10-K

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

FORM 10-K

(MARK ONE)
/X/   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.)
1735 Market Street, Suite 2800      Philadelphia, Pennsylvania	19103-7590
(Address of principal executive offices)	(Zip code)
Registrant’s telephone number, including area code: (215) 665-5046
Securities registered pursuant to Section 12(b): None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $5.00 per share
(Title of Class)
Rights to Purchase Preferred Stock
(Title of Class)

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 / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of February 28, 2002, was $445,180,306.

There were 31,211,856 shares outstanding of the registrant’s Class A Common stock, $5 par value per share, as of the close of business on February 28, 2002.

DOCUMENTS INCORPORATED BY REFERENCE:

(1) Parts I, II and IV of this Form 10-K incorporate by reference portions of the Annual Report to Shareholders for the year ended December 31, 2001, as indicated herein.

(2) Part III of this Form 10-K incorporates by reference portions of the registrant’s proxy statement to be dated March 22, 2002 for the 2002 Annual Meeting of Shareholders.

INDEX

PART I	Page
Item 1    Business	1
Company Overview	1
PMA Re	3
The PMA Insurance Group	7
Caliber One	12
Reinsurance and Retrocessional Protection	14
Loss Reserves	16
Investments	20
Competition	21
Regulatory Matters	23
Employees	26
Glossary of Selected Insurance Terms	27
Risk Factors	30
Item 2    Properties	35
Item 3    Legal Proceedings	35
Item 4    Submission of Matters to a Vote of Security Holders	35
Executive Officers of the Registrant	35
PART II
Item 5    Market for the Registrant's Common Equity and Related Shareholder Matters	36
Item 6    Selected Financial Data	36
Item 7    Management's Discussion and Analysis of Financial Condition
and Results of Operations	36
Item 7A Quantitative and Qualitative Disclosure About Market Risk	37
Item 8    Financial Statements and Supplementary Data	37
Item 9    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure	37
PART III
Item 10   Directors and Executive Officers of the Registrant	37
Item 11   Executive Compensation	37
Item 12   Security Ownership of Certain Beneficial Owners and Management	37
Item 13   Certain Relationships and Related Transactions	37
PART IV
Item 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K	38
Signatures	39
Index to Financial Statement Schedules	FS-1
Index to Exhibits	E-1

PART I

The Business Section and other parts of this Form 10-K contain forward-looking statements that involve inherent risks and uncertainties. Words such as “believes,” “estimates,” “anticipates,” “expects” or similar words are intended to identify forward-looking statements. Our actual results may differ materially from the projected results discussed in the forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in the Risk Factors beginning on page 30 and in the “Cautionary Statements” on page 48 of our Management’s Discussion and Analysis (“MD&A”) section of our 2001 Annual Report to Shareholders (“Annual Report”) that has been incorporated by reference into Part II, Item 7 of this Form 10-K.

Item 1. Business

COMPANY OVERVIEW

        We are an insurance holding company focused on specialty insurance markets where we believe our underwriting expertise, experienced management and financial strength allow us to produce attractive returns. Through our operating subsidiaries, we are a leading provider of property and casualty reinsurance and a regionally focused provider of commercial property and casualty insurance. Our primary insurance business has been in operation since 1915 and our reinsurance operations began writing business in 1969. At December 31, 2001, we had total assets of approximately $3.8 billion and shareholders’ equity of approximately $612 million.

        We conduct our insurance and reinsurance business through three specialty operating segments:

 • Our reinsurance operations, PMA Re, offer excess of loss and pro rata property and casualty reinsurance protection mainly through reinsurance brokers. PMA Re focuses on risk-exposed business, which we believe allows us to best utilize our underwriting and actuarial expertise.

 • Our property and casualty insurance operations, The PMA Insurance Group, write workers’compensation, integrated disability and, to a lesser extent, other standard lines of commercial insurance, primarily in the eastern part of the United States. Currently, approximately 90% of The PMA Insurance Group’s business is produced through independent agents and brokers.

 • Our specialty property and casualty operations, Caliber One, write excess and surplus lines of business throughout the United States, generally through surplus lines brokers.

        In addition, we have a Corporate and Other segment, which includes unallocated investment income and expenses, including debt service, as well as the results of certain of our real estate properties.

        Financial information in the tables that follow is presented in conformity with generally accepted accounting principles (“GAAP”), unless otherwise indicated. Certain reclassifications have been made to prior periods’ financial information to conform to the 2001 presentation. Revenues, pre-tax operating income (loss) and assets attributable to each of our operating segments and our Corporate and Other segment for the last three years are set forth in Note 14 to our consolidated financial statements for the year ended December 31, 2001 (“Financial Statements”) included in our Annual Report.

        Our gross and net premiums written by segment were as follows:

	2001						2000						1999						2001 as    % of Total
(dollar amounts in thousands)	Gross			Net			Gross			Net			Gross			Net			Gross		Net
PMA Re	$	476,591		$	360,604		$	394,823		$	261,505		$	343,607		$	278,998			47%		47%
The PMA Insurance Group		416,695			355,547			335,466			268,839			295,441			233,713			41%		46%
Caliber One		124,335			53,674			93,405			16,043			93,417			51,237			12%		7%
Corporate and Other		(767	)		(767	)		(2,431	)		(832	)		(2,412	)		(438	)		—		—
Total	$	1,016,854		$	769,058		$	821,263		$	545,555		$	730,053		$	563,510			100%		100%

1

        Property and casualty insurance and reinsurance companies provide loss protection to insureds in exchange for premiums. If earned premiums exceed the sum of losses and loss adjustment expenses (which we refer to as LAE), acquisition expenses, operating expenses and policyholders’ dividends, then underwriting profits are realized. When earned premiums do not exceed the sum of these items, the result is an underwriting loss.

        The “combined ratio” is a frequently used measure of property and casualty underwriting performance. The combined ratio computed on a GAAP basis is equal to losses and LAE, plus acquisition expenses, operating expenses and policyholders’ dividends, where applicable, all divided by net premiums earned. Thus, a combined ratio of under 100% reflects an underwriting profit. The combined ratios of our operating segments were as follows:

	2001		2000		1999
PMA Re	114.2	%	123.3	%	102.5	%
The PMA Insurance Group	105.5	%	111.7	%	115.4	%
Caliber One	163.3	%	139.7	%	109.6	%

        Because time normally elapses between the receipt of premiums and the payment of claims and certain related expenses, we invest the available premiums. Underwriting results do not include investment income from these funds. Given the long-tail nature of our liabilities, we believe that the operating ratios are also important in evaluating our business. The operating ratio is the combined ratio less the investment income ratio, which is net investment income divided by premiums earned. The operating ratios of our operating segments were as follows:

	2001		2000		1999
PMA Re	100.9	%	102.9	%	82.9	%
The PMA Insurance Group	94.1	%	92.7	%	92.7	%
Caliber One	156.5	%	124.3	%	99.7	%

A glossary of selected insurance terms used in this Form 10-K is included on pages 27 to 29.

2

PMA RE

Background

        Our reinsurance operations conduct business mainly in the broker market. We offer excess of loss and pro rata property and casualty reinsurance protection, with an emphasis on risk-exposed, excess of loss coverages. We believe that these types of coverages allow us to best apply our actuarial and underwriting expertise to price our products and to control our loss exposures. PMA Re provides treaty reinsurance on both a traditional and finite risk basis, and facultative reinsurance. Since 1999, PMA Re’s mix of business has included an increasing amount of finite risk business, which offers a more predictable level of profitability, and hence, lower volatility in earnings. During that period, the contribution to net premiums written of PMA Re’s traditional treaty business declined as PMA Re non-renewed traditional treaty business that did not meet our pricing guidelines. However, we now see significant opportunities for growth in our traditional reinsurance business, and we believe that demand for our finite and facultative products will remain strong.

        PMA Re competes on the basis of its ability to offer specialized products to its clients, its long-term relationships with brokers and insurance company clients, and its prompt and responsive service. PMA Re focuses on providing reinsurance to small- to medium-sized insurers (defined as insurers with statutory surplus of less than $500 million). PMA Re believes that its actuarial and underwriting expertise is important to ceding companies in that size category and accordingly, it can build long-term relationships with its ceding companies. As of December 31, 2001, PMA Capital Insurance Company, PMA Re’s insurance entity, was the 8^th largest broker market reinsurance company in the United States in terms of statutory capital and surplus, according to data provided by the Reinsurance Association of America.

        In the broker reinsurance market, the products (reinsurance coverages) are distributed to the ultimate customer (ceding companies) through reinsurance intermediaries, known as brokers. In exchange for providing such distribution services, the brokers are paid commissions, known as brokerage, which are typically based upon a percentage of the premiums ceded from the ceding companies to the reinsurer under a particular contract. The broker reinsurance market differs from the direct reinsurance market in that direct reinsurers maintain their own sales forces and distribute their products directly to their ceding company clients.

        Late in 2000, PMA Re invested in a Lloyd’s of London managing general agency, Cathedral Capital, and commencing in 2001, we began participating in the results of Syndicate 2010. The Lloyd’s operation primarily writes property and aviation reinsurance.

Products

        Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts. Reinsurance provides ceding companies with several benefits: reducing exposure on individual risks, protecting against catastrophic losses, stabilizing underwriting results and maintaining acceptable capital ratios.

        PMA Re provides reinsurance coverage primarily under two arrangements: treaty and facultative. Typically, in treaty reinsurance, the primary insurer or ceding company is obligated to cede and the reinsurer is obligated to accept a specified portion of all agreed upon types or categories of risks originally written by the primary insurer or ceding company. Facultative reinsurance is a form of reinsurance coverage that is placed on a risk-by-risk basis, and the reinsurer retains the right to accept or reject each individual risk submitted by the ceding company. Of PMA Re’s total net premiums written during 2001, 98% were treaty, and 2% were facultative.

        To better serve its brokers and ceding companies, PMA Re has established four distinct underwriting units, organized by class of business, which provide more specialized expertise in each area. The Traditional-Treaty, Finite Risk and Financial Products, and Specialty-Treaty units provide treaty reinsurance coverage. The fourth unit, Facultative, provides reinsurance on a facultative basis.

•  Traditional-Treaty: This underwriting unit writes general property and casualty business and emphasizes risk-exposed, excess of loss programs. Included in the client base for the Traditional unit are standard lines companies, some excess and surplus lines companies, and, to a lesser extent, non-traditional sources of business, such as self-insureds. The Traditional casualty portfolio includes general liability, umbrella, commercial automobile and workers’compensation. This unit presently writes more excess of loss business than pro rata business. Excess of loss reinsurance, sometimes called nonproportional reinsurance, generally indemnifies the reinsured against all or a specified portion of losses on underlying insurance policies in excess of a specified

3

dollar amount. With pro rata reinsurance, sometimes called proportional or participating reinsurance, the reinsurer shares a proportional part of the ceded insurance liability, premiums and losses of the ceding company.

The breakdown of the Traditional-Treaty unit’s net premiums written between excess of loss and pro rata reinsurance is as follows:

(dollar amounts in thousands)	2001			2000			1999
Excess of Loss	$	68,828	59%	$	63,455	47%	$	53,394	39%
Pro Rata		46,986	41%		71,269	53%		84,292	61%
Total Traditional-Treaty	$	115,814	100%	$	134,724	100%	$	137,686	100%

•   Finite Risk and Financial Products: In 1998, PMA Re made the strategic decision to broaden its product offerings by adding a finite risk underwriting unit to its traditional treaty reinsurance portfolio. This underwriting unit is charged with providing PMA Re’s clients with creative risk management solutions that complement their traditional reinsurance program. Under its finite risk covers, PMA Re assumes a measured amount of insurance risk in exchange for a specified margin. Our finite risk reinsurance covers typically include a combination of sub-limits and caps on the maximum gain or loss to PMA Re as the reinsurer. Many insurance companies have some form of finite protection as a permanent part of their reinsurance program. Examples of finite risk and financial risk products are aggregate stop-loss coverages, funded catastrophe coverages and financial quota share coverages.

These finite and financial risk products, in various formats, have been used by ceding companies for decades. PMA Re’s approach is to create customized risk management solutions for its clients. Our average account size is approximately $4 million. Although most of the Finite Risk and Financial Products unit’s business is related to domestic insurers, approximately $30 million of the unit’s gross premiums written for 2001 were generated from foreign insurers and reinsurers.

•  Specialty-Treaty: This unit underwrites business that falls outside the confines of our traditional property and casualty risks. These risks include directors’and officers’liability and errors and omissions, as well as all other forms of professional liability.

•  Facultative: This unit writes property and casualty reinsurance on an individual risk basis and on a program/semi-automatic basis, in which we agree to accept risks that fall within certain predetermined parameters. In addition to serving the facultative brokerage community, this unit strengthens PMA Re’s reputation as a full service reinsurer. Through its facultative property book, PMA Re emphasizes program/semi-automatic business. The facultative casualty focus is on general liability, umbrella and commercial automobile lines. Our Facultative unit’s emphasis in commercial automobile is on manufacturing, contracting and service fleets. This unit also reinsures a broad range of professional liability business, with an emphasis on directors’and officers’liability, and medical malpractice/hospital professional liability.

4

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

(dollar amounts in thousands)	2001						2000				1999
	Gross			Net			Gross		Net		Gross		Net
Finite Risk and Financial Products
Casualty	$	115,220		$	90,480		$	57,825	$	40,309	$	49,881	$	49,153
Property		128,110			118,296			50,007		47,736		19,854		20,149
Other		1,197			1,163			1,230		1,209		254		249
Total		244,527			209,939			109,062		89,254		69,989		69,551
Traditional - Treaty
Casualty		98,264			66,754			155,913		85,401		106,756		80,762
Property		71,668			47,674			67,742		48,752		72,209		55,436
Other		1,386			1,386			571		571		1,510		1,488
Total		171,318			115,814			224,226		134,724		180,475		137,686
Specialty - Treaty
Casualty		31,690			24,452			48,689		32,082		88,433		68,818
Property		2,093			1,403			1,531		1,229		—		—
Other		397			397			751		751		—		—
Total		34,180			26,252			50,971		34,062		88,433		68,818
Facultative
Casualty		21,498			4,917			6,450		95		1,590		380
Property		5,069			3,683			4,113		3,369		3,120		2,563
Other		(1	)		(1	)		1		1		—		—
Total		26,566			8,599			10,564		3,465		4,710		2,943
Total Casualty		266,672			186,603			268,877		157,887		246,660		199,113
Total Property		206,940			171,056			123,393		101,086		95,183		78,148
Total Other		2,979			2,945			2,553		2,532		1,764		1,737
Total Premiums Written	$	476,591		$	360,604		$	394,823	$	261,505	$	343,607	$	278,998

        As of December 31, 2001, traditional catastrophe covers accounted for approximately 2% of gross property premiums written. The per risk property programs written by PMA Re generally contain per occurrence limits and in some instances there is less catastrophe exposure either because of the locations of the insured values or the nature of the underlying exposures. In addition, PMA Re’s gross premiums written include approximately $70 million of funded catastrophe coverages written by the Finite Risk and Financial Products unit. These funded covers contain per occurrence and aggregate limits, as well as loss sensitive additional premium provisions in the event of a loss.

        However, as is common in property reinsurance, PMA Re is exposed to the possibility of loss from catastrophes due to the aggregation of losses. PMA Re actively manages this exposure through zonal management, minimizing writings of catastrophe business, and the purchase of retrocessional protection. See “Reinsurance and Retrocessional Protection” on page 14 for PMA Re’s catastrophe retrocessional program.

Distribution

        PMA Re operates primarily through the domestic broker reinsurance market. We believe that PMA Re has developed relationships with the major reinsurance brokers enabling it to gain access to a wide range of ceding companies with varying reinsurance and related service needs. Brokers that accounted for more than 10% of PMA Re’s gross premiums written in 2001 were as follows:

(dollar amounts in thousands)	Gross premiums written		% of total
Guy Carpenter		$   153,483		32%
Benfield Blanch		97,172		21%
Towers Perrin		70,758		15%
AON Reinsurance		57,835		12%

        As of December 31, 2001, PMA Re had approximately 175 unaffiliated clients, with no individual client accounting for more than 10% of gross premiums written in 2001. Approximately 75% of PMA Re’s gross premiums written in 2001 was from small- to medium-sized insurers (defined as insurers with statutory surplus of up to $500 million).

5

Underwriting

        In reinsurance, underwriting involves the selection of risks and determining an adequate price given expected losses and estimated volatility of such losses. Maintaining underwriting and pricing discipline is critical to the maintenance of acceptable operating results.

        PMA Re’s underwriting process has two principal aspects — underwriting the specific program/risk submission and underwriting the ceding company. Underwriting the specific program/risk to be reinsured involves, in addition to pricing, a review of the type of account, the total risk and the ceding company’s coverages. Underwriting the ceding company involves an evaluation of the expected future performance of the ceding company through an examination of that company’s management, financial strength, claims handling and underwriting abilities. PMA Re may conduct underwriting and claim reviews at the offices of prospective ceding companies before entering into a treaty, as well as throughout the life of the reinsurance contract.

        PMA Re’s underwriters and actuaries work together to evaluate reinsurance programs. Using the information provided by the broker, the actuaries employ pricing models to estimate the ultimate loss exposure to the treaty. The pricing models employ various experience-rating and exposure-rating techniques and are tailored in each case to the risk exposures underlying each treaty. The underwriters then analyze the results of the pricing models with the terms and conditions being offered to determine PMA Re’s selected price.

        In underwriting excess of loss business, PMA Re has typically sought to write treaties that are risk exposed within the original policy limits of the ceding company. We believe these layers generally lend themselves more effectively to actuarial pricing techniques. In underwriting pro rata business, PMA Re attempts to ensure proper pricing levels are being achieved by the ceding company by reviewing the ceding company’s data, including actuarial reports, and examining their underlying rate structure.

        PMA Re is attempting to exclude coverage of losses due to future terrorist acts from its assumed reinsurance policies. However, if a client, because of the types of coverages that they are writing, cannot accept a full terrorism exclusion and PMA Re still desires to write the particular business, its underwriters will attempt to include terms and conditions in the reinsurance contracts intended to limit PMA Re’s exposure to losses from future terrorist acts, such as occurrence caps, aggregate limits and specific terrorism-event exclusions. Further, PMA Re’s underwriters also review and monitor geographic concentrations of underlying risks along with the classes of business and industries to be reinsured in deciding whether to write the business.

Claims Administration

        PMA Re’s claims department analyzes reported claims, establishes individual claim reserves, pays claims, provides claims-related services to clients, audits the claims activities of selected clients and assists in the underwriting process by evaluating the claims departments of selected prospective clients. The claims department’s evaluation of claims activity includes reviewing loss reports received from ceding companies to confirm that claims are covered under the terms of the relevant reinsurance contract, establishing reserves on an individual case basis and monitoring the adequacy of those reserves. The claims department monitors the progress and ultimate outcome of the claims to determine that subrogation, salvage and other cost recovery opportunities have been adequately explored. The claims department also performs these functions in coordination with the actuarial and underwriting departments.

        In addition to evaluating and adjusting claims, the claims department conducts claims audits at the offices of selected prospective ceding companies. Satisfactory audit results are required in order for reinsurance coverage to be written or continued by PMA Re. The claims department also conducts annual claims audits for many current and former client ceding companies.

        PMA Re’s claims department uses electronic data interchange where trading partner capabilities exist to maintain the timeliness of claims remittances and processing efficiency.

6

THE PMA INSURANCE GROUP

Background

        The PMA Insurance Group emphasizes its traditional core business, workers’ compensation insurance and integrated disability. We also provide a range of other commercial insurance products to our workers’ compensation customers, including commercial automobile and multi-peril coverages, general liability and related services. The PMA Insurance Group focuses primarily on middle-market and large accounts operating in our principal marketing territory concentrated in the eastern part of the United States. Currently, approximately 90% of this business is produced through independent agents and brokers.

        The PMA Insurance Group competes on the basis of its ability to offer tailored workplace disability management solutions to its clients, its long-term relationships with its agents and brokers, its localized service and its reputation as a high-quality claims and risk control service provider.

        The PMA Insurance Group believes it has enhanced its ability to handle multi-state clients based in its operating territory but which have operations in other parts of the U.S. by being authorized to do business in 52 jurisdictions (including Puerto Rico and the District of Columbia) for workers’ compensation, general liability and commercial automobile. The PMA Insurance Group intends to continue writing other lines of property and casualty insurance, but generally only if such writings are supported by its core workers’ compensation business. The PMA Insurance Group is one of the leading providers of integrated disability products with 136 accounts as of December 31, 2001 that generated approximately $41 million in combined workers’ compensation and integrated disability premium in 2001. The PMA Insurance Group’s primary insurance subsidiaries (Pennsylvania Manufacturers’ Association Insurance Company, Manufacturers Alliance Insurance Company and Pennsylvania Manufacturers Indemnity Company) will sometimes be referred to as the Pooled Companies because they share results under an intercompany pooling agreement.

Products

        The PMA Insurance Group’s premiums written were as follows:

(dollar amounts in thousands)	2001		2000		1999
Gross premiums written:
Workers' compensation and integrated disability	$	321,942	$	250,237	$	214,706
Commercial multi-peril		34,227		38,325		38,483
Commercial automobile		50,474		40,398		33,372
Other		10,052		6,506		8,880
Total	$	416,695	$	335,466	$	295,441
Net premiums written:
Workers' compensation and integrated disability	$	292,171	$	210,870	$	183,806
Commercial multi-peril		22,360		27,317		26,322
Commercial automobile		35,985		29,178		21,610
Other		5,031		1,474		1,975
Total	$	355,547	$	268,839	$	233,713

7

Workers’ Compensation Insurance

        All states require employers to provide workers’ compensation benefits to their employees for injuries and occupational diseases arising out of employment, regardless of whether such injuries result from the employer’s or the employee’s negligence. Employers may insure their workers’ compensation obligations or, subject to regulatory approval, self-insure their liabilities. Workers’ compensation statutes require that a policy cover three types of benefits: medical expenses, disability (indemnity) benefits and death benefits. The amounts of disability and death benefits payable for various types of claims are set and limited by statute, but no maximum dollar limitation exists for medical benefits. Workers’ compensation benefits vary among states, and insurance rates are subject to differing forms of state regulation.

        Statutory direct workers’ compensation business written by jurisdiction was as follows:

(dollar amounts in thousands)	2001		2000		1999
Pennsylvania	$	132,211	$	120,276	$	108,692
New Jersey		37,794		30,769		29,177
New York		29,349		19,113		15,185
Virginia		20,736		18,319		17,382
North Carolina		16,063		13,925		10,711
Maryland		12,039		8,253		11,787
Georgia		8,200		5,078		4,174
South Carolina		6,745		5,275		3,790
Delaware		6,477		7,643		7,501
Other		37,597		20,137		7,172
Total	$	307,211	$	248,788	$	215,571

        Based upon direct written premium information published by the American Insurance Association for the most recently available year (2000), The PMA Insurance Group is the largest writer of workers’ compensation insurance in Pennsylvania and ranks among the ten largest writers of workers’ compensation insurance in Delaware and Virginia. The PMA Insurance Group has focused on the jurisdictions in the table above based upon its knowledge of their workers’ compensation systems and its assessment of each state’s respective business, economic, legal and regulatory climates. We closely monitor and take into consideration rate adequacy, regulatory climate and economic conditions in each state in the underwriting process. The PMA Insurance Group intends to employ similar analyses in determining whether and to what extent it will offer products in additional jurisdictions.

        The PMA Insurance Group is focused on expanding its premium base in territories that meet its underwriting and actuarial criteria. In recent years, The PMA Insurance Group increased its writings of workers’ compensation premiums through focused marketing efforts in its principal marketing territories. In 2001, The PMA Insurance Group expanded its operations by adding an office in Nashville, Tennessee. The PMA Insurance Group continued to achieve profitable growth in its two prior expansion states, New York and Georgia. In addition, The PMA Insurance Group benefited in 2001, 2000 and, to a lesser extent, in 1999, from writing business for insureds mainly operating in The PMA Insurance Group’s principal marketing territory but with some operations in other states.

        Workers’ compensation insurers doing business in certain states are required to provide insurance for risks that are not otherwise written on a voluntary basis by the private market (“residual market business”). This system exists in all of the jurisdictions in which The PMA Insurance Group does business, except Pennsylvania, New York and Maryland. In these three states, separate governmental entities write all of the workers’ compensation residual market business. In 2001, The PMA Insurance Group wrote $5.1 million in premiums of residual market business, which constituted less than two percent of its gross workers’ compensation premiums written. Based upon data for policy year 2000 reported by the National Council on Compensation Insurance, the percentage of residual market business for the industry as a whole, in all states, was 4.5% of direct workers’ compensation premiums written.

8

        The PMA Insurance Group offers a variety of workers’ compensation products to its customers. Rate-sensitive products are based on manual rates filed and approved by state insurance departments, while loss-sensitive products are priced to a certain extent on the basis of the insured’s own loss experience. The PMA Insurance Group has also developed and sold alternative market products, such as large deductible products and other programs and services to customers who agree to assume even greater exposure to loss than under more traditional loss-sensitive products. The PMA Insurance Group decides which type of product to offer a customer based upon the customer’s needs and an underwriting review.

        Terrorism exclusions are not permitted under the workers’ compensation laws of any state or jurisdiction in which The PMA Insurance Group operates. In addition, effective January 1, 2002, The PMA Insurance Group’s reinsurance coverage for its workers’ compensation risks excludes terrorism risks on business written in 2002. Therefore, The PMA Insurance Group has refined its workers’ compensation underwriting guidelines to reduce the underwriting exposure from terrorism risks, including the review of aggregation of risks by geographic location, evacuation and security of buildings in which insured employees work, and the type of entities located in the vicinity of the prospective insured. These refined underwriting procedures have not materially affected The PMA Insurance Group’s net premiums written or mix of business.

        The PMA Insurance Group’s voluntary workers’ compensation direct premiums written by product type were as follows:

	2001		2000		1999
Rate-sensitive products		59%		60%		59%
Loss-sensitive products		34%		33%		34%
Alternative market products		7%		7%		7%
Total		100%		100%		100%

• Rate-sensitive products include fixed-cost policies and dividend paying policies. The premium charged on a fixed-cost policy is based upon the manual rates filed with and approved by the state insurance department and does not increase or decrease based upon the losses incurred during the policy period. Under policies that are subject to dividend plans, the customer may receive a dividend based upon loss experience during the policy period.

• The PMA Insurance Group’s loss-sensitive products adjust the amount of the insured’s premiums after the policy period expires based, to a certain extent, upon the insured’s actual losses incurred during the policy period. These loss-sensitive products are generally subject to less price regulation than rate-sensitive products and reduce, but do not eliminate, risk to the insurer. Under these types of policies, claims professionals and actuaries periodically evaluate the reserves on losses after the policy period expires to determine whether additional premium adjustments are required under the policy. These policies are typically subject to adjustment for an average of five years after policy expiration. The PMA Insurance Group generally restricts loss-sensitive products to accounts developing minimum annual premiums in excess of $100,000.

• The PMA Insurance Group offers a variety of alternative market products for larger accounts, including large deductible policies and off-shore captive programs. Typically, The PMA Insurance Group receives a lower up-front premium for these types of alternative market product plans. However, under this type of business, the insured retains a greater share of the underwriting risk than under rate-sensitive or loss-sensitive products, which reduces the potential for unfavorable claim activity on the accounts and encourages loss control on the part of the insured. For example, under a large deductible policy, the customer is contractually obligated to pay its own losses up to the amount of the deductible for each occurrence. The deductibles under these policies generally range from $250,000 to $1.0 million. In addition to these products, The PMA Insurance Group offers its clients certain workers’compensation services such as claims, risk management and other services.

9

        The PMA Insurance Group has developed a product for group integrated occupational and non-occupational disability coverages, named PMA One®, which it began marketing in 1998. PMA One leverages what we consider to be one of The PMA Insurance Group’s most important core competencies: managing employee disabilities. PMA One offers employers the benefits of coordinated workers’ compensation and disability administration, reduced costs, programs designed to encourage faster return to work and heightened employee productivity. In 2001, the number of PMA One clients totaled 136, and generated approximately $41 million of combined workers’ compensation and integrated disability written premiums. PMA One clients include health care systems, educational institutions, manufacturers and financial institutions.

        Through The PMA Insurance Group’s workers’ compensation and integrated disability product offerings, we provide a comprehensive array of managed care services to control loss costs. These include:

• Case review and intervention by disability management coordinators, all of who are registered nurses. These disability management coordinators employ an early intervention model to proactively manage medical treatment and length of disability in concert with The PMA Insurance Group’s claims professionals and the insured employer. There are also case management nurses who manage more serious claims via on-site visits with injured workers and medical providers.

• In most of its marketing states, access to the First Health^® Network, a workers’ compensation preferred provider network, which includes doctors, hospitals, physical therapists, outpatient clinics and imaging centers. Utilization of the network generally results in reduced medical costs, in comparison to medical costs incurred when a claim is handled outside this network.

• Utilization of an automated medical bill review system to detect duplicate billings, unrelated charges and coding discrepancies. Complex bills are forwarded to The PMA Insurance Group’s cost containment unit, which is staffed by registered nurses and other medical professionals, to resolve questions regarding causal relationship and appropriate utilization levels.

• Use of Paradigm Corporation for the medical management of certain catastrophic injuries. Paradigm adds a team of catastrophic case management experts to assist in achieving enhanced clinical and financial outcomes on these catastrophic injuries.

Commercial Lines

        The PMA Insurance Group writes property and liability coverages for larger and middle market accounts that satisfy its underwriting standards. See “Underwriting” on page 11. These coverages feature commercial multi-peril, general liability and umbrella, and commercial automobile business. The PMA Insurance Group offers these products, but generally only if they complement the core workers’ compensation business.

Other Products and Services

        The PMA Insurance Group offers “rent-a-captive” products for certain insureds and associations. The purpose of a rent-a-captive program is to offer a customer an alternative method of managing its loss exposures by obtaining many of the benefits of a captive insurer without establishing and capitalizing its own captive; in effect, the insured is “renting” a captive facility that we have already established.

        Under this arrangement, the client purchases an insurance policy from us and chooses a participation level. We then cede this portion of the premium and loss exposures to our Bermuda- or Cayman-based subsidiary. The client participates in the loss and investment experience of the portion ceded to the Bermuda- or Cayman-based subsidiary through a dividend mechanism. The client is responsible for any loss that may arise within its participation level, and this potential obligation is typically secured through a letter of credit or similar arrangement. Our principal sources of income from this rent-a-captive program are the premium income on the risk retained by us and captive management fees earned.

        Through PMA Management Corp., The PMA Insurance Group provides claims, risk management and related services primarily to self-insureds on an unbundled basis.

10

Distribution

        The PMA Insurance Group distributes its products through multiple channels, including national, regional and local brokers and agents, employee benefits brokers, and direct sales representatives.

        As of December 31, 2001, The PMA Insurance Group employed 12 direct sales representatives and used approximately 300 independent brokers and agents. The direct sales representatives are generally responsible for certain business located in Pennsylvania and Delaware. For the year ended December 31, 2001, these employees produced approximately $40 million in direct premiums written, constituting approximately 10% of The PMA Insurance Group’s direct written premiums.

        The brokers and agents solicit business throughout the marketing territory. The current distribution network generally consists of large regional agents and brokers, local agents, and national brokers that specialize in larger to middle market accounts that require the variety of workers’ compensation, commercial lines and alternative market products offered by The PMA Insurance Group. In 2001, brokers and agents accounted for approximately 90% of The PMA Insurance Group’s direct written premiums. The top ten brokers and agents accounted for approximately 25% of The PMA Insurance Group’s direct written premiums, the largest of which accounted for approximately 8% of its direct written premiums.

        The PMA Insurance Group’s underwriters review all business from brokers and agents before it is accepted. The PMA Insurance Group monitors several statistics with respect to its brokers and agents, including a complete profile of the broker/agent, the number of years the broker/agent has been associated with The PMA Insurance Group, the percentage of the broker/agent’s business that is underwritten by The PMA Insurance Group, the ranking of The PMA Insurance Group within the broker/agent’s business and the profitability of the broker/agent’s business.

        As of December 31, 2001, the field organization consisted of 17 offices throughout The PMA Insurance Group’s principal marketing territory. These offices deliver a full range of services directly to customers located in their service territory, while satellite offices primarily offer underwriting and claim adjustment services.

Underwriting

        The PMA Insurance Group’s underwriters, in consultation with actuaries, determine the general type of business to be written using a number of criteria, including past performance, relative exposure to hazard, premium size, type of business and other indicators of potential loss. Specific types of business are referred to underwriting specialists and actuaries for individual pricing. The underwriting team also establishes classes of business that The PMA Insurance Group generally will not write, such as certain property exposures, certain hazardous products and activities, and certain environmental coverages. As a result of the attack on the World Trade Center, The PMA Insurance Group has refined its underwriting guidelines to evaluate terrorism risks and their effect on risk concentrations.

        Underwriters and risk-control professionals in the field report functionally to the Chief Underwriting Officer and locally to branch vice presidents who are accountable for territorial operating results. Underwriters also work with the field marketing force to identify business that meets prescribed underwriting standards and to develop specific strategies to write the desired business. In performing this assessment, the field office professionals also consult with actuaries who have been assigned to the specific field office regarding loss trends and pricing and utilize actuarial loss rating models to assess the projected underwriting results of accounts.

        The PMA Insurance Group also employs credit analysts. These employees review the financial strength and stability of customers who utilize loss-sensitive and alternative market products and specify the type and amount of collateral that customers must provide under these arrangements.

11

Claims Administration

        Claims services are delivered to customers primarily through employees in the field offices. The PMA Insurance Group maintains a centralized call center for loss reporting and has automated and centralized the processing of claims payments, which allows the claims adjusters to substantially reduce the time that they spend with clerical and repetitive functions. In 2001, The PMA Insurance Group launched an Internet-based risk management information system that allows clients to analyze losses, manage claims costs and report claims electronically. The PMA Insurance Group also employs in-house attorneys who represent customers in workers’ compensation cases and other insurance matters. The PMA Insurance Group has a separate, anti-fraud unit that investigates suspected false claims and other irregularities. Certain specialized matters, such as asbestos and environmental claims, are referred to a special claims unit in the home office.

Run-off Operations

        As a part of The PMA Insurance Group’s 1996 restructuring plan, Run-off Operations were established principally to manage the capital supporting workers’ compensation loss reserves for accident years 1991 and prior. The reserves primarily related to the period of time from 1987 to 1991 when The PMA Insurance Group wrote a much higher volume of business and experienced poor underwriting results. Effective December 31, 2000, substantially all of the remaining assets and liabilities of the Run-off Operations were transferred 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 Run-off Operations.

CALIBER ONE

Background

        Our specialty insurance unit commenced writing business in 1998. Caliber One focuses on excess and surplus lines of insurance for low frequency/high severity risks that are declined by the standard market. Caliber One writes business throughout the United States, generally through surplus lines brokers.

Products

        Caliber One offers liability coverages for low frequency/high severity classes, including medium- to high-hazard products liability classes of business, commercial contractors, professional liability and other difficult-to-insure liability risks, as well as property coverages for risks declined by the standard market. In addition, Caliber One offers various ocean marine coverages including cargo, hull and liability. Caliber One’s policy forms contain various endorsements and exclusions, and in some cases, include defense costs within the policy limits rather than offering such coverages outside the policy limits. Caliber One has diversified its product offerings and classes of business within its product offerings so that it will generally not have more than 10% of its net premiums written in any one class of business.

        Caliber One’s premiums written by major line of business are as follows:

(dollar amounts in thousands)	2001			2000			1999
Gross premiums written:
Casualty	$	55,228	44%	$	51,769	55%	$	67,500	72%
Property		69,107	56%		41,636	45%		25,917	28%
Total	$	124,335	100%	$	93,405	100%	$	93,417	100%
Net premiums written:
Casualty	$	21,995	41%	$	8,596	54%	$	47,873	93%
Property		31,679	59%		7,447	46%		3,364	7%
Total	$	53,674	100%	$	16,043	100%	$	51,237	100%

12

        Caliber One currently operates through three internal underwriting units based on classes of business and distribution channels: casualty brokerage, property brokerage and ocean marine brokerage. Program business is managed through the respective underwriting units. Premiums written by underwriting unit are as follows:

(dollar amounts in thousands)	2001			2000			1999
Gross premiums written:
Casualty brokerage	$	54,618	44%	$	43,354	46%	$	57,116	61%
Property brokerage		32,740	26%		21,277	23%		9,505	10%
Programs		30,870	25%		28,329	30%		26,796	29%
Ocean marine brokerage		6,107	5%		445	1%		—	—
Total	$	124,335	100%	$	93,405	100%	$	93,417	100%
Net premiums written:
Casualty brokerage	$	20,039	37%	$	8,927	56%	$	39,026	76%
Property brokerage		22,610	42%		4,229	26%		649	1%
Programs		5,604	11%		2,609	16%		11,562	23%
Ocean marine brokerage		5,421	10%		278	2%		—	—
Total	$	53,674	100%	$	16,043	100%	$	51,237	100%

Underwriting

        The underwriting of excess and surplus lines involves reviewing the claims exposure and experience of an account, if any, as well as the claims experience of the particular class or similar classes of risk. As a surplus lines insurer, Caliber One is generally free from rate and policy form regulation by insurance regulatory bodies. Accordingly, Caliber One utilizes policy features that can be changed in light of the circumstances, such as occurrence versus claims-made coverage, different levels of retentions, exclusions and endorsements.

        Caliber One is attempting to include terrorism exclusions in its excess and surplus lines policies when underwriters determine that there is a significant terrorism risk. However, if a client objects to a full terrorism exclusion and Caliber One still desires to write the particular business, its underwriters may include terms and conditions in its insurance contracts intended to limit Caliber One’s exposure to losses from future terrorist acts, such as occurrence caps, aggregate limits and specific terrorism-event exclusions. Further, Caliber One’s underwriters have the ability to review and monitor geographic concentrations of its underlying risks and the types of industry or industries to be insured in deciding whether to write the business.

Distribution

        Caliber One distributes its excess and surplus lines products on a nationwide basis through approximately 100 appointed surplus lines brokers. Caliber One underwrites its casualty coverages from its home office in Yardley, Pennsylvania and through branch offices in Seattle, Washington, which was opened in 2000 and Glendale, California, which was opened in 2001. Property and ocean marine coverages are underwritten centrally in the home office. Caliber One generally does not grant underwriting or binding authority to its brokers.

        Two brokers accounted for more than 10% of Caliber One’s gross premiums written in 2001: Sherwood Insurance Services, $27.9 million (22%), and Swett & Crawford, $16.2 million (13%).

        Based upon direct written premium information published by A.M. Best Company for 2000, Caliber One is the 22nd largest domestic writer of excess and surplus lines.

Claims Administration

        Caliber One’s claims department analyzes and investigates reported claims, establishes individual claim reserves, pays claims and monitors the progress and ultimate outcome of the claims. In addition, they determine that subrogation, salvage and other cost recovery opportunities have been adequately explored.

        All notices of claims are reported to Caliber One’s centralized claims department in Yardley. Claims services are delivered to customers through employees and independent adjusters under the direction of Caliber One’s claims staff. Caliber One also utilizes outside attorneys for specific cases. Caliber One’s claims staff actively directs and manages the activities of all outside attorneys utilized in the claims process.

13

REINSURANCE AND RETROCESSIONAL PROTECTION

        We follow the customary insurance practice of reinsuring with other insurance companies a portion of the risks under the policies written by our insurance subsidiaries. This reinsurance is maintained to protect the insurance subsidiaries against the severity of losses on individual claims and unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss. Although reinsurance does not discharge the insurance subsidiaries from their primary liabilities to their policyholders for losses insured under the insurance policies, it does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk.

        The ceded reinsurance agreements of our insurance subsidiaries generally may be terminated at their annual anniversary by either party upon 30 to 90 days’ notice. In general, the reinsurance agreements are of the treaty variety, which cover all underwritten risks of the types specified in the treaties. Our reinsurance is on a per risk and per occurrence basis. Per risk reinsurance offers reinsurance protection for each risk involved in each occurrence. Per occurrence reinsurance is a form of reinsurance under which the date of the loss event is deemed to be the date of the occurrence regardless of when reported and permits all losses arising out of one event to be aggregated.

        At December 31, 2001, our reinsurance and retrocessional protections were as follows:

	Retention			Limits (1)
PMA Re
Per Occurrence:
Casualty lines(2)	$	2.8 million		$	17.5 million
Workers' compensation(2)	$	2.0 million		$	98.0 million
Property lines	$	10.0 million		$	50.0 million
Per Risk:
Property lines	$	750,000		$	4.2 million
Casualty lines	$	1.5 million		$	6.0 million
The PMA Insurance Group
Per Occurrence:
Workers' compensation	$	150,000	(3)	$	104.9 million
Per Risk:
Property lines(4)	$	500,000		$	19.5 million
Auto physical damage	$	500,000		$	2.0 million
Other casualty lines(5)	$	250,000		$	4.8 million
Caliber One
Per Occurrence and Per Risk:
Property lines	$	500,000		$	17.0 million
Casualty lines	$	250,000		$	10.8 million

(1) Represents the amount of loss protection above our level of loss retention.

(2) Effective January 1, 2002, the retention and limits were changed to $5.0 million and $15.0 million, respectively.

(3) The PMA Insurance Group retains the first $10 million of losses. Effective January 1, 2002, the retention increased to $250,000, with The PMA Insurance Group retaining the first $3 million of losses.

(4) This coverage also provides protection of $47.5 million per occurrence over the combined net retention of $500,000.

(5) Effective January 1, 2002, the retention and limits were changed to $500,000 and $4.5 million, respectively. This coverage also provides protection of $59.5 million per occurrence over its combined net retention of $500,000.

        In addition to the reinsurance and retrocessional protection shown in the table above, for 2001 we had excess of loss retrocessional protection that allowed us to cede losses up to a limit of $73 million once our loss and LAE ratio exceeded a predetermined level. Cession of losses under this contract required us to cede additional premium in 2001. Effective January 1, 2002, the limit was increased to $150 million, which includes protection for losses caused by terrorist activities.

14

        We actively manage our exposure to catastrophes through our underwriting process, where we generally monitor the accumulation of insurable values in catastrophe-prone regions. Also, in writing property reinsurance coverages, PMA Re typically requires per occurrence loss limitations for contracts that could have catastrophe exposure. Through per risk reinsurance, we manage our net retention in each exposure. PMA Re’s property per occurrence reinsurance provides catastrophe protection of $50.0 million in excess of $10.0 million on its traditional property book. Under certain conditions, PMA Re may recover $6.0 million of the $10.0 million retention for multiple net catastrophe losses. PMA Re also maintains catastrophe protection of $12.5 million in excess of $5.0 million for property exposures underwritten by its Finite Risk and Financial Products unit. PMA Re can also recover an additional $40.0 million of Finite Risk and Financial Products occurrence losses under certain industry loss scenarios. The PMA Insurance Group maintains catastrophe reinsurance protection of 95% of $18.0 million excess of $2.0 million and Caliber One maintains catastrophe reinsurance protection of $14.7 million excess of $1.3 million. Any cession of losses under certain of these contracts requires that we cede additional premiums.

        In 2001, our loss and LAE ratios were impacted by the attack on the World Trade Center as discussed beginning on page 29 of the Annual Report. In 2000 and 1999, our loss and LAE ratios were not significantly impacted by catastrophes. Although we believe that we have adequate reinsurance to protect against the estimated probable maximum gross loss from a catastrophe, an especially severe catastrophe or series of catastrophes could exceed our reinsurance and/or retrocessional protection and may have a material adverse impact on our financial condition, results of operations and liquidity.

        With respect to the reinsurance and retrocessional protection shown in the table on page 14, our treaties that renewed effective January 1, 2002 do not cover us for losses sustained from terrorist activities, except for PMA Re’s property per occurrence treaty. Further, for treaties that renew later in 2002 it is possible that losses due to terrorist attacks may be excluded. Therefore, future terrorist attacks may result in losses that have a material adverse effect on our financial condition, results of operations and liquidity.

        The collectibility of reinsurance is largely a function of the solvency of reinsurers. At December 31, 2001, the Company had reinsurance receivables due from the following unaffiliated reinsurers in excess of 5% of shareholders’ equity:

(dollar amounts in thousands)	Reinsurance Receivables		Collateral		Rating(1)
The London Reinsurance Group	$	343,270	$	343,270		A
United States Fidelity and Guaranty		143,635		104,154		A	+
Underwriters Re		86,549		86,549		NR	(2)
Houston Casualty		74,566		–		A	+
Mountain Ridge Insurance Company		49,829		49,829		NR	(3)
PXRE		36,495		2,754		A
Folksamerica Re		31,732		1,243		A	-

(1) Ratings are as of February 28, 2002. A.M. Best ratings are as follows: A++, Superior, 1st of 16; A+, Superior, 2^nd of 16; A, Excellent, 3^rd of 16; and A-, Excellent, 4^th of 16; NR, Not Rated.

(2) Underwriters Re is a subsidiary of Swiss Re, which is rated A++.

(3) Mountain Ridge is a subsidiary of St. Paul, which is rated A+.

        We perform credit reviews of our reinsurers focusing on, among other things, financial capacity, stability, trends and commitment to the reinsurance business. Prospective and existing reinsurers failing to meet our standards are excluded from our reinsurance programs. In addition, we require collateral, typically assets in trust, letters of credit or funds withheld, to support balances due from certain reinsurers, consisting generally of those not authorized to transact business in the applicable jurisdictions. At December 31, 2001 and 2000, our reinsurance receivables were supported by $626.9 million and $553.6 million of collateral. Of the uncollateralized reinsurance receivables as of December 31, 2001, approximately 95% were recoverable from reinsurers rated “A-” or better by A.M. Best. We believe that the amounts receivable from reinsurers are fully collectible and that the allowance for uncollectible items is adequate to cover any disputes about amounts owed by reinsurers to us. In the last three years combined, we have written off less than $1 million of reinsurance receivables. The timing and collectibility of reinsurance receivables have not had, and are not expected to have, a material adverse effect on our liquidity.

        See Note 5 to the Financial Statements included in the Annual Report for additional information on reinsurance.

15

LOSS RESERVES

        Insurers establish reserves representing estimates of future amounts needed to pay claims with respect to insured events that have occurred, including events that have not been reported to the insurer. Reserves are also established for LAE representing the estimated expenses of settling claims, including legal and other fees, and general expenses of administering the claims adjustment process.

        After a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The estimate reflects the informed judgment of management based on reserving practices and management’s experience and knowledge regarding the nature and value of the specific type of claim. Claims personnel review and update their estimates as additional information becomes available and claims proceed towards resolution. In addition, reserves are also established on an aggregate basis:

 • to provide for losses incurred but not yet reported to the insurer;

 • to provide for the estimated expenses of settling claims, including legal and other fees and general expenses of administering the claims adjustment process; and

 • to adjust for the fact that, in the aggregate, case reserves may not accurately estimate the ultimate liability for reported claims.

        Reserves are estimated using various generally accepted actuarial techniques. As part of the reserving process, historical and industry data is reviewed and consideration is given to the anticipated impact of various factors such as legal developments, changes in social attitudes and economic conditions, including the effects of inflation. This process relies on the basic assumption that past experience, adjusted for the effect of current developments and probable trends, provides a reasonable basis for predicting future events. The reserving process provides implicit recognition of the impact of inflation and other factors affecting claims payments by taking into account changes in historic payment patterns and perceived probable trends. There is generally no precise method, however, for subsequently evaluating the adequacy of the consideration given to inflation or to any other specific factor, since the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent.

        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 insurer and the insurer’s payment of that loss. Liabilities for reinsurers generally become known more slowly than for primary insurers and are generally subject to more unforeseen development. Estimating our 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 our ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at December 31, 2001, the related adjustments could have a material adverse effect on our financial condition, results of operations and liquidity.

        The table on the next page presents the subsequent development of the estimated year-end property and casualty reserves, net of reinsurance (“net reserves”), for the ten years prior to 2001. The first section of the table shows the estimated net reserves that were recorded at the end of each respective year for all current and prior year unpaid losses and LAE. The second section shows the cumulative amounts of such previously recorded net reserves paid in succeeding years. The third section shows the re-estimates of the net reserves made in each succeeding year.

        The cumulative deficiency (redundancy) as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through December 31, 2001; an increase in a loss estimate that related to a prior year occurrence generates a deficiency in each intervening year. For example, a deficiency first recognized in 1998 relating to losses incurred in 1991 would be included in the cumulative deficiency amount for each of the years 1991 through 1997. However, the deficiency would be reflected in operating results in 1998 only.

        Conditions and trends that have affected the reserve development reflected in the table may change, and care should be exercised in extrapolating future reserve redundancies or deficiencies from such development.

16

Consolidated Loss and Loss Adjustment Expense Development

December 31,
(dollar amounts in millions)

	1991		1992		1993			1994			1995			1996			1997			1998			1999		2000		2001
I. Initial estimated liability for
unpaid losses and LAE,
net of reinsurance	$	1,824.3	$	1,941.0	$	1,932.0		$	1,855.9		$	1,808.5		$	1,834.5		$	1,670.9		$	1,347.2		$	1,284.4	$	1,128.7	$	1,143.1
II. Amount of reserve paid,
net of reinsurance through:
- one year later	$	490.5	$	442.4	$	407.8		$	398.9		$	437.6		$	398.8		$	360.7		$	354.6		$	494.9	$	457.0
- two years later		848.8		779.1		746.1			763.7			780.0			669.6			646.0			717.7			764.1
- three years later		1,127.0		1,066.8		1,055.9			1,072.9			999.0			894.8			924.6			880.3
- four years later		1,364.9		1,329.2		1,330.6			1,252.2			1,183.5			1,118.2			1,013.0
- five years later		1,585.4		1,573.8		1,472.7			1,405.9			1,369.7			1,172.3
- six years later		1,788.9		1,688.7		1,605.4			1,573.2			1,407.9
- seven years later		1,882.2		1,805.4		1,761.7			1,595.8
- eight years later		1,986.5		1,953.8		1,779.3
- nine years later		2,125.1		1,967.6
- ten years later		2,134.3
III. Re-estimated liability,
net of reinsurance, as of
- one year later	$	1,966.8	$	1,998.1	$	1,932.3		$	1,907.4		$	1,964.6		$	1,748.5		$	1,624.3		$	1,314.7		$	1,290.9	$	1,152.2
- two years later		2,067.5		2,006.5		1,982.5			2,073.4			1,866.8			1,700.5			1,557.6			1,299.7			1,304.1
- three years later		2,081.5		2,060.6		2,163.9			1,986.7			1,819.2			1,611.1			1,495.3			1,288.9
- four years later		2,134.8		2,258.2		2,078.3			1,942.0			1,742.1			1,542.3			1,480.8
- five years later		2,302.0		2,170.3		2,030.5			1,880.3			1,672.6			1,524.3
- six years later		2,209.3		2,126.6		1,973.2			1,822.1			1,658.0
- seven years later		2,169.5		2,079.9		1,922.1			1,807.6
- eight years later		2,133.7		2,036.5		1,910.9
- nine years later		2,096.8		2,027.0
- ten years later		2,089.3
IV. Cumulative deficiency
(redundancy):	$	265.0	$	86.0	$	(21.1	)	$	(48.3	)	$	(150.5	)	$	(310.2	)	$	(190.1	)	$	(58.3	)	$	19.7	$	23.5
V. Net liability					$	1,932.0		$	1,855.9		$	1,808.5		$	1,834.5		$	1,670.9		$	1,347.2		$	1,284.4	$	1,129.4	$	1,143.1
Reinsurance recoverables						218.7			247.9			261.5			256.6			332.3			593.7			648.2		924.4		1,181.3
Gross liability					$	2,150.7		$	2,103.8		$	2,070.0		$	2,091.1		$	2,003.2		$	1,940.9		$	1,932.6	$	2,053.8	$	2,324.4
VI. Re-estimated net liability					$	1,910.9		$	1,807.6		$	1,658.0		$	1,524.3		$	1,480.8		$	1,288.9		$	1,304.1	$	1,152.2
Re-estimated reinsurance recoverables						234.1			276.2			306.2			289.1			360.9			652.1			833.0		1,062.3
Re-estimated gross liability					$	2,145.0		$	2,083.8		$	1,964.2		$	1,813.4		$	1,841.7		$	1,941.0		$	2,137.1	$	2,214.5

17

        Unpaid losses and LAE on a GAAP basis were $2,324.4 million and $2,053.1 million at December 31, 2001 and 2000, respectively. Unpaid losses and LAE on a statutory basis were $1,039.8 million and $1,073.6 million at December 31, 2001 and 2000, respectively. The difference between GAAP and statutory loss reserves reflects: 1) reinsurance receivables on unpaid losses and LAE, which are recorded as assets for GAAP but netted against statutory loss reserves, and 2) non-U.S. domiciled insurance companies, whose unpaid losses and LAE are included for GAAP purposes, but not for statutory purposes.

        The components of our (favorable) unfavorable development of reserves for losses and LAE for prior accident years, excluding accretion of discount, are as follows:

(dollar amounts in thousands)	2001			2000			1999
PMA Re	$	(1,568	)	$	9,691		$	(23,526	)
The PMA Insurance Group		2,889			(6,074	)		(8,988	)
Caliber One		22,191			2,874			-
Total	$	23,512		$	6,491		$	(32,514	)

        During 2001, PMA Re recorded favorable prior year development of $1.6 million, reflecting development on prior accident years due to re-estimated loss trends for such years that were lower than previous expectations. This is largely due to favorable development on casualty business.

        In 2000, PMA Re recorded unfavorable prior year development of $9.7 million, reflecting higher than expected losses and LAE primarily from more recent accident years, partially offset by lower than expected losses and LAE for accident years 1996 and prior. PMA Re’s actuarial department conducted its routine semi-annual reserve study to determine the impact of any emerging data on anticipated loss development trends and recorded unpaid losses and LAE reserves. Based on the actuarial work performed, which included analyzing recent trends in the levels of the reported and paid claims, an updated selection of actuarially determined loss reserve estimates was developed by accident year for each major line of business written by PMA Re. Management’s selection of the ultimate losses indicated that gross loss reserves needed to be increased by $83.2 million.

        The increase in the estimate of gross loss and LAE reserves primarily reflects higher than anticipated losses mainly in the Company’s pro rata business, where PMA Re participates with the insured by agreeing to pay a predetermined percentage of all losses arising under a particular insurance contract of the insured in exchange for the same predetermined percentage of all applicable premiums received under that contract. The concentration of estimated adverse loss development was in PMA Re’s pro rata reinsurance business related primarily to general liability treaties written on a claims made basis covering losses in 1998 and 1999, property treaties covering 1999 losses and, to a lesser extent, commercial automobile liability treaties covering losses in 1998 and 1999. In addition, the reserve increase reflects unfavorable prior year development in the excess of loss general liability line for accident years 1998 and 1999. Under existing retrocessional contracts, $60.0 million of gross losses were ceded to PMA Re’s retrocessionaires, reducing the impact on net incurred losses and LAE to $23.2 million. The increase in incurred losses and LAE, combined with $35.0 million of ceded premiums and interest on funds held under existing retrocessional contracts covering the ceded losses, resulted in a pre-tax charge of approximately $60 million to PMA Re’s operating results in 2000.

        During 1999, PMA Re recorded favorable prior year development of $23.5 million, reflecting development on prior accident years due to re-estimated loss trends for such years that were lower than previous expectations. This was largely due to favorable development on casualty excess of loss business.

        The PMA Insurance Group experienced unfavorable prior year development of $2.9 million in 2001, and favorable prior year development of $6.1 million and $9.0 million in 2000 and 1999, respectively. The unfavorable prior year development in 2001 reflects higher than expected claims handling costs. The favorable prior year development in 2000 and 1999 primarily reflects better than expected loss experience from loss-sensitive and rent-a-captive workers’ compensation business. Premium adjustments for loss-sensitive business and policyholders’ dividends for rent-a-captive business have substantially offset this favorable development. Rent-a-captives are used by customers as an alternative method to manage their loss exposure without establishing and capitalizing their own captive insurance company.

18

        As a result of its reserve reviews conducted during 2001, Caliber One revised its estimate of ultimate expected claims activity and, accordingly, increased its estimate of ultimate losses for accident years 1999 and 2000. During 2001, Caliber One recorded unfavorable prior year development of $22.2 million, which is net of losses of approximately $26 million ceded to third party reinsurers under existing reinsurance contracts covering the prior year loss development. These losses primarily reflect higher than expected claim frequency and severity that emerged in 2001 on certain casualty lines of business, primarily professional liability policies for the nursing homes class of business, and, to a lesser extent, property lines of business.

        During 2000, Caliber One recorded unfavorable prior year development of $2.9 million, primarily related to the emergence of higher than expected losses and LAE in certain segments of the professional liability, commercial automobile, general liability and property lines of business for coverage of 1999 exposures. During 2000, Caliber One discontinued writing or cancelled policies in the professional liability (nursing homes) and commercial automobile classes of business that produced the emergence of higher than expected losses.

        At December 31, 2001 and 2000, our GAAP loss reserves were stated net of discount of $113.7 million and $104.0 million, respectively, primarily related to workers’ compensation business. Pre-tax income is negatively impacted by accretion of discount on prior year reserves and favorably impacted by recording of discount for current year reserves. The net of these amounts is referred to as net discount accretion. Net discount accretion increased (decreased) pre-tax income by $11.5 million and $(4.9) million in 2001 and 2000, respectively.

        At December 31, 2001, our loss reserves were stated net of $40.8 million of salvage and subrogation. Our policy with respect to estimating the amounts and realizability of salvage and subrogation is to develop accident year schedules of historic paid salvage and subrogation by line of business, which are then projected to an ultimate basis using actuarial projection techniques. The anticipated salvage and subrogation is the estimated ultimate salvage and subrogation less any amounts received by us. The realizability of anticipated salvage and subrogation is reflected in the historical data that is used to complete the projection, as historical paid data implicitly considers realization and collectibility.

Asbestos and Environmental Reserves

        Our asbestos-related liabilities included in unpaid losses and LAE were as follows:

(dollar amounts in thousands)	2001			2000			1999
Gross of reinsurance:
Beginning reserves	$	49,193		$	61,277		$	67,857
Incurred losses and LAE		23,295			1,640			1,910
Paid losses and LAE		(12,629	)		(13,724	)		(8,490	)
Ending reserves	$	59,859		$	49,193		$	61,277
Net of reinsurance:
Beginning reserves	$	32,043		$	38,851		$	43,556
Incurred losses and LAE		131			(341	)		(341	)
Paid losses and LAE		(3,604	)		(6,467	)		(4,364	)
Ending reserves	$	28,570		$	32,043		$	38,851

19

        Our environmental-related liabilities included in unpaid losses and LAE were as follows:

(dollar amounts in thousands)	2001			2000			1999
Gross of reinsurance:
Beginning reserves	$	29,483		$	41,359		$	47,036
Incurred losses and LAE		2,846			(7,848	)		5,081
Paid losses and LAE		(2,745	)		(4,028	)		(10,758	)
Ending reserves	$	29,584		$	29,483		$	41,359
Net of reinsurance:
Beginning reserves	$	18,020		$	24,522		$	29,356
Incurred losses and LAE		15			(3,212	)		82
Paid losses and LAE		(2,058	)		(3,290	)		(4,916	)
Ending reserves	$	15,977		$	18,020		$	24,522

        Of the total net asbestos reserves, approximately $26.6 million, $27.2 million and $32.0 million related to incurred but not reported losses at December 31, 2001, 2000 and 1999, respectively. Of the total net environmental reserves, approximately $9.2 million, $9.2 million and $18.0 million related to incurred but not reported losses at December 31, 2001, 2000 and 1999, respectively. All incurred asbestos and environmental losses were for accident years 1986 and prior.

        Estimating reserves for asbestos and environmental exposures continues to be difficult because of several factors, including: (i) evolving methodologies for the estimation of the liabilities; (ii) lack of reliable historical claim data; (iii) uncertainties with respect to insurance and reinsurance coverage related to these obligations; (iv) changing judicial interpretations; and (v) changing government standards and regulations. We believe that our reserves for asbestos and environmental claims are appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies. However, due to changing interpretations by courts involving coverage issues, the potential for changes in federal and state standards for clean-up and liability, as well as issues involving policy provisions, allocation of liability among participating insurers, and proof of coverage, our ultimate exposure for these claims may vary significantly from the amounts currently recorded, resulting in a potential future adjustment that could be material to our financial condition and results of operations.

INVESTMENTS

        An important component of our financial results is the return on invested assets. Our investment objectives are to (i) seek competitive after-tax income and total return as appropriate, (ii) maintain medium to high investment grade asset quality and high marketability, (iii) maintain maturity distribution commensurate with our business objectives, (iv) provide portfolio flexibility for changing business and investment climates and (v) provide liquidity to meet operating objectives. Our investment strategy includes guidelines for asset quality standards, asset allocations among investment types and issuers, and other relevant criteria for our portfolio. In addition, invested asset cash flows, both current income and investment maturities, are structured after considering projected liability cash flows of loss reserve payouts using actuarial models. Property and casualty claim demands are somewhat unpredictable in nature and require liquidity from the underlying invested assets, which are structured to emphasize current investment income to the extent consistent with maintaining appropriate portfolio quality and diversity. The liquidity requirements are met primarily through publicly traded fixed maturities as well as operating cash flows and short-term investments.

        The executive committee of our board of directors is responsible for our investment objectives. We retain outside investment advisers to provide investment advice and guidance, supervise our portfolio and arrange securities transactions through brokers and dealers. Investments by the Pooled Companies and PMA Capital Insurance Company must comply with the insurance laws and regulations of the Commonwealth of Pennsylvania and investments for Caliber One Indemnity Company must comply with the insurance laws and regulations of the State of Delaware.

        We currently have no derivative financial instruments outstanding. We do not use derivatives for speculative purposes. Our investment portfolio does not contain any significant concentrations in single issuers other than U.S. Treasury and agency obligations. In addition, we do not have a significant concentration of investments in any single industry segment other than finance companies, which comprise 8% of invested assets at December 31, 2001. Included in this industry segment are financial institutions, including financing subsidiaries of automotive manufacturers.

20

        For additional information on our investments, including carrying values by category, quality ratings and net investment income, see pages 43 and 44 of the MD&A as well as Notes 2B and 3 to the Financial Statements in the Annual Report.

COMPETITION

General

        The domestic property and casualty insurance and reinsurance industries are very competitive and consist of many companies, with no one company dominating the market. In addition, the degree and nature of competition varies from state to state for a variety of reasons, including the regulatory climate and other market participants in each state. PMA Re competes with other reinsurers in the broker market as well as reinsurers that underwrite reinsurance business on a direct basis. In addition to competition from other insurance companies, The PMA Insurance Group and Caliber One compete with certain alternative market arrangements, such as captive insurers, risk-sharing pools and associations, risk retention groups, and self-insurance programs. Many of our competitors are larger and have greater financial resources than us.

        The main factors upon which entities in our markets compete are price, service, product capabilities and financial security. PMA Re, The PMA Insurance Group and Caliber One attempt to price their products in such a way that the prices charged to their clients are commensurate with the overall marketplace while still meeting our rate of return targets. The soft pricing environment which existed until the second half of 2000 in most of our business has made competing solely on the basis of price increasingly difficult. PMA Re, The PMA Insurance Group and Caliber One have rejected and/or non-renewed certain accounts in recent years, as the market rates, terms and conditions for such risks did not provide the opportunity to achieve an acceptable rate of return.

        In terms of service, we maintain service standards concerning turn-around time for underwriting submissions, information flow, claims handling and the quality of other services. These standards help ensure that clients are satisfied with our products and services. We periodically participate in surveys of intermediaries and clients to gain an understanding of the perceptions of our service as compared to our competitors.

        We attempt to design products that meet the needs of clients in our markets. PMA Re has expanded its product line in recent years to satisfy the needs of its client base. Products introduced by PMA Re in the last four years include finite risk and financial products reinsurance and facultative reinsurance. See “PMA Re—Products” for additional discussion. In recent years, The PMA Insurance Group has developed products that reflect the evolving nature of the workers’ compensation market. Specifically, it has developed PMA One, a product that provides for group integrated occupational and non-occupational disability coverages. The PMA Insurance Group has also increased its focus on rehabilitation and managed care to control workers’ compensation costs for the employers. In addition, it also benefited in 2001, 2000 and, to a lesser extent, in 1999, from writing business for insureds mainly operating in The PMA Insurance Group’s principal marketing territory but with some operations in other states. See “The PMA Insurance Group — Products” for additional discussion. Caliber One designs products that meet the needs of new classes of business and that cover emerging risks. We continually evaluate new product opportunities for PMA Re, The PMA Insurance Group and Caliber One.

Industry Trends

        During the 1990s and into 2000, the property and casualty insurance and reinsurance industry was characterized by excess capacity, which resulted in highly competitive market conditions evidenced by declining premium rates and, in many cases, policy terms less favorable to the insurers. As a result of this prolonged soft market, beginning in 2000, capacity in the property and casualty market began to contract as companies withdrew from the business or ceased operations. In response to market conditions, many insurance and reinsurance companies, including our companies, independently sought and achieved significant price increases and improved policy terms commencing in the second half of 2000. For example, in 2000, we realized an increase of approximately 25% in premiums on renewal business at PMA Re and achieved average (weighted by premium volume) price increases at The PMA Insurance Group in excess of 10%. These increases continued in 2001 as follows:

PMA Re	30%
The PMA Insurance Group:
Workers' Compensation	15%
Commercial Lines	25%
Caliber One	25%

21

        In addition to these increases, we have achieved generally improved terms in certain of our insurance and reinsurance policies. For example, we have implemented broader coverage exclusions, lower occurrence limits, lower ceding commissions, accelerated payment terms and higher retentions or deductibles for insureds. As a result of the events of September 11th, we experienced an acceleration of the improvement in pricing and terms. These improvements in terms and conditions should further enhance the profitability of our business.

