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, 2007

/  / 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 001-31706

PMA Capital Corporation

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2217932
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
380 Sentry Parkway
Blue Bell, Pennsylvania	19422
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (610) 397-5298

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Name of each exchange on which registered:
8.50% Monthly Income Senior Notes due 2018	American Stock Exchange
Class A Common Stock, par value $5.00 per share	The NASDAQ Stock Market LLC
Rights to Purchase Preferred Stock

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act.  YES /  /  NO /X/

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES /  /  NO /X/

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.  /  /

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):  Large accelerated Filer /  /  Accelerated filer /X/  Non-accelerated filer /  /  Smaller reporting company /  /

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES /  /  NO /X/

The aggregate market value of the Class A Common Stock held by non-affiliates of the registrant on June 30, 2007, based on the last price at which the Class A Common Stock was sold on such date, was $336,230,774.

There were 31,761,106 shares outstanding of the registrant’s Class A Common Stock, $5 par value per share, as of the close of business on

March 6, 2008.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III of this Form 10-K incorporates by reference portions of the registrant’s proxy statement for its 2008 Annual Meeting of Shareholders.

INDEX

PART I			Page
Item 1.	Business		1
		Company Overview	1
		The PMA Insurance Group	2
		Fee-based Business	8
		Discontinued Operations	9
		Reinsurance and Retrocessional Protection	9
		Loss Reserves	10
		Investments	12
		Ratings	13
		Regulatory Matters	13
		Employees	17
		Available Information	17
		Glossary of Selected Insurance Terms	18
Item 1A.	Risk Factors		21
Item 1B.	Unresolved Staff Comments		28
Item 2.	Properties		28
Item 3.	Legal Proceedings		28
Item 4.	Submission of Matters to a Vote of Security Holders		28
Executive Officers of the Registrant			28
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and
		Issuer Purchases of Equity Securities	29
Item 6.	Selected Financial Data		31
Item 7.	Management’s Discussion and Analysis of Financial Condition
		and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk		64
Item 8.	Financial Statements and Supplementary Data		65
Item 9.	Changes in and Disagreements with Accountants on
		Accounting and Financial Disclosure	102
Item 9A.	Controls and Procedures		102
Item 9B.	Other Information		103
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		103
Item 11.	Executive Compensation		103
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related
		Stockholder Matters	103
Item 13.	Certain Relationships and Related Transactions, and Director Independence		103
Item 14.	Principal Accounting Fees and Services		103
PART IV
Item 15.	Exhibits, Financial Statement Schedules		104
Signatures			105
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, which involve inherent risks and uncertainties.  Statements that are not historical facts, including statements about our beliefs and expectations, and statements containing words such as “believe,” “estimate,” “anticipate,” “expect” or similar words are forward-looking statements.  These forward-looking statements may include estimates, assumptions or projections and are based on currently available financial, competitive and economic data and our current operating plans.  Although management believes that our expectations are reasonable, there can be no assurance that our actual results will not differ materially from those expected, and therefore, you should not place undue reliance on such forward-looking statements.  Factors that could cause such differences include, but are not limited to, those discussed in “Item 1A – Risk Factors” and in the “Cautionary Statements” in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”).

Item 1.  Business.

COMPANY OVERVIEW

We are a holding company whose operating subsidiaries provide insurance and fee-based services.  Our insurance products include workers’ compensation and other commercial property and casualty lines of insurance, which are marketed primarily in the eastern part of the United States.  These products are written through The PMA Insurance Group, our property and casualty insurance segment, which has been in operation since 1915.  Fee-based services include third party administrator (“TPA”), managing general agent and program administrator services.  Our Fee-based Business includes the operations of PMA Management Corp. and Midlands Management Corporation (“Midlands”).  PMA Management Corp. is a TPA, which was previously part of The PMA Insurance Group.  Midlands is an Oklahoma City-based managing general agent, program administrator and provider of TPA services.  Also, we have a Corporate and Other segment, which primarily includes corporate expenses and debt service.

In November 2007, we announced that we were actively pursuing the sale of our Run-off Operations.  Our Run-off Operations include our reinsurance and excess and surplus lines businesses which we placed into run-off in 2003 and 2002, respectively.  In February 2008, we announced that we entered into a non-binding letter of intent with a third party and expect to execute a definitive stock purchase agreement in the first quarter of 2008.  The transfer of ownership will be subject to regulatory approval.  Because of the expected divestiture, we determined that these operations should be reflected as discontinued operations.

The Pennsylvania Insurance Department approved our requests for extraordinary dividends of $73.5 million in 2006 and $37.5 million in 2007 from PMA Capital Insurance Company (“PMACIC”), our reinsurance subsidiary in run-off.  As a result of the extraordinary dividends received from PMACIC, we were able to significantly reduce our outstanding debt, acquire Midlands, repurchase shares of our Class A Common Stock and improve liquidity at our holding company.

Over the past two years, we reduced our outstanding debt by $64.9 million, or 33%.  During this period, we retired $72.2 million principal amount of our 6.50% Senior Secured Convertible Debt (“6.50% Convertible Debt”) which could have been put to us on June 30, 2009 at 114% of the principal amount.  This debt also contained restrictive covenants regarding uses of holding company cash.  In January 2008, we retired the remaining $1.3 million principal amount of our 6.50% Convertible Debt.

On October 1, 2007, we entered into a Stock Purchase Agreement under which we acquired all of the stock of Midlands Holding Corporation.  Under the Stock Purchase Agreement, we paid cash of $19.8 million for the company’s stock on the closing date.  The ultimate purchase price for the stock, which could range from $22.8 million to $44.5 million, will be based on the future earnings growth of Midlands, the operating subsidiary of Midlands Holding Corporation, over the next four years.

The financial information in the tables that follow is presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”), unless otherwise indicated.  Certain prior year amounts have been reclassified to conform to the current year classification.  In 2007, we reported the results of our Run-off Operations as discontinued operations.  In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), the Statements of Operations have been presented with the net results from discontinued operations, shown after the results from continuing operations.  For comparative purposes, we have reclassified our prior period financial presentation to conform to this change.  Revenues and pre-tax operating income (loss) for the last three years and assets at the end of the last two years attributable to each of our continuing operating segments and our Corporate and Other segment are set forth in Note 16 in Item 8 of this Form 10-K.  Assets at the end of the last two years also include our assets of discontinued operations.

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Our gross and net premiums written, net premiums earned and fee-based revenues from our continuing operating segments were as follows:

(dollar amounts in thousands)	2007				2006				2005
Gross premiums written (1)	$	524,799			$	456,452			$	421,605
Net premiums written (1)	$	395,325			$	373,697			$	375,793
Net premiums earned (1)	$	378,870	91	%	$	368,099	93	%	$	358,642	94	%
Fee-based revenues (2)		37,152	9	%		27,853	7	%		23,591	6	%
	$	416,022	100	%	$	395,952	100	%	$	382,233	100	%

(1)Excludes the effect of eliminating transactions in the Corporate and Other segment.

(2) Excludes net investment income and net realized investment gains (losses).

Property and casualty insurance companies provide loss protection to insureds in exchange for premiums.  If earned premiums exceed the sum of losses and loss adjustment expenses (“LAE”), acquisition and 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 and operating expenses and policyholders’ dividends, all divided by net premiums earned.  Thus, a combined ratio of less than 100% reflects an underwriting profit.  Combined ratios of The PMA Insurance Group were 99.7%, 102.1% and 103.3% in 2007, 2006 and 2005, respectively.

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 equal to the combined ratio less the net investment income ratio, which is computed by dividing net investment income by net premiums earned.  The operating ratios of The PMA Insurance Group were 89.7%, 92.6% and 94.5% in 2007, 2006 and 2005, respectively.

See “Glossary of Selected Insurance Terms” for definitions of insurance and fee-based terms used in this Form 10-K.

THE PMA INSURANCE GROUP

Background

The PMA Insurance Group emphasizes our traditional core business, workers’ compensation insurance.  We also provide a range of other commercial line insurance products, primarily including commercial automobile, commercial multi-peril and general liability coverages.  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.  Approximately 92% of this business was produced through independent agents and brokers in 2007.

The PMA Insurance Group competes on the basis of our service model, our workers’ compensation expertise, our long-term relationships with our agents and brokers, our localized service, and our reputation as a high quality claims and risk control service provider.

The PMA Insurance Group has the ability to handle multi-state clients that are based in our operating territory but which have operations in other parts of the U.S.  We are licensed to do business in all 50 states along with Puerto Rico and the District of Columbia for workers’ compensation, commercial automobile, multi-peril and general liability coverages.  The PMA Insurance Group’s principal 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.

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Products

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

(dollar amounts in thousands)	2007				2006				2005
Gross premiums written:
Workers' compensation	$	471,610	90	%	$	407,287	89	%	$	369,953	88	%
Commercial automobile		28,352	5	%		25,209	6	%		25,631	6	%
Commercial multi-peril		12,993	3	%		12,172	3	%		13,586	3	%
Other		11,844	2	%		11,784	2	%		12,435	3	%
Total	$	524,799	100	%	$	456,452	100	%	$	421,605	100	%
Net premiums written:
Workers' compensation	$	361,670	91	%	$	344,379	92	%	$	334,708	89	%
Commercial automobile		21,909	6	%		20,646	6	%		22,677	6	%
Commercial multi-peril		7,972	2	%		5,453	1	%		10,287	3	%
Other		3,774	1	%		3,219	1	%		8,121	2	%
Total	$	395,325	100	%	$	373,697	100	%	$	375,793	100	%

Workers’ Compensation Insurance

Most 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 subject to state regulation 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 the insurance rates we charge to our customers are subject to differing forms of state regulation.

