PMA CAPITAL CORPORATION 6/30/01 FORM 10-Q

10-Q 1 pma6-01q.htm PMA CAPITAL CORPORATION 6/30/01 10-Q PMA CAPITAL CORPORATION 6/30/01 FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(MARK ONE)

/X/

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

/ /

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

Commission File Number 000-22761

PMA Capital Corporation
(Exact name of registrant as specified in its charter)

Pennsylvania		23-2217932
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

Mellon Bank Center, Suite 2800
1735 Market Street
Philadelphia, Pennsylvania		19103-7590
(Address of principal executive offices)		(Zip Code)

(215) 665-5046
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / /

There were 21,545,845 shares outstanding of the registrant’s Class A Common Stock, $5 par value per share, as of the close of business on July 31, 2001.

INDEX

		Page

Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated balance sheets as of June 30, 2001 (unaudited) and December 31, 2000	1

	Consolidated statements of operations for the three and six months ended June 30, 2001 and 2000 (unaudited)	2

	Consolidated statements of cash flows for the six months ended June 30, 2001 and 2000 (unaudited)	3

	Consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2001 and 2000 (unaudited)	4

	Notes to the consolidated financial statements	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10

Part II.	Other Information

Item 4.	Submission of Matters to a Vote of Security Holders	25

Item 6.	Exhibits and Reports on Form 8-K	25

Signatures		26

Exhibit Index		27

Part I. Financial Information
Item 1. Financial Statements

PMA Capital Corporation
Consolidated Balance Sheets

(dollar amounts in thousands)	(Unaudited) As of June 30, 2001			As of December 31, 2000

Assets:
Investments and cash:
Fixed maturities available for sale, at fair value
(amortized cost: 2001 - $1,497,189; 2000 - $1,507,667)	$	1,486,770		$	1,485,308
Short-term investments, at amortized cost which approximates fair value		401,294			341,641
Cash		11,757			5,604

Total investments and cash		1,899,821			1,832,553

Accrued investment income		19,560			20,867
Premiums receivable (net of valuation allowance:
2001 - $15,657; 2000 - $16,630)		309,161			299,342
Reinsurance receivables (net of valuation allowance:
2001 - $4,328; 2000 - $4,328)		1,008,604			933,889
Deferred income taxes, net		92,672			89,011
Deferred acquisition costs		54,918			48,522
Funds held by reinsureds		101,284			73,999
Other assets		155,123			171,223

Total assets	$	3,641,143		$	3,469,406

Liabilities:
Unpaid losses and loss adjustment expenses	$	2,099,101		$	2,053,138
Unearned premiums		290,432			269,734
Long-term debt		125,000			163,000
Accounts payable, accrued expenses and other liabilities		224,431			207,211
Funds held under reinsurance treaties		196,702			173,762
Dividends to policyholders		17,121			17,246
Payable under securities loan agreements		232,554			145,269

Total liabilities		3,185,341			3,029,360

Commitments and contingencies (Note 7)
Shareholders' Equity:
Class A Common stock, $5 par value (40,000,000 shares authorized;
2001 - 24,442,945 shares issued and 21,544,845 outstanding
2000 - 24,442,945 shares issued and 21,573,316 outstanding)		122,214			122,214
Additional paid-in capital		339			339
Retained earnings		393,723			384,694
Accumulated other comprehensive loss		(7,149	)		(14,373	)
Notes receivable from officers		(154	)		(56	)
Treasury stock, at cost (shares: 2001 - 2,898,100 and 2000 - 2,869,629)		(53,171	)		(52,772	)

Total shareholders' equity		455,802			440,046

Total liabilities and shareholders' equity	$	3,641,143		$	3,469,406

See accompanying notes to the consolidated financial statements.

PMA Capital Corporation
Consolidated Statement of Operations
(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
(dollar amounts in thousands, except per share data)	2001		2000		2001			2000


Revenues:
Net premiums written	$	174,733	$	122,502	$	369,754		$	286,841
Change in net unearned premiums		15,726		22,296		(25,083	)		(15,816	)

Net premiums earned		190,459		144,798		344,671			271,025
Net investment income		22,043		26,290		44,376			53,692
Net realized investment gains (losses)		1,561		3,532		5,312			(1,929	)
Other revenues		3,012		3,274		16,315			6,661

Total revenues		217,075		177,894		410,674			329,449


Losses and expenses:
Losses and loss adjustment expenses		142,816		110,193		288,495			204,481
Acquisition expenses		39,825		27,073		64,811			53,384
Operating expenses		20,249		17,508		39,426			33,960
Dividends to policyholders		2,683		4,347		6,794			9,037
Interest expense		1,776		2,966		3,971			6,041

Total losses and expenses		207,349		162,087		403,497			306,903


Income before income taxes		9,726		15,807		7,177			22,546

Income tax expense (benefit):
Current		3,233		3,433		592			5,532
Deferred		453		2,234		(7,546	)		2,496

Total		3,686		5,667		(6,954	)		8,028


Net income	$	6,040	$	10,140	$	14,131		$	14,518


Net income per share:
Basic	$	0.28	$	0.46	$	0.66		$	0.66
Diluted	$	0.28	$	0.45	$	0.65		$	0.64

See accompanying notes to the consolidated financial statements.

PMA Capital Corporation
Consolidated Statements of Cash Flows
(Unaudited)

	Six Months Ended June 30,
(dollar amounts in thousands)	2001			2000


Cash flows from operating activities:
Net income	$	14,131		$	14,518
Adjustments to reconcile net income to net cash flows used in
operating activities:
Deferred income tax expense (benefit)		(7,546	)		2,496
Net realized investment (gains) losses		(5,312	)		1,929
Gain on sale of real estate		(9,763	)		-
Change in:
Premiums receivable and unearned premiums, net		10,879			13,781
Dividends to policyholders		(125	)		2,082
Reinsurance receivables		(74,715	)		(93,675	)
Unpaid losses and loss adjustment expenses		45,963			16,810
Funds held, net		(4,345	)		(2,804	)
Accrued investment income		1,307			1,233
Deferred acquisition costs		(6,396	)		(883	)
Accounts payable, accrued expenses and other liabilities		20,704			19,047
Other, net		4,558			(4,767	)

Net cash flows used in operating activities		(10,660	)		(30,233	)


Cash flows from investing activities:
Fixed maturities available for sale:
Purchases		(692,826	)		(294,432	)
Maturities or calls		187,616			67,738
Sales		526,115			292,516
Equity securities:
Purchases		-			(24,706	)
Sales		-			23,554
Net sales (purchases) of short-term investments		29,929			(81,294	)
Proceeds from sale of real estate		14,401			-
Other, net		(4,823	)		(7,929	)

Net cash flows provided by (used in) investing activities		60,412			(24,553	)


Cash flows from financing activities:
Dividends paid to shareholders		(4,519	)		(3,775	)
Proceeds from exercise of stock options		650			1,815
Purchase of treasury stock		(1,632	)		(11,676	)
Repayments of long-term debt		(38,000	)		-
Net issuance of notes receivable from officers		(98	)		-

Net cash flows used in financing activities		(43,599	)		(13,636	)


Net increase (decrease) in cash		6,153			(68,422	)
Cash - beginning of period		5,604			84,261

Cash - end of period	$	11,757		$	15,839


Supplementary cash flow information:
Income taxes paid (refunded)	$	(8,250	)	$	4,500
Interest paid	$	4,463		$	5,930

See accompanying notes to the consolidated financial statements.

