same period last year. The increase in revenues for the fourth quarter primarily reflected higher claims service revenues of $6 million. Total revenues for full year 2008 increased to $72 million, up from $38 million in 2007. The full year growth in revenues related primarily to our acquisition of Midlands and also reflected 26% organic growth rate at PMA Management Corp., and the inclusion of $4 million in revenues from PMA Management Corp. of New England, which we acquired in June 2008. Total increase in revenues during 2008 compared to the prior year consisted primarily of $24 million in higher claim service revenues and $9 million in additional commission income.

Now I would like to make a few comments on our discontinued operations. The discontinued operations, which are our run off operations and consists of our former reinsurance and excess and surplus lines business reported after-tax losses of $7.8 million for the fourth quarter and $12.8 million for the full-year 2008, compared to after-tax losses of $40.7 million and $57.3 million for the same periods in 2007. Results for the fourth quarter and full-year 2008 included an after-tax charge of $8.5 million resulting from the capital contribution made to PMA Capital Insurance Company from the holding company. The contribution, which included $5 million of cash and a promissory note of $8 million, $4 million payable in March 2009 and the other $4 million payable in March 2010, increased the statutory capital of the run off operations. Increase was written off in the fourth quarter. We believe that the additional capital will not result in an increase for the cash that we expect to receive at closing.

Results for 2008 also included an after-tax charge of $4.9 million for adverse loss development. The expected cash to be received at closing and the phased amount of the contingent consideration each remain at $2.5 million. We have reflected only the expected cash amount in our financial statements.

Results for the fourth quarter and full year 2007 reflected an impairment loss of $40 million. The results for 2007 also included an after-tax charge of $14.3 million for prior year lost development recorded in the third quarter.

And now I would like to turn my attention to the overall financial condition. Our book value was $10.78 a share at December 31, 2008 compared to $11.92 a share at December 31, 2007. The decrease in book value was primarily due to the decline of $25 million or 78% per share related to the change in the unrealized position on our available for sale fixed income portfolio. Book value per share was also reduced by $17 million or $0.54 per share due to an increase in our net pension liabilities, which resulted primarily from the decrease in the value of the investments in our pension plan to support our pension obligations. The impact of the decline in the unrealized position of our portfolio and in our pension investments was partially offset by net income.

We continue to review our investment portfolio in light of recent changing market conditions. The fair value of our total invested assets from continuing operations was $762 million at December 31, 2008 which represents 96% of amortized costs. The investment portfolio’s average credit quality was AA+, contains substantially all investment grade securities which has duration of 3.2 years. Of the $762 million, $387 million or 51% of the investment portfolio was allocated to residential and commercial mortgage-backed and other asset-backed construction securities. Of this $387 million, $133 million or 34% were commercial mortgage-backed securities or CMBS. The CMBS were carried at 83% of amortized cost to December 31, 2008.

All of the CMBS in our portfolio are either the senior or super senior tranches of their respective mortgage pools. The CMBS portfolio had a weighted average life of 5.2 years and an average credit quality of AAA. On a weighted average basis, the CMBS we hold at its current credit support of 28% of the par with securities and 1% of the underlying pool collateral is currently delinquent. Also included in the $387 million of structured securities were $176 million or 45% of that portfolio in residential mortgage-backed pools are collateralized mortgage obligations issued by either US government agencies or US government-sponsored enterprises. Our structured securities holdings also include $15 million from residential mortgage-backed securities whose underlying collateral was either a subprime or alternative A mortgage. The $15 million, which includes $14 million of alternative A collateral and $1 million of subprime collateral had an estimated rate of life of 2.8 years, with $4 million of that balance expected to pay off within one year. And these pieces of the portfolio have an average credit quality of AAA-. The portfolio also held securities with a fair value of $34 million or 4% of the total investment portfolio where credit ratings were enhanced by various financial guaranteed issuers.

Of the credit enhanced securities, $11 million were asset-backed securities, none of which were wrapped ABS CDO exposure. At a weighted average life of 3.7 years and the underlying collateral exclusive of the credit had an intuitive internal credit rating of A. Approximately 45% of our year-end reinsurance recoverables balances of $826 million are collateralized and 3% of these recoverable balances are due to PMA for losses that we have already paid.

We had $26.4 million in cash and short-term investments at our holding company in non-regulated subsidiaries at December 31, 2008. We believe that our current funds, combined with our other capital sources will continue to provide us with sufficient funds to meet our foreseeable ongoing operating expenses and interest payments. Statutory surplus for insurance companies in the PMA Insurance group was $333 million at December 31, 2008 compared to $335 million at the end of 2007. The PMA Insurance group companies have the ability to pay $31.8 million in dividend during 2009, without the prior approval of the Pennsylvania Insurance Department, the statutory surplus of PMA Capital Insurance Company, our wholly owned run off reinsurance subsidiary which is reported in discontinued operations with $34 million at December 31, 2008 compared to $48 million at December 31, 2007. During 2008 PMA Capital Insurance companies admitted assets decreased 26% to $276 million. PMA Capital Insurance company’s statutory surplus and admitted assets at December 31 included a $13 million capital contribution made by the holding company in the fourth quarter.