Statutory direct workers’ compensation premiums written by jurisdiction were as follows:

(dollar amounts in thousands)	2007				2006				2005
Pennsylvania	$	142,974	31	%	$	131,831	35	%	$	140,973	42	%
California		66,715	14	%		18,025	5	%		4,296	1	%
New Jersey		49,384	11	%		44,883	12	%		38,848	12	%
New York		37,669	8	%		37,619	10	%		31,490	9	%
Maryland		23,901	5	%		22,184	6	%		15,350	5	%
Florida		21,247	5	%		17,893	5	%		17,826	5	%
Virginia		18,116	4	%		17,469	5	%		14,627	4	%
North Carolina		15,413	3	%		11,990	3	%		10,487	3	%
Tennessee		11,527	3	%		9,482	3	%		7,163	2	%
Georgia		10,877	2	%		6,828	2	%		5,810	2	%
Delaware		10,613	2	%		10,020	3	%		6,441	2	%
Other		52,640	12	%		46,572	11	%		42,335	13	%
Total	$	461,076	100	%	$	374,796	100	%	$	335,646	100	%

The increases in total direct workers’ compensation premiums written, and more specifically those written in the state of California, for 2007 and 2006, compared to the immediately preceding year, reflected business written under our agreement with Midwest Insurance Companies (“Midwest”).  In September 2006, we entered into an agreement with Midwest General Insurance Agency (“MGIA”) under which MGIA underwrites and services workers’ compensation policies in California using our approved forms and rates.  Upon inception, we ceded 100% of the direct premiums and related losses on this business to non-affiliated reinsurers selected by us, including Midwest, an affiliate of MGIA.  Effective April 1, 2007, we retained 5% of the direct premiums and related losses on this business.  Our retention of this business increased to 10% effective September 1, 2007.  Total direct premiums written under this agreement were $59.8 million in 2007 and $14.8

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million in 2006.  Our agreement with Midwest terminated in March 2008.  We will continue to earn fees and service the business previously written, but no additional business will be written or renewed.

The PMA Insurance Group operates primarily in the eastern part of the United States, with service offices as far north as Syracuse, New York, as far south as Tampa, Florida and as far west as Nashville, Tennessee.  We have focused on the eastern United States because of our knowledge of workers’ compensation systems in this region’s states and our 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 employs similar analyses in determining whether and to what extent we will offer products in additional jurisdictions.  We are focused on expanding our premium base provided that any new business meets our underwriting standards.

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.  We refer to this business as residual market business.  Typically, an insurer’s share of this residual market business is assigned retrospectively based on its market share of voluntary direct premiums written.  This system exists in all of the states listed in the above table, except Pennsylvania, New York, Maryland and California.  In these four states, separate governmental entities write all of the workers’ compensation residual market business. In 2007, The PMA Insurance Group’s written premiums included $14.3 million of residual market business, which constituted 3% of our direct workers’ compensation premiums written.  Based upon data for policy year 2007 reported by the National Council on Compensation Insurance, the percentage of residual market business for the industry, in all states, was approximately 8% of direct workers’ compensation premiums written.

The PMA Insurance Group offers a variety of workers’ compensation products to our customers.  Rate-sensitive products are priced based primarily 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 loss experience during the policy period.  We also sell alternative market products, such as large deductible products and other programs and services, to customers who agree to assume even greater exposure to losses than under more traditional loss-sensitive products.  We decide which type of product to offer a customer based upon the customer’s needs, an underwriting review and credit history.

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

	2007(1)			2006(1)			2005
Rate-sensitive products		59	%		58	%		57	%
Loss-sensitive products		25	%		28	%		30	%
Alternative market products		16	%		14	%		13	%
Total		100	%		100	%		100	%

(1)  Excludes business written with Midwest.

• Rate-sensitive products include fixed-cost policies and dividend paying policies.  The premium charged on a fixed-cost policy is essentially 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.

• Loss-sensitive products enable us to 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 rate regulation than rate-sensitive products and reduce, but do not eliminate, risk to the insurer.  Under these types of policies, losses are evaluated after the policy period expires in order to determine whether additional premium adjustments are required.  These policies are typically subject to adjustment for an average of five years after policy expiration.  We generally restrict loss-sensitive products to accounts with annual premiums in excess of $100,000.

• We also offer a variety of alternative market products for larger accounts, including large deductible policies and off-shore and domestic captive programs.  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, subject to an aggregate limit.  The deductibles under these policies generally range from $250,000 to $500,000.  Typically, we receive a lower up-front premium for these types of alternative market product plans as the insured retains a greater share of the

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underwriting risk than under rate-sensitive or loss-sensitive products.  This reduces the potential for unfavorable claims activity on an account and encourages loss control on the part of the insured.

Through The PMA Insurance Group’s workers’ compensation product offerings, we generally provide risk control services to our insureds.  We also provide a comprehensive array of managed care services to control loss costs.  These include:

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

• Access to the First Health® 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.  In addition, MedRisk, a physical and occupational therapy expert provider organization is available to clients.

• Access to the QualCare Inc. preferred provider organization network in New Jersey, which includes doctors, hospitals and ancillary healthcare providers.

• 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.

• The TMESYS® pharmacy benefit management program.  TMESYS® is a pharmacy program designed specifically for the workers’ compensation industry.  It includes access to a nationwide network of pharmacies, increased savings through volume pricing, on-line drug utilization review and the ability to capture the first prescription within the program.

• An out of network negotiation program that targets services rendered by medical providers and facilities outside of our preferred provider organization networks.  This program enhances savings on certain high dollar medical services that meet the out of network program review criteria.  The program achieves cost savings by utilizing a medical data driven database, and by leveraging expert negotiation services, where appropriate.

The PMA Insurance Group also employs an automated medical bill review system in order to detect duplicate billings, unrelated and unauthorized charges and coding discrepancies.  Additionally, complex bills are forwarded to our cost containment unit, which is staffed by registered nurses and other medical professionals, to resolve questions regarding causal relationship and appropriate utilization levels.

Other Commercial Lines

The PMA Insurance Group writes other commercial property and liability coverages, including commercial automobile, commercial multi-peril, general liability and umbrella, for larger and middle market accounts that satisfy our underwriting standards.  See “The PMA Insurance Group—Underwriting” for additional discussion.

Other Products

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 investing in 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 a portion of the premium and loss exposures to either a 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.  This potential obligation is typically secured through assets in trust, a letter of credit or similar arrangement.  Our principal sources of income from this rent-a-captive program are the premium revenue on the risk retained by us and captive management fees earned.

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Distribution

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

As of December 31, 2007, The PMA Insurance Group had contracts with 492 independent agents and brokers.  During 2007, these independent brokers and agents accounted for approximately 92% of The PMA Insurance Group’s direct written premiums.  The top ten independent brokers and agents, excluding Midwest, accounted for 27% of The PMA Insurance Group’s 2007 direct written premiums, the largest of which accounted for 4% of direct written premiums.

We typically pay commissions to the agents and brokers on individual policies placed with us.  We have also entered into agreements with our agents and brokers under which they have the potential to earn additional commissions based on specified contractual criteria, primarily related to premium growth.

As of December 31, 2007, The PMA Insurance Group employed 11 direct sales representatives who are generally responsible for certain business located in Pennsylvania and Delaware.  These employees produced $40.4 million in direct written premiums in 2007.

The PMA Insurance Group’s underwriters review business submissions before they are accepted.  The PMA Insurance Group monitors several statistics with respect to our independent 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, 2007, our field organization consisted of 15 branch or satellite offices throughout The PMA Insurance Group’s principal marketing territory.  Branch offices deliver a full range of services directly to customers located in their service territory, while satellite offices primarily offer risk control and claims adjustment services.

Underwriting

The PMA Insurance Group’s underwriters, in consultation with our 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.  Certain 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.  We mitigate our exposure to catastrophic loss, including terrorism, by various methods including individual account underwriting guidelines, further review of significant risks by an in-house catastrophe committee, the use of catastrophe modeling and thematic software, the purchase of per-risk and catastrophe reinsurance coverage, and potential utilization of benefits provided by federal programs.  Because terrorism exclusions are not permitted for workers’ compensation business, we refined our workers’ compensation underwriting guidelines after September 11, 2001 to manage the underwriting exposure from terrorism risks to include the review of aggregation of risks by geographic location, the evacuation and security protocols of buildings in which insured employees work, and to assess the types of entities located in the vicinity of the prospective insured.  Adherence to these procedures has not materially affected The PMA Insurance Group’s mix of business.  The PMA Insurance Group considers the added potential risk of loss due to terrorist activity, and this has led us to decline to write or renew certain business.  Additional rates may be charged for terrorism coverage, and as of January 1, 2004, The PMA Insurance Group had adopted such premium charges for terrorism coverage under workers’ compensation insurance in all states.  We will continue to review and refine our terrorism underwriting guidelines on a going forward basis.

Underwriters, who are based in each of our local field offices, report directly to regional underwriting officers who are primarily responsible for executing our underwriting strategy.  Regional underwriting officers report directly to senior regional executives who are accountable for territorial operating results.  The senior regional executives, along with home office underwriting, including the product management department, report directly to the Chief Underwriting Officer.  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 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.  A formal underwriting quality assurance program is employed to ensure consistent adherence to underwriting standards and controls.