PMA Capital Corporation
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(dollar amounts in thousands)	2001			2000			2001			2000


Net income	$	6,040		$	10,140		$	14,131		$	14,518


Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during the period		(6,428	)		(4,742	)		11,217			3,365
Less: reclassification adjustment for (gains)
losses included in net income (net of tax
expense (benefit): $546 and $1,236 for
three months ended June 30, 2001 and
2000; $1,859 and $(675) for six months
ended June 30, 2001 and 2000)		(1,015	)		(2,296	)		(3,453	)		1,254


Total unrealized gain (loss) on securities		(7,443	)		(7,038	)		7,764			4,619
Foreign currency translation loss, net of tax
benefit: $55 and $0 for three months ended
June 30, 2001 and 2000; $291 and $0 for six
months ended June 30, 2001 and 2000		(102	)		-			(540	)		-


Other comprehensive income (loss), net of tax		(7,545	)		(7,038	)		7,224			4,619


Comprehensive income (loss)	$	(1,505	)	$	3,102		$	21,355		$	19,137

See accompanying notes to the consolidated financial statements.

PMA Capital Corporation

Notes to the Consolidated Financial Statements

1. BUSINESS DESCRIPTION

The accompanying consolidated financial statements include the accounts of PMA Capital Corporation and its subsidiaries (collectively referred to as “PMA Capital” or the “Company”). PMA Capital is an insurance holding company that operates three specialty risk management businesses:

PMA Re — PMA Capital’s reinsurance operations offer excess of loss and pro rata property and casualty reinsurance protection mainly through brokers. PMA Re provides reinsurance coverages on traditional treaty, finite and facultative bases.

The PMA Insurance Group — PMA Capital’s property and casualty insurance subsidiaries include Pennsylvania domiciled insurance companies as well as certain foreign subsidiaries. The PMA Insurance Group primarily writes workers’ compensation, integrated disability, and to a lesser extent, other standard lines of commercial insurance, primarily in the Mid-Atlantic and Southern regions of the U.S. The majority of The PMA Insurance Group’s business is produced by independent agents and brokers.

Caliber One — PMA Capital’s specialty property and casualty operations write excess and surplus lines of business nationally on a non-admitted basis through surplus lines brokers.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation – The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. It is management’s opinion that all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Certain reclassifications of prior year amounts have been made to conform to the 2001 presentation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Due to this and certain other factors, such as the seasonal nature of portions of the insurance business as well as competitive and other market conditions, operating results for the three and six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year.

The information included in this Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in its 2000 Annual Report to Shareholders and incorporated by reference in its Form 10-K for the year ended December 31, 2000.

B. Recent Accounting Pronouncements – Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as “derivatives”) and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. The Company does not have any derivative instruments that are impacted by the accounting requirements of SFAS No. 133 and the Company does not currently participate in any hedging activities. Accordingly, the adoption of SFAS No. 133 did not have a material impact on the Company’s financial condition, results of operations or liquidity.

In September 2000, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125.” SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. SFAS No. 140 revises the standards for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of SFAS No. 125 without reconsideration. The Company's existing policies and practices for its securities lending program are in conformity with SFAS No. 140, accordingly, the adoption of SFAS No. 140 did not have a material impact on the Company's financial condition, results of operations or liquidity.

Effective January 1, 2000, the Company adopted Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” SAB No. 101 summarizes certain interpretations of the staff of the Securities and Exchange Commission regarding the application of GAAP to revenue recognition in financial statements. The adoption of SAB No. 101 did not have a material impact on the Company's financial condition, results of operations or liquidity.

Effective January 1, 2000, the Company adopted Statement of Position (“SOP”) 98-7, “Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.” This statement identifies several methods of deposit accounting and provides guidance on the application of each method. This statement classifies insurance and reinsurance contracts for which the deposit method is appropriate as contracts that (i) transfer only significant timing risk, (ii) transfer only significant underwriting risk, (iii) transfer neither significant timing nor underwriting risk and (iv) have an indeterminate risk. The adoption of SOP 98-7 did not have a material impact on the Company’s financial condition, results of operations or liquidity.

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets. The Company is required to adopt the provisions of this statement effective January 1, 2002. This statement is required to be applied to all goodwill and other intangible assets recognized in the Company’s financial statements at the date of adoption. At that time, goodwill will no longer be amortized, but will be tested for impairment annually. As of June 30, 2001, the Company had approximately $4.7 million of goodwill, which is included in “other assets” on the Company’s balance sheet. The Company is currently assessing the impact this statement will have on the Company’s financial statements when it is adopted at the beginning of 2002.

3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Unpaid losses and loss adjustment expenses (“LAE”) reflect management’s best estimate of future amounts needed to pay claims and related settlement costs with respect to insured events which have occurred, including events that have not been reported to the Company. In many cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the Company’s payment of that loss. In general, liabilities for reinsurers become known more slowly than for primary insurers and are subject to more unforeseen development and uncertainty. As part of the process in determining these amounts, historical data is reviewed and consideration is given to the impact of various factors, such as legal developments, changes in social attitudes and economic conditions.

During 2001, Caliber One reported net unfavorable prior year development of $17.8 million, which is net of losses of $12.0 million ceded to a third party reinsurer under an existing reinsurance contract covering the prior year loss development. This prior year development reflects higher than expected claim frequency and severity that emerged in the first quarter of 2001 on certain casualty and property lines of business, primarily professional liability policies for the nursing homes class of business. As a result of its first quarter 2001 reserve review, Caliber One revised its estimate of ultimate expected claim activity and, accordingly, increased its estimate of ultimate losses for accident years 1999 and 2000.

medical and indemnity payments, and economic conditions, the estimates are revised accordingly. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at June 30, 2001, the related adjustments could have a material adverse impact on the Company’s financial condition, results of operations and liquidity.

4. REINSURANCE

In the ordinary course of business, PMA Capital’s reinsurance and insurance subsidiaries assume and cede premiums with other insurance companies and are members of various pools and associations. The reinsurance and insurance subsidiaries cede business in order to limit the maximum net loss from large risks and limit the accumulation of many smaller losses. The reinsurance and insurance subsidiaries remain primarily liable to their clients in the event their reinsurers are unable to meet their financial obligations.