This concludes our prepared marks. Vince and I would now welcome any questions. And Josh, if you could please open the lines for any questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions). And our first question comes from Robert Paun from Sidoti & Co. Robert, you may proceed.

Robert Paun – Sidoti & Co.

Good morning. It seems as though the operating expense ratio ticked up a bit in the fourth quarter. Can you comment on that and provide maybe a little bit more color there?

Bill Hitselberger

The operating expense actually – I think our fourth quarter 2008 is relatively normal, Robert. What happened is that actually in 2007, we had a reinsurance item that was in dispute with one of our carriers at the PMA Insurance group and we have made provision for credit loss associated with that reinsurance recoverable. We negotiated a settlement with the carrier in the fourth quarter of 2007, and as a result of that discussion we actually lowered the provision that had we put up during 2005 and 2006 associated with that reinsurance item. So I guess the way I would look at it is that the operating expenses on a relative basis appear higher in the fourth quarter of 2008. I think the operating expense ratio in 2008 is more along the normal lines of what we would expect to see.

Robert Paun – Sidoti & Co.

Okay, thanks. That's helpful. Also you have seen some good traction from the fee business from Midlands and Webster. Can you comment on what you're seeing as far as new opportunities in that market?

Vince Connelly

Sure. Good morning, Robert. Let me take PMA Managed Group of New England which has been with us nearly six months. We are very excited in terms of the transition as part of the overall organization is going well. I think we expect that we will be able to bring some of the capabilities that currently exist in PMA in terms of our managed-care relationships and some of our technology that is going to help us expand that business deal. Even in the first six months of being part of the company, we virtually had 100% retention. So I think that we have made a pretty smooth transition for our customer base. With respect to Midlands, Midlands basically has two businesses within their operations. One is a TPA for basically non-workers compensation business and we are very excited about the growth of that business. They do work primarily for other insurance companies, handling their casual type of claims, customer bases are some of the ENS markets, some of the London-based companies, some of the Bermuda markets and we just succeed – they have been able to continue their expand those relationships and so we see a bright future for that business. The other piece of the business is excess workers compensation, which they are placing there in effect an NGU for that and we are not taking any insurance risks. That certainly has been impacted and we saw that in the fourth quarter,

That certainly has been impacted and we saw that in the fourth quarter, we’ve seen that to 2008 that the competitive conditions that I commented on, with respect to the insurance marketplace in general has impacted that business. So, we have seen – we certainly have seen a slow down relative to what they have experienced in 2007 and 2006, but we think Midlands has an excellent reputation, it is one that it has built-up over about a 20 year period and even though we are not taking risks, we take it in a very responsible and disciplined fashion so that our markets feel very comfortable with our self. As market conditions potentially improve there, we are well positioned to take advantage of that.

Robert Paun – Sidoti & Co.

Okay great. And last question here. Vince you spoke about the significant rate decreases in New York and Florida, might have missed it in your comments, but is this still in line with the lost trends you are seeing and the reforms that have taken place, can you provide some more color on that?

Vince Donnelly

Sure. I think in New York that is certainly true. I think we are – based on the information that our actuaries have looked at and dialoguing with the rating bureau in New York, we still feel comfortable that there is a balance between the rate reductions and the impact of the reform. In terms of Florida, I would say that’s true through 2008. We certainly see a change in ’09 and two things going on 2009, one is it was another significant rate reduction that was filed and approved by the insurance department effective 1/1. The other thing that has taken place there is there has been a slight roll back of the reforms that took place in 2003, specifically with respect to attorney fees. Now there has been a rate increase that has been approved effective I believe April 1 of about 6.5% that will go in effect. We think overall though that the pricing changes in 2009 are slightly greater than what we believe the trends are and so that is something we will factor into our thinking as we look at growing our business in Florida that there is a slight in-balance between the trends and the rates. Now the attorney fee change is something that will take a while to play out, but we do believe that the 6.5 were pleased about it was less than what was filed and what is needed down there. So, we will factor it into our thinking.

Robert Paun – Sidoti & Co.

Okay thanks. That’s all I have for now.

Operator

And our next question comes from Michael Nannizzi from Oppenheimer. Michael you may proceed.

Vince Donnelly

Hi.

Michael Nannizzi – Oppenheimer

Hi. So just a couple of questions, but I don’t know if you have these (inaudible) the workers comp premiums ceded assumed those sub segments, I think they are usually in the queue?