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

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customers must provide under these arrangements.  Premium auditors perform audits to determine that premiums charged accurately reflect the actual exposure bases.

Claims Administration

Claims services are delivered to customers primarily through employees located in branch or satellite offices.  Claims are assigned to claims professionals based on coverage and jurisdictional expertise.  Claims meeting certain criteria are referred to line of business claim specialists.  Certain claims arising outside of our principal marketing territory are assigned to an independent claims service provider.  A formal quality assurance program is carried out to ensure the consistency and effectiveness of claims adjustment activities.  Claims professionals are also supported by in-house legal counsel and an anti-fraud investigative unit.  A special claims unit in the home office manages more complex specialized matters such as asbestos and environmental claims.

The PMA Insurance Group maintains a centralized customer service center in order to minimize the volume of clerical and repetitive administrative demands on our claims professionals.  The center’s ability to handle loss reports, perform claim set-up, issue payments and conduct statutory reporting allows the claims professionals to focus on immediate contact and timely, effective claim resolution.  PMA’s Customer Service Center also houses a centralized call center providing 24 hour service for customer requests and inquiries.  Currently, approximately 60% of new losses are reported electronically through our internet based technology, including PMA Cinch®, our internet risk management information system.

Competition

The domestic property and casualty insurance industry is very competitive and consists of many companies, with no one company dominating the market for all products.  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.  The PMA Insurance Group has six major competitors: Liberty Mutual Group, American International Group, Inc., Zurich/Farmers Group, St. Paul Travelers, The Hartford Insurance Group and CNA, all of which are larger and have greater financial resources than us.  In addition to competition from other insurance companies, The PMA Insurance Group competes with certain alternative market arrangements, such as captive insurers, risk-sharing pools and associations, risk retention groups and self-insurance programs.  Some of these competitors also 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.  The PMA Insurance Group attempts to price our products in such a way that the prices charged to our clients are competitive with the overall marketplace while still adhering to our underwriting standards.  The PMA Insurance Group will reject or non-renew accounts where we believe the market rates, terms and conditions for such risks are not acceptable.

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 conduct client surveys to gain an understanding of the perceptions of our service as compared to our competitors.  In our most recent survey which was conducted independently in 2007, 96% of our client respondents reported that we have either met or exceeded their service expectations.  Among the areas for which we received the strongest ratings were: ease of doing business with the carrier, service provided by our call center, claims management, local service capabilities, and risk control expertise, including technical knowledge, responsiveness and understanding clients’ risk exposures and business operations.

We continuously evaluate our products to meet the needs of clients in our markets.  In 2007, The PMA Insurance Group formed a new business unit, PMA Specialty Markets, in order to expand our focus on the growing captive and groups/programs property and casualty insurance market.  As an increasing number of property and casualty insurance buyers seek alternative market solutions for their insurance needs, this new business unit will enhance The PMA Insurance Group’s ability to compete for this type of business.  In 2006, The PMA Insurance Group introduced access to two provider networks, MedRisk and QualCare Inc., which offer managed care services to control loss costs.  In 2005, The PMA Insurance Group introduced enhanced commercial multi-peril products that were specifically designed for clients in twelve different industry groups in which we already had a presence in the workers’ compensation line of business.  These products offer additional property and liability coverages and increased limits compared to prior products offered by The PMA Insurance Group.  The PMA Insurance Group continues to focus on rehabilitation and managed care services to control workers’ compensation costs for our clients and to evaluate new product opportunities that may enhance our overall competitive position.  See “The PMA Insurance Group—Workers’ Compensation Insurance” for additional discussion.

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Industry Trends

The property and casualty insurance industry has historically been cyclical in nature.  This cyclical nature has included periods characterized by excess capacity, which have resulted in highly competitive market conditions evidenced by declining premium rates and, in many cases, policy terms less favorable to the insurers.  These “soft markets” have typically led companies to withdraw from portions of the business that are under-priced or to cease operations.  In turn, market conditions typically begin to “harden” as the market contracts and many insurance and reinsurance companies independently seek price increases and more favorable policy terms.  Alternatively, catastrophic events, such as the World Trade Center attack or natural disasters may trigger the beginning of a harder market.

Pricing on The PMA Insurance Group’s rate-sensitive workers’ compensation products decreased by 4% in 2007, compared to decreases of 2% in 2006 and price increases of 4% in 2005.  While we focus on the relative amount by which we can adjust insureds’ premiums based on actual losses incurred on loss-sensitive products, there can be no assurance that price changes coupled with payroll inflation will increase at a level consistent with loss cost inflation.  This is true even if loss costs increase throughout the industry as a whole.  Furthermore, on rate-sensitive products, any benefit that we derive from potential price increases may be partially or completely offset by price increases on our ceded reinsurance, by frequency of reported losses and by loss cost inflation.

In February 2008, the Pennsylvania Compensation Rating Bureau recommended a reduction in loss costs of 10.2%, which was approved by the Pennsylvania Insurance Department and will become effective on April 1, 2008.  While this will result in lower filed loss costs in Pennsylvania, we will continue our practice of underwriting our business with a goal of achieving a reasonable level of profitability on each account.  We do not expect that the filed loss costs will result in a reduction in premiums in Pennsylvania at the same level of the loss cost reduction, based on our current views of the experience modification factors and potential future experience of our book of business.  We will continue to determine our business pricing through schedule charges/credits that we file and use to limit the effect of filed loss cost changes.  We also believe that the loss cost change should not significantly affect the results or the profitability of our loss-sensitive and alternative market books of business, which represent approximately 42% of our Pennsylvania workers’ compensation business.

FEE-BASED BUSINESS

Background

PMA Management Corp. has been in operation since 1991 and was previously reported by us as part of The PMA Insurance Group.  PMA Management Corp. provides various claims administration, risk management, loss prevention and related services, primarily to self-insured clients under fee for service arrangements.  PMA Management Corp. shares resources with the Pooled Companies and, therefore, requires minimal capital investment.  In addition, this business competes on the basis of our reputation as a high quality claims and risk control service provider.  As part of the claims administration services, clients benefit from the same comprehensive array of managed care services to control loss costs that are provided as part of The PMA Insurance Group’s workers’ compensation product offerings.

As a result of our acquisition of Midlands in October 2007, we reported the combined operating results of our fee-based businesses, PMA Management Corp. and Midlands, in a new reporting segment, Fee-based Business.  These businesses allow us to expand and diversify our revenue base to include services that do not include assumption of insurance risk.  Midlands is a managing general agent, program administrator and provider of TPA services.  Midlands has been in operation since 1990 and is based in Oklahoma City, Oklahoma.  Midlands acts as a broker of excess and surplus lines insurance, a managing general agent, and a claims administration and consulting firm.  Its activities encompass underwriting, brokerage, insurance consulting, and claims management.

Products

Fee-based revenues were as follows:

(dollar amounts in thousands)	2007				2006				2005
Revenues (1):
Claims service revenues	$	34,034	92	%	$	27,853	100	%	$	23,591	100	%
Commission income		3,005	8	%		-	0	%		-	0	%
Other revenues		113	0	%		-	0	%		-	0	%
Total	$	37,152	100	%	$	27,853	100	%	$	23,591	100	%

(1) The revenues of Midlands are included only from the date of acquisition, October 1, 2007.

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Claims Services

Our Fee-based Business primarily generates its revenues through claims services provided to clients.  Under claims services, our Fee-based Business operates as a TPA, and therefore, provides claims services while undertaking no insurance risk in the arrangement.  Fee-based Business provides complete multi-line claim administration services to individual, captive, and group self-insured clients, ceding carriers and reinsurers.  More specifically, our Fee-based Business offers claims services under a variety of insurance products, including workers’ compensation, property, casualty, personal accident, accident and health, and marine.

Agency and Brokerage

Agency and brokerage business accounted for 8% of our fee-based revenues in 2007.  We are licensed in all 50 states to provide agency and brokerage services.  We generate this business from acting as an intermediary for reinsurance contracts and brokering products for retail insurance agents and wholesale brokers specializing in hard-to-place property and casualty business and specialty products.  We also provide consulting services for a variety of clients, including insurance companies, associations, purchasing groups, and large corporate insurance buyers.

Distribution

As of December 31, 2007, PMA Management Corp. had 15 offices that offer risk control and claims adjustment services and Midlands had six offices, including three offices solely dedicated to claims services.

Competition

The markets in which our Fee-based Business competes contain many participants and are very competitive.  For claims services, our Fee-based Business competes with national, regional and local providers of TPA services.  Our main competitors within the claims service business at a national level include Gallagher Bassett, Corvel and CMS.  Unlike The PMA Insurance Group, which competes with both insurance companies and the alternative risk market, our claims service business at Midlands competes only with other participants providing services within the alternative risk market.  Our agency and brokerage business competes with national and regional insurance brokers and insurance companies.  To gauge our performance against competition, we conduct client surveys and audits.