        Despite current market conditions, there can be no assurance that prices and premiums will increase at a level consistent with these expectations. Even if the industry in general experiences those types of increases, we cannot assure you that we will see similar increases in one or more of our businesses or that we will achieve price increases consistent with 2001. Further, any benefit that we derive from such price increases may be partially or completely offset by increases in ceded reinsurance premiums and unexpected increases in our loss reserves.

Ratings

        We believe that our customers place a high degree of value on an insurer or reinsurer that has good financial security, and will therefore find such insurer or reinsurer to be of acceptable credit quality to underwrite the customers’ risks. For many intermediaries and clients, financial security is measured by the ratings assigned by independent rating agencies. Certain of our insurance subsidiaries are rated by independent rating agencies. The ratings represent the opinions of the rating agencies on the insurance company’s financial strength and our ability to pay obligations to policyholders and are not directed toward the protection of investors. Management believes that the ratings assigned by nationally recognized, independent rating agencies, particularly A.M. Best, are material to our operations.

        The rating scales of the principal agencies that rate our insurance subsidiaries are characterized as follows:

 • A.M. Best Company, Inc. ("A.M. Best"), A++ to S ("Superior" to "Suspended")

 • Standard &Poor's ("S&P"), AAA to R ("Extremely Strong" to "Regulatory Supervision")

 • Moody's Investors Service ("Moody's"), Aaa to C ("Exceptional" to "Lowest")

        As of February 28, 2002, our principal insurance subsidiaries had the following ratings⁽¹⁾:

	A. M. Best	S&P	Moody's
PMA Capital Insurance   Company	A  ("Excellent" - 3rd of 16)	A  ("Strong" - 6th of 21)	A3    ("Good" - 7th of 21)
Pooled Companies	A- ("Excellent" - 4th of 16)	A  ("Strong" - 6th of 21)	Baa1 ("Adequate" - 8th of 21)
Caliber One Indemnity Company	A  ("Excellent" - 3rd of 16)	Not rated	Not rated

(1) See page 30 of the MD&A for information regarding rating agency reviews conducted as a result of our losses from the attack on the World Trade Center.

        These ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that PMA Capital Insurance Company, the Pooled Companies and/or Caliber One Indemnity Company can maintain these ratings. Each rating should be evaluated independently of any other rating. A downgrade in these ratings could affect our competitive position in the insurance industry and make it more difficult for us to market our products. A significant downgrade could result in a material loss of business as policyholders move to other companies with higher ratings.

22

REGULATORY MATTERS

General

        PMA Capital Insurance Company is licensed or accredited to transact business in, and is subject to regulation and supervision by, 50 states and the District of Columbia. One or more of the Pooled Companies are licensed to transact insurance business in, and are subject to regulation and supervision by, 52 jurisdictions (including Puerto Rico and the District of Columbia). Caliber One Indemnity Company is licensed in Delaware, its domiciliary state, and is an eligible excess and surplus lines carrier in 44 states, the District of Columbia, U.S. Virgin Islands and Puerto Rico. Our insurance subsidiaries are authorized and regulated in all jurisdictions where they conduct insurance business.

        In supervising and regulating insurance and reinsurance companies, state insurance departments, charged primarily with protecting policyholders and the public rather than investors, enjoy broad authority and discretion in applying applicable insurance laws and regulations for that purpose. PMA Capital Insurance Company and the Pooled Companies are domiciled in Pennsylvania, and the Pennsylvania Insurance Department exercises principal regulatory jurisdiction over them. Caliber One Indemnity Company is domiciled in Delaware, and the Delaware Insurance Department exercises principal jurisdiction over Caliber One Indemnity Company. The extent of regulation by the states varies, but in general, most jurisdictions have laws and regulations governing standards of solvency, adequacy of reserves, reinsurance, capital adequacy and standards of business conduct.

        In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related material and, for certain lines of insurance, including rate-sensitive workers’ compensation, the approval of rates. Property and casualty reinsurers, and excess and surplus lines carriers are generally not subject to filing or other regulatory requirements applicable to primary standard lines insurers with respect to rates, underwriting rules and policy forms. The form and content of statutory financial statements are regulated.

        The U.S. federal government does not directly regulate the insurance industry; however, federal initiatives from time to time can impact the insurance industry. In 1999, Gramm-Leach-Bliley Financial Modernization Act was signed into law. This Act removed many of the restrictions on affiliations among firms in different financial services businesses, notably banking, securities and insurance. The Act also contained provisions to protect the privacy of certain information on individuals held by insurance companies and financial institutions. Several governmental agencies and insurance departments have enacted or proposed regulations to implement these privacy provisions. To date, the Act has not had a material effect on us, although future privacy regulations could result in additional costs to us. Further, the Act may result in additional competition in one or more of the markets in which we sell our products and services.

        Further, although we do not write health insurance, federal and state rules and regulations affecting health care services can affect the workers’ compensation and integrated disability services we provide. Pending initiatives to increase health care regulation at the federal and state level include managed care reform and a patient’s bill of rights. We cannot predict what health care reform legislation will be adopted by Congress or by state legislatures where we do business or the effect, if any, that the adoption of health care legislation or regulations at the federal or state level will have on our results of operations.

        In the aftermath of the September 11th terrorist attack, the Bush Administration and Congress discussed various proposals that would make the federal government share in a portion of any future terrorism losses in the property and casualty industry. Although the House of Representatives passed legislation, the Senate did not. As of February 28, 2002, no further action has been taken by Congress to enact legislation on this subject. Without this type of legislation, property and casualty insurance companies may be responsible for losses arising from acts of terrorism to the extent that coverage for acts of terrorism is not excluded from their insurance policies.

        We are currently attempting to exclude coverage of losses due to terrorist activity in our assumed reinsurance contracts and in our surplus lines insurance agreements where underwriters determine that there is a significant risk of loss from terrorism activities. For the commercial insurance business offered by The PMA Insurance Group, excluding our workers’ compensation business, state insurance departments must approve the terms of our insurance forms and new exclusions included in those forms. As of January 31, 2002, all states except for California, Georgia, Florida and New York, have approved terrorism exclusions for polices on commercial insurance business, other than workers’ compensation insurance. Accordingly, we are attempting to include terrorism exclusions when permitted. With respect to workers’ compensation insurance, terrorism exclusions are not permitted under workers’ compensation laws of any state or jurisdiction in which we operate. When underwriting existing and new workers’ compensation business, we are considering the added potential risk of loss due to terrorist activity, and this may lead us to decline to write or non-renew certain business. However, even when terrorism exclusions are permitted, because our clients may not accept a full

23

terrorism exclusion in connection with business that we may still desire to write without an exclusion, some or many of our insurance policies or reinsurance contracts may not include a terrorism exclusion or only include a limited exclusion. Therefore, future terrorist attacks may result in losses that have a material adverse effect on our financial condition, results of operations and liquidity.

        State insurance departments in jurisdictions in which our insurance subsidiaries do business also conduct periodic examinations of their respective operations and accounts and require the filing of annual and other reports relating to their financial condition. The Pennsylvania Department of Insurance last conducted examinations of PMA Capital Insurance Company and the Pooled Companies as of December 31, 1997. No material adjustments to previously filed statutory financial statements were required as a result of such examinations. In addition, there were no material qualitative matters indicated in the examination reports that had a material adverse effect on the operations of PMA Capital Insurance Company and the Pooled Companies. The Delaware Department of Insurance recently completed an examination of Caliber One Indemnity Company for the three-year period ended December 31, 2000. Although a final report on this examination has not yet been issued, we do not expect there to be any significant adjustments to our reported statutory financial statements.

Insurance Holding Company Regulation

        The Company and its insurance subsidiaries are subject to regulation pursuant to the insurance holding company laws of Pennsylvania and Delaware. These state insurance holding company laws generally require an insurance holding company and insurers and reinsurers that are members of such insurance holding company’s system to register with the state regulatory authorities, to file with those authorities certain reports disclosing information including their capital structure, ownership, management, financial condition, certain intercompany transactions, including material transfers of assets and intercompany business agreements, and to report material changes in that information. These laws also require that intercompany transactions be fair and reasonable and, under certain circumstances, prior approval of a state’s insurance department must be received before entering into an intercompany transaction. Further, these laws require that an insurer’s policyholders’ surplus following any dividends or distributions to shareholder affiliates be reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs.

        Under Pennsylvania and Delaware law, no person may acquire, directly or indirectly, a controlling interest in our capital stock unless such person, corporation or other entity has obtained prior approval from the respective Commissioner for such acquisition of control. Pursuant to the Pennsylvania and Delaware law, any person acquiring, controlling or holding the power to vote, directly or indirectly, ten percent or more of the voting securities of an insurance company, is presumed to have “control” of such company. This presumption may be rebutted by a showing that control does not exist in fact. The respective Commissioner, however, may find that “control” exists in circumstances in which a person owns or controls a smaller amount of voting securities. To obtain approval from the Commissioner of any acquisition of control of an insurance company, the proposed acquirer must file with the Commissioner an application containing information regarding: the identity and background of the acquirer and its affiliates; the nature, source and amount of funds to be used to carry out the acquisition; the financial statements of the acquirer and its affiliates; any potential plans for disposition of the securities or business of the insurer; the number and type of securities to be acquired; any contracts with respect to the securities to be acquired; any agreements with broker-dealers; and other matters.

        Other jurisdictions in which our insurance subsidiaries are licensed to transact business may have requirements for prior approval of any acquisition of control of an insurance or reinsurance company licensed or authorized to transact business in those jurisdictions. Additional requirements in those jurisdictions may include re-licensing or subsequent approval for renewal of existing licenses upon an acquisition of control. As further described below, laws that govern the holding company structure also govern payment of dividends to us by our insurance subsidiaries.

Restrictions on Subsidiaries’ Dividends and Other Payments

        We are a holding company that transacts substantially all of our business directly and indirectly through subsidiaries. Our primary assets are the stock of our operating subsidiaries. Our ability to meet our obligations on our outstanding debt and to pay dividends and our general and administrative expenses depends on the surplus and earnings of our subsidiaries and the ability of our subsidiaries to pay dividends or to advance or repay funds to us.

        Our domestic insurance subsidiaries’ ability to pay dividends is regulated under the insurance laws and regulations of Pennsylvania and Delaware (the laws of which are substantially similar with respect to dividends). In addition to the regulatory restrictions, our existing revolving credit and letter of credit facilities limit the amount of dividends that our subsidiaries may pay to us. As a result, we may not be able to receive dividends from these subsidiaries at times and in amounts necessary to meet our obligations or to pay dividends on our Class A Common stock.

24

        Under Pennsylvania laws and regulations, our Pennsylvania-domiciled insurance subsidiaries (PMA Capital Insurance Company and the Pooled Companies) may pay dividends only from unassigned surplus and future earnings arising from their businesses and must receive prior approval of the Pennsylvania Insurance Commissioner to pay a dividend if such dividend would exceed the statutory limitation. The current statutory limitation is the greater of (i) 10% of the insurer’s policyholders’ surplus, as shown on its last annual statement on file with the Pennsylvania Insurance Commissioner or (ii) the insurer’s statutory net income for the previous calendar year, but in no event to exceed statutory unassigned surplus. Pennsylvania law gives the Pennsylvania Insurance Commissioner broad discretion to disapprove requests for dividends in excess of these limits. Pennsylvania law also provides that following the payment of any dividend, the insurer’s policyholders’ surplus must be reasonable in relation to its outstanding liabilities and adequate for its financial needs, and permits the Pennsylvania Insurance Commissioner to bring an action to rescind a dividend which violates these standards.

        All of our domestic insurance entities are owned by PMA Capital Insurance Company. Only PMA Capital Insurance Company, a Pennsylvania domiciled company, may pay dividends directly to us. During 2001, we received $29.6 million in dividends from PMA Capital Insurance Company. As of December 31, 2001, approximately $56 million of dividends are available to be paid to us without prior approval of the Pennsylvania Insurance Commissioner during 2002. As of December 31, 2001, The PMA Insurance Group can pay up to approximately $27 million in dividends to PMA Capital Insurance Company during 2002.

        Caliber One Indemnity Company is a Delaware-domiciled insurance subsidiary of PMA Capital Insurance Company. As a subsidiary of PMA Capital Insurance Company, Caliber One Indemnity Company’s dividends are not directly available to us. As noted above, the Delaware insurance law provisions restricting dividends by insurers are substantially similar to such provisions under Pennsylvania insurance laws. As of December 31, 2001, Caliber One Indemnity Company may not pay dividends to PMA Capital Insurance Company without prior approval of the Delaware Insurance Commissioner during 2002. During 2001, no dividends were declared or paid by Caliber One Indemnity Company.

        In the event that PMA Capital Insurance Company’s ability to pay dividends or make other payments to us in the future is reduced or eliminated, our ability to pay dividends to our shareholders and meet our other obligations, including operating expenses and any principal and interest on debt, could be materially and adversely affected, depending upon the extent of such reduction. In the event that the Pennsylvania Insurance Commissioner determines that the policyholders’ surplus of one subsidiary is inadequate, the Commissioner could use his or her broad discretionary authority to seek to require us to apply payments received from another subsidiary for the benefit of that insurance subsidiary.

        In addition to regulatory restrictions on dividends, our Revolving Credit Facility and Letter of Credit Facility also impose restrictions on the ability of our insurance subsidiaries to pay dividends. Under the most restrictive debt covenant of the Facilities, PMA Capital would be able to pay approximately $15 million in dividends in 2002.

Risk-Based Capital

        The National Association of Insurance Commissioners has adopted risk-based capital requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. Under RBC requirements, regulatory compliance is determined by the ratio of a company’s total adjusted capital, as defined by the NAIC, to its authorized control level of RBC (known as the RBC ratio), also as defined by the NAIC.

        Four levels of regulatory attention may be triggered if the RBC ratio is insufficient:

 • “Company action level”—If the RBC ratio is between 150% and 200%, then the insurer must submit a plan to the regulator detailing corrective action it proposes to undertake.

 • “Regulatory action level”—If the RBC ratio is between 100% and 150%, then the insurer must submit a plan, but a regulator may also issue a corrective order requiring the insurer to comply within a specified period.

 • “Authorized control level”—If the RBC ratio is between 70% and 100%, then the regulatory response is the same as at the “Regulatory action level,” but in addition, the regulator may take action to rehabilitate or liquidate the insurer.

 • “Mandatory control level”—If the RBC ratio is less than 70%, then the regulator must rehabilitate or liquidate the insurer.

25

        At December 31, 2001, the RBC ratios of the Pooled Companies ranged from 355% to 612%. PMA Capital Insurance Company’s RBC ratio was 323% and Caliber One Indemnity Company’s RBC ratio was 426%.

        We believe that we will be able to maintain the RBC ratios of our insurance subsidiaries in excess of “Company action level” through prudent underwriting, claims handling, investing and capital management. However, no assurances can be given that developments affecting the insurance subsidiaries, many of which could be outside of our control, including but not limited to changes in the regulatory environment, economic conditions and competitive conditions in the jurisdictions in which we write business, will not cause the RBC ratios to fall below required levels resulting in a corresponding regulatory response.

        The NAIC has also developed a series of twelve ratios (known as the IRIS ratios) designed to further assist regulators in assessing the financial condition of insurers. These ratio results are computed annually and reported to the NAIC and the insurer’s state of domicile. In 2001, each of the Pooled Companies reported an unusual value in one ratio, relating to reserve development due to the paydown of loss reserves.

        In 2001, PMA Capital Insurance Company reported three unusual values, relating to: (1) the change in net premiums written, (2) two-year overall operating ratio and (3) reserve development. The unusual value relating to the change in net premiums written is attributable to an intercompany quota share reinsurance treaty with Caliber One Indemnity Company, which commenced in 2001, and higher ceded premiums in 2000 due to the third quarter 2000 reserve action. The unusual value relating to the two-year overall operating ratio is due to the losses resulting from the attack on the World Trade Center in 2001 and the third quarter 2000 reserve action. The unusual value relating to reserve development is due to the long-tail nature of PMA Capital Insurance Company’s loss reserves, coupled with the above average premium growth in 2001 discussed above.

        In 2001, Caliber One Indemnity Company reported six unusual values, relating to: (1) the change in net premiums written, (2) surplus aid to surplus, (3) two-year overall operating ratio, (4) gross agents’ balances to surplus, (5) one-year reserve development and (6) change in surplus. The unusual values relating to the change in net premiums written and surplus aid to surplus were attributable to an intercompany quota share reinsurance treaty with PMA Capital Insurance Company. The unusual values relating to the two-year overall operating ratio, one-year reserve development and change in surplus are primarily the result of the higher than expected claim frequency and severity that emerged in 2001 on certain casualty lines of business, primarily professional liability policies for the nursing homes class of business. The unusual value relating to gross agents’ balances to surplus is attributable to increased gross premiums written in the fourth quarter of 2001, which is reflective of the improving market conditions experienced by Caliber One in the excess and surplus lines marketplace.

EMPLOYEES

        As of February 28, 2002, we had approximately 1,250 full-time employees. None of our employees are represented by a labor union and we are not a party to any collective bargaining agreements. We consider our employee relations to be good.

26

GLOSSARY OF SELECTED INSURANCE TERMS

Acquisition expense	The cost of acquiring both new and renewal insurance business, including commissions to agents or brokers and premium taxes.
Broker	One who negotiates contracts of insurance or reinsurance between parties. An insurance broker negotiates on behalf of an insured and a primary insurer. A reinsurance broker negotiates on behalf of a primary insurer or other reinsured and a reinsurer. The broker receives a commission for placement and other services rendered.
Case reserves	Loss reserves established with respect to individual reported claims.
Casualty insurance and/or   reinsurance	Insurance and/or reinsurance that is concerned primarily with the losses caused by injuries to third persons (in other words, persons other than the policyholder) and the legal liability imposed on the insured resulting therefrom.
Catastrophe reinsurance	A form of excess of loss property reinsurance that, subject to a specified limit, indemnifies the ceding company for the amount of loss in excess of a specified retention with respect to an accumulation of losses resulting from a catastrophic event.
Cede; ceding company;   cedent	When a company reinsures its risk with another, it "cedes" business and is referred to as the "ceding company" or the "cedent."
Combined ratio	The sum of losses and LAE, acquisition expenses, operating expenses and policyholders' dividends, where applicable, all divided by net premiums earned.
Direct reinsurer, direct   underwriter, direct writer	A reinsurer that markets and sells reinsurance directly to its reinsureds without the assistance of brokers.
Excess and surplus lines	Surplus lines risks are those risks not fitting normal underwriting patterns, involving a degree of risk that is not commensurate with standard rates and/or policy forms, or that will not be written by standard carriers because of general market conditions. Excess insurance refers to coverage that attaches for an insured over the limits of a primary policy or a stipulated self-insured retention. Policies are bound or accepted by carriers not licensed in the jurisdiction where the risk is located, and generally are not subject to regulations governing premium rates or policy language.
Excess of loss reinsurance	The generic term describing reinsurance that indemnifies the reinsured against all or a specified portion of losses on underlying insurance policies in excess of a specified dollar amount, called a "layer" or "retention." Also known as nonproportional reinsurance.
Facultative reinsurance	The reinsurance of all or a portion of the insurance provided by a single policy. Each policy reinsured is separately negotiated.
Financial quota share   reinsurance	A form of finite risk reinsurance wherein the cedent transfers some of its premiums to a finite risk provider and achieves, by virtue of an individual arrangement for reinsurance commission, the required financial effects, such as a stabilization of net claims costs.
Finite risk reinsurance	A form of reinsurance combining common features of traditional reinsurance with additional features that recognize the reinsured's needs regarding cash flows, investment yields and capital management. This type of reinsurance usually includes caps on the maximum gain or loss to the reinsurer.

27

Funded catastrophe coverages	Reinsurance contracts under which the ceding company pays a higher than normal premium intended to build a fund from which to pay expected losses. All of the premium less the reinsurance charge will be returned to the ceding company at some time in the future as loss payments, returned premiums, or contingent commissions.
Funds held	The holding by a ceding company of funds representing the unearned premium reserve or the outstanding loss reserve applied to the business it cedes to a reinsurer.
Gross premiums written	Total premiums for direct insurance and reinsurance assumed during a given period.
Incurred but not reported   ("IBNR") reserves	Loss reserves for estimated losses that have been incurred but not yet reported to the insurer or reinsurer.
Incurred losses	The total losses sustained by an insurance company under a policy or policies, whether paid or unpaid. Incurred losses include a provision for claims that have occurred but have not yet been reported to the insurer ("IBNR").
Layers	The division of a particular reinsurance program delineated by an attachment point and a maximum limit. Often, a reinsurance program will be divided into several layers, with the lower layers typically having higher premiums and higher claim frequency and the higher layers typically having lower premiums and claim frequency.
Loss adjustment expenses   ("LAE")	The expenses of settling claims, including legal and other fees and the portion of general expenses allocated to claim settlement costs.
Loss and LAE ratio	Loss and LAE ratio is equal to losses and LAE divided by earned premiums.
Loss reserves	Liabilities established by insurers and reinsurers to reflect the estimated cost of claims payments that the insurer or reinsurer ultimately will be required to pay in respect of insurance or reinsurance it has written. Reserves are established for losses and for LAE and consist of case reserves and bulk reserves.
Manual rates	Insurance rates for lines and classes of business that are approved and published by state insurance departments.
Net premiums earned	The portion of net premiums written that is earned during a period and recognized for accounting purposes as revenue.
Net premiums written	Gross premiums written for a given period less premiums ceded to reinsurers during such period.
Per occurrence	A form of insurance or reinsurance under which the date of the loss event is deemed to be the date of the occurrence, regardless of when reported and permits all losses arising out of one event to be aggregated instead of being handled on a risk-by-risk basis.
Policyholders' dividend ratio	The ratio of policyholders' dividends to earned premiums.
Primary insurer	An insurance company that issues insurance policies to the general public or to certain non-insurance entities.
Pro rata reinsurance	A form of reinsurance in which the reinsurer shares a proportional part of the ceded insurance liability, premiums and losses of the ceding company. Pro rata reinsurance also is known as proportional reinsurance or participating reinsurance.

28

Property insurance   and/or reinsurance	Insurance and/or reinsurance that indemnifies a person with an insurable interest in tangible property for his property loss, damage or loss of use.
Reinsurance	A transaction whereby the reinsurer, for consideration, agrees to indemnify the reinsured company against all or part of the loss the company may sustain under the policy or policies it has issued. The reinsured may be referred to as the original or primary insurer, the direct writing company or the ceding company.
Retention, retention layer	The amount or portion of risk that an insurer or reinsurer retains for its own account. Losses in excess of the retention layer are paid by the reinsurer or retrocessionaire. In proportional treaties, the retention may be a percentage of the original policy's limit. In excess of loss business, the retention is a dollar amount of loss, a loss ratio or a percentage.
Retrocession;   retrocessionaire	A transaction whereby a reinsurer cedes to another reinsurer (the "retrocessionaire") all or part of the reinsurance it has assumed. Retrocession does not legally discharge the ceding reinsurer from its liability with respect to its obligations to the reinsured.
Semi-automatic facultative   arrangements	Facultative reinsurance contracts where the ceding company has the right, but not the obligation to cede risks to a reinsurer and the reinsurer is obligated to accept such risks as they are within stated criteria. If a risk falls outside such criteria, the reinsurer has the option of either accepting the risk, declining the risk, or repricing the risk.
Statutory accounting   principles ("SAP")	Recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by state insurance regulatory authorities and the NAIC.
Statutory or policyholders'   surplus; statutory capital   &surplus	The excess of admitted assets over total liabilities (including loss reserves), determined in accordance with SAP.
Stop loss	See "Excess of loss reinsurance."
Treaty reinsurance	The reinsurance of a specified type or category of risks defined in a reinsurance agreement (a "treaty") between a primary insurer or other reinsured and a reinsurer. Typically, in treaty reinsurance, the primary insurer or reinsured is obligated to offer and the reinsurer is obligated to accept a specified portion of all agreed upon types or categories of risks originally written by the primary insurer or reinsured.
Underwriting	The insurer's/reinsurer's process of reviewing applications submitted for insurance coverage, deciding whether to accept all or part of the coverage requested and determining the applicable premiums.
Unearned premiums	The portion of a premium representing the unexpired portion of the exposure period as of a certain date.
Unearned premium reserve	Liabilities established by insurers and reinsurers to reflect unearned premiums which are refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.

29

RISK FACTORS

        Our business faces significant risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition, results of operations or prospects could be affected materially.

Our results may fluctuate as a result of many factors, including cyclical changes in the insurance and reinsurance industry.

        The results of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. The industry’s profitability can be affected significantly by:

•  rising levels of actual costs that are not known by companies at the time they price their products;

• volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes;

• changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’liability develop;

• fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital and may impact the ultimate payout of losses; and

• volatility associated with the long-tail nature of the reinsurance business, which may impact our operating results.

        The property and casualty insurance industry historically is cyclical in nature. The demand for property and casualty insurance can vary significantly, rising as the overall level of economic activity increases and falling as such activity decreases. The property and casualty insurance industry and especially the reinsurance business also have been very competitive, although our insurance subsidiaries have experienced more favorable terms and pricing beginning in the second half of 2000 and continuing into early 2002. These fluctuations in demand and competition and the impact on us of other factors identified above could have a negative impact on our results of operations and financial condition.

Because we operate in a highly competitive industry, we may be unable to maintain adequate rates.

        The property and casualty insurance and reinsurance industry is highly competitive. We compete with major U.S. and regional insurers and reinsurers as well as non-U.S. insurers and reinsurers. Some of our competitors have greater financial, marketing and management resources than we do.

        A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include:

• an influx of new capital in the marketplace as existing companies attempt to expand their business and new companies attempt to enter the insurance and reinsurance business as a result of better pricing and/or terms;

• the enactment of the Gramm-Leach-Bliley Act of 1999 (which permits financial services companies, such as banks and brokerage firms, to engage in certain insurance activities), which could result in increased competition from financial services companies;

• the implementation of commercial lines deregulation in several states, which could increase competition from standard carriers for our excess and surplus lines of insurance business;

• programs in which state-sponsored entities provide property insurance in catastrophe-prone areas or other alternative markets types of coverage; and

• changing practices caused by the Internet, which have led to greater competition in the insurance business.

30

        These developments could make the property and casualty insurance marketplace more competitive by increasing the supply of insurance and reinsurance available. The significant amount of capital in the property and casualty marketplace has, until recently, resulted in the supply of insurance and reinsurance outpacing demand. This oversupply has made it difficult to achieve a level of rate adequacy related to the amount of risk undertaken. Although rates have improved recently, continued oversupply may negatively influence the sustainability of adequate rate changes, and accordingly, have an adverse effect on our earnings.

If our actual losses from insureds exceed our loss reserves, our financial results would be adversely affected.

        Like all insurers, we establish reserves representing estimates of future amounts needed to pay claims with respect to insured events that have occurred, including events that have not been reported to us. We also establish reserves for loss adjustment expenses, which represent the estimated expenses of settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. Reserves are merely estimates and do not and cannot represent an exact measure of liability. The reserving process involves actuarial models, which rely on the basic assumption that past experience, adjusted for the effect of current developments and likely trends in claims severity, frequency, judicial theories of liability and other factors, is an appropriate basis for predicting future events. However, 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 insurer and the insurer’s payment of that loss. Further, liabilities for reinsurers generally become known more slowly than for primary insurers and are generally subject to more unforeseen development.

        If, during that time, actual losses and loss adjustment expenses develop faster or are larger than our loss reserve estimates, which may be due to a wide range of factors, including inflation, changes in claims and litigation trends and legislative or regulatory changes, we would have to increase reserves. As a result, we would incur a charge to earnings in the period the reserves are increased. For example, in the third quarter of 2000, we took a charge of approximately $60 million to our pre-tax earnings as a result of higher than expected loss and loss adjustment expenses in certain lines of our reinsurance business.

        Reserve estimates are continually refined through an ongoing process as further claims are reported and settled and additional information concerning loss experience becomes known. Because setting reserves is inherently uncertain, our current reserves may prove inadequate in light of subsequent developments. As stated in the preceding paragraph, should we need to increase our reserves, our earnings for the period will generally decrease by a corresponding amount. Therefore, future reserve increases could have a material adverse effect on our results of operations and financial condition.

We have exposure to unpredictable catastrophes, which can materially affect our financial results.

        We are subject to claims arising out of catastrophes that may have a significant effect on our results of operations, liquidity and financial condition. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Insurance companies are not permitted to reserve for catastrophes until such event takes place. Therefore, although we actively manage our exposure to catastrophes through our underwriting process and the purchase of reinsurance protection, an especially severe catastrophe or series of catastrophes could exceed our reinsurance and may have a material adverse impact on our financial condition, results of operations and liquidity.

        Man-made events, such as terrorism, can also cause catastrophes. For example, the attack on the World Trade Center resulted in approximately $30 million in pre-tax losses to us, after deduction of all reinsurance and retrocessional protection, for 2001. This estimate is based on our analysis of the available facts known by us to date and our examination of known exposures. However, it is difficult to fully estimate our losses from the attack given the uncertain nature of damage theories and loss amounts, and the possible development of additional facts related to the attack. As more information becomes available, we may need to increase our estimate of these losses.

        We are currently attempting to exclude coverage of losses due to terrorist activity in our assumed reinsurance contracts and in our surplus lines insurance agreements where underwriters determine that there is a significant risk of loss from terrorism activities. For the commercial insurance business offered by The PMA Insurance Group, excluding our workers’ compensation business, state insurance departments must approve the terms of our insurance forms and new exclusions included in those forms. As of January 31, 2002, all states except for California, Georgia, Florida and New York, have approved terrorism exclusions for polices on commercial insurance business, other than workers’

31

compensation insurance. Accordingly, we are attempting to include terrorism exclusions when permitted. With respect to workers’ compensation insurance, terrorism exclusions are not permitted under workers’ compensation laws of any state or jurisdiction in which we operate. When underwriting existing and new workers’ compensation business, we are considering the added potential risk of loss due to terrorist activity, and this may lead us to decline to write or non-renew certain business. However, even when terrorism exclusions are permitted, because our clients may object to a terrorism exclusion in connection with business that we may still desire to write without an exclusion, some or many of our insurance policies or reinsurance contracts may not include a terrorism exclusion. Therefore, future terrorist attacks may result in losses that have a material adverse effect on our financial condition, results of operations and liquidity.

We face a risk of non-collectibility of reinsurance, which could materially affect our results of operations.

        We follow the customary insurance practice of reinsuring with other insurance and reinsurance companies a portion of the risks under the policies written by our insurance and reinsurance subsidiaries. This reinsurance is maintained to protect our insurance and reinsurance subsidiaries against the severity of losses on individual claims and unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss. Although reinsurance does not discharge our subsidiaries from their primary obligation to pay policyholders for losses insured under the policies we issue, reinsurance does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk. The collectibility of reinsurance is largely a function of the solvency of reinsurers. We perform annual credit reviews on our reinsurers, focusing on, among other things, financial capacity, stability, trends and commitment to the reinsurance business. We also require assets in trust, letters of credit or other acceptable collateral to support balances due from reinsurers not authorized to transact business in the applicable jurisdictions. Despite these measures, a reinsurer’s insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on our results of operations and financial condition.

We face a risk of non-availability of reinsurance, which could materially affect our ability to write business and our results of operations.

        Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase. We cannot assure you that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as are currently available. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient, we would either have to be willing to accept an increase in our net exposures or reduce our insurance writings. Due to the terrorist attack on the World Trade Center, for example, our reinsurers have generally included terrorism exclusions or limits in their reinsurance agreements. Although this has not materially affected our business written or our results of operations, future terrorist attacks leading to claims under policies that we have written without terrorism exclusions may have a material adverse effect on our results of operations.

Because insurance ratings are important to our policyholders, downgrades in our insurance ratings may adversely affect us.

        Rating agencies rate insurance companies based on financial strength and the ability to pay claims, factors more relevant to policyholders than investors. We believe that the ratings assigned by nationally recognized, independent rating agencies, particularly A.M. Best, are material to our operations. A. M. Best, Standard & Poor’s and Moody’s Investor Services currently rate our principal insurance subsidiaries. Please see “Competition — Ratings” on page 22 for a description of our ratings.

        A downgrade in these ratings could affect our competitive position in the insurance industry and make it more difficult for us to market our products. A significant downgrade could result in a material loss of business as policyholders move to other companies with higher claims-paying and financial strength ratings.

32

Because we are heavily regulated by the states in which we do business, we may be limited in the way we operate.

        We are subject to extensive supervision and regulation in the states in which we do business. The supervision and regulation relate to numerous aspects of our business and financial condition. The primary purpose of the supervision and regulation is the protection of our insurance policyholders, and not our investors. The extent of regulation varies, but generally is governed by state statutes. These statutes delegate regulatory, supervisory and administrative authority to state insurance departments. This system of supervision and regulation covers, among other things:

• standards of solvency, including risk-based capital measurements;

• restrictions on the nature, quality and concentration of investments;

• limitations on the rates that we may charge on our workers' compensation business;

• restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary insurance operations;

• certain required methods of accounting;

• reserves for unearned premiums, losses and other purposes; and

• potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies.

        The regulations of the state insurance departments may affect the cost or demand for our products and may impede us from obtaining rate increases on insurance policies offered by our primary insurance operations or taking other actions we might wish to take to increase our profitability. Further, we may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations, which may change from time to time. Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines. In light of recent insolvencies of large property and casualty insurers, it is possible that the regulations governing the level of the guaranty fund or association assessments against us may change, requiring us to increase our level of payments.

Because our reinsurance operations depend on a few reinsurance brokers for a large portion of their revenue, loss of business provided by them could adversely affect us.

        We market our reinsurance products through reinsurance brokers. Four brokerage firms accounted for 80% of our reinsurance gross premiums written and 37% of our consolidated gross premiums written for the year ended December 31, 2001. Please see “PMA Re — Distribution” on page 5 for a further description of our broker relationships. Loss of all or a substantial portion of the business provided by these brokers could have a material adverse effect on us.

Because our investment portfolio is made up primarily of fixed-income securities, the fair value of our investment portfolio and our investment income could suffer as a result of fluctuations in interest rates.

        We currently maintain and intend to continue to maintain an investment portfolio made up primarily of fixed-income securities. The fair value of these securities can fluctuate depending on changes in interest rates. Generally, the fair market value of these investments increases or decreases in an inverse relationship with changes in interest rates, while net investment income earned by us from future investments in fixed-income securities will generally increase or decrease with interest rates. Our overall investment strategy is to invest in high quality securities while maintaining diversification to avoid significant concentrations in individual issuers, industry segments and geographic regions. All of our fixed-income securities are classified as available for sale; as a result, changes in the market value of our fixed-income securities are reflected in our balance sheet. Accordingly, changes in interest rates may result in fluctuations in the income from, and the valuation of, our fixed-income investments, which could have an adverse effect on our results of operations and financial condition.

33

Our status as an insurance holding company with no direct operations could adversely affect our ability to meet our obligations and pay dividends.

        We are a holding company that transacts substantially all of our business directly and indirectly through subsidiaries. Our primary assets are the stock of our operating subsidiaries. Our ability to meet our obligations on our outstanding debt and to pay dividends and our general and administrative expenses depends on the surplus and earnings of our subsidiaries and the ability of our subsidiaries to pay dividends or to advance or repay funds to us. Payments of dividends and advances and repayments by our insurance operating subsidiaries are restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds. Approximately $56 million of dividends are available to be paid to us in 2002 from our domestic insurance subsidiaries without prior regulatory approval. In addition to the regulatory restrictions, our existing revolving credit and letter of credit facilities limit the amount of dividends that our subsidiaries may pay to us. As a result, we may not be able to receive dividends from these subsidiaries at times and in amounts necessary to meet our debt obligations or to pay dividends on our capital securities.

The covenants in our debt agreements could limit our financial and operational flexibility, which could have an adverse effect on our financial condition, and limit the amount of dividends that we can pay on any class of capital stock.

        We have incurred indebtedness and may incur additional indebtedness in the future. At December 31, 2001, we had $62.5 million outstanding under our credit facility and $27.9 million outstanding in letters of credit under our secured letter of credit facility. The agreements governing our indebtedness contain numerous covenants that limit, or have the effect of limiting, our ability to, among other things, borrow money, sell assets, merge or consolidate and make investments. These restrictions could limit our ability to take advantage of business and investment opportunities, and therefore, could adversely affect our financial condition, liquidity and results of operations. In addition, these agreements limit our ability to pay dividends on our Class A Common stock. In 2002, under the most restrictive covenants of these agreements, we would be able to pay dividends of approximately $15 million on any class of capital stock.

Our business is dependent upon our key executives who do not have employment agreements with restrictive covenants and can leave our employment at any time.

        Our success depends significantly on the efforts and abilities of our Chairman, Frederick W. Anton III; our President and Chief Executive Officer, John W. Smithson; the President and Chief Operating Officer of PMA Re, Stephen G. Tirney; the President and Chief Operating Officer of The PMA Insurance Group, Vincent T. Donnelly; and the President and Chief Operating Officer of Caliber One, Ronald S. Austin. We do not presently have employment agreements that include restrictive covenants with our key executives. Accordingly, our key executives may leave our employment at any time. Because our business is based to some extent upon relationships with our brokers and insureds, our future results of operations could be adversely affected if we are unable to retain our current executives or to attract new executives.

34

Item 2.  Properties

        The Company’s and PMA Re’s headquarters are located in 87,500 square feet of leased space in center city Philadelphia, Pennsylvania. The PMA Insurance Group’s headquarters are located in a four story, 110,000 square foot building in Blue Bell, Pennsylvania. Caliber One’s headquarters are located in approximately 50,000 square feet of leased office space in Yardley, Pennsylvania.

        Through various wholly owned subsidiaries, the Company also owns and occupies additional office facilities in three other locations and rents additional office space for its insurance operations in 16 other locations. The Company believes that such owned properties are suitable and adequate for its current business operations.

Item 3.  Legal Proceedings

        We are 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 our insureds, or as an insurer defending coverage claims brought against it by our policyholders or other insurers. While the outcome of all litigation involving us, 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 our 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 receivables by amounts that would be material to our financial condition, results of operations or liquidity.

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

        There were no matters submitted to a vote of security holders during the fourth quarter of 2001.

Executive Officers of the Registrant

        Our executive officers are as follows:

Name	Age	Position
John W. Smithson	56	President and Chief Executive Officer
Frederick W. Anton III	68	Chairman of the Board
Ronald S. Austin	44	President and Chief Operating Officer -
		Caliber One Management Company
Vincent T. Donnelly	49	President and Chief Operating Officer -
		The PMA Insurance Group
Francis W. McDonnell	45	Senior Vice President, Chief Financial Officer
		and Treasurer
Robert L. Pratter	57	Senior Vice President, General Counsel and
		Secretary
Stephen G. Tirney	48	President and Chief Operating Officer -
		PMA Re Management Company

        John W. Smithson has served as our President and Chief Executive Officer since May 1997, and as a director since 1987. Mr. Smithson served as our President and Chief Operating Officer from 1995 to May 1997. He has also served as Chairman and Chief Executive Officer of the following subsidiaries: PMA Capital Insurance Company since 1984; The PMA Insurance Group since 1995; Caliber One Management Company since 1997; Caliber One Indemnity Company since 1997; and PMA Re Management Company since 2000.

        Frederick W. Anton III has served as Chairman of the Board since 1995 and as a director since 1972. Mr. Anton served as Chairman of the Board and Chief Executive Officer from 1995 to May 1997, and as President and Chief Executive Officer from 1981 to 1995.

        Ronald S. Austin has served as the President and Chief Operating Officer of Caliber One Management Company and Caliber One Indemnity Company since 1997, and has served as Executive Vice President of PMA Capital Insurance Company since November 2000. From 1988 to 1997, Mr. Austin served as an officer and director of General Star Management Company, a subsidiary of the General Re Group.

35

        Vincent T. Donnelly has served as President and Chief Operating Officer of The PMA Insurance Group since February 1997, and has served as Executive Vice President of PMA Capital Insurance Company since November 2000. Mr. Donnelly served as Senior Vice President — Finance and Chief Actuary of The PMA Insurance Group from 1995 to 1997.

        Francis W. McDonnell has served as our Senior Vice President and Chief Financial Officer since 1995 and as Treasurer since 1997, and has served as Vice President and Chief Financial Officer of PMA Capital Insurance Company since 1995.

        Robert L. Pratter has served as our Senior Vice President, General Counsel and Secretary since 1999, and has served as Vice President and General Counsel of PMA Capital Insurance Company since November 2000. From 1969 to 1999, Mr. Pratter was an attorney and partner in the law firm of Duane, Morris & Heckscher LLP.

        Stephen G. Tirney has served as President and Chief Operating Officer of PMA Re Management Company, since November 2000, Executive Vice President of PMA Capital Insurance Company since November 2000 and President and Chief Operating Officer of PMA Reinsurance Corporation from 1997 to November 2000. Mr. Tirney served as Executive Vice President of PMA Reinsurance Corporation from 1993 to 1997.

PART II

Item 5.  Market for the Registrant's Common Equity and Related Shareholder Matters

Market For Class A Common Stock

        The “Class A Common Stock Prices” under the caption “Quarterly Financial Information” and the last paragraph on page 74 of the Annual Report, as well as the information under the captions “Securities Listing” and “Dividends” on page 77 of the Annual Report are incorporated herein by reference. Further, the information in Note 8 to the Financial Statements in the Annual Report and under the caption “Regulatory Matters—Restrictions on Subsidiaries’ Dividends and Other Payments” in Item 1 of this Form 10-K is incorporated herein by reference.

Related Shareholder Matters

        On November 21, 2001, we commenced an offering of 8,500,000 shares of Class A Common Stock by filing a registration statement on Form S-3, No. 333-72952. The offering was joint lead-managed by Credit Suisse First Boston (bookrunner) and Banc of America Securities LLC, and was co-managed by Sandler O’Neill & Partners, L.P. The offering closed on December 19, 2001, and we sold 9,775,000 shares in the offering, including the underwriters’ overallotment option for 1,275,000 shares, at $17.25 per share. We realized proceeds of $157.9 million, net of issuance costs of $585,000 and underwriting discounts and commissions of $10.2 million. We used $62.5 million of the proceeds to repay a portion of our outstanding debt under our revolving credit facility and the remainder was contributed to the capital of our insurance subsidiaries.

Item 6.  Selected Financial Data

        The information under the caption “Selected Financial Data” on pages 26 and 27 of the Annual Report is incorporated herein by reference.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

        Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 28 through 48 of the Annual Report is incorporated herein by reference.

36

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

        The information under the caption “Market Risk of Financial Instruments” on pages 44 and 45 of the Annual Report is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

        Our Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 49 through 72 and the Report of Independent Accountants on page 73 of the Annual Report are incorporated herein by reference, as is the unaudited “Income Statement Data” and “Per Share Data” under the caption “Quarterly Financial Information” on page 74 of the Annual Report.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

PART III

Item 10.  Directors and Executive Officers of the Registrant

        See “Executive Officers of the Registrant” under Item 4 above. The information under the captions “Nominees For Election” and “Directors Continuing in Office” on pages 5 through 7 of our Proxy Statement, dated March 22, 2002 for the 2002 Annual Meeting of Shareholders (“Proxy Statement”) is incorporated herein by reference, as is the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” on page 27 of the Proxy Statement.

Item 11.  Executive Compensation

        The information under the caption “Compensation of Executive Officers” on pages 10 through 13 and under the caption “Director Compensation” on page 8 of the Proxy Statement is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

        The information under the caption “Beneficial Ownership of Class A Common Stock” on pages 3 through 5 of the Proxy Statement is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

        The information under the caption “Certain Transactions” on pages 17 and 18 of the Proxy Statement is incorporated herein by reference.

37

PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

FINANCIAL STATEMENTS AND SCHEDULES

(a) (1) The following consolidated financial statements of PMA Capital and its subsidiary companies and Report of Independent Accountants, included on pages 49 through 73 of the Annual Report are incorporated herein by reference:

• Consolidated Balance Sheets at December 31, 2001 and 2000

• Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999

• Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999

• Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999

• Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2001, 2000 and 1999

• Notes to Consolidated Financial Statements

• Report of Independent Accountants

(a) (2) The Financial Statement Schedules are listed in the Index to Financial Statement Schedules on page FS-1

All other schedules specified by Article 7 of Regulation S-X are not required pursuant to the related instructions or are inapplicable and, therefore, have been omitted.

(a) (3) The Exhibits are listed in the Index to Exhibits on pages E-1 through E-4.

(b) Reports on Form 8-K filed during the quarter ended December 31, 2001:

During the quarterly period ended December 31, 2001, the Company filed the following reports on Form 8-K:

• dated November 7, 2001, Items 5 and 9 – containing a news release regarding its third quarter 2001 results and informing investors that its third quarter 2001 statistical supplement is available on its website.

• dated November 8, 2001, Item 9 – containing a news release announcing that it has filed a registration statement with the Securities and Exchange Commission covering an offering of shares of its common stock.

38

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, and in the capacities indicated, by the undersigned, thereunto duly authorized.

	PMA CAPITAL CORPORATION
Date: March 19, 2002	By: /s/ Francis W. McDonnell
	Francis W. McDonnell
	Senior Vice President,
	Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 19, 2002.

Signature*	Title
John W. Smithson	President and Chief Executive Officer and a Director (Principal Executive Officer)
Frederick W. Anton III	Chairman of the Board and a Director
Paul I. Detwiler, Jr.	Director
Joseph H. Foster	Director
Thomas J. Gallen	Director
Anne S. Genter	Director
James F. Malone III	Director
Louis N. McCarter III	Director
John W. Miller, Jr.	Director
Edward H. Owlett	Director
Louis I. Pollock	Director
Roderic H. Ross	Director
L. J. Rowell, Jr.	Director
* By: /s/ Charles A. Brawley, III          Charles A. Brawley, III            Attorney-in-Fact

39

PMA Capital Corporation
Index to Financial Statement Schedules

Schedule No.	Description	Page
II	Condensed Financial Information of Registrant as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999	FS-2 to FS-4
III	Supplementary Insurance Information for the years ended December 31, 2001, 2000 and 1999	FS-5
IV	Reinsurance for the years ended December 31, 2001, 2000 and 1999	FS-6
V	Valuation and Qualifying Accounts for the years ended December 31, 2001, 2000 and 1999	FS-7
VI	Supplemental Information Concerning Property and Casualty Insurance Operations for the years ended December 31, 2001, 2000 and 1999	FS-8
	Report of Independent Accountants on Financial Statement Schedules	FS-9

Certain financial statement schedules have been omitted because they are either not applicable or the required financial information is contained in the Company’s 2001 Consolidated Financial Statements and notes thereto.

FS-1

PMA Capital Corporation
Schedule II – Registrant Only Financial Statements
Balance Sheets
(Parent Company Only)

	December 31,
(dollar amounts in thousands)	2001			2000
Assets
Cash	$	1		$	435
Investment in subsidiaries		741,700			633,336
Deferred income taxes, net		20,953			7,845
Other assets		8,040			8,110
Total assets	$	770,694		$	649,726
Liabilities
Short-term debt	$	62,500		$	100,500
Long-term debt		-			62,500
Related party payables		66,773			17,887
Other liabilities		29,415			28,793
Total liabilities		158,688			209,680
Shareholders' Equity
Class A Common stock, $5 par value (40,000,000 shares authorized;
2001 - 34,217,945 shares issued and 31,167,006 outstanding
2000 - 24,442,945 shares issued and 21,573,316 outstanding		171,090			122,214
Additional paid-in capital		109,331			339
Retained earnings		382,165			384,694
Accumulated other comprehensive income (loss)		5,375			(14,373	)
Notes receivable from officers		(158	)		(56	)
Treasury stock, at cost (2001 – 3,050,939 shares; 2000 – 2,869,629 shares)		(55,797	)		(52,772	)
Total shareholders' equity		612,006			440,046
Total liabilities and shareholders' equity	$	770,694		$	649,726

These financial statements should be read in conjunction with the Consolidated Financial
Statements and the notes thereto.

FS-2

PMA Capital Corporation
Schedule II – Registrant Only Financial Statements
Statements of Operations
(Parent Company Only)

	Years Ended December 31,
(dollar amounts in thousands)	2001			2000			1999
Revenues:
Net investment income (expense)	$	45		$	(60	)	$	(14	)
Other revenues		50			653			98
Total revenues		95			593			84
Expenses:
General expenses		6,143			5,189			8,012
Interest expense		7,629			12,708			12,434
Total expenses		13,772			17,897			20,446
Loss before income taxes and equity in earnings of subsidiaries		(13,677	)		(17,304	)		(20,362	)
Income tax benefit		(16,415	)		(11,628	)		(6,426	)
Income (loss) before equity in earnings of subsidiaries		2,738			(5,676	)		(13,936	)
Equity in earnings of subsidiaries		4,365			7,001			39,530
Net income	$	7,103		$	1,325		$	25,594

These financial statements should be read in conjunction with the Consolidated Financial
Statements and the notes thereto.

FS-3

PMA Capital Corporation
Schedule II – Registrant Only Financial Statements
Statements of Cash Flows
(Parent Company Only)

	Years ended December 31,
(dollar amounts in thousands)	2001			2000			1999
Cash Flows From Operating Activities:
Net income	$	7,103		$	1,325		$	25,594
Adjustments to reconcile net income to net cash flows provided
by operating activities:
Equity in earnings of subsidiaries		(4,365	)		(7,001	)		(39,530	)
Dividends received from subsidiaries		29,600			35,925			43,206
Net tax sharing payments received from subsidiaries		2,403			6,404			21,798
Deferred income tax expense (benefit)		(12,520	)		(4,091	)		5,926
Other, net		(9,583	)		3,838			(5,173	)
Net cash flows provided by operating activities		12,638			36,400			51,821
Cash Flows From Investing Activities:
Cash contributions to subsidiaries		(103,850	)		(9,000	)		(7,100	)
Net cash flows used in investing activities		(103,850	)		(9,000	)		(7,100	)
Cash Flows From Financing Activities:
Proceeds from issuance of stock		157,868			-			-
Dividends paid to shareholders		(9,035	)		(8,020	)		(7,795	)
Proceeds from exercise of stock options		1,387			2,866			6,035
Purchase of treasury stock		(5,323	)		(18,427	)		(30,241	)
Repayments of debt		(100,500	)		-			-
Net repayments (issuance) of notes receivable from officers		(102	)		-			442
Change in related party receivables and payables		46,483			(3,989	)		(12,557	)
Net cash flows provided by (used in) financing activities		90,778			(27,570	)		(44,116	)
Net increase (decrease) in cash		(434	)		(170	)		605
Cash - beginning of year		435			605			-
Cash - end of year	$	1		$	435		$	605
Supplementary cash flow information:
Income taxes paid (refunded)	$	(8,991	)	$	7,300		$	12,352
Interest paid	$	8,163		$	12,615		$	12,263

These financial statements should be read in conjunction with the Consolidated Financial
Statements and the notes thereto.

FS-4

PMA Capital Corporation
Schedule III
Supplementary Insurance Information

(dollar amounts in thousands)	Deferred acquisition costs		Unpaid losses and loss adjustment expenses			Unearned premiums		Net premiums earned			Net investment income(1)			Losses and loss adjustment expenses		Acquisition expenses		Operating expenses		Net premiums written
December 31, 2001:
PMA Re	$	34,286	$	1,047,503		$	105,085	$	340,401		$	45,361		$	297,623	$	71,013	$	20,188	$	360,604
The PMA Insurance Group		24,932		1,107,141			146,658		346,574			39,444			258,933		60,909		40,181		355,547
Caliber One		5,132		189,534			56,549		46,232			3,124			60,207		7,060		8,257		53,674
Corporate and Other(2)		-		(19,739	)		-		(767	)		(984	)		-		-		9,389		(767	)
Total	$	64,350	$	2,324,439		$	308,292	$	732,440		$	86,945		$	616,763	$	138,982	$	78,015	$	769,058
December 31, 2000:
PMA Re	$	22,969	$	871,727		$	90,851	$	251,109		$	51,125		$	229,925	$	65,522	$	14,084	$	261,505
The PMA Insurance Group		23,554		1,058,524			138,554		252,348			47,969			189,001		46,464		34,495		268,839
Caliber One		1,999		132,104			40,329		28,799			4,424			30,462		668		9,107		16,043
Corporate and Other(2)		-		(9,217	)		-		(832	)		(927	)		-		-		9,395		(832	)
Total	$	48,522	$	2,053,138		$	269,734	$	531,424		$	102,591		$	449,388	$	112,654	$	67,081	$	545,555
December 31, 1999:
PMA Re	$	23,446	$	743,528		$	88,183	$	293,862		$	57,686		$	206,891	$	80,749	$	13,589	$	278,998
The PMA Insurance Group		20,558		1,144,087			120,928		221,934			50,282			166,674		39,378		38,909		233,713
Caliber One		4,945		54,809			51,241		24,729			2,459			18,908		4,241		3,956		51,237
Corporate and Other(2)		-		(9,823	)		-		(438	)		(370	)		-		-		10,368		(438	)
Total	$	48,949	$	1,932,601		$	260,352	$	540,087		$	110,057		$	392,473	$	124,368	$	66,822	$	563,510

(1) Net investment income is based on each segment's invested assets.

(2) Corporate and Other includes unallocated investment income and expenses, including debt service, as well as the results of certain of our real estate properties. Corporate and Other also includes the effect of eliminating intercompany transactions.

FS-5

PMA Capital Corporation
Schedule IV
Reinsurance

(dollar amounts in thousands)	Direct amount		Ceded to other companies		Assumed from other companies		Net amount		Percentage of amount assumed to net
Year Ended December 31, 2001:
Property and liability insurance premiums	$	508,821	$	243,356	$	466,975	$	732,440		64%
Year Ended December 31, 2000:
Property and liability insurance premiums	$	416,152	$	278,556	$	393,828	$	531,424		74%
Year Ended December 31, 1999:
Property and liability insurance premiums	$	328,590	$	154,532	$	366,029	$	540,087		68%

FS-6

PMA Capital Corporation
Schedule V
Valuation and Qualifying Accounts

(dollar amounts in thousands)
Description	Balance at beginning of period	Charged (credited) to costs and expenses		Deductions - write-offs of uncollectible accounts		Balance at end of period
Year ended December 31, 2001:
Allowance for uncollectible accounts:
Premiums receivable	$16,630	($4,358	)	$311		$12,583
Reinsurance receivables	4,328	234		-		4,562
Year ended December 31, 2000:
Allowance for uncollectible accounts:
Premiums receivable	$18,088	($1,450	)	($8	)	$16,630
Reinsurance receivables	5,528	(1,200	)	-		4,328
Year ended December 31, 1999:
Allowance for uncollectible accounts:
Premiums receivable	$19,874	$275		($2,061	)	$18,088
Reinsurance receivables	2,178	3,350		-		5,528

FS-7

PMA Capital Corporation
Schedule VI
Supplemental Information Concerning Property and Casualty Insurance Operations

(dollar amounts in thousands)
Affiliation with registrant	Deferred acquisition costs		Unpaid losses and loss adjustment expenses		Discount on unpaid losses and loss adjustment expenses(1)		Unearned premiums		Net premiums earned		Net investment income		Losses and loss adjustment expenses incurred        related to        Current        Prior     year(2)       years(2)					Acquisition expenses		Paid losses and loss adjustment expenses		Net premiums written
Consolidated property-casualty
subsidiaries:
December 31, 2001	$	64,350	$	2,324,439	$	113,712	$	308,292	$	732,440	$	86,945	$	586,392	$	23,512		$	138,982	$	602,355	$	769,058
December 31, 2000		48,522		2,053,138		103,994		269,734		531,424		102,591		432,767		6,491			112,654		556,053		545,555
December 31, 1999		48,949		1,932,601		180,379		260,352		540,087		110,057		409,554		(32,514	)		124,368		455,293		563,510

(1) - Reserves discounted at approximately 5%.

(2) - Excludes accretion of loss reserve discount of $6,859, $10,130 and $15,433 in 2001, 2000 and 1999, respectively.

FS-8

PRICEWATERHOUSECOOPERS LLP (LOGO)

PricewaterhouseCoopers LLP

Two Commerce Square, Suite 1700

2001 Market Street
Philadelphia PA 19103-7042

Telephone (267) 330 3000

Facsimile (267) 330 3300

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Shareholders of
PMA Capital Corporation

Our audits of the consolidated financial statements referred to in our report dated February 6, 2002 appearing in the 2001 Annual Report to Shareholders of PMA Capital Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Philadelphia, PA
February 6, 2002

FS-9

INDEX TO EXHIBITS

Exhibit No.		Description of Exhibit	Method of Filing
(3)		Articles of Incorporation and Bylaws:
	3.1	Restated Articles of Incorporation of the Company.	Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q/A, No. 1 for the quarter ended June 30, 2001 and incorporated herein by reference.
	3.2	Amended and Restated Bylaws of the Company.	Filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q/A, No. 1 for the quarter ended June 30, 2001 and incorporated herein by reference.
(4)		Instruments defining the rights of security holders, including indentures:
	4.1	Rights Agreement, dated as of May 3, 2000, between the Company and The Bank of New York, as Rights Agent.	Filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated May 5, 2000 and incorporated herein by reference.
(10)		Material Contracts: Exhibits 10.1 through 10.24 are management contracts or compensatory plans.
	10.1	Description of 2001 stock appreciation rights.	Filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference.
	10.2	PMA Capital Corporation 401(k) Excess Plan, dated March 29, 2001.	Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference.
	10.3	PMA Capital Corporation Executive Deferred Compensation Plan (as Amended and Restated Effective January 1, 1999), dated March 29, 2001.	Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference.
	10.4	PMA Capital Corporation Supplemental Executive Retirement Plan (as Amended and Restated Effective January 1, 1999), dated March 7, 2001.	Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference.
	10.5	PMA Capital Corporation Executive Management Pension Plan, dated March 7, 2001.	Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference.
	10.6	Amended and Restated Employment Agreement, dated May 1, 1999, between PMA Capital Corporation and Frederick W. Anton III.	Filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q/A, No. 1 for the quarter ended June 30, 1999 and incorporated herein by reference.

E-1

10.7	Amended and Restated Split-Dollar Insurance Agreement, dated May 12, 1999, among PMA Capital Corporation, Frederick W. Anton III and Irrevocable Deed and Trust of Frederick W. Anton III.	Filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q/A, No. 1 for the quarter ended June 30, 1999 and incorporated herein by reference.
10.8	Split-Dollar Insurance Agreement, dated May 12, 1999, among PMA Capital Corporation, Frederick W. Anton III and Irrevocable Deed of Trust of Frederick W. Anton III.	Filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q/A, No. 1 for the quarter ended June 30, 1999 and incorporated herein by reference.
10.9	Split-Dollar Insurance Agreement, dated May 12, 1999, among PMA Capital Corporation, Frederick W. Anton III and Irrevocable Deed of Trust of Frederick W. Anton III.	Filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q/A, No. 1 for the quarter ended June 30, 1999 and incorporated herein by reference.
10.10	Employment Agreement dated May 1, 1995 between the Company and John W. Smithson.	Filed as Exhibit 10.2 to the Company's Registration Statement on Form 10 dated June 26, 1997 and incorporated herein by reference.
10.11	Amended and Restated Deferred Compensation Plan for Non-Employee Directors of the Company.	Filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
10.12	Company's Annual Incentive Plan.	Filed as Annex C to the Company's Definitive Proxy Statement on Schedule 14A dated March 23, 2000 and incorporated herein by reference.
10.13	Company's Amended and Restated 1987 Incentive Stock Option Plan.	Filed as Exhibit 10.5 to the Company's Registration Statement on Form 10 dated June 26, 1997 and incorporated herein by reference.
10.14	Company's Amended and Restated 1991 Equity Incentive Plan.	Filed as Exhibit 10.6 to the Company's Registration Statement on Form 10 dated June 26, 1997 and incorporated herein by reference.
10.15	Amendment No. 1 to the Amended and Restated 1991 Equity Incentive Plan dated May 5, 1999.	Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference.
10.16	Company's Amended and Restated 1993 Equity Incentive Plan.	Filed as Exhibit 10.7 to the Company's Registration Statement on Form 10 dated June 26, 1997 and incorporated herein by reference.

E-2

10.17	Amendment No. 1 to the Amended and Restated 1993 Equity Incentive Plan dated May 5, 1999.	Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference.
10.18	Company's Amended and Restated 1994 Equity Incentive Plan.	Filed as Exhibit 10.8 to the Company's Registration Statement on Form 10 dated June 26, 1997 and incorporated herein by reference.
10.19	Amendment No. 1 to the Amended and Restated 1994 Equity Incentive Plan dated May 5, 1999.	Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference.
10.20	Company's 1995 Equity Incentive Plan.	Filed as Exhibit 10.9 to the Company's Registration Statement on Form 10 dated June 26, 1997 and incorporated herein by reference.
10.21	Amendment No. 1 to the 1995 Equity Incentive Plan dated May 5, 1999.	Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference.
10.22	Company's 1996 Equity Incentive Plan.	Filed as Exhibit 10.10 to the Company's Registration Statement on Form 10 dated June 26, 1997 and incorporated herein by reference.
10.23	Amendment No. 1 to the 1996 Equity Incentive Plan dated May 5, 1999.	Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference.
10.24	Company's 1999 Equity Incentive Plan.	Filed as Annex A to the Company's Definitive Proxy Statement on Schedule 14A dated March 26, 1999 and incorporated herein by reference.
10.25	Credit Agreement dated as of March 14, 1997 by and among the Company, The Bank of New York, First Union National Bank of North Carolina, Fleet National Bank, PNC Bank, National Association, Mellon Bank, N.A., CoreStates Bank, N.A. and Dresdner Bank AG, New York Branch and Grand Cayman Branch.	Filed as Exhibit 10.13 to the Company's Registration Statement on Form 10 dated June 26, 1997 and incorporated herein by reference.
10.26	First Amendment, dated as of October 2, 1998, to the Credit Agreement dated as of March 14, 1997.	Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A, No. 1 for the quarter ended September 30, 1998 and incorporated herein by reference.

E-3

	10.27	Second Amendment and Consent, dated as of November 17, 2000, to the Credit Agreement dated as of March 14, 1997.	Filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.
	10.28	Third Amendment, dated as of December 7, 2001, to the Credit Agreement dated as of March 14, 1997.	Filed herewith.
	10.29	Master Agreement dated as of February 7, 1997 between the Company and First Union National Bank of North Carolina.	Filed as Exhibit 10.14 to the Company's Registration Statement on Form 10 dated June 26, 1997 and incorporated herein by reference.
	10.30	Letter of Credit Agreement dated as of December 4, 2001, by and among the Company and Certain Co-Applicants and Fleet National Bank and Other Banks Party Thereto.	Filed herewith.
	10.31	Pledge and Security Agreement, dated as of December 4, 2001, by and among the Company and Certain Co-Applicants and Fleet National Bank and Other Banks Party Thereto.	Filed herewith.
	10.32	Form of Control Agreement, dated as of December 4, 2001, by and among the Company, Certain Pledgors and Fleet National Bank.	Filed herewith.
(12)		Computation of Ratio of Earnings to Fixed Charges.	Filed herewith.
(13)		Portions of the Company's 2001 Annual Report to Shareholders, which are expressly incorporated by reference in this Form 10-K, are "filed" as part of this Form 10-K.	Filed herewith.
(21)		Subsidiaries of the Company.	Filed herewith.
(23)		Consent of Independent Accountants.	Filed herewith.
(24)		Power of Attorney:
	24.1	Powers of Attorney.	Filed herewith.
	24.2	Certified Resolutions.	Filed herewith.

Shareholders may obtain copies of exhibits by writing to the Company at PMA Capital Corporation, 1735 Market Street, Suite 2800, Philadelphia, PA. 19103-7590, Attn: Secretary

E-4

EX-10

THIRD AMENDMENT TO CREDIT AGREEMENT

        THIS THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of December 7, 2001 (this “Amendment”), is made in respect of the Credit Agreement dated as of March 14, 1997 (as amended, the “Credit Agreement”), by and between PMA CAPITAL CORPORATION, a Pennsylvania corporation formerly known as Pennsylvania Manufacturers Corporation (the “Borrower”), the banks and financial institutions listed on the signature pages thereof or that become parties thereto after the date thereof (collectively the “Lenders”), THE BANK OF NEW YORK, as administrative agent for the Lenders (in such capacity, the “Administrative Agent”), and FIRST UNION NATIONAL BANK (formerly known as First Union National Bank of North Carolina), as documentation agent for the Lenders (in such capacity, the “Documentation Agent”) (each of the Administrative Agent and Documentation Agent, an “Agent” and collectively, the “Agents”). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Credit Agreement.

RECITALS

        The Borrower has requested that the Credit Agreement be amended to permit it to engage in certain transactions as set forth herein, and the Required Lenders signing below are willing to approve such request subject to the terms and conditions set forth below.

STATEMENT OF AGREEMENT

        NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Agents and the Lenders, for themselves and their successors and assigns, agree as follows:

ARTICLE I

AMENDMENTS TO CREDIT AGREEMENT

        1.1 Amendment to Section 1.1.

        (a) Section 1.1 of the Credit Agreement shall be amended by amending and restating the definition of Applicable Margin as follows:

     “Applicable Margin” shall mean, at any time with respect to any LIBOR Committed Loan, 1.375%, and with respect to the Facility Fee, 0.375%.

        (b) Section 1.1 of the Credit Agreement is further amended by deleting the period at the end of the definition of “Letter of Credit Facility” and replacing it with “and as the same may be replaced by a similar letter of credit agreement with the same or different agents, issuing banks and other banks.