Vince Donnelly

Yes. We don’t have those right at our finger tips.

Michael Nannizzi – Oppenheimer

Okay.

Vince Donnelly

But, I guess what trend were you looking for Michael, could maybe I can help you there?

Michael Nannizzi – Oppenheimer

I just like, I mean it is just, it literally is in numbers kind of modeling thing. I just want to get that space filled if I can. I can touch with you afterwards it is fine.

Vince Donnelly

I mean yes. Because we can certainly, I mean, we had, the direct business for the quarter with a $115.2 million and the assumed business was $2.5 million.

Michael Nannizzi – Oppenheimer

Okay, you know what, I think I can get to the rest from there.

Vince Donnelly

That’s just for workers comp and then the ceded was 28.8.

Michael Nannizzi – Oppenheimer

Perfect, excellent thank you.

Vince Donnelly

We had net. Hopefully if my math is right and that would be 88.9 and that was 88.9 million was workers comp in the fourth at a 97.4 million in total premiums.

Michael Nannizzi – Oppenheimer

Right I can pull the rest. Okay thanks I appreciate that.

Vince Donnelly

Yes.

Michael Nannizzi – Oppenheimer

On the CMBS portfolio, what is the vintage breakdown of the portfolio? Do you have that handy?

Vince Donnelly

Yes actually it is in the exhibits that are on our website, but I would say that it is skewed, we have some in 2006, we have the very – a modest amount in 2007, a more substantive amount in 2006 and 2005. And then I would say a relatively – we have securities in every vintage back till 1999, but in aggregate I would say we probably waited more towards ’04, ’05 and into ’06. When we looked at the CMBS because one of the issues that we were a little bit concerned about in the fourth quarter perhaps it was in the first quarter of this year was that Moody’s had announced that they were taking another look at the AAA structures of the more recent vintages. The 2000 – I guess the end of 2005, end of 2006, and 2007.

Michael Nannizzi – Oppenheimer

Right.

Vince Donnelly

So, we spent some time with the portfolio on our portfolio managers and we are very pleased to know that, I guess as the market migrated in those years the senior structures contained a couple of different trenches and actually the more recent vintages have what are called, I guess are called AJ and AM trenches. The way it is split out Michael was that about 11.5% to 12% of the AAA portfolio was subordinated. So, then you had a two tiering almost of the AAA structure having super senior securities that had a 28% support level and then you had subordinated securities, which were subordinated to that 28% interest.

Michael Nannizzi – Oppenheimer

Right.

Vince Donnelly

All of our securities in those more recent vintages are in that super senior structure. So, they are all in that 28% support level.

Michael Nannizzi – Oppenheimer

Got it, got it. Okay perfect. And then so I take it the ratings on the website as of the 31 of December probably somewhere to where it is today?

Vince Donnelly

Yes we certainly are not aware of any changes to any trenches and we actually did take a look at that. Gosh, I think it was a couple of days ago, but we know we haven’t seen any ratings changes and I will be honest, we don’t anticipate seeing any ratings change that leased based on the most recent public statements made by the rating agencies.

Michael Nannizzi – Oppenheimer

Okay great, fantastic disclosure by the way. And what was the number on the reinsurance recoverable? I think that you had mentioned a percentage that’s collateralized.

Vince Donnelly

That 45% of balance are collateralized Michael.

Michael Nannizzi – Oppenheimer

Okay at 45%. And then if I could just one overall question. On the alternative business, is there any, I know that Vince had mentioned that that business starts to feel pressure when the markets gets really soft, what about the access to credit for insureds, I mean is that – I guess a lot of time insureds will place letters of credit to kind of get these programs going, is that an area that you are seeing change or people are posting more hard assets or is that just kind of continuing longer as it has? And thank you very much.

Vince Donnelly

Michael that – I guess that really pertains more to our large deductible business and where we secure through letters of credit. I would certainly say that our customer base is more pressured as the credit markets are where they are and yet what we have seen in the last few months including January is that there really was not a major impact on our existing customer base and or new customers we had. So, that is something that we will continue to monitor the year and hopefully the credit markets cooperate, but that is a pressure point in that business for our customers because the credit part of the underwriting process is very critical. We have in builds operation in the financial department a unit that works very closely with the large account underwriting team and it is very critical. So, we talked about underwriting discipline in terms of our underwriting standards in the large account business that also encompasses to make sure that we stay disciplined with respect to our credit exposure. I think what we said to our customer base is we are trying to get out with our renewals and make sure that we are having conversations, perhaps even a little bit earlier so that we can understand where they are, where their financials are, what’s going on with their businesses, so that we can work together to make sure that we are protected in and that things are reasonable from their end.

Michael Nannizzi – Oppenheimer

Alright. Okay great thank you very much.