DISCONTINUED OPERATIONS

In November 2007, we announced that we were actively pursuing the sale of our Run-off Operations.  Our Run-off Operations include our reinsurance and excess and surplus lines businesses which we placed into run-off in 2003 and 2002, respectively.  In February 2008, we announced that we entered into a non-binding letter of intent with a third party and expect to execute a definitive stock purchase agreement in the first quarter of 2008.  The transfer of ownership will be subject to regulatory approval.  Because of the expected divestiture, we determined that these operations should be reflected as discontinued operations.  As such, we recorded an after-tax impairment loss of $40.0 million in the fourth quarter of 2007, as the book value of our Run-off Operations was greater than the estimated net proceeds we expect to receive in a sale.  We will continue to run-off the liabilities related to these businesses until they have been sold.

See Note 4 in Item 8 of this Form 10-K for additional information regarding our discontinued operations.

REINSURANCE AND RETROCESSIONAL PROTECTION

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 subsidiaries.  This reinsurance is maintained to protect us 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 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 are renewable annually.  Some contracts are continuous in nature and may be terminated at their annual anniversary by either party upon 30 to 120 days’ notice.  In general, the reinsurance agreements are treaty agreements, 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

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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.

See “Item 7 – MD&A – Loss Reserves and Reinsurance” and Note 7 in Item 8 of this Form 10-K for additional information.

LOSS RESERVES

Insurers establish reserves for unpaid losses and LAE based upon their best estimate of future amounts needed to pay claims and related settlement costs with respect to insured events which have occurred.  Reserves are established for both losses already reported (“case reserves”) and losses that have been incurred but not yet reported (“IBNR”).  Reserves are not, and cannot be, an exact measure of an insurer’s ultimate liability.

Reserves are established using various generally accepted actuarial methodologies.  These methodologies require that our actuaries review our historical and industry data and anticipate the impact of various factors such as legal developments, changes in social attitudes and changes in economic conditions in order to estimate the ultimate amount of losses and LAE that will be required to be paid.  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 estimating future outcomes.

For certain types of business, primarily workers’ compensation, there is a significant period of time between the occurrence of an insured loss, the reporting of the loss and the settlement of that loss.  We refer to these types of business as “long-tail business.”  The risk of ultimate losses deviating from reserved losses is implicitly greater for long-tail business than it is for shorter tailed business.

Estimating our ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates, assumptions and judgments using data currently available.  While we believe that our reserves are fairly stated as of December 31, 2007, the possibility exists that as additional experience and data become available regarding claims payment and reporting patterns, legal and legislative developments, judicial theories of liability, the impact of regulatory trends on benefit levels for both medical and indemnity payments, changes in social attitudes and economic conditions, ultimate losses, net of reinsurance, could differ substantially from the amounts currently recorded.  Any future change in the estimate of reserves could have a material adverse effect on our financial condition, results of operations and liquidity.

See “Critical Accounting Estimates — Unpaid Losses and Loss Adjustment Expenses” beginning on page 56 for additional information.  In addition, see “Cautionary Statements” on page 63 and “Item 1A – Risk Factors” for a discussion of factors that may adversely impact our losses and LAE in the future.

The table on the following page presents the subsequent development of the estimated year-end reserves, net of reinsurance (“net reserves”), for the ten years prior to 2007.  The table does not include the reserves of our run-off reinsurance and excess and surplus lines businesses, which are reflected in our financial statements as discontinued operations.  Unpaid losses and LAE of our discontinued operations are presented with the gross liabilities of discontinued operations in a separate line on the Balance Sheet.  Unpaid losses and LAE for these operations on a GAAP basis were $339.1 million and $482.2 million at December 31, 2007 and 2006, respectively.  Unpaid losses and LAE for these operations on a statutory basis were $128.9 million and $81.6 million at December 31, 2007 and 2006, respectively.

At December 31, 2007 and 2006, our gross and net liabilities for unpaid losses and LAE from discontinued operations were both recorded net of discount of $22.1 million and $26.3 million, respectively, and as of December 31, 2007, net of $407,000 of salvage and subrogation.  Unpaid losses for our workers’ compensation claims on this business, net of reinsurance, at December 31, 2007 and 2006 were $48.8 million and $47.8 million, net of discount of $19.5 million and $22.2 million, respectively.  Net discount accretion further reduced our loss from discontinued operations by $4.2 million, $4.0 million and $4.3 million in 2007, 2006 and 2005, respectively.

For additional information regarding the loss reserves and prior year loss development at our discontinued operations, see Note 4 in Item 8 of this Form 10-K and the sections of our MD&A in Item 7 of this Form 10-K entitled “Discontinued Operations – Premiums, Losses and Expenses” and “Loss Reserves and Reinsurance – Discontinued Operations.”

The table on the following page and subsequent information in this section relate to our continuing operations.  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-estimated net reserves made in each succeeding year.  

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The reserves in the first and third sections are recorded net of discount, as discussed below the table, while paid loss information is not discounted.

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, 2007; 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 2002 relating to losses incurred in 1997 would be included in the cumulative deficiency amount for each of the years 1997 through 2001.  However, the deficiency would be reflected in operating results in 2002 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.

 Loss and Loss Adjustment Expense Development

December 31,

(dollar amounts in millions)

		1997			1998			1999		2000		2001		2002		2003		2004		2005			2006			2007
I.	Initial estimated liability for
	unpaid losses and LAE,
	net of reinsurance	$	1,141.7		$	778.9		$	646.6	$	462.3	$	459.6	$	404.7	$	486.8	$	504.7	$	468.0		$	456.8		$	444.8
II.	Amount of reserve paid,
	net of reinsurance through:
	- one year later	$	277.8		$	234.3		$	295.5	$	179.9	$	275.2	$	257.5	$	226.7	$	241.6	$	212.9		$	210.4		$	-
	- two years later		491.9			469.2			397.2		362.2		442.0		372.1		368.1		383.2		351.6
	- three years later		697.0			552.1			555.9		468.0		503.3		448.7		454.1		474.1
	- four years later		752.3			694.7			652.2		503.9		534.6		485.6		502.5
	- five years later		879.2			785.5			679.7		524.1		548.1		497.8
	- six years later		959.8			807.7			694.2		530.0		559.4
	- seven years later		979.4			821.8			696.1		533.0
	- eight years later		993.3			823.2			696.2
	- nine years later		994.4			821.9
	- ten years later		993.8
III.	Reestimated liability,
	net of reinsurance, as of
	- one year later	$	1,126.8		$	769.9		$	640.5	$	465.1	$	460.7	$	454.4	$	484.7	$	502.8	$	465.7		$	455.1		$	-
	- two years later		1,112.6			764.0			640.4		465.4		490.8		453.2		484.3		505.2		465.1
	- three years later		1,107.4			763.1			639.8		471.2		489.1		454.6		490.1		505.7
	- four years later		1,106.4			761.8			642.7		469.4		495.0		460.6		493.8
	- five years later		1,104.5			765.5			640.9		480.5		499.0		463.8
	- six years later		1,108.3			765.1			647.6		482.8		501.6
	- seven years later		1,108.2			770.9			649.5		485.2
	- eight years later		1,112.8			772.9			652.8
	- nine years later		1,114.8			775.9
	- ten years later		1,118.3
IV.	Cumulative deficiency
	(redundancy):	$	(23.4	)	$	(3.0	)	$	6.2	$	22.9	$	42.0	$	59.1	$	7.0	$	1.0	$	(2.9	)	$	(1.7	)	$	-
V.	Net liability	$	1,141.7		$	778.9		$	646.6	$	462.3	$	459.6	$	404.7	$	486.8	$	504.7	$	468.0		$	456.8		$	444.8
	Reinsurance recoverables		212.2			471.8			497.5		596.2		647.5		787.4		772.9		722.1		701.3			695.9			768.2
	Gross liability	$	1,353.9		$	1,250.7		$	1,144.1	$	1,058.5	$	1,107.1	$	1,192.1	$	1,259.7	$	1,226.8	$	1,169.3		$	1,152.7		$	1,213.0
VI.	Re-estimated net liability	$	1,118.3		$	775.9		$	652.8	$	485.2	$	501.6	$	463.8	$	493.8	$	505.7	$	465.1		$	455.1
	Re-estimated reinsurance recoverables		224.4			500.4			596.8		738.9		766.1		862.7		830.8		759.6		728.7			723.7
	Re-estimated gross liability	$	1,342.7		$	1,276.3		$	1,249.6	$	1,224.1	$	1,267.7	$	1,326.5	$	1,324.6	$	1,265.3	$	1,193.8		$	1,178.8

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Unpaid losses and LAE on a GAAP basis were $1,213.0 million and $1,152.7 million at December 31, 2007 and 2006, respectively.  Unpaid losses and LAE on a statutory basis were $429.7 million and $397.4 million at December 31, 2007 and 2006, respectively.  The primary differences between our GAAP and statutory loss reserves reflect: 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.

At December 31, 2007 and 2006, our gross unpaid losses and LAE were recorded net of discount of $154.5 million and $159.9 million, respectively.  Our net liability for unpaid losses and LAE was recorded net of discount of $21.5 million and $29.7 million at December 31, 2007 and 2006, respectively.  Unpaid losses for our workers’ compensation claims, net of reinsurance, at December 31, 2007 and 2006 were $379.5 million and $362.8 million, net of discount of $21.4 million and $17.8 million, respectively.  Unpaid losses on certain workers’ compensation claims are discounted to present value using our actual payment experience and mortality and interest assumptions as mandated by the statutory accounting practices prescribed by the Pennsylvania Insurance Department.  We also discount unpaid losses and LAE for certain other claims at rates permitted by domiciliary regulators or if the timing and amount of such claims are fixed and determinable.  Pre-tax income (loss) 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 improved pre-tax results by $1.7 million, $1.5 million and $515,000 in 2007, 2006 and 2005, respectively.