        (c) Section 1.1 of the Credit Agreement is further amended by adding the following definitions in appropriate alphabetical order:

     “Asset Disposition” shall mean any sale, assignment, transfer or other disposition by the Borrower or any of its Subsidiaries to any other Person (other than to the Borrower or to a Wholly Owned Subsidiary), whether in one transaction or in a series of related transactions, of any of its assets, business units or other properties (including any interests in property, whether tangible or intangible, and including capital stock of Subsidiaries), excluding sales and licenses of inventory and other assets in the ordinary course of business.

     “Debt Issuance” shall mean the issuance or sale by the Borrower or any of its Subsidiaries of any debt securities, whether in a public offering of such securities or otherwise, to any Person that is not an Affiliate of the Borrower, except for any Indebtedness permitted under clauses (i), (ii), (iii), (iv), (vii), (viii), (ix), (xi) and (xii) of Section 7.2.

     “Net Cash Proceeds” shall mean (i) in the case of any Debt Issuance or issuance of capital stock of the Borrower, the aggregate cash payments received by the Borrower and its Subsidiaries less reasonable and customary fees and expenses (including underwriting discounts and commissions) incurred by the Borrower and its Subsidiaries in connection therewith, and (ii) in the case of any Asset Disposition, the aggregate amount of all cash payments received by the Borrower and its Subsidiaries in connection with such Asset Disposition less (x) reasonable fees and expenses incurred by the Borrower and its Subsidiaries in connection therewith, (y) Indebtedness to the extent the amount thereof is secured by a Lien on the property that is the subject of such Asset Disposition and the transferee of (or holder of the Lien on) such Property requires that such Indebtedness be repaid as a condition to such Asset Disposition, and (z) any income or transfer taxes paid or reasonably estimated by the Borrower to be payable by the Borrower and its Subsidiaries as a result of such Asset Disposition.

     “New Note Indebtedness Documents” shall mean the applicable note purchase agreement and/or other documents evidencing the Indebtedness permitted under Section 7.2(xiii).

     “Third Amendment Date” shall mean the date of the Third Amendment to this Agreement.

2

        1.2 Amendments to Section 2.6. Section 2.6 of the Credit Agreement is hereby amended by changing subsection (d) thereof to subsection (e), and by inserting the following as a new subsection (d):

     (d) The Commitments shall, on each date upon which a prepayment of the Loans is required under Section 2.7(d), be automatically and permanently reduced by the amount, if any, of such required prepayment.

        1.3 Amendments to Section 2.7. Section 2.7 of the Credit Agreement is hereby amended by changing subsection (d) thereof to subsection (e), and by inserting the following as new subsection (d):

     (d) Promptly upon (and in any event not later than three (3) Business Days after) its receipt thereof, the Borrower will prepay the outstanding principal amount of the Loans in an amount equal to 100% of the Net Cash Proceeds from any Asset Disposition or Debt Issuance and will deliver to the Agents, concurrently with such prepayment, a certificate in form and substance reasonably satisfactory to the Agents setting forth the calculation of such Net Cash Proceeds.

        1.4 Amendment to Article V. Article V shall be amended by adding new Sections 5.13 and 5.14 as follows:

     5.13 Best Efforts Regarding Capital Raising. The Borrower shall use its best efforts to raise additional capital in order to repay the Obligations and reduce the Commitments in accordance with the terms hereof.

     5.14 Reinsurance Agreement. On or before March 31, 2002, the Borrower will, or will cause its Subsidiaries to, consummate one or more Reinsurance Agreements with an aggregate cover amount of at least $40,000,000 and a duration until at least December 31, 2002 with third-party reinsurers reasonably acceptable to the Agents with respect to the reserves of all of the Borrower’s Material Insurance Subsidiaries.

        1.5 Amendment to Section 7.2. Section 7.2 of the Credit Agreement shall be amended by deleting the word “and”at the end of clause (xi), by substituting “(other than Indebtedness specified in clauses (i) through (viii) and in clauses (x) through (xiii))” for the first parenthetical in clause (ix), by substituting “; and” for the period (“.”) at the end of clause (xii), and by adding the following new clause (xiii) to the end thereof:

     (xiii) unsecured Indebtedness of the Borrower or its Subsidiaries incurred through Debt Issuance consummated after the Third Amendment Date, provided (a) the Borrower shall make the prepayments required by Section 2.7(d), (b) such Indebtedness

3

shall have covenants and undertakings that, in the reasonable determination of the Agents, are not more restrictive on the Borrower and its Subsidiaries than those set forth herein, (c) such Indebtedness shall not require any scheduled payment of principal prior to 90 days after the Maturity Date, (d) such Indebtedness shall be ranked no better than pari passu in right and time of payment to the Obligations, and (e) if requested by the Agents, the holders of such Indebtedness shall have entered into an intercreditor agreement with the Agents, on behalf of the Lenders, in form and substance satisfactory to the Agents.

        1.6 Amendment to Section 7.3. Section 7.3 of the Credit Agreement shall be amended by deleting the following language from the introductory clause thereof: “or enter into or suffer to exist any agreement or restriction that prohibits or conditions the creation, incurrence or assumption of,”.

        1.7 Amendment to Section 7.5. Section 7.5 of the Credit Agreement shall be amended by amending and restating subclause (ii) thereof as set forth below and by adding a new subclause (iii) as set forth below:

     (ii) the Borrower may declare and make dividend payments or other distributions, in cash or in-kind, in each case provided that, immediately after giving effect thereto, no Default or Event of Default would exist; and

     (iii) the Borrower may purchase, redeem, retire or otherwise acquire shares of its capital stock provided that, (a) immediately after giving effect thereto, no Default or Event of Default would exist, and (b) the aggregate amount repurchased does not exceed (x) $3,000,000 during the period beginning on October 1, 2001 and ending on the date that the Borrower provides evidence satisfactory to the Agents (in their sole discretion) that the Borrower has received Net Cash Proceeds in an aggregate amount of at least $100,000,000 from any issuance of its capital stock, and (y) $15,000,000 thereafter.

        1.8 Amendment to Section 7.9. Section 7.9 of the Credit Agreement shall be amended and restated as follows:

     7.9 Limitation on Certain Restrictions. The Borrower will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on (i) the ability of the Borrower and its Subsidiaries to perform and comply with their respective obligations under the Credit Documents, the Letter of Credit Facility or the New Note Indebtedness Documents, (ii) the ability of the Borrower or any Subsidiary to grant, assume or permit to exist any Lien upon any of its assets or properties as security,

4

directly or indirectly, for the Obligations, other than the restrictions set forth in the Credit Documents, Letter of Credit Facility or the New Note Indebtedness Documents, or (iii) the ability of any Subsidiary of the Borrower to make any dividend payments or other distributions in respect of its capital stock, to make loans or advances to the Borrower or any other Subsidiary, or to transfer any of its assets or properties to the Borrower or any other Subsidiary, in each case other than such restrictions or encumbrances existing under or by reason of the Credit Documents, the Letter of Credit Facility, the New Note Indebtedness Documents or applicable Requirements of Law.

        1.9 Amendment to Section 8.1. Section 8.1 is further amended by deleting the “or” at end of clause (k) thereof, by substituting “; or” for the period (“.”) at the end of clause (l), and by adding the following as a new clause (m) thereof:

     (m) There shall be a "default" or a "change of control" under the New Note Indebtedness Documents.

ARTICLE II

CONDITIONS TO EFFECTIVENESS

        This Amendment shall be effective (the “Effective Date”) only upon the satisfaction of the following conditions precedent:

        2.1 Executed Amendment. The Documentation Agent shall have received executed signature pages of this Amendment from the Borrower and the Required Lenders.

        2.2 Representations and Warranties. The representations and warranties contained in this Amendment shall be true and correct as of the Effective Date.

        2.3 Material Adverse Change. No Material Adverse Change shall have occurred after December 31, 2000 other than as disclosed in writing to the Lenders on or before the date hereof.

        2.4 Material Proceedings. There shall be no material pending litigation, bankruptcy or insolvency injunction, order or claim pending with respect to the Borrower or any of its Subsidiaries.

        2.5 Fees. The Borrower shall have paid (i) to each Lender executing this Amendment, an amendment fee equal to 0.10% of such Lender’s Commitment outstanding on the date hereof, and (ii) all other fees due and payable in connection with this Amendment.

        2.6 Costs and Expenses. The Borrower shall have paid all reasonable costs and expenses of the Agents presented to it prior to the Effective Date in accordance with the Credit Documents.

5

ARTICLE III

REPRESENTATIONS AND WARRANTIES

        3.1 Representations and Warranties. As an inducement to obtain the consent and amendments set forth herein, the Borrower represents and warrants to the Agents and the Lenders as follows:

        (a) Each of the representations and warranties of the Borrower contained in Article IV the Credit Agreement is true and correct in all material respects on and as of the date hereof with the same effect as if made on and as of the date hereof (except (i) to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty is true and correct as of such date and (ii) with respect to Section 4.10 only, as disclosed in writing to the Lenders on or before the date hereof).

        (b) After giving effect to this amendment, no Default or Event of Default has occurred and is continuing.

ARTICLE IV

GENERAL

        4.1 Effect of Amendment. From and after the date hereof, all references to the Credit Agreement set forth in any other Credit Document or other agreement or instrument shall, unless otherwise specifically provided, be references to the Credit Agreement as amended by this Amendment and as may be further amended, modified, restated or supplemented from time to time. This Amendment is limited as specified and shall not constitute or be deemed to constitute an amendment, modification or waiver of any provision of the Credit Agreement or of any other Credit Document except as expressly set forth herein. Except as expressly amended hereby, the Credit Agreement shall remain in full force and effect in accordance with its terms.

        4.2 Governing Law. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of North Carolina (without regard to the conflicts of law provisions thereof).

        4.3 Severability. To the extent any provision of this Amendment is prohibited by or invalid under the applicable law of any jurisdiction, such provision shall be ineffective only to the extent of such prohibition or invalidity and only in any such jurisdiction, without prohibiting or invalidating such provision in any other jurisdiction or the remaining provisions of this Amendment in any jurisdiction.

        4.4 Successors and Assigns. This Amendment shall be binding upon, inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto.

        4.5 Construction. The headings of the various sections and subsections of this Amendment have been inserted for convenience only and shall not in any way affect the meaning or construction of any of the provisions hereof.

6

        4.6 Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument.

[The remainder of this page left blank intentionally]

7

        IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers all as of the day and year first above written.

PMA CAPITAL CORPORATION
By:	/s/ Albert D. Ciavardelli
Name:	Albert D. Ciavardelli
Title:	Vice President - Finance
THE BANK OF NEW YORK, as Administrative Agent and a Lender
By:	/s/ David Trick
Name:	David Trick
Title:	Vice President
FIRST UNION NATIONAL BANK, as Documentation Agent and as a Lender
By:	/s/ Kimberly Shaffer
Name:	Kimberly Shaffer
Title:	Director

8

CREDIT LYONNAIS NEW YORK BRANCH
By:	/s/ Sebastian Rocco
Name:	Sebastian Rocco
Title:	Senior Vice President
FLEET NATIONAL BANK
By:	/s/ Lawrence Davis
Name:	Lawrence Davis
Title:	Portfolio Manager
PNC BANK, NATIONAL ASSOCIATION
By:	/s/ Robert J. Giannone
Name:	Robert J. Giannone
Title:	Vice President
MELLON BANK N.A.
By:	/s/ Gary A. Best
Name:	Gary A. Best
Title:	Vice President

9

DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH
By:	/s/ Erika P. Walters-Engemann
Name:	Erika P. Walters-Engemann
Title:	Director
By:	/s/ Jonathan Wallin
Name:	Jonathan Wallin
Title:	Vice President
UNION BANK OF CALIFORNIA, N.A.
By:	/s/ Christine Davis
Name:	Christine Davis
Title:	Vice President

10

EX-10

LETTER OF CREDIT AGREEMENT

BY AND AMONG

PMA CAPITAL CORPORATION,

THE BANK(S) PARTY HERETO

AND

FLEET NATIONAL BANK

AS AGENT AND AS ISSUING BANK

_________________

$50,000,000

_________________

Dated as of December 4, 2001

TABLE OF CONTENTS

1.	DEFINITIONS AND PRINCIPLES OF CONSTRUCTION		1
	1.1.	Definitions	1
	1.2.	Principles of Construction	17
2.	AMOUNT AND TERMS OF LETTERS OF CREDIT		18
	2.1.	Issuance of Letters of Credit	18
	2.2.	Letter of Credit Participation and Funding Commitments	20
	2.3.	Interest Rate	21
	2.4.	Termination or Reduction of Commitment	21
	2.5.	Amendments to Letters of Credit	21
	2.6.	Extension of Commitment and Termination Date	23
	2.7.	Extension of the Stated Expiration Date of Each Letter of Credit	23
	2.8.	Reimbursement Obligations Absolute	24
	2.9.	No Liability of the Issuing Bank	25
	2.10.	Increased Costs: Capital Adequacy	25
	2.11.	Taxes	26
	2.12.	Agent's Records	27
	2.13.	Use of Proceeds	28
	2.14.	Collateral	28
	2.15.	Replacement of Banks	29
	2.16.	Commitment Fee	30
	2.17.	Letter of Credit Commissions	30
	2.18.	Utilization of Commitment in Optional Currencies	30
3	CONDITIONS PRECEDENT		31
	3.1.	Conditions to Effectiveness	31
	3.2.	Conditions for Issuance of All Letters of Credit and Extension and Increases
		thereof and Conditions to Effectiveness of Letters of Credit	33
	3.3.	Transitional Arrangements	34
4	REPRESENTATIONS AND WARRANTIES		35
	4.1.	Corporate Organization and Power	35
	4.2.	Authorization	36
	4.3.	No Violation	36

-ii-

	4.4.	Governmental Authorization; Permits	36
	4.5.	Litigation	37
	4.6.	Taxes	37
	4.7.	Subsidiaries	37
	4.8.	Full Disclosure	37
	4.9.	Margin Regulations	38
	4.10.	No Material Adverse Change	38
	4.11.	Financial Matters	38
	4.12.	Ownership of Properties	39
	4.13.	ERISA	39
	4.14.	Environmental Matters	40
	4.15.	Compliance With Laws	40
	4.16.	Regulated Industries	41
	4.17.	Insurance	41
	4.18.	Certain Contracts	41
5	AFFIRMATIVE COVENANTS		41
	5.1.	GAAP Financial Statements	42
	5.2.	Statutory Financial Statements	42
	5.3.	Other Business and Financial Information	43
	5.4.	Corporate Existence; Franchises; Maintenance of Properties	46
	5.5.	Compliance with Laws	46
	5.6.	Payment of Obligations	46
	5.7.	Insurance	47
	5.8.	Maintenance of Books and Records; Inspection	47
	5.9.	Dividends	47
	5.10.	Ownership of Insurance Subsidiaries	47
	5.11.	Further Assurances	47
6	FINANCIAL COVENANTS		48
	6.1.	Capitalization Ratio	48
	6.2.	Cash Coverage Ratio	48
	6.3.	Statutory Surplus	48
	6.4.	Risk-Based Capital	48
7	NEGATIVE COVENANTS		49

-iii-

	7.1.	Merger; Consolidation; Disposition of Assets	49
	7.2.	Indebtedness	49
	7.3.	Liens	50
	7.4.	Investments; Acquisitions	51
	7.5.	Restricted Payments	52
	7.6.	Transactions with Affiliates	52
	7.7.	Certain Amendments	52
	7.8.	Lines of Business	53
	7.9.	Limitations on Certain Restrictions	53
	7.10.	Fiscal Year	53
	7.11.	Accounting Changes	53
8	DEFAULT		54
	8.1.	Events of Default	54
9	THE AGENT		58
	9.1.	Appointment	58
	9.2.	Delegation of Duties	58
	9.3.	Exculpatory Provisions	58
	9.4.	Reliance by Agent	59
	9.5.	Notice of Default	59
	9.6.	Non-Reliance on Agent and Other Banks	59
	9.7.	Indemnification	60
	9.8.	Agent in Its Individual Capacity	61
	9.9.	Successor Agent	61
10	OTHER PROVISIONS		61
	10.1.	Amendments and Waivers	61
	10.2.	Notices	62
	10.3.	No Waiver; Cumulative Remedies	64
	10.4.	Survival of Representations and Warranties	64
	10.5.	Payment of Expenses and Taxes	64
	10.6.	Assignments and Participants	65
	10.7.	Counterparts	66
	10.8.	Adjustments; Set-off	67
	10.9.	Construction	67

-iv-

10.10.	Indemnity	68
10.11.	Governing Law	68
10.12.	Headings Descriptive	68
10.13.	Severability	69
10.14.	Integration	69
10.15.	Consent to Jurisdiction	69
10.16.	Service of Process	69
10.17.	No Limitation on Service or Suit	69
10.18.	WAIVER OF TRIAL BY JURY	70
10.19.	Confidentiality	70

-v-

EXHIBITS
Exhibit A	List of Commitment Percentages
Exhibit B	Form of Assignment and Acceptance Agreement
Exhibit C	Form of Letter of Credit Request
Exhibit D	Form of Letter of Credit
Exhibit E-1	Form of Compliance Certificate (GAAP Financial Statements)
Exhibit E-2	Form of Compliance Certificate (Statutory Financial Statements)
Exhibit F	Form of Financial Condition Certificate
Exhibit G	Form of Opinion of Counsel to the Applicant
Exhibit H	Form of Extension Request
SCHEDULES
Schedule I	Existing Letters of Credit
Schedule 1.1	Management Group
Schedule 4.4	Licenses
Schedule 4.6	Taxes
Schedule 4.7	Subsidiaries
Schedule 4.14(a)	Environmental Matters
Schedule 4.14(b)	Environmental Matters
Schedule 4.18	Material Contracts
Schedule 7.2	Indebtedness
Schedule 7.3	Liens
Schedule 7.6	Transactions with Affiliates
Schedule 10.2	List of Banks and their Addresses

        LETTER OF CREDIT AGREEMENT, dated as of December 4, 2001, by and among PMA CAPITAL CORPORATION, a Pennsylvania corporation (the “Applicant”), each Co-Applicant (as defined in Section 1), the bank(s) or other lending institution(s) party hereto (together with their respective successors and assigns, the “Banks”, and each a “Bank”) and FLEET NATIONAL BANK, as agent for itself and the other Banks (in such capacity, together with its successors and assigns in such capacity, the “Agent”), and as issuing bank (in such capacity, together as with its successors and assigns in such capacity, the “Issuing Bank”) for the Letters of Credit (as defined in Section 1).

1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION

1.1. Definitions

                     As used in this Agreement, terms defined in the preamble have the meanings therein indicated, and the following terms have the following meanings:

                     “Affiliate” shall mean, as to any Person, each other Person that directly, or indirectly through one or more intermediaries, owns or controls, is controlled by or under common control with, such Person or is a director or officer of such Person. For purposes of this definition, with respect to any Person, “control” shall mean (i) the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, or (ii) the beneficial ownership of securities or other ownership interests of such Person having ten percent (10%) or more of the combined voting power of the then outstanding securities or other ownership interests of such Person ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors or other governing body of such Person.

                     “Agent” means Fleet in its capacity as agent for the Banks hereunder, and its successors and assigns in such capacity.

                     “Agreement” means this Letter of Credit Agreement, as the same may be amended, supplemented or otherwise modified from time to time.

                     “Alternate Base Rate” means on any date, a rate of interest per annum equal to the higher of (i) the Federal Funds Rate in effect on such date plus one half of one percent (½ of 1%) or (ii) the Prime Rate in effect on such date. Each change in the Alternate Base Rate resulting from a change in the Federal Funds Rate or the Prime Rate shall take effect on the date when such change in the Federal Funds Rate or the Prime Rate occurs.

                     “Annual Statement” shall mean, with respect to any Insurance Subsidiary for any fiscal year, the annual financial statements of such Insurance Subsidiary as required to be filed with the Insurance Regulatory Authority of its jurisdiction of domicile and in accordance with the laws of such jurisdiction, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith.

-2-

                     “Applicable Fee Percentage” means (i) with respect to the Letter of Credit Commissions, 0.450% and (ii) with respect to Commitment Fees, 0.150%.

                     “Assignment and Acceptance Agreement” means an assignment and acceptance agreement executed by a Bank and an Eligible Assignee substantially in the form of Exhibit B.

                     “Assignment Fee” has the meaning set forth in Section 10.6(b).

                     “Authorized Signatory” means as to (i) any Person which is a corporation, the chairman of the board, the president, any vice president, the chief financial officer or any other duly authorized officer of such Person and (ii) any Person which is not a corporation, the general partner or other managing Person thereof.

                     “Available Amount” means at any time the amount of the Commitment less the Letter of Credit Exposure.

                     “Available Dividend Amount” shall mean, with respect to any Insurance Subsidiary for any period of four consecutive fiscal quarters, the aggregate maximum amount of dividends that is, or would be if such period were a fiscal year, permitted by the Insurance Regulatory Authority of its jurisdiction of domicile, under applicable Requirements of Law (without the necessity of any consent, approval or other action of such Insurance Regulatory Authority involving the granting of permission or the exercise of discretion by such Insurance Regulatory Authority), to be paid by such Insurance Subsidiary to the Applicant or another Subsidiary of the Applicant in respect of such four-quarter period as if such period were a fiscal year (whether or not any such dividends are actually paid).

                     “Bank” means each bank listed on the signature pages hereof and each assignee which becomes a Bank pursuant to Section 10.6, and their respective assigns, each of which shall meet the criteria of “Eligible Assignee” hereunder.

                     “Bankruptcy Code” shall mean 11 U.S.C.ss.ss.101 et seq., as amended from time to time, and any successor statute.

                     “Beneficiary Notification Date” shall mean, with respect to an Evergreen Letter of Credit, the last day on which the beneficiary thereof may be notified in order that such Stated Expiration Date is not to be automatically extended.

                     “Benefit Arrangement” shall mean any time, an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group.

                     “Benefitted Bank” has the meaning set forth in Section 10.8.

                     “Business Day” means any day other than a Saturday, a Sunday or other day on which commercial banks located in Boston or New York are authorized or required by law or other governmental action to close; and with respect to draws or reimbursements under a Letter

-3-

of Credit denominated in an Optional Currency such day shall be a day (i) on which dealings in deposits in the relevant Optional Currency are carried on in the applicable interbank market, and (ii) on which foreign exchange markets are open for business in the principal financial center of the country of the relevant Optional Currency.

                     “Caliber” shall mean Caliber One Indemnity Company, a Delaware insurance company.

                     “Capitalization Ratio” shall mean, as of the last day of any fiscal quarter, the ratio of (i) Consolidated Indebtedness as of such date to (ii) the sum of Consolidated Indebtedness and Consolidated Net Worth, each as of such date.

                     “Cash Coverage Ratio” shall mean as of the last day of any period of four consecutive fiscal quarters (the “Measurement Period”), the ratio of:

                              (i) the aggregate of (y) the Available Dividend Amount for the Measurement Period for the Insurance Subsidiaries, other than each Insurance Subsidiary that is a Subsidiary of another Insurance Subsidiary plus (z) the Net Tax Sharing Payments (whether a positive or negative number) for the Measurement Period, to

                              (ii) the aggregate of (x) Interest Expense incurred during the Measurement Period, (y) the aggregate of all operating costs and expenses of the Applicant, including rent, utilities and payroll expenses paid by the Applicant during the Measurement Period, and (z) all dividends paid by the Applicant during the Measurement Period.

                     “Cash Equivalents” shall mean (i) securities issued or unconditionally guaranteed by the United States of America or any agency or instrumentality thereof, backed by the full faith and credit of the United States of America and maturing within one hundred eighty (180) days from the date of acquisition, (ii) commercial paper issued by any Person organized under the laws of the United States of America, maturing within one hundred eighty (180) days from the date of acquisition and, at the time of acquisition, having a rating of at least A-1 or the equivalent thereof by Standard &Poor’s and at least P-1 or the equivalent thereof by Moody’s, (iii) time deposits, certificates of deposit and banker’s acceptances maturing within one hundred eighty (180) days from the date of issuance and issued by a bank or trust company organized under the laws of the United States of America or any state thereof that has combined capital and surplus of at least $500,000,000 and that has (or is a subsidiary of a bank holding company that has) a long-term unsecured debt rating of at least A or the equivalent thereof by Standard &Poor’s or at least A-2 or the equivalent thereof by Moody’s, and (iv) repurchase obligations of a bank or trust company described in clause (iii) above or of a broker-dealer or other party that has a long-term unsecured debt rating of at least A by Standard &Poor’s (or an equivalent rating of a nationally recognized rating agency) and having a term not exceeding seven (7) days with respect to underlying securities of the types described in clause (i) above entered into with any bank or trust company meeting the qualifications specified in clause (iii) above.

-4-

                     “CMOs” shall mean any security or certificate representing any interest or participation in a pool of Mortgage Backed Securities (it being understood that Mortgage Backed Securities themselves are not CMOs).

                     “Collateral” has the meaning set forth in Section 2.14.

                     “Collateral Accounts” has the meaning set forth in Section 2.14 hereof.

                     “Co-Applicant” shall mean individually and “Co-Applicants” shall mean collectively each of (i) PMACIC, (ii) PMAIC, (iii) High Mountain Reinsurance, Ltd., a Cayman Island corporation, and (iv) each other Subsidiary of the Applicant which hereafter becomes a party hereto.

                     “Combined Annual Statement” shall mean, with respect to PMACIC and its combined Affiliates, the combined annual statement of such entities on the Fire and Casualty form (or any successor form thereto) as required to be filed by any such entity with the Insurance Regulatory Authority of its jurisdiction of domicile in accordance with the laws of such jurisdiction, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith.

                     “Commitment” means the commitment of Fleet, as Issuing Bank, to issue Letters of Credit having an aggregate outstanding Dollar Equivalent face amount up to $50,000,000 (as reduced from time to time pursuant to Section 2.4), and with respect to the Banks shall mean their commitment to participate in the Letter of Credit Exposure in an amount equal to their respective Commitment Percentages as set forth in Section 2.2 in an aggregate amount up to their respective Commitment Amounts.

                     “Commitment Amount” means as to any Bank, the maximum Dollar amount of its Commitment set forth opposite the name of such Bank in Exhibit A under the heading “Commitment Amount”.

                     “Commitment Fee” has the meaning set forth in Section 2.16.

                     “ Commitment Percentage” means as to any Bank, the percentage set forth opposite the name of such Bank in Exhibit A under the heading “Commitment Percentage”.

                     “Commitment Period” means the period from the Effective Date through the day preceding the Termination Date.

                     “ Compliance Certificate” shall mean a fully completed and duly executed certificate in the form of Exhibit E-1 or Exhibit E-2, as applicable.

                     “Consolidated Affiliates” shall mean, collectively, Caliber, the PMA Group and any other fire and casualty insurance company that is or hereafter becomes an Affiliate of PMACIC and the accounts of which are prescribed or permitted by Statutory Accounting

-5-

Principles to be consolidated with those of PMACIC for purposes of any Combined Annual Statements.

                     “Consolidated Indebtedness” shall mean, as of the last day of any fiscal quarter, the aggregate (without duplication) of all Indebtedness of the Applicant and its Subsidiaries as of such date, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles but excluding reimbursement obligations with respect to letters of credit issued hereunder.

                     “Consolidated Net Worth” shall mean, at any time, the net worth of the Applicant and its Subsidiaries at such time, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles but (i) excluding any preferred stock or other class of equity securities that, by its stated terms (or by the terms of any class of equity securities issuable upon conversion thereof or in exchange therefor), or upon the occurrence of any event, matures or is mandatorily redeemable, or is redeemable at the option of the holders thereof, in whole or in part, and (ii) without regard to the requirements of Statement of Financial Accounting Standards No. 115 issued by the Financial Accounting Standards Board.

                     “Consolidated Statutory Surplus” shall mean, as to all Insurance Subsidiaries, as of any date, the sum (without duplication) of the total amounts shown (i) with respect to each Insurance Subsidiary not legally domiciled in the United States, the shareholders’equity of such Insurance Subsidiary as determined in accordance with Generally Accepted Accounting Principles (without regard to the requirements of Statement of Financial Accounting Standards No. 115 issued by the Financial Accounting Standards Board), (ii) with respect to each other Insurance Subsidiary that is a life and accident and health insurance company, on line 38, column 1, page 3 of the Annual Statement of such Insurance Subsidiary, and (iii) with respect to each other Insurance Subsidiary, on line 27, column 1, page 3 of the Annual Statement of such Insurance Subsidiary, excluding in each case under clauses (i), (ii) and (iii) any finance Subsidiary that is a Subsidiary of an Insurance Subsidiary, or the sum of amounts determined in a consistent manner for any date other than one as of which an Annual Statement is prepared.

                     “Contingent Obligation” shall mean, with respect to any Person, (without duplication) any direct or indirect liability of such Person with respect to any Indebtedness, liability or other obligation (the “primary obligation”) of another Person (the “primary obligor”), whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor, in respect thereof, to make payment of such primary obligation or (d) otherwise to assume or hold harmless the owner of any such primary obligation against loss or failure or inability to perform in respect thereof; provided, however, that, with respect to the Applicant and its Subsidiaries, the term Contingent Obligation shall not include (w) guarantees or agreements issued by the Applicant to Insurance Regulatory Authorities pursuant to which the Applicant agrees to maintain the statutory surplus

-6-

of PMAIC and MAIC in an amount (in each case) not to exceed $7,500,000, (x) guarantees or agreements issued by Applicant to PMAIC pursuant to which Applicant agrees to maintain the statutory surplus of PMA Cayman in an amount not to exceed $15,000,000, (y) endorsements for collection or deposit in the ordinary course of business or (z) obligations entered into by an Insurance Subsidiary in the ordinary course of its business under insurance policies or contracts issued by it or to which it is a party, including reinsurance agreements (and security posted by any such Insurance Subsidiary in the ordinary course of its business to secure obligations thereunder).

                     “Control Agreements” shall mean each of those certain Control Agreements from time to time in effect among the Applicant and one or more Co-Applicants, the Agent and the Custodian relating to the Pledge Agreement and the Collateral Accounts, as replaced, amended, supplemented or otherwise modified from time to time.

                     “Covenant Compliance Worksheet” shall mean a fully completed worksheet in the form of Attachment A to Exhibit E-1 or Exhibit E-2, as applicable.

                     “Credit Documents” means collectively, this Agreement, each Letter of Credit Request, the Pledge Agreement, the Control Agreements, and all other agreements, instruments, documents and certificates now or hereafter executed and delivered to the Agent or any Bank by or on behalf of the Applicant or any of its Subsidiaries with respect to this Agreement and the transactions contemplated hereby, in each case as amended, modified, supplemented or restated from time to time.

                     “Credit Party” means the Applicant, each Co-Applicant and each other party (other than the Agent, the Issuing Bank and the Banks) that is a signatory to a Credit Document.

                     “Custodian” shall mean Fleet in its capacity as custodian of the Collateral Accounts and its successors and assigns in such capacity.

                     “Date of Issuance” means any Business Day specified in a Letter of Credit Request as a date on which the Applicant and, if applicable, a Co-Applicant, requests the issuance by the Issuing Bank of a Letter of Credit.

                     “Debt Agreement” means the Revolving Credit Agreement and any renewal, replacement, extension, refinancing or refunding thereof and any other indenture, mortgage, deed of trust, loan, purchase or credit agreement or any other agreement or instrument pursuant to which debt for borrowed money shall be incurred, which, in the aggregate, does not exceed $300,000,000 of outstanding or available debt.

                     “Default” means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default.

                     “Discounted Collateral Value” means, in respect of Eligible Collateral consisting of (i) cash, one hundred percent (100%) of the amount thereof, (ii) Treasury Securities, ninety.

-7-

percent (90%) of the fair market value thereof, and (iii) U.S. Federal Agency Obligations, eighty (80%) of the fair market value thereof,. The fair market value of Treasury Securities and U.S. Federal Agency Obligations shall be as determined in good faith by the Agent and the Agent’s good faith determination thereof shall be conclusive absent manifest error

                     “Dollar Equivalent” shall mean, with respect to any amount of any currency, the Equivalent Amount of such currency expressed in Dollars.

                     “Dollar Roll Agreements” shall mean, as to any Person, an agreement pursuant to which such Person sells securities to another Person and agrees to repurchase “substantially the same” securities (as determined by the Public Securities Association and Generally Accepted Accounting Principles) at a described or specified date and price.

                     “Dollars” and “$” means lawful currency of the United States of America.

                     “Duff & Phelps” shall mean Duff & Phelps Credit Rating Co., Inc., its successors and assigns.

                     “Effective Date” means December 4, 2001.

                     “Eligible Assignee” shall mean and include a commercial bank or other financial institution (other than a property or casualty insurance company) acceptable to the Issuing Bank and the Agent.

                     “Eligible Collateral” means cash (in Dollars), Treasury Securities and U.S. Federal Agency Obligations.

                     “Environmental Claims” shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims (other than claims in the ordinary course of business covered by insurance or reinsurance written or assumed by any Insurance Subsidiary), liens, notices of noncompliance or violation, investigations (other than internal reports prepared by any Person in the ordinary course of its business and not in response to any third party action or request of any kind) or proceedings relating in any way to any Environmental Law or any permit issued, or any approval given, under any such Environmental Law (collectively, “Claims”), including, without limitation, (i) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (ii) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Substances or arising from alleged injury or threat of injury to human health or the environment.

                     “Environmental Laws” shall mean any and all federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, interpretations, rules of common law and orders of courts or Governmental Authorities, relating to the protection of human health or occupational safety or the environment, now or hereafter in effect and in each case as amended from time to time, including, without limitation, requirements pertaining to the

-8-

manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Substances.

                     “Equivalent Amount” shall mean, at any time, as determined by the Agent (which determination shall be conclusive absent manifest error), with respect to an amount of any currency (the “Reference Currency”) which is to be computed as an equivalent amount of another currency (the “Equivalent Currency”): (i) if the Reference Currency and the Equivalent Currency are the same, the amount of such Reference Currency, or (ii) if the Reference Currency and the Equivalent Currency are not the same, the amount of such Equivalent Currency converted from such Reference Currency at Agent’s spot selling rate (based on the rates quoted by Reuters) for the sale of such Equivalent Currency for such Reference Currency at the open of Agent’s business on the Business Day on which such calculation is made.

                     “Equivalent Currency” shall have the meaning assigned to such term in the definition of Equivalent Amount.

                     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder.

                     “ERISA Group” shall mean the Applicant and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Applicant, are treated as a single employer under Section 414 of the Internal Revenue Code.

                     “Event of Default” has the meaning set forth in Section 8.1.

                     “Evergreen Letter of Credit” shall mean a Letter of Credit, the Stated Expiration Date of which, by terms of such Letter of Credit, is automatically extended for the period therein specified unless the beneficiary thereof is notified a specified number of days prior to the then scheduled Stated Expiration Date that such scheduled Stated Expiration Date will not be extended.

                     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder.

                     “Existing Credit Agreement” shall mean that certain Second Amended and Restated Letter Of Credit Agreement, dated as of November 22, 2000, as amended, by and among the Applicant, each subsidiary of the Applicant which is party thereto, the banks or other lending institutions party thereto (the “Existing Banks”) and PNC, as agent for itself and the other Existing Banks, and as issuing bank of the Existing Letters of Credit.

                     “Existing Letters of Credit” shall mean the outstanding letters of credit issued by the PNC, as issuing bank, under the Existing Credit Agreement and described in Schedule I hereto.

-9-

                     “Extension Consent Period” means the period which is less than thirty-five (35) days, but equal to or greater than thirty (30) days, prior to the then current Termination Date (provided, however, that if such thirtieth (30^th) prior day falls on a day that is not a Business Day, such date shall be extended to the next following Business Day).

                     “Extension Request” has the meaning set forth in Section 2.6.

                     “Federal Funds Rate” means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Fleet on such day on such transactions as determined by the Agent.

                     “Generally Accepted Accounting Principles” shall mean generally accepted accounting principles, as followed in the United States and as set forth in the statements, opinions and pronouncements of the Accounting Principles Board, the American Institute of Certified Public Accountants and the Financial Accounting Standards Board (or, to the extent not so set forth in such statements, opinions and pronouncements, as generally followed by entities similar in size to the Applicant and engaged in generally similar lines of business), consistently applied and maintained and in conformity with those used in the preparation of the most recent financial statements of the Applicant referred to in Section 4.1l(a).

                     “Governmental Authority” shall mean any nation or government, any state or other political subdivision thereof and any central bank thereof, any municipal, local, city or county government, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

                     “Hazardous Substances” shall mean any substances or materials (i) that are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants or toxic substances under any Environmental Law, (ii) that are defined by any Environmental Law as toxic, explosive, corrosive, ignitable, infectious, radioactive, mutagenic or otherwise hazardous, (iii) the presence of which require investigation or response under any Environmental Law, (iv) that constitute a nuisance, trespass or health or safety hazard to Persons or neighboring properties, (v) that consist of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance or (vi) that contain, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or wastes, crude oil, nuclear fuel, natural gas or synthetic gas.

-10-

                     “Hedge Agreement” shall mean any interest or foreign currency rate swap, cap, collar, option, hedge, forward rate or other similar agreement or arrangement designed to protect against fluctuations in interest rates or currency exchange rates.

                     “Historical Statutory Statements” shall have the meaning given to such term in Section 4.11(b).

                     “Indebtedness” shall mean, with respect to any Person (without duplication), (i) all indebtedness of such Person for borrowed money or in respect of loans or advances, (ii) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (iii) all reimbursement obligations of such Person with respect to surety bonds, letters of credit (other than Letters of Credit issued hereunder) and bankers’acceptances (in each case, whether or not drawn or matured and in the stated amount thereof), (iv) all obligations of such Person to pay the deferred purchase price of property or services, (v) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, (vi) all obligations of such Person as lessee under leases that are or should be, in accordance with Generally Accepted Accounting Principles, recorded as capital leases, to the extent such obligations are required to be so recorded, (vii) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any capital stock or other equity securities that, by their stated terms (or by the terms of any equity securities issuable upon conversion thereof or in exchange therefor), or upon the occurrence of any event, mature or are mandatorily redeemable, or are redeemable at the option of the holder thereof, in whole or in part, (viii) the net termination obligations of such Person under any Hedge Agreements, other than any Hedge Agreement that qualifies as a hedge of an exposure to an identifiable interest rate risk as determined in accordance with Statement of Financial Accounting Standards No. 80 issued by the Financial Accounting Standards Board, calculated as of any date as if such agreement or arrangement were terminated as of such date, (ix) all indebtedness of such Person in respect of Reverse Repurchase Agreements and Dollar Roll Agreements, (x) all Contingent Obligations of such Person and (xi) all indebtedness referred to in clauses (i) through (x) above secured by any Lien on any property or asset owned or held by such Person regardless of whether the indebtedness secured thereby shall have been assumed by such Person or is nonrecourse to the credit of such Person.

                     “Indemnified Person” has the meaning set forth in Section 10.10.

                     “Insurance Agreement” shall mean all contracts of insurance issued by any Insurance Subsidiary.

                     “Insurance Regulatory Authority” mean, with respect to any Insurance Subsidiary, the insurance department or similar Governmental Authority charged with regulating insurance companies or insurance holding companies, in its jurisdiction of domicile and, to the extent that it has regulatory authority over such Insurance Subsidiary, in each other jurisdiction in which such Insurance Subsidiary conducts business or is licensed to conduct business.

                     “Insurance Subsidiary” shall mean any Subsidiary of the Applicant the ability of which to pay dividends is regulated by an Insurance Regulatory Authority or that is otherwise

-11-

required to be regulated thereby in accordance with the applicable Requirements of Law of its jurisdiction of domicile, and shall mean and include, without limitation, each of PMACIC and PMAIC.

                     “Interest Expense” shall mean, for any period, total interest expense of the Applicant for such period in respect of Indebtedness of the Applicant and its Subsidiaries (including all such interest expense accrued or capitalized during such period, whether or not actually paid during such period, and such portion of finance leases properly characterized as interest), adjusted to give effect to all interest rate swap, cap or other interest rate hedging arrangements and fees and expenses paid in connection therewith, all as determined on a consolidated basis in accordance with Generally Accepted Accounting Principles.

                     “Internal Revenue Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute, and all rules and regulations from time to time promulgated thereunder.

                     “Invested Assets” shall mean, with respect to any Person, the amount, on a consolidated basis, of such Person’s investments, cash and cash equivalents as reflected on its most recent balance sheet.

                     “Investment Grade Securities” shall mean (i) non-equity securities (other than those issued by an Affiliate of the Applicant and other than CMOs and REMICS) that, if rated by the NAIC, are rated “NAIC 2” (or the equivalent thereof) or better by the NAIC, or, if not rated by the NAIC, are rated “BBB-” (or the equivalent thereof) or higher by Standard & Poor’s, “Baa3” (or the equivalent thereof) or higher by Moody’s, or “BBB-” (or the equivalent thereof) or higher by Duff & Phelps, (ii) municipal bonds that, if rated by the NAIC, are rated “NAIC 2” (or the equivalent thereof) or better by the NAIC, or if not rated by the NAIC, are rated “SP-2” (or the equivalent thereof) or higher by Standard &Poor’s, “Baa3” or “MIG4” (or the equivalent thereof) or higher by Moody’s, or “BBB-” (or the equivalent thereof) or higher by Duff & Phelps, and (iii) Permitted CMOs and Mortgage Backed Securities that, if rated by the NAIC, are rated “NAIC 2” (or the equivalent thereof) or higher by the NAIC or, if not rated by the NAIC, are rated “BBB-” (or the equivalent thereof) or higher by Standard &Poor’s, “Baa3” (or the equivalent thereof) or higher by Moody’s, or “BBB-” (or the equivalent thereof) or higher by Duff & Phelps (or, in the case of clauses (i), (ii) and (iii) above, in the event all such rating agencies cease to publish investment ratings, carrying an equivalent rating of a nationally recognized rating agency).

                     “Issuing Bank” means Fleet in its capacity as issuing bank hereunder, and its successors in such capacity.

                     “Letters of Credit” shall mean letters of credit issued by the Issuing Bank for the account of the Applicant and any Co-Applicant as defined in Section 2.1.

                     “Letter of Credit Commissions” has the meaning set forth in Section 2.17.

-12-

                     “Letter of Credit Exposure” means at any date, (i) in respect of all the Banks, the Dollar Equivalent sum, without duplication, of (x) the aggregate undrawn face amount of the outstanding Letters of Credit at such date, (y) the aggregate amount of unpaid drafts drawn on all Letters of Credit at such date, and (z) the aggregate unpaid reimbursement obligations in respect of the Letters of Credit at such date, and (ii) in respect of any Bank, a Dollar Equivalent amount equal to such Bank’s Commitment Percentage multiplied by the amount determined under clause (i) of this definition.

                     “Letter of Credit Request” means a request from the Applicant, or from the Applicant and a Co-Applicant, for the issuance of a Letter of Credit, substantially in the form of Exhibit C.

                     “Licenses” shall have the meaning given to such term in Section 4.4(c).

                     “Lien” shall mean any mortgage, pledge, hypothecation, assignment, security interest, lien (statutory or otherwise), preference, priority, charge or other encumbrance of any nature, whether voluntary or involuntary, including, without limitation, the interest of any vendor or lessor under any conditional sale agreement, title retention agreement, capital lease or any other lease or arrangement having substantially the same effect as any of the foregoing, except as created under the Credit Documents.

                     “MAIC” shall mean Manufacturers Alliance Insurance Company, a Pennsylvania insurance corporation.

                     “Management Group” shall mean, collectively, the individuals listed on Schedule 1.1; provided, however, each individual shall be included in the Management Group only so long as such individual is a member of the Applicant’s Board of Directors or is employed by the Applicant or any Material Insurance Subsidiary in a senior management position.

                     “Margin Stock” shall have the meaning given to such term in Regulation U.

                     “Material Adverse Change” shall mean a material adverse change in the condition (financial or otherwise), operations, business, properties or financial prospects of the Applicant or the Applicant and its Subsidiaries, taken as a whole.

                     “Material Adverse Effect” shall mean a material adverse effect upon (i) the condition (financial or otherwise), operations, business, properties or financial prospects of the Applicant or the Applicant and its Subsidiaries, taken as a whole, (ii) the ability of the Applicant to perform its obligations under this Agreement or any of the other Credit Documents or (iii) the legality, validity or enforceability of this Agreement or any of the other Credit Documents.

                     “Material Insurance Subsidiary” shall mean any Insurance Subsidiary that is a Material Subsidiary.

                     “Material Plan” shall mean, at any time, a Plan or Plans having aggregate Unfunded Liabilities in excess of $10,000,000.

-13-

                     “Material Subsidiary” shall mean each of (i) PMACIC, (ii) Caliber, (iii) the members of the PMA Group, (iv) at the relevant time of determination, any Subsidiary of the Applicant having (after the elimination of intercompany accounts) (y) assets constituting at least ten percent (10%) of the total assets of the Applicant and its Subsidiaries on a consolidated basis, or (z) revenues constituting at least twelve and one-half percent (12.50%) of the total revenues of the Applicant and its Subsidiaries on a consolidated basis, in each case as determined as of the date of the financial statements of the Applicant and its Subsidiaries most recently delivered under Section 5.1 prior to such time, and (v) any Subsidiary that has one of the foregoing as a Subsidiary;

                     “Moody's” shall mean Moody's Investors Service, Inc., its successors and assigns.

                     “Mortgage Backed Securities” shall mean investment securities representing any undivided interest or participation in or which are secured by, a pool of loans secured by mortgages or deeds of trust.

                     “Multiemployer Plan” shall mean, at any time, an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five (5) plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five (5) year period.

                     “NAIC” shall mean the National Association of Insurance Commissioners and any successor thereto.

                     “Net Tax Sharing Payments” shall mean, for any period, (i) the aggregate (without duplication) of all payments made or to be made to the Applicant by its Subsidiaries pursuant to tax sharing or allocation agreements or arrangements or otherwise in respect of taxable income realized during such period, minus (ii) the aggregate (without duplication) of all foreign, federal, state or local income, franchise and other tax payments made or to be made by the Applicant in respect of taxable income realized during such period and any payments made or to be made by the Applicant during such period pursuant to such tax sharing or tax allocation agreement or arrangement.

                     “Obligations” means all of the obligations and liabilities of the Applicant and the Co-Applicants under the Credit Documents, including, without limitation, reimbursement obligations (whether absolute or contingent) under any Letter of Credit or Credit Document and all obligations in respect of fees, expenses and other amounts payable under any Credit Document, in each case whether fixed, contingent, now existing or hereafter arising, created, assumed, incurred or acquired.

                     “Optional Currency” shall mean any of the following currencies: (i) British pounds, (ii) Canadian dollars, (iii) German marks, (iv) euros, (v) French francs, (vi) Mexican

-14-

pesos, (vii) Swiss francs and (viii) Japanese yen and any other currency approved by Agent pursuant to Section 2.18(b).

                     “Other Taxes” shall have the meaning given such term in Section 2.11.

                     “Outstanding Letters of Credit” means at any time the Letters of Credit outstanding at such time.

                     “PAC I” shall means a planned amortization class bond which is a tranche or class of CMO or REMIC that is retired according to a predetermined amortization schedule independent of the prepayment rate on the underlying collateral and which has the highest level of protection within the pool against prepayment or extension.

                     “Parent” means, with respect to any Bank, any Person controlling such Bank.

                     “PBGC” shall mean the Pension Benefit Guaranty Corporation and any successor thereto.

                     “Permitted CMOs and Mortgage Backed Securities” shall mean (i) mortgage participation certificates issued by the Federal Home Loan Mortgage Corporation, (ii) mortgage backed securities issued by the Federal National Mortgage Association, (iii) securities guaranteed by the Government National Mortgage Association, and (iv) other securities and certificates representing participations in any CMO or REMIC which are PAC I’s or which have comparable priority in respect of the repayment thereof.

                     “Permitted Liens” shall have the meaning given to such term in Section 7.3.

                     “Person” shall mean any corporation, association, joint venture, partnership, limited liability company, organization, business, individual, trust, Governmental Authority or other entity of whatever nature.

                     “Plan” shall mean, at any time, an employee Pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five (5) years been maintained, or contributed to, by any Person which was at such a time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group.

                     “Pledge Agreement” shall mean that certain Pledge and Security Agreement from the Applicant to the Agent relating to the Collateral Accounts, as the same may be amended, supplemented or otherwise modified from time to time.

                     “PMA Cayman” shall mean PMA Holdings, Cayman Ltd., a Cayman Island corporation.

-15-

                     “PMA Group” shall mean PMAIC, Manufacturers Alliance Insurance Company, a Pennsylvania insurance corporation, and Pennsylvania Manufacturers Indemnity Company, a Pennsylvania insurance corporation.

                     “PMACIC” shall mean PMA Capital Insurance Company, a Pennsylvania insurance corporation.

                     “PMAIC” shall mean Pennsylvania Manufacturers’Association Insurance Company, a Pennsylvania insurance corporation.

                     “PNC” shall mean PNC Bank, National Association.

                     “Prime Rate” means the rate of interest publicly announced by Fleet in Philadelphia from time to time as its Prime Rate.

                     “Property” means all types of real, personal, tangible, intangible or mixed property.

                     “Quarterly Statement” shall mean, with respect to any Insurance Subsidiary for any fiscal quarter, the quarterly financial statements of such Insurance Subsidiary as required to be filed with the Insurance Regulatory Authority of its jurisdiction of domicile, together with all exhibits, schedules, certificates and actuarial opinions required to be filed or delivered therewith.

                     “Reference Currency” shall have the meaning assigned to such term in the definition of Equivalent Amount.

                     “Regulations D, T, U and X” shall mean Regulations D, T, U and X respectively, of the Federal Reserve Board, and any successor regulations.

                     “Reinsurance Agreement” shall mean any agreement, contract, treaty, certificate of other arrangement whereby any Insurance Subsidiary agrees to transfer, cede or retrocede to another insurer or reinsurer all or part of the liability assumed or assets held by such Insurance Subsidiary under a policy or policies of insurance issued by such Insurance Subsidiary.

                     “REMIC” shall mean real estate mortgage investment conduit.

                     “Replaced Bank” has the meaning set forth in Section 2.15.

                     “Required Banks” means at any time Banks representing at least 51% of the Commitment or, if the Commitment shall have been terminated, at least 51% of the Letter of Credit Exposure at such time.

                     “Requirement of Law” shall mean, with respect to any Person, the charter, articles or certificate of organization or incorporation and bylaws or other organizational or governing documents of such Person, and any statute, law, treaty, rule, regulation, order, decree, writ, injunction or determination of any arbitrator or court or other Governmental Authority, in each

-16-

case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject or otherwise pertaining to any or all of the transactions contemplated by this Agreement and the other Credit Documents.

                     “Reverse Repurchase Agreement” shall mean, as to any Person, an agreement pursuant to which such Person sells securities to another Person (the “Counterparty”) and agrees to repurchase such securities at a described or specified date and price; provided, however, that “Reverse Repurchase Agreements” shall not include any agreement pursuant to which such Person lends securities pursuant to a securities lending arrangement to a Counterparty who collateralizes such borrowing with cash, Cash Equivalents, letters of credit or other collateral acceptable to the Required Banks, and agrees to return such securities to such Person at a described or specified date.

                     “Revolving Credit Agreement” shall mean that certain Revolving Credit Agreement among the Applicant and the lenders party thereto, The Bank of New York, as administrative agent for the lenders, and First Union National Bank, as documentation agent for the lenders, dated as of March 14, 1997, as amended, together with the Credit Documents (as defined in such Revolving Credit Agreement).

                     “Standard & Poor's” shall mean, Standard & Poor's Ratings Services, a division of McGraw-Hill Companies, Inc., its successors and assigns.

                     “Stated Expiration Date” means, with respect to each Letter of Credit, the date occurring up to one year after the Date of Issuance, as such date may be extended in accordance with the terms of this Agreement.

                     “Statutory Accounting Practices” shall mean, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Insurance Regulatory Authority of its state of domicile, consistently applied and maintained and in conformity with those used in the preparation of the most recent Historical Statutory Statements.

                     “Subsidiary” with respect to any Person, any corporation or other Person of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors, in the case of a corporation, or of the ownership or beneficial interests, in the case of a Person not a corporation, is at the time, directly or indirectly, owned or controlled by such Person and one or more of its other Subsidiaries or a combination thereof (irrespective of whether, at the time, securities of any other class or classes of any such corporation or other Person shall or might have voting power by reason of the happening of any contingency). When used without reference to a parent entity, the term “Subsidiary” shall be deemed to refer to a Subsidiary of the Applicant.

                     “Surplus Relief Reinsurance Agreement” shall mean any agreement or other arrangement whereby any Insurance Subsidiary cedes business under a reinsurance agreement that would not be considered a transaction that indemnifies an insurer against loss or liability relating to insurance risk, as determined in accordance with Statement of Financial Accounting Standards No. 113 (“FAS 113”) issued by the Financial Accounting Standards Board.

-17-

                     “Taxes” shall have the meaning given such term in Section 2.11.

                     “Termination Date” means December 2, 2002, or such earlier date on which the Commitment is terminated, or if the Commitment is extended with the consent of the Banks pursuant to Section 2.6, such later date.

                     “Trabaja” shall mean Trabaja Reinsurance Company, a Cayman Island insurance company.

                     “Treasury Security” shall mean any “Treasury security” under, and as such term is defined in, 31 C.F.R. part 306, subpart O, as amended.

                     “United States” means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions.

                     “Unfunded Liabilities” shall mean, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA.

                     “U.S. Federal Agency Obligations” shall mean bonds, debentures, notes or other evidences of indebtedness issued by the Federal National Mortgage Association or issued or guaranteed by the Government National Mortgage Association.

                     “Wholly Owned” shall mean, with respect to any Subsidiary of any Person, that one hundred percent (100%) of the outstanding capital stock or other ownership interests of such Subsidiary is owned, directly or indirectly, by such Person.

1.2. Principles of Construction.

                     (a) All terms defined in a Credit Document shall have the meanings given such terms therein when used in the other Credit Documents or any certificate, opinion or other document made or delivered pursuant thereto, unless otherwise defined therein.

                     (b) Except as specifically provided otherwise in this Agreement, all accounting terms used herein that are not specifically defined shall have the meanings customarily given them, and all financial computations hereunder shall be made, in accordance with Generally Accepted Accounting Principles (or, to the extent that such terms apply solely to any Insurance Subsidiary or if otherwise expressly required, Statutory Accounting Practices). Notwithstanding the foregoing, in the event that any changes in Generally Accepted Accounting Principles or Statutory Accounting Practices after the date hereof are required to be applied to the transactions described herein and would affect the computation of the financial covenants contained in Section 6.1 through 6.4, as applicable, such changes shall be followed in the

-18-

computation of such financial covenants only from and after the date this Agreement shall have been amended to take into account any such changes, provided the parties agree to negotiate in good faith to so amend this Agreement as soon as practicable after such a change. References to amounts on particular exhibits, schedules, lines, pages and columns of any Annual Statement or Quarterly Statement are based on the format promulgated by the NAIC for the 2000 Annual Statements and Quarterly Statements. In the event such format is changed in future years so that different information is contained in such items or they no longer exist, or if the Annual Statement or Quarterly Statement is replaced by the NAIC or by any Insurance Regulatory Authority after the date hereof such that different forms of financial statements are required to be furnished by the Insurance Subsidiaries in lieu thereof, such references shall be to information consistent with that reported in the referenced item in the 2000 Annual Statements or Quarterly Statements, as the case may be.

                     (c) The words “hereof”, “herein”, “hereto” and “hereunder” and similar words when used in a Credit Document shall refer to such Credit Document as a whole and not to any particular provision thereof, and Section, schedule and exhibit references contained therein shall refer to Sections thereof or schedules or exhibits thereto unless otherwise expressly provided therein.

                     (d) The phrase "may not" is prohibitive and not permissive.

                     (e) Unless the context otherwise requires, words in the singular number include the plural, and words in the plural include the singular.

                     (f) Unless specifically provided in a Credit Document to the contrary, references to a time shall refer to Philadelphia city time.

                     (g) Unless specifically provided in a Credit Document to the contrary, in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding”.

                     (h) References in any Credit Document to a fiscal period shall refer to that fiscal period of the Applicant.

2. AMOUNT AND TERMS OF LETTERS OF CREDIT

2.1. Issuance of Letters of Credit.

                     (a) Subject to the terms and conditions of this Agreement, the Issuing Bank agrees, in reliance on the agreement of the other Banks set forth in Section 2.2, to issue standby letters of credit (collectively, the “Letters of Credit”; each, individually, a “Letter of Credit”) during the Commitment Period for the account of the Applicant, or jointly and severally for the account of the Applicant and each Co-Applicant delivering a Letter of Credit Request. The aggregate Letter of Credit Exposure shall not at any time exceed the amount of the Commitment at such time, and such Letters of Credit may be denominated in either Dollars or an Optional Currency. In addition, the Letter of Credit Exposure in respect of Letters of Credit issued during

-19-

the Commitment Period for the account of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries shall not at any time exceed $15,000,000 in the aggregate. Each Letter of Credit issued pursuant to this Section shall have a Stated Expiration Date. No Letter of Credit shall be issued if the Agent determines that the conditions set forth in Section 3.2 have not been satisfied.

                     (b) Each Letter of Credit shall be issued for the account of the Applicant, individually, or for the account of the Applicant and one or more Co-Applicants, jointly and severally, in support of an obligation of the Applicant or of the Applicant and one or more Co-Applicants in favor of a beneficiary which has requested the issuance of such Letter of Credit as a condition to a transaction entered into in connection with the Applicant’s or the Co-Applicant’s or Co-Applicants’ reinsurance or insurance business or otherwise for the general corporate purposes of the Applicant or Co-Applicant(s); provided, however, that the Letter of Credit Exposure with respect to Letters of Credit issued for the general corporate purposes of the Applicant or Co-Applicant(s) shall not at any time exceed $15,000,000. The Applicant, and any Co-Applicant, as the case may be, shall give the Agent a Letter of Credit Request for the issuance of each Letter of Credit by 11:00 A.M., one Business Day prior to the requested Date of Issuance. Each Letter of Credit Request executed by a Co-Applicant shall provide that such Co-Applicant shall be, from and after the Date of Issuance of the Letter of Credit which is requested, a party hereto and shall have all the rights and obligations of a Co-Applicant under this Agreement and under the other Credit Documents to which it is a party. Such Letter of Credit Request shall specify (i) the beneficiary of such Letter of Credit and the obligations of the Applicant and/or Co-Applicant in respect of which such Letter of Credit is to be issued, (ii) the Applicant’s and/or Co-Applicant’s proposal as to the conditions under which a drawing may be made under such Letter of Credit and the documentation to be required in respect thereof, (iii) the maximum Dollar Equivalent amount to be available under such Letter of Credit, (iv) the requested Date of Issuance, (v) the requested Stated Expiration Date for such Letter of Credit which shall not be more than one year from the requested Date of Issuance, (vi) whether such Letter of Credit is to be an Evergreen Letter of Credit and, if so, the Beneficiary Notification Date (which shall be at least thirty (30) days prior to the Stated Expiration Date thereof), (vii) the account party with respect to such Letter of Credit and (viii) whether such Letter of Credit shall be denominated in Dollars or an Optional Currency. Upon receipt of such Letter of Credit Request, the Agent shall promptly notify the Issuing Bank and each other Bank thereof. The Issuing Bank shall make every effort on the proposed Date of Issuance and subject to the other terms and conditions of this Agreement, issue the requested Letter of Credit. Each Letter of Credit shall be in form and substance reasonably satisfactory to the Issuing Bank, with such provisions with respect to the conditions under which a drawing may be made thereunder and the documentation required in respect of such drawing as the Issuing Bank shall reasonably require. The parties agree that a Letter of Credit substantially in the form of Exhibit D shall be deemed to be in form and substance reasonably satisfactory to the Issuing Bank; provided, however, that Letters of Credit issued pursuant hereto need not be in the form of said Exhibit D. Each Letter of Credit shall be used solely for the purposes described therein.

                     (c) Each payment by the Issuing Bank of a draft drawn under a Letter of Credit shall give rise to an immediate obligation on the part of the Applicant, or to an immediate joint and several obligation on the part of the Applicant and the Co-Applicant, as the case may

-20-

be, to reimburse the Issuing Bank in Dollars for the Dollar Equivalent amount thereof on the Business Day on which the payment of such draft has been made to the beneficiary (which notice shall be given promptly and shall be deemed to constitute a demand for reimbursement).

2.2. Letter of Credit Participation and Funding Commitments.

                     (a) Each Bank hereby unconditionally and irrevocably, severally for itself only and without any notice to or the taking of any action by such Bank, takes an undivided participating interest in the obligations of the Issuing Bank under and in connection with each Letter of Credit in an amount equal to such Bank’s Commitment Percentage of the Dollar Equivalent amount of such Letter of Credit provided that the aggregate Letter of Credit Exposure of such Bank shall not exceed such Bank’s Commitment Amount. Each Bank shall be liable to the Issuing Bank for its Commitment Percentage of the unreimbursed Dollar Equivalent amount of any draft drawn and honored under each Letter of Credit. Each Bank shall also be liable for a Dollar Equivalent amount equal to the product of its Commitment Percentage and any amounts paid by the Applicant or any Co-Applicant that are subsequently rescinded or avoided, or must otherwise be restored or returned. Subject to the penultimate sentence of subsection (b) below, such liabilities (i) shall be payable in Dollars and (ii) shall be unconditional and without regard to the occurrence, of any Default or Event of Default or the compliance by the Applicant or any Co-Applicant with any of their obligations under the Credit Documents.

                     (b) The Agent will promptly (and in no event later than two (2) Business Days) notify each Bank (which notice shall be promptly confirmed in writing) of the date and the Dollar Equivalent amount on the Business Day paid of any draft presented under any Letter of Credit with respect to which full reimbursement of payment is not made by the Applicant or any Co-Applicant immediately, and forthwith upon receipt of such notice, such Bank (other than the Issuing Bank) shall make available to the Agent for the account of the Issuing Bank its Commitment Percentage of such amount of such unreimbursed draft at the office of the Agent specified in Section 10.2, in lawful money of the United States and in immediately available funds, before 4:00 P.M., on the day such notice was given by the Agent, if the relevant notice was given by the Agent at or prior to 1:00 P.M., on such day, and before 12:00 Noon, on the next Business Day, if the relevant notice was given by the Agent after 1:00 P.M., on such day. The Agent shall distribute the payments made by each Bank (other than the Issuing Bank) pursuant to the immediately preceding sentence to the Issuing Bank promptly upon receipt thereof in like funds as received. Each Bank shall indemnify and hold harmless the Agent and the Issuing Bank from and against any and all losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, costs and expenses) resulting from any failure on the part of such Bank to provide, or from any delay in providing, the Agent with such Bank’s Commitment Percentage of the Dollar Equivalent amount of any payment made by the Issuing Bank under a Letter of Credit in accordance with this subsection (b) above (except in respect of losses, liabilities or other obligations suffered by the Issuing Bank). If a Bank does not make available to the Agent, when due, such Bank’s Commitment Percentage of any unreimbursed payment made by the Issuing Bank under a Letter of Credit (other than payments made by the Issuing Bank by reason of its gross negligence or willful misconduct), such Bank shall be required to pay interest in Dollars to the Agent for the account of the Issuing Bank on such Bank’s Commitment Percentage of such payment from the date such Bank’s payment is due until the date such payment is received by

-21-

the Agent at a rate of interest per annum equal to (i) for the first three (3) days after the due date of such payment, the Federal Funds Rate and (ii) thereafter, the Federal Funds Rate plus two percent (2%). The Agent shall distribute such interest payments to the Issuing Bank upon receipt thereof in like funds as received.

                     (c) Whenever the Agent is reimbursed by the Applicant or any Co-Applicant, for the account of the Issuing Bank, for the Dollar Equivalent of any payment under a Letter of Credit and such payment relates to an amount previously paid by a Bank in respect of its Commitment Percentage of the amount of such payment under such Letter of Credit, the Agent will pay over such payment in Dollars to such Bank (i) before 4:00 P.M. on the day such payment from the Applicant or the Co-Applicant is received, if such payment is received at or prior to 1:00 P.M. on such day, or (ii) before 12:00 Noon on the next succeeding Business Day, if such payment from the Applicant or the Co-Applicant is received after 1:00 P.M. on such day.

2.3. Interest Rate.

                     If all or any portion of the Dollar Equivalent of any reimbursement obligation in respect of a Letter of Credit shall not be paid on the Business Day on which payment of such draft has been made, such overdue amount shall bear interest at a rate per annum equal to the Alternate Base Rate plus two percent (2%) from the date of such nonpayment until paid in full (whether before or after the entry of a judgment thereon). All such interest shall be payable in Dollars and monthly in arrears on the last day of each month of each year. Interest computed with reference to the Prime Rate or the Federal Funds Rate shall be calculated on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. The Applicant acknowledges that to the extent interest is based on the Prime Rate, such rate is only one of the bases for computing interest on extensions of credit made by the Banks, and by basing interest on the Prime Rate, the Banks have not committed to charge, and neither the Applicant nor any Co-Applicant has in any way bargained for, interest based on a lower or the lowest rate at which the Banks may now or in the future make extensions of credit to other Persons.

2.4. Termination or Reduction of Commitment.

                     The Applicant shall have the right, upon at least three (3) Business Days’ prior written notice to the Agent, at any time to terminate or reduce the amount of the Commitment in an amount of $10,000,000 or such amount plus multiples of $5,000,000 in excess thereof, provided that after giving effect thereto, the Commitment shall not be less than the Letter of Credit Exposure at such time. Any reduction of the Commitment shall be applied pro rata according to the Commitment Percentage of each Bank. Simultaneously with any reduction of the Commitment the Applicant shall pay the Commitment Fee accrued on the amount by which the Commitment has been reduced.