Vince Donnelly

Thanks Michael.

Operator

(Operator instructions) And our next question comes from the line of Randy Binner from FBR Capital Markets. Randy you may proceed.

Randy Binner – FBR Capital Markets

Hi thank you. Most of my questions were answered, but I guess Bill maybe we could touch on the NOL, we have a steadier trend of earnings now and the fee business is helping. So, can you just remind us of how that process is going to work and maybe color and timeline around when you might be able to realize some of those tax benefits?

Bill Hitselberger

Sure actually, we have NOLs that are included within our differed tax assets. And we also have NOLs that we have reserved for that are actually excluded from our balance sheet. The number that is excluded from our balance sheet is $60.5 million, so it is slightly less than $1.90 a share. And that’s, what we have done is, we made an evaluation when we put our run-off business into run-off that we might not be able to utilize those NOLs. Those NOLs expire sequentially and leave its 2021 and out to 2028. So, we reduced our book-value by $1.90 in 2003 and into 2004 to reflect the potential inability to use those NOLs. Your point is correct we have had a more consistent earnings base. And we certainly have worked on and evaluated the differed tax asset in the context of those earnings streams. I think Randy from my perspective, we certainly feel that the ongoing operations are generating, improving earnings, we intend to see those improving earnings continue, we still have and we still need to deal with the closure of the sale of one-off operation. You know my view would be as that run-off – the uncertainties around the run-off are lifted we would feel much more confident about the ability of future operating earnings to fully utilize those NOLs. That said, I mean we go to the valuation process quarterly, I think your comment is correct. We feel better and better about our ability as time moves on, but I don’t think we are at a point yet where we would concede that we wanted to start reducing that valuation allowance.

Randy Binner – FBR Capital Markets

Yes, okay. So, it is the valuation allowance that will decreased and then that would effectively, I mean how would that work through the income statement, I guess we had a write book-value back –

Bill Hitselberger

Yes you would write it back up and in the actions what it would do Randy is it would reduce the tax rate. So, at some point in time, I mean presuming that we continue our trend, which we certainly feel confident that it is going to happen what would happen what I would expect to see is a lower tax rate, a lower effective tax rate on our business. And depending on how aggressively we looked at that valuation allowance you could even have a negative tax rate in the quarter.

Randy Binner – FBR Capital Markets

But it would be, I mean that’s a cash tax, would you have to report a GAAP tax rate or with all that –

Bill Hitselberger

What would happen – that’s a great point. We don’t pay cash taxes right now other than alternative minimum taxes. So, while our statutory annuities, the PMA Insurance companies report tax expense that tax expense is actually paid to PMA Capital. PMA Capital actually utilizes the money and we pay the Federal Government by utilizing NOLs. We’ve been utilize net operating losses since 2005. Well it happens as on a GAAP basis, we record an expense today, but we are not – it is a non-cash item. Our taxes paid – while our tax expense is relative substantive the cash tax rate that we are paying is closer to 2%, but the very small amount of cash tax is paid. As we unwind that NOL valuation allowance, the effective GAAP tax rate that we have will reduce. Right now it is slightly over 35%, probably it will reduce down as we, that effective rate will reduce down as we unwind the valuation allowance. But either piece is setting up of the allowance or unwinding of the allowance does not affect the cash taxes, they are just effected very simply by whatever NOLs we utilize on our tax return and then awaited the tax situation works as we in substance pay AMT at a 2% rate on our taxable income as long as we have NOLs.

Randy Binner – FBR Capital Markets

Okay great. Thank you for that review, I think may – hopefully that is helpful for others too. Just one other quick question, did you sign us any big cases in the fourth quarter, to get the tap line number higher on the workers comp side?

Vince Donnelly

We initiated big cases –

Randy Binner – FBR Capital Markets

What is their name [ph]?

Vince Donnelly

There is no household names, if that is what you are asking Randy. Our larger count business I would say there is unusual about the nature of the accounts that we wrote now, we just had some good success.

Bill Hitselberger

And the other comment I would make Randy is that we began to see in the fourth quarter the effect of the two fronting relationships that we established. So, while production was up in the fourth quarter, the premiums written are also very influenced by the change in fronted business that we had, which in our view is a risk less transaction for us.

Randy Binner – FBR Capital Markets

Got it, understood thank you guys.

Operator

At this time we are showing no further question available. Mr. Hitselberger you may proceed.

Bill Hitselberger

Thanks Josh. Everybody thank you very much for participating, this does conclude the conference call. And Josh if you could, please proceed with the closing instructions.

Operator

Ladies and gentlemen this concludes today’s conference call. Should you require additional information about PMA Capital Corporation, please contact the Investors Relations Department of PMA Capital Corporation at 610-397-5298. Thank you for your participation. You may disconnect at this time.

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