At December 31, 2007, our loss reserves were stated net of $18.0 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 already 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.

For additional information regarding our loss reserves and prior year loss development, see Note 6 in Item 8 of this Form 10-K and the sections of our MD&A in Item 7 of this Form 10-K entitled “The PMA Insurance Group – Losses and Expenses” and “Loss Reserves and Reinsurance.”

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 returns, (ii) maintain 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 setting guidelines for asset quality standards, allocating assets among investment types and issuers, and other relevant criteria for our portfolio.  In addition, invested asset cash flows, which include both current interest income received and investment maturities, are structured to consider 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 while maintaining appropriate portfolio quality and diversity.  Liquidity requirements are met primarily through operating cash flows and maintaining a portfolio with maturities that reflect expected cash flow requirements.

The Strategy and Operations Committee of our Board of Directors is responsible for reviewing 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 PMACIC must comply with the insurance laws and regulations of the Commonwealth of Pennsylvania.

We do not currently have any derivative financial instruments in our investment portfolio.  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 comprised 10% of invested assets at December 31, 2007.  Included in this industry segment are diverse financial institutions, including banks and insurance companies.

For additional information on our investments, including carrying values by category, quality ratings and net investment income, see “Item 7 – MD&A – Investments” as well as Notes 2-B, 4 and 5 in Item 8 of this Form 10-K.

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RATINGS

Nationally recognized ratings agencies rate the financial strength of our principal insurance subsidiaries and the debt of PMA Capital Corporation.  Ratings are not recommendations to buy our securities.

Rating agencies rate insurance companies based on financial strength and the ability to pay claims and other factors more relevant to policyholders than investors.  We believe that the ratings assigned by nationally recognized, independent rating agencies, particularly A.M. Best Company, Inc. (“A.M. Best”), are material to our operations.  We currently participate in the ratings processes of A.M. Best, Fitch Ratings and Moody’s Investor Services.  Other rating agencies also rate our securities, but we do not disclose such ratings in our reports.

The rating scales of A.M. Best, Fitch and Moody’s are characterized as follows:

A.M. Best—A++ to S (“Superior” to “Suspended”)

Fitch—AAA to C (Exceptionally strong to lowest-rated class)

Moody’s—Aaa to C (Exceptional financial security to lowest-rated class)

As of February 29, 2008, the financial strength ratings of our principal insurance subsidiaries and the debt ratings of PMA Capital Corporation, as published by the principal rating agencies, are as follows:

Financial Strength Ratings:	A. M. Best		Fitch		Moody's
Pooled Companies(1)	A-	(4th of 16)	BBB+	(8th of 21)	Baa3	(10th of 21)
PMA Capital Insurance Company	B	(7th of 16)	B-	(16th of 21)	B1	(14th of 21)
Senior Debt Ratings:			Fitch		Moody's
PMA Capital Corporation			BB+	(11th of 21)	Ba3	(13th of 21)

(1)   The Pooled Companies represent the domestic subsidiary insurance companies through which The PMA Insurance Group writes its insurance business, which share results through an intercompany pooling agreement.  The Pooled Companies are rated as one entity.

A downgrade in the A.M. Best ratings of the Pooled Companies would result in a material loss of business as policyholders move to other companies with higher financial strength ratings.  Accordingly, such a downgrade would have a material adverse effect on our results of operations, liquidity and capital resources.  A downgrade in our debt ratings could affect our ability to issue additional debt on terms favorable to us.

These ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that we or our principal insurance subsidiaries can maintain these ratings.  Each rating should be evaluated independently of any other rating.

See “Item 1A – Risk Factors” for additional information regarding our ratings.

REGULATORY MATTERS

General

Collectively, the Pooled Companies are licensed to transact insurance business in, and are subject to regulation and supervision by, all 50 states and Puerto Rico and the District of Columbia.  Although PMACIC is currently part of our discontinued operations, it maintains licenses or is accredited to transact business in, and is subject to regulation and supervision by, 48 states and the District of Columbia.

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.  The Pooled Companies and PMACIC are domiciled in Pennsylvania, and the Pennsylvania Insurance Department (the “Department”) exercises principal regulatory jurisdiction over them.  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.

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In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms, certain terms and conditions and related material and, for certain lines of insurance, including rate-sensitive workers’ compensation, the approval of rates.  Property and casualty reinsurers 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.  All insurers and reinsurers that are domiciled in the United States are required to file financial statements that are prepared in accordance with Statutory Accounting Principles with their state of domicile, as well as with any other states which grant them a license or authority.

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 November 2002, the Terrorism Risk Insurance Act of 2002 (“TRIA”) became effective.  TRIA provided federal reinsurance protection for property and casualty losses in the United States or to United States aircraft or vessels arising from certified terrorist acts through the end of 2005.  In January 2006, the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) became effective.  TRIEA, which extended most of the original provisions of TRIA, expired on December 31, 2007.  In December 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) became effective.  TRIPRA, which extends the program established under TRIA, provides a seven-year extension through December 31, 2014.  For terrorist acts to be covered under TRIPRA, they must be certified as such by the United States Government and may be committed by individuals acting on behalf of a foreign or domestic person or interest.  TRIPRA contains a “make available” provision, which requires insurers subject to the Act to offer coverage for acts of terrorism that does not differ materially from the terms (other than price), amounts and other coverage limitations offered to the policyholder for losses from events other than acts of terrorism.  The “make available” provision permits exclusions for certain types of losses, if a state permits exclusions for such losses.  TRIPRA requires insurers to pay a deductible equal to 20% of commercial lines (as defined by TRIPRA) direct earned premiums.  The federal government covers 85% of the losses above the deductible, while a company retains 15% of the losses.  TRIPRA contains an annual limit of $100 billion of covered industry-wide losses.  TRIPRA applies to certain commercial lines of property and casualty insurance, including workers’ compensation insurance, offered by The PMA Insurance Group, but does not apply to reinsurance.  The PMA Insurance Group would be subject to a deductible of approximately $90 million in 2008 if a covered terrorist act were to occur.  Such deductible would be covered by our existing reinsurance program.

Workers’ compensation policy forms were not permitted to exclude terrorism from coverage prior to the enactment of TRIA, and continue to be subject to this prohibition.  When underwriting new and renewal commercial lines insurance business, The PMA Insurance Group considers the added potential risk of loss due to terrorist activity, and this has lead us to decline to write or renew certain business.  Additional rates may be charged for terrorism coverage, and as of January 1, 2004, The PMA Insurance Group had adopted such premium charges for terrorism coverage under workers’ compensation insurance in all states.  The PMA Insurance Group has also refined its underwriting procedures in consideration of terrorism risks.  For additional information regarding The PMA Insurance Group’s underwriting criteria, see “Business – The PMA Insurance Group, Underwriting” section of this Form 10-K.

Because of the unpredictable nature of terrorism, and the deductibles that we would be subject to under TRIPRA, if future terrorist attacks occur, they may result in losses that could have a material adverse effect on our financial condition, results of operations and liquidity.

While we do not write health insurance, federal and state rules and regulations affecting health care services can affect the workers’ compensation services we provide.  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.

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 Department is currently in the process of performing its examination of the Pooled Companies and PMACIC as of and for the years ended December 31, 2003 through 2007, respectively.

Insurance Holding Company Regulation

The Company and its insurance subsidiaries are subject to regulation pursuant to the insurance holding company laws of the Commonwealth of Pennsylvania.  Pennsylvania’s 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 insurance department authorities, to file with it 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 the Department must be received before entering into an intercompany transaction.  Further, these laws require that an insurer’s policyholders’

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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.

As a result of discussions with the Department, PMACIC entered into a voluntary agreement with the Department, dated December 22, 2003.  Pursuant to the agreement, PMACIC agreed to request the Department’s prior approval of certain actions, including: entering into any new reinsurance contracts, treaties or agreements, except as may be required by law; making any payments, dividends or other distributions to, or engaging in any transactions with, any of PMACIC’s affiliates; making any withdrawal of monies from PMACIC or making any disbursements, payments or transfers of assets in an amount exceeding five percent (which equaled $11.5 million as of December 31, 2007) of the fair value of PMACIC’s then aggregate cash and investments; incurring any debt, obligation or liability for borrowed money, pledging its assets or loaning monies to any person or entity (whether or not affiliated); appointing any new director or executive officer; or altering its or its Pennsylvania-domiciled insurance company subsidiaries’ ownership structure.  The letter agreement will remain in effect until the Commissioner, or PMACIC and the Commissioner, determine it is no longer necessary, or until and unless it is superseded by a regulatory order.

In a 2004 order (the “2004 Order”) approving the transfer of the Pooled Companies from PMACIC to PMA Capital Corporation, the Department prohibited PMACIC from declaring or paying any dividends, return of capital or other types of distributions to PMA Capital Corporation prior to 2006.  Under the terms of the 2004 Order, PMACIC was permitted to request an “extraordinary” dividend, as defined under Pennsylvania law, in 2006 provided that immediately after giving effect to the dividend or return of capital, PMACIC’s risk-based capital equaled or exceeded 225% of Authorized Control Level Capital, as defined by the National Association of Insurance Commissioners (“NAIC”).  In 2006, the Department approved our request for an “extraordinary” dividend in the amount of $73.5 million from PMACIC.  We used the proceeds to reduce our debt obligations and to maintain liquidity at the holding company.  In 2007, the Department approved our request for an additional “extraordinary” dividend in the amount of $37.5 million from PMACIC.  We used the proceeds to purchase Midlands, to repurchase shares of our Class A Common Stock and to maintain liquidity at the holding company.