The components of net premiums earned and losses and LAE incurred are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(dollar amounts in thousands)	2001			2000			2001			2000


Premiums earned:
Direct	$	122,858		$	109,908		$	240,391		$	207,957
Assumed		118,464			91,085			212,647			173,764
Ceded		(50,863	)		(56,195	)		(108,367	)		(110,696	)

Net	$	190,459		$	144,798		$	344,671		$	271,025

Losses and LAE:
Direct	$	99,878		$	95,808		$	229,655		$	197,297
Assumed		103,196			64,065			180,238			123,498
Ceded		(60,258	)		(49,680	)		(121,398	)		(116,314	)

Net	$	142,816		$	110,193		$	288,495		$	204,481

5. EARNINGS PER SHARE

A reconciliation of the shares used as the denominator of the basic and diluted earnings per share computations is presented below. For all periods presented, there were no differences in the numerator (net income) for the basic and diluted earnings per share calculation:

	Three Months Ended June 30,				Six Months Ended June 30,
	2001		2000		2001		2000


Denominator:
Basic shares - weighted average shares outstanding		21,520,461		22,057,649		21,511,941		22,161,668
Effect of dilutive stock options		340,602		505,907		363,805		528,362

Total diluted shares		21,861,063		22,563,556		21,875,746		22,690,030

6. BUSINESS SEGMENTS

The Company’s revenues, substantially all of which are generated within the U.S., and pre-tax operating income (loss) by principal business segment were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(dollar amounts in thousands)	2001			2000			2001			2000


Revenues:
PMA Re	$	101,077		$	85,174		$	187,144		$	162,779
The PMA Insurance Group
Excluding Run-off Operations		94,218			80,885			186,712			151,755
Run-off Operations ⁽¹⁾		-			1,078			-			2,164

Total		94,218			81,963			186,712			153,919
Caliber One		20,454			7,263			21,543			14,238
Corporate and Other		(235	)		(38	)		9,963			442
Net realized investment gains (losses)		1,561			3,532			5,312			(1,929	)

Total revenues	$	217,075		$	177,894		$	410,674		$	329,449


Components of pre-tax operating
income⁽²⁾ and net income:
PMA Re	$	6,611		$	12,779		$	12,533		$	26,762
The PMA Insurance Group:
Excluding Run-off Operations		5,773			5,960			11,490			11,343
Run-off Operations ⁽¹⁾		-			(344	)		-			(125	)

Total		5,773			5,616			11,490			11,218
Caliber One		57			(518	)		(22,256	)		(2,791	)
Corporate and Other		(4,276	)		(5,602	)		98			(10,714	)

Pre-tax operating income		8,165			12,275			1,865			24,475
Net realized investment gains (losses)		1,561			3,532			5,312			(1,929	)

Income before income taxes		9,726			15,807			7,177			22,546
Income tax expense (benefit)		3,686			5,667			(6,954	)		8,028

Net income	$	6,040		$	10,140		$	14,131		$	14,518

(1) Effective December 31, 2000, all of the remaining loss reserves of the Run-off Operations were ceded to a third party under an assumption reinsurance agreement. As a result of this transaction, The PMA Insurance Group no longer reports separate results for the Run-off Operations.

(2) Operating income differs from net income under GAAP because operating income excludes net realized investment gains and losses. Pre-tax operating income is defined as income from continuing operations before income taxes, excluding net realized investment gains and losses. The Company excludes net realized investment gains (losses) from the profit and loss measure it utilizes to assess the performance of its operating segments because (i) net realized investment gains (losses) are unpredictable and not necessarily indicative of current operating fundamentals or future performance and (ii) in many instances, decisions to buy and sell securities are made at the holding company level, and such decisions result in net realized gains (losses) that do not relate to the operations of the individual segments.

7. COMMITMENTS AND CONTINGENCIES

The Company’s businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Such changes could include various legislative and regulatory changes, which may affect the pricing or profitability of the insurance products sold by the Company. In addition, it is always possible that judicial reinterpretation of insurance contracts after the policies were written may result in coverage unanticipated by the Company at the time the policies were issued. The eventual effect on the Company of the changing environment in which it operates remains uncertain.

In the event a property and casualty insurer operating in a jurisdiction where the Company’s insurance subsidiaries also operate becomes or is declared insolvent, state insurance regulations provide for the assessment of other insurers to fund any capital deficiency of the insolvent insurer. Generally, this assessment is based upon the ratio of an insurer’s voluntary premiums written to the total premiums written for all insurers in that particular jurisdiction. The Company is not aware of any material potential assessments at June 30, 2001.

The Company has provided guarantees of approximately $9.7 million, primarily related to loans on properties in which the Company has an interest.

The Company is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of business, either as a liability insurer defending third-party claims brought against its insureds, or as an insurer defending coverage claims brought against it by its policyholders or other insurers. While the outcome of all litigation involving the Company, including insurance-related litigation, cannot be determined, litigation is not expected to result in losses that differ from recorded reserves by amounts that would be material to the Company’s financial condition, results of operations or liquidity. In addition, reinsurance recoveries related to claims in litigation, net of the allowance for uncollectible reinsurance, are not expected to result in recoveries that differ from recorded recoverables by amounts that would be material to the Company’s financial condition, results of operations or liquidity.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of PMA Capital’s financial condition as of June 30, 2001, compared with December 31, 2000, and the results of operations of PMA Capital for the three and six months ended June 30, 2001, compared with the same periods last year. This discussion should be read in conjunction with Management’s Discussion and Analysis included in PMA Capital’s 2000 Annual Report to Shareholders (pages 28 through 44), to which the reader is directed for additional information. The term “SAP” refers to the statutory accounting practices prescribed or permitted by applicable state insurance departments and the term “GAAP” refers to generally accepted accounting principles.

Consolidated Results of Operations

The major components of operating revenues, pre-tax operating income and net income are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(dollar amounts in thousands)	2001			2000			2001			2000


Operating revenues:
Net premiums written	$	174,733		$	122,502		$	369,754		$	286,841


Net premiums earned	$	190,459		$	144,798		$	344,671		$	271,025
Net investment income		22,043			26,290			44,376			53,692
Other revenues		3,012			3,274			16,315			6,661

Total operating revenues	$	215,514		$	174,362		$	405,362		$	331,378


Components of pre-tax operating
income⁽¹⁾ and net income:
PMA Re	$	6,611		$	12,779		$	12,533		$	26,762
The PMA Insurance Group:
Excluding Run-off Operations		5,773			5,960			11,490			11,343
Run-off Operations ⁽²⁾		-			(344	)		-			(125	)

Total		5,773			5,616			11,490			11,218
Caliber One		57			(518	)		(22,256	)		(2,791	)
Corporate and Other		(4,276	)		(5,602	)		98			(10,714	)

Pre-tax operating income		8,165			12,275			1,865			24,475
Net realized investment gains (losses)		1,561			3,532			5,312			(1,929	)

Income before income taxes		9,726			15,807			7,177			22,546
Income tax expense (benefit)		3,686			5,667			(6,954	)		8,028

Net income	$	6,040		$	10,140		$	14,131		$	14,518

(1) Operating income differs from net income under GAAP because operating income excludes net realized investment gains and losses. Pre-tax operating income is defined as income from continuing operations before income taxes, excluding net realized investment gains and losses. The Company excludes net realized investment gains (losses) from the profit and loss measure it utilizes to assess the performance of its operating segments because (i) net realized investment gains (losses) are unpredictable and not necessarily indicative of current operating fundamentals or future performance and (ii) in many instances, decisions to buy and sell securities are made at the holding company level, and such decisions result in net realized gains (losses) that do not relate to the operations of the individual segments.

(2) Effective December 31, 2000, all of the remaining loss reserves of the Run-off Operations were ceded to a third party under an assumption reinsurance agreement. As a result of this transaction, The PMA Insurance Group no longer reports separate results for the Run-off Operations.