2.5. Amendments to Letters of Credit.

                     (a) At any time during the Commitment Period:

-22-

                             (i) except as otherwise provided in Section 2.7(a), Evergreen Letters of Credit shall be automatically extended unless at least two (2) Business Days prior to the Beneficiary Notification Date, the Agent shall have received written notice from the Applicant, a Co-Applicant or a Bank that a Default or an Event of Default has occurred and is continuing in which event the Agent shall instruct the Issuing Bank to, and the Issuing Bank shall, notify the beneficiary of such Evergreen Letter of Credit on or before the Beneficiary Notification Date that the Stated Expiration Date of such Evergreen Letter of Credit will not be extended;

                             (ii) the Applicant, together with the Co-Applicant, if any, with respect to an Outstanding Letter of Credit, shall have the right to request in writing that such Outstanding Letter of Credit be amended, including an amendment to increase or reduce the undrawn face amount thereof and/or, in the case of a Letter of Credit other than an Evergreen Letter of Credit, to extend for up to one year from the date of such amendment the then Stated Expiration Date. Provided that (A) no Default or Event of Default shall exist and be continuing and (B) after giving effect thereto (1) the Letter of Credit Exposure does not exceed the Commitment and (2) the Letter of Credit Exposure with respect to Letters of Credit issued for the account of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries does not exceed $15,000,000 in the aggregate, the Agent shall promptly request that the Issuing Bank amend such Letter of Credit to give effect to such increase, reduction, extension and/or other requested amendment, and the Issuing Bank shall either amend such Letter of Credit or issue a substitute Letter of Credit containing such amended terms. Notwithstanding the foregoing, in the event that a requested amendment of a Letter of Credit would reduce the amount available to be drawn thereunder, reduce the period during which drawings can be made thereunder or would otherwise be adverse to the beneficiary thereof, such amendment or such substitute Letter of Credit shall not, by its term, be effective unless and until such beneficiary shall have consented in writing thereto.

                     (b) Following the Termination Date, provided that no Default or Event of Default shall then exist and be continuing, the Applicant, together with the Co-Applicant, if any, with respect to an Outstanding Letter of Credit, may request that an Outstanding Letter of Credit be amended, including an amendment to increase or reduce the undrawn face amount but excluding any amendment which extends the Stated Expiration Date which extensions are governed by Section 2.7, provided that any such increase in the face amount of Outstanding Letters of Credit which expire on the same date, after giving effect to any reductions which become effective on the same date as such increase with respect to such Outstanding Letters of Credit which expire on the same date, shall not cause an increase, at such date, in the undrawn face amount of Outstanding Letters of Credit which expire on the same date. Upon receipt of such request, the Agent shall promptly request that the Issuing Bank amend such Letter of Credit to give effect to such amendment, and the Issuing Bank, shall either amend such Letter of Credit or issue a substitute Letter of Credit containing such amended terms. Notwithstanding the foregoing (i) in the event that such requested amendment would increase the amount available to be drawn therewith, the Agent shall not request the Issuing Bank to either amend such Letter of Credit or issue a substitute Letter of Credit, and the Issuing Bank shall not so amend or issue unless all of the Banks shall have consented thereto and (ii) in the event that a requested amendment of a Letter of Credit would reduce the amount available to be drawn thereunder, reduce the period during which drawings can be made thereunder or would otherwise be adverse

-23-

to the beneficiary thereof, such amendment or such substitute Letter of Credit shall not, by its terms, be effective unless and until such beneficiary shall have consented in writing thereto.

2.6. Extension of Commitment and Termination Date.

                     Provided that no Default or Event of Default shall exist and be continuing, the Applicant may request that the Commitment be extended for an additional period of three hundred sixty-four (364) days by giving written notice of such request substantially in the form of Exhibit H (an “Extension Request”) to the Agent during the period not more than one hundred eighty (180) days but not less than sixty (60) days prior to the then Termination Date, and upon the receipt of such notice, the Agent shall promptly notify each Bank of such request. If each Bank consents to such Extension Request during the Extension Consent Period by giving written notice thereof to the Agent, then effective on the first day of the Extension Consent Period, the then applicable Termination Date shall be extended by three hundred sixty-four (364) days. If all of the Banks have not consented to such Extension Request during the Extension Consent Period and such nonconsenting Bank or Banks have not been replaced pursuant to Section 2.15 during the Extension Consent Period, the Termination Date shall not be extended.

2.7. Extension of the Stated Expiration Date of Each Letter of Credit.

                     The Stated Expiration Date of each Letter of Credit shall be up to one year from its Date of Issuance thereof, or, if extended during the Commitment Period as provided in Section 2.5, such later date. In addition, with respect to a Letter of Credit the Stated Expiration Date of which is after the Termination Date, such Stated Expiration Date thereof may be extended as follows:

                     (a) Evergreen Letters of Credit. In the case of an Evergreen Letter of Credit the Beneficiary Notification Date for which is before the Termination Date, the Stated Expiration Date for such Letter of Credit shall be automatically extended for a term of up to one (1) year from the then Stated Expiration Date in accordance with the provisions of this subsection (a) unless either (i) the Applicant and/or Co-Applicant, if any, for such Letter of Credit have or (ii) any bank has notified the Agent and the Issuing Bank at least ten (10) days prior to such Beneficiary Notification Date that such Evergreen Letter of Credit is not to be extended. The Agent shall advise each Bank of any such extension of the Stated Expiration Date of such Letter of Credit. Notwithstanding the foregoing, in the event that at least two (2) Business Days prior to the Beneficiary Notification Date the Agent shall have received written notice from the Applicant, a Co-Applicant or a Bank that a Default or an Event of Default has occurred and is continuing, or if the Beneficiary Notification Date for such Evergreen Letter of Credit is after the Termination Date, the Agent shall instruct the Issuing Bank to, and the Issuing Bank shall, notify the beneficiary of such Evergreen Letter of Credit on or before the Beneficiary Notification Date that the Stated Expiration Date of such Evergreen Letter of Credit will not be extended.

                     (b) Other Letters of Credit. In the case of a Letter of Credit other than an Evergreen Letter of Credit, the Applicant and the Co-Applicants, if any, may request in writing delivered to the Agent that the Stated Expiration Date thereof be extended for a term of up to one (1) year from the then Stated Expiration Date, and the Agent shall then elect, in its sole

-24-

discretion, to extend such Stated Expiration Date. Upon receipt of such request, the Agent will promptly notify each Bank thereof. If all of the Banks consent to such extension, the Agent shall notify the Issuing Bank and the Issuing Bank shall amend such Letter of Credit to reflect such extended Stated Expiration Date. Each Bank will use its best efforts to promptly respond to any such request; provided that no Bank’s failure to so respond shall create any claim against it or have the effect of extending the Stated Expiration Date of such Letter of Credit. Notwithstanding the foregoing, in the event that the Agent shall have received prior written notice from the Applicant, a Co-Applicant or Bank that a Default or an Event of Default has occurred and is continuing, the Agent shall not extend the Stated Expiration Date of such Letter of Credit.

                     (c) In General. Each Letter of Credit may be extended in the manner set forth herein an unlimited number of times. In the event that the Termination Date is extended pursuant to Section 2.6 after the procedures set forth in this Section 2.7 have commenced, the provisions of Section 2.5 shall apply and shall supercede the provisions of this Section 2.7.

               2.8. Reimbursement Obligations Absolute.   The reimbursement obligations of the Applicant and each Co-Applicant, if any, in respect of a Letter of Credit (x) shall be payable in Dollars, (y) shall be absolute, unconditional and irrevocable, and (z) shall be performed strictly in accordance with the terms of this Agreement, irrespective of any circumstances, including, without limitation, the following:

      (i) any lack of validity or enforceability of any Letter of Credit;

      (ii) any amendment or waiver of, or consent to departure from, all or any of the other Credit Documents;

      (iii) the existence of any claim, set-off, defense or other right which the Applicant, any Co-Applicant, or any other Person may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Person or entity for whom any such beneficiary or any such transferee may be acting), the Issuing Bank, the Agent, any Bank, any participant or assignee, or any other Person or entity, whether in connection with this Agreement, any other Credit Document or any unrelated transaction;

      (iv) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever;

      (v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or certificate which does not comply with the terms of the Letter of Credit; or

      (vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing.

-25-

2.9. No Liability of the Issuing Bank.

                     It is understood that in making any payment under a Letter of Credit (i) the Issuing Bank’s exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the Dollar Equivalent amount of any draft presented under such Letter of Credit, whether or not the Dollar Equivalent amount due to the beneficiary equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever; and (ii) any noncompliance of the documents presented in an immaterial respect under a Letter of Credit with the terms thereof shall in each case not be deemed willful misconduct or gross negligence of the Issuing Bank.

2.10. Increased Costs: Capital Adequacy.

                     (a) If on or after the Effective Date the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Issuing Bank or any Bank with any request or directive after such date (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Issuing Bank or any Bank or shall impose on any Bank any other condition affecting its Commitment or the term thereof or its obligation to issue or participate in Letters of Credit and the result of any of the foregoing is to increase the cost to the Issuing Bank or such Bank of issuing or maintaining the Letters of Credit or its obligations pursuant to Section 2.2, or to reduce the amount of any sum received or receivable by the Issuing Bank or such Bank under this Agreement with respect thereto, by an amount deemed by the Issuing Bank or such Bank to be material, then, within fifteen (15) days after demand by the Issuing Bank or such Bank (with a copy to the Agent), the Applicant shall pay in Dollars to the Issuing Bank or such Bank such additional amount or amounts as will compensate the Issuing Bank or such Bank for such increased cost or reduction.

                     (b) If any Bank or the Issuing Bank shall have determined that, after the Effective Date, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank or the Issuing Bank (or its Parent) as a consequence of such Bank’s or the Issuing Bank’s, obligations hereunder to a level

-26-

below that which such Bank or the Issuing Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank or the Issuing Bank to be material, then from time to time, within fifteen (15) days after demand by such Bank or the Issuing Bank (with a copy to the Agent), the Applicant shall pay in Dollars to such Bank or the Issuing Bank such additional amount or amounts as will compensate such Bank or the Issuing Bank (or its Parent) for such reduction.

                     (c) Each Bank or the Issuing Bank, as the case may be, will promptly notify the Applicant and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section. A certificate of any Bank or the Issuing Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank or the Issuing Bank may use any reasonable averaging and attribution methods.

2.11. Taxes.

                     (a) All payments made by the Applicant and Co-Applicants hereunder shall be made free and clear of and without deduction for any present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto (excluding, in the case of the Agent and each Bank, income taxes and franchise or gross receipts taxes or other revenue-based taxes imposed on the Agent or such Bank, as the case may be, levied by any Governmental Authority or other taxing authority imposing such tax (all such non-excluded taxes, levies, imposts, duties, charges, fees, deductions and withholdings being hereinafter called “Taxes”)). If the Applicant and Co-Applicants shall be required by applicable law to deduct any Taxes from or in respect of any sum payable hereunder, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Agent and each Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Applicant and Co-Applicants shall make such deductions and (iii) the Applicant and Co-Applicants shall timely pay the full amount deducted to the relevant tax authority or other authority in accordance with applicable law.

                     (b) In addition, the Applicant and Co-Applicants agree to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made hereunder or from the execution, delivery, or registration of, or otherwise with respect to, this Agreement or any Note (hereinafter referred to as “Other Taxes”).

                     (c) The Applicant and Co-Applicants shall indemnify the Agent and each Bank for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this subsection) paid by the Agent or any Bank and any liability (including penalties, interest, and expenses other than those arising solely from the Agent’s or any such Bank’s failure to timely notify the Applicant of such Taxes or Other Taxes payable hereunder) arising therefrom or with respect thereto, whether or

-27-

not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within thirty (30) days from the date the Agent or a Bank makes written demand therefor.

                     (d) Within thirty (30) days after the date of any payment of any Taxes by the Applicant and Co-Applicants, if available, the Applicant and Co-Applicants shall furnish to the Agent and each Bank, at its address referred to herein, the original or a certified copy of a receipt evidencing payment thereof.

                     (e) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in subsections 2.11(a) through (d) shall survive the payment in full of all payments due hereunder.

                     (f) At least five (5) Business Days prior to the first date on which interest or fees are payable hereunder, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Applicant and Co-Applicants and the Agent (i) two duly completed copies of United States Internal Revenue Service Form W-8ECI or W-8BEN or successor applicable form, as the case may be, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form. Each such Bank also agrees to deliver to the Applicant and the Agent two further copies of the said Form W-8ECI or W-BEN and Form W-8 or W-9, or successor applicable forms or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Applicant, and such extensions or renewals thereof as may reasonably be requested by the Applicant or the Agent, unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank so advises the Applicant and the Agent. Each such Bank shall certify (i) in the case of a Form W-8ECI or W-BEN, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9 or successor applicable form, that it is entitled to an exemption from United States backup withholding tax.

                     (g) Notwithstanding the foregoing subsections 2.11(a) through (e), the Applicant and Co-Applicants shall not be required to pay any additional amounts to any Bank in respect of United States withholding tax pursuant to such subsections if (i) the obligation to pay such additional amounts would not have arisen but for a failure by such Bank to comply with the requirements of subsection 2.11(f) or (ii) such Bank shall not have furnished the Applicant with such forms listed in subsection 2.11(f) and shall not have taken such other steps as reasonably may be available to it under applicable tax laws and any applicable tax treaty or convention to obtain an exemption from, or reduction (to the lowest applicable rate) of, such United States withholding tax.

2.12. Agent's Records.

                     The Agent’s records regarding the amount of each Letter of Credit, each payment

-28-

by the Applicant or any Co-Applicant of reimbursement obligations in respect of Letters of Credit and other information relating to the Letters of Credit shall be presumptively correct absent manifest error.

               2.13. Use of Proceeds. The Applicant and Co-Applicants will use the Letters of Credit only for the following purposes:

                     (a) The collateralization of reinsurance liabilities assumed by direct and indirect Wholly Owned Consolidated Subsidiaries of the Applicant;

                     (b) The collateralization of insurance liabilities of any direct and indirect Wholly Owned Consolidated Subsidiaries of the Applicant;

                     (c) The collateralization of reinsurance recoverable from Trabaja, not to exceed $24,000,000; and

                     (d) Otherwise for the Applicant's or Co-Applicant's general corporate purposes.

                     Notwithstanding anything to the contrary contained in any Credit Document, the Applicant and each Co-Applicant agrees that no part of the proceeds of any Letters of Credit will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any Margin Stock.

2.14. Collateral.

                     (a) In General.

                             (i) With respect to each Letter of Credit, on or prior to the Date of Issuance thereof, the Applicant and/or any Co-Applicant, if applicable, shall deliver to the Custodian for deposit in the Collateral Accounts (as defined below) Eligible Collateral, the Discounted Collateral Value of which together with the Discounted Collateral Value of all other Eligible Collateral then held in the Collateral Accounts shall not be less than the Letter of Credit Exposure determined with respect to all Letters of Credit.

                             (ii) The Applicant hereby unconditionally agrees that at all times the Obligations attributable to Letters of Credit shall be secured by a security interest in Eligible Collateral, the Discounted Collateral Value of which equals or exceeds the Letter of Credit Exposure attributable to all Letters of Credit at such time; provided, however, that at no time shall U.S. Federal Agency Obligations issued by the Federal National Mortgage Association represent more than fifty percent (50%) of the Eligible Collateral securing the Obligations. In the event that the Discounted Collateral Value of the Eligible Collateral is less than such amount, the Applicant or, if applicable, the Co-Applicant(s), shall promptly (and in no event later than two (2) Business Days) deliver to the Custodian additional Eligible Collateral as shall be necessary so that the Discounted Collateral Value of all Eligible Collateral then held in the Collateral Accounts shall equal or exceed the Letter of Credit Exposure attributable to all Letters

-29-

of Credit at such time.

                             (iii) In the event that the Discounted Collateral Value of the Eligible Collateral in the Collateral Accounts is greater than one hundred five percent (105%) of the Letter of Credit Exposure at such time and so long as no Default or Event of Default shall then exist, the Applicant and/or Co-Applicant, if applicable, shall have the right to withdraw from the Collateral Accounts Eligible Collateral in an amount such that after giving effect to such withdrawal the Discounted Collateral Value of the Eligible Collateral remaining in the Collateral Accounts is equal to or greater than the above one hundred five percent (105%), subject to the terms of the Control Agreements and the Pledge Agreement and the Agent agrees to direct the Custodian to make any such permitted withdrawal.

                     (b) Collateral Accounts. To secure prompt and complete payment, observance and performance of the Obligations, the Applicant and certain of the Co-Applicants have, pursuant to the Pledge Agreement, pledged and granted to the Agent a security interest in and to all of the Applicant’s and each such Co-Applicant’s right, title and interest in and to the Collateral Accounts and all Property, including all money and securities, at any time and from time to time on deposit therein, and all of the Proceeds (which shall include all distributions and income on and in respect of all of the foregoing and all other rights and benefits in respect thereof) of all of the foregoing, whether now owned or existing or hereafter arising or acquired (collectively, the “Collateral”). The Applicant and certain of the Co-Applicants have established and shall maintain, at the offices of the Custodian located at 100 Federal Street, Boston, Massachusetts 02110 in their names in favor of the Agent, one or more securities custody accounts (collectively, the “Collateral Accounts”) pursuant to one or more Custody Agreements between the Applicant, certain of the Co-Applicants and the Custodian. Subject to the provisions of the Control Agreements and the Pledge Agreement, the Custodian shall hold any Eligible Collateral delivered to it as Collateral.

                     (c) All Property in the Collateral Accounts shall be held by the Custodian as collateral for the payment and performance of all Obligations. At the direction of the Agent, Collateral may (A) be applied to reimburse the Issuing Bank for Letter of Credit payments and disbursements, and (B) be held for the satisfaction of the reimbursement obligations of the Applicant and Co-Applicants for the then outstanding Letter of Credit Exposure. After the occurrence and during the continuation of an Event of Default, the Agent may, in accordance with the provisions of this Agreement and the Pledge Agreement, apply or cause the Custodian to apply all or any portion of the Collateral held in the Collateral Accounts to the Obligations and shall have the power to sell, or cause the Custodian to sell, any securities held therein in connection therewith.

2.15. Replacement of Banks.

                     (a) If any Bank does not consent to an Extension Request pursuant to Section 2.6, the Applicant shall have the right, if no Default or Event of Default then exists, to replace such Bank (any such Bank being referred to herein as “Replaced Bank”) with one or more Eligible Assignee or Eligible Assignees, each of which shall be acceptable to the Agent and the Issuing Bank, and such Replaced Bank shall assign to such Eligible Assignee or Eligible

-30-

Assignees who are willing to so purchase the same for such Replaced Bank, all (but not less than all) of such Replaced Bank’s rights and obligations under this Agreement, providedthat such Eligible Assignee or Eligible Assignee shall pay to such Replaced Bank, an amount equal to all interest, fees and other amounts owing or accrued to such Replaced Bank to the date of such assignment, but without any premium.

               (b) For each assignment, the parties shall execute and deliver to the Agent an Assignment and Acceptance Agreement. Upon such execution and delivery, from and after the effective date specified in such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and the assignor Bank released from its obligations hereunder to the extent provided therein.

2.16. Commitment Fee

                     The Applicant agrees to pay in Dollars to the Agent, for the account of the Banks in accordance with each Bank’s Commitment Percentage, a fee (the “Commitment Fee”), during the Commitment Period, equal to the Applicable Fee Percentage per annum on the average daily Available Amount. The Commitment Fee shall be payable quarterly in arrears on the last day of each March, June, September and December of each year and on the Termination Date or other date on which the Commitment shall expire or otherwise terminate, and upon each reduction of the Available Amount. The Commitment Fee shall be calculated on the basis of a three hundred sixty-five (365) or three hundred sixty-six (366) day year, as applicable, for the actual number of days elapsed.

2.17. Letter of Credit Commissions.

                     The Applicant agrees to pay in Dollars to the Agent, for the account of the Banks in accordance with each Bank’s Commitment Percentage, commissions (the “Letter of Credit Commissions”) with respect to each Letter of Credit for the period from and including the Date of Issuance thereof to and including the expiration date thereof (giving effect to any extensions, cancellations or other amendments thereto), at a rate per annum equal to the Applicable Fee Percentage per annum on the average daily Dollar Equivalent amount available to be drawn under such Letter of Credit. The Letter of Credit Commissions shall be (i) calculated on the basis of a three hundred sixty-five (365) or three hundred sixty-six (366) day year, as applicable, for the actual number of days elapsed, (ii) payable quarterly in arrears on the last day of each March, June, September and December of each year and on the date that the Commitment shall expire and (iii) nonrefundable. In addition to the Letter of Credit Commissions, the Applicant agrees to pay in Dollars to the Issuing Bank, for its own account, its standard fees and charges customarily charged to customers similar to the Applicant with respect to any Letter of Credit.

2.18. Utilization of Commitment in Optional Currencies.

                     (a) The Agent will determine the Dollar Equivalent amount of (i) proposed Letter of Credit to be denominated in an Optional Currency as of the Date of Issuance and (ii) Outstanding Letters of Credit denominated in an Optional Currency as of the last Business Day of each month.

-31-

                     (b) The Applicant and/or Co-Applicant, if applicable, may deliver to Agent a written request that Letters of Credit issued hereunder also be permitted to be made in any other lawful currency (other than Dollars), in addition to the currencies specified in the definition of “Optional Currency” herein provided that such currency must be freely traded in the offshore interbank foreign exchange markets, freely transferable, freely convertible into Dollars and available to the Agent in the applicable interbank market. The Agent will promptly notify the Banks of any such request promptly after the Agent receives such request. The Agent may grant or accept such request in their sole discretion. The requested currency shall be approved as an Optional Currency hereunder only if the Agent approves of the Applicant’s and/or Co-Applicant’s request.

                     (c) If at any time the Agent determines that the Dollar Equivalent of the Letter of Credit Exposure of all the Banks exceeds the aggregate of the Commitment Amounts of all the Banks whether because of currency fluctuations or otherwise (the amount of such excess being referred to as the “Excess Letter of Credit Exposure”), the Applicant shall (i) promptly, and in any event not later than thirty (30) days from the date the Agent notifies the Applicant of such Excess Letter of Credit Exposure, eliminate any such Excess Letter of Credit Exposure by arranging for the surrender of, or reduction in amount available to be drawn under, one or more Letters of Credit, and (ii) until such time as it has taken the action required by subsection (i) above, cause the Eligible Collateral at such time contained in the Collateral Accounts (x) to include an amount of cash (in Dollars) equal to or greater than the Excess Letter of Credit Exposure and (y) to otherwise meet the coverage requirements of Section 2.14(a).

3. CONDITIONS PRECEDENT

3.1. Conditions to Effectiveness.

                     The effectiveness of this Agreement and the obligation of the Issuing Bank to issue any Letter of Credit on the Effective Date or any day thereafter, and the Banks to participate therein shall be subject to the fulfillment of the following conditions precedent:

                     (a) The Agent shall have received the following, each dated as of the Effective Date (unless otherwise specified) and in sufficient copies for each Bank:

      (i) counterparts of the Pledge Agreement and the Control Agreements duly executed by the parties thereto and evidence satisfactory to the Agent of the establishment of the Collateral Accounts and the transfer thereto of sufficient Eligible Collateral to satisfy the requirements of Section 2.14;

      (ii) a certificate, signed by the chief executive officer, chief financial officer or an executive vice president of the Applicant, in form and substance satisfactory to the Agent, certifying that (A) all representations and warranties of the Applicant contained in this Agreement and the other Credit Documents are true and correct in all material respects as of the Effective Date, (B) no Default or Event of Default has

-32-

occurred and is continuing, (C) there are no insurance regulatory proceedings pending or, to such individual’s knowledge, threatened against any of the Insurance Subsidiaries in any jurisdiction that, if adversely determined, would be reasonably likely to have a Material Adverse Effect, and (D) both immediately before and after giving effect to the consummation of the transactions contemplated by this Agreement, no Material Adverse Change has occurred since September 30, 2001, and, to such officer’s knowledge, there exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change;

      (iii) a certificate of the secretary or an assistant secretary of each of the Applicant and its Material Subsidiaries, in form and substance satisfactory to the Agent, certifying (A) that attached thereto is a true and complete copy of the articles or certificate of incorporation and all amendments thereto of the Applicant or such Subsidiary, as the case may be, certified as of a recent date by the Secretary of State (or comparable Governmental Authority) of its jurisdiction of organization, and that the same has not been amended since the date of such certification, (B) that attached thereto is a true and complete copy of the bylaws of the Applicant or such Subsidiary, as the case may be, as then in effect and as in effect at all times from the date on which the resolutions referred to in clause (C) below were adopted to and including the date of such certificate, and (C) as to the Applicant only, that attached thereto is a true and complete copy of resolutions adopted by the board of directors of the Applicant authorizing the execution, delivery and performance of this Agreement and the other Credit Documents to which it is a party, and as to the incumbency and genuineness of the signature of each officer of the Applicant executing this Agreement or any of the other Credit Documents, and attaching all such copies of the documents described above;

      (iv) a certificate of the Applicant's chief financial officer as to the financial condition of the Applicant in the form of Exhibit F; and

      (v) a favorable opinion of Charles A. Brawley, III, Esq., covering the matters set forth in items 1 through 8 of Exhibit G and a favorable opinion of Duane, Morris & Heckscher LLP as to item 9 of Exhibit G, in each case acceptable to the Agent, addressed to Agent and the Banks.

                     (b) The Agent shall have received (i) a certificate as of a recent date of the good standing of each of the Applicant and its Material Subsidiaries under the laws of its jurisdiction of organization from the Secretary of State (or comparable Governmental Authority) of such jurisdiction, and (ii) as to each Material Insurance Subsidiary, a certificate of compliance as of a recent date, issued by the Insurance Regulatory Authority of its jurisdiction of legal domicile and any other jurisdiction in which such Insurance Subsidiary is reasonably likely to be commercially domiciled as defined under the laws and revelations of such jurisdiction.

                     (c) All approvals, permits and consents of any Governmental Authorities (including, without limitation, all relevant Insurance Regulatory Authorities) or other Persons required in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been obtained (without the imposition of

-33-

conditions that are not reasonably acceptable to the Agent), and all related filings, if any, shall have been made, and all such approvals, permits, consents and filings shall be in full force and effect and the Agent shall have received such copies thereof as it shall have requested; all applicable waiting periods shall have expired without any adverse action being taken by any Governmental Authority having jurisdiction; and no action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before, and no order, injunction or decree shall have been entered by, any court or other Governmental Authority, in each case to enjoin, restrain or prohibit, to obtain substantial damages in respect of, or that is otherwise related to or arises out of, this Agreement or the consummation of the transactions contemplated hereby, or that, in the opinion of the Agent, would otherwise be reasonably likely to have a Material Adverse Effect.

                     (d) Since September 30, 2001, both immediately before and after giving effect to the consummation of the transactions contemplated by this Agreement there shall not have occurred any Material Adverse Change or any event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change.

                     (e) The Agent shall be satisfied with the actuarial review and valuation statement of, and opinion as to the adequacy of, each Insurance Subsidiary’s loss and loss adjustment expense reserve positions as of December 31, 2000, with respect to the insurance business then in force, prepared and given by each Insurance Subsidiary’s chief actuary.

                     (f) The Applicant shall have paid all fees and expenses of the Agent required hereunder or under any other Credit Document to be paid on or prior to the Effective Date (including reasonable fees and expenses of counsel) in connection with this Agreement and the transactions contemplated hereby.

                     (g) Where applicable, the Agent shall have received an agreement in substantially the form of the Letter of Credit Request from each Co-Applicant with respect to any Existing Letter of Credit issued for the account of such Co-Applicant.

                     (h) The Agent and each Bank shall have received such other documents, certificates, opinions and instruments as it shall have reasonably requested.

               3.2. Conditions for Issuance of All Letters of Credit and Extension and Increases thereof and Conditions to Effectiveness of Letters of Credit.

                     The obligation of the Issuing Bank to issue any Letter of Credit on a Date of Issuance and each Bank to participate therein and any increase of the face amount of any Letter of Credit or any extension of the Stated Expiration Date of any Letter of Credit is subject to the satisfaction of the following conditions precedent as of such Date of Issuance or the date of such increase or extension:

                     (a) On each Date of Issuance, and on each date on which the face amount of any Letter of Credit is to be increased or the Stated Expiration Date of any Letter of Credit is to be extended, and both before and after giving effect to the Letters of Credit to be issued thereon

-34-

or such increase or extension, as the case may be, (i) each of the representations and warranties contained in Section 4 and in the other Credit Documents shall be true and correct in all respects on and as of such date with the same effect as if made on and as of such date (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty shall be true and correct in all respects as of such date), (ii) no Default or Event of Default shall have occurred and be continuing on such date, (iii) the aggregate Letter of Credit Exposure will not exceed the Commitment, (iv) the aggregate Letter of Credit Exposure with respect to Letters of Credit issued for the account of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries will not exceed $15,000,000 and (v) the aggregate Letter of Credit Exposure with respect to Letters of Credit issued for the general corporate purposes of the Applicant or a Co-Applicant shall not exceed $15,000,000. Each request by the Applicant for the issuance of a Letter of Credit shall constitute a certification by the Applicant as of such date that each of the foregoing matters is true and correct in all material respects.

                     (b) All documents required by the provisions of the Credit Documents to be executed or delivered to the Agent on or before the applicable Date of Issuance shall have been executed and shall have been delivered at the office of the Agent set forth in Section 10.2 on or before such Date of Issuance.

                     (c) With respect to the issuance of each Letter of Credit, the Agent shall have received a Letter of Credit Request duly executed by an Authorized Signatory of the Applicant and, if applicable, the Co-Applicant.

                     (d) With respect to each Letter of Credit, the Applicant or the Co-Applicants, as the case may be, shall have delivered Eligible Collateral to the Agent as required by Section 2.14.

3.3. Transitional Arrangements.

                     (a) On the Effective Date, replacement Letters of Credit issued by the Issuing Bank under this Agreement shall be substituted for the Existing Letters of Credit issued by PNC under the Existing Credit Agreement, the effectiveness of which replacement Letters of Credit shall be conditioned on the surrender to PNC for cancellation of the corresponding Existing Letter of Credit. By execution of this Agreement, the Applicant and each Co-Applicant, as applicable, requests the Issuing Bank to issue such replacement Letters of Credit in substantially the same form as the Existing Letters of Credit they are to replace. The Applicant agrees to use its best efforts to cause each beneficiary of an Existing Letter of Credit to promptly surrender such Existing Letter of Credit in exchange for the corresponding replacement Letter of Credit.

                     (b) Each Letter of Credit substituted for an Existing Letter of Credit pursuant to Section 3.3(a) hereof shall supersede such Existing Letter of Credit in its entirety, shall be deemed to be made under this Agreement and shall be governed by this Agreement and the other Credit Documents.

                     (c) As of the Effective Date, except as otherwise provided in this Agreement,

-35-

the Existing Credit Agreement shall be superseded by this Agreement and the Credit Documents and shall be of no further force and effect.

                     (d) Until such time as an Existing Letter of Credit is surrendered to PNC for cancellation, such Existing Letter of Credit shall be deemed to be a Letter of Credit issued hereunder, and PNC shall be entitled to the rights and benefits of the Issuing Bank hereunder in respect of such Existing Letter of Credit for purposes of the obligations (i) of the Applicant and Co-Applicant, as the case may be, to reimburse PNC for any payments of drafts under such Existing Letter of Credit as provided in Sections 2.1(c) and 2.3 hereof and to indemnify PNC as provided in Section 10.10, and (ii) of each Bank, as defined herein, to participate in and to make available for PNC’s account such Bank’s Commitment Percentage of the amount of any unreimbursed draft on such Existing Letter of Credit as provided in Section 2.2 hereof. Each Existing Letter of Credit shall be entitled to the benefits of the security otherwise provided under Section 2.14 for the Letter of Credit issued hereunder in replacement for such Existing Letter of Credit for so long as it remains outstanding or any draft thereunder has not been fully reimbursed. In no event shall the maturity date of any Existing Letter of Credit be extended by PNC and as to any Existing Letter of Credit pursuant to the terms of which the Stated Expiration Date would be automatically extended, unless the beneficiary thereof is notified in advance of the then scheduled expiration date that such scheduled expiration date will not be extended, PNC shall give such a notice of non-extension to the beneficiary at the earliest permitted opportunity following the Effective Date if such a notice has not been given prior to the Effective Date.

                     (e) All interest, commissions and all commitment and other fees and expenses owing or accrued under or in respect of the Existing Credit Agreement and the Existing Letters of Credit not replaced hereunder, shall be calculated as of the Effective Date (prorated in the case of any fractional periods), and shall be paid on such date in accordance with the method specified in the Existing Credit Agreement, as if it were still in effect.

4. REPRESENTATIONS AND WARRANTIES

                     In order to induce the Agent and the Banks to enter into this Agreement and the Issuing Bank to issue the Letters of Credit and the Banks to participate therein, the Applicant makes the following representations and warranties to the Agent, each Bank and the Issuing Bank:

4.1. Corporate Organization and Power.

                     Each of the Applicant and its Material Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the full corporate power and authority to execute, deliver and perform the Credit Documents to which it is or will be a party, to own and hold its property and to engage in its business as presently conducted, and (iii) is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the nature of its business or the ownership of its properties requires it to be so qualified except where the failure to be so qualified would not have a Material Adverse Effect.

-36-

4.2. Authorization.

                     The Applicant has taken all necessary corporate action to execute, deliver and perform each of the Credit Documents to which it is or will be a party, and has, or on the Effective Date (or any later date of execution and delivery) will have, validly executed and delivered each of the Credit Documents to which it is or will be a party. This Agreement constitutes, and each of the other Credit Documents upon execution and delivery by the Applicant will constitute, assuming the due execution of the other parties hereto, the legal, valid and binding obligation of the Applicant, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’rights generally or by general equitable principles.

4.3. No Violation.

                     The execution, delivery and performance by the Applicant of this Agreement and each of the other Credit Documents, and compliance by it with the terms hereof and thereof, do not and will not (i) contravene any Requirement of Law applicable to the Applicant, (ii) conflict with, result in a breach of or constitute (with notice, lapse of time or both) a default under any material indenture, agreement or other instrument to which it is a party, by which it or any of its properties is bound or to which it is subject, or (iii) result in or require the creation or imposition of any Lien upon any of its properties or assets except to the extent provided in the Credit Documents. No Subsidiary is subject to any restriction or encumbrance on its ability to make dividend payments or other distributions in respect of its capital stock, to make loans or advances to the Applicant or any other Subsidiary, or to transfer any of its assets or properties to the Applicant or any other Subsidiary, in each case other than such restrictions or encumbrances existing under or by reason of the Credit Documents or any Debt Agreement or applicable Requirements of Law.

4.4. Governmental Authorization; Permits.

                     (a) No consent, approval, authorization or other action by, notice to, or registration or filing with, any Governmental Authority or other Person is or will be required as a condition to or otherwise in connection with the due execution, delivery and performance by the Applicant of this Agreement or any of the other Credit Documents or the legality, validity or enforceability hereof or thereof.

                     (b) Each of the Applicant and its Subsidiaries has, and is in good standing with respect to, all governmental approvals, licenses, permits and authorizations necessary to conduct its business as presently conducted and to own or lease and operate its properties except where the failure to do so would not have a Material Adverse Effect.

                     (c) Schedule 4.4 lists with respect to each Material Insurance Subsidiary, as of the Effective Date, all of the jurisdictions in which such Material Insurance Subsidiary holds licenses (including, without limitation, licenses or certificates of authority from relevant Insurance Regulatory Authorities), permits or authorizations to transact insurance and reinsurance business (collectively, the “Licenses”), and indicates the line or lines of insurance in

-37-

which each such Material Insurance Subsidiary is permitted to be engaged with respect to each License therein listed. To the knowledge of the Applicant, (i) no such License is the subject of a proceeding for suspension, revocation or limitation or any similar proceedings, (ii) there is no sustainable basis for such a suspension, revocation or limitation, and (iii) no such suspension, revocation or limitation is threatened by any relevant Insurance Regulatory Authority. No Material Insurance Subsidiary transacts as of the Effective Date any insurance business, directly or indirectly, in any jurisdiction other than those listed on Schedule 4.4, where such business requires any license, permit or other authorization of an Insurance Regulatory Authority of such jurisdiction.

4.5. Litigation.

                     There are no actions, investigations, suits or proceedings pending or, to the knowledge of the Applicant, threatened, at law, in equity or in arbitration, before any court, other Governmental Authority or other Person, (i) against or affecting the Applicant, any of its Subsidiaries or any of their respective properties that would, if adversely determined, be reasonably likely to have a Material Adverse Effect or (ii) with respect to this Agreement or any of the other Credit Documents.

4.6. Taxes

                     Each of the Applicant and its Subsidiaries has timely filed all federal and all material state and local tax returns and reports required to be filed by it and has paid all taxes, assessments, fees and other charges levied upon it or upon its properties that are shown thereon as due and payable, other than those that are being contested in good faith and by proper proceedings and for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles. Such returns accurately reflect in all material respects all liability for taxes of the Applicant and its Subsidiaries for the periods covered thereby. Except as set forth on Schedule 4.6, there is no ongoing audit or examination or, to the knowledge of the Applicant, other investigation by any Governmental Authority of the tax liability of the Applicant or any of its Subsidiaries; and there is no unresolved claim by any Governmental Authority concerning the tax liability of the Applicant or any of its Subsidiaries for any period for which tax returns have been or were required to have been filed, other than claims for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles.

4.7. Subsidiaries.

                     Schedule 4.7 sets forth a list, as of the Effective Date, of all of the Subsidiaries of the Applicant and, as to each such Subsidiary, the percentage ownership (direct and indirect) of the Applicant in each class of its capital stock and each direct owner thereof, and indicates in each case whether such Subsidiary is a Material Subsidiary.

4.8. Full Disclosure

                     All factual information heretofore or contemporaneously furnished to the Agent

-38-

or any Bank in writing by or on behalf of the Applicant or any of its Subsidiaries for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all other such factual information hereafter furnished to the Agent or any Bank in writing by or on behalf of the Applicant or any of its Subsidiaries will be, true and accurate in all material respects on the date as of which such information is dated or certified (or, if such information has been amended or supplemented, on the date as of which any such amendment or supplement is dated or certified) and not made incomplete by omitting to state a material fact necessary to make the statements contained therein, in light of the circumstances under which such information was provided, not misleading.

4.9. Margin Regulations

                     Neither the Applicant nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. No Letter of Credit will be used, directly or indirectly, to purchase or carry any Margin Stock, to extend credit for such purpose or for any other purpose that would violate or be inconsistent with Regulations T, U or X or any provision of the Exchange Act.

4.10. No Material Adverse Change

                     There exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change.

4.11. Financial Matters.

                     (a) The Applicant has heretofore furnished to the Agent copies of the audited consolidated balance sheets of the Applicant and its Subsidiaries as of December 31, 2000, 1999, 1998, and 1997, and the related statements of income, stockholders’ equity and cash flows for the fiscal years then ended, together with the opinions of PricewaterhouseCoopers, LLP (or its predecessor, Coopers & Lybrand, LLP) thereon. Such financial statements have been prepared in accordance with Generally Accepted Accounting Principles (subject, with respect to the unaudited financial statements, to the absence of notes required by Generally Accepted Accounting Principles and to normal year-end audit adjustments) and present fairly the financial condition of the Applicant and its Subsidiaries on a consolidated basis as of the respective dates thereof and the consolidated results of operations of the Applicant and its Subsidiaries for the respective periods then ended. Except as fully reflected in the most recent financial statements referred to above and the notes thereto, there are no material liabilities or obligations with respect to the Applicant or any of its Subsidiaries of any nature whatsoever (whether absolute, contingent or otherwise and whether or not due).

                     (b) The Applicant has heretofore furnished to the Agent copies of (i) the Annual Statements of each of the Insurance Subsidiaries as of December 31, 2000, 1999, and 1998, and for the fiscal years then ended, each as filed with the relevant Insurance Regulatory Authority (collectively, the “Historical Statutory Statements”). The Historical Statutory Statements (including, without limitation, the provisions made therein for investments and the valuation thereof, reserves, policy and contract claims and statutory liabilities) have been

-39-

prepared in accordance with Statutory Accounting Practices (except as may be reflected in the notes thereto), were in compliance with applicable Requirements of Law when filed and present fairly the financial condition of the respective Insurance Subsidiaries covered thereby as of the respective dates thereof and the results of operations, changes in capital and surplus and cash flow of the respective Insurance Subsidiaries covered thereby for the respective periods then ended. Except for liabilities and obligations disclosed or provided for in the Historical Statutory Statements (including, without limitation, reserves, policy and contract claims and statutory liabilities), no Insurance Subsidiary had, as of the date of its respective Historical Statutory Statements, any material liabilities or obligations of any nature whatsoever (whether absolute, contingent or other-wise and whether or not due) that, in accordance with Statutory Accounting Practices, would have been required to have been disclosed or provided for in such Historical Statutory Statements. All books of account of each Insurance Subsidiary fully and fairly disclose all of its material transactions, properties, assets, investments, liabilities and obligations, are in its possession and are true, correct and complete in all material respects.

                     (c) Each of the Applicant and its Material Subsidiaries, after giving effect to the consummation of the transactions contemplated hereby, (i) will have capital sufficient to carry on its businesses as conducted and as proposed to be conducted, (ii) will have assets with a fair saleable value, determined on a going concern basis, (y) not less than the amount required to pay the probable liability on its existing debts as they become absolute and matured and (z) greater than the total amount of its liabilities (including identified contingent liabilities, valued at the amount that can reasonably be expected to become absolute and matured), and (iii) will not intend to, and will not believe that it will, incur debts or liabilities beyond its ability to pay such debts and liabilities as they mature.

4.12. Ownership of Properties.

                     Each of the Applicant and its Material Subsidiaries (i) has good and marketable title to all real property owned by it, (ii) holds interests as lessee under valid leases in full force and effect with respect to all material leased real and personal property used in connection with its business, and (iii) has good title to all of its other properties and assets reflected in the most recent financial statements referred to in Section 4.11(a) (except as sold or otherwise disposed of since the date thereof in the ordinary course of business), in each case under (i), (ii) and (iii) above free and clear of all Liens other than Permitted Liens.

4.13. ERISA

                     Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in Compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred

-40-

any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA.

4.14. Environmental Matters.

                     (a) Except as set forth in Schedule 4.14(a), no Hazardous Substances are or, to the knowledge of the Applicant, have been generated, released, treated or disposed of by the Applicant or any of its Subsidiaries or, to the knowledge of the Applicant, by any other Person or otherwise, in, on or under any portion of any real property owned by the Applicant or any of its Subsidiaries, except in material compliance with all applicable Environmental Laws, and, to the knowledge of the Applicant, no portion of any such real property has been contaminated by any Hazardous Substance. For purposes of this Section 4.14, “contaminated” means the presence of Hazardous Substances that require or required, as the case may be, remediation under any Environmental Law.

                     (b) Except as set forth on Schedule 4.14(b), to the knowledge of the Applicant, (i) no portion of any real property owned by the Applicant or any of its Subsidiaries has been used as or for a mine, a landfill, a dump or other disposal facility, a gasoline service station, or (other than for petroleum substances stored in the ordinary course of business) a petroleum products storage facility, (ii) no portion of such real property or any other real property at any time owned by the Applicant or any of its Subsidiaries has, pursuant to any Environmental Law, been placed on the “National Priorities List” or “CERCLIS List” (or any similar federal, state or local list) of sites subject to possible environmental problems, and (iii) there are not and have never been any underground storage tanks situated on any real property owned by the Applicant or any of its Subsidiaries.

                     (c) All activities and operations of the Applicant and its Subsidiaries are in compliance with the requirements of all applicable Environmental Laws, except to the extent the failure so to comply, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. Other than normal claims in the ordinary course of business pursuant to insurance policies written by an Insurance Subsidiary, neither the Applicant nor any of its Subsidiaries is involved in any suit, action or proceeding, or has received any notice, complaint or other request for information from any Governmental Authority or other Person, with respect to any actual or alleged Environmental Claims that, if adversely determined, would be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect; and, to the knowledge of the Applicant, there are no threatened actions, suits, proceedings or investigations with respect to any such Environmental Claims, nor any basis therefor.

4.15. Compliance With Laws.

                     Each of the Applicant and its Subsidiaries has timely filed all material reports, documents and other materials required to be filed by it under all applicable Requirements of Law with any Governmental Authority, has retained all material records and documents required to be retained by it under all applicable Requirements of Law, and is otherwise in compliance with all applicable Requirements of Law in respect of the conduct of its business and the ownership and operation of its properties, except for such Requirements of Law the failure to

-41-

comply with which, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect.

4.16. Regulated Industries.

                     Neither the Applicant nor any of its Subsidiaries is (i) an “investment company,” a company “controlled” by an “investment company,” or an “investment advisor,” within the meaning of the Investment Company Act of 1940, as amended, or (ii) a “holding company,” a “subsidiary company” of a “holding company,” or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding company,” within the meaning of the Public Utility Holding Company Act of 1935, as amended.

4.17. Insurance

                     The assets, properties and business of the Applicant and its Subsidiaries are insured against such hazards and liabilities (other than normal life insurance risk), under such coverages and in such amounts, as are customarily maintained by prudent companies similarly situated and under policies issued by insurers of recognized responsibility. No notice of any pending or threatened cancellation or material premium increase has been received by the Applicant or any of its Subsidiaries with respect to any such insurance policies, and the Applicant and each of its Subsidiaries are in substantial compliance with all conditions contained therein.

4.18. Certain Contracts.

                     Schedule 4.18 lists, as of the Effective Date, each material contract, agreement or commitment, written or oral, other than Reinsurance Agreements and Insurance Agreements, to which the Applicant or any of its Subsidiaries is a party, by which any of them or their respective properties is bound or to which any of them is subject (other than insurance policies written in the ordinary course of business) and that (i) relates to employment or labor matters, (ii) involves aggregate consideration payable to or by any party thereto of $1,000,000 or more or (iii) is otherwise material to the business, condition (financial or otherwise), operations, performance or properties of the Applicant or any of its Subsidiaries, and also indicates the parties, subject matter thereof. As of the Effective Date, each such contract is in full force and effect, and neither the Applicant nor any of its Subsidiaries or, to the knowledge of the Applicant, any other party thereto, is in breach of or in default under any such contract. As of the Effective Date, none of such other parties has notified the Applicant that it has any presently exercisable right to terminate any such contract nor will any such other party have any right to terminate any such contract on account of the execution, delivery and performance of the Credit Documents.

5. AFFIRMATIVE COVENANTS

               The Applicant agrees that so long as this Agreement is in effect, any reimbursement obligations (contingent or otherwise) in respect of any Letter of Credit remain outstanding and unpaid, or any other amount is owing under any Credit Document to the Issuing Bank, any Bank or the Agent:

-42-

5.1. GAAP Financial Statements.

                     The Applicant will deliver to each Bank:

                     (a) As soon as available and in any event within sixty (60) days after the end of each of the first three fiscal quarters of each fiscal year, beginning with the first fiscal quarter ending March 31, 2002, unaudited consolidated balance sheets of the Applicant and its Subsidiaries as of the end of such fiscal quarter and unaudited consolidated statements of income, comprehensive income and cash flows for the Applicant and its Subsidiaries for the fiscal quarter then ended and for that portion of the fiscal year then ended, in each case setting forth comparative consolidated figures as of the end of and for the corresponding period in the preceding fiscal year, all prepared in accordance with Generally Accepted Accounting Principles (subject to the absence of notes required by Generally Accepted Accounting Principles and subject to normal year-end audit adjustments) applied on a basis consistent with that of the preceding quarter or containing disclosure of the effect on the financial condition or results of operations of any change in the application of accounting principles and practices during such quarter; and

                     (b) As soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 2001, (i) an audited consolidated balance sheet of the Applicant and its Subsidiaries as of the end of such fiscal year and audited consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the Applicant and its Subsidiaries for the fiscal year then ended, including the applicable notes, in each case setting forth comparative figures is of the end of and for the preceding fiscal year, certified by the independent certified public accounting firm regularly retained by the Applicant or another independent certified public accounting firm of recognized national standing reasonably acceptable to the Required Banks, together with a report thereon by such accountants that is not qualified as to going concern or scope of audit and to the effect that such financial statements present fairly the consolidated financial condition and results of operations of the Applicant and its Subsidiaries as of the dates and for the periods indicated in accordance with generally accepted accounting principles, and (ii) unaudited consolidating statements of income and cash flows for the Applicant and its Subsidiaries for the fiscal year then ended, in reasonable detail, all prepared in accordance with Generally Accepted Accounting Principles applied on a consistent basis with that of the preceding fiscal year or containing disclosure of the effect on the financial condition or results of operations of any change in the application of accounting principles and practices during such fiscal year.

5.2. Statutory Financial Statements.

                     The Applicant will deliver to each Bank:

                     (a) As soon as available and in any event within sixty-five (65) days after the end of each of the first three fiscal quarters of each fiscal year, beginning with the first fiscal quarter ending after the date hereof, a Quarterly Statement of each Material Insurance Subsidiary as of the end of such fiscal quarter and for that portion of the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with Statutory

-43-

Accounting Practices;

                     (b) As soon as available and in any event within sixty-five (65) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 2001, an Annual Statement of each Material Insurance Subsidiary as of the end of such fiscal year and for the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with Statutory Accounting Practices; and

                     (c) As soon as available and in any event within one hundred twenty-six (126) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 2001, a Combined Annual Statement of PMACIC and its combined Affiliates as of the end of such fiscal year and for the fiscal year then ended, in the form filed with the relevant Insurance Regulatory Authority, prepared in accordance with Statutory Accounting Practices.

5.3. Other Business and Financial Information

                     The Applicant will deliver to each Bank:

                     (a) Concurrently with each delivery of the financial statements described in Sections 5.1 and 5.2, a Compliance Certificate in the form of Exhibit E-1 (in the case of the financial statements described in Section 5.1) or Exhibit E-2 (in the case of the financial statements described in Section 5.2) with respect to the period covered by the financial statements then being delivered, executed by the chief financial officer of the Applicant (or a vice president of the Applicant having significant responsibility for financial matters), together, in the case of the financial statements described in Section 5.1, with a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.1 and 6.2 as of the last day of the period covered by such financial statements, and in the case of the financial statements described in Section 5.2, with a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.3 and 6.4 as of the last day of the period covered by such financial statements;

                     (b) Promptly upon filing with the relevant Insurance Regulatory Authority and in any event within ninety (90) days after the end of each fiscal year, beginning with the fiscal year ended December 31, 2001, a copy of each Insurance Subsidiary’s “Statement of Actuarial Opinion” (or equivalent information should the relevant Insurance Regulatory Authority not require such a statement) as to the adequacy of such Insurance Subsidiary’s loss reserves for such fiscal year, together with a copy of its management discussion and analysis in connection therewith, each in the format prescribed by the applicable insurance laws of such Insurance Subsidiary’s jurisdiction of domicile;

                     (c) Promptly upon the sending or filing thereof, copies of any “internal control” letter filed by on behalf of the Applicant or any of its Subsidiaries with any Insurance Regulatory Authority;

                     (d) Promptly upon the sending, filing or receipt thereof, copies of (i) all financial statements, reports, notices and proxy statements that the Applicant or any of its

-44-

Subsidiaries shall send or make available generally to its shareholders, (ii) all regular, periodic and special reports, registration statements and prospectuses that the Applicant or any of its Subsidiaries shall render to or file with the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. or any national securities exchange, (iii) all significant reports on examination or similar significant reports, financial examinations reports or market conduct examination reports by the NAIC or any Insurance Regulatory Authority or other Governmental Authority with respect to any Insurance Subsidiary’s insurance business, and (iv) all significant filings made under applicable state insurance holding company acts by the Applicant or any of its Subsidiaries, including, without limitation, filings seeking approval of transactions with Affiliates;

                     (e) Promptly upon (and in any event within five (5) Business Days after) an officer of the Applicant obtaining knowledge thereof, written notice of any of the following:

                             (i) the occurrence of any Default or Event of Default, together with a written statement of the chief executive officer or chief financial officer of the Applicant specifying the nature of such Default or Event of Default, the period of existence thereof and the action that the Applicant has taken and proposes to take with respect thereto;

                             (ii) the institution or threatened institution of any action, suit, investigation or proceeding against or affecting the Applicant or any of its Subsidiaries, including any such investigation or proceeding by any insurance Regulatory Authority or other Governmental Authority (other than routine periodic inquiries, investigations or reviews), that would, if adversely determined, be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect, and any material development in any litigation or other proceeding previously reported pursuant to Section 4.5 or this Section 5.3(e)(ii);

                             (iii) the receipt by the Applicant or any of its Subsidiaries from any Insurance Regulatory Authority or other Governmental Authority of (A) any notice asserting any failure by the Applicant or any of its Subsidiaries to be in compliance with applicable Requirements of Law or that threatens the taking of any action against the Applicant or such Subsidiary or sets forth circumstances that, if taken or adversely determined, would be reasonably likely to have a Material Adverse Effect, or (B) any notice of any actual or threatened suspension, limitation or revocation of, failure to renew, or imposition of any restraining order, escrow or impoundment of funds in connection with, any license, permit, accreditation or authorization of the Applicant or any of its Subsidiaries, where such action would be reasonably likely to have a Material Adverse Effect;

                             (iv) the occurrence of any of the following, together with a reasonably detailed description thereof and copies of any filings, communications, reports or other information relating thereto made available to the Applicant or any of its Subsidiaries: (A) the assertion of any Environmental Claim against or affecting the Applicant, any of its Subsidiaries or any of their respective real property, leased or owned; (B) the receipt by the Applicant or any of its Subsidiaries of notice of any alleged violation of or noncompliance with any Environmental Laws by the Applicant or any of its Subsidiaries; or (C) the taking of any remedial action by the Applicant, any of its Subsidiaries or any other Person in response to the

-45-

actual or alleged generation, storage, release, disposal or discharge of any Hazardous Substances on, to, upon or from any real property leased or owned by the Applicant or any of its Subsidiaries; but in each case under clauses (A), (B) and (C) above, only to the extent the same would be reasonably likely to have a Material Adverse Effect;

                             (v) the occurrence of any actual changes in any insurance statute or regulation governing the investment or dividend practices of any Insurance Subsidiary that would be reasonably likely to have a Material Adverse Effect;

                             (vi) if and when any member of the ERISA Group (A) gives or is required to give notice to the PBGC of any “reportable event” (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (B) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (C) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer, any Plan, a copy of such notice; (D) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (E) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (F) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (G) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Applicant setting forth details as to such occurrence and action, if any, which the Applicant or applicable member of the ERISA Group is required or proposes to take; and

                             (vii) any other matter or event that has, or would have a Material Adverse Effect together with a written statement of the chief executive officer or chief financial officer of the Applicant setting forth the name and period of existence thereof and the action that the Applicant has taken and proposes to take with respect thereto;

                     (f) Promptly, notice of (i) the occurrence of any material amendment or modification to any Reinsurance Agreement (whether entered into before or after the Effective Date), including any such agreements that are in a runoff mode on the Effective Date, which amendment or modification would be reasonably likely to have a Material Adverse Effect, or (ii) the receipt by the Applicant or any of its Subsidiaries of any written notice of any denial of coverage, litigation, claim or arbitration arising out of any Reinsurance Agreement to which it is a party which would be reasonably likely to have a Material Adverse Effect;

                     (g) As promptly as reasonably possible, such other information about the business, condition (financial or otherwise), operations or properties of the Applicant or any of its Subsidiaries (including, without limitation, financial, actuarial and other information with

-46-

respect to Reinsurance Agreements) as the Agent or any Bank may from time to time reasonably request; and

                     (h) Upon the request of the Agent at the direction of the Required Banks (which absent a showing of good cause shall not be more often than one time during any twelve-month period), at the Applicant’s expense, deliver to each Bank within sixty (60) days of such request an actuarial review of the liabilities and other items of each Insurance Subsidiary prepared by an actuary or a firm of actuaries reasonably acceptable to the Agent, such actuarial review to be in form and substance reasonably acceptable to the Required Banks.

5.4. Corporate Existence; Franchises; Maintenance of Properties.

                     The Applicant will, and will cause each of its Subsidiaries to, maintain and preserve in full force and effect its corporate existence, except as expressly permitted otherwise by Section 7.l. The Applicant will, and will cause each of its Subsidiaries to, (i) obtain, maintain and preserve in full force and effect all other rights, franchises, licenses, permits, certifications, approvals and authorizations required by Governmental Authorities and necessary to the Ownership, Occupation or use of its properties or the conduct of its business, except to the extent the failure to do so would not be reasonably likely to have a Material Adverse Effect, and (ii) keep all material properties in good working order and condition (normal wear and tear excepted) and from time to time make all necessary repairs to and renewals and replacements of such properties, except to the extent that any of such properties are obsolete or are being replaced.

5.5. Compliance with Laws.

                     The Applicant will, and will cause each of its Subsidiaries to, comply in all respects with all Requirements of Law applicable in respect of the conduct of its business and the ownership and operation of its properties, except to the extent the failure so to comply would not be reasonably likely to have a Material Adverse Effect.

5.6. Payment of Obligations.

                     The Applicant will, and will cause each of its Subsidiaries to, (i) pay all liabilities and obligations as and when due (subject to any applicable subordination provisions), except to the extent failure to do so would not be reasonably likely to have a Material Adverse Effect, and (ii) pay and discharge all taxes, assessments and governmental charges or levies imposed upon it, upon its income or profits or upon any of its properties, prior to the date on which penalties would attach thereto, and all lawful claims that, if unpaid, might become a Lien upon any of the properties of the Applicant or any of its Subsidiaries; provided, however, that neither the Applicant nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim that is being contested in good faith and by proper proceedings and as to which the Applicant or such Subsidiary is maintaining adequate reserves with respect thereto in accordance with Generally Accepted Accounting Principles.

-47-

5.7. Insurance.

                     The Applicant will, and will cause each of its Subsidiaries to, maintain with financially sound and reputable insurance companies insurance with respect to its assets, properties and business, against such hazards and liabilities (other than normal life insurance risk), of such types and in such amounts, as is customarily maintained by companies in the same or similar businesses similarly situated.

5.8. Maintenance of Books and Records; Inspection

                     The Applicant will, and will cause each of its Subsidiaries to, (i) maintain adequate books, accounts and records, in which full, true and correct entries shall be made of all financial transactions in relation to its business and properties, and prepare all financial statements required under this Agreement, in each case in accordance with Generally Accepted Accounting Principles or Statutory Accounting Practices, as applicable, and in compliance with the requirements of any Governmental Authority having jurisdiction over it, and (ii) permit employees or agents of the Agent or any Bank, at the Agent’s or Bank’s expense (except as provided in Section 10.5), to inspect its properties and examine or audit its books, records, working papers and accounts and make copies and memoranda of them, and to discuss its affairs, finances and accounts with its officers and employees and, with the prior consent of the Applicant (such consent not to be unreasonably withheld), the independent public accountants of the Applicant and its Subsidiaries (and by this provision the Applicant authorizes such accountants to discuss the finances of the Applicant and its Subsidiaries), all at such times and from time to time, upon reasonable notice and during business hours, as may be reasonably requested.

5.9. Dividends

                     The Applicant will take all action necessary to cause its Subsidiaries to make such dividends, distributions or other payments to the Applicant as shall be necessary for the Applicant to make payments of the Obligations. In the event the approval of any Governmental Authority or other Person is required in order for any such Subsidiary to make any such dividends, distributions or other payments to the Applicant, or for the Applicant to make any such principal or interest payments, the Applicant will forthwith exercise its best efforts and take all actions permitted by law and necessary to obtain such approval.

5.10. Ownership of Insurance Subsidiaries.

                     The Applicant will cause each of its Insurance Subsidiaries to remain at all times a Wholly Owned Subsidiary of the Applicant, except as expressly permitted otherwise by Section 7.1.

5.11. Further Assurances.

                     The Applicant will, and will cause each of its Subsidiaries to, make, execute, endorse, acknowledge and deliver any amendments, modifications or supplements hereto and

-48-

restatements hereof and any other agreements, instruments or documents, and take any and all such other actions, as may from time to time be reasonably requested by the Agent or the Required Banks to effect, confirm or further assure or protect and preserve the interests, rights and remedies of the Agent and the Banks under this Agreement and the other Credit Documents.

6. FINANCIAL COVENANTS

                     The Applicant agrees that so long as this Agreement is in effect, any reimbursement obligations (contingent or otherwise) in respect of any Letter of Credit remain outstanding and unpaid, or any other amount owing under any Credit Document to the Issuing Bank, any Bank or the Agent:

6.1. Capitalization Ratio

                     The Applicant will not permit the Capitalization Ratio to be greater than 0.35 to 1.0 as of the last day of any fiscal quarter, beginning with the fiscal quarter ending September 30, 2001.

6.2. Cash Coverage Ratio.

                     The Applicant will not permit the Cash Coverage Ratio to be less than 2.75 to 1.0, with respect to any four fiscal quarter period ending on or after September 30, 2001.

6.3. Statutory Surplus.

                     The Applicant will cause the Consolidated Statutory Surplus of the Insurance Subsidiaries to be not less than $450,000,000 at all times from and after the Effective Date.

6.4. Risk-Based Capital.

                     The Applicant will not permit “total adjusted capital” (within the meaning of the Risk-Based Capital for Insurers Model Act as promulgated by the NAIC as of the date hereof (the “Model Act”)) of the following Insurance Subsidiaries to be less than the percentages set forth below, as of the dates set forth below, of the applicable “Company Action Level RBC” (within the meaning of the Model Act):

      (i) with respect to PMACIC, as of the last day of any fiscal year, beginning with the fiscal year ending December 31, 2000, not less than one hundred fifty percent (150%);

      (ii) with respect to any other Insurance Subsidiary (other than an Insurance Subsidiary not required by the relevant Insurance Regulatory Authority to meet any RBC requirements), as of the last day of any fiscal year beginning with the fiscal year ending December 31, 2000, not less than, one hundred twenty percent (120%).

-49-

7. NEGATIVE COVENANTS

                     The Applicant agrees that, so long as this Agreement is in effect, any reimbursement obligations (contingent or otherwise) in respect of any Letter of Credit remain outstanding and unpaid, or any other amount is owing under any Credit Document to the Issuing Bank, any Bank or the Agent:

7.1. Merger; Consolidation; Disposition of Assets.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, liquidate, wind up or dissolve, enter into any consolidation, merger or other combination, or sell, assign, lease, convey, transfer, or otherwise dispose of (whether in one or a series of transactions) all or any substantial portion of its assets, business or properties outside of the ordinary course of its business, or agree to do any of the foregoing; provided, however, that:

      (i) any Subsidiary may merge or consolidate with, or sell or otherwise dispose of assets to, another Subsidiary or the Applicant so long as (y) the surviving or transferee corporation is the Applicant or a Wholly Owned Subsidiary and (z) immediately after giving effect thereto, no Default or Event of Default would exist; and

      (ii) the Applicant and its Subsidiaries may (x) sell, or otherwise dispose of, the capital stock or all or any portion of the assets, business or properties of a Subsidiary that is not a Material Subsidiary, (y) liquidate, windup or dissolve any Subsidiary that is not a Material Subsidiary, and (z) sell, or otherwise dispose of, any asset or group of assets constituting less than (A) in any single transaction or series of related transactions, ten percent (10%) of Consolidated Statutory Surplus as of the last day of the fiscal quarter ending on or immediately prior to the date of such sale, and (B) during any fiscal year, in the aggregate with all such other sales pursuant to this clause (ii), thirty percent (30%) of Consolidated Statutory Surplus as of the end of the immediately preceding fiscal year.

7.2. Indebtedness.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist, any Indebtedness other than:

                             (i) Indebtedness under any Debt Agreement;

                             (ii) Accrued expenses, current trade or other accounts payable and other current liabilities arising in the ordinary course of business and not incurred through the borrowing of money, provided that the same shall be paid when due except to the extent being contested in good faith and by appropriate proceedings;

-50-

                             (iii) Indebtedness of any Wholly Owned Subsidiary of the Applicant to the Applicant or to another Wholly Owned Subsidiary and of the Applicant to any Wholly Owned Subsidiary;

                             (iv) Indebtedness due under the Credit Documents and the Existing Letters of Credit;

                             (v) Indebtedness existing on the Effective Date as set forth on Schedule 7.2; provided that for so long as no Default or Event of Default has occurred and is continuing at such time, such Indebtedness may be extended, renewed or refunded as long as the principal amount of such renewed Indebtedness shall not exceed the principal amount of such Indebtedness being extended, renewed or refunded together with any accrued interest with respect thereto;

                             (vi) Indebtedness in respect of any Hedge Agreement covering a notional principal amount not in excess of the aggregate principal amount of Indebtedness permitted under clause (i) hereunder;

                             (vii) Indebtedness (other than Indebtedness specified in clauses (i) through (vi) above) in the aggregate principal amount outstanding not exceeding $15,000,000 at any time and constituting (y) unsecured Indebtedness of the Applicant or (z) reimbursement obligations under letters of credit (whether or not drawn or matured in the stated amount thereof) issued on behalf of an Insurance Subsidiary in the ordinary course of such Insurance Subsidiary’s business; and

                             (viii) Indebtedness in respect of guarantees for officer loan programs for the purpose of purchasing Applicant's common stock not to exceed $20,000,000 outstanding at any time.