Under Pennsylvania 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 Commissioner for such acquisition of control.  Pursuant to the Pennsylvania 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.  The 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 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.

Under Pennsylvania laws and regulations, our insurance subsidiaries 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

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which violates these standards.  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.

The Pooled Companies did not pay any dividends to PMA Capital Corporation in 2007.  As of December 31, 2007, the Pooled Companies can pay up to $29.2 million in dividends to PMA Capital Corporation during 2008 without the prior approval of the Department.  In considering their future dividend policy, the Pooled Companies will consider, among other things, the impact of paying dividends on their financial strength ratings.  Given the anticipated sale of PMACIC, we do not expect to receive any dividends from this operation in 2008.

In addition to the regulatory restrictions, we may not declare or pay cash dividends or distributions on our Class A Common Stock if we elect to exercise our right to defer interest payments on our $64.4 million principal amount of junior subordinated debt outstanding.

Risk-Based Capital

The NAIC has adopted risk-based capital requirements for property and 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 risk-based capital (“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.

At December 31, 2007, the RBC ratios of the Pooled Companies ranged from 497% to 1340% and PMACIC’s RBC ratio was 241%.

We believe that we will be able to maintain the RBC ratios of the Pooled Companies 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 2007, none of the Pooled Companies reported any unusual values while PMACIC reported six unusual values, relating to: (1) change in net premiums written, (2) two-year overall operating ratio, (3) investment yield, (4) gross change in policyholders surplus, (5) change in adjusted policyholders surplus, and (6) adjusted liabilities to liquid assets.  The unusual value for the change in net premiums written was due to PMACIC’s run-off status.  The unusual value for the two-year overall operating ratio resulted from negative net premiums earned and negative net premiums written due to premium cessions under the adverse development cover.  The low value for investment yield was a result of the commutation of the adverse development cover which resulted in an increase in cash and investments of $171.9 million at the end of 2007, but did not earn investment income throughout the year.  The unusual values for the changes in policyholders surplus were largely due to PMACIC’s 2007 statutory loss of $50.7 million and its extraordinary dividend payment of $37.5 million to PMA Capital in April 2007.  The unusual value related to adjusted liabilities to liquid assets was primarily due to $94.6 million of assets, such as funds held by reinsureds and deposit assets, which are not considered

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liquid assets for purposes of this calculation, while their offsetting liabilities were included in the liability component of this ratio.

EMPLOYEES

As of February 1, 2008, we had 1,221 full-time employees, including 21 at our discontinued operations.  None of our employees is represented by a labor union and we are not a party to any collective bargaining agreements.  We consider the relationship with our employees to be good.

AVAILABLE INFORMATION

The address for our website is www.pmacapital.com.  We make available, free of charge, through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

The Annual Statements for the Pooled Companies and PMACIC, which we file with the Pennsylvania Insurance Department, contain financial statements prepared in accordance with statutory accounting practices.  Annual Statements for the years ended December 31, 2007, 2006 and 2005 for each of these subsidiaries are available on the Annual Report portion of our website www.pmacapital.com.

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GLOSSARY OF SELECTED INSURANCE TERMS

Accident year	The year in which an event occurs, regardless of when any policies covering it are written, when the event is reported, or when the associated claims are closed and paid.
Acquisition expense	The cost of acquiring both new and renewal insurance business, including commissions to agents or brokers and premium taxes.
Agent	One who negotiates insurance contracts on behalf of an insurer.  The agent receives a commission for placement and other services rendered.
Broker	One who negotiates insurance or reinsurance contracts 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 by claims personnel 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	When an insurance company reinsures its risk with another, it “cedes” business and is referred to as the “ceding company.”
Combined ratio	The sum of losses and LAE, acquisition expenses, operating expenses and policyholders’ dividends, all divided by net premiums earned.
Commutation	Transaction in which policyholders and insurers surrender all rights and are relieved from all obligations under an insurance or reinsurance contract.
Direct premiums written	The amounts charged by a primary insurer for the policies that it underwrites.
Direct reinsurer, direct
underwriter, direct writer	A reinsurer and/or insurer that markets and sells reinsurance and/or insurance directly to its reinsureds and/or insureds without the assistance of brokers or agents.
Excess and surplus lines	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.  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 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.

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Funds held	The holding by a ceding company of funds usually 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”).
Indemnity benefits	Amounts paid directly to an injured worker as compensation for lost wages.
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 incurred 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 believes it will ultimately be required to pay with respect to insurance or reinsurance it has written.  Reserves are established for losses and for LAE and consist of case reserves and IBNR.  Reserves are not, and cannot be, an exact measure of an insurers’ ultimate liability.
Managing general agent	A person or firm authorized by an insurer to transact insurance business who may have authority to bind the insurer, issue policies, appoint producers, adjust claims and provide administrative support for the types of insurance coverage pursuant to an agency agreement.
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.
Novation	The substitution of one party to a contract by another, with the consent of the other contracting party.
Occurrence policy	A term describing an insurance policy that covers an incident occurring while the policy is in force regardless of when the claim arising out of that incident is asserted.
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 consumers or businesses on a first dollar basis, sometimes subject to a deductible.

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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.
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.
Renewal retention rate	The current period renewal premium, excluding pricing, exposure and policy form changes, as a percentage of the total premium available for renewal.
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 “retrocessionaires”) 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.
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
and surplus	The excess of admitted assets over total liabilities (including loss reserves), determined in accordance with SAP.
Third party administrator	A service group who provides various claims, risk management, loss prevention and related services, primarily to self-insured clients under a fee arrangement.  No insurance risk is undertaken in the arrangement.
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 usually refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.

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Item 1A.  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, liquidity or prospects could be affected materially.

Reserves are estimates and do not and cannot represent an exact measure of liability. If our actual losses from insureds exceed our loss reserves, our financial results would be adversely affected.

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.  Our reserves as of December 31, 2007 were $1.2 billion related to our continuing operations at The PMA Insurance Group.  We also had $339 million of reserves related to our discontinued operations, formerly our Run-off Operations.  During the years ended December 31, 2007 and 2005, we increased our reserves for prior years’ losses and loss adjustment expenses at our discontinued operations by $21.6 million and $28.8 million, respectively.  Reserves are 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 outcomes.  The inherent uncertainties of estimating insurance reserves are generally greater for casualty coverages than for property coverages.  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.  We refer to this business as “long-tail” business.  Our major long-tail lines include our workers’ compensation and casualty reinsurance business.  Long-tail products are generally subject to more unforeseen development and uncertainty than shorter tailed products.  Additionally, as reinsurers rely on their ceding companies to provide them with information regarding incurred losses, reported claims for reinsurers become known more slowly than for primary insurers.  This also generally leads to more unforeseen development and uncertainty.

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.  If we increase our reserves or if our reserves are inadequate, our earnings for the period will generally decrease by a corresponding amount.  Therefore, future reserve increases or losses in excess of reserves could have a material adverse effect on our results of operations, financial condition and financial strength and credit ratings.

We have recorded significant reserve charges in the past and if we experience additional significant reserve charges it could adversely affect our ability to continue in the ordinary course of our business.

We have recorded significant reserve charges in the past.  In the third quarter of 2007, we recorded a charge of $22 million pre-tax, related to increased loss development from a limited number of ceding companies on our claims-made general liability business, primarily related to professional liability claims for accident years 2001 to 2003 written by our former reinsurance business.  In the first quarter of 2005, we recorded a charge of $30 million pre-tax, related to higher than expected claim frequency and severity on policies covering contractors’ liability for construction defects from accident years 1998 to 2001 written by our former excess and surplus lines operation and an increase in reported losses and continued volatility in pro rata professional liability reinsurance business written from accident years 1997 to 2001.  Our capital position was diminished due to these charges.  If, in the future, actual losses and loss adjustment expenses are greater 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.  A significant increase in reserves could have a material adverse effect on our insurance ratings and our ability to continue in the ordinary course of our business.  A significant increase in reserves at our discontinued operations could also adversely impact our ability to sell this business.

Because insurance ratings, particularly from A.M. Best, are important to our policyholders, downgrades in our ratings may adversely affect us.

Nationally recognized ratings agencies rate the financial strength of our principal insurance subsidiaries.  Ratings are not recommendations to buy our securities.

In November 2003, The PMA Insurance Group’s financial strength rating was downgraded from “A-” to “B++.”  This constrained its ability to attract and retain business.  Certain clients, particularly large account clients and clients in the

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construction industry, will not purchase property and casualty insurance from insurers with less than an “A-” (4th of 16) A.M. Best rating.  The PMA Insurance Group’s “A-” rating was restored on November 15, 2004.  However, any future downgrade in The PMA Insurance Group’s A.M. Best rating might result in a material loss of business as policyholders might move to other companies with higher financial strength ratings and we could lose key executives necessary to operate our business.  Accordingly, such a downgrade to our insurer financial strength ratings will likely result in lower premiums written and lower profitability and would have a material adverse effect on our results of operations, liquidity and capital resources.

These ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that we or our principal insurance subsidiaries can maintain or improve these ratings.  Each rating should be evaluated independently of any other rating.

We may not have sufficient funds to satisfy our obligations under our indebtedness and our other financial obligations.

As of December 31, 2007, we had $131.3 million of outstanding indebtedness.  Our ability to service our indebtedness and to meet our other financial obligations will depend upon our future operating performance, which in turn is subject to market conditions and other factors, including factors beyond our control.  In order to obtain funds sufficient to satisfy our obligations under our indebtedness as well as meet our other financial obligations, we may need to raise additional capital through the sale of securities or certain of our assets.  However, we may not be able to enter into or complete any such transactions by the maturity date or put date of our indebtedness or on terms and conditions that are acceptable to us.  Accordingly, we cannot assure you that we will have sufficient funds to satisfy our obligations under our indebtedness and to meet our other financial obligations.

The indentures governing our indebtedness restrict our ability to engage in certain activities.

The indentures governing our indebtedness restrict our ability to, among other things:

• incur additional debt;

• pay dividends on or redeem or repurchase capital stock;

• make certain investments;

• enter into transactions with affiliates;

• transfer or dispose of capital stock of subsidiaries; and

• merge or consolidate with another company.

The above restrictions could limit our ability to obtain future financing and may prevent us from taking advantage of attractive business opportunities.

Because credit ratings are important to our creditors, downgrades in our credit ratings may adversely affect us.

Nationally recognized rating agencies rate the debt of PMA Capital Corporation.  Ratings are not recommendations to buy our securities.  A downgrade in our debt ratings will affect our ability to issue additional debt with terms and conditions similar to our current debt, and, accordingly, will increase our cost of capital.  In addition, a downgrade of our debt ratings will make it more difficult to raise capital to refinance any maturing debt obligations and to maintain or improve the current financial strength ratings of our principal insurance subsidiaries.

Our reserves for asbestos and environmental claims may be insufficient.

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 have been appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies.  However, the potential exists for changes in federal and state standards for clean-up and liability and changing interpretations by courts resulting from the resolution of coverage issues.  Coverage issues in cases where we are a party include disputes concerning proof of insurance coverage, questions of allocation of liability and damages among the insured and participating insurers, assertions that asbestos claims are not product or completed operations claims subject to an aggregate limit and contentions that more than a single occurrence exists for purposes of determining the available coverage.  Therefore, our ultimate exposure for these claims may vary significantly from the amounts currently recorded, resulting in potential future adjustments that could be material to our financial condition, results of operations and liquidity.

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At December 31, 2007, 2006 and 2005, gross reserves for asbestos-related losses for our continuing operations were $25.7 million, $17.3 million and $22.3 million, respectively ($10.8 million, $9.8 million and $12.6 million, net of reinsurance, respectively).  Of the net asbestos reserves, approximately $2.2 million, $6.6 million and $10.1 million related to IBNR losses at December 31, 2007, 2006 and 2005, respectively.  At December 31, 2007, 2006 and 2005, gross reserves for environmental-related losses for our continuing operations were $10.3 million, $11.9 million and $14.0 million, respectively ($0, $3.0 million and $4.1 million, net of reinsurance, respectively).  Of the net environmental reserves, approximately $1.0 million and $1.6 million related to IBNR losses at December 31, 2006 and 2005, respectively.  All incurred asbestos and environmental losses for our continuing operations were for accident years 1986 and prior.

At December 31, 2007, 2006 and 2005, the discontinued operations’ gross reserves for asbestos-related losses were $7.5 million, $5.9 million and $4.6 million, respectively ($1.6 million, $825,000 and $560,000, net of reinsurance, respectively).  Of the net asbestos reserves, approximately $350,000 at December 31, 2007 and $38,000 at December 31, 2006 and 2005, respectively, related to IBNR losses.  At December 31, 2007, 2006 and 2005, the discontinued operations’ gross reserves for environmental-related losses were $877,000, $1.5 million and $1.3 million, respectively ($364,000, $1.1 million and $900,000, net of reinsurance, respectively).  Of the net environmental reserves, approximately $373,000 related to IBNR losses at December 31, 2006 and 2005, respectively.  All incurred asbestos and environmental losses for our discontinued operations were also for accident years 1986 and prior.

The effects of emerging claims and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge.  These issues may harm our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims.  In addition to the uncertainties with respect to asbestos and environmental claims discussed above, recent examples of emerging claims and coverage issues that have affected us include:

• increases in the number and size of claims relating to construction defects and mold, which often present complex coverage and damage valuation questions, making it difficult for us to predict our exposure to losses; and

• changes in interpretation of the named insured provision with respect to the uninsured/underinsured motorist coverage in commercial automobile policies, effectively broadening coverage and increasing our exposure to claims.

The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict and could harm our business.

We rely on independent agents and brokers and therefore we are exposed to certain risks.

Approximately 92% of The PMA Insurance Group’s business in 2007 was produced through independent agents and brokers.  We do business with a large number of independent brokers on a non-exclusive basis and many of these agents still offer insurance policies issued by other companies which compete with us.  Therefore, we cannot rely on their ongoing commitment to our insurance products.

In accordance with industry practice, our customers often pay the premiums for their policies to agents and brokers for payment over to us.  These premiums are considered paid when received by the broker and, thereafter, the customer is no longer liable to us for those amounts, whether or not we have actually received the premiums from the agent or broker.  Consequently, we assume a degree of credit risk associated with our reliance on agents and brokers in connection with the settlement of insurance balances.

Our failure to realize our deferred income tax asset could lead to a write-down, which could adversely affect our results of operations and financial position.

Realization of our deferred income tax asset is dependent upon the generation of taxable income in those jurisdictions where the relevant tax losses and other timing differences exist.  As of December 31, 2007, our net deferred tax asset was $118.9 million.  Failure to achieve projected levels of profitability could lead to a write-down in the deferred tax asset if the recovery period becomes uncertain or longer than expected.

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

We follow the 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 (known as ceding).  During 2007, we had $524.2 million of gross premiums written of which we ceded $129.5 million, or 25% of gross premiums written, to reinsurers for reinsurance protection.  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.  As of December 31, 2007, we had $795.9 million of reinsurance receivables from reinsurers for paid and unpaid losses, for which they are obligated to reimburse us under our reinsurance contracts.  As of December 31, 2007, we also had $150.1 million of reinsurance receivables from reinsurers at our discontinued operations for paid and unpaid losses, for which they are obligated to reimburse us under our reinsurance contracts.  Our ability to collect reinsurance is dependent upon numerous factors including the solvency of our reinsurers, the payment performance of our reinsurers and whether there are any disputes or collection issues with our reinsurers.  We perform 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 or unwillingness to make payments under the terms of a reinsurance contract could have a material adverse effect on our results of operations and financial condition.

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

Our insurance operations 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, 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 of certain transactions between our insurance subsidiaries and their affiliates, including us;

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

• limitations on the rates that we may charge on our primary insurance business;

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

• limitations on the amount of dividends that insurance subsidiaries can pay;

• the existence and licensing status of a company under circumstances where it is not writing new or renewal business;

• certain required methods of accounting;

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

• assignment of residual market business 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.

On December 22, 2003, PMACIC entered into a voluntary agreement with the Pennsylvania Insurance Department.  Pursuant to the agreement, PMACIC has agreed to request the Department’s prior approval of certain actions, including: entering into any new reinsurance contracts, treaties or agreements, except as may be required by law; making any payments, dividends or other distributions to, or engaging in any transactions with any of PMACIC’s affiliates; making any withdrawal of monies from PMACIC or making any disbursements, payments or transfers of assets in an amount exceeding five percent of the fair value of PMACIC’s then aggregate cash and investments; incurring any debt, obligation or liability for borrowed money, pledging its assets or loaning monies to any person or entity (whether or not affiliated); appointing any new director or executive officer; or altering its or its Pennsylvania-domiciled insurance company subsidiaries’ ownership structure.  Finally, the Department may impose additional operational or administrative restrictions deemed necessary by the Pennsylvania Insurance Commissioner for implementation of the agreement.  These restrictions, as well as any further restrictions on the conduct of PMACIC’s business, may adversely affect its ability to efficiently conduct the run-off of its insurance liabilities.

In its 2004 Order approving the transfer of the Pooled Companies from PMACIC to PMA Capital Corporation, the Department prohibited PMACIC from declaring or paying any dividends, return of capital or other types of distributions to PMA Capital Corporation prior to 2006.  Under the terms of the 2004 Order, PMACIC was permitted to request an “extraordinary” dividend, as defined under Pennsylvania law, in 2006 provided that immediately after giving effect to the

24

dividend or return of capital, PMACIC’s risk-based capital equaled or exceeded 225% of Authorized Control Level Capital, as defined by the National Association of Insurance Commissioners.  In 2006, the Department approved our request for an “extraordinary” dividend in the amount of $73.5 million from PMACIC.  We used the proceeds to reduce our debt obligations and to maintain liquidity at the holding company.  In 2007, the Department approved our request for an additional “extraordinary” dividend in the amount of $37.5 million from PMACIC.

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 subsidiaries 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.  Further, insurance regulatory authorities have relatively broad discretion to issue orders of supervision, which permit such authorities to supervise the business and operations of an insurance company.  During 2007, no state insurance regulatory authority had imposed on us any substantial fines or revoked or suspended any of our licenses to conduct insurance business in any state or issued an order of supervision with respect to our insurance subsidiaries which would have a material adverse effect on our results of operations or financial condition.