Consolidated operating revenues for the three and six months ended June 30, 2001, were $215.5 million and $405.4 million, respectively, compared to $174.4 million and $331.4 million for the same periods last year. The increases in operating revenues primarily reflect higher net premiums earned and the first quarter 2001 gain on the sale of certain real estate properties (included in Other Revenues), partially offset by lower net investment income.

Operating income is one of the primary performance measures the Company uses to monitor and assess the performance of its insurance operations. Operating income differs from net income under GAAP because operating income excludes net realized investment gains and losses. Pre-tax operating income was $8.2 million and $1.9 million for the three and six months ended June 30, 2001, compared to $12.3 million and $24.5 million for the same periods last year. The decline in pre-tax operating income for the quarter ended June 30, 2001, reflects lower earnings at PMA Re, partially offset by lower interest expense at Corporate and Other. The decrease in pre-tax operating income for the six months ended June 30, 2001, is primarily due to higher than expected losses at Caliber One and lower earnings at PMA Re, partially offset by a pre-tax gain of $9.8 million on the sale of certain real estate properties recorded in Corporate and Other and lower interest expense. After-tax operating income was $5.0 million and $10.7 million for the three and six months ended June 30, 2001, respectively, compared to $7.8 million and $15.8 million for the same periods in 2000. After-tax operating income for the six months ended June 30, 2001 includes a tax benefit of $10.1 million resulting from the completion of an IRS examination of the Company’s 1996 tax return.

Net income was $6.0 million and $14.1 million for the three and six months ended June 30, 2001, respectively, compared to net income of $10.1 million and $14.5 million for the same periods last year. Net income includes after-tax gains and losses on the sale of investments. Throughout 2000 and into 2001, the Company shifted the mix of its invested asset portfolio from U.S. Treasury and agency securities to corporate bonds and structured securities as a means to enhance the portfolio’s yield. As a result of investment sales pursuant to this strategy and given the declining interest rates in 2001, PMA Capital recorded $1.0 million and $3.4 million of after-tax net realized investment gains in the three and six months ended June 30, 2001, respectively. After-tax net realized investment gains of $2.3 million and after-tax net realized investment losses of $1.3 million were recognized in the three and six months ended June 30, 2000. During the second quarter of 2000, gains from the sale of equity securities, which had reached the Company’s targeted exit price level, more than offset net realized investment losses from the sale of U.S. Treasury and agency securities in an environment of rising interest rates.

Business Outlook

Based on management’s current expectations, the estimated range of consolidated after-tax operating earnings for 2001 is between $0.70 and $1.00 per diluted share. Management currently expects improved earnings in 2001, compared to 2000, resulting in part from the rate increases achieved in all three of PMA Capital’s specialty insurance businesses. So far in 2001, the Company has experienced substantial price increases across all of its specialty insurance businesses with premiums on PMA Re’s renewed business rising approximately 20%. The Company is seeing price increases averaging 15% for the workers’ compensation business and 25% for other commercial lines business written by The PMA Insurance Group. At Caliber One, rates have risen on average by more than 25% on its excess and surplus lines business. In addition, management currently expects earnings to improve resulting in part from the first quarter’s gain on the sale of real estate and tax benefit. Any unexpected emergence of losses may cause actual results to differ materially from current earnings expectations.

These statements are forward-looking, and actual results may differ materially from management’s current expectations, as a result of the factors described in the Cautionary Statements accompanying the forward-looking statements, and the additional Cautionary Statements on page 24, which describe other factors.

PMA Re

Summarized financial results of PMA Re are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollar amounts in thousands)	2001		2000		2001		2000


Net premiums written	$	85,196	$	74,280	$	149,123	$	141,593


Net premiums earned	$	89,414	$	71,035	$	163,308	$	134,493
Net investment income		11,663		14,139		23,836		28,286

Operating revenues		101,077		85,174		187,144		162,779


Losses and LAE		67,333		52,506		132,216		97,922
Acquisition and operating expenses		27,133		19,889		42,395		38,095

Total losses and expenses		94,466		72,395		174,611		136,017


Pre-tax operating income	$	6,611	$	12,779	$	12,533	$	26,762

PMA Re’s pre-tax operating income was $6.6 million and $12.5 million for the three and six months ended June 30, 2001, respectively, compared to $12.8 million and $26.8 million for the same periods in 2000. Lower earnings for the second quarter and first six months of 2001, compared to comparable periods of 2000, are attributable to decreased underwriting results and lower net investment income.

Premiums

PMA Re’s gross premiums written by business unit and major lines of business are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollar amounts in thousands)	2001		2000		2001		2000


Business Unit:
Finite Risk and Financial Products	$	56,927	$	29,306	$	90,790	$	52,401
Traditional - Treaty		44,701		46,133		80,514		94,636
Specialty - Treaty		4,091		13,986		11,050		28,185
Facultative		5,667		2,276		9,943		3,959

Total	$	111,386	$	91,701	$	192,297	$	179,181


Major Lines of Business:
Casualty lines	$	72,715	$	61,324	$	109,267	$	122,632
Property lines		38,297		29,513		82,213		55,228
Other lines		374		864		817		1,321

Total	$	111,386	$	91,701	$	192,297	$	179,181

PMA Re’s net premiums written by business unit and major lines of business are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollar amounts in thousands)	2001		2000		2001		2000


Business Unit:
Finite Risk and Financial Products	$	49,798	$	25,655	$	80,628	$	47,010
Traditional - Treaty		31,187		36,821		57,363		70,214
Specialty - Treaty		2,891		10,643		8,364		22,250
Facultative		1,320		1,161		2,768		2,119

Total	$	85,196	$	74,280	$	149,123	$	141,593


Major Lines of Business:
Casualty lines	$	49,571	$	46,955	$	75,032	$	92,639
Property lines		35,251		26,483		73,277		47,661
Other lines		374		842		814		1,293

Total	$	85,196	$	74,280	$	149,123	$	141,593

Net premiums written increased $10.9 million and $7.5 million for the three and six months ended June 30, 2001, respectively, compared to the same periods in 2000. The Finite Risk and Financial Products unit achieved targeted growth by providing non-traditional reinsurance coverages mostly to small- and medium-sized insurers. Also, during 2001, net premiums written for property lines increased due to the rate increases being achieved on these coverages and an increase in the volume of risks underwritten. However, this growth was partially offset by lower premiums from the Specialty and Traditional units, primarily in casualty lines of business. PMA Re continues its efforts to obtain price increases on renewal business, however, approximately one-third of the beginning in-force business in the Traditional and Specialty Treaty units was non-renewed during the first six months of 2001, largely reflecting PMA Re’s decision to non-renew accounts that did not meet its price guidelines.