7.3. Liens

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, make, create, incur, assume or suffer to exist, or enter into or suffer to exist any agreement or restriction (other than under any Debt Agreement) that prohibits or conditions the creation, incurrence or assumption of, any Lien upon or with respect to any part of its property or assets, whether now owned or hereafter acquired, or agree to do any of the foregoing, other than the following (collectively, “Permitted Liens”):

                     (i) Liens (x) securing the Indebtedness under any Debt Agreement, (y) securing Indebtedness in existence on the Effective Date which is set forth on Schedule 7.3 and (z) arising out of the refinancing, extension, renewal or refunding of any Indebtedness described in the foregoing clauses (x) and (y), providedthat such Indebtedness is not increased and is not secured by any additional assets;

                     (ii) Liens imposed by law, such as Liens of carriers, warehousemen, mechanics, materialmen and landlords, and other similar Liens incurred in the ordinary course of

-51-

business for sums not constituting borrowed money that are not overdue for a period of more than thirty (30) days or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles;

                     (iii) Liens (other than any lien imposed by ERISA, the creation or incurrence of which would result in an Event of Default under Section 8.1(k)) incurred in the ordinary course of business in connection with worker’s compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure the performance of letters of credit, bids, tenders, statutory obligations, surety and appeal bonds, leases, government contracts and other similar obligations (other than obligations for borrowed money) entered into in the ordinary course of business;

                     (iv) Liens for taxes, assessments or other governmental charges or statutory obligations, that are not delinquent or remain payable without any penalty or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with Generally Accepted Accounting Principles;

                     (v) Liens in connection with pledges and deposits made pursuant to statutory and regulatory requirements of Insurance Regulatory Authorities by an Insurance Subsidiary in the ordinary course of its business, for the purpose of securing regulatory capital or satisfying other financial responsibility requirements;

                     (vi) with respect to any real property occupied by the Applicant or any of its Subsidiaries, all easements, rights of way, licenses and similar encumbrances on title that do not materially impair the use of such property for its intended purposes;

                     (vii) Liens in favor of the Agent and the Banks hereunder; and

                     (viii) Liens (other than Liens specified in clauses (i) through (vii) above) securing obligations in the aggregate principal amount not exceeding, at any time, the greater of (y) five percent (5%) of Consolidated Net Worth as of the end of the immediately preceding fiscal year or (z) $20,000,000.

7.4. Investments; Acquisitions.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, purchase, own, invest in or otherwise acquire any capital stock, evidence of indebtedness or other obligation or security or any interest whatsoever in any other Person, or make or permit to exist any loans, advances or extensions of credit to, or any investment in cash or by delivery of property in, any other Person, or purchase or otherwise acquire (whether in one or a series of related transactions) any portion of the assets, business or properties of another Person, or create or acquire any Subsidiary, or become a partner or joint venturer in any partnership or joint venture (collectively, “Investments”), or make a commitment or otherwise agree to do any of the foregoing, if, immediately after any such Investment, the amount of the cash, Cash Equivalents and Investment Grade Securities owned by the Applicant and its

-52-

Subsidiaries, on a consolidated basis, would be less than eighty-five percent (85%) of the total Invested Assets of the Applicant and its Subsidiaries determined as of the end of the most recent fiscal quarter.

7.5. Restricted Payments.

                     (a) The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, declare or make any dividend payment, or make any other distribution of cash, property or assets, in respect of any of its capital stock or any warrants, rights or options (other than employee stock options) to acquire its capital stock, or purchase, redeem, retire or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire its capital stock, or set aside funds for any of the foregoing, except that:

                             (i) each Wholly Owned Subsidiary may declare and make dividend payments or other distributions to the Applicant or another Wholly Owned Subsidiary to the extent permitted under applicable Requirements of Law and, as to the Insurance Subsidiaries, by each relevant Insurance Regulatory Authority, and

                             (ii) the Applicant may declare and make dividend payments or other distributions, and may purchase, redeem, retire or otherwise acquire shares of its capital stock, in cash or in-kind, in each case, provided that immediately after giving effect thereto, no Default or Event of Default would exist.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, make (or give any notice in respect of) any voluntary or optional payment or prepayment on any Indebtedness (other than Indebtedness under any Debt Agreement) or, directly or indirectly, make any redemption (including pursuant to any change of control provision), retirement, defeasance or other acquisition for value of any Indebtedness, or make any deposit or otherwise set aside funds for any of the foregoing purposes, provided that immediately after giving effect thereto, no Default or Event of Default would exist.

7.6. Transactions with Affiliates.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, enter into any transaction with any Affiliate of the Applicant or any Subsidiary, except in the ordinary course of its business and upon fair and reasonable terms that are no less favorable to it than would obtain in a comparable arm’s length transaction with a Person other than an Affiliate of the Applicant or such Subsidiary; provided, however, that nothing contained in this Section shall prohibit transactions described on Schedule 7.6 or otherwise expressly permitted hereunder.

7.7. Certain Amendments.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, (i) amend, modify or waive, or permit the amendment, modification or waiver of, any provision of any agreement or instrument evidencing or governing any Indebtedness, including, without limitation, the Revolving Credit Agreement, or (ii) amend or modify its articles or certificate of

-53-

incorporation or bylaws, in each case under clauses (i) and (ii) other than any amendments or modifications that would not adversely affect the Banks in any material respect.

7.8. Lines of Business.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, engage to any substantial degree in any business other than the lines of property and casualty insurance or reinsurance business and other businesses engaged in by the Applicant and its Subsidiaries on the date hereof or a business reasonably related thereto.

7.9. Limitations on Certain Restrictions.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction or encumbrance on (i) the ability of the Applicant and its Subsidiaries to perform and comply with their respective obligations under the Credit Documents or any Debt Agreement, (ii) the ability of the Applicant or any Subsidiary to grant, assume or permit to exist any Lien upon any of its assets or properties as security, directly or indirectly, for the Obligations, other than the restrictions, set forth in the Credit Documents or any Debt Agreement, or (iii) the ability of any Subsidiary of the payments or other distributions in respect of its capital to the Applicant or any other Subsidiary, or to transfer to the Applicant or any other Subsidiary, in each case other existing under or by reason of the Credit Documents, any Debt Agreement or applicable Requirements of Law.

7.10. Fiscal Year.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, change the ending date of its fiscal year to a date other than December 31 unless (i) the Applicant shall have given the Banks written notice of its intention to change such ending date at least sixty (60) days prior to the effective date thereof and (ii) prior to such effective date this Agreement shall have been amended to make any changes in the financial covenants and other terms and conditions to the extent necessary, in the reasonable determination of the Required Banks, to reflect the new fiscal year ending date.

7.11. Accounting Changes.

                     The Applicant will not, and will not permit or cause any of its Subsidiaries to, make or permit any material change in its accounting policies or reporting practices, except as may be required by Generally Accepted Accounting Principles or Statutory Accounting Practices, as applicable, and any change to an accounting principle that can be demonstrated by the Applicant to be “preferable” in accordance with Statements on Auditing Standards No. 58 as promulgated by the Auditing Standards Board.

-54-

8. DEFAULT

8.1. Events of Default.

                     The following shall each constitute an “Event of Default” hereunder:

                     (a) The failure of the Applicant or any Co-Applicant to pay any reimbursement obligations in respect of any Letter of Credit within one (1) Business Day after demand; or

                     (b) The failure of the Applicant or any Co-Applicant to pay any interest or any other fees or expenses payable under any Credit Document or otherwise to the Agent with respect to the credit facilities established hereunder within three (3) Business Days of the date when due and payable; or

                     (c) The issuance of any Letter of Credit for a purpose inconsistent with or in violation of Section 2.1(b) or the use of the proceeds of any Letter of Credit in a manner inconsistent with or in violation of Section 2.13; or

                     (d) The failure of the Agent to have a perfected first priority security interest in the Collateral (other than to the extent covered solely by the action or inactions of the Agent); or

                     (e) The Applicant, any Co-Applicant or any of the Applicant’s Subsidiaries shall fail to observe, perform or comply with any condition, covenant or agreement contained in this Agreement or any of the other Credit Documents other than those enumerated in clauses (a), (b), (c), or (d) above and such failure shall continue unremedied for any grace period specifically applicable thereto or, if no such grace period is applicable, for a period after the Applicant acquires knowledge thereof of (i) five (5) days with respect to covenants set forth in Sections 2.14(a), 5.1, 5.2, 5.3 or 5.4(i) or (ii) thirty (30) days with respect to any other condition, covenant or agreement; or

                     (f) Any representation, warranty, certification or statement made by the Applicant or any Co-Applicant in this Agreement or in any Credit Document or any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); or

                     (g) The Applicant or any of its Subsidiaries shall (i) fail to pay when due (whether by scheduled maturity, acceleration or otherwise and after giving effect to any applicable grace period) any principal of or interest on any Indebtedness (other than the Indebtedness incurred pursuant to this Agreement) having an aggregate principal amount of at least $5,000,000; or (ii) fail to observe, perform or comply with any condition, covenant or agreement contained in any agreement or instrument evidencing or relating to any such Indebtedness, or any other event shall occur or condition exist in respect thereof, and the effect of such failure, event or condition is to cause, or permit the holder or holders of such Indebtedness (or a trustee or agent on its or their behalf) to cause (with the giving of no lapse of

-55-

time, or both), such Indebtedness to become due, or to be prepaid, redeemed, purchased or defeased, prior to its stated maturity; or

                     (h) The Applicant or any of its Subsidiaries shall (i) file a voluntary petition or commence a voluntary case seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to controvert in a timely and appropriate manner, any petition or case of the type described in subsection (i) below, (iii) apply for or consent to the appointment of or taking possession by a custodian, trustee, receiver or similar official for or of itself or all or a substantial part of its properties or assets, (iv) fail generally, or admit in writing its inability, to pay its debts generally as they become due, (v) make a general assignment for the benefit of creditors or (vi) take any corporate action to authorize or approve any of the foregoing; or

                     (i) Any involuntary petition or case shall be filed or commenced against the Applicant or any of its Subsidiaries seeking liquidation, winding-up, reorganization, dissolution, arrangement, readjustment of debts, the appointment of a custodian, trustee, receiver or similar official for it or all or a substantial part of its properties or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, and such petition or case shall continue undismissed and unstayed for a period of sixty (60) days; or an order, judgment or decree approving or ordering any of the foregoing shall be entered in any such proceeding; or

                     (j) Any one or more money judgments, writs or warrants of attachment, executions or similar processes involving an aggregate amount (exclusive of amounts fully bonded or covered by insurance as to which the surety or insurer, as the case may be, has acknowledged its liability in writing) in excess of $5,000,000 (other than a liability of an Insurance Subsidiary under an insurance contract written in the ordinary course of business) shall be entered or filed against the Applicant or any of its Subsidiaries or any of their respective properties, and the same shall not be dismissed, stayed or discharged for a period of thirty (30) days; or

                     (k) Any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a Trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $5,000,000; or

-56-

                     (l) Any Insurance Regulatory Authority or other Governmental Authority having jurisdiction shall issue any order of conservation, supervision, rehabilitation or liquidation or any other order of similar effect in respect of any Insurance Subsidiary, and such action, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect; or

                     (m) Any one or more licenses, permits, accreditations or authorizations of the Applicant or any of its Subsidiaries shall be suspended, limited or terminated or shall not be renewed, or any other action shall be taken, by any Governmental Authority in response to any alleged failure by the Applicant or any of its Subsidiaries to be in compliance with applicable Requirements of Law, and such action, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect; or

                     (n) Any of the following shall occur: (i) any Person, including, without limitation, any individual member of the Management Group, or group of Persons acting in concert as a partnership or other group shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become, after the date hereof, the “beneficial owner” (within the meaning of such term under Rule 13d-3 under the Exchange Act) of securities of the Applicant representing thirty percent (30%) or more of the combined voting power of the then outstanding securities of the Applicant ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors; provided, however, The PMA Foundation, a Pennsylvania non-profit corporation, may become the beneficial owner of securities of the Applicant representing fifty percent (50%) or less of the combined voting power of the then outstanding securities of the Applicant so long as it remains a non-profit corporation that has no members with voting rights and the Management Group collectively may become the beneficial owner of securities of the Applicant representing fifty percent (50 %) or less of the combined voting power of the then outstanding securities of the Applicant (unless such increase in beneficial ownership beyond 50% is the result of a decrease in the shares of voting stock outstanding), or (ii) the Board of Directors of the Applicant shall cease to consist of a majority of the individuals who constituted the Board of Directors of the Applicant as of the date hereof or who shall have become a member thereof subsequent to the date hereof after having been nominated, or otherwise approved in writing, by at least a majority of individuals who constituted the Board of Directors of the Applicant as of the date hereof (or their replacements approved as herein required).

                     Upon the occurrence of an Event of Default or at any time thereafter during the continuance thereof, (a) if such event is an Event of Default specified in clause (h) or (i) above, the Commitment shall immediately and automatically terminate and any reimbursement obligations owing or contingently owing in respect of all Outstanding Letters of Credit and all other amounts owing under the Credit Documents shall immediately become due and payable, and the Agent may, and, upon the direction of the Required Banks shall, exercise any and all remedies and other rights provided in the Credit Documents, and (b) if such event is any other Event of Default, any or all of the following actions may be taken: (i) with the consent of the Required Banks, the Agent may, and upon the direction of the Required Banks shall, by notice to the Applicant, declare the Commitment to be terminated forthwith, whereupon the Commitment shall immediately terminate, and (ii) with the consent of the Required Banks, the Agent may, and

-57-

upon the direction of the Required Banks shall, by notice of default to the Applicant, declare any reimbursement obligations owing or contingently owing in respect of all Outstanding Letters of Credit and all other amounts owing under the Credit Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable, and the Agent may, and upon the direction of the Required Banks shall, exercise any and all remedies and other rights provided pursuant to the Credit Documents. Except as otherwise provided in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. Each Credit Party hereby further expressly waives and covenants not to assert any appraisement, valuation, stay, extension, redemption or similar laws, now or at any time hereafter in force which might delay, prevent or otherwise impede the performance or enforcement of any Credit Document.

                     Upon the occurrence of an Event of Default or at any time thereafter during the continuance thereof, the Agent may and, at the direction of Required Banks, shall (i) exercise any and all rights and remedies granted to a secured party by the Uniform Commercial Code in effect in the Commonwealth of Massachusetts or otherwise allowed at law, and otherwise provided by this Agreement, and (ii) dispose of the Collateral consisting of Treasury Securities and U.S. Federal Agency Obligations as it may choose, so long as every aspect of the disposition including the method, manner, time, place and terms are commercially reasonable, and the Applicant and each Co-Applicant agrees that, without limitation, the following are each commercially reasonable: (A) the Agent shall not in any event be required to give more than five (5) days prior notice to the Applicant or any Co-Applicant of any such disposition, (B) any place within the cities of New York, Boston or Hartford may be designated by the Agent for disposition, and (C) the Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.

                     In the event that the Commitment shall have been terminated pursuant to the provisions of this Section, any funds received by the Agent and the Banks from or on behalf of the Applicant and/or any Co-Applicant shall, in the event that any Letters of Credit remain outstanding, either be held by the Agent or applied by the Agent in liquidation of the obligations of the Applicant and the Co-Applicants under the Credit Documents in the Agent’s discretion. Any such funds to be applied by the Agent and the Banks in liquidation of the obligations of the Applicant and the Co-Applicants under the Credit Documents shall be applied (i) first, to reimburse the Agent and the Banks for any expenses due from the Applicant and/or any Co-Applicant, pursuant to the provisions of Section 10.5; (ii) second, to the payment of the accrued and unpaid Commitment Fees, Letter of Credit Commissions and all other fees, expenses and amounts due under the Credit Documents (other than the reimbursement obligations); (iii) third, to the payment of interest due on the reimbursement obligations, on a pro rata basis; (iv) fourth, to the payment of the reimbursement obligations, on a pro rata basis; and (v) fifth, to the payment of any other amounts owing to the Agent and the Banks under any Credit Document.

-58-

9. THE AGENT

9.1. Appointment

                     Each Bank and the Issuing Bank hereby irrevocably designates and appoints Fleet as Agent hereunder and under the other Credit Documents and each such Bank and the Issuing Bank hereby irrevocably authorizes the Agent to take such action on its behalf under the provisions of the Credit Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of the Credit Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in any Credit Document, the Agent shall not have any duties or responsibilities other than those expressly set forth therein, or any fiduciary relationship with any Bank or the Issuing Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Credit Documents or otherwise exist against the Agent.

9.2. Delegation of Duties.

                     The Agent may execute any of its duties under the Credit Documents by or through agents or attorneys-in-fact and shall be entitled to rely upon the advice of counsel concerning all matters pertaining to such duties.

9.3. Exculpatory Provisions.

                     Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the Credit Documents (except for its or their own gross negligence or willful misconduct, including gross negligence or willful misconduct in selecting a Person to whom duties are delegated pursuant to Section 9.2), or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by any Credit Party or any officer thereof contained in the Credit Documents, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, the Credit Documents or for the value, validity, effectiveness, genuineness, perfection, enforceability or sufficiency of any of the Credit Documents or for any failure of any Credit Party or any other Person to perform its obligations thereunder. The Agent shall not be under any obligation to any Bank or the Issuing Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Credit Documents, or to inspect the properties, books or records of any Credit Party. The Agent shall not be under any liability or responsibility whatsoever, as Agent, to any Credit Party or any other Person as a consequence of any failure or delay in performance, or any breach, by any Bank or the Issuing Bank of any of its obligations under any of the Credit Documents.

-59-

9.4. Reliance by Agent.

                     The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, opinion, letter, cablegram, telegram, facsimile, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitations counsel to any Credit Party), independent accountants and other experts selected by the Agent. The Agent may treat each Bank and the Issuing Bank, or the Person designated in the last notice filed with it under this Section, as the holder of all of the interests of such Bank or Issuing Bank hereunder until written notice of transfer, signed by such Bank or Issuing Bank (or the Person designated in the last notice filed with the Agent) and by the Person designated in such written notice of transfer, in form and substance satisfactory to the Agent, shall have been filed with the Agent. The Agent shall not be under any duty to examine or pass upon the validity, effective, enforceability, perfection or genuineness of the Credit Documents or any instrument, document or communication furnished pursuant thereto or in connection therewith, and the Agent shall be entitled to assume that the same are valid, effective and genuine, have been signed or sent by the proper parties and are what they purport to be. The Agent shall be fully justified in failing or refusing to take any action under the Credit Documents unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate. The Agent shall in all cases be fully protected in acting, or in refraining from acting, in accordance with a request or direction of the Required Banks, and such request or direction and any action taken or failure to act pursuant thereto shall be binding upon all the Banks, including all future Banks and the Issuing Bank.

9.5. Notice of Default.

                     The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Agent has received written notice thereof from the Issuing Bank, a Bank or the Applicant or any Co-Applicant. In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Issuing Bank, the Banks and the Applicant. The Agent shall take such action with respect to such Default or Event of Default as shall be directed by the Required Banks; provided, however, that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem to be in the best interests of the Banks.

9.6. Non-Reliance on Agent and Other Banks.

                     Each Bank and the Issuing Bank expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereinafter, including any review of the affairs of any Credit Party, shall be deemed to constitute any representation or warranty by the Agent to any Bank or the Issuing Bank. Each Bank and the Issuing Bank represents to the Agent that it has, independently and without reliance upon the Agent or any other Bank or the Issuing Bank, and based on such documents and information as it has deemed

-60-

appropriate, made its own evaluation of and investigation into the business, operations, Property, financial and other condition and creditworthiness of the Credit Parties and made its own decision to enter into this Agreement. Each Bank and the Issuing Bank also represents that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, evaluations and decisions in taking or not taking action under any Credit Document, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Credit Parties. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank or the Issuing Bank with any credit or other information concerning the business, operations, Property, financial and other condition or creditworthiness of the Credit Parties which may come into the possession of the Agent or any of its officers, directors, employees, agent, attorneys-in-fact or affiliates.

9.7. Indemnification.

                     Each Bank agrees to indemnify and reimburse in Dollars the Agent in its capacity as such (to the extent not promptly reimbursed by the Applicant or any Co-Applicant and without limiting the obligation of any Credit Party to do so), in the Dollar Equivalent amount of its pro rata share (based on its Commitment Percentage hereunder), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever including, without limitation, any amounts paid to the Banks (through the Agent) by the Applicant or any Co-Applicant pursuant to the terms of the Credit Documents, that are subsequently rescinded or avoided, or must otherwise be restored or returned) which may at any time be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Credit Documents or any other documents contemplated by or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by the Agent under or in connection with any of the foregoing; provided, however, that no Bank shall be liable for the payment of any portion, of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting primarily from the finally adjudicated gross negligence or willful misconduct of the Agent (or any final settlement in which the Agent admits being guilty of gross negligence or willful misconduct). Without limitation of the foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its pro rata share of any unpaid fees owing to the Agent, and any costs and expenses (including, without limitation, reasonable fees and expenses of counsel) payable by the Applicant under Section 10.5, to the extent that the Agent has not been paid such fees or has not been reimbursed for such costs and expenses, by the Applicant or other Credit Party. The failure of any Bank to reimburse the Agent promptly upon demand for its pro rata share of any amount required to be paid by the Banks to the Agent as provided in this Section shall not relieve any other Bank of its obligation hereunder to reimburse the Agent for its pro rata share of such amount, but no Bank shall be responsible for the failure of another Bank to reimburse the Agent for such other Bank’s pro rata share of such amount. The agreements in this Section shall survive the payment of all amounts payable under the Credit Documents.

-61-

9.8. Agent in Its Individual Capacity.

                     The Agent and its respective affiliates may make loans to, accept deposits from, issue letters of credit for the account of, and generally engage in any kind of business with, any Credit Party as though the Agent were not Agent hereunder. With respect to its Commitment and participation as a Bank with respect to Letters of Credit, the Agent, in its individual capacity and not as Agent, shall have the same rights and powers under the Credit Documents as any Bank and may exercise the same as though it were not the Agent, and the terms “Bank”and “Banks” shall in each case include the Agent in its individual capacity and not as Agent.

9.9. Successor Agent.

                     If at any time the Agent deems it advisable, in its sole discretion, it may submit to each of the Banks and the Issuing Bank a written notice of its resignation as Agent under the Credit Documents, such resignation to be effective upon the earlier of (i) the written acceptance of the duties of the Agent under the Credit Documents by a successor Agent and (ii) on the thirtieth (30^th) day after the date of such notice. Upon any such resignation, the Required Banks shall have the right to appoint from among the Banks a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and accepted such appointment in writing within thirty (30) days after retiring Agent’s giving of notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which successor Agent shall be a commercial bank organized under the laws of the United States of America or any State thereof. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent’s rights, powers, privileges and duties as Agent under the Credit Documents shall be terminated. The Applicant, Co-Applicant, Issuing Bank and the Banks shall execute such documents as shall be necessary to effect such appointment. After any retiring Agent’s resignation as Agent, the provisions of the Credit Documents shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Credit Documents. If at any time there shall not be a duly appointed and acting Agent, the Applicant agrees to make each payment due under the Credit Documents directly to the Issuing Bank and the Banks entitled thereto during such time.

10. OTHER PROVISIONS

10.1. Amendments and Waivers.

                     With the written consent of the Required Banks, the Agent and the appropriate Credit Parties may, from time to time, enter into written amendments, supplements or modifications of the Credit Documents and, with the consent of the Required Banks, the Agent on behalf of the Banks may execute and deliver to any such parties a written instrument waiving or a consent to a departure from, on such terms and conditions as the Agent may specify in such instrument, any of the requirements of the Credit Documents or any Default or Event of Default and its consequences; provided, however, that:

-62-

                     (a) no such amendment, supplement, modification, waiver or consent shall, without the consent of all of the Banks, (i) increase the Commitment Percentage of any Bank or the Commitment, (ii) extend the Termination Date (except as provided in Section 2.6) or, subject to Section 2.5, the Stated Expiration Date of any Letter of Credit, (iii) reduce interest, any fees or other amounts payable hereunder, (iv) postpone any date fixed for payment of reimbursement obligations, interest or any fees or other amounts payable hereunder, (v) change the provisions of Sections 2.11, 2.12, 2.14, 10.1 or 10.6(a), (vi) increase the sublimit applicable to Letters of Credit issued at the request of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries, (vii) change the definition of Required Banks or (viii) release any Collateral other than as expressly permitted hereunder;

                     (b) without the written consent of the Issuing Bank, no such amendment, supplement, modification or waiver shall change the Commitment, change the amount or the time of payment of the Letter of Credit Commissions or change any other term or provision which relates to the Commitment or the Letters of Credit; and

                     (c) without the written consent of the Agent, no such amendment, supplement, modification or waiver shall amend, modify or waive any provision of Section 9 or otherwise change any of the rights or obligations of the Agent hereunder or under the Credit Documents.

                     Any such amendment, supplement, modification or waiver shall apply equally to each of the Banks and shall be binding upon the parties to the applicable Credit Document, the Banks, the Agent, the Issuing Bank and all future Banks. In the case of any waiver, the parties to the applicable Credit Document, the Banks and the Agent shall be restored to their former position and rights hereunder and under the other Credit Documents to the extent provided for in such waiver, and any Default or Event of Default waived shall not extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. The Credit Documents may not be amended orally or by any course of conduct.

10.2. Notices.

                     All notices, requests and demands to or upon the respective parties to the Credit Documents to be effective shall be in writing and, unless otherwise expressly provided therein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, first-class postage or, in the case of notice by facsimile, when sent, addressed as follows in the case of the Applicant, the Issuing Bank, the Agent and to the address of a Bank designated as such on Schedule 10.2 hereto and to the address of a Credit Party set forth in a Credit Document, or to such other addresses as to which the Agent may be hereafter notified by the respective parties thereto:

-63-

The Applicant:
PMA Capital Corporation
Mellon Bank Center, 28th Floor
1735 Market Street
Philadelphia, Pennsylvania 19103-7590
Attention:	Francis W. McDonnell, Senior Vice President, Chief Financial Officer and Treasurer
Telephone:	(215) 665-5070
Facsimile:	(215) 665-5043
with a copy to in the case of notices to the Applicant:
PMA Capital Corporation
Mellon Bank Center, 28th Floor
1735 Market Street
Philadelphia, Pennsylvania 19103-7590
Attention:	Charles A. Brawley, III, Esq.
Telephone:	(215) 665-5039
Facsimile:	(215) 665-5043
The Agent:
Fleet National Bank
777 Main Street
Hartford, Connecticut 06115
Attention:	Anson T. Harris, Director
Telephone:	(860) 986-7518
Facsimile:	(860) 986-1264
The Issuing Bank:
Fleet National Bank
One Fleet Way
Mail Stop: PA EH 0802SM
Scranton, PA 18507
Attn:	Letter of Credit Department
Telephone:	(570)330-4212
Facsimile:	(570) 330-4187

except that any notice, request or demand by the Applicant to or upon the Agent, the Issuing Bank or the Banks pursuant to Sections 2.1, 2.5 or 2.6 shall not be effective until received, and any notice of payment or demand for payment under Section 2.1(c) shall not be effective until received at the facsimile number designated above for the Applicant. Any party to a Credit Document may rely on signatures of the parties thereto which are transmitted by facsimile or

-64-

other electronic means as fully as if originally signed.

10.3. No Waiver; Cumulative Remedies.

                     No failure to exercise and no delay in exercising, on the part of the Agent, the Issuing Bank or any Bank, any right, remedy, power or privilege under any Credit Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under any Credit Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges under the Credit Documents are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

10.4. Survival of Representations and Warranties.

                     All representations and warranties made under the Credit Documents and in any document, certificate or statement delivered pursuant thereto or in connection therewith shall survive the execution and delivery of the Credit Documents.

10.5. Payment of Expenses and Taxes.

                     The Applicant agrees, promptly upon presentation of a statement or invoice therefor, and whether any Letter of Credit is issued (i) to pay or reimburse the Agent for all its out-of-pocket costs and expenses reasonably incurred in connection with (A) the development, preparation and execution of, the Credit Documents and any amendment, supplement or modification thereto (whether or not executed), any documents prepared in connection therewith and the consummation of the transactions contemplated thereby, including syndication, and (B) any costs incurred in connection with any confirmation of any Letters of Credit and, including, in each case without limitation, the reasonable attorneys’fees and disbursements, (ii) to pay or reimburse the Agent or the Issuing Bank for the cost of any confirmation of any Letter of Credit, (iii) to pay or reimburse the Agent, the Issuing Bank and the Banks for all of their respective costs and expenses, including, without limitation reasonable fees and disbursements of counsel, incurred in connection with (A) any Default or Event of Default and any enforcement or collection proceedings resulting therefrom or in connection with the negotiation of any restructuring or “work-out” (whether consummated or not) of the obligations of the Credit Parties under any of the Credit Documents, and (B) the enforcement of this Section, (iv) to pay, indemnify, and hold each Bank, the Issuing Bank and the Agent harmless from and against any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the directions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, the Credit Documents and any such other documents, and (v) to pay, indemnify and hold each Bank, the Issuing Bank and the Agent and each of their respective officers, directors and employees harmless from and against any and all other liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or name whatsoever (including, without limitation reasonable counsel fees and disbursements) with respect to the enforcement and performance of

-65-

the Credit Documents, the issuance and use of the Letters of Credit (all the foregoing, collectively, the “indemnified liabilities”) and, if and to the extent that the foregoing indemnity may be unenforceable for any reason, the Applicant agrees to make the maximum payment permitted or not prohibited under applicable law; provided, however, that the Applicant shall have no obligation hereunder to pay indemnified liabilities to the Agent, the Issuing Bank or any Bank arising from the finally adjudicated gross negligence or willful misconduct of the Agent, the Issuing Bank or such Bank or claims between one indemnified party and another indemnified party (or any final settlement in which the Agent, the Issuing Bank, or such Bank admits being guilty of gross negligence or willful misconduct). The Applicant further agrees that all payments made pursuant to this Section 10.5 shall be made in Dollars. The agreements in this Section shall survive the termination of the Commitment and the payment of all amounts payable under the Credit Documents.

10.6. Assignments and Participants.

                     (a) The Credit Documents shall be binding upon and inure to the benefit of the Applicant, the Co-Applicants, the Banks, the Issuing Bank, the Agent, all future Banks and their respective successors and assigns, except that no Credit Party may assign, delegate or transfer any of its rights or obligations under the Credit Documents without the prior written consent of the Agent and each Bank.

                     (b) Each Bank shall have the right at any time, upon written notice to the Agent of its intent to do so, to sell, assign, transfer or negotiate all or any part of such Bank’s rights under the Credit Documents to one or more of its affiliates which would otherwise be Eligible Assignees, to one or more of the other Banks (or to affiliates of such other Banks which would be an Eligible Assignee) or, with the prior written consent of the Applicant, the Issuing Bank and the Agent (which consent shall not be unreasonably withheld and which consent of Applicant shall not be required upon the occurrence and during the continuance of an Event of Default), to sell, assign, transfer or negotiate all or any part of such Bank’s rights and obligations under the Credit Documents to any other bank, insurance company, pension fund, mutual fund or other financial institution which meets the criteria of Eligible Assignee, provided that (i) each such partial sale, assignment, transfer or negotiation (other than sales, assignments, transfers or negotiations to affiliates of such Bank) shall be in a minimum amount of $5,000,000 and (ii) there shall be paid to the Agent by the assigning Bank a fee (the “Assignment Fee”) of $3,000. For each assignment, the parties to such assignment shall execute and deliver to the Agent for its acceptance and recording an Assignment and Acceptance Agreement. Upon such execution, delivery, acceptance and recording by the Agent, from and after the effective date specified in such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance Agreement, the assignor Bank thereunder shall be released from its obligations under the Credit Documents. Upon any such sale, assignment or other transfer, the Commitment Percentages set forth in Exhibit A shall be adjusted accordingly by the Agent and a new Exhibit A shall be distributed by the Agent to the Applicant and each Bank.

                     (c) Each Bank may grant participations in all or any part of its Commitment Percentage to one or more Persons (other than property and casualty insurance companies),

-66-

provided that (i) such Bank’s obligations under the Credit Documents shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties to the Credit Documents for the performance of such obligations, (iii) the Applicant, the Issuing Bank, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under the Credit Documents, (v) no sub-participations shall be permitted and (vi) the voting rights of any holder of any participation shall be limited to decisions that only do any of the following: (A) subject the participant to any additional obligation, (B) reduce interest, any fees or other amounts payable hereunder, or (C) postpone any date fixed for the payment of reimbursement obligations, interest or any fees or other amounts payable hereunder. The Applicant acknowledges and agrees that any such participant shall for purposes of Sections 2.11 and 2.12 be deemed to be a “Bank”; provided, however, the Applicant shall not, at any time, be obligated to pay any participant in any interest of any Bank hereunder any sum in excess of the sum which the Applicant would have been obligated to pay to such Bank in respect of such interest had such Bank not sold such participation.

                     (d) No Bank shall, as between and among the Applicant, any Co-Applicant, the Issuing Bank, the Agent and such Bank, be relieved of any of its obligations under the Credit Documents as a result of any sale, assignment, transfer or negotiation of, or granting of participations in, all or any part of its Commitment Percentage, except that a Bank shall be relieved of its obligations to the extent of any such sale, assignment, transfer or negotiation of any Commitment Percentage.

                     (e) Notwithstanding anything to the contrary contained in this Section, any Bank may at any time or from time to time assign all or any portion of its rights under the Credit Documents to a Federal Reserve Bank, provided that any such assignment shall not release such assignor from its obligations thereunder.

                     (f) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the Assignee or Participant or proposed Assignee or Participant any information relating to the Applicant and its Subsidiaries furnished to it by or on behalf of any other party hereto, provided that such Assignee or Participant or proposed Assignee or Participant agrees in writing to keep such information confidential to the same extent required of the Banks under Section 10.19.

10.7. Counterparts.

                     Each Credit Document may be executed by one or more of the parties thereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same document. It shall not be necessary in making proof of any Credit Document to produce or account for more than one counterpart signed by the party to be charged. A counterpart of any Credit Document, and of any amendment, modification, consent or waiver to or of any Credit Document transmitted by facsimile shall be deemed to be an originally executed counterpart. A set of the copies of the Credit Documents signed by all the parties thereto shall be deposited with each of the Applicant and the Agent. Any party to a Credit Document may rely upon the signatures of any other party thereto which are transmitted by facsimile or other electronic means to the same extent as if originally signed.

-67-

10.8. Adjustments; Set-off.

                     (a) If any Bank (a “Benefitted Bank”) shall at any time receive any payment or collateral in respect of the Obligations in excess of its pro rata share (based on its Commitment Percentage) (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 8.1(h) or (i), or otherwise), such Benefitted Bank shall purchase from each of the other Banks such portion of each such other Bank’s participation in the Obligations, and shall provide each of such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each of the Banks, provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Applicant and Co-Applicants agree that each Bank so purchasing a portion of another Bank’s percentage of Obligations may exercise all rights of payment (including, without limitation, rights of set-off, to the extent not prohibited by law) with respect to such portion as fully as if such Bank were the direct holder of such portion.

                     (b) In addition to any rights and remedies of the Banks provided by law, upon the occurrence of and during the continuance of an Event of Default under Section 8.1(a) or (b), each Bank shall have the right, without prior notice to the Applicant, any such notice being expressly waived by each Credit Party to the extent not prohibited by applicable law, to set-off and apply against any indebtedness, whether contingent, matured or unmatured of such Credit Party to such Bank, any amount owing from such Bank to such Credit Party, at, or at any time after, the happening of any of the above mentioned events. To the extent not prohibited by applicable law, the aforesaid right of set-off may be exercised by such Bank against such Credit Party or against any trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor of such Credit Party, or against anyone else claiming through or against such Credit Party or such trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receivers or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Bank prior to the making, filing or issuance, or service upon such Bank of, or of notice of, any such petition, assignment for the benefit of creditors, appointment or application for the appointment of a receiver, or issuance of execution, subpoena, order or warrant. Each Bank agrees promptly to notify the applicable Credit Party, the Issuing Bank and the Agent after any such set-off and application made by such Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application.

10.9. Construction

                     Each Credit Party represents that it has been represented by counsel in connection with the Credit Documents and the transactions contemplated thereby and that the principle that agreements are to be construed against the draftsman shall be inapplicable.

-68-

10.10. Indemnity.

                     The Applicant agrees to indemnify and hold harmless the Agent, the Issuing Bank and each Bank and their affiliates, directors, officers, employees, attorneys and agents (each an “Indemnified Person”) from and against any loss, cost, liability, claim, damage or expense (including the reasonable fees and disbursements of counsel of such Indemnified Person, including all local counsel hired by any such counsel) incurred by such Indemnified Person in investigating, preparing for, defending against, or providing evidence, producing documents or taking any-other action in respect of, any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law or any other statute of any jurisdiction, or any regulation, or at common law or otherwise, which is alleged to arise out of or is based upon (i) any untrue statement or alleged untrue statement of any material fact by any Credit Party in any document or schedule executed or filed with any governmental body, agency or authority, by or on behalf of any Credit Party; (ii) any omission or alleged omission to state any material fact required to be stated in such document or schedule, or necessary to make the statements made therein, in light of the circumstances under which made, not misleading; (iii) any acts, practices or omissions or alleged acts, practices or omissions of any Credit Party or its agents relating to the issuance and maintenance of any or all Letters of Credit or the use of any or all Letters of Credit by the Applicant which are alleged to be in violation of Section 2.13, or in violation of any federal securities law or of any other statute, regulation or other law of any jurisdiction applicable thereto or (iv) the violation of, noncompliance with or liability under any applicable environmental laws applicable to the Credit Parties. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Applicant and/or Co-Applicant to each Indemnified Person under the Credit Documents or at common law or otherwise, and shall survive any termination of the Credit Documents, the expiration of the Commitment and the payment of all obligations of the Applicant and Co-Applicants under the Credit Documents, provided that the Applicant shall have no obligation under this Section to an Indemnified Person with respect to any of the foregoing to the extent found in a final judgment of a court having jurisdiction to have resulted primarily out of the gross negligence or willful misconduct of such Indemnified Person or arising solely from claims between one such Indemnified Person and another such Indemnified Person.

10.11. Governing Law.

                     The Credit Documents and the rights and obligations of the parties thereunder shall be governed by, and construed and interpreted in accordance with, the internal laws of the Commonwealth of Massachusetts, without regard to principles of conflict of laws.

10.12. Headings Descriptive.

                     Section headings have been inserted in the Credit Documents for convenience only and shall not be construed to be a part thereof.

-69-

10.13. Severability.

                     Every provision of the Credit Documents is intended to be severable, and if any term or provision thereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction.

10.14. Integration

                     All exhibits to a Credit Document shall be deemed to be a part thereof. The Credit Documents embody the entire agreement and understanding among the Credit Parties, the Agent, the Issuing Bank and the Banks with respect to the subject matter thereof and supersede all prior agreements and understandings among the Credit Parties, the Agent, the Issuing Bank and the Banks with respect to the subject matter thereof.

10.15. Consent to Jurisdiction.

                     Each Credit Party hereby irrevocably submits to the jurisdiction of any Massachusetts or Connecticut State or Federal court in Massachusetts or Connecticut over any suit, action or proceeding arising out of or relating to the Credit Documents. Each Credit Party hereby irrevocably waives, to the fullest extent permitted or not prohibited by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. Each Credit Party hereby agrees that a final judgment in any such suit, action or proceeding brought in such a court, after all appropriate appeals, shall be conclusive and binding upon it.

10.16. Service of Process.

                     Each Credit Party hereby irrevocably consents to the service of process in any suit, action or proceeding by sending the same by first class mail, return receipt requested or by overnight courier service, to the address of such Credit Party set forth in or referred to in Section 10.2 or in the applicable Credit Document executed by such Credit Party. Each Credit Party hereby agrees that any such service (i) shall be deemed in every respect effective service of process upon it in any such suit, action, or proceeding, and (ii) shall to the fullest extent enforceable by law, be taken and held to be valid personal service upon and personal delivery to it.

10.17. No Limitation on Service or Suit

                     Nothing in the Credit Documents or any modification, waiver, consent or amendment thereto shall affect the right of the Agent or any Bank to serve process in any manner permitted by law or limit the right of the Agent, the Issuing Bank or any Bank to bring proceedings against any Credit Party in the courts of any jurisdiction or jurisdictions in which

-70-

such Credit Party may be served.

10.18. WAIVER OF TRIAL BY JURY.

                     THE AGENT, THE ISSUING BANK, THE BANKS AND EACH CREDIT PARTY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREIN. FURTHER, EACH CREDIT PARTY HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE AGENT, THE ISSUING BANK, OR THE BANKS, OR COUNSEL TO THE AGENT, THE ISSUING BANK OR THE BANKS, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT, THE ISSUING BANK OR THE BANKS WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. EACH CREDIT PARTY ACKNOWLEDGES THAT THE AGENT, THE ISSUING BANK AND THE BANKS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION.

10.19. Confidentiality.

                     Each Bank agrees to keep confidential, pursuant to its customary procedures for handling confidential information of a similar nature and in accordance with safe and sound banking practices, all nonpublic information provided to it by or on behalf of the Applicant or any of its Subsidiaries in connection with this Agreement or any other Credit Document; provided, however, that any Bank may disclose such information (i) to its directors, employees and agents and to its auditors, counsel and other professional advisors, (ii) at the demand or request of any bank regulatory authority, court or other Governmental Authority having or asserting jurisdiction over such Bank, as may be required pursuant to subpoena or other legal process, or otherwise in order to comply with any Requirement of Law, (iii) in connection with any proceeding to enforce its other Credit Document or any other litigation or proceeding is a party, (iv) to the Agent or any other Bank, (v) to the extent the same has become publicly available other than as a result of a breach of this Agreement and (vi) pursuant to and in accordance with the provisions of Section 10.6(f).

-71-

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

PMA CAPITAL CORPORATION
By:	/s/ Francis W. McDonnell
Name:	Francis W. McDonnell
Title:	Senior Vice President, Chief Financial Officer & Treasurer
PMA CAPITAL INSURANCE COMPANY
By:	/s/ Albert D. Ciavardelli
Name:	Albert D. Ciavardelli
Title:	Vice President & Treasurer
PENNSYLVANIA MANUFACTURERS' ASSOCIATION INSURANCE COMPANY
By:	/s/ William E. Hitselberger
Name:	William E. Hitselberger
Title:	Senior Vice President, Chief Financial Officer & Treasurer
HIGH MOUNTAIN REINSURANCE, LTD.
By:	/s/ Edward S. Hochberg
Name:	Edward S. Hochberg
Title:	Treasurer & Secretary

-72-

FLEET NATIONAL BANK, Individually and as Agent and Issuing Bank
By:	/s/ Anita M. Presmarita
Name:	Anita M. Presmarita
Title:	Vice President

A-1

PMA CAPITAL CORPORATION EXHIBIT A

COMMITMENT

Bank	Commitment    Percentage	Commitment    Amount
Fleet National Bank	100%	$ 50,000,000
Total	100%	$ 50,000,000

B-1

PMA CAPITAL CORPORATION EXHIBIT B

FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT

        This Assignment and Acceptance Agreement is made and entered into as of _________, 200_, by and between ____________________ (the “Assignor”) and _______________ (the “Assignee”).

R E C I T A L S

        A. The Assignor, one or more other banks (together with any prior assignees, (the “Banks”) and Fleet National Bank, as agent (the “Agent”) and as issuing bank (the “Issuing Bank”), are parties to that certain Letter of Credit Agreement dated as of ________________, 2001 (as from time to time amended, the “Agreement”) with PMA Capital Corporation, a Pennsylvania corporation (the “Applicant”) and certain subsidiaries of the Applicant party thereto. Pursuant to the Agreement, the Banks agreed to participate in Letters of Credit issued by the Issuing Bank under the Agreement in accordance with their Commitment Percentage. The Assignor’s Commitment (without giving effect to the assignment effected hereby or to other assignments thereof which have not yet become effective) is specified in Item 1 of Schedule 1 hereto. The Assignor’s percentage of the Letter of Credit Exposure (without giving effect to the assignment effected hereby or to other assignments thereof which have not yet become effective) is specified in Item 2 of Schedule 1 hereto. All capitalized terms not otherwise defined herein are used herein as defined in the Agreement.

        B. The Assignor wishes to sell and assign to the Assignee, and the Assignee wishes to purchase and assume from the Assignor, the portion of the Assignor’s Commitment specified in. Item 3 of Schedule 1 hereto together with its related rights and obligations under the Credit Documents and in respect of the Collateral (the “Assigned Commitment”).

        The parties agree as follows:

        1. Assignment. Subject to the terms and conditions set forth herein and in the Agreement, the Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, without recourse, on the date set forth above (the “Assignment Date”) all obligations of the Assignor under the Agreement with respect to the Assigned Commitment together with its related rights and obligations under the Credit Documents and in respect of the Collateral. As consideration for the assignment and sale contemplated hereby, the Assignee shall pay to the Assignor on the date hereof the amount heretofore agreed between them.

        2. Representation and Warranties. Each of the Assignor and the Assignee represents and warrants to the other that (a) it has full power and legal right to execute and deliver this Assignment and Acceptance Agreement and to perform the provisions of this Assignment and Acceptance Agreement; (b) the execution, delivery and performance of this Assignment and Acceptance Agreement have been authorized by all action, corporate or otherwise, and do not

B-2

violate any provisions of its charter or by-laws or any contractual obligations or requirement of law binding on it; and (c) this Assignment and Acceptance Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. The Assignor further represents that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim created by the Assignor. The Assignee further represents that it is an “Eligible Assignee”as said term is defined in the Agreement.

        3. Condition Precedent. The obligations of the Assignor and the Assignee hereunder shall be subject to the fulfillment of the condition that the Assignor shall have complied with the other applicable provisions of Section 10.6 of the Agreement.

        4. Notice of Assignment. The Assignor agrees to give notice of the assignment and assumption of the Assigned Commitment to the Agent, the Issuing Bank and the Applicant and hereby instructs the Agent, the Issuing Bank and the Applicant to make all payments with respect to the Assigned Commitment directly to the Assignee at the applicable office specified on Schedule 2 hereto; provided, however, that the Applicant, the Agent and the Issuing Bank all shall be entitled to continue to deal solely and directly with the Assignor in connection with the interests so assigned until the Agent, the Issuing Bank and the Applicant, to the extent required by Section 10.6 of the Agreement, shall have received notice of the assignment, the Applicant, the Agent and the Issuing Bank shall have consented in writing thereto to the extent required by Section 10.6 of the Agreement, and the Agent shall have recorded and accepted this Assignment and Acceptance Agreement and received the Assignment Fee required to be paid pursuant to Section 10.6 of the Agreement. From and after the date (the “Effective Date”) on which the Agent shall notify the Applicant and the Assignor that the requirements set forth in the foregoing sentence shall have occurred and all consents (if any) required shall have been given, (i) the Assignee shall be deemed to be a party to the Agreement and, to the extent that rights and obligations thereunder shall have been assigned to Assignee as provided in such notice of assignment to the Agent, shall have the rights and obligations of a Bank under the Agreement, and (ii) the Assignee shall be deemed to have appointed the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto. After the Effective Date, the Agent shall make all payments in respect of the interest assigned hereby (including payments of interest, fees and other amounts) to the Assignee. The Assignor and Assignee shall make all appropriate adjustment in payments under the Assigned Commitment for periods prior to the Effective Date hereof directly between themselves. If the Assignee is not a United States Person as defined in Section 7701(a)(30) of the Code, the Assignee shall deliver herewith the forms required by Section 2.11 of the Agreement to evidence the Assignee’s complete exemption from United States withholding taxes with respect to payments under the Credit Documents.

        5. Independent Investigation. The Assignee acknowledges that it is purchasing the Assigned Commitment from the Assignor totally without recourse and, except as provided in Section 2 hereof, without representation or warranty. The Assignee further acknowledges that it has made its own independent investigation and credit evaluation of the Applicant and any Co-Applicant in connection with its purchase of the Assigned Commitment. Except for the

B-3

representations or warranties set forth in Section 2, the Assignee acknowledges that it is not relying on any representation or warranty of the Assignor, expressed or implied, including without limitation, any representation or warranty relating to the legality, validity, genuineness, enforceability, collectibility, interest rate, repayment schedule or status of the Assigned Commitment, the legality, validity, genuineness or enforceability of the Agreement, or any other Credit Document referred to in or delivered pursuant to the Agreement, or financial condition or creditworthiness of the Applicant, any Co-Applicant or any other Person. The Assignor has not and will not be acting as either the representative, agent or trustee of the Assignee with respect to matters arising out of or relating to the Agreement or this Assignment and Acceptance Agreement. From and after the Effective Date, except as set forth in Section 4 above, the Assignor shall have no rights or obligations with respect to the Assigned Commitment.

        6. Consent of the Applicant. Pursuant to the provisions of Section 10.6 of the Agreement, and to the extent required thereby, the Applicant, by signing below, consents to this Assignment and Acceptance Agreement and to the assignment contemplated herein.

        7. Method of Payment. Any payments to be made by either party hereunder shall be in funds available at the place of payment on the same day and shall be made by wire transfer to the account designated by the party to receive payment.

        8. Integration. This Assignment and Acceptance Agreement shall supersede any prior agreement or understanding between the parties (other than the Credit Documents) as to the subject matter hereof.

        9. Counterparts. This Assignment and Acceptance Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon both parties, their successors and assigns.

        10. Headings. Section headings have been inserted herein for convenience only and shall not be construed to be a part hereof.

        11. Amendments; Waivers. This Assignment and Acceptance Agreement may not be amended, changed, waived or modified except by a writing executed by the parties hereto, and may not be amended, changed, waived or modified in any manner inconsistent with Section 10.6 of the Agreement without the prior written consent of the Agent.

        12. Governing Law. This Assignment and Acceptance Agreement shall be governed by, and construed in accordance with the laws of, the Commonwealth of Massachusetts.

B-4

        IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

________________________, as Assignor

By:

Name:

Title:

________________________, as Assignee

By:

Name:

Title:

Consented to:

PMA CAPITAL CORPORATION

By:

Name:

Title:

Consented to and Accepted:

FLEET NATIONAL BANK,
as Agent

By:

Name:

Title:

FLEET NATIONAL BANK,
as Issuing Bank

By:

Name:

Title:

B-5

SCHEDULE 1

TO

ASSIGNMENT AND ACCEPTANCE AGREEMENT

between
______________________, as Assignor
and
______________________, as Assignee

relating to

Letter of Credit Agreement among
PMA Capital Corporation,
the Banks party thereto,
and
Fleet National Bank, as Agent and as Issuing Bank,
dated as of ____________, 2001

Item 1. (a)	Assignor's Commitment           Percentage:	__________ %
	(b)     Assignor's Commitment:	$___________
Item 2.	Assignor's Letter of           Credit Exposure:           (the Assignor's Commitment Percentage           times the Letter of Credit Exposure)	$___________
Item 3.	Assigned Commitment:	$___________

B-6

SCHEDULE 2

TO

ASSIGNMENT AND ACCEPTANCE AGREEMENT

between
_______________________, as Assignor
and
_______________________, as Assignee

relating to

Letter of Credit Agreement among
PMA Capital Corporation,
the Banks party thereto,
and
Fleet National Bank, as Agent and as Issuing, Bank,
dated as of _______________, 2001

Address for Notices

______________________________
______________________________
Attention: ______________________
Telephone: _____________________
Fax: __________________________

C-1

PMA CAPITAL CORPORATION EXHIBIT C

FORM OF LETTER OF CREDIT REQUEST

_________________, 200_

Fleet National Bank, as Agent
777 Main Street
Hartford, Connecticut 06115
Attention: Anson T. Harris, Director

Fleet National Bank, as Issuing Bank
100 Federal Street
Boston, Massachusetts 02110
Attention: Letter of Credit Department

Gentlemen:

        Reference is made to the Letter of Credit Agreement, dated as of _______________, 2001, by and among PMA CAPITAL CORPORATION (the “Applicant”), each Subsidiary of the Applicant which is or may become a party thereto (each, a “Co-Applicant”), the Banks party thereto and FLEET NATIONAL BANK, as Agent and Issuing Bank (as from time to time amended, the “Agreement”).

        Capitalized terms used herein that are defined in the Agreement shall have the meanings therein defined.

        1. Pursuant to Section 2.1 and 3.2(c) of the Agreement, the undersigned Applicant [and, if applicable, ____________________ (the “Co-Applicant(s)”)] hereby requests that the Issuing Bank issue the Letter(s) of Credit in accordance with the information annexed hereto which contains the verbatim text of the proposed letter(s) of credit including the proposed terms and conditions and a precise description of the documentation required to be complied with and submitted by the beneficiary, which, if complied with by the beneficiary on or prior to the Stated Expiration Date, would require the Issuing Bank to make payment under the Letter of Credit.

        2. The Applicant hereby certifies that on the date hereof and on the Date of Issuance set forth in Annex A, and after giving effect to the Letter(s) of Credit requested hereby:

               (a) The Applicant is and shall be in compliance with all of the terms, covenants and conditions of the Credit Documents.

               (b) There exists and there shall exist no Default or Event of Default under the

C-2

Agreement.

               (c) Each of the representations and warranties contained in the Agreement which is required to be made on such Date of Issuance is and shall be true and correct in all material respects.

               (d) After giving effect to the Letter(s) of Credit requested to be issued hereby, the aggregate Letters of Credit Exposure will not exceed the Commitment and the aggregate Letter of Credit Exposure with respect to Letters of Credit issued for the account of Subsidiaries of the Applicant which are not Material Insurance Subsidiaries will not exceed $15,000,000.

        [3. Each Co-Applicant which signs this Letter of Credit Request acknowledges that it has received a copy of the Agreement and acknowledges and agrees that from and after the Date of Issuance of the Letter(s) of Credit requested hereby, the undersigned shall be jointly and severally liable with the Applicant for all obligations with respect to the Letter(s) of Credit requested hereby and that the undersigned shall be a party to the Agreement and the other Credit Documents as a Co-Applicant with all the rights and obligations of a Co-Applicant under the Agreement and Credit Documents with respect to the Letter(s) of Credit requested hereby, and each and every reference in the Agreement and in any other Credit Document to “Co-Applicant” shall mean and be a reference to include the undersigned. The undersigned will, at the request of the Agent, execute a copy of the Agreement and such other Credit Documents as may be required.]¹

        [4. Each Co-Applicant which signs this Letter of Credit Request represents and warrants that the Agreement and each Credit Document executed by the undersigned Co-Applicant constitutes a legal, valid and binding obligation of the undersigned Co-Applicant in each case enforceable in accordance with its terms.]

        [5. Each Co-Applicant which signs this Letter of Credit Request specifically acknowledges that certain provisions of the Agreement, including, without limitation, Section 10.1 (Amendments and Waivers), 10.3 (No Waiver; Cumulative Remedies), 10.6 (Assignments and Participation), 10.7 (Counterparts), 10.11 (Governing Law), 10.13 (Severability), 10.14 (Integration), 10.15 (Consent to Jurisdiction), 10.16 (Service of Process), 10.17 (No Limitation on Service or Suit) and 10.18 (Waiver of Trial by Jury) thereof, are made applicable to the Co-Applicant.]

_________________
1 Delete Items 3 through 5 if inapplicable

C-3

        IN WITNESS WHEREOF, the Applicant [and Co-Applicant, if applicable] has caused this certificate to be executed by its duly authorized-officer(s) as of the date and year first written above.

PMA CAPITAL CORPORATION

By:

Name:

Title:

[CO-APPLICANT]

By:

Name:

Title:

[CO-APPLICANT]

By:

Name:

Title:

C-4

Annex A

LETTER OF CREDIT INFORMATION

1. Name of Beneficiary: _______________________________________________________.

2. Address of Beneficiary to which Letter of Credit will be sent:
_______________________________________________________
_______________________________________________________.

3. Name of Account Party: _____________________________________________________.

4. Address of Account Party: ___________________________________________________.

5. Conditions under which a drawing may be made (specify the required documentation):
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________

6. Maximum amount to be available under such Letter of Credit: $_________________.

7. Requested Date of Issuance: __________________, 200_.

8. Stated Expiration Date: _____________________, 200_.¹

9. Text of Letter of Credit: _________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________

__________________
¹ Not to be more than one year from the date of issuance.

C-5

10. Name and address of Co-Applicant, if any: __________________________________________
____________________________________________________________________________
____________________________________________________________________________

11. Obligations in respect of which the Letter of Credit is to be issued: ____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________

BR>

12. Letter of Credit is to be (check one box only):

|_|   Evergreen Letter of Credit.

|_|   Not an Evergreen Letter of Credit.

13. If the Evergreen Letter of Credit box in Item 12 was checked, specify the Beneficiary Notification Date.

D-1

PMA CAPITAL CORPORATION EXHIBIT D

FORM OF LETTER OF CREDIT

FLEET NATIONAL BANK
100 Federal Street
Boston, MA 02110

OUR REF NO.                     DATE

Beneficiary
[Address]

GENTLEMEN/LADIES:

OUR REFERENCE NO.

ACCOUNT OF:
[Name of Account Party]
[Address]

AVAILABLE WITH: OURSELVES
BY PAYMENT

DRAFTS AT SIGHT
DRAWN ON FLEET NATIONAL BANK,
BOSTON, MASSACHUSETTS, AS INDICATED BELOW.

TO THE EXTENT OF: ***USD ***

EXPIRY DATE:PLACE OF EXPIRY:
OUR COUNTERS

ADDITIONAL DETAILS:

WE HEREBY ESTABLISH THIS IRREVOCABLE LETTER OF CREDIT IN YOUR FAVOR FOR DRAWINGS UP TO US$________________________ , EFFECTIVE [Date] AND EXPIRING AT OUR OFFICE AT 100 FEDERAL STREET, _________ FLOOR, BOSTON, MASSACHUSETTS 02110, WITH OUR CLOSE OF BUSINESS ON [Date].

D-2

WE HEREBY UNDERTAKE TO PROMPTLY HONOR YOUR SIGHT DRAFT(S), MARKED “DRAWN UNDER LETTER OF CREDIT NO. ______________", FOR ALL OR ANY PART OF THIS LETTER OF CREDIT IF PRESENTED AT OUR 100 FEDERAL STREET, _________ FLOOR, BOSTON, MASSACHUSETTS 02110 ON OR BEFORE THE EXPIRY DATE OR ANY AUTOMATICALLY EXTENDED DATE.

EXCEPT AS STATED HEREIN, THIS UNDERTAKING IS NOT SUBJECT TO ANY CONDITION OR QUALIFICATION. THE OBLIGATION OF FLEET NATIONAL BANK UNDER THIS LETTER OF CREDIT IS THE INDIVIDUAL OBLIGATION OF FLEET NATIONAL BANK, AND IS IN NO WAY CONTINGENT UPON REIMBURSEMENT WITH RESPECT THERETO.

[IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT IS DEEMED TO BE AUTOMATICALLY EXTENDED, WITHOUT AMENDMENT, FOR ONE YEAR FROM THE EXPIRY DATE OR ANY FUTURE EXPIRATION DATE, UNLESS AT LEAST DAYS PRIOR TO ANY EXPIRATION DATE WE NOTIFY YOU BY REGISTERED MAIL THAT WE ELECT NOT TO CONSIDER THIS LETTER OF CREDIT RENEWED FOR ANY SUCH ADDITIONAL PERIOD.]^*

THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500.

YOURS VERY TRULY,

AUTHORIZED SIGNATURE

______________
* To be included in Evergreen Letters of Credit only.

E-1-1

PMA CAPITAL CORPORATION EXHIBIT E-1

FORM OF COMPLIANCE CERTIFICATE
(GAAP Financial Statements)

        THIS CERTIFICATE is given pursuant to Section 5.3(a) of the Letter of Credit Agreement, dated as of ________________, 2001 (as amended, modified or supplemented from time to time, the “Agreement,” the terms defined therein being used herein as therein defined), by and among PMA Capital Corporation (the “Applicant”), the Banks party thereto and Fleet National Bank, as Agent and Issuing Bank.

        The undersigned hereby certifies that:¹

               1. He is [the duly appointed chief financial officer of the Applicant] [a duly appointed vice president of the Applicant having significant responsibility for financial matters].

               2. Enclosed with this Certificate are copies of the financial statements of the Applicant and its Subsidiaries as of _______________, and for the [__________ -month period] [year] then ended, required to be delivered under Section [5.1(a)] [5.l(b)] of the Agreement. Such financial statements have been prepared in accordance with generally accepted accounting principles [(subject to the absence of notes required by generally accepted accounting principles and subject to normal year-end audit adjustments)]²and present fairly the financial condition of the Applicant and its Subsidiaries on a consolidated basis as of the date indicated and the results of operations of the Applicant and its Subsidiaries on a consolidated basis for the period covered thereby.

               3. The undersigned has reviewed the terms of the Agreement and has made, or caused to be made under the supervision of the undersigned, a review in reasonable detail of the activities of the Applicant and its Subsidiaries during the accounting period covered by such financial statements with a view to determining whether the Applicant has performed and maintained all of its obligations under the Agreement.

               4. Based upon the review described in paragraph 3 above, the undersigned has no knowledge of the existence of any Default or Event of Default during or at the end of the accounting period covered by such financial statements or as of the date of this Certificate except as set forth herein].³

______________
1    Insert applicable bracketed language throughout the Certificate.
2    Insert in the case of quarterly financial statements.
3    Insert if applicable and describe in the Certificate or in a separate attachment any exceptions to paragraph 4 above by listing, in reasonable detail, the nature of the Default or Event of Default, the period during which it existed and the action the Applicant has taken or proposes to take with respect thereto.

E-1-2

               5. Attached to this Certificate as Attachment A is a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.1 and 6.2 of the Agreement, as of the last day of the period covered by the financial statements enclosed herewith.

        IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate as of the _______ day of ___________________, 200_.

[signature]

Name:

Title:

E-1-3

ATTACHMENT A
TO GAAP COMPLIANCE CERTIFICATE

COVENANT COMPLIANCE WORKSHEET

Capitalization Ratio (Section 6.1 of the Agreement):		Not greater than 0.35 to 1.0
(1)	Consolidated Indebtedness:
	(a)   Indebtedness of Applicant and Subsidiaries as of         __________, ____ (the "Measurement Date")	$__________
	(b)   (b) Reimbursement obligations with respect to         letters of credit hereunder.	___________
	(c)   Consolidated Indebtedness: Subtract lines l(b)         and l(c) from l (a)	$__________
(2)	Capitalization:
	(a)   Consolidated Indebtedness as of the         Measurement Date (from Line l(d))	$__________
	(b)   Consolidated Net Worth as of the Measurement         Date	___________
	(c)   Capitalization: Add Lines 2(a) and 2(b)	$__________
(3)	Ratio of Consolidated Indebtedness to Total Capitalization:         Divide Line l(d) by Line 2(c)	___ to

E-1-4

Cash Coverage Ratio (Section 6.2 of the Agreement):		Not less than 2.75 to 1.0
(1)	Cash Available:
	(a)   Aggregate Available Dividend Amount for the         Insurance Subsidiaries1         for the Measurement Period2	$_________________
	(b)   Net Tax Sharing Payments for the Measurement         Period
	(i)   Tax sharing payments received by Applicant	$_________________
	(ii)   Tax sharing payments estimated to be                 received by Applicant in respect of                 Measurement Period	_________________
	(iii)  Taxes paid by Applicant	(_______________)
	(iv)   Taxes estimated to be paid by Applicant in                 respect of Measurement Period	(_______________)
	(v)   Other payments, if any, paid or to be paid                 by Applicant under tax sharing                agreements or arrangements during                Measurement Period	(_______________)
	(vi)    Net Amount (lines (i) + minus lines (iii) +                 (iv) + (v))	_______________
	(C)   Cash Available:         Add lines 1(a) and l(b)(v)	$_______________
(2)	Cash Uses:
	(a)   Interest Expense incurred during the         Measurement Period	$_______________

_________________
1 Other than each Insurance Subsidiary that is a Subsidiary of another Insurance Subsidiary and determined as if the four fiscal quarters measured constitute a fiscal year for regulatory purposes.

2 The four fiscal quarters immediately preceding the Measurement Date.

E-1-5

	(b)   Operating, expenses paid by the Applicant         during the Measurement Period	_________________
	(c)   Dividends paid by the Applicant during the         Measurement Period	_________________
	(d)   Cash Uses:         Add lines 2(a), 2(b) and 2(c)	$
(3)	Cash Coverage Ratio:
	Divide line l(c) by line 2(d)	___ to 1.0

F-1

PMA CAPITAL CORPORATION EXHIBIT E-2

FORM OF COMPLIANCE CERTIFICATE
(Statutory Financial Statements)

        THIS CERTIFICATE is given pursuant to Section 5.3(a) of the Letter of Credit Agreement, dated as of ________________, 2001 (as amended, modified or supplemented from time to time, the “Agreement,” the terms defined therein being used herein as therein defined), by and among PMA Capital Corporation (the “Applicant”), the Banks party thereto and Fleet National Bank, as Agent and Issuing Bank.

        The undersigned hereby certifies that:⁴

               1) He is [the duly appointed chief financial officer of the Applicant] [a duly appointed vice president of the Applicant having significant responsibility for financial matters].

               2) Enclosed with this Certificate are copies of the financial statements of the Applicant and its Subsidiaries as of __________, and for the [__________-month period] [year] then ended, required to be delivered under Section [5.2(a)] [5.2(b)]of the Agreement. Such financial statements have been prepared in accordance with Statutory Accounting Principles and present fairly the financial condition of the Applicant and its Subsidiaries on a consolidated basis as of the date indicated and the results of operations of the Applicant and its Subsidiaries on a consolidated basis for the period covered thereby.

               3) Attached to this Certificate as Attachment A is a Covenant Compliance Worksheet reflecting the computation of the financial covenants set forth in Sections 6.3 and 6.4 of the Agreement as of the last day of the period covered by the financial statements enclosed herewith.

        IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate as of the ________ day of _______________, ____.