Net premiums earned increased 26% and 21% for the three and six months ended June 30, 2001, respectively, compared to the same periods last year. Traditionally, trends in net premiums earned follow patterns similar to net premiums written, with premiums being earned principally on a pro rata basis over the coverage periods of the underlying policies. Many of PMA Re’s Traditional and Specialty contracts are written on a policy attaching basis, where premiums are earned over 24 months. Due to a shift in the business mix towards Finite Risk and Financial Products contracts, where coverages are typically placed on a loss occurring basis with premiums being earned over twelve months, net premiums earned in the three and six months ended June 30, 2001 increased at a greater rate than the increase in net premiums written.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2001		2000		2001		2000


Loss and LAE ratio		75.3%		73.9%		81.0%		72.8%

Expense ratio:
Acquisition expenses		25.0%		22.9%		20.7%		22.9%
Operating expenses		5.3%		5.1%		5.3%		5.4%

Total expense ratio		30.3%		28.0%		26.0%		28.3%

GAAP combined ratio⁽¹⁾		105.6%		101.9%		107.0%		101.1%

(1) The combined ratio computed on a GAAP basis is equal to losses and LAE, plus acquisition expenses and operating expenses, all divided by net premiums earned.

The loss and LAE ratio increased 1.4 points and 8.2 points for the three and six months ended June 30, 2001, respectively, compared to the same periods in 2000, due to an increase in the current accident year loss and LAE ratio and a decrease in favorable prior year development. The current accident year loss and LAE ratio increased 0.9 points and 3.9 points for the three and six months ended June 30, 2001, respectively, compared to the same periods in 2000. The increases primarily reflect a shift in business towards Finite Risk and Financial Products business, which traditionally carries a higher loss and LAE ratio than PMA Re’s other business units, but also carries a lower acquisition expense ratio. Additionally, the lower favorable prior year development for the three and six months ended June 30, 2001, compared to the same periods last year, resulted in an increase in the loss and LAE ratio of 0.5 points and 4.3 points.

The acquisition expense ratio increased 2.1 points and decreased 2.2 points in the three and six months ended June 30, 2001, respectively, compared to the same periods in 2000. The increase in the second quarter was primarily due to updating commission calculations on in-force contracts during the quarter. The lower acquisition expense ratio on a year-to-date basis is primarily due to the shift in business towards Finite Risk and Financial Products business, which generates a lower acquisition expense ratio than traditional treaty business. The operating expense ratio has remained fairly consistent between periods, as increases in operating expenses have essentially kept pace with increases in earned premiums.

Net Investment Income

Net investment income decreased $2.5 million and $4.5 million for the three and six months ended June 30, 2001, respectively, compared to the same periods in 2000. The decreases in net investment income primarily reflect an increase in interest on funds held on retrocessional contracts, primarily resulting from cessions in the third quarter of 2000, and, to a lesser extent, lower invested asset yields.

The PMA Insurance Group

Summarized financial results of The PMA Insurance Group are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollar amounts in thousands)	2001		2000		2001		2000


The PMA Insurance Group
Net premiums written	$	61,621	$	48,935	$	189,486	$	136,381


Net premiums earned	$	81,458	$	67,690	$	161,576	$	124,782
Net investment income		10,034		11,699		19,682		23,932
Other revenues		2,726		2,574		5,454		5,205

Operating revenues		94,218		81,963		186,712		153,919


Losses and LAE		60,013		50,806		118,947		93,459
Acquisition and operating expenses		25,749		21,194		49,481		40,205
Dividends to policyholders		2,683		4,347		6,794		9,037

Total losses and expenses		88,445		76,347		175,222		142,701

Pre-tax operating income	$	5,773	$	5,616	$	11,490	$	11,218


The PMA Insurance Group
Excluding Run-off Operations⁽¹⁾
Net premiums written	$	61,621	$	48,935	$	189,486	$	136,381


Net premiums earned	$	81,458	$	67,690	$	161,576	$	124,782
Net investment income		10,034		10,621		19,682		21,768
Other revenues		2,726		2,574		5,454		5,205

Operating revenues		94,218		80,885		186,712		151,755


Losses and LAE		60,013		50,118		118,947		92,068
Acquisition and operating expenses		25,749		20,460		49,481		39,307
Dividends to policyholders		2,683		4,347		6,794		9,037

Total losses and expenses		88,445		74,925		175,222		140,412

Pre-tax operating income	$	5,773	$	5,960	$	11,490	$	11,343

(1) Run-off operations (“Run-off operations”) of The PMA Insurance Group reinsured certain obligations primarily associated with workers’ compensation claims written by The PMA Insurance Group’s Pooled Companies for the years 1991 and prior. For the three and six months ended June 30, 2000, Run-off operations generated net investment income of $1.1 million and $2.2 million, losses and expenses of $1.4 million and $2.3 million, and pre-tax operating losses of $344,000 and $125,000. Effective December 31, 2000, all of the remaining loss reserves of the Run-off operations were ceded to a third party under an assumption reinsurance agreement. As a result of this transaction, The PMA Insurance Group no longer reports separate results for the Run-off operations.

Pre-tax operating income for The PMA Insurance Group was $5.8 million and $11.5 million for the three and six months ended June 30, 2001, compared to $5.6 million and $11.2 million for the same periods in 2000. The increases in operating income were primarily due to premium growth, which outpaced higher losses and expenses, and lower dividends to policyholders, partially offset by lower net investment income.

The PMA Insurance Group Excluding Run-off Operations

Premiums

	Three Months Ended June 30,						Six Months Ended June 30,
(dollar amounts in thousands)	2001			2000			2001			2000


Workers' compensation and integrated disability:
Direct premiums written	$	54,394		$	43,180		$	162,486		$	120,655
Premiums assumed		920			1,277			1,798			1,633
Premiums ceded		(6,809	)		(8,277	)		(12,928	)		(19,060	)

Net premiums written	$	48,505		$	36,180		$	151,356		$	103,228


Commercial Lines:
Direct premiums written	$	20,132		$	18,588		$	53,356		$	45,340
Premiums assumed		618			193			1,002			743
Premiums ceded		(7,634	)		(6,026	)		(16,228	)		(12,930	)

Net premiums written	$	13,116		$	12,755		$	38,130		$	33,153


Total:
Direct premiums written	$	74,526		$	61,768		$	215,842		$	165,995
Premiums assumed		1,538			1,470			2,800			2,376
Premiums ceded		(14,443	)		(14,303	)		(29,156	)		(31,990	)

Net premiums written	$	61,621		$	48,935		$	189,486		$	136,381

Direct workers’ compensation and integrated disability premiums written increased by $11.2 million and $41.8 million for the three and six months ended June 30, 2001 primarily due to rate increases and, to a lesser extent, an increase in the level of workers’ compensation risks underwritten. Direct writings of commercial lines of business other than workers’ compensation, such as commercial auto, general liability, umbrella, multi-peril and commercial property lines (collectively, “Commercial Lines”), increased by $1.5 million and $8.0 million for the three and six months ended June 30, 2001, compared to the same periods in 2000, primarily due to rate increases for commercial auto and commercial multi-peril lines.

The change in premiums ceded reflects decreases of $1.5 million and $6.1 million in premiums ceded for workers’ compensation for the three months and six months ended June 30, 2001, respectively, compared to the same periods in 2000. This was a result of The PMA Insurance Group increasing its net retention by adding a deductible limit of approximately $10 million to its workers’ compensation reinsurance program, effective January 1, 2001. Offsetting these decreases were higher premiums ceded for Commercial Lines of $1.6 million and $3.3 million, as a result of the increase in direct premiums written.

Net premiums earned increased 20% and 29% for the three and six months ended June 30, 2001, respectively, compared to the same periods in 2000. Generally, trends in net premiums earned follow patterns similar to net premiums written adjusted for the customary lag related to the timing of premium writings within the year. Direct premiums are earned principally on a pro rata basis over the terms of the policies.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2001		2000		2001		2000


Loss and LAE ratio		73.7%		74.0%		73.6%		73.8%

Expense ratio:
Acquisition expenses		17.7%		18.0%		17.6%		18.4%
Operating expenses⁽¹⁾		11.4%		9.6%		10.5%		10.3%

Total expense ratio		29.1%		27.6%		28.1%		28.7%

Policyholders' dividend ratio		3.3%		6.4%		4.2%		7.2%


GAAP combined ratio ^(1)(2)(3)		106.1%		108.0%		105.9%		109.7%

(1) The expense ratio and the combined ratio exclude $2.0 million and $4.1 million for the three and six months ended June 30, 2001, respectively, and $1.8 million and $3.5 million for the three and six months ended June 30, 2000, respectively, for direct expenses related to service revenues, which are not included in premiums earned.
(2) The combined ratio computed on a GAAP basis is equal to losses and LAE, plus acquisition expenses, operating expenses and policyholders’ dividends, all divided by net premiums earned.
(3) The GAAP combined ratios for The PMA Insurance Group including the Run-off Operations were 110.2% and 111.5% for the three and six months ended June 30, 2000, respectively.

The loss and LAE ratios for the three and six months ended June 30, 2001, were essentially level with the same periods last year. The PMA Insurance Group did not experience any prior year development for the three months ended June 30, 2001, and favorable prior year development was $214,000 for the six months ended June 30, 2001. Favorable prior year development was $2.2 million and $2.7 million for the same periods in 2000. The favorable prior year development in both years reflects better than expected loss experience from rent-a-captive workers’ compensation business; the 2000 year also reflects better than expected loss experience from loss-sensitive workers’ compensation business. Policyholders’ dividends for rent-a-captive business and premium adjustments for loss-sensitive business have substantially offset this favorable prior year development.

The loss and LAE ratio is negatively impacted by accretion of discount on prior year reserves and favorably impacted by setting up discount for current year reserves. The net of these is referred to as net discount accretion. The setting up of discount exceeded the accretion of discount on prior year reserves by $28,000 and $13,000 for the three and six months ended June 30, 2001, respectively. The accretion of discount on prior year reserves exceeded the setting up of discount by $172,000 and $556,000 for the same periods last year. The decline in net discount accretion reflects the increase in workers’ compensation writings during 2001, compared to 2000, and favorably impacts the loss and LAE ratio by 0.3 points and 0.5 points, respectively.

Overall, the GAAP expense ratio decreased by 0.6 points for the six months ended June 30, 2001, compared to the same period in 2000, due to growth in net premiums earned that outpaced the increase in expenses. The GAAP expense ratio increased by 1.5 points for the three months ended June 30, 2001, compared to the same period in 2000, primarily due to an increase in expenses in the second quarter of 2001.

The policyholders’ dividend ratio was 3.3% and 4.2% for the three and six months ended June 30, 2001, respectively, compared to 6.4% and 7.2% for the same periods last year. Under policies that are subject to dividend plans, the customer may receive a dividend based upon loss experience during the policy period. The decreases in the policyholders’ dividend ratio occurred primarily because The PMA Insurance Group has sold less business under dividend plans in the three and six months ended June 30, 2001, compared to the same periods in 2000, and has written business under lower paying dividend plans in 2001, compared to 2000.

Net Investment Income

Net investment income was $10.0 million and $19.7 million for the three and six months ended June 30, 2001, compared to $10.6 million and $21.8 million for the same periods in 2000. The decrease in net investment income primarily reflects a lower asset base resulting from the paydown of loss reserves from prior accident years.

Caliber One

Summarized financial results of Caliber One are as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
(dollar amounts in thousands)	2001		2000			2001			2000


Net premiums written	$	28,117	$	(316	)	$	31,548		$	9,358


Net premiums earned	$	19,788	$	6,470		$	20,190		$	12,241
Net investment income		666		793			1,353			1,997

Operating revenues		20,454		7,263			21,543			14,238


Losses and LAE		15,470		6,881			37,332			13,100
Acquisition and operating expenses		4,927		900			6,467			3,929

Total losses and expenses		20,397		7,781			43,799			17,029


Pre-tax operating income (loss)	$	57	$	(518	)	$	(22,256	)	$	(2,791	)

Caliber One recorded pre-tax operating income of $57,000 for the three months ended June 30, 2001, and a pre-tax operating loss of $22.3 million for the six months ended June 30, 2001, compared to pre-tax operating losses of $518,000 and $2.8 million for the same periods in 2000. The improvement in pre-tax operating results for the three months ended June 30, 2001, compared to the same period last year, primarily reflects a lower underwriting loss. The increase in pre-tax operating losses for the six months ended June 30, 2001, compared to the same period in 2000, reflects higher underwriting losses recorded in the first quarter of 2001, including $17.8 million of net unfavorable prior year loss development in the 1999 and 2000 accident years.

Premiums

	Three Months Ended June 30,					Six Months Ended June 30,
(dollar amounts in thousands)	2001		2000			2001		2000


Gross premiums written:
Property	$	15,797	$	10,898		$	36,758	$	21,545
Products liability		7,346		7,031			12,537		12,493
General liability		5,486		2,584			9,997		5,894
Professional liability		845		(2,163	)		1,580		8,454
Other liability		1,938		5,618			3,266		8,790

Total	$	31,412	$	23,968		$	64,138	$	57,176


Net premiums written:
Property	$	13,450	$	535		$	20,985	$	3,941
Products liability		3,732		2,050			4,547		6,068
General liability		2,246		487			4,026		797
Professional liability		7,870		(5,049	)		340		(4,203	)
Other liability		819		1,661			1,650		2,755

Total	$	28,117	$	(316	)	$	31,548	$	9,358

Gross premiums written increased $7.4 million and $7.0 million for the three and six months ended June 30, 2001, compared to the same periods last year. Gross premiums written in 2001 reflect growth in property and certain classes of liability lines of business due to growth in policy volume as well as rate increases, offset by the Company’s decision in 2000 to exit from certain segments of the professional liability line of business, primarily the nursing homes class, and from certain commercial automobile lines of business (included in “Other liability” in the table above). Mid-term policy cancellations in the nursing homes class of business also impacted premiums written for the professional liability line of business in 2000.

Net premiums written increased $28.4 million and $22.2 million in the three and six months ended June 30, 2001, respectively, compared to the same periods last year. Net premiums written in 2000 included substantial ceded premiums related primarily to professional liability, commercial automobile and property catastrophe exposures. Net property premiums written increased $12.9 million and $17.0 million for the three and six months ended June 30, 2001, respectively, compared to the same periods last year, reflecting a reduction of $8.2 million in premiums ceded in the second quarter of 2001 as a result of a change in reinsurance structure. Net premiums written for the professional liability line of business for the second quarter of 2001 include an adjustment of $7.5 million for the re-estimation of premium cessions in 2001, which increased net premiums written.