[signature]

Name:

Title:

_________________
4 Insert applicable bracketed language throughout the Certificate.

F-2

ATTACHMENT A

TO STATUTORY COMPLIANCE CERTIFICATE

COVENANT COMPLIANCE WORKSHEET

Statutory Surplus (Section 6.3 of the Agreement):		Not less than $450,000,000
(1)	Statutory Surplus of each Insurance Subsidiary1 as of (the "Measurement Date"):
	(a)   PMACIC	$_________________
	(b)   Other Insurance Subsidiaries legally domiciled in         the United States2	$_________________
	(c)   [Other Insurance Subsidiaries not legally domiciled         in the United States3]2	$_________________
(2)	Consolidated Statutory Surplus -- Sum of lines in item (1)	$_________________

1. Do not include any Insurance Subsidiary whose Statutory Surplus is included in the Statutory Surplus of another Insurance Subsidiary.

2. List each such Insurance Subsidiary individually.

3. Include the shareholders’ equity of such Insurance Subsidiary as determined in accordance with Generally Accepted Accounting Principles (without regard to the requirements of Statement of Financial Accounting Standards No. 115 issues by the Financial Accounting Standards Board).

F-3

ATTACHMENT A
TO STATUTORY COMPLIANCE CERTIFICATE

COVENANT COMPLIANCE WORKSHEET

Risk-Based Capital (Section 6.4 of the Agreement):1		For each Insurance Subsidiary, as   appropriate, line (a) to be not less   than line (d)
(1)	PMACIC
	(a)   Total adjusted capital as of the         Measurement Date	$_________________
	(b)   Company Action Level RBC2 as of the         Measurement Date	$_________________
	(c)   Required Multiple	150%
	(d)   Required total adjusted capital as of the         Measurement Date:         Multiply Line l(b) by l(c)	$_________________
(2)	Other Insurance Subsidiaries3
	(a)   Total adjusted capital as of the         Measurement Date	$_________________
	(b)   Company Action Level RBC2 as of the         Measurement Date	$_________________
	(c)   Required Percentage3:	120%
	(D)   Required total adjusted capital as of the         Measurement Date:         Multiply Line 3(b) by 3(c)	$_________________

_________________
1 To be calculated and submitted annually.
2 As defined by the Risk-Based Capital for Insurers Model Act of the NAIC.
3 Complete different schedule for each Insurance Subsidiary required by the relevant Insurance Regulatory Authority to meet any RBC requirements.

F-4

PMA CAPITAL CORPORATION EXHIBIT F

FORM OF FINANCIAL CONDITION CERTIFICATE

        THIS FINANCIAL CONDITION CERTIFICATE is delivered pursuant to Section 3.1 (a)(iv) of the Letter of Credit Agreement, dated as of ________________, 2001 (the “Agreement”), by and among PMA Capital Corporation, a Pennsylvania corporation (the “Applicant”), the Banks party thereto and Fleet National Bank, as Agent and as Issuing Bank. Capitalized terms used herein without definition shall have the meanings given to such terms in the Agreement.

        The undersigned hereby certifies for and on behalf of the Applicant as follows:

               1. Capacity. The undersigned is, and at all pertinent times mentioned herein has been, the Applicant’s duly qualified and acting chief financial officer (and in such capacity has responsibility for the management of the Applicant’s financial affairs) and senior accounting officer (and in such capacity has responsibility for the preparation of the Applicant’s financial statements). The undersigned has, together with other officers of the Applicant, acted on behalf of the Applicant in connection with the negotiation and consummation of the Agreement and the transactions contemplated thereby.

               2. Procedures. For purposes of this certificate, the undersigned, or officers or other personnel of the Applicant under the direction and supervision of the undersigned, have, as of or prior to the date hereof, undertaken the following activities in connection herewith:

               a) The undersigned has carefully reviewed the following:

i) the contents of this certificate;

ii) the Agreement (including the exhibits and schedules thereto); and

iii) the audited consolidated balance sheets of the Applicant for the fiscal years ended December 31, 1998, 1999, and 2000 and the related consolidated statements of income, comprehensive income and cash flows of the Applicant for the three-year period ended December 31, 2000, each audited by PricewaterhouseCoopers, LLP (successor by merger to Coopers and Lybrand, LLP) .

               b) With respect to any Contingent Obligations of the Applicant, the undersigned:

i) has inquired of certain officers and other personnel of the Applicant who have responsibility for the legal, financial and accounting affairs of the Applicant, as to the existence and estimated amounts of all Contingent Obligations known to them;

F-5

ii) has confirmed with senior officers of the Applicant that, to the best of such officers knowledge, (i) all appropriate items have been included in the Contingent Obligations made known to the undersigned in the course of the inquiry of the undersigned in connection herewith, and (ii) the amounts relating thereto were the maximum estimated amounts of liability reasonably likely to result therefrom as of the date hereof, and

iii) confirms that, to the best of his knowledge, all material Contingent Obligations that may arise from any pending litigation, asserted claims and assessments, guarantees, uninsured risks, and other Contingent Obligations of the Applicant have been considered in making the certification set forth herein, and with respect to each such Contingent Obligation the estimable maximum estimated of liability with respect thereto was used in making such certification.

               c) In connection with the preparation for consummation of the transactions contemplated by the Agreement, the undersigned has caused the preparation of and has reviewed projected financial statements consisting of balance sheets and statements of income of the Applicant giving effect to the transactions contemplated by the Agreement. The assumptions upon which such projections are based were, in the opinion of the undersigned, reasonable when made and continue to be reasonable as of the date hereof, subject to the uncertainties and approximations inherent in any projections.

               d) The undersigned has inquired of certain officers of the Applicant having responsibility for financial reporting and accounting matters regarding whether such persons were aware of any events or conditions that, as of the date hereof, would cause the statements made in Section 3 below to be untrue.

               e) The undersigned has conferred with counsel to the Applicant for the purpose of discussing the meaning of the contents of this Certificate (including, without limitation, Sections 3(a), 3(c) and 3(d) below).

               3. Certifications. Based on the foregoing, the undersigned hereby certifies as follows:

               a) The Applicant is not now, nor will consummation of the transactions contemplated by the Agreement and the incurrence of the Obligations under the Agreement render the Applicant, “insolvent” (as hereinafter defined). The undersigned understands that, in this context, “insolvent” means that the present fair saleable value of assets is less than the amount that will be required to be paid on or in respect of the existing debts and other liabilities as such debts and liabilities of the Applicant mature. The undersigned understands that the term “debts” includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent, including any guaranty obligations. A valuation of the Applicant, on the basis thereof, with reasonable allowance for error, would reflect the net worth of the

F-6

Applicant in the aggregate (excess of fair value of assets over liabilities) as not less than $__________.

               b) After giving effect to the transaction contemplated by the Agreement, all accounts and other liabilities of the Applicant are current and not past due.

               c) The undersigned believes that, by incurring the Obligations pursuant to the Agreement, the Applicant will not incur debts beyond its ability to pay as such obligations mature (taking into account the timing and amounts of cash to be payable on or in respect of the Applicant’s Indebtedness). The foregoing conclusion is based in part on the projections, which demonstrate that the cash flow of the Applicant, after taking into account all anticipated uses of the cash of the Applicant, will at all times be sufficient to pay all amounts on or in respect of Indebtedness of the Applicant when such amounts are required to be paid (including without limitation, scheduled payments pursuant to the Agreement).

               d) As of the date hereof, the consummation of the transactions contemplated by the Agreement will not leave the Applicant with “unreasonably small capital” within the meaning of Section 548(a) of the Bankruptcy Code or with remaining assets that are unreasonably small. In reaching this conclusion, the undersigned understands that “unreasonably small capital” depends upon the nature of the particular business or businesses conducted or to be conducted, and has reached this conclusion based on the needs and anticipated needs for capital of the businesses conducted or anticipated to be conducted by the Applicant in light of the Applicant’s available credit capacity.

               e) The Applicant has not executed the Agreement, or any documents mentioned herein, or made any transfer or incurred any obligations thereunder, with intent to hinder, delay or defraud either present or future creditors of the Applicant.

               f) The undersigned understands that the Banks have performed their own review and analysis of the financial condition of the Applicant, but that the Banks are relying on the foregoing statements in connection with the extension of credit to the Applicant pursuant to the Agreement.

        Executed this ____ day of ______________, 2001.

___________________________________
Chief Financial Officer
PMA Capital Corporation

G-1

PMA CAPITAL CORPORATION EXHIBIT G

MATTERS TO BE COVERED IN OPINIONS OF COUNSEL TO THE APPLICANT

        1. Each of the Applicant and its Material Subsidiaries is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the nature of its business or the ownership of its properties requires it to be so qualified, except where the failure to be so qualified would not have a Material Adverse Effect.

        2. Each of the Applicant and its Material Subsidiaries has the full corporate power and authority to execute, deliver and perform the Credit Documents to which it is a party, to own and hold its property and to engage in its business as presently conducted.

        3. The Applicant and each Co-Applicants have taken all necessary corporate action to execute, deliver and perform each Credit Document, and each Credit Document has been validly executed and delivered by, and constitutes the legal, valid and binding obligation of the Applicant, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting creditors’ rights generally or by general equitable principles which may limit rights of acceleration, self-help and the availability of equitable remedies, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law).

        4. No consent, approval, authorization, exemption or other action by, notice to, or declaration or filing with, any governmental or regulatory authority of the United States or the Commonwealth of Pennsylvania is required in connection with the due execution, delivery and performance by the Applicant of the Credit Documents, the legality, validity or enforceability thereof or the consummation of the transactions contemplated thereby.

        5. The execution, delivery and performance by the Applicant and each Co-Applicant of the Credit Documents, and compliance by it therewith, do not and will not (i) violate any provision of its certificate of incorporation or bylaws, (ii) contravene any provisions of any applicable law, rule or regulation or, to the best of such counsel’s knowledge, any judgment, order, writ, injunction or decree to which it is subject, (iii) to the best of such counsel’s knowledge, conflict with, result in a breach of or constitute (with notice, lapse of time or both) a default under any material indenture, agreement or other instrument to which it is a party, by which it or any of its properties is bound or to which it may be subject, or (iv) result in the creation or imposition of any Lien (except for Permitted Liens) arising under any of the documents or instruments referred to in clause (iii), upon any property or assets of the Applicant and each Co-Applicant; provided, however, in the case of (ii), (iii) and (iv) herein, where to do so would not have a Material Adverse Effect.

G-2

        6. To the best of such counsel’s knowledge, there are no actions, investigations, suits or proceedings pending or threatened, at law, in equity or in arbitration, before any court, other Governmental Authority or other Person, against or affecting the Applicant and its Subsidiaries or any of their respective properties that, if adversely determined, would be reasonably likely to have a Material Adverse Effect.

        7. Neither the Applicant nor any of its Subsidiaries is an “investment company,” a company controlled by an “investment company,” or an “investment advisor,” within the meaning of the Investment Company Act of 1940, as amended.

        8. Neither the Applicant nor any of its Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and the consummation of the transactions contemplated by the Agreement will not violate Regulations T, U or X of the Board of Governors of the Federal Reserve System.

        9. The provisions of the Pledge Agreement are effective to create an enforceable security interest in favor of the Agent (for the benefit of the Banks) in the Collateral (as defined in the Pledge Agreement). Upon the execution and delivery of the Control Agreements among the Applicant, the Co-Applicants, the Agent and the Custodian (as defined in the Pledge Agreement), dated as of _________________, 2001, the Agent will have a perfected security interest in and to the Collateral in the Securities Accounts (as defined in the Pledge Agreement) under Division 9 of the Uniform Commercial Code (the “UCC”).

H-1

PMA CAPITAL CORPORATION EXHIBIT H

FORM OF EXTENSION REQUEST

               EXTENSION REQUEST (this “Extension Request”), dated as of __________ __, 200__, made by PMA CAPITAL CORPORATION, a Pennsylvania corporation (the “Applicant”) pursuant to the Letter of Credit Agreement, dated as of ________________, 2001, by and among the Applicant, the Banks party thereto and FLEET NATIONAL BANK, in its capacity as Agent and as Issuing Bank (as time amended, supplemented or otherwise modified from time to time, the “Agreement”).

RECITALS

               A. Capitalized terms used herein which are not defined herein and which are defined in the Agreement shall have the same meanings as therein defined.

               B. Section 2.6 of the Agreement provides that so long as no Default or Event of Default shall exist and be continuing, the Applicant may request that the Termination Date be extended for a period of 364 days by delivering an Extension Request to the Agent.

               C. Section 2.6 of the Agreement further provides that if each Bank consents to an Extension Request during the Extension Consent Period by giving written notice thereof to the Agent, then effective on the first day of the Extension Consent Period, the then applicable Termination Date shall be extended by 364 days.

               D. As of the date hereof, the Termination Date (without giving effect to the extension requested hereby) is November __, 200_.

               E. The Applicant desires that the Termination Date be extended for an additional period of 364 days and the Banks signing below desire to consent thereto.

               In consideration of the premises, and the terms and conditions herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

        1. Pursuant to Section 2.6 of the Agreement, the Applicant hereby requests that the Termination Date be extended for an additional period of 364 days.

        2. The Applicant hereby represents and warrants to the Agent, the Co-Agent, the Issuing Bank and each Bank that no Default or Event of Default exists and is continuing.

        3. Each Bank signing below hereby consents to this Extension Request.

        4. Subject to receipt by the Agent during the Extension Consent Period of a counterpart of this Extension Request signed by each Bank (or a replacement bank pursuant to

H-2

Section 2.15), then effective on the first day of such Extension Consent Period, the then applicable Termination Date shall be extended by 364 days.

        5. This instrument may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one instrument. It shall not be necessary in making proof of this instrument to produce or account for more than one counterpart signed by the party to be charged.

        6. This instrument is being delivered in and is intended to be performed in the Commonwealth of Massachusetts and shall be construed and enforceable in accordance with, and be governed by, the internal laws of the Commonwealth of Massachusetts without regard to principles of conflict of laws.

               IN WITNESS WHEREOF, each of the parties has caused this Extension Request to be executed by its duly authorized officer as of the date and year first written above.

PMA CAPITAL CORPORATION

By:

Name:

Title:

FLEET NATIONAL BANK,
Individually and as Agent and Issuing Bank

By:

Name:

Title:

EX-10

PLEDGE AND SECURITY AGREEMENT

        This Pledge and Security Agreement, dated as of December 4, 2001, made by and among PMA CAPITAL CORPORATION, a Pennsylvania corporation (the “Applicant”), each subsidiary of the Applicant which is or may become a party hereto (each individually a “Co-Applicant” and collectively the “Co-Applicants” and together with the Applicant, each individually a “Pledgor” and collectively the “Pledgors”), and FLEET NATIONAL BANK, as agent (in such capacity, the “Agent”) for the banks and other financial institutions (collectively, the “Banks”) parties to the Credit Agreement (as defined below).

W I T N E S S E T H :

        WHEREAS, the Pledgors, the Banks and the Agent have entered into a Letter of Credit Agreement, dated December 4, 2001 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”);

        WHEREAS, pursuant to the provisions of the Credit Agreement and upon the terms and subject to the conditions set forth therein, Fleet National Bank (in such capacity, the “Issuing Bank”) has agreed to issue Letters of Credit for the account of the Borrower thereunder; and

        WHEREAS, it is a condition precedent to the obligation of the Issuing Bank to issue Letters of Credit for the account of the Applicant and/or Co-Applicants under the Credit Agreement that the Pledgors shall have executed and delivered this Pledge Agreement to the Agent for the ratable benefit of the Issuing Bank and the Banks to secure the due and punctual payment of the Obligations.

        NOW, THEREFORE, in consideration of the premises and to induce the Issuing Bank to issue Letters of Credit for the account of the Borrower under the Credit Agreement, the Pledgors hereby agree with the Agent as follows:

        1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein are so used as so defined, and the following terms shall have the following meanings:

     “Code” means the Uniform Commercial Code from time to time in effect in the Commonwealth of Massachusetts.

     “Collateral” shall have the meaning set forth in Section 2.

     “Control Agreement” shall mean individually and “Control Agreements” shall mean collectively each Control Agreement from time to time in effect among one or more of the Pledgors, the Agent and the Custodian, as replaced, amended, supplemented or otherwise modified from time to time.

     “Custodian” shall have the meaning set forth in Section 2.

-2-

     “Obligations” means all of the obligations and liabilities of the Pledgors and the other Credit Parties under the Credit Documents, including, without limitation, reimbursement obligations (whether absolute or contingent) with respect to any Letter of Credit and all obligations (including, without limitation, any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to any of the Pledgors or other Credit Parties, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) in respect of fees, expenses and other amounts payable under any Credit Document, in each case whether fixed, contingent, now existing or hereafter arising, created, assumed, incurred or acquired.

     “Pledge Agreement” means this Pledge and Security Agreement, as amended, supplemented or otherwise modified from time to time.

     “Securities Account” and “Securities Accounts” shall have the meanings set forth in Section 2.

        2. Pledge; Grant of Security Interest. In order to induce the Issuing Bank to issue Letters of Credit and as security for the Obligations, each of the Pledgors hereby jointly and severally grants a security interest in and pledges to the Agent, for the ratable benefit of the Issuing Bank and the Banks, all of such Pledgor’s present or future right, title and interest in and to the applicable Securities Account titled in the names of such Pledgor and one or more other Pledgors (each a “Securities Account” and collectively, the “Securities Accounts”) with Fleet National Bank (in such capacity, the “Custodian”) described on Exhibit A attached hereto and made a part hereof and in any and all of the property and assets, including, without limitation, the assets referred to in clauses (a) and (b) below, but only to the extent held in or registered or credited to the Securities Accounts (all such property and assets being collectively referred to as the “Collateral”):

               a. all of the securities and other investment property and security entitlements with respect thereto and financial assets now or hereafter owned (whether in certificated or book-entry form or otherwise, and whether any such investment property, security entitlements or financial assets are based on securities, general intangibles or other property) by such Pledgor or in which such Pledgor now has or at any time in the future may acquire any right, title or interest, including, without limitation all (i) time deposits issued by Fleet National Bank, repurchase agreements, money market funds and asset management accounts, (ii) securities commonly known as “commercial paper”, (iii) government securities defined as obligations of the United States Treasury and issues of United States agencies quoted daily in The Wall Street Journal or (iv) bonds issued by municipalities of the United States or corporate bonds; all of the certificates and/or instruments (if any) representing or evidencing such securities or such other property; and all cash, securities dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed or distributable in the future in respect of or in exchange for any of all such securities or other property,

               b. any and all other property of such Pledgor now or hereafter owned, or in which such Pledgor may have or in the future may acquire an interest, in the possession or control

-3-

of the Agent or any third party acting on its behalf (including without limitation the Custodian), or otherwise, including but not limited to (i) any deposit or other balance of account standing to the credit of such Pledgor on the books of the Agent, regardless of whether for the express purpose of being used by the Agent as collateral security or for safekeeping or for any other or different purposes, including property in transit or covered or affected by documents in the Agent’s possession or control, (ii) rights to receive any security, interests or other property, (iii) all cash and cash equivalents and all interest and other income therefrom and (iv) all books and records pertaining to any of the property referred to in this Section 2, and

               c. the proceeds and accessions and all collateral security and guarantees given by any person with respect to any of the property described in clauses (a) and (b) above, whether now or hereafter owned by such Pledgor or in which such Pledgor now has or at any time in the future may acquire any interest.

        3. Representations and Warranties. Each of the Pledgors hereby represents and warrants to the Agent and the Banks that:

     a. such Pledgor is the entitlement holder of the Collateral that is held in the Securities Accounts and there are no restrictions on the pledge or transfer of any of the Collateral;

     b. all the Collateral, where applicable, has been duly and validly issued and is fully paid and nonassessable;

     c. except for the pledge and security interest granted hereby or subordinate liens of the Custodian permitted by the applicable Control Agreement, (i) the Collateral is free and clear of any security interests, pledges, liens, encumbrances, charges, agreements, claims or other arrangements or restrictions of any kind, and (ii) such Pledgor will not incur, create, assume or permit to exist any pledge, security interest, lien, charge or other encumbrance of any nature whatsoever on any of the Collateral or assign, pledge or otherwise encumber any right to receive income from the Collateral;

     d. the chief executive office of such Pledgor is set forth on Schedule I hereto;

     e. such Pledgor has the right to transfer the Collateral free of any encumbrances and such Pledgor will defend such Pledgor’s title to the Collateral against the claims of all persons, and any registration with, or consent or approval of, or other action by, any federal, state or other governmental authority or regulatory body which was or is necessary for the validity of the pledge of and grant of the security interest in the Collateral has been obtained; and

     f. the pledge of and grant of the security interest in the Collateral under this Pledge Agreement, together with the execution of the applicable Control Agreement by the parties thereto, is effective to vest in the Agent for the ratable benefit of the Issuing Bank and

-4-

the Banks a valid and perfected first priority security interest in and to the Collateral as set forth herein enforceable against all creditors of such Pledgor.

        4. Covenants. The Pledgors shall maintain, or cause the Custodian to maintain, at all times in the Securities Accounts as financial assets (within the meaning of the Code), sufficient Eligible Collateral to meet the requirements of Section 2.14 of the Credit Agreement. Except as set forth in Section 7 hereof or in the Control Agreement, no withdrawal of Collateral from the Securities Accounts shall be permitted or made without the prior written consent of the Agent. The obligations of the Pledgors hereunder shall remain full force and effect without regard to, and shall not be impaired by (i) any exercise or nonexercise, or any waiver, by the Agent of any right, remedy, power or privilege under or in respect of any of the Obligations or any security therefor (including this Agreement); (ii) any amendment to or modification of the Credit Agreement, the other Credit Documents or any of the Obligations; (iii) any amendment to or modification of any instrument (other than this Agreement) securing any of the Obligations, including, without limitation, any of the Credit Documents; or (iv) the taking of additional security for, or any other assurances of payment of, any of the Obligations or the release or discharge or termination of any security or other assurances of payment or performance for any of the Obligations; whether or not the Pledgors shall have notice or knowledge of any of the foregoing, the Pledgors hereby generally waiving all suretyship defenses to the extent applicable.

        5. Default; Remedies.

               5.1. If any of the following occur (each an “Event of Default”): (i) any Event of Default under the Credit Agreement or any other Credit Document, (ii) the failure by any of the Pledgors to perform any of its obligations hereunder, (iii) the falsity, inaccuracy or material breach by any of the Pledgors of any covenant, warranty, representation or statement made or furnished to the Agent by or on behalf of such Pledgor, (iv) the failure of the Agent to have a perfected first priority security interest in the Collateral (other than to the extent caused solely by the action or inaction of the Agent), (v) any restriction is imposed on the pledge or transfer of any of the Collateral after the date of this Agreement without the prior written consent of the Agent, or (vi) the breach of any of the Control Agreements, or receipt of notice of termination of any of the Control Agreements if no successor custodian reasonably acceptable to the Agent has executed a replacement Control Agreement, then the Agent is authorized in its discretion to exercise any one or more of the rights and remedies granted pursuant to this Pledge Agreement or given to a secured party under the Code or otherwise at law or in equity, including without limitation the right to sell or otherwise dispose of any or all of the Collateral at public or private sale, with or without advertisement thereof, upon such terms and conditions as it may deem advisable and at such prices as it may deem best.

               5.2. (a) At any bona fide public sale, and to the extent permitted by law, at any private sale, the Agent or any Bank shall be free to purchase all or any part of the Collateral, free of any right or equity of redemption in the Pledgors, which right or equity is hereby waived and released. Any such sale may be on cash or credit. The Agent will not be obligated to make any sale if it determines not to do so, regardless of the fact that notice of the sale may have been given. The Agent may adjourn any sale and sell at the time and place to which the sale is adjourned. If the Collateral is customarily sold on a recognized market or threatens to decline speedily in value, the

-5-

Agent may sell such Collateral at any time without giving prior notice to the Pledgors. Whenever notice is otherwise required by law to be sent by the Agent to the Pledgors of any sale or other disposition of the Collateral, five (5) days written notice sent to the Pledgors at the address specified on Schedule I hereto will be reasonable. The Agent may buy any part or all of the Collateral at any public sale and, with respect to any part or all of the Collateral that is of a type customarily sold in a recognized market or is of the type which is the subject of widely-distributed standard price quotations, the Agent may buy at private sale and may make payments thereof by any means.

               (b) The Pledgors recognize that the Agent may be unable to effect or cause to be effected a public sale of the Collateral by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the “Act”), so that the Agent may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obligated to agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgors understand that private sales so made may be at prices and on other terms less favorable to the seller than if the Collateral were sold at public sales, and agrees that the Agent has no obligation to delay or agree to delay the sale of any of the Collateral for the period of time necessary to permit the issuer of the securities which are part of the Collateral (even if the issuer would agree), to register such securities for sale under the Act. The Pledgors agree that private sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner.

               5.3. The net proceeds arising from the disposition of the Collateral as provided herein, after deducting expenses incurred by the Agent will be applied to the Obligations and the costs and expenses incurred by the Agent in enforcing this Pledge Agreement in the order determined by the Agent. If any excess remains after the discharge of all of the Obligations, the same will be paid to the Pledgors. If after exhausting all of the Collateral there is a deficiency, the Pledgors will be liable therefor to the Agent and the Banks; provided, however, that nothing contained herein will obligate the Agent to proceed against any other party obligated under the Obligations or against any other collateral for the Obligations prior to proceeding against the Collateral.

               5.4. If any demand is made at any time upon the Agent or any Bank for the repayment or recovery of any amount received by it in payment or on account of any of the Obligations or such Bank from the disposition of the Collateral and if the Agent or such Bank repays all or any part of such amount, the Pledgors will be and remain liable for the amounts so repaid or recovered to the same extent as if never originally received by the Agent or such Bank.

        6. Voting Rights and Entitlement Orders.

     a. Prior to the occurrence of an Event of Default, notwithstanding anything in the Control Agreements to the contrary, (i) the Agent shall not issue any entitlement orders or other instructions to the Custodian with respect to the Securities Accounts or the Collateral (except in connection with withdrawals from the Securities Accounts requested by the Pledgors and approved by the Agent) and (ii) the Pledgors will have the right to exercise all voting and consensual rights with respect to the Collateral.

-6-

     b. At any time after the occurrence of an Event of Default, the Agent may issue such entitlement orders and instructions as it may in its discretion elect, may transfer any or all of the Collateral into its name or that of its nominee and may exercise all voting rights with respect to the Collateral, but no such transfer shall constitute a taking of such Collateral in satisfaction of any or all of the Obligations unless the Agent expressly so indicates by written notice to the Pledgors.

        7. Dividends, Distributions, Interest and Premiums. Prior to the occurrence of any Event of Default, notwithstanding anything in the Control Agreements to the contrary, the Pledgors will have the right to withdraw from the Securities Accounts and receive free and clear of the Agent’s security interest hereunder (i) all cash dividends, distributions, interest and premiums declared and paid on the Collateral and (ii) any portion of the Collateral if the Discounted Collateral Value is greater than 105% of the Letter of Credit Exposure (as defined in the Credit Agreement) all as more fully set forth in Section 2.14 of the Credit Agreement. Prior to the occurrence of any Event of Default, notwithstanding anything in the Control Agreements to the contrary, the Pledgors shall be permitted to make substitutions of Collateral provided that the Discounted Collateral Value of the Collateral is at least equal to that of the Collateral for which it is substituted. At any time after the occurrence of an Event of Default, no such withdrawal or substitution shall be permitted and the Agent shall be entitled to receive all cash or stock dividends, distributions, interest and premiums declared or paid on the Collateral, all of which shall be subject to the Agent’s rights under Section 5 above. In the event any additional shares are issued to any of the Pledgors as a stock dividend or in lieu of interest on any of the Collateral, as a result of any split of any of the Collateral, by reclassification or otherwise, any certificates evidencing any such additional shares will be immediately delivered to the Custodian and such shares will be subject to this Pledge Agreement and a part of the Collateral to the same extent as the original Collateral.

        8. Securities Account. Each of the Pledgors agrees to cause the Custodian to execute and deliver, contemporaneously herewith, the appropriate Control Agreement in order to protect the Agent's security interest in the Securities Accounts and the Collateral.

        9. Further Assurances. At any time and from time to time, upon demand of the Agent, each of the Pledgors will give, execute, file and record any notice, financing statement, continuation statement, instrument, document or agreement that the Agent may consider necessary or desirable to create, preserve, continue, perfect or validate any security interest granted hereunder or to enable the Agent to exercise or enforce its rights hereunder with respect to such security interest. Without limiting the generality of the foregoing, each of the Pledgors hereby irrevocably appoints the Agent as such Pledgor’s attorney-in-fact to do all acts and things in such Pledgor’s name that the Agent may deem necessary or desirable to perfect or enforce its security interest hereunder. This power of attorney is coupled with an interest with full power of substitution and is irrevocable. The Agent is authorized at any time and from time to time to file financing statements, continuation statements and other documents under the Code relating to the Collateral without such Pledgor’s signature, naming such Pledgor as debtor and the Agent as secured party. The Agent is further authorized at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that contain any information

-7-

required by part 5 of Article 9 of the Uniform Commercial Code of the jurisdiction of the filing office for the sufficiency or filing office acceptance of any financing statement or amendment, including whether any Pledgor is an organization, the type of organization and any organization identification number issued to such Pledgor. Each Pledgor agrees to furnish any such information to the Agent promptly upon request.

        10. Limitation on Duties Regarding Collateral. The Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Agent deals with similar securities and property for its own account. Neither any holder of any Obligation nor any of its respective directors, officers, employees or agents shall be liable for any failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgors or otherwise.

        11. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest.

        12. Severability. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provisions in any other jurisdiction.

        13. Section Headings. The section headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

        14. No Waiver; Cumulative Remedies. No holder of any Obligation shall by any act (except by a written instrument pursuant to Section 16 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any default of any obligation under any Loan Document or in any breach of any of the terms and conditions hereof or thereof. No failure to exercise, nor any delay in exercising, on the part of any holder of any Obligation of any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by any holder of any Obligation of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law.

        15. Waivers and Amendments; Successors and Assigns; Governing Law. None of the terms or provisions of this Pledge Agreement may be amended, supplemented or otherwise modified except by a written instrument executed by the Pledgors and the Agent, provided that any provision of this Pledge Agreement may be waived by the Agent in a letter or agreement executed by the Agent or by telex or facsimile transmission from the Agent. This Pledge Agreement shall be binding

-8-

upon the respective heirs, administrators, successors and assigns of the Pledgors and shall inure to the benefit of the holder of the Obligations and their respective successors and assigns. THIS PLEDGE AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.

        16. Notices. All notices hereunder to the Agent or the Pledgors to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given when delivered or sent in the manner and to the respective addresses as provided in the Credit Agreement.

        17. Irrevocable Authorization and Instruction. Each of the Pledgors hereby authorizes and instructs the Custodian to comply with any instruction received by it from the Agent in writing that (a) states that an Event of Default has occurred and is continuing and (b) is otherwise in accordance with the terms of this Pledge Agreement or the Control Agreement, without any other or further instructions from such Pledgor, and such Pledgor agrees that the Custodian shall be fully protected in so complying. Each of the Pledgors hereby instructs the Custodian to mark its records to reflect the pledge of the Collateral and to take such other action as may be required or customary to effect or evidence the pledge of the Collateral made and intended to be made pursuant to this Pledge Agreement.

        18. Authority of Agent. Each of the Pledgors acknowledges that the rights and responsibilities of the Agent under this Pledge Agreement with respect to any action taken by the Agent or the exercise or non-exercise by the Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Pledge Agreement shall, as between the Agent and the Banks, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Agent and such Pledgor, the Agent shall be conclusively presumed to be acting as the holder of the Obligations and on behalf of the Banks with full and valid authority so to act or refrain from acting, and neither such Pledgor nor any Issuer shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

        19. Termination. Upon satisfaction in full of all Obligations, this Agreement shall terminate automatically and the Agent shall deliver such notice thereof to the Custodian as may be required or permitted by the Control Agreements (a) advising that all of the Obligations secured by the Collateral have been satisfied and (b) instructing the Custodian to release the Collateral. The Agent shall execute such documents as may be necessary to evidence the termination of this Agreement.

        20. Submission to Jurisdiction; Waivers.

     a. Each of the Pledgors hereby irrevocably and unconditionally:

-9-

     (i) submits for itself and its property in any legal action or proceeding relating to this Pledge Agreement, or for recognition and enforcement of any judgment in respect thereof to the non-exclusive general jurisdiction of the courts of the Commonwealth of Massachusetts, the courts of the State of Connecticut, the courts of the State of Connecticut, the courts of the United States of America in Massachusetts or Connecticut, and appellate courts from any thereof;

     (ii) consents that any such action or proceeding may be brought in such courts, and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;

     (iii) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Pledgor at its address set forth in Schedule I hereto or at such other address of which the Agent shall have been notified;

     (iv) waives and hereby acknowledges that it is estopped from raising any objection based on forum non conveniens, any claim that any of the above-referenced courts lack proper venue or any objection that any of such courts lack personal jurisdiction over it so as to prohibit such courts from adjudicating any issues raised in a complaint filed with such courts against such Pledgor concerning this Pledge Agreement;

     (v) acknowledges and agrees that the choice of forum contained in this paragraph shall not be deemed to preclude the enforcement of any judgment obtained in any forum or the taking of any action under this Pledge Agreement to enforce the same in any appropriate jurisdiction;

     (vi) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary or punitive or consequential damages; and

     (vii) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction.

     (b) EACH OF THE PLEDGORS IRREVOCABLY WAIVES ANY AND ALL RIGHT THE PLEDGOR MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS PLEDGE AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS PLEDGE AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. EACH OF THE PLEDGORS ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.

-10-

        IN WITNESS WHEREOF, the undersigned have caused this Pledge Agreement to be duly executed and delivered as of the date first above written.

PMA CAPITAL CORPORATION
By:	/s/ Francis W. McDonnell
Name:	Francis W. McDonnell
Title:	Senior Vice President, Chief Financial Officer & Treasurer
PMA CAPITAL INSURANCE COMPANY
By:	/s/ Albert D. Ciavardelli
Name:	Albert D. Ciavardelli
Title:	Vice President & Treasurer
PENNSYLVANIA MANUFACTURERS' ASSOCIATION INSURANCE COMPANY
By:	/s/ William E. Hitselberger
Name:	William E. Hitselberger
Title:	Senior Vice President, Chief Financial Officer & Treasurer
FLEET NATIONAL BANK, as Agent
By:	/s/ Anita M. Presmarita
Name:	Anita M. Presmarita
Title:	Vice President

EXHIBIT A TO
PLEDGE AND SECURITY AGREEMENT

With respect to the following accounts:

Securities Account Number and Title:	# 0002575180 - Account of PMA Capital Insurance Company for the benefit of Fleet National Bank, as agent and secured party
Securities Account Number and Title:	# 0002576980 - Account of Pennsylvania Manufacturers' Association Insurance Company for the benefit of Fleet National Bank, as agent and secured party
Custodian:	Fleet National Bank

        The Securities Accounts referred to above and all assets in the Securities Accounts (including, without limitation, all financial assets) are being pledged as collateral but trading is permitted in the Eligible Collateral (as defined in the Credit Agreement referred to in the Pledge and Security Agreement). Except as expressly permitted by the terms and subject to compliance with the conditions set forth in the Pledge and Security Agreement and/or the related Control Agreements, no withdrawals may be made from the Securities Accounts without the prior written consent of the Agent as secured party.

SCHEDULE I

To Pledge Agreement

ADDRESSES OF PLEDGORS

PMA Capital Corporation Mellon Bank Center 1735 Market Street Philadelphia, Pennsylvania 19103-7590
Attention:	Francis W. McDonnell, Senior Vice President, Chief Financial Officer and Treasurer
PMA Capital Insurance Company Mellon Bank Center 1735 Market Street Philadelphia, Pennsylvania 19103-7590
Attention:	Francis W. McDonnell, Senior Vice President, Chief Financial Officer and Treasurer
Pennsylvania Manufacturers’ Association Insurance Company 380 Sentry Parkway Blue Bell, Pennsylvania 19422-0754
Attention:	William Hitselberger, Senior Vice President, Chief Financial Officer and Treasurer

EX-10

FORM OF CONTROL AGREEMENT

December 4, 2001

Fleet National Bank, as Custodian
777 Main Street
Hartford, CT 06103

Re: PMA Capital Corporation

Ladies and Gentlemen:

        Please be advised that PMA Capital Corporation and __________________________ (each individually, “Pledgor” and collectively, “Pledgors”) and Fleet National Bank, as agent (the “Agent”) for the banks and other financial institutions parties to the Credit Agreement (hereinafter defined), under a certain Letter of Credit Agreement dated the date hereof (the “Credit Agreement”), entered into a certain Pledge and Security Agreement dated the date hereof (the “Pledge Agreement”), pursuant to which Pledgors assigned to and granted to the Agent a security interest in and lien upon Securities Account No. 0002576980 entitled “Account of Pennsylvania Manufacturers’ Association Insurance Company for the benefit of Fleet National Bank, as agent and secured party” (the “Securities Account”) held by Fleet National Bank as Custodian (“Securities Intermediary”) under a Custody Agreement executed on or before the date hereof, and upon all Collateral (as such term is defined in the Pledge Agreement), a copy of which is attached hereto.

        In connection with the financing arrangement between Pledgors and the Agent, and in order to establish the Agent’s “control” of the Collateral under and pursuant to the Uniform Commercial Code in effect in the Governing Law State, as hereafter defined (the “UCC”), for valuable consideration and intending to be legally bound, it is hereby agreed by and among Pledgors, Securities Intermediary, and the Agent, as follows:

1. Possession of Collateral. Securities Intermediary acknowledges, represents, warrants and agrees that: (a) the Securities Account is held by Securities Intermediary in the name of the Pledgors and the Collateral is held by Securities Intermediary for Pledgors in the Securities Account, (b) Securities Intermediary is a “securities intermediary” (within the meaning of Article 8 of the UCC), (c) Pledgors’ interest as an “entitlement holder” (within the meaning of Article 8 of the UCC) of the Collateral appears on Securities Intermediary’s books and records but the Agent has dominion and control (including “control” (within the meaning of Article 8 of the UCC)) over the Securities Account and all assets therein, and (d) Securities Intermediary will treat all Collateral as “financial assets” under Article 8 of the UCC.

2. Securities Account. Securities Intermediary acknowledges that this Agreement constitutes written notification to Securities Intermediary, pursuant to Articles 8 and 9 of the UCC and applicable federal regulations for the Federal Reserve Book Entry System, of the

Agent’s security interest in the Collateral. Pledgors irrevocably direct Securities Intermediary to make all notations in the records of Securities Intermediary pertaining to the Securities Account that are necessary or appropriate to reflect the pledge described above (the “Pledge”). Securities Intermediary acknowledges and agrees that all of the Collateral is and will continue to be held by it subject to the first, perfected security interest of the Agent.

3. Disclaimer of Interest; Subordination. Securities Intermediary agrees that it has no present security interest or other lien on the Collateral, and acknowledges that it has not received notice of any other security interest in the Collateral. In the event that any such notice is received, Securities Intermediary shall promptly (within three business days) notify the Agent. Securities Intermediary hereby subordinates any lien, encumbrance or claim it may now have or may have at any time in the future against the Securities Account, or any financial or other asset credited to the Securities Account, to the security interest of the Agent.

4. No Liens on Collateral. Pledgors represent to the Agent that the Collateral is free and clear of any liens or encumbrances, and agree that no further or additional liens or encumbrances will be placed on the Collateral without the express written consent of the Agent.

5. Maintenance of the Account; Setoff and Customary Charges. Securities Intermediary agrees that unless the Agent consents, Securities Intermediary will not exercise any right of setoff, or assert any security interest or other lien against the Collateral that Securities Intermediary may have on account of any credit or other obligation owed by Pledgors or any other person. Securities Intermediary further agrees that unless the Agent consents, it will not invade the assets in the Securities Account to cover margin debts or calls in any other accounts of Pledgors. Securities Intermediary may, from time to time, debit the Securities Account for customary charges due to it for maintaining the Account that have not been separately paid or reimbursed.

6. Account Information. Pledgors irrevocably authorize and direct Securities Intermediary to send copies of all notices, statements and all other communications concerning the Securities Account to the following address or such other address as may be specified in written instructions from the Agent:

Fleet National Bank, as Agent
777 Main Street
Hartford, CT 06103
Attn: Anson T. Harris, Director

        Securities Intermediary agrees to provide to the Agent, with a duplicate copy simultaneously to Pledgors at their respective addresses set forth in the Pledge Agreement, a monthly statement of assets and a confirmation statement of each transaction effected in the Securities Account after such transaction is effected.

7. Instructions; Control. (a) Pledgors irrevocably instruct Securities Intermediary to follow instructions received from the Agent, furnished in writing, without further consent of

Pledgors, concerning: (1) the payment or reinvestment of dividends or distributions; and (2) the redemption, transfer, sale or any other disposition or transaction concerning the Collateral or the income and principal proceeds, substitutions and reinvestment thereof. Unless and until Securities Intermediary receives written notice from the Agent terminating this Agreement, Securities Intermediary agrees to honor any and all instructions from the Agent with respect to the Collateral, including any direction from the Agent to dispose of all or any portion of the Collateral at any time, without any further consent or instruction from Pledgors. Provided, however:

               (i) In accordance with Section 7 of the Pledge Agreement, Pledgors may withdraw and receive free and clear of the Agent’s security interest hereunder (i) all cash dividends, interest and premiums declared and paid on the Collateral and (ii) any portion of the Collateral if the Discounted Collateral Value (as such term is defined in the Credit Agreement) is greater than 105% of the Letter of Credit Exposure (as such term is defined in the Credit Agreement), all as more fully set forth in Section 2.14 of the Credit Agreement.

               (ii) In accordance with Section 7 of the Pledge Agreement, Pledgors may originate trading instructions to Securities Intermediary to make substitutions for and additions to the Collateral, all of which are Collateral to be held in the Securities Account subject to the Pledge in favor of the Agent.

No withdrawal of Collateral from the Securities Account by Pledgors will be permitted under any circumstances, except to the extent set forth in the Pledge Agreement. Any additional securities delivered to the Securities Account will be subject to the Pledge, without the necessity for any further documentation. Any such income or collateral substitution rights granted to Pledgors may be revoked in writing at any time solely by the Agent.

        (b) Until written instructions from the Agent are received by Securities Intermediary to the contrary, Pledgors shall be entitled to continue to give Securities Intermediary instructions as to the Collateral and as to the purchase of assets for and disposition of assets in the Securities Account. Provided, however:

               (i) Pledgors may not, without the Agent’s prior written consent, withdraw any sums or other assets from the Securities Account if the aggregate market value of the remaining Collateral would be less than the minimum value of the Collateral required by Section 2.14 of the Credit Agreement.

               (ii) Assets purchased for the Securities Account must meet the criteria of “Eligible Collateral” defined in the Credit Agreement.

        (c) To the extent permitted by applicable law, the Commonwealth of Massachusetts shall be deemed to be Securities Intermediary’s jurisdiction for the purposes of this Agreement and the perfection and priority of the Agent’s security interest in the Collateral. In the event that the Securities Intermediary no longer serves as custodian for the Collateral, the Collateral shall be transferred to a successor custodian satisfactory to the Agent and Pledgors, provided that prior

to such transfer, such successor custodian executes an agreement that is in all material respects the same as this Agreement.

8. No Consent Required; Authority of Agent. Pledgors agree that the Agent shall be entitled, for the purposes of this Agreement, at any time to give Securities Intermediary instructions as to the disposition or investment of any of the Collateral, including instructions to sell, redeem, close open trades or otherwise liquidate any assets in the account (including instructions to re-register assets held by a clearing corporation in the name of the Agent or to transfer assets to, or into an account in the name of the Agent) or as to any other matters relating to the Securities Account, without the consent of Pledgors. Securities Intermediary is directed to follow the Agent’s instructions without investigating the reason for any action taken by the Agent or the existence of any default under the Pledge Agreement (it being understood and agreed that Securities Intermediary shall have no duty or obligation whatsoever of any kind or character to have knowledge of whether or not an event of default exists under the Pledge Agreement). The Agent’s signature alone shall be sufficient authority for the exercise of any rights by the Agent and a receipt from the Agent alone will be a full release and discharge for Securities Intermediary.

9. Agreement of Securities Intermediary; Conflicting Instructions. Instructions to the Securities Intermediary shall be in writing and signed by a Vice President, Senior Vice President, Director or other senior officer of the Agent. Pledgors acknowledge and agree that Securities Intermediary shall be fully entitled to rely upon instructions from the Agent given to Securities Intermediary, even if such instructions are contrary to any instructions or demands that Pledgors may give to Securities Intermediary. In the event that conflicting instructions as to the disposition of the Collateral are at any time given by Pledgors and the Agent, Securities Intermediary agrees that it shall abide by the instructions of the Agent without consent of Pledgors.

10. Reliance on Instructions; Revocation and Amendment. Neither Securities Intermediary nor any of its respective partners, trustees, officers, employees or affiliates will be liable for complying in good faith with the instructions contained in this Agreement or failing to comply with any contrary or inconsistent instructions that may be subsequently issued by Pledgor. The instructions contained in this Agreement may be revoked and the terms of this Agreement may be amended by Pledgors only upon the receipt by Securities Intermediary of the Agent’s written consent to such revocation or amendment, or written notification to Securities Intermediary from the Agent that the Pledge has been terminated.

11. No Additional Duties; Custody Agreement. This Agreement is not intended by the parties to impose or create any obligations or duties upon Securities Intermediary greater than or in addition to the customary and usual obligations and duties of Securities Intermediary to Pledgors under the custody agreement(s), except and to the extent that Securities Intermediary shall henceforth accept instructions in connection with the Collateral as provided in this Agreement. Pledgors and the Agent acknowledge that this Agreement supplements Pledgors; existing custody agreement(s) with Securities Intermediary and in no way is this Agreement intended to abridge any rights that Securities Intermediary might otherwise have.

12. Indemnification. Pledgors hereby release Securities Intermediary from any and all liability that may arise as a result of Securities Intermediary acting in accordance with instructions from the Agent, and Pledgors agree to indemnify and hold harmless Securities Intermediary, its affiliates, officers and employees from and against any and all claims, causes of action, liabilities, lawsuits, demands and/or damages, including, without limitation, any and all court costs and reasonable attorney’s fees, that may arise as a result of Securities Intermediary acting in accordance with instructions from the Agent.

13. No Other Control Agreements. Securities Intermediary agrees that it will not enter into any agreement with any other person or entity by which Securities Intermediary is obligated to comply with instructions from such person or entity as to the disposition or other dealings with any of the Collateral. Securities Intermediary agrees, that except as otherwise directed by the Agent and as set forth in Section 5 above, not to comply with the entitlement orders, instructions or directions of any other person.

14. Bailee in Possession. Securities Intermediary agrees to hold the Securities Account and all of the contents including any free credit balances for and on behalf of the Agent as bailee in possession for the Agent.

15. Reporting of Income. All items of income including dividends, interest and other income, gain, expense and loss recognized in the Securities Account shall be reported by Securities Intermediary in the names and tax identification numbers of Pledgors.

16. Construction and Amendment; Conflict. If any term or provision of this Agreement is determined to be invalid or unenforceable, the remainder of this Agreement shall be construed in all respects as if the invalid or unenforceable term or provision were omitted. This Agreement may not be altered or amended in any manner without the express written consent of Pledgors, the Agent and Securities Intermediary. This Agreement may be executed in any number of counterparts all of which shall constitute one original agreement. In the event of a conflict between this Agreement and any other agreement between Securities Intermediary and Pledgors, the terms of this Agreement shall prevail.

17. Termination; Release of Collateral. (a) This Agreement may be terminated by Securities Intermediary upon thirty (30) days written notice to Pledgors and the Agent. Upon delivery of such notice, Securities Intermediary shall be under no further obligation except to hold the Collateral in accordance with the terms of this Agreement, pending receipt of written instructions from the Agent regarding the further disposition of the Collateral. The rights and powers granted herein to the Agent have been granted in order to perfect its security interest in the Securities Account, are powers coupled with an interest and will neither be affected by the death or bankruptcy of any Pledgor nor by the lapse of time.

        (b) This Agreement shall terminate automatically upon receipt by Securities Intermediary of written notice executed by two officers of the Agent holding titles of Vice President or higher that (i) all of the obligations secured by the Collateral have been satisfied, or

(b) all of the Collateral may be released, whichever is sooner, and Securities Intermediary shall thereafter be relieved of all duties and obligations hereunder. In addition, any notice from the Agent relating to release of all or any portion of the Collateral not otherwise permitted by this Agreement without the consent of the Agent shall be effective only if executed by two officers of the Agent holding titles of Vice President or higher.

18. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors and assigns, representatives and heirs, of the respective parties hereto and shall be construed in accordance with the laws of the Commonwealth of Massachusetts (the “Governing Law State”) without regard to its conflict of law principles and the rights and remedies of the parties shall be determined in accordance with such laws.

19. Entire Agreement. This Agreement (including the documents and instruments referred to herein) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof.

[Remainder of Page Intentionally Left Bank; Next Page is Signature Page]

        IN WITNESS WHEREOF, Pledgors, the Agent and Securities Intermediary have caused this Agreement to be executed by their duly authorized officers all as of the day first above written.

PMA CAPITAL CORPORATION

By:

Name:

Title:

By:

Name:

Title:

FLEET NATIONAL BANK, as Agent

By:

Name:

Title:

FLEET NATIONAL BANK, as Custodian

By:

Name:

Title:

EX-12

EXHIBIT 12

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(1)
(Dollar Amounts In Thousands)

		2001			2000		1999		1998		1997
EARNINGS
Pre-tax income (loss)	$	(4,416	)	$	123	$	40,092	$	55,069	$	25,153
Fixed charges		7,832			13,024		13,109		15,865		16,683
Total (a)	$	3,416		$	13,147	$	53,201	$	70,934	$	41,836
FIXED CHARGES
Interest expense and amortization of
debt discount and premium on all
indebtedness	$	6,541		$	11,889	$	12,221	$	15,009	$	15,768
Interest portion of rental expense		1,291			1,135		888		856		915
Total fixed charges (b)	$	7,832		$	13,024	$	13,109	$	15,865	$	16,683
Ratio of earnings to fixed
charges (a)/(b)		(2	)		1.0x		4.1x		4.5x		2.5x

(1) For purposes of determining this ratio, earnings represents pre-tax income (loss), which consists of income (loss) before income taxes, cumulative effect of accounting change (1999) and extraordinary loss (1997), plus fixed charges. Fixed charges include interest expense and the interest portion of rent expense.

(2) Earnings were insufficient to cover fixed charges by $4.4 million in 2001.

EX-13

P M A  C A P I T A L

Selected Financial Data

(dollar amounts in thousands, except per share data)	2001(1)		2000(1)		1999			1998		1997(1)
Net premiums written	$	769,058	$	545,555	$	563,510		$	474,761	$	381,282
Consolidated Results of Operations:
Net premiums earned	$	732,440	$	531,424	$	540,087		$	466,715	$	375,951
Net investment income		86,945		102,591		110,057			120,125		133,392
Net realized investment gains (losses)		7,988		11,975		(7,745	)		21,745		8,598
Other revenues		22,599		14,000		12,718			14,896		13,617
Total consolidated revenues	$	849,972	$	659,990	$	655,117		$	623,481	$	531,558
Income before extraordinary loss and
cumulative effect of accounting change	$	7,103	$	1,325	$	28,353		$	44,734	$	19,753
Extraordinary loss from early extinguishment
of debt, net of related tax effect(2)		--		--		--			--		(4,734	)
Cumulative effect of accounting change,
net of related tax effect(3)		--		--		(2,759	)		--		--
Net income	$	7,103	$	1,325	$	25,594		$	44,734	$	15,019
Per Share Data:
Weighted average shares:
Basic		21,831,725		21,898,967		22,976,326			23,608,618		23,855,031
Diluted		22,216,695		22,353,622		23,785,916			24,524,888		24,567,378
Income before extraordinary loss and
cumulative effect of accounting change:
Basic	$	0.33	$	0.06	$	1.23		$	1.89	$	0.83
Diluted		0.32		0.06		1.19			1.82		0.80
Net income per share:
Basic		0.33		0.06		1.11			1.89		0.63
Diluted		0.32		0.06		1.08			1.82		0.61
Dividends paid per Common share(4)		--		0.16		0.32			0.32		0.32
Dividends paid per Class A Common share(4)		0.42		0.375		0.36			0.36		0.36
Shareholders' equity per share		19.64		20.40		19.21			21.90		19.96
Consolidated Financial Position:
Total investments	$	1,775,335	$	1,826,949	$	1,918,035		$	2,325,409	$	2,194,738
Total assets		3,802,979		3,469,406		3,245,087			3,460,718		3,057,258
Reserves for unpaid losses and LAE		2,324,439		2,053,138		1,932,601			1,940,895		2,003,187
Debt		62,500		163,000		163,000			163,000		203,000
Shareholders' equity		612,006		440,046		429,143			511,480		478,347

(1) Operating results in 2001, 2000 and 1997 were impacted by approximately $22 million, $60 million and $12 million, respectively, of reserve strengthening, restructuring and other special charges.

(2) In 1997, the Company refinanced substantially all of its long-term debt resulting in a $4.7 million extraordinary loss, net of tax effect.

(3) In 1999, the Company adopted SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." As a result of adopting SOP 97-3, the Company recorded a liability of $4.3 million pre-tax and a resulting charge to earnings of $2.8 million, net of tax effect.

(4) Effective at the close of business April 24, 2000, all shares of Common stock were reclassified as Class A Common stock. Accordingly, all dividends subsequent to April 24, 2000 are for the Class A Common stock.

26

P M A  C A P I T A L

(dollar amounts in thousands, except per share data)	2001(1)			2000(1)			1999			1998			1997(1)
Pre-tax operating income (loss)(5):
PMA Re	$	(3,062	)	$	(7,297	)	$	50,319		$	46,408		$	45,957
The PMA Insurance Group		23,148			21,601			18,200			10,470			(3,680	)
Caliber One		(26,168	)		(7,014	)		83			(1,606	)		--
Corporate and Other		(6,322	)		(19,142	)		(20,765	)		(21,948	)		(25,722	)
Pre-tax operating income (loss)		(12,404	)		(11,852	)		47,837			33,324			16,555
Net realized investment gains (losses)		7,988			11,975			(7,745	)		21,745			8,598
Income (loss) before income taxes,
extraordinary loss and cumulative
effect of accounting change		(4,416	)		123			40,092			55,069			25,153
Income tax expense (benefit)		(11,519	)		(1,202	)		11,739			10,335			5,400
Income before extraordinary loss and
cumulative effect of accounting change		7,103			1,325			28,353			44,734			19,753
Extraordinary loss from early extinguishment
of debt, net of related tax effect(2)		--			--			--			--			(4,734	)
Cumulative effect of accounting change,
net of related tax effect(3)		--			--			(2,759	)		--			--
Net income	$	7,103		$	1,325		$	25,594		$	44,734		$	15,019
GAAP Ratios for Insurance Segments:
PMA Re:
Loss and LAE ratio		87.4%			91.6%			70.4%			68.9%			69.6%
Expense ratio		26.8%			31.7%			32.1%			34.8%			34.2%
Combined ratio(6)		114.2%			123.3%			102.5%			103.7%			103.8%
Operating ratio(7)		100.9%			102.9%			82.9%			79.2%			71.9%
The PMA Insurance Group:
Loss and LAE ratio		74.7%			74.9%			75.1%			81.6%			91.1%
Expense ratio(8)		26.7%			29.3%			31.7%			33.7%			42.8%
Policyholders' dividend ratio		4.1%			7.5%			8.6%			7.3%			6.9%
Combined ratio(6)		105.5%			111.7%			115.4%			122.6%			140.8%
Operating ratio(7)		94.1%			92.7%			92.7%			95.9%			102.2%
Caliber One(9):
Loss and LAE ratio		130.2%			105.8%			76.5%			--			--
Expense ratio		33.1%			33.9%			33.1%			--			--
Combined ratio(6)		163.3%			139.7%			109.6%			--			--
Operating ratio(7)		156.5%			124.3%			99.7%			--			--

(5) Pre-tax operating income (loss) excludes net realized investment gains (losses). Pre-tax operating income by business segment for all periods is unaudited and has been presented in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which the Company adopted on January 1, 1998. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14 to the Company’s Consolidated Financial Statements. 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.

(6) The combined ratio computed on a GAAP basis is equal to losses and loss adjustment expenses plus acquisition expenses, operating expenses and policyholders’ dividends (where applicable), all divided by net premiums earned.

(7) The operating ratio is equal to the combined ratio less the net investment income ratio, which is computed by dividing net investment income by net earned premiums.

(8) The GAAP operating expense ratios exclude $8.8 million, $7.0 million, $7.9 million, $9.0 million and $9.3 million for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively, of PMA Management Corp. direct expenses related to service revenues, which are not included in premiums earned. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(9) Caliber One was formed in 1997 and its results prior to 1999 were not material to the underwriting ratios of the Company; accordingly, the ratios for Caliber One have not been presented for these years.

27

P M A  C A P I T A L

Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following is a discussion of the financial condition of PMA Capital Corporation and its consolidated subsidiaries (“PMA Capital” or the “Company” which also may be referred to as “we” or “us”) as of December 31, 2001, compared with December 31, 2000, and the results of operations of PMA Capital for 2001 and 2000, compared with the immediately preceding year. The balance sheet information presented below is as of December 31 for each respective year. The statement of operations information is for the year ended December 31 for each respective year.

        This discussion and analysis should be read in conjunction with our audited Consolidated Financial Statements and Notes thereto presented on pages 49 to 72 in this Annual Report. You should also read our Critical Accounting Policies beginning on page 46 for an explanation of those accounting policies that we believe are most important to the portrayal of our financial condition and results of operations and that require our most difficult, subjective and complex judgements.

        This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, including those made in the Business Outlook section, which involve inherent risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. These statements are based upon current estimates, assumptions and projections. Actual results may differ materially from those projected in such forward-looking statements, and therefore, you should not place undue reliance on them. See the Cautionary Statements on page 48 for a list of factors that could cause actual results to differ materially from those contained in any forward-looking statement. Also, see the Risk Factors in our Form 10-K for the year ended December 31, 2001 (“2001 Form 10-K”) for a further discussion of risks that could materially affect our business.

Consolidated Results

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

(dollar amounts in thousands)	2001			2000			1999
Operating revenues:
Net premiums written	$	769,058		$	545,555		$	563,510
Net premiums earned	$	732,440		$	531,424		$	540,087
Net investment income		86,945			102,591			110,057
Other revenues		22,599			14,000			12,718
Total operating revenues	$	841,984		$	648,015		$	662,862
Components of pre-tax operating income (loss)(1)   and net income:
PMA Re	$	(3,062	)	$	(7,297	)	$	50,319
The PMA Insurance Group		23,148			21,601			18,200
Caliber One		(26,168	)		(7,014	)		83
Corporate and Other		(6,322	)		(19,142	)		(20,765	)
Pre-tax operating income (loss)		(12,404	)		(11,852	)		47,837
Net realized investment gains (losses)		7,988			11,975			(7,745	)
Income (loss) before income taxes and
cumulative effect of accounting change		(4,416	)		123			40,092
Income tax expense (benefit)		(11,519	)		(1,202	)		11,739
Income before cumulative effect of accounting change		7,103			1,325			28,353
Cumulative effect of accounting change, net of tax		--			--			(2,759	)
Net income	$	7,103		$	1,325		$	25,594

(1) Operating income (loss) differs from net income under GAAP because operating income excludes net realized investment gains and losses. Pre-tax operating income (loss) is defined as income (loss) from continuing operations before income taxes, excluding net realized investment gains and losses. We exclude net realized investment gains (losses) from the profit and loss measure we utilize to assess the performance of our 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.

28

P M A  C A P I T A L

        Consolidated operating revenues were $842.0 million, $648.0 million and $662.9 million in 2001, 2000 and 1999, respectively. The increase in operating revenues in 2001, compared to 2000, primarily reflects higher net premiums earned for all three business segments, partially offset by lower net investment income. The decrease in operating revenues in 2000, compared to 1999, primarily reflects lower net premiums earned at PMA Re and lower net investment income, partially offset by higher net premiums earned at The PMA Insurance Group and Caliber One.

        Operating income (loss) is one of the primary performance measures we use to monitor and assess the performance of our insurance operations. Operating income (loss) differs from net income under GAAP because operating income excludes net realized investment gains and losses. In 2001, we recorded a pre-tax operating loss of $12.4 million (operating income of $1.9 million after-tax), compared to a pre-tax operating loss of $11.9 million ($6.5 million after-tax) in 2000 and pre-tax operating income of $47.8 million ($33.4 million after-tax) in 1999. The 2001 results include a charge of approximately $30 million pre-tax (approximately $20 million after-tax) relating to losses resulting from the attack on the World Trade Center and losses of $22.2 million pre-tax ($14.4 million after-tax) due to higher than expected losses and loss adjustment expenses (“LAE”) at Caliber One. These losses were partially offset by a pre-tax gain of $9.8 million ($6.4 million after-tax) on the sale of certain real estate properties recorded in Corporate and Other. In addition, after-tax operating income for 2001 includes a tax benefit of $10.1 million resulting from the completion of an IRS examination of our 1996 federal income tax return.

        The 2000 operating loss includes a charge of approximately $60 million pre-tax (approximately $40 million after-tax) for higher than expected losses and LAE in certain lines of business written by PMA Re. To a lesser extent, the 2000 results also reflect higher losses from certain lines of business written by Caliber One. Improved earnings at The PMA Insurance Group and a lower effective tax rate in 2000, compared to 1999, partially offset the decline in earnings at PMA Re and Caliber One.

        Net income was $7.1 million, $1.3 million and $25.6 million in 2001, 2000 and 1999, respectively. Net income for 1999 includes an after-tax charge of $2.8 million for the effect of adopting Statement of Position (“SOP”) 97-3, “Accounting by Insurance and Other Enterprises for Insurance-Related Assessments.” See Recent Accounting Pronouncements on page 45 for additional information.

        Net income also includes after-tax gains and losses on the sale of investments. The timing and recognition of such gains and losses are unpredictable and are not indicative of current operating fundamentals or future performance of our operating segments. Accordingly, such gains and losses are not included as a component of operating income (loss). After-tax net realized investment gains were $5.2 million and $7.8 million for 2001 and 2000, respectively, and after-tax net realized investment losses were $5.0 million in 1999. Throughout 2000 and into the first half of 2001, we shifted the mix of our 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, we recorded after-tax net realized investment gains in 2001.The realized investment gains in 2000 reflect the sale of equity securities, which had reached our targeted price level. The realized investment losses for 1999 reflect sales of securities in a rising interest rate environment in order to invest in yield enhancing investment opportunities.

Impact on 2001 Results from the September 11th Terrorist Attack on the World Trade Center

PMA Re’s pre-tax results for 2001 were adversely impacted by approximately $30 million as a result of losses from the September 11th terrorist attack on the World Trade Center. The pre-tax charge of approximately $30 million consists of total assumed losses of approximately $135 million, which is before (1) reinsurance recoveries, (2) additional premiums due to PMA Re’s retrocessionaires, and (3) additional premiums due to PMA Re on its assumed business. Of these losses, approximately 80% were property losses, primarily from property excess of loss and property catastrophe coverages. The remaining 20% were casualty losses, primarily from umbrella coverages and, to a lesser extent, workers’ compensation coverages. PMA Re

29

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

expects to recover approximately $80 million of its total loss from its retrocessionaires under existing retrocessional contracts after deducting additional ceded premiums of approximately $30 million due to its retrocessionaires. In addition, PMA Re expects to collect approximately $25 million of additional premiums from its ceding companies under contractual provisions of their assumed reinsurance contracts. Caliber One’s net losses and LAE for 2001 include approximately $1 million of net property losses related to the September 11th terrorist attack on the World Trade Center, net of $9 million of ceded losses. Approximately 30% of our reinsurance receivables are secured by collateral, such as letters of credit or funds held. Substantially all of the remainder is from reinsurers and retrocessionaires rated “A-”or better by nationally recognized insurance rating agencies. Accordingly, we expect all receivables to be fully collectible. Our estimate of losses from the terrorist attack on the World Trade Center and amounts due to us for reinsurance recoveries and additional premiums are based on our analysis to date of known exposures. However, it is difficult to fully estimate our losses from the attack given the uncertain nature of damage theories and loss amounts, and the development of additional facts related to the attack. As more information becomes available, we may need to increase our estimate of these losses.

        As a result of the losses from the attack on the World Trade Center, the insurance rating agencies placed the financial strength rating of many insurance and reinsurance companies under review. Specifically, A.M. Best, Standard & Poor’s and Moody’s placed the financial strength rating of PMA Capital Insurance Company (“PMACIC”) under review. In addition, because Standard & Poor’s rating of PMACIC also covers the insurance subsidiaries through which The PMA Insurance Group underwrites its business (the “Pooled Companies”), the financial strength rating of those subsidiaries was also placed under review. In late December 2001 and early January 2002, all three rating agencies removed these insurance subsidiaries from their watchlists and affirmed their financial strength ratings.

Business Outlook

Based on management’s current expectations, the estimated range of consolidated after-tax operating earnings for 2002 is between $1.40 and $1.55 per diluted share. In 2002, we expect price increases across all of our businesses to contribute to strong growth in premiums with the most significant growth coming from PMA Re, our reinsurance business. Based on current market trends, we expect rate increases, as measured by the increase in premiums on PMA Re’s renewal business, to average between 30-50% in 2002 in its property and casualty lines. At The PMA Insurance Group, we expect price increases for workers’ compensation business to average 15%, with higher rate increases for the other commercial lines. At Caliber One, we expect premium rates to rise significantly for excess and surplus lines coverages. As the favorable effects of both price increases and improved terms and conditions are earned into our results over the next 12 to 18 months, we expect to achieve our combined ratio goal of 100% or better for PMA Re and Caliber One, and 104% or better for The PMA Insurance Group.