Effective July 1, 2001, Caliber One changed its property reinsurance protection from a pro rata structure with a limit of $5.0 million and a retention of $500,000, to an excess of loss structure with a limit of $2.5 million and a retention of $500,000 per risk and per occurrence. The Company purchases facultative reinsurance for exposures in excess of these limits up to a maximum capacity of $25.0 million.

Net premiums earned increased $13.3 million and $7.9 million for the three and six months ended June 30, 2001, respectively, compared to the same periods in 2000. Generally, trends in net premiums earned follow patterns similar to net premiums written adjusted for the customary lag related to the timing of premium writings within the year.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2001		2000		2001		2000


Loss and LAE ratio		78.2%		106.4%		184.9%		107.0%

Expense ratio:
Acquisition expenses		15.4%		-20.6%		12.8%		-3.3%
Operating expenses		9.5%		34.5%		19.2%		35.4%

Total expense ratio		24.9%		13.9%		32.0%		32.1%

GAAP combined ratio		103.1%		120.3%		216.9%		139.1%

Caliber One’s incurred losses and LAE were $15.5 million and $37.3 million for the three and six months ended June 30, 2001, respectively. The losses and LAE in 2001 include net unfavorable prior year development of $17.8 million, which is net of losses of $12.0 million ceded to a third party reinsurer under an existing reinsurance contract covering the prior year loss development. These losses reflect higher than expected claim frequency and severity that emerged in the first quarter of 2001 on certain casualty and property lines of business, primarily professional liability policies for the nursing homes class of business. As a result of its first quarter 2001 reserve review, Caliber One revised its estimate of ultimate expected claim activity and, accordingly, increased its estimate of ultimate losses for accident years 1999 and 2000.

Caliber One’s loss and LAE ratio for the six months ended June 30, 2000 reflects higher than expected losses and LAE in the professional liability, commercial automobile, general liability and property lines of business. The loss and LAE ratio for the three months ended June 30, 2001 reflects improved results in most liability classes of business, partially offset by higher than expected losses in property lines. The loss and LAE ratio for 2000 reflects the ceding of a substantial amount of losses and LAE from the professional liability and commercial automobile lines of business to reinsurers.

Acquisition expenses for the three and six months ended June 30, 2001 increased $4.4 million and $3.0 million, compared to the same periods last year, which reflects higher levels of earned premiums in 2001. In addition, acquisition expenses in the second quarter of 2001 include an adjustment which increased acquisition expenses by $2.3 million for the re-estimation of ceding commissions related to premium cessions in 2001. The acquisition expense ratios for 2000 reflect ceding commissions associated with the reinsurance purchased for professional liability and commercial automobile lines of business.

For the three and six months ended June 30, 2001, operating expenses were $1.9 million and $3.9 million, respectively, which is a decrease of $356,000 and $456,000 compared to the same periods last year, reflecting the substantial completion of Caliber One’s infrastructure development in 2000.

Net Investment Income

Net investment income was $666,000 and $1.4 million for the three and six months ended June 30, 2001, respectively, compared to $793,000 and $2.0 million for the same periods in 2000. The decrease in net investment income for the quarter ended June 30, 2001, compared to the same period last year, is primarily due to lower yield on invested assets. The decrease for the six months ended June 30, 2001, compared to the same period in 2000, is mainly due to an increase in interest charged on funds held reinsurance contracts.

Loss Reserves

Unpaid losses and LAE reflect management’s best estimate of future amounts needed to pay claims and related settlement costs with respect to insured events which have occurred, including events that have not been reported to the Company. In many cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an

insured loss, the reporting of the loss to the Company and the Company’s payment of that loss. In general, liabilities for reinsurers become known more slowly than for primary insurers and are subject to more unforeseen development and uncertainty. As part of the process for determining the Company’s unpaid losses and LAE, historical data is reviewed and consideration is given to the impact of various factors, such as legal developments, changes in social attitudes and economic conditions.

Management believes that its unpaid losses and LAE are fairly stated at June 30, 2001. However, estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates and judgments using data currently available. As additional experience and data become available regarding claims payment and reporting patterns, legislative developments, regulatory trends on benefit levels for both medical and indemnity payments, and economic conditions, the estimates are revised accordingly. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at June 30, 2001, the related adjustments could have a material adverse effect on the Company’s financial condition, results of operations and liquidity.

See the discussion under Losses and Expenses on page 20 for additional information regarding Caliber One’s first quarter 2001 loss reserve increase.

For additional discussion of loss reserves and reinsurance, see pages 37 to 39 of the Management’s Discussion and Analysis included in the Company’s 2000 Annual Report to Shareholders, as well as pages 14 to 20 of the Company’s Form 10-K for the year ended December 31, 2000.

Corporate and Other

The Corporate and Other segment includes unallocated investment income, expenses, including debt service, as well as the results of certain of the Company’s real estate properties. Corporate and Other recorded a pre-tax operating loss of $4.3 million for the three months ended June 30, 2001 and pre-tax operating income of $98,000 for the six months ended June 30, 2001, compared to pre-tax operating losses of $5.6 million and $10.7 million for the same periods in 2000. During the first quarter of 2001, the Company sold certain real estate properties for net proceeds totaling $14.4 million, resulting in a pre-tax gain of $9.8 million, which is recorded in other revenues. Additionally, Corporate and Other benefited from declines of $1.2 million and $2.1 million in interest expense for the three and six months ended June 30, 2001, compared to the same periods last year, due primarily to the $38.0 million paydown of outstanding debt early in the first quarter of 2001.

Liquidity and Capital Resources

Liquidity is a measure of an entity’s ability to secure sufficient cash to meet its contractual obligations and operating needs. At the holding company level, PMA Capital’s primary sources of liquidity are dividends from subsidiaries, net tax payments received from subsidiaries and borrowings. The Company utilizes cash to pay debt obligations, including interest costs; dividends to shareholders; taxes to the Federal government; and corporate expenses. In addition, the Company utilizes cash resources to repurchase shares of its common stock and to capitalize subsidiaries from time to time.

The Company’s domestic insurance subsidiaries’ ability to pay dividends to the holding company is limited by the insurance laws and regulations of Pennsylvania. Under Pennsylvania laws and regulations, dividends may not be paid without prior approval of the Pennsylvania Insurance Commissioner in excess of the greater of (i) 10% of policyholders’ surplus as of the end of the preceding year or (ii) statutory net income for the preceding year, but in no event to exceed statutory unassigned surplus. As of December 31, 2000, approximately $53 million of dividends are available to be paid to PMA Capital from PMA Capital Insurance Company (“PMACIC”) without prior approval of the Pennsylvania Insurance Commissioner during 2001. As of December 31, 2000, The PMA Insurance Group can pay up to $20.1 million in dividends to PMACIC during 2001. Under Delaware law (which is substantially similar to Pennsylvania law with respect to dividends), Caliber One can pay up to $5.5 million in dividends to PMACIC in 2001. Dividends received from subsidiaries were $7.0 million and $14.0 million for the three and six months ended June 30, 2001, respectively, compared to $8.1 million and $12.8 million for the same periods in 2000.

Net tax payments received from subsidiaries were $3.4 million and $6.3 million for the three and six months ended June 30, 2001, compared to $6.8 million and $11.2 million for the same periods in 2000.

The Company had $125.0 million and $163.0 million outstanding under its existing Revolving Credit Facility (“Credit Facility”) at June 30, 2001 and December 31, 2000, respectively. In accordance with the terms of the Credit Facility, the Company repaid $38.0 million on January 2, 2001 thereby reducing the outstanding debt to $125.0 million, which is the maximum amount PMA Capital can borrow under the Credit Facility. The Credit Facility matures as follows: $62.5 million on December 31, 2001 and $62.5 million on December 31, 2002. During the three and six months ended June 30, 2001, the Company incurred $1.8 million and $4.0 million of interest expense, compared to $3.0 million and $6.0 million for same periods in 2000.

In addition to the Credit Facility, the Company maintains a committed facility of $67.5 million for letters of credit (the “Letter of Credit Facility”). The Letter of Credit Facility is utilized primarily for securing reinsurance obligations of the Company’s insurance subsidiaries. As of June 30, 2001, the Company had $25.2 million outstanding under the Letter of Credit Facility, compared to $40.1 million at December 31, 2000.

The Company paid dividends to shareholders of $2.2 million and $4.5 million, respectively, during the three and six months ended June 30, 2001, compared to $1.9 million and $3.8 million for the same periods last year. Dividends paid to shareholders increased in 2001, compared to 2000, due to an increase in the annual dividend rate to $0.42 from $0.36 commencing with the fourth quarter 2000 dividend payment. Partially offsetting the higher dividend rate were fewer shares outstanding due to share repurchase activities. PMA Capital’s dividends to shareholders are restricted by its debt agreements. Based upon the terms of the Credit Facility, under the most restrictive debt covenant, PMA Capital would be able to pay dividends of approximately $9.5 million in 2001.

The Company repurchased 92,000 shares at a total cost of $1.6 million during the first six months of 2001. Since the inception of its share repurchase program in 1998, PMA Capital has repurchased a total of approximately 3.6 million shares at a cost of $69.1 million, which represents approximately 15% of the outstanding shares. PMA Capital’s remaining share repurchase authorization at June 30, 2001 is $20.9 million. Decisions regarding share repurchases are subject to prevailing market conditions and an evaluation of the costs and benefits associated with alternative uses of capital.

Management believes that the Company’s available sources of funds will provide sufficient liquidity to meet its short-term and long-term obligations. In addition, management currently believes that its existing capital structure is appropriate. However, management continually monitors the capital structure in light of developments in its businesses, and the present assessment could change as management becomes aware of new opportunities and challenges in the Company’s business.

Other Matters

The Company’s businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to restrict insurance pricing and the application of underwriting standards and reinterpretations of insurance contracts long after the policies were written in an effort to provide coverage unanticipated by the Company. The eventual effect on the Company of the changing environment in which it operates remains uncertain.

Comparison of SAP and GAAP Results

Results presented in accordance with GAAP vary in certain respects from statutory accounting practices prescribed or permitted by the Pennsylvania Insurance Department and the Delaware Insurance Department, (collectively “SAP”). Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of National Association of Insurance Commissioners (“NAIC”) publications. Permitted SAP encompasses all accounting practices that are not prescribed. Effective December 31, 2000, the Company’s insurance subsidiaries implemented the NAIC Codification of Statutory Accounting Principles, resulting in an increase of $20.5 million in its statutory surplus.

Recent Accounting Pronouncements

Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as “derivatives”) and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. The Company does not have any derivative instruments that are impacted by the accounting requirements of SFAS No. 133 and the Company does not currently participate in any hedging activities. Accordingly, the adoption of SFAS No. 133 did not have a material impact on the Company’s financial condition, results of operations or liquidity.

Cautionary Statements

Except for historical information provided in Management’s Discussion and Analysis and otherwise in this report, statements made throughout, including in the Business Outlook section are forward-looking and contain information about financial results, economic conditions, trends and known uncertainties. These forward-looking statements are based on currently available financial, competitive and economic data and the Company’s current operating plans based on assumptions regarding future events. The Company’s actual results could differ materially from those expected by the Company’s management. The factors that could cause actual results to vary materially, some of which are described with the forward-looking statements, include, but are not limited to:

•

changes in general economic conditions, including the performance of financial markets, interest rates and the level of unemployment;

•

regulatory or tax changes, including changes in risk-based capital or other regulatory standards that affect the cost of or demand for the Company’s products or otherwise affect the ability of the Company to conduct its business;

•

competitive conditions resulting from the significant amount of capital in the property and casualty insurance marketplace that may affect the level of rate adequacy related to the amount of risk undertaken and that may influence the sustainability of adequate rate changes;

•

the effect of changes in workers' compensation statutes and their administration;

•

the Company's ability to predict and effectively manage claims related to insurance and reinsurance policies;

•

the lowering or loss of one or more of the financial strength or claims paying ratings of the Company's insurance subsidiaries;

•

adequacy of reserves for claim liabilities;

•

adverse property and casualty loss development for events the Company insured in prior years;

•

adequacy and collectibility of reinsurance purchased by the Company;

•

severity of natural disasters and other catastrophes;

•

reliance on key management; and

•

other factors disclosed from time to time in the Company’s most recent Forms 10-K, 10-Q and 8-K filed by the Company with the Securities and Exchange Commission.

Investors should not place undue reliance on any such forward-looking statements. Unless otherwise stated, the Company disclaims any current intention to update forward-looking information and to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Part II. Other Information

Item 4. Submission of Matters to a Vote of Security Holders

The Company’s 2001 Annual Meeting of Shareholders (“Annual Meeting”) was held on April 20, 2001. At the Annual Meeting, the shareholders acted upon the following matters:

Proposal to elect five nominees as members of the Company’s Board of Directors to serve for terms expiring at the 2004 Annual Meeting and until their successors are elected:

Name of Nominee	Votes Cast For	Votes Withheld
Thomas J. Gallen	19,414,842	11,561
Louis N. McCarter III	18,923,042	503,361
John W. Miller, Jr., M.D.	18,972,742	453,661
Edward H. Owlett	18,918,642	507,761
Louis I. Pollock	18,923,042	503,361

Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Independent Accountants was approved as follows:

	Total Votes
Votes in favor	19,415,867
Votes against	10,536
Abstentions	-

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The Exhibits are listed in the Exhibit Index on page 27.

(b) Report on Form 8-K filed during the quarter ended June 30, 2001:

During the quarterly period ended June 30, 2001, the Company filed the following Report on Form 8-K:

–

dated May 2, 2001, Items 5 and 9 – containing a news release regarding its first quarter 2001 results and informing investors that its First Quarter 2001 Statistical Supplement is available on its website.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		PMA CAPITAL CORPORATION


Date: August 10, 2001		By: /s/ Francis W. McDonnell

		Francis W. McDonnell
		Senior Vice President,
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

Exhibit Index

Exhibit No.	Description of Exhibit	Method of Filing

(10)	Description of 2001 stock appreciation rights grants	Filed herewith

(12)	Computation of Ratio of Earnings to Fixed Charges	Filed herewith