        These statements are forward-looking. 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 other factors described in the Cautionary Statements on page 48. Also, see the Risk Factors described in our 2001 Form 10-K.

30

P M A  C A P I T A L

PMA Re

Summarized financial results of PMA Re are as follows:

(dollar amounts in thousands)	2001			2000			1999
Net premiums written	$	360,604		$	261,505		$	278,998
Net premiums earned	$	340,401		$	251,109		$	293,862
Net investment income		45,361			51,125			57,686
Operating revenues		385,762			302,234			351,548
Losses and LAE		297,623			229,925			206,891
Acquisition and
operating expenses		91,201			79,606			94,338
Total losses and expenses		388,824			309,531			301,229
Pre-tax operating income (loss)	$	(3,062	)	$	(7,297	)	$	50,319
Combined ratio		114.2%			123.3%			102.5%
Less: net investment income ratio		13.3%			20.4%			19.6%
Operating ratio		100.9%			102.9%			82.9%

PMA Re recorded pre-tax operating losses of $3.1 million in 2001 and $7.3 million in 2000, and pre-tax operating income of $50.3 million in 1999. The operating loss in 2001 includes a pre-tax charge of approximately $30 million relating to the effects of the losses caused by the attack on the World Trade Center. The operating loss in 2000 includes a pre-tax charge of approximately $60 million relating to the effects of higher than expected losses and LAE. For additional information, see the discussion in Losses and Expenses on page 32.

Premiums

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

(dollar amounts in thousands)	2001		2000		1999
Business Unit:
Finite Risk and
Financial Products	$	244,527	$	109,062	$	69,989
Traditional - Treaty		171,318		224,226		180,475
Specialty - Treaty		34,180		50,971		88,433
Facultative		26,566		10,564		4,710
Total	$	476,591	$	394,823	$	343,607
Major Lines of Business:
Casualty	$	266,672	$	268,877	$	246,660
Property		206,940		123,393		95,183
Other		2,979		2,553		1,764
Total	$	476,591	$	394,823	$	343,607

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

(dollar amounts in thousands)	2001		2000		1999
Business Unit:
Finite Risk and
Financial Products	$	209,939	$	89,254	$	69,551
Traditional - Treaty		115,814		134,724		137,686
Specialty - Treaty		26,252		34,062		68,818
Facultative		8,599		3,465		2,943
Total	$	360,604	$	261,505	$	278,998
Major Lines of Business:
Casualty	$	186,603	$	157,887	$	199,113
Property		171,056		101,086		78,148
Other		2,945		2,532		1,737
Total	$	360,604	$	261,505	$	278,998

Gross premiums written were $476.6 million and $394.8 million and net premiums written were $360.6 million and $261.5 million in 2001 and 2000, respectively. In 2001, gross and net premiums written were affected by the attack on the World Trade Center. Contractual provisions under certain of PMA Re’s assumed business in the Finite Risk and Financial Products unit provide for approximately $25 million of additional premium due to PMA Re because losses were ceded to PMA Re under the terms of these contracts. These additional

31

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

premiums were more than offset by approximately $30 million of ceded premiums payable by PMA Re to its retrocessionaires because PMA Re ceded a portion of its gross losses incurred to these retrocessionaires. In 2000, net premiums written were impacted by ceded premiums of $52.1 million on existing retrocessional contracts covering higher than expected losses and LAE in 2000.

        Excluding the effects of these items, gross and net premiums written would have increased by 14% and 17%, respectively, for 2001, compared to 2000. In addition to rate increases, the increase in gross and net written premiums in 2001, compared to 2000, reflects higher premium volume for both property and casualty coverages written by the Finite Risk and Financial Products unit due primarily to increased demand for these coverages. The Finite Risk and Financial Products unit continued to achieve growth in both property and casualty lines by providing non-traditional reinsurance coverages mostly to small- and medium-sized insurers, which we define as insurers with less than $500 million in policyholders’ surplus.

        Partially offsetting premium growth in the Finite Risk and Financial Products unit was lower premium volume from PMA Re’s Specialty and Traditional treaty units, which primarily write casualty lines of business. During 2001, approximately 35% of the beginning in-force business for the Traditional and Specialty treaty units was non-renewed, largely reflecting PMA Re’s decision to non-renew accounts that did not meet its pricing guidelines. Despite the full year decline in writings for PMA Re’s Traditional and Specialty treaty coverages, the environment for writing these coverages on acceptable terms became increasingly more favorable as 2001 progressed. This resulted in an increase in premiums written for the Traditional and Specialty treaty coverages for the second half of 2001, compared with the first half of the year.

        For 2000, PMA Re’s gross premiums written increased 15%, compared to 1999, primarily reflecting increased premiums written by the Finite Risk and Financial Products unit. Also contributing to the growth in gross premiums written were price increases in all segments of PMA Re’s business. The improvement in gross premiums written was partially offset by a decline of $37.5 million for the Specialty treaty unit due to competitive rates and conditions in the professional liability market, which caused PMA Re to non-renew business that did not meet its price guidelines. In addition, gross premiums written in 2000 included $17.5 million of premiums recognized as a result of a change in the estimate of ultimate premiums by underwriting year.

        Net premiums written decreased by 6% in 2000, compared to 1999, as increases in ceded premiums of $68.7 million for 2000, compared to 1999, more than offset the growth in gross premiums written. The increase in ceded premiums was primarily due to additional ceded premiums of $52.1 million on existing retrocessional contracts covering the higher than expected losses and LAE in 2000. Also contributing to the increase in ceded premiums was $17 million from the effect of one casualty reinsurance treaty, on which substantially all of the assumed premiums were retroceded.

        Net premiums earned increased 36% in 2001 and decreased 15% in 2000, compared to the immediately preceding year. After adjusting for the impact of the additional assumed and ceded premiums discussed above, net premiums earned increased 14% in 2001, compared to 2000. Net premiums earned in 2000 included $12.4 million of premiums recognized as a result of a change in the estimate of ultimate premiums by underwriting year. PMA Re’s earned premiums for 1999 include approximately $32 million related to a revision in the methodology used in estimating premiums on in-force contracts. After adjusting for these revisions and for the additional ceded premiums discussed above, net premiums earned increased 11% in 2000, compared to 1999. 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.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

	2001		2000		1999
Loss and LAE ratio		87.4%		91.6%		70.4%
Expense ratio:
Acquisition expenses		20.9%		26.1%		27.5%
Operating expenses		5.9%		5.6%		4.6%
Total expense ratio		26.8%		31.7%		32.1%
Combined ratio(1)		114.2%		123.3%		102.5%

(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.

32

P M A  C A P I T A L

In 2001, PMA Re’s combined ratio and the individual components of the combined ratio were impacted by the unfavorable loss activity related to the attack on the World Trade Center. Excluding the impact of the attack, PMA Re’s loss and LAE ratio was approximately 80% and the combined ratio was approximately 105% for 2001. For additional information, see Impact on 2001 Results from the September 11th Terrorist Attack on the World Trade Center on page 29.

        PMA Re’s loss and LAE ratio increased significantly in 2000, compared to 1999, reflecting the recognition in the third quarter of 2000 of the effects of higher than expected losses and LAE in certain lines of business, primarily coverages for 1998 and 1999 written on a pro rata basis, partially offset by lower than expected losses and LAE for treaties covering losses occurring in accident years 1996 and prior. In the third quarter of 2000, PMA Re’s actuarial department conducted its routine semi-annual reserve study to determine the impact of any emerging data on anticipated loss development trends and recorded unpaid losses and LAE reserves. Based on the actuarial work performed, which included analyzing recent trends in the levels of the reported and paid claims, an updated selection of actuarially determined loss reserve estimates was developed by accident year for each major line of business written by PMA Re. Management’s selection of the ultimate losses indicated that gross loss reserves needed to be increased by $83.2 million.

        The increase in the estimate of gross loss and LAE reserves primarily reflected higher than anticipated losses mainly in our pro rata business, where PMA Re participates with the insured by agreeing to pay a predetermined percentage of all losses arising under a particular insurance contract of the insured in exchange for the same predetermined percentage of all applicable premiums received under that contract. The concentration of estimated adverse loss development was in PMA Re’s pro rata reinsurance business related primarily to general liability treaties written on a claims made basis covering losses in 1998 and 1999, property treaties covering 1999 losses and, to a lesser extent, commercial automobile liability treaties covering losses in 1998 and 1999. In addition, the reserve increase reflects unfavorable prior year loss reserve development in the excess of loss general liability line for accident years 1998 and 1999. Under existing retrocessional contracts, $60.0 million of gross losses were ceded to PMA Re’s retrocessionaires, reducing the impact on net incurred losses and LAE to $23.2 million. The increase in net incurred losses and LAE, combined with $35.0 million of ceded premiums and interest on funds held under existing retrocessional contracts covering the ceded losses, resulted in a pre-tax charge of approximately $60 million to PMA Re’s operating results in 2000.

        For additional information about PMA Re’s loss reserves, see pages 38 and 39 and Note 4 to our Consolidated Financial Statements.

        Net premiums earned, which are used in calculating the acquisition and expense ratios, were adversely impacted by the attack on the World Trade Center in 2001 and the higher than expected losses in 2000. Excluding the effect of these items, the acquisition expense ratio decreased 1.0 point and the operating expense ratio increased 1.1 points for 2001, compared to 2000. The lower acquisition expense ratio 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 increase in the operating expense ratio is due to operating expenses growing at a faster rate than earned premiums in 2001, which reflects net expenses related to our participation in a Lloyd’s of London operation, beginning in 2001.

        In 2000, the acquisition expense ratio decreased by 5.9 points and the operating expense ratio remained essentially flat, compared to 1999, excluding the impact of the additional ceded premium on retrocessional contracts discussed above. The decline in the acquisition expense ratio reflects the shift in business towards Finite Risk and Financial Products business.

Net Investment Income

Net investment income was $45.4 million, $51.1 million and $57.7 million in 2001, 2000 and 1999, respectively. The decrease in 2001, compared to 2000, is primarily due to lower investment yields. The decrease in 2000, compared to 1999, principally reflects an increase of $9.2 million in interest credited on ceded retrocessional funds held treaties under which PMA Re ceded premiums and losses during 2000, as discussed above. Excluding the impact of the interest credited on funds held treaties, net investment income increased in 2000, compared to 1999, due to higher yields on invested assets resulting from a portfolio shift towards higher yielding investments, which began in the second quarter of 1999 and was substantially completed by the beginning of the fourth quarter of 1999.

33

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

The PMA Insurance Group

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

(dollar amounts in thousands)	2001		2000		1999
The PMA Insurance Group
Net premiums written	$	355,547	$	268,839	$	233,713
Net premiums earned	$	346,574	$	252,348	$	221,934
Net investment income		39,444		47,969		50,282
Other revenues		11,240		10,099		10,086
Operating revenues		397,258		310,416		282,302
Losses and LAE		258,933		189,001		166,674
Acquisition and
operating expenses		101,090		80,959		78,287
Dividends to policyholders		14,087		18,855		19,141
Total losses and expenses		374,110		288,815		264,102
Pre-tax operating income	$	23,148	$	21,601	$	18,200
Combined ratio		105.5%		111.7%		115.4%
Less: net investment
income ratio		11.4%		19.0%		22.7%
Operating ratio		94.1%		92.7%		92.7%
The PMA Insurance Group
Excluding Run-off Operations (1)
Net premiums written	$	355,547	$	268,839	$	233,713
Net premiums earned	$	346,574	$	252,348	$	221,934
Net investment income		39,444		43,886		45,870
Other revenues		11,240		10,099		10,086
Operating revenues		397,258		306,333		277,890
Losses and LAE		258,933		186,317		163,375
Acquisition and
operating expenses		101,090		79,515		76,985
Dividends to policyholders		14,087		18,855		19,141
Total losses and expenses		374,110		284,687		259,501
Pre-tax operating income	$	23,148	$	21,646	$	18,389
Combined ratio		105.5%		110.0%		113.3%
Less: net investment
income ratio		11.4%		17.4%		20.7%
Operating ratio		94.1%		92.6%		92.6%

(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 2000 and 1999, Run-off operations generated net investment income of $4.1 million and $4.4 million, losses and expenses of $4.1 million and $4.6 million, and pre-tax operating losses of $45,000 and $189,000. Effective December 31, 2000, substantially all of the remaining assets and liabilities of the Run-off operations were transferred 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 increased in 2001 to $23.1 million, compared to $21.6 million in 2000 and $18.2 million in 1999. Operating income increased 7% and 19% for 2001 and 2000, respectively, compared to the immediately preceding year, primarily due to improved underwriting results reflecting premium growth that 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

(dollar amounts in thousands)	2001			2000			1999
Workers' compensation and
integrated disability:
Direct premiums written	$	315,611		$	246,617		$	210,118
Premiums assumed		6,331			3,620			4,588
Premiums ceded		(29,771	)		(39,367	)		(30,900	)
Net premiums written	$	292,171		$	210,870		$	183,806
Commercial Lines:
Direct premiums written	$	92,107		$	83,381		$	78,953
Premiums assumed		2,646			1,848			1,782
Premiums ceded		(31,377	)		(27,260	)		(30,828	)
Net premiums written	$	63,376		$	57,969		$	49,907
Total:
Direct premiums written	$	407,718		$	329,998		$	289,071
Premiums assumed		8,977			5,468			6,370
Premiums ceded		(61,148	)		(66,627	)		(61,728	)
Net premiums written	$	355,547		$	268,839		$	233,713

Direct workers’ compensation and integrated disability premiums written increased 28% in 2001 and 17% in 2000, compared to the immediately preceding year, primarily due to increased prices on workers’ compensation business and an increase in the volume of risks underwritten for the workers’ compensation and integrated disability lines of business. In recent years, The PMA Insurance Group increased its writings of workers’ compensation premiums through focused marketing efforts in its principal marketing territory. It also benefited in 2001 and 2000 from writing business for insureds mainly operating in The PMA Insurance Group’s principal marketing territory but with some operations in other states.

34

P M A  C A P I T A L

        The premium charged on a fixed-cost policy is primarily based upon the manual rates filed with the state insurance department. Manual rates in The PMA Insurance Group’s principal marketing territories for workers’ compensation increased on average approximately 10% in 2001 and 8% in 2000, compared to a decline of 3% in 1999. The increase in manual rates reflects the effects of higher average medical and indemnity costs in recent years. Because manual rate fluctuations directly affect the prices that The PMA Insurance Group can charge for its rate sensitive workers’ compensation products, which include fixed cost and dividend policies, such fluctuations in manual rate levels affect workers’ compensation premium volume.

        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 $8.7 million in 2001, compared to 2000, primarily due to rate increases for commercial auto and commercial multi-peril lines. During 2000, direct writings of Commercial Lines increased $4.4 million, compared to 1999. This increase was primarily due to rate increases for commercial auto and commercial package lines, partially offset by non-renewals of certain accounts that did not meet underwriting standards.

        Premiums ceded decreased $5.5 million in 2001, compared to 2000. The change in premiums ceded reflects a decrease of $9.6 million in premiums ceded for workers’ compensation, partially offset by an increase of $4.1 million in premiums ceded for Commercial Lines in 2001, compared to 2000. Premiums ceded for workers’ compensation decreased despite the growth in gross premiums written for workers’ compensation because The PMA Insurance Group increased its net retention by adding a deductible limit of approximately $10 million on its workers’ compensation reinsurance program, effective January 1, 2001. The increase in premiums ceded for Commercial Lines is primarily due to the increase in direct premiums written for these products.

        Premiums ceded increased $4.9 million for 2000, compared to 1999, reflecting an increase of $8.5 million in ceded workers’ compensation and integrated disability premiums, partially offset by a decrease of $3.6 million in ceded premiums for Commercial Lines. The increase in workers’ compensation premiums ceded is primarily due to the increase in direct writings for these products. The decrease in Commercial Lines premiums ceded is primarily due to an increase in the reinsurance retention for the commercial casualty lines of business from $175,000 to $250,000, effective January 1, 2000.

        Net premiums earned increased 37% in 2001, compared to 2000, and 14% in 2000, compared to 1999. 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:

	2001		2000		1999
Loss and LAE ratio		74.7%		73.8%		73.6%
Expense ratio:
Acquisition expenses		17.6%		18.4%		17.7%
Operating expenses(1) (2)		9.1%		10.3%		13.4%
Total expense ratio		26.7%		28.7%		31.1%
Policyholders' dividend ratio		4.1%		7.5%		8.6%
Combined ratio(1) (2) (3) (4)		105.5%		110.0%		113.3%

(1) The expense ratio and the combined ratio exclude $8.8 million, $7.0 million and $7.9 million in 2001, 2000 and 1999, respectively, for direct expenses related to loss adjusting services and risk control fees included in other revenues, which are not included in premiums earned.

(2) The expense ratio and the combined ratio for 1999 exclude the impact of the cumulative effect of accounting change of $4.3 million ($2.8 million after-tax) for insurance-related assessments.

(3) 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.

(4) The GAAP combined ratios for The PMA Insurance Group including the Run-off operations were 111.7% and 115.4% for 2000 and 1999, respectively.

The loss and LAE ratio increased slightly in 2001 and 2000, compared to the immediately preceding year, primarily due to the unfavorable impact of changes in prior year development, partially offset by an improved current accident year loss and LAE ratio, and a decline in net discount accretion.

35

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

        The PMA Insurance Group experienced $2.9 million of unfavorable prior year development in 2001, compared to favorable prior year development of $6.1 million and $9.2 million in 2000 and 1999, respectively. The changes in prior year development unfavorably impacted the loss and LAE ratio by 3.2 points and 1.8 points for 2001 and 2000, respectively, compared to the immediately preceding year. The unfavorable prior year development in 2001 primarily reflects higher than expected claims handling costs. The favorable prior year development in 2000 and 1999 primarily reflects better than expected loss experience from loss-sensitive and rent-a-captive workers’ compensation business. Premium adjustments for loss-sensitive business and policyholders’ dividends for rent-a-captive business have substantially offset this favorable development. Rent-a-captives are used by customers as an alternative method to manage their loss exposure without establishing and capitalizing their own captive insurance company.

        The current accident year loss and LAE ratio improved by 1.7 points in 2001 and 1.2 points in 2000, compared to the immediately preceding year, primarily reflecting improved current accident year loss and LAE ratios for the workers’ compensation and integrated disability lines of business. The reduction in the loss and LAE ratios for workers’ compensation and integrated disability primarily reflect price increases and a decline in claims frequency for the workers’ compensation line of business. However, a slowdown in the United States economy may change the trend of declining claims frequency. Also, in most economic slowdowns, we have generally experienced increasing claims severity. Further, medical cost inflation continues, which may contribute to increased severity of losses, despite The PMAInsurance Group’s attempt to mitigate medical cost inflation through its affiliation with a national preferred provider organization.

        The loss and LAE ratio is negatively impacted by accretion of discount on prior year reserves and favorably impacted by the recording of discount for current year reserves. The net of these amounts is referred to as net discount accretion. The recording of discount essentially offset the accretion of discount on prior year reserves for 2001, whereas the accretion of discount on prior year reserves exceeded the recording of discount for 2000 and 1999. The decline in net discount accretion in 2001, compared to 2000, favorably impacted the loss and LAE ratio by 0.6 points, reflecting the increase in workers’ compensation writings during 2001. The decline in net discount accretion in 2000, compared to 1999, favorably impacted the loss and LAE ratio by 0.4 points, reflecting a reduction in discount accretion attributable to prior year loss reserves. For additional information regarding The PMAInsurance Group’s loss reserves, see pages 38 and 39.

        The expense ratio improved by 2.0 points in 2001 and by 2.4 points in 2000, compared to the immediately preceding year, due to growth in net premiums earned that outpaced the increase in expenses.

        The policyholders’ dividend ratio was 4.1%, 7.5% and 8.6% in 2001, 2000 and 1999, respectively. Under policies that are subject to dividend plans, the customer may receive a dividend based upon loss experience during the policy period. The improvements in the policyholders’ dividend ratio occurred primarily because The PMA Insurance Group sold less business under dividend plans and wrote business under lower paying dividend plans.

Net Investment Income

Net investment income was $4.4 million lower in 2001 and $2.0 million lower in 2000, compared to the immediately preceding year. The decrease in net investment income over the three years is primarily due to a lower invested asset base resulting from the paydown of loss reserves from prior accident years. The decrease in 2000, compared to 1999, was partially offset by higher investment yields associated with a shift in invested assets towards higher yielding invested assets.

Caliber One

Summarized financial results of Caliber One are as follows:

(dollar amounts in thousands)	2001			2000			1999
Net premiums written	$	53,674		$	16,043		$	51,237
Net premiums earned	$	46,232		$	28,799		$	24,729
Net investment income		3,124			4,424			2,459
Operating revenues		49,356			33,223			27,188
Losses and LAE		60,207			30,462			18,908
Acquisition and
operating expenses		15,317			9,775			8,197
Total losses and expenses		75,524			40,237			27,105
Pre-tax operating income (loss)	$	(26,168	)	$	(7,014	)	$	83
Combined ratio		163.3%			139.7%			109.6%
Less: net investment
income ratio		6.8%			15.4%			9.9%
Operating ratio		156.5%			124.3%			99.7%

36

P M A  C A P I T A L

Caliber One recorded pre-tax operating losses of $26.2 million in 2001 and $7.0 million in 2000, and pre-tax operating income of $83,000 in 1999. The increase in the pre-tax operating loss for 2001, compared to 2000, reflects higher underwriting losses, which included $22.2 million of net unfavorable prior year loss development, substantially all of which was from the 1999 and 2000 accident years. The pre-tax operating loss for 2000, compared to pre-tax operating income in 1999, reflects higher underwriting losses, partially offset by higher net investment income.

Premiums

(dollar amounts in thousands)	2001		2000			1999
Gross premiums written:
Property	$	69,107	$	41,636		$	25,917
Products liability		26,143		21,190			15,574
General liability		17,807		10,995			14,031
Professional liability		6,637		7,049			22,566
Other liability		4,641		12,535			15,329
Total	$	124,335	$	93,405		$	93,417
Net premiums written:
Property	$	31,679	$	7,447		$	3,364
Products liability		9,409		10,020			10,393
General liability		7,117		3,428			12,539
Professional liability		3,534		(5,813	)		17,480
Other liability		1,935		961			7,461
Total	$	53,674	$	16,043		$	51,237

Gross premiums written increased $30.9 million for 2001, compared to 2000, and were essentially flat in 2000, compared to 1999. Gross premiums written in 2001 reflect growth in property and certain classes of liability lines of business due to rate increases as well as growth in policy volume, partially offset by our 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 $37.6 million in 2001, compared to 2000. Net property premiums written increased $24.2 million for 2001, compared to 2000, reflecting rate increases and growth in policy volume. Net liability premiums written increased $13.4 million in 2001, compared to 2000, reflecting rate increases in most liability lines of business. Additionally, net premiums written in 2000 included higher levels of ceded premiums related primarily to professional liability and commercial automobile exposures. Net premiums written declined in 2000, compared to 1999, primarily due to higher levels of ceded premiums related to professional liability, commercial automobile, general liability and property catastrophe exposures.

        Net premiums earned increased $17.4 million in 2001, compared to 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. Net premiums earned in 2000 increased $4.1 million, compared to 1999, primarily reflecting the increase in premiums written in the latter part of 1999 and early 2000, partially offset by increased ceded premiums in 2000, as discussed above.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

	2001		2000		1999
Loss and LAE ratio		130.2%		105.8%		76.5%
Expense ratio:
Acquisition expenses		15.3%		2.3%		17.1%
Operating expenses		17.8%		31.6%		16.0%
Total expense ratio		33.1%		33.9%		33.1%
Combined ratio(1)		163.3%		139.7%		109.6%

(1) 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.

Caliber One’s loss and LAE ratio increased significantly in 2001, compared to 2000, primarily due to net unfavorable prior year development of $22.2 million, which is net of losses of approximately $26 million ceded to third party reinsurers under existing reinsurance contracts covering the prior year loss development. These losses primarily reflect higher than expected claim frequency and severity that emerged in 2001 on certain casualty lines of business, primarily professional liability policies for

37

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

the nursing homes class of business, and, to a lesser extent, property lines of business. As a result of its reserve reviews conducted in 2001, Caliber One revised its estimate of ultimate expected claims activity and, accordingly, increased its estimate of ultimate losses, substantially all for accident years 1999 and 2000.

        Caliber One’s loss and LAE ratio increased significantly for 2000, compared to 1999, primarily due to higher than expected losses and LAE in certain segments of the professional liability, commercial automobile, general liability and property lines of business for coverage of 2000 and 1999 exposures. 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. For additional information regarding Caliber One’s loss reserves, see pages 38 and 39.

        The acquisition expense ratio increased significantly for 2001, compared to 2000, primarily as a result of lower ceding commissions. The acquisition expense ratio decreased significantly for 2000, compared to 1999, primarily due to the benefit of higher ceding commissions on Caliber One’s 2000 reinsurance coverage for the professional liability and commercial automobile lines of business. Ceding commissions are offset against acquisition expenses.

        The operating expense ratio decreased substantially in 2001, compared to 2000, primarily due to the effect on net premiums earned of the increased use of reinsurance and policy cancellations in 2000. Operating expenses were $8.3 million in 2001, which is a decrease of $850,000 compared to 2000, reflecting the substantial completion in 2000 of Caliber One’s infrastructure development. The operating expense ratio increased substantially for 2000, compared to 1999, primarily reflecting increases in operating expenses associated with Caliber One’s continued growth in net premiums earned and infrastructure development, as well as the negative effect on net premiums earned of the increased use of reinsurance and policy cancellations in 2000.

Net Investment Income

Net investment income was $3.1 million, $4.4 million and $2.5 million for 2001, 2000 and 1999, respectively. The decrease in net investment income for 2001, compared to 2000, is due to an increase in interest on funds held reinsurance contracts and lower yields on invested assets, partially offset by an increase in Caliber One’s invested asset base.

        The increase in 2000, compared to 1999, primarily reflects a larger average invested asset base, due primarily to premium collections in excess of paid losses and expenses and, to a lesser extent, capital contributions received, partially offset in 2000 by an increase in interest credited on funds held reinsurance contracts.

Loss Reserves and Reinsurance

Loss Reserves

Our consolidated unpaid losses and LAE, net of reinsurance, at December 31, 2001 and 2000 were $1,143.1 million and $1,128.7 million, net of discount of $113.7 million and $104.0 million, respectively. Included in the consolidated unpaid losses and LAE are amounts related to our workers’ compensation claims of $363.5 million and $341.8 million, net of discount of $91.0 million and $88.4 million at December 31, 2001 and 2000, respectively. The approximate discount rate used was 5% at December 31, 2001 and 2000.

        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 us. 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 us and our 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 our unpaid losses and LAE, actuarial models are used that analyze historical data and consider the impact of current developments and trends, such as trends in claims severity and frequency. Also considered are legal developments, regulatory trends, legislative developments, changes in social attitudes and economic conditions. See the discussion under Losses and Expenses on pages 32 and 37 for additional information regarding higher than expected losses and LAE during 2001 and 2000 at PMA Re and Caliber One.

38

P M A  C A P I T A L

        Management believes that its unpaid losses and LAE are fairly stated at December 31, 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, judicial theories of liability, regulatory trends on benefit levels for both medical and indemnity payments, social attitudes, and economic conditions, the estimates are revised accordingly. If our ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at December 31, 2001, the related adjustments could have a material adverse effect on our financial condition, results of operations and liquidity. See the Cautionary Statements on page 48 and Risk Factors in our 2001 Form 10-K for a discussion of factors that may adversely impact our losses and LAE in the future.

        At December 31, 2001, 2000 and 1999, our gross reserves for asbestos-related losses were $59.9 million, $49.2 million and $61.3 million, respectively ($28.6 million, $32.0 million and $38.9 million, net of reinsurance, respectively). At December 31, 2001, 2000 and 1999, our gross reserves for environmental-related losses were $29.6 million, $29.5 million and $41.4 million, respectively ($16.0 million, $18.0 million and $24.5 million, net of reinsurance, respectively).

        Estimating reserves for asbestos and environmental exposures continues to be difficult because of several factors, including: (i) evolving methodologies for the estimation of the liabilities; (ii) lack of reliable historical claim data; (iii) uncertainties with respect to insurance and reinsurance coverage related to these obligations; (iv) changing judicial interpretations; and (v) changing government standards. Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies. However, due to changing interpretations by courts involving coverage issues, the potential for changes in federal and state standards for clean-up and liability, as well as issues involving policy provisions, allocation of liability among participating insurers, and proof of coverage, our ultimate exposure for these claims may vary significantly from the amounts currently recorded, resulting in a potential future adjustment that could be material to our financial condition and results of operations. See Loss Reserves in our 2001 Form 10-K and Note 4 to our Consolidated Financial Statements for additional discussion.

Reinsurance

At December 31, 2001, our reinsurance and retrocessional protection was as follows:

	Retention			Limits (1)
PMA Re
Per Occurrence:
Casualty lines(2)	$	2.8 million		$	17.5 million
Workers' compensation(2)	$	2.0 million		$	98.0 million
Property lines	$	10.0 million		$	50.0 million
Per Risk:
Property lines	$	750,000		$	4.2 million
Casualty lines	$	1.5 million		$	6.0 million
The PMA Insurance Group
Per Occurrence:
Workers' compensation	$	150,000	(3)	$	104.9 million
Per Risk:
Property lines(4)	$	500,000		$	19.5 million
Auto physical damage	$	500,000		$	2.0 million
Other casualty lines(5)	$	250,000		$	4.8 million
Caliber One
Per Occurrence and Per Risk:
Property lines	$	500,000		$	17.0 million
Casualty lines	$	250,000		$	10.8 million

(1) Represents the amount of loss protection above our level of loss retention.

(2) Effective January 1, 2002, the retention and limits were changed to $5.0 million and $15.0 million, respectively.

(3) The PMA Insurance Group retains the first $10 million of losses. Effective January 1, 2002, the retention increased to $250,000, with The PMAInsurance Group retaining the first $3 million of losses.

(4) This coverage also provides protection of $47.5 million per occurrence over the combined net retention of $500,000.

(5) Effective January 1, 2002, the retention and limits were changed to $500,000 and $4.5 million, respectively. This coverage also provides protection of $59.5 million per occurrence over the combined net retention of $500,000.

In addition to the reinsurance and retrocessional protections shown in the table above, for 2001 we had excess of loss retrocessional protection that allowed us to cede losses up to a limit of $73 million once our loss and LAE ratio exceeded a predetermined level. Cession of losses under this contract required us to cede additional premium in 2001. Effective January 1, 2002, the limit was increased to $150 million, which includes protection for losses caused by terrorist activities.

        We actively manage our exposure to catastrophes through our underwriting process, where we generally monitor the accumulation of insurable values in catastrophe-prone regions. Also, in writing property reinsurance coverages, PMA Re typically requires per occurrence loss limitations for contracts that could have catastrophe

39

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

exposure. Through per risk reinsurance, we manage our net retention in each exposure. PMA Re's property per occurrence reinsurance provides catastrophe protection of $50.0 million in excess of $10.0 million on its traditional property book. Under certain conditions, PMA Re may recover $6.0 million of the $10.0 million retention for multiple net catastrophe losses. PMA Re also maintains catastrophe protection of $12.5 million in excess of $5.0 million for property exposures underwritten by its Finite Risk and Financial Products unit. PMA Re can also recover an additional $40.0 million of Finite Risk and Financial Products occurrence losses under certain industry loss scenarios. The PMA Insurance Group maintains catastrophe reinsurance protection of 95% of $18.0 million excess of $2.0 million and Caliber One maintains catastrophe reinsurance protection of $14.7 million excess of $1.3 million. Any cession of losses under certain of these contracts requires that we cede additional premiums.

        In 2001, our loss and LAE ratios were impacted by the attack on the World Trade Center as discussed on page 29. In 2000 and 1999, our loss and LAE ratios were not significantly impacted by catastrophes. Although we believe that we have adequate reinsurance to protect against the estimated probable maximum gross loss from a catastrophe, an especially severe catastrophe or series of catastrophes could exceed our reinsurance and/or retrocessional protection and may have a material adverse impact on our financial condition, results of operations and liquidity.

        With respect to the reinsurance and retrocessional protection shown in the table on page 39, our treaties that renewed effective January 1, 2002 do not cover us for losses sustained from terrorist activities, except for PMA Re's property per occurrence treaty. Further, for treaties that renew later in 2002 it is possible that losses due to terrorist attacks may be excluded. Therefore, future terrorist attacks may result in losses that have a material adverse effect on our financial condition, results of operations and liquidity. See discussion under Terrorism on page 41 for steps we are taking to mitigate this exposure.

        Under our reinsurance and retrocessional coverages in place during 2001, 2000 and 1999, we ceded premiums totaling $243.4 million, $278.6 million and $154.5 million, and ceded losses and LAE of $359.6 million, $308.8 million and $113.1 million to reinsurers and retrocessionaires. The increase in ceded losses in 2001, compared to 2000, is primarily related to the attack on the World Trade Center. The significant increase in ceded premiums and ceded losses in 2000, compared to prior years is due to PMA Re's and Caliber One's use of reinsurance protection to cover a substantial portion of their higher than expected gross losses and LAE recognized in 2000. See the discussions under Impact on 2001 Results from the September 11th Terrorist Attack on the World Trade Center on page 29 and Losses and Expenses on pages 32 and 37 for additional information.

        At December 31, 2001 and 2000, we had amounts receivable from our reinsurers and retrocessionaires totaling $1,210.8 million and $933.9 million, respectively. Approximately $36 million and $15 million of these amounts are due to us on losses we have already paid at December 31, 2001 and 2000, respectively. The remainder of the reinsurance receivables relate to unpaid claims.

        At December 31, 2001, we had reinsurance receivables due from the following unaffiliated reinsurers in excess of 5% of shareholders' equity:

(dollar amounts in thousands)	Reinsurance Receivables		Collateral		Rating(1)
The London Reinsurance Group	$	343,270	$	343,270		A
United States Fidelity and Guaranty		143,635		104,154		A	+
Underwriters Re		86,549		86,549		NR	(2)
Houston Casualty		74,566		--		A	+
Mountain Ridge Insurance Company		49,829		49,829		NR	(3)
PXRE		36,495		13,688		A
Folksamerica Re		31,732		1,243		A	-

(1) Ratings are as of February 28, 2002. A.M. Best ratings are as follows: A++, Superior, 1st of 16; A+, Superior, 2nd of 16; A, Excellent, 3rd of 16; and A-, Excellent, 4th of 16; NR, Not Rated.

(2) Underwriters Re is a subsidiary of Swiss Re, which is rated A++.

(3) Mountain Ridge is a subsidiary of St. Paul, which is rated A+.

40

P M A  C A P I T A L

        We perform credit reviews of our reinsurers focusing on, among other things, financial capacity, stability, trends and commitment to the reinsurance business. Prospective and existing reinsurers failing to meet our standards are excluded from our reinsurance programs. In addition, we require collateral, typically assets in trust, letters of credit or funds withheld, to support balances due from certain reinsurers, consisting generally of those not authorized to transact business in the applicable jurisdictions. At December 31, 2001 and 2000, our reinsurance receivables were supported by $626.9 million and $553.6 million of collateral. Of the uncollateralized reinsurance receivables at December 31, 2001, approximately 95%, were due from reinsurers rated “A-”or better by A.M. Best. We believe that the amounts receivable from reinsurers are fully collectible and that the allowance for uncollectible items is adequate to cover any disputes about amounts owed by reinsurers to us. In the last three years combined, we have written off less than $1 million of reinsurance receivables. The timing and collectibility of reinsurance receivables have not had, and are not expected to have, a material adverse effect on our liquidity. See Note 5 to our Consolidated Financial Statements for additional discussion.

Terrorism

We are currently attempting to exclude coverage of losses due to terrorist activity in our assumed reinsurance contracts and in our surplus lines insurance agreements where underwriters determine that there is a significant risk of loss from terrorist activities. For the commercial insurance business offered by The PMA Insurance Group, excluding our workers’ compensation business, state insurance departments must approve the terms of our insurance forms and new exclusions included in those forms. As of January 31, 2002, all states except for California, Georgia, Florida and New York have approved terrorism exclusions for policies on commercial insurance business, other than workers’ compensation insurance. Accordingly, we are attempting to include terrorism exclusions when permitted. With respect to workers’ compensation insurance, terrorism exclusions are not permitted under workers’ compensation laws of any state or jurisdiction in which we operate. When underwriting existing and new workers’ compensation business, we are considering the added potential risk of loss due to terrorist activity, and this may lead us to decline to write or non-renew certain business. However, even when terrorism exclusions are permitted, because our clients may not accept a full terrorism exclusion in connection with business that we may still desire to write without an exclusion, some or many of our insurance policies or reinsurance contracts may not include a terrorism exclusion or only include a limited exclusion. Therefore, future terrorist attacks may result in losses that have a material adverse effect on our financial condition, results of operations and liquidity. For additional information regarding the underwriting criteria of our operating segments, see our 2001 Form 10-K.

Corporate and Other

The Corporate and Other segment includes unallocated investment income, expenses, including debt service, as well as the results of certain of our real estate properties. This segment had pre-tax operating losses of $6.3 million, $19.1 million and $20.8 million in 2001, 2000 and 1999, respectively. During 2001, we 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. We recorded interest expense of $6.5 million, $11.9 million and $12.2 million in 2001, 2000 and 1999, respectively. The decrease in interest expense for 2001, compared to 2000, is due to the $38.0 million paydown of outstanding debt early in the first quarter of 2001 and lower interest rates throughout 2001.

Net Realized Investment Gains/Losses

We recorded net pre-tax realized investment gains of $8.0 million in 2001, compared to net pre-tax realized investment gains of $12.0 million in 2000 and net pre-tax realized investment losses of $7.7 million in 1999. Throughout 2000 and into the first half of 2001, we shifted the mix of our 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, we recorded net realized investment gains in 2001. During 2000, realized investment gains reflect the sale of equity securities, which had reached our targeted price level. The realized investment losses for 1999 reflect sales of securities in a rising interest rate environment in order to invest in yield enhancing investment opportunities.

41

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

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, our primary sources of liquidity are dividends from subsidiaries, net tax payments received from subsidiaries and capital raising activities (both debt and equity). We utilize cash to pay debt obligations, including interest costs; dividends to shareholders; taxes to the Federal government; and corporate expenses. In addition, we utilize cash resources to repurchase shares of our common stock and to capitalize subsidiaries from time to time.

        In December 2001, we issued 9,775,000 shares of Class A Common stock, for net proceeds of approximately $158 million. We used the net proceeds from this issuance to contribute additional capital to our reinsurance subsidiary and to repay a portion of our outstanding debt under our Revolving Credit Facility.

        Our domestic insurance subsidiaries’ ability to pay dividends to us is limited by the insurance laws and regulations of Pennsylvania. All of our domestic insurance entities are owned by PMA Capital Insurance Company (“PMACIC”). As a result, dividends from The PMAInsurance Group’s Pooled Companies and Caliber One Indemnity Company may not be paid directly to PMA Capital. Instead, only PMACIC, a Pennsylvania domiciled company, may pay dividends directly to PMA Capital. Approximately $56 million of dividends are available to be paid by PMACIC to PMA Capital in 2002 without the prior approval of the Pennsylvania Insurance Commissioner during 2002. As of December 31, 2001, The PMA Insurance Group’s Pooled Companies can pay up to $27.4 million in dividends to PMACIC during 2002. Under Delaware law, Caliber One can not pay dividends to PMACIC in 2002. Dividends received from subsidiaries were $29.6 million, $36.0 million and $43.2 million in 2001, 2000 and 1999, respectively.

        Net tax payments received from subsidiaries were $2.4 million, $6.4 million and $21.8 million in 2001, 2000 and 1999, respectively.

        We had $62.5 million and $163.0 million outstanding under our existing Revolving Credit Facility (“Credit Facility”) at December 31, 2001 and 2000, respectively. Under the terms of the Credit Facility, we repaid $62.5 million in December 2001 and $38.0 million in January 2001 thereby reducing the outstanding debt to $62.5 million, which is the maximum amount PMA Capital can borrow under the Credit Facility as of December 31, 2001. The outstanding balance at December 31, 2001 of $62.5 million matures on December 31, 2002. In 2002, we will be evaluating alternatives to replace our existing Credit Facility.

        During 2001, 2000 and 1999, we incurred $6.5 million, $11.9 million and $12.2 million of interest expense related to the Credit Facility, substantially all of which was paid in each respective year.

        In addition to the Credit Facility, we maintain a committed facility of $50.0 million for letters of credit (the “Letter of Credit Facility”). The Letter of Credit Facility is utilized primarily for securing reinsurance obligations of our insurance subsidiaries. As of December 31, 2001, we had $27.9 million outstanding in letters of credit under the Letter of Credit Facility.

        In addition to the $62.5 million of debt maturing in 2002, we currently have contractual obligations to pay $4.5 million in operating lease payments in 2002. Our future commitment for operating lease payments are $4.9 million in 2003, $4.5 million in 2004, $3.2 million in 2005 and $16.9 million thereafter.

        During 2001, 2000 and 1999, we paid dividends to shareholders of $9.0 million, $8.0 million and $7.8 million, respectively. In 2001 and 2000, dividends paid were higher due to an increase in the annual dividend rate to $0.42 from $0.36 commencing with the fourth quarter 2000 dividend payment. Our dividends to shareholders are restricted by our debt agreements. Based upon the terms of our debt agreements, under the most restrictive debt covenant, PMA Capital would be able to pay dividends of approximately $15 million in 2002.

        In 1998, our Board of Directors authorized a plan to repurchase shares of Class A Common stock in an amount not to exceed $25.0 million. Our Board of Directors authorized an additional $15.0 million and $50.0 million of share repurchase authority in 2000 and 1999, respectively. Since the inception of our share repurchase program, we have repurchased a total of approximately 3.8 million shares at a cost of $72.8 million. We repurchased 299,000 shares at a cost of $5.3 million in 2001, 1.0 million shares at a cost of $18.4 million in 2000 and 1.5 million shares at a cost of $30.2 million in 1999. Our remaining share repurchase authorization at December 31, 2001 is $17.2 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.

42

P M A  C A P I T A L

        We made capital contributions in the form of cash to our subsidiaries totaling $103.9 million, $9.0 million and $7.1 million in 2001, 2000 and 1999, respectively.

        Management believes that our available sources of funds will provide sufficient liquidity to meet our short-term and long-term obligations. However, because we depend primarily upon dividends from our operating subsidiaries to meet our short-term and long-term obligations, any event that has a material adverse effect on the results of operations of our insurance subsidiaries could affect our liquidity and ability to meet our contractual obligations and operating needs. Management currently believes that the 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 our business.

        Our total assets increased to $3,803.0 million at December 31, 2001 from $3,469.4 million at December 31, 2000. The increase in total assets in 2001, compared to 2000, is primarily attributable to an increase of $276.9 million in reinsurance receivables.

Investments

Our investment objectives are to (i) seek competitive after-tax income and total return as appropriate, (ii) maintain medium to high investment grade asset quality and high marketability, (iii) maintain maturity distribution commensurate with our business objectives, (iv) provide portfolio flexibility for changing business and investment climates and (v) provide liquidity to meet operating objectives. Our investment strategy includes guidelines for asset quality standards, asset allocations among investment types and issuers, and other relevant criteria for our portfolio. In addition, invested asset cash flows, both current income and investment maturities, are structured after considering projected liability cash flows of loss reserve payouts using actuarial models. Property and casualty claim demands are somewhat unpredictable in nature and require liquidity from the underlying invested assets, which are structured to emphasize current investment income to the extent consistent with maintaining appropriate portfolio quality and diversity. The liquidity requirements are met primarily through publicly traded fixed maturities as well as operating cash flows and short-term investments.

        Our investment portfolio is diversified and does not contain any significant concentrations in single issuers other than U.S. Treasury and agency obligations. In addition, we do not have a significant concentration of our investments in any single industry segment other than finance companies, which comprise 8% of invested assets at December 31, 2001. Included in this industry segment are financial institutions, including the financing subsidiaries of automotive manufacturers. All of our investments are dollar denominated as of December 31, 2001.

        Our investments at December 31 were as follows:

	2001				2000
(dollar amounts in millions)	Fair Value		Percent		Fair Value		Percent
U.S. Treasury securities and obligations
of U.S. Government agencies	$	266.0		15%	$	355.9		19%
States, political subdivisions and foreign
government securities		17.1		1%		28.4		2%
Corporate debt securities		599.0		34%		503.9		28%
Mortgage-backed and other asset-backed securities		543.2		30%		597.1		32%
Total fixed maturities available for sale		1,425.3		80%		1,485.3		81%
Short-term investments		350.0		20%		341.6		19%
Total	$	1,775.3		100%	$	1,826.9		100%

Mortgage-backed and other asset-backed securities in the table above include collateralized mortgage obligations (“CMOs”) of $125.6 million and $167.7 million carried at fair value as of December 31, 2001 and 2000, respectively. CMO holdings are concentrated in securities with limited prepayment, extension and default risk, such as planned amortization class bonds.

43

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

At December 31, the ratings of our fixed maturities were as follows:

	2001				2000
(dollar amounts in millions)	Fair Value		Percent		Fair Value		Percent
U.S. Treasury securities and AAA	$	793.2		56%	$	946.0		64%
AA		87.8		6%		101.6		7%
A		263.8		19%		288.4		19%
BBB		257.8		18%		116.9		8%
BB		20.7		1%		28.8		2%
B		2.0		--		3.6		--
Total	$	1,425.3		100%	$	1,485.3		100%

Ratings as assigned by Standard and Poor’s. Such ratings are generally assigned at the time of the issuance of the securities, subject to revision on the basis of ongoing evaluations.

Our investment results were as follows:

(dollar amounts in millions)	2001		2000		1999
Average invested assets(1)	$	1,648.2	$	1,742.8	$	1,818.0
Investment income(2)	$	98.6	$	112.7	$	108.7
Net effective yield(3)		5.98%		6.47%		5.98%

(1) Average invested assets throughout the year, at amortized cost, excluding amounts related to securities lending activities.

(2) Gross investment income less investment expenses and before interest credited on funds held treaties of $12.0 million and $10.6 million in 2001 and 2000, respectively. Excludes net realized investment gains and losses and amounts related to securities lending activities.

(3) Investment income for the period divided by average invested assets for the same period.

As of December 31, 2001, the duration of our investments that support the insurance reserves was 3.2 years and the duration of our insurance reserves was 3.3 years.

        See Business – Investments in our 2001 Form 10-K and Notes 2B and 3 to our Consolidated Financial Statements for additional discussion about our investment portfolio.

Market Risk of Financial Instruments

A significant portion of our assets and liabilities are financial instruments that are subject to the market risk of potential losses from adverse changes in market rates and prices. Our primary market risk exposures relate to interest rate risk on fixed rate domestic medium-term instruments and, to a lesser extent, domestic short- and long-term instruments. To manage our exposure to market risk, we have established strategies, asset quality standards, asset allocations and other relevant criteria for our investment portfolio. In addition, invested asset cash flows are structured after considering projected liability cash flows with actuarial models. All of our financial instruments are held for purposes other than trading. As stated above, our portfolio does not contain a significant concentration in single issuers other than U.S. Treasury and agency obligations. In addition, we do not have a significant concentration of our investments in any single industry segment other than finance companies, which comprise 8% of invested assets at December 31, 2001. Included in this industry segment are financial institutions, including the financing subsidiaries of automotive manufacturers. See Notes 2B, 3, 6 and 11 to our Consolidated Financial Statements for additional information about financial instruments.

        Caution should be used in evaluating our overall market risk from the information below, since actual results could differ materially because the information was developed using estimates and assumptions as described below, and because insurance liabilities and reinsurance receivables are excluded in the hypothetical effects (insurance liabilities represent 73% of our total liabilities and reinsurance receivables on unpaid losses represent 32% of our total assets).

        The hypothetical effects of changes in market rates or prices on the fair values of financial instruments as of December 31, 2001, excluding insurance liabilities

44

P M A  C A P I T A L

and reinsurance receivables on unpaid losses because such insurance related assets and liabilities are not carried at fair value, would have been as follows:

• If interest rates had increased by 100 basis points, there would have been no significant change in the fair value of our debt. The change in fair values was determined by estimating the present value of future cash flows using models that measure the change in net present values arising from selected hypothetical changes in market interest rates.

• If interest rates had increased by 100 basis points, there would have been a net decrease of approximately $65 million in the fair value of our investment portfolio. The change in fair values was determined by estimating the present value of future cash flows using various models, primarily duration modeling.

Other Matters

Environmental Factors

Our 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 us. The eventual effect on us of the changing environment in which we operate remains uncertain. See Notes 4, 7 and 12 to our Consolidated Financial Statements for additional discussion.

Comparison of SAP and GAAP Results

Results presented in accordance with GAAP vary in certain respects from results presented in accordance with 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, our insurance subsidiaries implemented the Codification guidelines, resulting in an increase of $20.5 million in its statutory surplus. See Note 16 to our Consolidated Financial Statements for additional discussion.

Recent Accounting Pronouncements

Effective January 1, 2001, we 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. We do not have any derivative instruments that are impacted by the accounting requirements of SFAS No. 133 and we do not currently participate in any hedging activities. Accordingly, the adoption of SFAS No. 133 did not have a material impact on our financial condition, results of operations or liquidity.

        In 2001, we adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-- a Replacement of SFAS 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. Our existing policies and practices for our securities lending program are in conformity with SFAS No. 140. Accordingly, the adoption of SFAS No. 140 did not have a material impact on our financial condition, results of operations or liquidity.

        As of December 31, 2001, we adopted Statement of Position (“SOP”) 01-05, “Amendments to Specific AICPA Pronouncements for Changes Related to the NAIC Codification.” SOP 01-05 requires insurance enterprises to disclose any prescribed or permitted statutory accounting practice that it uses and the related monetary effect on statutory surplus if such accounting practice differs from either state prescribed statutory accounting practices or NAIC statutory accounting practices. See Note 16 to our Consolidated Financial Statements for additional information.

45

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

        Effective January 1, 2000, we adopted 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 our financial condition, results of operations or liquidity.

        Effective January 1, 1999, we adopted SOP 97-3, “Accounting by Insurance and Other Enterprises for Insurance-Related Assessments.” SOP 97-3 provides guidance for determining when an insurance company should recognize a liability for guaranty fund and other insurance-related assessments and how to measure that liability. As a result of adopting SOP 97-3, we recorded a liability of $4.3 million pre-tax and a resulting charge to earnings of $2.8 million, net of income tax benefit of $1.5 million, which has been reported as a cumulative effect of accounting change. This accounting change impacted The PMA Insurance Group segment.

        In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets. We will 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 our financial statements at the date of adoption. At that time, goodwill will no longer be amortized, but will be tested periodically for impairment. As of December 31, 2001, we had approximately $4.3 million of goodwill, which is included in other assets on our balance sheet, and goodwill amortization was $960,000, $220,000 and $220,000 in 2001, 2000 and 1999, respectively. We do not expect adoption of this statement to have a material impact on our financial condition, results of operations or liquidity.

Critical Accounting Policies

Our Consolidated Financial Statements have been prepared in accordance with GAAP. Some of the accounting policies permitted by GAAP require us to make estimates of the amounts of assets and liabilities to be reported in our Consolidated Financial Statements. We have provided a summary of all of our significant accounting policies on pages 54 to 56 of our Consolidated Financial Statements. We recommend that you read all of these policies.

        The following discussion is intended to provide you with an understanding of our critical accounting policies, which are those accounting policies that we believe are most important to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective and complex judgements.

Unpaid losses and loss adjustment expenses

At December 31, 2001, we estimated that under all insurance policies and reinsurance contracts issued by our insurance businesses the ultimate amount that we would have to pay for all events that occurred as of December 31, 2001 is $2,324.4 million. This amount includes estimated losses from claims plus estimated expenses to settle claims. Our estimate also includes amounts for losses occurring prior to December 31, 2001 whether or not these claims have been reported to us.

        In arriving at the estimate of unpaid claims, our actuaries performed detailed studies of historical data for incurred claims, reported claims and paid claims for each major line of business and by accident year. The review of this data results in patterns and trends that are analyzed using actuarial models that assume that historical development patterns will be predictive of future patterns. Along with this historical data, our actuaries consider the impact of legal and legislative developments, regulatory trends, changes in social attitudes and economic conditions. From this assessment, we develop various sets of assumptions that we believe are valid and can be relied upon to help us predict future claim trends. These assumptions are then applied to various actuarially accepted methods and techniques, which provide us with a range of possible outcomes of the ultimate claims to be paid by us in the future. Management uses its judgment to select the best estimate of the amounts needed to pay all future claims and related expenses from this range of possible outcomes. Under GAAP, we record a liability on our balance sheet equal to that amount.

46

P M A  C A P I T A L

        It is important that you realize and understand that the process of estimating our 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 to us. As additional experience and data become available regarding claim payment and reporting patterns, legal and legislative developments, regulatory trends on benefit levels for both medical and indemnity payments, and economic conditions, we revise our estimates accordingly. We believe that our liability for unpaid losses and loss adjustment expenses are fairly stated at December 31, 2001. However, if our future estimate of ultimate unpaid losses is larger than the recorded amounts, we would have to increase our reserves. The increase in reserves would result in a charge to earnings in the period recorded. Accordingly, any related reserve adjustment could have a material adverse effect on our financial condition, results of operations and liquidity.

        For additional information about our liability for unpaid losses and loss adjustment expenses, see Notes 2D and 4 to our Consolidated Financial Statements as well as the discussion on pages 38 and 39 of this Management’s Discussion and Analysis.

Investments

All investments in our portfolio are carried at market value. For 99% of our investments, we determine the market value using prices obtained in the public markets, both primary and secondary markets. These market prices reflect publicly reported values of recent purchase and sale transactions for each specific, individual security. Therefore, we believe that the reported fair values for our investments at December 31, 2001 reflect the value that we could realize if we sold these investments in the open market at that time.

        As part of determining the market value for each specific investment that we hold, we evaluate each issuer’s ability to fully meet their obligation to pay all amounts, both interest and principal, due in the future. Because we have invested in fixed income obligations with an average credit quality of AA-, and 99% of our investments are currently meeting their obligations with respect to scheduled interest income and principal payments, we believe that we will fully realize the value of our investments. However, future general economic conditions and/or specific company performance issues may cause a particular issuer, or group of issuers in the same industry segment, to become unable to meet their obligation to pay principal and interest as it comes due. If such events were to occur, then we would evaluate our ability to fully recover the recorded value of our investment. Ultimately, we may have to write down an investment to its then determined net realizable value and reflect that write-down in earnings in the period such determination is made.

        For additional information about our investments, see Notes 2B, 3 and 11 as well as the discussion on pages 43 to 45 of this Management’s Discussion and Analysis.

Reinsurance Receivables

We follow the customary insurance industry practice of reinsuring with other insurance and reinsurance companies a portion of the risks under the policies written by our insurance and reinsurance subsidiaries. Our reinsurance receivables total $1,210.8 million at December 31, 2001. We have also estimated that $4.6 million of reinsurance receivables will be uncollectible, and we have provided a valuation allowance for that amount.

        Although the contractual obligation of individual reinsurers to pay their reinsurance obligations is determinable from specific contract provisions, the collectibility of such amounts requires significant estimation by management. Many years may pass between the occurrence of a claim, when it is reported to us and when we ultimately settle and pay the claim. As a result, it can be several years before a reinsurer has to actually pay amounts to us. Over this period of time, economic conditions and operational performance of a particular reinsurer may impact their ability to meet these obligations and while they may still acknowledge their contractual obligation to do so, they may not have the financial resources to fully meet their obligation to us. If this occurs, we may have to write down a reinsurance receivable to its then determined net realizable value and reflect that write-down in earnings in the period such determination is made. We attempt to limit any such exposure to uncollectible reinsurance receivables by performing credit reviews of our reinsurers. In addition, we require collateral, such as assets held in trust or letters of credit, for certain reinsurance receivables. However, if our future estimate of uncollectible receivables exceeds our current expectations, we may need to increase our allowance for uncollectible reinsurance receivables. The increase in this allowance would result in a charge to earnings in the period recorded. Accordingly, any related charge could have a material adverse effect on our financial condition, results of operations and liquidity.

47

P M A  C A P I T A L

Management's Discussion and Analysis (continued)

        For additional information about reinsurance receivables, see Note 5 to the Consolidated Financial Statements as well as the discussion on pages 39 to 41 of this Management’s Discussion and Analysis.

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. Words such as “believes,” “estimates,” “anticipates,” “expects,” or similar words, are intended to identify forward-looking statements. These forward-looking statements are based on currently available financial, competitive and economic data and our current operating plans based on assumptions regarding future events. Our actual results could differ materially from those expected by our 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, our products or otherwise affect our ability to conduct our business;

• competitive conditions 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;

• ability to implement and maintain rate increases;

• the effect of changes in workers’ compensation statutes and their administration, which may affect the rates that we can charge and the manner in which we administer claims;

• our 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 our insurance subsidiaries;

• adequacy of reserves for claim liabilities;

• adverse property and casualty loss development for events that we insured in prior years;

• the uncertain nature of damage theories and loss amounts and the development of additional facts related to the attack on the World Trade Center;

• uncertainty as to the price and availability of reinsurance on business we intend to write in the future, including reinsurance for terrorist acts;

• adequacy and collectibility of reinsurance that we purchase;

• severity of natural disasters and other catastrophes;

• reliance on key management; and

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

You should not place undue reliance on any such forward-looking statements. Unless otherwise stated, we disclaim any current intention to update forward-looking infor-mation 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.

48

P M A  C A P I T A L

Consolidated Balance Sheets

(in thousands, except share data)	2001			2000
Assets:
Investments:
Fixed maturities available for sale, at fair value (amortized cost:
2001 - $1,416,901; 2000 - $1,507,667)	$	1,425,281		$	1,485,308
Short-term investments, at cost which approximates fair value		350,054			341,641
Cash		20,656			5,604
Total investments and cash		1,795,991			1,832,553
Accrued investment income		19,121			20,867
Premiums receivable (net of valuation allowance: 2001 - $12,583; 2000 - $16,630)		301,104			299,342
Reinsurance receivables (net of valuation allowance: 2001 - $4,562;    2000 - $4,328)		1,210,764			933,889
Deferred income taxes, net		82,120			89,011
Deferred acquisition costs		64,350			48,522
Funds held by reinsureds		145,239			73,999
Other assets		184,290			171,223
Total assets	$	3,802,979		$	3,469,406
Liabilities:
Unpaid losses and loss adjustment expenses	$	2,324,439		$	2,053,138
Unearned premiums		308,292			269,734
Short-term debt		62,500			100,500
Long-term debt		--			62,500
Accounts payable, accrued expenses and other liabilities		217,490			207,211
Funds held under reinsurance treaties		227,892			173,762
Dividends to policyholders		17,132			17,246
Payable under securities loan agreements		33,228			145,269
Total liabilities		3,190,973			3,029,360
Commitments and contingencies (Note 7)
Shareholders' Equity:
Class A Common stock, $5 par value (40,000,000 shares authorized;
2001 - 34,217,945 shares issued and 31,167,006 outstanding;
2000 - 24,442,945 shares issued and 21,573,316 outstanding)		171,090			122,214
Additional paid-in capital		109,331			339
Retained earnings		382,165			384,694
Accumulated other comprehensive income (loss)		5,375			(14,373	)
Notes receivable from officers		(158	)		(56	)
Treasury stock, at cost (2001 - 3,050,939 shares; 2000 - 2,869,629 shares)		(55,797	)		(52,772	)
Total shareholders' equity		612,006			440,046
Total liabilities and shareholders' equity	$	3,802,979		$	3,469,406

See accompanying notes to the consolidated financial statements.

49

P M A  C A P I T A L

Consolidated Statements of Operations

(in thousands, except per share data)	2001			2000			1999
Revenues:
Net premiums written	$	769,058		$	545,555		$	563,510
Change in net unearned premiums		(36,618	)		(14,131	)		(23,423	)
Net premiums earned		732,440			531,424			540,087
Net investment income		86,945			102,591			110,057
Net realized investment gains (losses)		7,988			11,975			(7,745	)
Other revenues		22,599			14,000			12,718
Total revenues		849,972			659,990			655,117
Losses and Expenses:
Losses and loss adjustment expenses		616,763			449,388			392,473
Acquisition expenses		138,982			112,654			124,368
Operating expenses		78,015			67,081			66,822
Dividends to policyholders		14,087			18,855			19,141
Interest expense		6,541			11,889			12,221
Total losses and expenses		854,388			659,867			615,025
Income (loss) before income taxes and cumulative
effect of accounting change		(4,416	)		123			40,092
Income tax expense (benefit)		(11,519	)		(1,202	)		11,739
Income before cumulative effect of accounting change		7,103			1,325			28,353
Cumulative effect of accounting change
(net of income tax benefit of $1,485)		--			--			(2,759	)
Net income	$	7,103		$	1,325		$	25,594
Income per share:
Basic:
Income before cumulative effect of accounting change	$	0.33		$	0.06		$	1.23
Cumulative effect of accounting change		--			--			(0.12	)
Net income	$	0.33		$	0.06		$	1.11
Diluted:
Income before cumulative effect of accounting change	$	0.32		$	0.06		$	1.19
Cumulative effect of accounting change		--			--			(0.11	)
Net income	$	0.32		$	0.06		$	1.08

See accompanying notes to the consolidated financial statements.

50

P M A  C A P I T A L

Consolidated Statements of Cash Flows

(in thousands)	2001			2000			1999
Cash flows from operating activities:
Net income	$	7,103		$	1,325		$	25,594
Adjustments to reconcile net income to net cash flows
provided by (used in) operating activities:
Deferred income tax expense (benefit)		(3,147	)		(82	)		1,813
Cumulative effect of accounting change		--			--			2,759
Net realized investment (gains) losses		(7,988	)		(11,975	)		7,745
Gain on sale of real estate		(9,763	)		--			--
Change in:
Premiums receivable and unearned premiums, net		20,236			(18,127	)		40,207
Dividends to policyholders		(114	)		3,464			3,082
Reinsurance receivables		(276,875	)		(275,725	)		(47,873	)
Unpaid losses and loss adjustment expenses		257,520			120,537			(8,294	)
Funds held by reinsureds		(72,588	)		(54,721	)		(10,979	)
Funds held under reinsurance treaties		54,130			79,317			16,771
Accrued investment income		1,746			1,866			(580	)
Deferred acquisition costs		(15,828	)		427			2,166
Accounts payable, accrued expenses and other liabilities		45,122			96,667			1,495
Other, net		(9,129	)		1,988			(16,509	)
Net cash flows provided by (used in) operating activities		(9,575	)		(55,039	)		17,397
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases		(1,054,794	)		(422,350	)		(1,198,557	)
Maturities or calls		297,549			121,814			171,091
Sales		833,884			408,233			1,149,951
Equity securities:
Purchases		--			(24,706	)		(37,779	)
Sales		--			78,182			6
Net (purchases) sales of short-term investments		(102,637	)		(131,688	)		15,887
Proceeds from sale of real estate		14,401			--			--
Other, net		(8,071	)		(29,522	)		(4,738	)
Net cash flows provided by (used in) investing activities		(19,668	)		(37	)		95,861
Cash flows from financing activities:
Proceeds from issuance of stock		157,868			--			--
Dividends paid to shareholders		(9,035	)		(8,020	)		(7,795	)
Proceeds from exercise of stock options		1,387			2,866			6,035
Purchase of treasury stock		(5,323	)		(18,427	)		(30,241	)
Repayments of debt		(100,500	)		--			--
Net repayments (issuance) of notes receivable from officers		(102	)		--			442
Net cash flows provided by (used in) financing activities		44,295			(23,581	)		(31,559	)
Net increase (decrease) in cash		15,052			(78,657	)		81,699
Cash - beginning of year		5,604			84,261			2,562
Cash - end of year	$	20,656		$	5,604		$	84,261
Supplementary cash flow information:
Income tax paid (refunded)	$	(8,991	)	$	7,300		$	12,352
Interest paid	$	7,074		$	11,795		$	12,050

See accompanying notes to the consolidated financial statements.

51

P M A  C A P I T A L

Consolidated Statements of Shareholders’ Equity

(in thousands)	2001			2000			1999
Class A Common stock:
Balance at beginning of year	$	122,214		$	56,791		$	52,433
Issuance of Class A Common stock		48,876			--			--
Conversion of Common stock into Class A Common stock		--			65,423			4,358
Balance at end of year		171,090			122,214			56,791
Common stock:
Balance at beginning of year		--			65,423			69,781
Conversion of Common stock into Class A Common stock		--			(65,423	)		(4,358	)
Balance at end of year		--			--			65,423
Additional paid-in capital - Class A Common stock:
Balance at beginning of year		339			339			339
Issuance of Class A Common stock		108,992			--			--
Balance at end of year		109,331			339			339
Retained earnings:
Balance at beginning of year		384,694			391,981			377,601
Net income		7,103			1,325			25,594
Class A Common stock dividends declared		(9,018	)		(7,458	)		(3,543	)
Common stock dividends declared		--			(922	)		(4,139	)
Reissuance of treasury shares under employee benefit plans		(614	)		(232	)		(3,532	)
Balance at end of year		382,165			384,694			391,981
Accumulated other comprehensive income (loss):
Balance at beginning of year		(14,373	)		(46,844	)		30,016
Other comprehensive income (loss), net of tax
(expense) benefit:
2001 - ($10,634); 2000 - ($17,484); 1999 - $41,386		19,748			32,471			(76,860	)
Balance at end of year		5,375			(14,373	)		(46,844	)
Notes receivable from officers:
Balance at beginning of year		(56	)		(56	)		(498	)
Repayment (issuance) of notes receivable from officers		(102	)		--			442
Balance at end of year		(158	)		(56	)		(56	)
Treasury stock - Class A Common:
Balance at beginning of year		(52,772	)		(32,909	)		(12,610	)
Purchase of treasury shares		(5,323	)		(18,427	)		(30,241	)
Conversion of Common stock into Class A Common stock		--			(5,582	)		--
Reissuance of treasury shares under employee benefit plans		2,298			4,146			9,942
Balance at end of year		(55,797	)		(52,772	)		(32,909	)
Treasury stock - Common:
Balance at beginning of year		--			(5,582	)		(5,582	)
Conversion of Common stock into Class A Common stock		--			5,582			--
Balance at end of year		--			--			(5,582	)
Total shareholders' equity:
Balance at beginning of year		440,046			429,143			511,480
Net income		7,103			1,325			25,594
Issuance of Class A Common stock		157,868			--			--
Class A Common stock dividends declared		(9,018	)		(7,458	)		(3,543	)
Common stock dividends declared		--			(922	)		(4,139	)
Purchase of treasury shares		(5,323	)		(18,427	)		(30,241	)
Reissuance of treasury shares under employee benefit plans		1,684			3,914			6,410
Other comprehensive income (loss)		19,748			32,471			(76,860	)
Repayment (issuance) of notes receivable from officers		(102	)		--			442
Balance at end of year	$	612,006		$	440,046		$	429,143

See accompanying notes to the consolidated financial statements.

52

P M A  C A P I T A L

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)	2001			2000			1999
Net income	$	7,103		$	1,325		$	25,594
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Holding gain (loss) arising during the period		25,175			40,095			(81,894	)
Less: reclassification adjustment for (gains) losses included
in net income, net of tax expense (benefit): 2001 - $2,796;
2000 - $4,191; 1999 - ($2,711)		(5,192	)		(7,784	)		5,034
Total unrealized gain (loss) on securities		19,983			32,311			(76,860	)
Foreign currency translation (gain) loss, net of tax
expense (benefit):
2001 - ($127); 2000 - $87		(235	)		160			--
Other comprehensive income (loss), net of tax		19,748			32,471			(76,860	)
Comprehensive income (loss)	$	26,851		$	33,796		$	(51,266	)

See accompanying notes to the consolidated financial statements.

53

P M A  C A P I T A L

Notes to 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 reinsurance brokers.

The PMA Insurance Group — The PMA Insurance Group writes workers’ compensation, integrated disability and, to a lesser extent, other standard lines of commercial insurance, primarily in the eastern part of the United States. Approximately 90% of The PMA Insurance Group’s business is produced through independent agents and brokers.

Caliber One — PMA Capital’s specialty property and casualty operations write excess and surplus lines of business throughout the United States, generally 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”). All significant intercompany accounts and transactions have been eliminated in consolidation. 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. Actual results could differ from those estimates. In addition, certain prior year amounts have been restated to conform to the current year classification. The balance sheet information presented in these financial statements and notes thereto is as of December 31 for each respective year. The statement of operations information is for the year ended December 31 for each respective year.

B. Investments — All fixed maturities are classified as available-for-sale and, accordingly, are carried at fair value. Changes in fair value of fixed maturities, net of income tax effects, are reflected in accumulated other comprehensive income (loss). Short-term investments, which have original maturities of one year or less, are carried at amortized cost, which approximates fair value. All short-term, highly liquid investments, which are part of the Company’s investing activities, are treated as short-term investments.

        Realized gains and losses, determined by specific identification where possible and the first-in, first-out method in other instances, are reflected in income in the period in which the sale transaction occurs. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded in net realized investment losses.

        The Company participates in a securities lending program through which securities are lent from the Company’s portfolio for short periods of time to qualifying third parties via a lending agent. Borrowers of these securities must provide collateral equal to a minimum of 102% of the market value including accrued interest of the lent securities. Acceptable collateral may be in the form of either cash or securities. Cash received as collateral is invested in short-term investments, and is recorded as such on the balance sheet, along with a corresponding liability included in payable under securities loan agreements. All securities received as collateral are of similar quality to those securities lent by the Company. The Company is not permitted by contract to sell or repledge the securities received as collateral. Additionally, the Company limits securities lending to 40% of statutory admitted assets of its insurance subsidiaries, with a 2% limit on statutory admitted assets to any individual borrower. The Company either receives a fee from the borrower or retains a portion of the income earned on the collateral. Under the terms of the securities lending program, the Company is indemnified against borrower default, with the lending agent responsible to the Company for any deficiency between the cost of replacing a security that was not returned and the amount of collateral held by the Company.

54

P M A  C A P I T A L

C. Premiums — Premiums, including estimates of additional premiums resulting from audits of insureds’ records, and premiums from ceding companies which are typically reported on a delayed basis, are earned principally on a pro rata basis over the terms of the policies. Premiums applicable to the unexpired terms of policies in force are reported as unearned premiums. The estimated premiums receivable on retrospectively rated policies are reported as a component of premiums receivable.

D. Unpaid Losses and Loss Adjustment Expenses — Unpaid losses and loss adjustment expenses (“LAE”), which are stated net of estimated salvage and subrogation, are estimates of losses and loss adjustment expenses on known claims, and estimates of losses and loss adjustment expenses incurred but not reported (“IBNR”). IBNR reserves are calculated utilizing various actuarial methods. Unpaid losses on certain workers’ compensation claims are discounted to present value using the Company’s payment experience and mortality and interest assumptions in accordance with statutory accounting practices prescribed by the Pennsylvania Insurance Department (collectively “SAP”). The Company also discounts unpaid losses and LAE for certain other claims at rates permitted by domiciliary regulators. The methods of making such estimates and establishing the resulting reserves are continually reviewed and updated and any adjustments resulting therefrom are reflected in earnings in the period identified. See Note 4 for additional information.

E. Deferred Acquisition Costs — Costs that directly relate to and vary with acquisition of new and renewal business are deferred and amortized over the period during which the related premiums are earned. Such direct costs include commissions, brokerage and premium taxes, as well as other policy issuance costs and underwriting expenses. The Company determines whether deferred acquisition costs are recoverable considering future losses and loss adjustment expenses, maintenance costs and anticipated investment income. To the extent that deferred acquisition costs are not recoverable, the deficiency is charged to income in the period identified.

F. Dividends to Policyholders — The PMA Insurance Group issues certain workers’ compensation insurance policies with dividend payment features. These policyholders share in the operating results of their respective policies in the form of dividends declared at the discretion of the Board of Directors of The PMA Insurance Group’s operating companies. Dividends to policyholders are accrued during the period in which the related premiums are earned and are determined based on the terms of the individual policies.

G. Income Taxes — The Company records deferred tax assets and liabilities to the extent of the tax effect of differences between the financial statement carrying values and tax bases of assets and liabilities. A valuation allowance is recorded for deferred tax assets where it appears more likely than not that the Company will not be able to recover the deferred tax asset.

H. Stock-Based Compensation — The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s Class A Common stock at grant date or other measurement date over the amount an employee must pay to acquire the Class A Common stock.

I. Other Revenues — Other revenues include service revenues related to unbundled claims, risk management and related services provided by The PMA Insurance Group, which are earned over the term of the related contracts in proportion to the actual services rendered, and other miscellaneous revenues.

J. 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.

55

P M A  C A P I T A L

Notes to Consolidated Financial Statements (continued)

        In 2001, the Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-- a Replacement of SFAS 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.

        As of December 31, 2001, the Company adopted Statement of Position (“SOP”) 01-05, “Amendments to Specific AICPA Pronouncements for Changes Related to the NAIC Codification.” SOP 01-05 requires insurance enterprises to disclose any prescribed or permitted statutory accounting practice that it uses and the related monetary effect on statutory surplus if such accounting practice differs from either state prescribed statutory accounting practices or National Association of Insurance Commissioners (“NAIC”) statutory accounting practices. See Note 16 for additional information.

        Effective January 1, 2000, the Company adopted 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.

        Effective January 1, 1999, the Company adopted SOP 97-3, “Accounting by Insurance and Other Enterprises for Insurance-Related Assessments.” SOP 97-3 provides guidance for determining when an insurance company should recognize a liability for guaranty fund and other insurance-related assessments and how to measure that liability. As a result of adopting SOP 97-3, the Company recorded a liability of $4.3 million pre-tax and a resulting charge to earnings of $2.8 million, net of income tax benefit of $1.5 million, which has been reported as a cumulative effect of accounting change. This accounting change impacted The PMA Insurance Group segment.

        In July 2001, the Financial Accounting Standards Board (“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 periodically for impairment. As of December 31, 2001, the Company had approximately $4.3 million of goodwill, which is included in other assets on the Company’s balance sheet, and goodwill amortization was $960,000, $220,000 and $220,000 in 2001, 2000 and 1999, respectively. The Company does not expect adoption of this statement to have a material impact on the Company’s financial condition, results of operations or liquidity when it is adopted.

56

P M A  C A P I T A L

3. Investments

The Company’s investment portfolio is diversified and does not contain any significant concentrations in single issuers other than U.S. Treasury and agency obligations. In addition, the Company does not have a significant concentration of investments in any single industry segment other than finance companies, which comprise 8% of invested assets at December 31, 2001. Included in this industry segment are financial institutions, including the financing subsidiaries of automotive manufacturers.

        The amortized cost and fair value of the Company’s investment portfolio are as follows:

(dollar amounts in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2001
Fixed maturities available for sale:
U.S. Treasury securities and obligations
of U.S. Government agencies	$	263,633	$	4,563	$	2,155	$	266,041
States, political subdivisions and foreign government securities		16,857		272		31		17,098
Corporate debt securities		594,477		13,354		8,828		599,003
Mortgage-backed and other asset-backed securities		541,934		10,215		9,010		543,139
Total fixed maturities available for sale		1,416,901		28,404		20,024		1,425,281
Short-term investments		350,054		--		--		350,054
Total investments	$	1,766,955	$	28,404	$	20,024	$	1,775,335
December 31, 2000
Fixed maturities available for sale:
U.S. Treasury securities and obligations
of U.S. Government agencies	$	349,112	$	7,433	$	680	$	355,865
States, political subdivisions and foreign government securities		28,784		103		449		28,438
Corporate debt securities		528,753		3,612		28,497		503,868
Mortgage-backed and other asset-backed securities		601,018		6,324		10,205		597,137
Total fixed maturities available for sale		1,507,667		17,472		39,831		1,485,308
Short-term investments		341,641		--		--		341,641
Total investments	$	1,849,308	$	17,472	$	39,831	$	1,826,949

The amortized cost and fair value of fixed maturities at December 31, 2001, by contractual maturity, are as follows:

(dollar amounts in thousands)	Amortized Cost		Fair Value
2002	$	96,254	$	98,278
2003-2006		283,169		290,404
2007-2011		216,428		215,367
2012 and thereafter		279,116		278,093
Mortgage-backed and other asset-backed securities		541,934		543,139
	$	1,416,901	$	1,425,281

57

P M A  C A P I T A L

Notes to Consolidated Financial Statements (continued)

Net investment income consists of the following:

(dollar amounts in thousands)	2001		2000		1999
Fixed maturities	$	91,530	$	103,490	$	106,058
Equity securities		--		716		131
Short-term investments		7,048		8,513		5,126
Other		2,911		3,002		2,887
Total investment income		101,489		115,721		114,202
Investment expenses(1)		14,544		13,130		4,145
Net investment income	$	86,945	$	102,591	$	110,057

(1) Includes $12.0 million and $10.6 million of interest credited on funds held treaties in 2001 and 2000, respectively.

The Company recognized income, net of lending fees, from securities lending transactions of $383,000, $600,000 and $1.3 million in 2001, 2000 and 1999, respectively, which was included in net investment income. At December 31, 2001, the Company had approximately $33.2 million of collateral related to securities on loan, substantially all of which was cash received and subsequently reinvested in short-term investments.

        Net realized investment gains (losses) consist of the following:

(dollar amounts in thousands)	2001			2000			1999
Realized gains:
Fixed maturities	$	15,768		$	3,423		$	6,839
Equity securities		--			15,698			2
		15,768			19,121			6,841
Realized losses:
Fixed maturities		(7,780	)		(7,146	)		(14,585	)
Equity securities		--			--			(1	)
		(7,780	)		(7,146	)		(14,586	)
Total net realized
investment gains (losses)	$	7,988		$	11,975		$	(7,745	)

The change in unrealized gains (losses) on investments for 2001, 2000 and 1999 was $30.7 million, $49.7 million and ($118.2) million, respectively, attributable to fixed maturities.

        On December 31, 2001, the Company had securities with a total amortized cost of $37.6 million and fair value of $39.0 million on deposit with various governmental authorities, as required by law. In addition, at December 31, 2001, securities with a total amortized cost of $46.8 million and fair value of $47.3 million were pledged as collateral for letters of credit issued on behalf of the Company, and securities with a total amortized cost of $18.3 million and fair value of $18.7 million were held in trust to support the Company’s investment in a Lloyd’s of London operation.

4. Unpaid Losses and Loss
Adjustment Expenses

Activity in the liability for unpaid losses and LAE is summarized as follows:

(dollar amounts in thousands)	2001			2000			1999
Balance at January 1	$	2,053,138		$	1,932,601		$	1,940,895
Less: reinsurance
recoverable on unpaid
losses and LAE		924,429			648,227			593,701
Net balance at January 1		1,128,709			1,284,374			1,347,194
Losses and LAE
incurred, net:
Current year, net
of discount		586,392			432,767			409,554
Prior years		23,512			6,491			(32,514	)
Accretion of prior
years' discount		6,859			10,130			15,433
Total losses and LAE
incurred, net		616,763			449,388			392,473
Losses and LAE paid, net:
Current year		(145,352	)		(110,188	)		(103,798	)
Prior years		(457,003	)		(445,865	)		(351,495	)
Total losses and LAE
paid, net		(602,355	)		(556,053	)		(455,293	)
Reserves transferred		--			(49,000	)		--
Net balance at December 31		1,143,117			1,128,709			1,284,374
Reinsurance recoverable
on unpaid losses and LAE		1,181,322			924,429			648,227
Balance at December 31	$	2,324,439		$	2,053,138		$	1,932,601

58

P M A  C A P I T A L

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, actuarial models are used that analyze historical data and consider the impact of current developments and trends, such as trends in claims severity and frequency. Also considered are legal developments, regulatory trends, legislative developments, changes in social attitudes and economic conditions.

        Losses and LAE incurred in 2001 were impacted by the September 11th terrorist attack on the World Trade Center. Gross losses of approximately $145 million resulted from this catastrophe, which is before (1) reinsurance recoveries, (2) additional premiums due to PMA Re’s retrocessionaires and (3) additional premiums due to PMA Re on its assumed business. Of these losses, approximately 80% were property losses, primarily from property excess of loss and property catastrophe coverages. The remaining 20% were casualty losses, primarily from umbrella coverages and, to a lesser extent, workers’ compensation coverages. The Company expects to recover approximately $120 million of its total losses from its reinsurers and retrocessionaires under existing reinsurance and retrocessional contracts. As a result of ceding these losses, the Company is required to pay additional premiums of approximately $30 million to its reinsurers and retrocessionaires. The Company expects to collect approximately $25 million of additional premiums from its ceding companies under contractual provisions of its assumed reinsurance contracts. These estimates are based on the Company’s analysis to date of known exposures. However, it is difficult to fully estimate the Company’s losses from the attack given the uncertain nature of damage theories and loss amounts, and the development of additional facts related to the attack. As more information becomes available, the Company’s estimate of these losses may need to be increased.

        The components of our (favorable) unfavorable development of reserves for losses and LAE for prior accident years, excluding accretion of discount, are as follows:

(dollar amounts in thousands)	2001			2000			1999
PMA Re	$	(1,568	)	$	9,691		$	(23,526	)
The PMA Insurance Group		2,889			(6,074	)		(8,988	)
Caliber One		22,191			2,874			--
Total	$	23,512		$	6,491		$	(32,514	)

During 2001, PMA Re recorded favorable prior year development of $1.6 million, reflecting development on prior accident years due to re-estimated loss trends for such years that were lower than previous expectations. This is largely due to favorable development on casualty business.

        In 2000, PMA Re recorded unfavorable prior year development of $9.7 million, reflecting higher than expected losses and LAE primarily from more recent accident years, partially offset by lower than expected losses and LAE for accident years 1996 and prior. PMA Re’s actuarial department conducted its routine semi-annual reserve study to determine the impact of any emerging data on anticipated loss development trends and recorded unpaid losses and LAE reserves. Based on the actuarial work performed, which included analyzing recent trends in the levels of the reported and paid claims, an updated selection of actuarially determined loss reserve estimates was developed by accident year for each major line of business written by PMA Re. Management’s selection of the ultimate losses indicated that gross loss reserves needed to be increased by $83.2 million.

        The increase in the estimate of gross loss and LAE reserves primarily reflects higher than anticipated losses mainly in the Company’s pro rata business, where PMA Re participates with the insured by agreeing to pay a predetermined percentage of all losses arising under a particular insurance contract of the insured in exchange for the same predetermined percentage of all applicable premiums received under that contract. The concentration of estimated adverse loss development was in PMA Re’s pro rata reinsurance business related primarily to general liability treaties written on a claims made basis covering losses in 1998 and 1999, property treaties covering 1999 losses and, to a lesser extent, commercial automobile liability treaties covering losses in 1998 and 1999. In addition, the reserve increase reflects unfavorable prior year development in the excess of loss general liability line for accident years 1998 and 1999. Under existing retrocessional contracts, $60.0 million of gross

59

P M A  C A P I T A L

Notes to Consolidated Financial Statements (continued)

losses were ceded to PMA Re’s retrocessionaires, reducing the impact on net incurred losses and LAE to $23.2 million. The increase in incurred losses and LAE, combined with $35.0 million of ceded premiums and interest on funds held under existing retrocessional contracts covering the ceded losses, resulted in a pre-tax charge of approximately $60 million to PMA Re’s operating results in 2000.

        During 1999, PMA Re recorded favorable prior year development of $23.5 million, reflecting development on prior accident years due to re-estimated loss trends for such years that were lower than previous expectations. This is largely due to favorable development on casualty excess of loss business.

        The PMA Insurance Group experienced unfavorable prior year development of $2.9 million in 2001, and favorable prior year development of $6.1 million and $9.0 million in 2000 and 1999, respectively. The unfavorable prior year development in 2001 reflects higher than expected claims handling costs. The favorable prior year development in 2000 and 1999 primarily reflects better than expected loss experience from loss-sensitive and rent-a-captive workers’ compensation business. Premium adjustments for loss-sensitive business and policyholders’ dividends for rent-a-captive business have substantially offset this favorable development. Rent-a-captives are used by customers as an alternative method to manage their loss exposure without establishing and capitalizing their own captive insurance company. Adjustments to premiums for retrospectively rated business and dividends on captive workers’ compensation business of $6.1 million and $8.4 million partially offset favorable prior year development in 2000 and 1999, respectively.

        As a result of its reserve reviews conducted during 2001, Caliber One revised its estimate of ultimate expected claims activity and, accordingly, increased its estimate of ultimate losses, substantially all for accident years 1999 and 2000. During 2001, Caliber One recorded unfavorable prior year development of $22.2 million, which is net of losses of approximately $26 million ceded to third party reinsurers under existing reinsurance contracts covering the prior year loss development. These losses primarily reflect higher than expected claim frequency and severity that emerged in 2001 on certain casualty lines of business, primarily professional liability policies for the nursing homes class of business, and, to a lesser extent, property lines of business.

        During 2000, Caliber One recorded unfavorable prior year development of $2.9 million, primarily related to the emergence of higher than expected losses and LAE in certain segments of the professional liability, commercial automobile, general liability and property lines of business for coverage of 1999 exposures. During 2000, Caliber One discontinued writing or cancelled policies in the professional liability (nursing homes) and commercial automobile classes of business that produced the emergence of higher than expected losses.

        Reserves transferred in 2000 reflect the assumption of liability by an unaffiliated third party of The PMA Insurance Group’s Run-off operations, which reinsured certain obligations primarily associated with workers’ compensation claims written by The PMA Insurance Group’s Pooled Companies for the years 1991 and prior.

        Unpaid losses for the Company’s workers’ compensation claims, net of reinsurance, at December 31, 2001 and 2000 were $363.5 million and $341.8 million, net of discount of $91.0 million and $88.4 million, respectively. The approximate discount rate used was 5% at December 31, 2001 and 2000.

        The Company’s loss reserves were stated net of salvage and subrogation of $40.8 million and $41.8 million at December 31, 2001 and 2000, respectively.

        Management believes that its unpaid losses and LAE are fairly stated at December 31, 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, judicial theories of liability, regulatory trends on benefit levels for both medical and indemnity payments, social attitudes 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 December 31, 2001, the related adjustments could have a material adverse effect on the Company’s financial condition, results of operations and liquidity.

        Asbestos-related liabilities included in unpaid losses and LAE were as follows:

(dollar amounts in thousands)	2001			2000			1999
Gross of reinsurance:
Beginning reserves	$	49,193		$	61,277		$	67,857
Incurred losses and LAE		23,295			1,640			1,910
Paid losses and LAE		(12,629	)		(13,724	)		(8,490	)
Ending reserves	$	59,859		$	49,193		$	61,277
Net of reinsurance:
Beginning reserves	$	32,043		$	38,851		$	43,556
Incurred losses and LAE		131			(341	)		(341	)
Paid losses and LAE		(3,604	)		(6,467	)		(4,364	)
Ending reserves	$	28,570		$	32,043		$	38,851

60

P M A  C A P I T A L

Environmental-related liabilities included in unpaid losses and LAE were as follows:

(dollar amounts in thousands)	2001			2000			1999
Gross of reinsurance:
Beginning reserves	$	29,483		$	41,359		$	47,036
Incurred losses and LAE		2,846			(7,848	)		5,081
Paid losses and LAE		(2,745	)		(4,028	)		(10,758	)
Ending reserves	$	29,584		$	29,483		$	41,359
Net of reinsurance:
Beginning reserves	$	18,020		$	24,522		$	29,356
Incurred losses and LAE		15			(3,212	)		82
Paid losses and LAE		(2,058	)		(3,290	)		(4,916	)
Ending reserves	$	15,977		$	18,020		$	24,522

Of the total net asbestos reserves, approximately $26.6 million, $27.2 million and $32.0 million related to IBNR losses at December 31, 2001, 2000 and 1999, respectively. Of the total net environmental reserves, approximately $9.2 million, $9.2 million and $18.0 million related to IBNR losses at December 31, 2001, 2000 and 1999, respectively. All incurred asbestos and environmental losses were for accident years 1986 and prior.

        Estimating reserves for asbestos and environmental exposures continues to be difficult because of several factors, including: (i) evolving methodologies for the estimation of the liabilities; (ii) lack of reliable historical claim data; (iii) uncertainties with respect to insurance and reinsurance coverage related to these obligations; (iv) changing judicial interpretations; and (v) changing government standards. Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies. However, due to changing interpretations by courts involving coverage issues, the potential for changes in federal and state standards for clean-up and liability, as well as issues involving policy provisions, allocation of liability among participating insurers, and proof of coverage, the Company’s ultimate exposure for these claims may vary significantly from the amounts currently recorded, resulting in a potential future adjustment that could be material to the Company’s financial condition and results of operations.

5. 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 insurance 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 from a catastrophic event. 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 written and earned, and losses and LAE incurred are as follows:

(dollar amounts in thousands)	2001			2000			1999
Written premiums:
Direct	$	531,286		$	422,537		$	382,001
Assumed		485,568			398,726			348,052
Ceded		(247,796	)		(275,708	)		(166,543	)
Net	$	769,058		$	545,555		$	563,510
Earned premiums:
Direct	$	508,821		$	416,152		$	328,590
Assumed		466,975			393,828			366,029
Ceded		(243,356	)		(278,556	)		(154,532	)
Net	$	732,440		$	531,424		$	540,087
Losses and LAE:
Direct	$	478,013		$	368,424		$	262,340
Assumed		498,366			389,724			243,200
Ceded		(359,616	)		(308,760	)		(113,067	)
Net	$	616,763		$	449,388		$	392,473

In 2001, losses and LAE ceded included approximately $120 million related to the September 11th attack on the World Trade Center. Approximately 30% of the ceded loss recoverables are secured by collateral, such as letters of credit or funds held. Substantially all of the remainder are from reinsurers and retrocessionaires rated “A-” or better by nationally recognized insurance rating agencies. Accordingly, the Company expects all recoverables to be fully collectible.

61

P M A  C A P I T A L

Notes to Consolidated Financial Statements (continued)

        At December 31, 2001, the Company had reinsurance receivables due from the following unaffiliated reinsurers in excess of 5% of shareholders’ equity:

(dollar amounts in thousands)	Reinsurance Receivables		Collateral		Rating(1)
The London Reinsurance Group	$	343,270	$	343,270		A
United States Fidelity and Guaranty		143,635		104,154		A	+
Underwriters Re		86,549		86,549		NR	(2)
Houston Casualty		74,566		--		A	+
Mountain Ridge Insurance Company		49,829		49,829		NR	(3)
PXRE		36,495		13,688		A
Folksamerica Re		31,732		1,243		A	-

(1) Ratings are as of February 28, 2002. A.M. Best ratings are as follows: A++, Superior, 1st of 16; A+, Superior, 2nd of 16; A, Excellent, 3rd of 16; and A-, Excellent, 4th of 16; NR, Not Rated.

(2) Underwriters Re is a subsidiary of Swiss Re, which is rated A++.

(3) Mountain Ridge is a subsidiary of St. Paul, which is rated A+.

The Company performs credit reviews of its reinsurers focusing on, among other things, financial capacity, stability, trends and commitment to the reinsurance business. Prospective and existing reinsurers failing to meet the Company’s standards are excluded from the Company’s reinsurance programs. In addition, the Company requires collateral, typically assets in trust, letters of credit or funds withheld, to support balances due from certain reinsurers, consisting generally of those not authorized to transact business in the applicable jurisdictions. At December 31, 2001 and 2000, the Company’s reinsurance receivables of $1,210.8 million and $933.9 million were supported by $626.9 million and $553.6 million of collateral. Of the uncollateralized reinsurance receivables as of December 31, 2001, approximately 95% were recoverable from reinsurers rated “A-” or better by A.M. Best. The Company believes that the amounts receivable from reinsurers are fully collectible and that the allowance for uncollectible items is adequate to cover any disputes about amounts owed by reinsurers to the Company.

6. Debt

At December 31, 2001 and 2000, the Company had $62.5 million and $163.0 million outstanding under its existing Revolving Credit Facility (“Credit Facility”). Under the terms of the Credit Facility, the Company repaid $38.0 million in January 2001 and $62.5 million at year-end 2001, thereby reducing the outstanding debt to $62.5 million, which is the maximum amount PMA Capital can borrow under the Credit Facility as of December 31, 2001. The balance outstanding at December 31, 2001 of $62.5 million matures on December 31, 2002.

        The Credit Facility bears interest at the London InterBank Offered Rate (“LIBOR”) plus 1.375% on the utilized portion and carries a 0.375% facility fee. As of December 31, 2001, the interest rate on the utilized portion of the Credit Facility was approximately 3.3%.

        The Company has a letter of credit facility (the “Letter of Credit Facility”) which provides for up to $50.0 million in letter of credit capacity. At December 31, 2001 and 2000, the aggregate outstanding face amount of letters of credit issued was $27.9 million and $40.1 million, respectively. The Letter of Credit Facility primarily secures reinsurance liabilities of the insurance subsidiaries of the Company. At December 31, 2001, the Letter of Credit Facility carried fees of 0.45% per annum on the utilized portion and 0.15% on the unutilized portion.

        The debt covenants supporting the Credit Facility and the Letter of Credit Facility contain provisions that, among other matters, limit the Company’s ability to incur additional indebtedness, merge, consolidate and acquire or sell assets. The debt covenants also require the Company to satisfy certain ratios related to net worth, debt-to-capitalization and interest coverage. Additionally, the debt covenants place restrictions on dividends to shareholders. See Note 8 for additional information.

62

P M A  C A P I T A L

7. Commitments and
Contingencies

For the years ended December 31, 2001, 2000 and 1999, total rent expense was $3.9 million, $3.4 million and $2.7 million, respectively. At December 31, 2001, the Company was obligated under noncancelable operating leases for office space with aggregate minimum annual rentals of $4.5 million in 2002, $4.9 million in 2003, $4.5 million in 2004, $3.2 million in 2005 and $16.9 million thereafter.

        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. As of December 31, 2001, the Company has recorded a liability of $3.8 million for these assessments, which is included in accounts payable, accrued expenses and other liabilities on the balance sheet. See Note 2J for additional information regarding SOP 97-3.

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

        Under the terms of the sale of one of the Company’s insurance subsidiaries in 1998, the Company has agreed to indemnify the buyer, up to a maximum of $15.0 million if the actual claim payments in the aggregate exceed the estimated payments upon which the loss reserves of the former subsidiary were established. If the actual claim payments in the aggregate are less than the estimated payments upon which the loss reserves have been established, the Company will participate in such favorable loss reserve development.

        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 receivables by amounts that would be material to the Company’s financial condition, results of operations or liquidity.

8. Shareholders’
Equity

In December 2001, the Company issued 9,775,000 shares of its Class A Common stock, realizing net proceeds of $157.9 million. The Company used the net proceeds from this issuance to contribute additional capital to its reinsurance subsidiary and to repay a portion of its outstanding debt under its Credit Facility.

        Effective on the close of business April 24, 2000, the Company eliminated its class of Common stock from the Company’s authorized capital and reclassified each issued share of Common stock into one share of Class A Common stock. In addition, in early 2000 the Company authorized 2,000,000 shares of undesignated Preferred stock, $0.01 par value per share. There are no shares of Preferred stock issued or outstanding.

        In 2000, the Company’s Board of Directors adopted a shareholder rights plan that will expire on May 22, 2010. The rights automatically attached to each share of Class A Common stock. Generally, the rights become exercisable after the acquisition of 15% or more of the Company’s Class A Common stock and permit rights-holders to purchase the Company’s Class A Common stock or that of an acquirer at a substantial discount. The Company may redeem the rights for $0.001 per right at any time prior to an acquisition.

        The Company declared dividends on its Class A Common stock of $0.42, $0.39 and $0.36 per share in 2001, 2000 and 1999, respectively. The Company declared dividends on its Common stock of $0.08 per share and $0.32 per share in 2000 and 1999, respectively.

63

P M A  C A P I T A L

Notes to Consolidated Financial Statements (continued)

Changes in Class A Common stock and Common stock shares were as follows:

	2001			2000			1999
Class A Common stock:
Balance at beginning of year		24,442,945			11,358,280			10,486,677
Issuance of Class A Common stock		9,775,000			--			--
Conversion of Common stock into Class A Common stock		--			13,084,665			871,603
Balance at end of year		34,217,945			24,442,945			11,358,280
Common stock:
Balance at beginning of year		--			13,084,665			13,956,268
Conversion of Common stock into Class A Common stock		--			(13,084,665	)		(871,603	)
Balance at end of year		--			--			13,084,665
Treasury stock - Class A Common stock:
Balance at beginning of year		2,869,629			1,665,426			648,714
Purchase of treasury shares		299,300			988,800			1,526,500
Reissuance of treasury shares under employee benefit plans		(117,990	)		(220,604	)		(509,788	)
Conversion of Common stock into Class A Common stock		--			436,007			--
Balance at end of year		3,050,939			2,869,629			1,665,426
Treasury stock - Common stock:
Balance at beginning of year		--			436,007			436,007
Conversion of Common stock into Class A Common stock		--			(436,007	)		--
Purchase of treasury shares		--			--			--
Balance at end of year		--			--			436,007

In 1998, the Company’s Board of Directors authorized a plan to repurchase shares of Class A Common stock in an amount not to exceed $25.0 million. The Company’s Board of Directors authorized an additional $15.0 million and $50.0 million of share repurchase authority in 2000 and 1999, respectively. Since the inception of its share repurchase program, the Company has repurchased a total of 3.8 million shares at a cost of $72.8 million. The Company repurchased 299,000 shares at a cost of $5.3 million in 2001, 1.0 million shares at a cost of $18.4 million in 2000 and 1.5 million shares at a cost of $30.2 million in 1999. The Company’s remaining share repurchase authorization at December 31, 2001 is $17.2 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.

        The Company’s domestic insurance subsidiaries’ ability to pay dividends to the holding company is limited by the insurance laws and regulations of Pennsylvania. All of PMA Capital’s domestic insurance entities are owned by PMA Capital Insurance Company (“PMACIC”).

        As a result, dividends from The PMA Insurance Group’s Pooled Companies and Caliber One Indemnity Company may not be paid directly to PMA Capital. Instead, only PMACIC, a Pennsylvania domiciled company, may pay dividends directly to PMA Capital. Approximately $56 million of dividends are available to be paid by PMACIC to PMA Capital in 2002 without the prior approval of the Pennsylvania Insurance Commissioner. As of December 31, 2001, The PMA Insurance Group’s Pooled Companies can pay up to approximately $27 million in dividends to PMACIC during 2002. Under Delaware law (which is substantially similar to Pennsylvania law with respect to dividends), Caliber One cannot pay dividends to PMACIC in 2002. Dividends received from subsidiaries were $29.6 million, $36.0 million and $43.2 million in 2001, 2000 and 1999, respectively.

        PMA Capital’s dividends to shareholders are restricted by its debt agreements. Under the most restrictive debt covenant of the Credit Facility and the Letter of Credit Facility, the Company would be able to pay dividends of approximately $15 million in 2002.

64

P M A  C A P I T A L

9. Stock
Options

The Company currently has stock option plans in place for stock options granted to officers and other key employees for the purchase of the Company’s Class A Common stock, under which 3,435,620 Class A Common shares were reserved for issuance at December 31, 2001. The stock options are granted under terms and conditions determined by the Stock Option Committee of the Board of Directors. Stock options granted have a maximum term of ten years, generally vest over periods ranging between zero and five years, and are typically granted with an exercise price at least equal to the fair market value of the Class A Common stock on the date the options are granted. Information regarding these option plans is as follows:

	2001					2000					1999
	Shares			Weighted Average Price		Shares			Weighted Average Price		Shares			Weighted Average Price
Options outstanding, beginning of year		3,444,026		$	16.22		3,320,556		$	15.40		3,446,170		$	14.39
Options granted		115,000			20.00		411,000			21.50		427,000			19.53
Options exercised		(128,372	)		12.20		(221,905	)		13.02		(515,864	)		11.94
Options forfeited or expired		(43,500	)		20.26		(65,625	)		18.84		(36,750	)		16.53
Options outstanding, end of year(1)		3,387,154		$	16.45		3,444,026		$	16.22		3,320,556		$	15.40
Options exercisable, end of year		2,190,357		$	14.91		2,102,509		$	14.38		2,160,486		$	14.03
Option price range at end of year		$10.00 to $21.50					$8.00 to $21.50					$8.00 to $20.44
Option price range for exercised shares		$8.00 to $17.00					$8.00 to $17.00					$8.00 to $17.00
Options available for grant at end of year		48,466					121,966					467,341

(1) Included in the options outstanding at the end of 2001, 2000 and 1999 are 420,000 options (“Target Price Options”) with an exercise price of $17.00, which become exercisable based on the Company’s Class A Common stock achieving certain target prices, with one-half of those options becoming exercisable if the share price reaches $28.00 by February 2003 and the remaining one-half becoming exercisable if the share price reaches $32.00 by February 2003. In 2000, the Company reduced the accrual for these Target Price Options by approximately $1 million. There was no accrued liability for the Target Price Options as of December 31, 2001 and 2000.

In 2001, 2000 and 1999, all options were granted with an exercise price that exceeded the market value on the grant date.

        The weighted average exercise price and fair value of options granted were as follows:

	2001		2000		1999
Weighted average exercise price	$	20.00	$	21.50	$	19.53
Fair value	$	6.39	$	7.16	$	9.61

The fair value of options at date of grant was estimated using a binomial option-pricing model with the following weighted average assumptions:

	2001		2000		1999
Expected life (years)		10		10		10
Risk-free interest rate		5.2%		6.5%		4.9%
Expected volatility		16%		17%		17%
Expected dividend yield		2.4%		2.4%		2.0%

Information regarding stock options outstanding and options exercisable at December 31, 2001 is as follows:

	Options Outstanding			Options Exercisable
Exercise Prices	Number of Shares	Weighted Average Remaining Life	Weighted Average Exercise Price	Number of Shares	Weighted Average Exercise Price
$10.00 to $13.00	768,989	1.54	$11.44	768,989	$11.44
$13.01 to $16.00	462,915	3.43	$15.50	462,915	$15.50
$16.01 to $19.00	1,282,250	4.11	$17.06	832,618	$17.09
$19.01 to $21.50	873,000	7.82	$20.46	125,835	$19.55

The Company has adopted the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation.” Accordingly, compensation cost that was recognized in 2001, 2000 and 1999 for stock options, other than Target Price Options, was not significant.

65

P M A  C A P I T A L

Notes to Consolidated Financial Statements (continued)

Had compensation costs for the Company’s stock option plans been determined based on the fair value at the grant date for awards granted during the year, the Company’s pre-tax income would have been reduced by $735,000, $2.9 million and $4.1 million in 2001, 2000 and 1999, respectively. After-tax income would have been reduced by $478,000, $1.9 million and $2.7 million or $0.02, $0.09 and $0.12 per basic share and $0.02, $0.09 and $0.11 per diluted share in 2001, 2000 and 1999, respectively.

10. Earnings
Per Share

A reconciliation of the shares used as the denominator of the basic and diluted earnings per share computations is presented below:

	2001		2000		1999
Basic shares - weighted
average shares
outstanding		21,831,725		21,898,967		22,976,326
Effect of dilutive
stock options		384,970		454,655		809,590
Total diluted shares		22,216,695		22,353,622		23,785,916

For all years presented, there were no differences in the numerator (income before cumulative effect of accounting change) for the basic and diluted earnings per share calculation.

        The effect of 873,000, 840,500 and 12,500 stock options were excluded from the computation of diluted earnings per share because they would have been anti-dilutive for 2001, 2000 and 1999, respectively.

11. Fair Value of Financial
Instruments

As of December 31, 2001 and 2000, the carrying amounts for the Company’s financial instruments approximated their estimated fair value. The Company measures the fair value of fixed maturities based upon quoted market prices or by obtaining quotes from dealers. The fair value of debt is estimated using discounted cash flow calculations based upon the Company’s current incremental borrowing rate for similar types of borrowing facilities or the rate utilized to prepay obligations, where applicable. For other financial instruments, the carrying values approximate their fair values. Certain financial instruments, specifically amounts relating to insurance and reinsurance contracts, are excluded from this disclosure.

12. Income
Taxes

The components of the Federal income tax expense (benefit) from income before cumulative effect of accounting change are:

(dollar amounts in thousands)	2001			2000			1999
Current	$	(8,372	)	$	(1,120	)	$	9,926
Deferred		(3,147	)		(82	)		1,813
Income tax expense (benefit)	$	(11,519	)	$	(1,202	)	$	11,739

In addition, in 1999, the Company recognized a deferred Federal income tax benefit of $1.5 million related to the cumulative effect of accounting change.

        A reconciliation between the total income tax expense (benefit) and the amounts computed at the statutory Federal income tax rate of 35% is as follows:

(dollar amounts in thousands)	2001			2000			1999
Federal income tax at the statutory rate	$	(1,546	)	$	43		$	14,032
Reversal of income
tax accruals		(10,076	)		(1,362	)		(2,672	)
Other		103			117			379
Income tax expense (benefit)	$	(11,519	)	$	(1,202	)	$	11,739

66

P M A  C A P I T A L

The tax effects of significant temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that represent the net deferred tax asset are as follows:

(dollar amounts in thousands)	2001			2000
Discounting of unpaid losses and LAE	$	54,647		$	60,762
Unrealized depreciation of investments		--			7,741
Tax credit carryforwards		29,189			22,357
Unearned premiums		18,508			16,060
Allowance for uncollectible accounts		6,402			6,297
Postretirement benefit obligation		4,878			5,031
Deferred compensation		3,001			3,168
Depreciation		1,909			1,490
Guaranty funds and other assessments		1,335			1,522
Other		9,469			6,685
Gross deferred tax assets		129,338			131,113
Valuation allowance		(572	)		--
Deferred tax assets, net of
valuation allowance		128,766			131,113
Deferred acquisition costs		(22,521	)		(16,982	)
Losses of foreign reinsurance affiliate		(11,120	)		(20,970	)
Unrealized appreciation of investments		(2,886	)		--
Prepaid pension		(2,945	)		--
Capitalized software		(4,100	)		(3,560	)
Other		(3,074	)		(590	)
Gross deferred tax liabilities		(46,646	)		(42,102	)
Net deferred tax assets	$	82,120		$	89,011

At December 31, 2001, the Company had $46.7 million of net operating loss carryforwards, which will expire in 2018 through 2021, and $12.1 million of alternative minimum tax credit carryforwards, which do not expire.

        Management believes that it is more likely than not that the benefit of its deferred tax asset will be fully realized, except for $572,000 of deferred tax assets relating to certain foreign insurance operations. Accordingly, the Company has recorded a valuation allowance for this portion of the deferred tax asset.

        The Company’s Federal income tax returns are subject to audit by the Internal Revenue Service (“IRS”), and provisions are made in the financial statements in anticipation of the results of these audits. The IRS completed their examination of the Company’s 1996 U.S. Federal tax return in 2001 with no material changes to the Company’s filed tax return. No other tax years are currently under audit by the IRS. In management’s opinion, adequate liabilities have been established for all years.

13. Employee Retirement,
Postretirement and
Postemployment Benefits

A. Pension and Other Postretirement Benefits:

Pension Benefits — The Company sponsors a qualified non-contributory defined benefit pension plan (the “Qualified Pension Plan”) covering substantially all employees. After meeting certain qualifications, an employee acquires a vested right to future benefits. The benefits payable under the plan are generally determined on the basis of an employee’s length of employment and salary during employment. The Company’s policy is to fund pension costs in accordance with the Employee Retirement Income Security Act of 1974.

        The Company also maintains non-qualified unfunded supplemental defined benefit pension plans (the “Non-qualified Pension Plans”) for the benefit of certain key employees. The projected benefit obligation and accumulated benefit obligation for the Non-qualified Pension Plans were $5.1 million and $4.6 million, respectively, as of December 31, 2001.

Other Postretirement Benefits — In addition to providing pension benefits, the Company provides certain health care benefits for retired employees and their spouses. Substantially all of the Company’s employees may become eligible for those benefits if they meet the requirements for early retirement under the Qualified Pension Plan and have a minimum of 10 years employment with the Company. For employees who retired on or subsequent to January 1, 1993, the Company will pay a fixed portion of medical insurance premiums, including Medicare Part B. Retirees will absorb future increases in medical premiums.The Company also provides retiree life insurance for certain retirees.

67

P M A  C A P I T A L

Notes to Consolidated Financial Statements (continued)

The following tables set forth the amounts recognized in the Company’s financial statements with respect to Pension Benefits and Other Postretirement Benefits:

	Pension Benefits						Other Postretirement Benefits
(dollar amounts in thousands)	2001			2000			2001			2000
Change in benefit obligation:
Benefit obligation at beginning of year	$	51,698		$	46,882		$	8,274		$	8,691
Service cost		1,917			1,408			205			181
Interest cost		3,911			3,686			605			613
Actuarial (gain) loss		1,868			2,026			496			(372	)
Benefits paid		(2,251	)		(2,224	)		(1,065	)		(839	)
Plan amendments and other		--			(80	)		--			--
Benefit obligation at end of year	$	57,143		$	51,698		$	8,515		$	8,274
Change in plan assets:
Fair value of plan assets at beginning of year	$	45,440		$	49,227		$	--		$	--
Actual return on plan assets		(2,862	)		(3,106	)		--			--
Employer contributions		9,000			1,650			--			--
Benefits paid		(2,251	)		(2,224	)		--			--
Other		--			(107	)		--			--
Fair value of plan assets at end of year	$	49,327		$	45,440		$	--		$	--
Benefit obligation greater than the
fair value of plan assets	$	(7,816	)	$	(6,258	)	$	(8,515	)	$	(8,274	)
Unrecognized actuarial (gain) loss		13,603			4,879			(4,354	)		(5,080	)
Unrecognized prior service (cost) benefit		497			502			(841	)		(960	)
Unrecognized net transition obligation		329			325			--			--
Prepaid (accrued) benefit at end of year	$	6,613		$	(552	)	$	(13,710	)	$	(14,314	)

	Pension Benefits									Other Postretirement Benefits
(dollar amounts in thousands)	2001			2000			1999			2001			2000			1999
Components of net periodic benefit cost:
Service cost	$	1,917		$	1,408		$	1,597		$	205		$	181		$	286
Interest cost		3,911			3,686			3,372			605			613			622
Expected return on plan assets		(3,983	)		(4,375	)		(3,619	)		--			--			--
Amortization of transition obligation		(4	)		(4	)		(5	)		--			--			--
Amortization of prior service cost		5			5			(30	)		(119	)		(119	)		(119	)
Recognized actuarial (gain) loss		26			(34	)		4			(231	)		(248	)		(155	)
Net periodic benefit cost	$	1,872		$	686		$	1,319		$	460		$	427		$	634
Weighted average assumptions:
Discount rate		7.25%			7.50%			7.75%			7.25%			7.50%			7.75%
Expected return on plan assets		9.00%			9.00%			9.00%			--			--			--
Rate of compensation increase		4.75%			4.75%			5.00%			--			--			--

For the measurement of Other Postretirement Benefits, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 5.50% by 2007 and remain at that level thereafter. A one percentage point change in assumed health care cost trend rates would have an immaterial impact on the total service and interest cost components of the net periodic benefit cost and the postretirement benefit obligation.

        Qualified Pension Plan assets consist of approximately 55% equity securities and approximately 45% fixed maturity securities at December 31, 2001.

68

P M A  C A P I T A L

B. Defined Contribution Savings Plan — The Company also maintains a voluntary defined contribution savings plan covering substantially all employees. The Company matches employee contributions up to 5% of compensation. Contributions under such plans expensed in 2001, 2000 and 1999 were $2.9 million, $2.6 million and $2.3 million, respectively.

C. Postemployment Benefits — The Company may provide certain benefits to employees subsequent to their employment, but prior to retirement including severance, long-term and short-term disability payments, and other related benefits. Postemployment benefits attributable to prior service and/or that relate to benefits that vest or accumulate are accrued presently if the payments are probable and reasonably estimable. Postemployment benefits that do not meet such criteria are accrued when payments are probable and reasonably estimable.

14. Business
Segments

The Company’s pre-tax operating income (loss) by principal business segment, and net income were as follows:

(dollar amounts in thousands)	2001			2000			1999
Pre-tax operating income (loss)(1):
PMA Re	$	(3,062	)	$	(7,297	)	$	50,319
The PMA Insurance Group		23,148			21,601			18,200
Caliber One		(26,168	)		(7,014	)		83
Corporate and Other		(6,322	)		(19,142	)		(20,765	)
Pre-tax operating income (loss)		(12,404	)		(11,852	)		47,837
Net realized investment
gains (losses)		7,988			11,975			(7,745	)
Income (loss) before income
taxes and cumulative effect
of accounting change		(4,416	)		123			40,092
Income tax expense (benefit)		(11,519	)		(1,202	)		11,739
Income before cumulative
effect of accounting change		7,103			1,325			28,353
Cumulative effect of accounting
change, net of tax		--			--			(2,759	)
Net income	$	7,103		$	1,325		$	25,594

(1) Operating income (loss) differs from net income under GAAP because operating income (loss) excludes net realized investment gains and losses. Pre-tax operating income (loss) is defined as income (loss) 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.

        The Company's revenues, substantially all of which are generated within the U.S., by principal business segment were as follows:

(dollar amounts in thousands)	2001		2000		1999
PMA Re	$	385,762	$	302,234	$	351,548
The PMA Insurance Group		397,258		310,416		282,302
Caliber One		49,356		33,223		27,188
Corporate and Other		9,608		2,142		1,824
Net realized investment
gains (losses)		7,988		11,975		(7,745	)
Total revenues	$	849,972	$	659,990	$	655,117

The Company’s amortization and depreciation expense by principal business segment were as follows:

(dollar amounts in thousands)	2001		2000		1999
PMA Re	$	3,520	$	1,803	$	2,852
The PMA Insurance Group		1,933		3,609		2,973
Caliber One		1,295		1,123		595
Corporate and Other		328		863		1,232
Total depreciation and
amortization expense	$	7,076	$	7,398	$	7,652

The Company’s total assets⁽¹⁾ by principal business segment were as follows:

(dollar amounts in thousands)	2001			2000		1999
PMA Re	$	1,868,818		$	1,539,853	$	1,351,962
The PMA Insurance Group		1,678,206			1,688,376		1,746,676
Caliber One		299,756			239,660		160,194
Corporate and Other		(43,801	)		1,517		(13,745	)
Total assets	$	3,802,979		$	3,469,406	$	3,245,087

(1) Equity investments in subsidiaries, which eliminate in consolidation, are excluded from total assets for each segment.

PMA Re distributes its products through reinsurance brokers, and PMA Re’s top four such brokers accounted for approximately 80% of PMA Re’s gross premiums written in 2001. During 2001, 2000 and 1999, total revenues of approximately $110 million, $76 million and $159 million, respectively, were placed through brokers which individually exceeded 10% of the Company’s total revenue.

69

P M A  C A P I T A L

Notes to Consolidated Financial Statements (continued)

        The PMA Insurance Group’s operations are concentrated in nine contiguous states in the eastern part of the U.S. As such, economic trends in individual states may not be independent of one another. Also, The PMA Insurance Group’s products are highly regulated by each of these states. For many of The PMA Insurance Group’s products, the insurance departments of the states in which it conducts business must approve rates and policy forms. In addition, workers’ compensation benefits are determined by statutes and regulations in each of these states. While The PMA Insurance Group considers factors such as rate adequacy, regulatory climate and economic factors in its underwriting process, unfavorable developments in these factors could have an adverse impact on the Company’s financial condition and results of operations. In 2001, 2000 and 1999, workers’ compensation net premiums written at The PMA Insurance Group represented 36.2%, 36.9% and 31.8%, respectively, of the Company’s total net premiums written.

        The Company actively manages its exposure to catastrophes through its underwriting process, where the Company generally monitors the accumulation of insurable values in catastrophe-prone regions. Also, in writing property reinsurance coverages, PMA Re typically requires per occurrence loss limitations for contracts that could have catastrophe exposure. Through per risk reinsurance, the Company manages its net retention in each exposure. PMA Re’s property per occurrence reinsurance provides catastrophe protection of $50.0 million in excess of $10.0 million on its traditional property book. Under certain conditions, PMA Re may recover $6.0 million of the $10.0 million retention for multiple net catastrophe losses. PMA Re also maintains catastrophe protection of $12.5 million in excess of $5.0 million for property exposures underwritten by its Finite Risk and Financial Products unit. PMA Re can also recover an additional $40 million of Finite Risk and Financial Products occurrence losses under certain industry loss scenarios. The PMA Insurance Group maintains catastrophe reinsurance protection of 95% of $18.0 million excess of $2.0 million and Caliber One maintains catastrophe reinsurance protection of $14.7 million excess of $1.3 million. Any cession of losses under certain of these contracts requires that we cede additional premiums.

        Although the Company believes that it has adequate reinsurance to protect against the estimated probable maximum gross loss from a catastrophe, an especially severe catastrophe or series of catastrophes could exceed the Company’s reinsurance and/or retrocessional protection and may have a material adverse impact on the Company’s financial condition, results of operations and liquidity. In 2001, the Company’s results reflect approximately $30 million pre-tax ($20 million after-tax) of losses due to the attack on the World Trade Center. See Note 4 for additional information. In 2000 and 1999, the Company’s loss and LAE ratios were not significantly impacted by catastrophes.

15. Transactions with
Related Parties

The Company’s largest shareholder is PMA Foundation (the “Foundation”), a not-for-profit corporation qualified under Section 501(c)(6) of the Internal Revenue Code, whose purposes include the promotion of the common business interests of its members and the economic prosperity of the Commonwealth of Pennsylvania. As of December 31, 2001, the Foundation owned 5,558,050 shares, or 17.8%, of the Company’s Class A Common stock. All but one member of the Company’s Board of Directors currently serve as members of the Foundation’s Board of Trustees. Also, Frederick W. Anton III, Chairman of the Company, serves as President and Chief Executive Officer of the Foundation. The Company and certain of its subsidiaries provide certain administrative services to the Foundation for which the Company and its subsidiaries receive reimbursement. Total reimbursements amounted to $13,000 for each of the years ended December 31, 2001, 2000 and 1999, respectively. The Foundation also leases its Harrisburg, Pennsylvania headquarters facility from a subsidiary of the Company under an operating lease presently requiring rent payments of $25,000 per month, and reimburses a subsidiary of the Company for its use of office space. Rent and related reimbursements paid to the Company’s affiliates by the Foundation was $304,000 for each of the years ended December 31, 2001, 2000 and 1999.

70

P M A  C A P I T A L

        The Company incurred legal and consulting expenses aggregating approximately $4.8 million, $5.3 million and $5.3 million in 2001, 2000 and 1999, respectively, from firms in which directors of the Company are partners or principals.

        At December 31, 2001, 2000 and 1999, the Company had notes receivable from officers totalling $158,000, $56,000 and $56,000, respectively, that are accounted for as a reduction of shareholders’ equity. At December 31, 2001, the interest rate on these notes was 5.5%.

        The Company has arranged an executive loan program with a financial institution. The institution provides personal demand loans to officers of the Company at a floating interest rate equal to the financial institution’s prime rate minus 1/2%. Such loans are collateralized by Class A Common stock beneficially owned by the officer and a Company treasury security. The Company has agreed to purchase any loan made to an officer (including accrued interest and related expenses) from the financial institution in the event that the borrower defaults on the loan. The amount of loans outstanding as of December 31, 2001 under this program was $2.7 million.

16. Statutory Financial
Information

These consolidated financial statements vary in certain respects from financial statements prepared using statutory accounting practices that are 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. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles (“Codification”) guidance, which replaced the Accounting Practices and Procedures manual as the NAIC’s primary guidance on statutory accounting. Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas, such as deferred income taxes. Effective December 31, 2000, the Company’s insurance subsidiaries implemented the Codification guidelines, resulting in an increase of $20.5 million in its statutory surplus.

        SAP net income (loss) and capital and surplus for PMA Capital’s domestic insurance subsidiaries are as follows:

(dollar amounts in thousands)	2001			2000			1999
SAP net income (loss):
PMA Capital Insurance Co.	$	(18,708	)	$	8,920		$	34,412
The PMA Insurance Group		25,341			4,847			6,963
Caliber One Indemnity Co.		(3,658	)		5,233			(5,453	)
Total	$	2,975		$	19,000		$	35,922
SAP capital and surplus:
PMA Capital Insurance Co.	$	559,578		$	529,631		$	287,635
The PMA Insurance Group		264,476			254,633			265,162
Caliber One Indemnity Co.		37,060			42,859			32,838
Eliminations(1)		(301,536	)		(297,492	)		(32,838	)
Total	$	559,578		$	529,631		$	552,797

(1) Caliber One Indemnity Company’s surplus is eliminated as it is included in the statutory surplus of PMA Capital Insurance Company. At December 31, 2001 and 2000, the surplus of The PMA Insurance Group’s domestic insurance subsidiaries is eliminated as it is included in the statutory surplus of PMA Capital Insurance Company.

71

P M A  C A P I T A L

Notes to Consolidated Financial Statements (continued)

A reconciliation of PMA Capital’s domestic insurance subsidiaries’ SAP net income to the Company’s GAAP net income is as follows:

(dollar amounts in thousands)	2001			2000			1999
SAP net income - domestic insurance subsidiaries	$	2,975		$	19,000		$	35,922
GAAP adjustments:
Dividends received from subsidiaries		(16,797	)		(1,706	)		--
Change in deferred acquisition costs		15,828			(109	)		(1,159	)
Benefit (provision) for deferred income taxes		(7,100	)		(5,205	)		3,937
Cumulative effect of accounting change		--			--			(2,759	)
Allowance for doubtful accounts		4,874			(454	)		1,750
Guaranty fund and loss based assessments		328			1,362			1,306
Other		1,497			(4,027	)		4,700
GAAP net income - domestic insurance subsidiaries		1,605			8,861			43,697
Other entities and eliminations		5,498			(7,536	)		(18,103	)
GAAP net income	$	7,103		$	1,325		$	25,594

A reconciliation of PMA Capital’s domestic insurance subsidiaries’ SAP capital and surplus to the Company’s GAAP shareholders’ equity is as follows:

(dollar amounts in thousands)	2001			2000
SAP capital and surplus - domestic insurance subsidiaries	$	559,578		$	529,631
GAAP adjustments:
Deferred acquisition costs		64,350			48,522
Deferred income taxes		36,226			41,843
Allowance for doubtful accounts		(13,954	)		(18,828	)
Retirement accruals		(8,943	)		(9,370	)
Reversal of non-admitted assets		88,150			50,770
Unrealized gain (loss) on fixed maturities available for sale		5,584			(12,789	)
Other		12,030			16,969
GAAP shareholders' equity - domestic insurance subsidiaries		743,021			646,748
Other entities and eliminations		(131,015	)		(206,702	)
GAAP shareholders' equity	$	612,006		$	440,046

The Company’s statutory financial statements are presented on the basis of accounting practices prescribed or permitted by the Pennsylvania Insurance Department (for PMA Capital Insurance Company and The PMA Insurance Group) and the Delaware Insurance Department (for Caliber One Indemnity Company). Pennsylvania and Delaware have adopted Codification as the basis of their statutory accounting practices. However, Pennsylvania has retained the prescribed practice of non-tabular discounting of unpaid losses and LAE for workers’ compensation, which was not permitted under Codification. This prescribed accounting practice increased statutory capital and surplus by $22.2 million and $20.4 million at December 31, 2001 and 2000, respectively, over what it would have been had the prescribed practice not been allowed.

72

P M A  C A P I T A L

Report of Independent Accountants

PRICEWATERHOUSECOOPERS LLP (LOGO)

To the Board of Directors and Shareholders of
PMA Capital Corporation

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows, shareholders’ equity and comprehensive income (loss) present fairly, in all material respects, the financial position of PMA Capital Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
Two Commerce Square
2001 Market Street
Philadelphia, PA
February 6, 2002

73

P M A  C A P I T A L

Quarterly Financial Information (Unaudited)

The following unaudited quarterly financial data are presented on a consolidated basis for each of the years ended December 31, 2001 and 2000. Quarterly financial results necessarily rely on estimates and caution is required in drawing specific conclusions from quarterly consolidated results.

	First Quarter			Second Quarter		Third Quarter			Fourth Quarter
2001
Income Statement Data:
Total revenues	$	193,599		$	217,075	$	210,155		$	229,143
Income (loss) before income taxes		(2,549	)		9,726		(20,934	)		9,341
Net income (loss)		8,091			6,040		(13,650	)		6,622
Per Share Data:
Net income (loss) (Basic)	$	0.38		$	0.28	$	(0.63	)	$	0.29
Net income (loss) (Diluted)	$	0.37		$	0.28	$	(0.63	)	$	0.29
Class A Common Stock Prices:
High	$	18.94		$	18.05	$	18.24		$	19.40
Low		16.50			16.59		16.13			16.05
Close		17.38			18.05		18.00			19.30
2000
Income Statement Data:
Total revenues	$	151,555		$	177,894	$	153,480		$	177,061
Income (loss) before income taxes		6,739			15,807		(38,989	)		16,566
Net income (loss)		4,378			10,140		(25,362	)		12,169
Per Share Data:
Net income (loss) (Basic)	$	0.20		$	0.46	$	(1.17	)	$	0.56
Net income (loss) (Diluted)	$	0.19		$	0.45	$	(1.17	)	$	0.56
Class A Common Stock Prices:
High	$	20.00		$	19.00	$	19.00		$	18.00
Low		16.06			15.88		16.25			15.25
Close		17.50			19.00		18.00			17.25

The Company had approximately 300 recordholders at January 31, 2002. In each quarter of 2001, the Company declared quarterly dividends of $0.105 per share for its Class A Common stock. In the first quarter of 2000, the Company declared a quarterly dividend of $0.08 and $0.09 per share for its Common stock and Class A Common stock, respectively. In the second quarter of 2000, the Company declared a quarterly dividend of $0.09 per share for its Class A Common stock. In the third and fourth quarters of 2000, the Company declared a quarterly dividend of $0.105 per share for its Class A Common stock. See Note 8 for a discussion of a change in the Company’s capital structure in 2000, which effectively converted all shares of Common stock to Class A Common stock.

74

Investor Information

Securities Listing

The Corporation's Class A Common stock is listed on The Nasdaq Stock Market®. It trades under the stock symbol: PMACA.

Dividends

PMA Capital Corporation’s quarterly dividends on Class A Common stock are paid on or about the first day of January, April, July and October.

77

EX-21

EXHIBIT 21

PMA Capital Corporation
Significant Subsidiaries of Registrant
As of December 31, 2001

PMA Capital Corporation (Pennsylvania)
     PMA Capital Insurance Company (Pennsylvania)
          Pennsylvania Manufacturers' Association Insurance Company (Pennsylvania)
          Pennsylvania Manufacturers Indemnity Company (Pennsylvania)
          Manufacturers Alliance Insurance Company (Pennsylvania)
          Caliber One Indemnity Company (Delaware)
          PMA Re Corporate Capital Limited (UK)
          PMA Holdings Ltd. (Bermuda)
               Pennsylvania Manufacturers' International Insurance Ltd. (Bermuda)
     Mid-Atlantic States Investment Company (Delaware)
          PMA Holdings, Cayman Ltd. (Cayman)
          High Mountain Reinsurance, Ltd. (Cayman)
          PMA Insurance SPC, Cayman (Cayman)
     Caliber One Management Company, Inc. (Delaware)
     PMA Re Management Company (Pennsylvania)
     PMA Management Corporation (Pennsylvania)
     PMA Services Incorporated (Pennsylvania)

EX-23

Exhibit 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-45949, File No. 333-68855, File No. 333-77111, and File No. 333-73240) of our report dated February 6, 2002 relating to the consolidated financial statements, which appears in the 2001 Annual Report to Shareholders of PMA Capital Corporation, which is incorporated by reference in PMA Capital Corporation's Annual Report on Form 10-K for the year ended December 31, 2001. We also consent to the incorporation by reference of our report dated February 6, 2002 relating to the financial statement schedules, which appears in such Annual Report on Form 10-K.

/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
March 19, 2002

EX-24

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director and officer of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ Frederick W. Anton III
    Frederick W. Anton III

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ Paul I. Detwiler, Jr.
    Paul I. Detwiler, Jr.

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ Joseph H. Foster
    Joseph H. Foster

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ Thomas J. Gallen
    Thomas J. Gallen

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ Anne S. Genter
     Anne S. Genter

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ James F. Malone III
    James F. Malone III

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ Louis N. McCarter III
    Louis N. McCarter III

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ John W. Miller, Jr.
    John W. Miller, Jr.

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ Edward H. Owlett
    Edward H. Owlett

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ Louis I. Pollock
    Louis I. Pollock

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ Roderic H. Ross
    Roderic H. Ross

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ L.J. Rowell, Jr.
    L.J. Rowell, Jr.

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director and officer of PMA Capital Corporation, a Pennsylvania corporation (“PMA”), hereby makes, designates, constitutes and appoints Robert L. Pratter, Francis W. McDonnell and Charles A. Brawley, III, and each of them (with full power to act without the other), as the undersigned’s true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned

(A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, of:

(i) PMA's Annual Report on Form 10-K for the year ended December 31, 2001 and all amendments thereto;

(ii) PMA’s registration statement on Form S-8 covering Class A Common Stock to be registered in connection with the 2002 Equity Incentive Plan and any amendments, including without limitation, post-effective amendments, in connection therewith; and

(iii) any and all other registration statements pertaining to employee benefit plans of PMA or its subsidiaries, including, without limitation, amendments to PMA’s registration statements on Form S-8 (Registration Numbers 333-73240, 333-77111, 333-68855 and 333-45949); and

(B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of PMA, of whatever class or series, offered, sold, issued, distributed, placed or resold by PMA, any of its subsidiaries, or any other person or entity.

Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, reports, registrations, amendments, qualifications and notifications to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May 15, 2003.

        IN WITNESS WHEREOF, the undersigned has executed this document as of the 6th day of February 2002.

/s/ John W. Smithson
    John W. Smithson

EX-24

Exhibit 24.2

CERTIFIED RESOLUTIONS

        Certified to be a true and correct copy of the resolutions adopted by the Board of Directors of PMA Capital Corporation at a meeting held on February 6, 2002, a quorum being present, and such resolutions are still in full force and effect as of this date of certification, not having been amended, modified or rescinded since the date of their adoption.

        RESOLVED, that the Officers of the Company, and each of them, are hereby authorized to sign the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, and any amendments thereto, (the “Form 10-K”) in the name and on behalf of the Company and as attorneys for each of its Directors and Officers.

        RESOLVED, that each Officer and Director of the Company who may be required to execute (whether on behalf of the Company or as an Officer or Director thereof) the Form 10-K, is hereby authorized to execute and deliver a power of attorney appointing such person or persons named therein as true and lawful attorneys and agents to execute in the name, place and stead (in any such capacity) of any such Officer or Director the Form 10-K and to file any such power of attorney together with the Form 10-K with the Securities and Exchange Commission.

        IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company, this 19th day of March, 2002.

/s/ Charles A. Brawley, III
Charles A. Brawley, III
Assistant Secretary

(SEAL)