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.  A significant assessment could have a material adverse effect on our financial condition and results of operations.

Our results may fluctuate based on many factors, including cyclical changes in the insurance 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 has been very competitive and the 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.

We operate in a highly competitive industry which makes it more difficult to attract and retain new business.

Our business is highly competitive and we believe that it will remain so for the foreseeable future.  The PMA Insurance Group has six major competitors: Liberty Mutual Group, American International Group, Inc., Zurich/Farmers Group, St. Paul Travelers, The Hartford Insurance Group and CNA.  All of these companies and some of our other 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;

• 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;

• 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 technology, which have led to greater competition in the insurance industry.

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Many commercial property and casualty insurers and industry groups and associations currently offer alternative forms of risk protection in addition to traditional insurance products.  These products, including large deductible programs and various forms of self-insurance that utilize captive insurance companies and risk retention groups, have been instituted to allow for better control of risk management and costs.  We cannot predict how continued growth in alternative forms of risk protection will affect our future results of operations, but it could reduce our premium volume, which could have a material adverse effect on our financial condition and results of operations.

Because our investment portfolio is primarily 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 primarily of fixed income securities.  The fair value of these securities can fluctuate depending on changes in interest rates.  Generally, the fair value of these investments increases or decreases in an inverse relationship to changes in interest rates, while net investment income earned by us from future investments in fixed income securities will generally increase or decrease in a direct relationship with changes in 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.  However, there can be no assurance that our investment securities will not become impaired or decline in quality or value.  All of our fixed income securities are classified as available for sale, with the exception of the fixed income securities of our discontinued operations, which are classified as trading.  Changes in the fair value of our available for sale fixed income securities are reflected in our balance sheet, whereas changes in the fair value of our trading fixed income securities are reflected in our statement of operations and are included in our loss from discontinued operations.  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.

Our business is dependent upon our key executives, certain of whom 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 key executives.  We currently have employment agreements that include restrictive covenants with certain of our key executives; however, we do not have employment agreements with our other executives.  Accordingly, such other executives may leave our employment at any time.  Our future results of operations could be adversely affected if we are unable to retain our current executives, attract new executives or if our current executives leave our employ and join companies that compete with us.

We have exposure to catastrophic events, 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.  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, or a terrorist event, could exceed our reinsurance protection 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 $31 million in pre-tax losses to us, after deduction of all reinsurance and retrocessional protection.  Although the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”), which expires December 31, 2014, may mitigate the impact of future terrorism losses in connection with the commercial lines insurance business offered by The PMA Insurance Group, because of the amount of losses a company must retain and the fact that nuclear, biological and chemical events are not covered in The PMA Insurance Group’s  reinsurance treaties, future terrorist attacks may result in losses that have a material adverse effect on our financial condition, results of operations and liquidity.  The PMA Insurance Group would be subject to a deductible of approximately $90 million in 2008 if a covered terrorist act were to occur.  Such deductible would be covered by our existing reinsurance program.

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, such as the amount of surplus in the reinsurance market and natural and man-made catastrophes, determine the availability and cost of the reinsurance protection we purchase.  We cannot give assurances that

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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 a reduction in our insurance writings.

We are subject to litigation in the ordinary course of our business.

We are frequently 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 us by our policyholders or other insurers.

We may require additional capital in the future, which may not be available or may be available only on unfavorable terms.

Our capital requirements depend on many factors, including our ability to write new and renewal business and rating agency capital requirements.  To the extent that our existing capital is insufficient to meet these requirements, we may need to raise additional funds through financings.

Any equity or debt financing, if available at all, may be on terms that are not favorable to us.  Equity financings could result in dilution to our shareholders and the securities may have rights, preferences and privileges that are senior to those of our shares of common stock.  If our need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for us to raise the necessary capital.  If we cannot obtain adequate capital on favorable terms or at all, our business, operating results and financial condition could be adversely affected.

We are a holding company with no direct operations.  Statutory requirements governing dividends from our principal insurance operating subsidiaries could adversely affect our ability to meet our obligations.

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 within any twelve month period and advances and repayments by our insurance operating subsidiaries are restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds.  Generally, this limitation is the greater of statutory net income for the preceding calendar year or 10% of the statutory surplus, but only to the extent of unassigned surplus.  In addition, insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels, and could refuse to permit the payment of dividends of the maximum amounts calculated under any applicable formula.

Provisions in our charter documents may impede attempts to replace or remove our current directors with directors favored by shareholders.

Our Restated Articles of Incorporation and Amended and Restated Bylaws contain provisions that could delay or prevent changes in our board of directors that shareholders may desire.  These provisions include:

• requiring advance notice for nominations for election to the board of directors or for proposing business that can be acted on by shareholders at meetings;

• establishing a classified board of directors and permitting our board to increase its size and appoint directors to fill newly created board vacancies;

• requiring shareholders to show cause to remove one or more directors; and

• prohibiting shareholders from acting by written consent.

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Item 1B.  Unresolved Staff Comments.

None

Item 2.  Properties.

Our headquarters are located in a four story, 110,000 square foot building that we own in Blue Bell, Pennsylvania.  Through various wholly-owned subsidiaries, we also own and occupy additional office facilities in three other locations and rent additional office space for our insurance operations in 13 other locations.  All but one of these facilities are shared by The PMA Insurance Group with PMA Management Corp.  We also rent additional office space for Midlands at six other locations in Oklahoma, Texas, California, and New York.  One of our offices in Oklahoma is partially subleased to an unaffiliated third party.

Our discontinued operations lease approximately 22,500 square feet in Philadelphia, Pennsylvania, of which approximately 6,000 square feet are subleased to an unaffiliated third party.  We also lease approximately 63,000 square feet of office space in Yardley, Pennsylvania, which previously housed our excess and surplus lines business and now is subleased to an unaffiliated third party.

We believe that such owned and leased properties are suitable and adequate for our current business operations.

Item 3.  Legal Proceedings.

We are frequently 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 us by our policyholders or other insurers.  While the outcome of litigation arising out of our ordinary course of business, including insurance-related litigation, cannot be determined, such 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.  See “Critical Accounting Estimates — Unpaid Losses and Loss Adjustment Expenses” beginning on page 56 for additional information.  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.  See “Critical Accounting Estimates — Reinsurance Receivables” beginning on page 60 for additional information.

On December 11, 2007, the U.S. District Court for the Eastern District of Pennsylvania approved the settlement of the securities class action, In re PMA Capital Corporation Securities Litigation (Civil Action No. 03-6121), against us and certain of officers and directors.  The settlement made no admission of liability or wrongdoing by us or our officers and directors.  The amounts necessary to fund this settlement have been paid on our behalf by insurance carriers.

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 2007.

Executive Officers of the Registrant

Our executive officers are as follows:

Name	Age	Position
Vincent T. Donnelly	55	President and Chief Executive Officer and a Director
William E. Hitselberger	50	Executive Vice President and Chief Financial Officer
Robert L. Pratter	63	Senior Vice President, General Counsel and Secretary

Vincent T. Donnelly was elected as President and Chief Executive Officer in February 2004 and served as head of the interim-Office of the President from November 2003 to February 2004.  He has also served as President and Chief Operating Officer of The PMA Insurance Group since February 1997 and 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.

William E. Hitselberger was elected as Executive Vice President in April 2004 and serves as our Chief Financial Officer.  Prior to that date, he had served as our Senior Vice President, Chief Financial Officer and Treasurer since June 2002.  He has also served as Vice President and Chief Financial Officer of The PMA Insurance Group from 1998 to June 2002 and Vice President of The PMA Insurance Group from 1996 to 1998.

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Robert L. Pratter has served as our Senior Vice President, General Counsel and Secretary since June 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 LLP.  Mr. Pratter will retire from his position with PMA Capital Corporation, effective March 14, 2008.

PART II

Item 5.  Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Our Class A Common Stock is listed on The Nasdaq Stock Market®.  It trades under the stock symbol: PMACA.

The following is information regarding trading prices for our Class A Common Stock:

		First	Second	Third	Fourth
		Quarter	Quarter	Quarter	Quarter
2007
Class A Common Stock prices:
	High	$          9.77	$        11.40	$        11.17	$        10.69
	Low	8.40	9.12	8.63	8.05
	Close	9.39	10.69	9.50	8.22
2006
Class A Common Stock prices:
	High	$        10.43	$        10.49	$        10.75	$        10.15
	Low	8.68	9.24	8.60	8.60
	Close	10.18	10.30	8.82	9.22

There were 144 holders of record of our Class A Common Stock at February 29, 2008.  On November 4, 2003, our Board of Directors resolved to suspend the dividends on our Class A Common Stock.  Our domestic insurance subsidiaries’ ability to pay dividends to us is limited by the insurance laws and regulations of Pennsylvania.  Furthermore, in its 2004 Order approving the transfer of the Pooled Companies from PMA Capital Insurance Company (“PMACIC”) to PMA Capital Corporation, the Pennsylvania Insurance Department (the “Department”) prohibited PMACIC from declaring or paying any dividends, return of capital or other types of distributions to PMA Capital Corporation prior to 2006.  In 2006, the Department approved our request for an “extraordinary” dividend in the amount of $73.5 million from PMACIC.  We used the proceeds to reduce our debt obligations and to maintain liquidity at the holding company.  In 2007, the Department approved our request for an additional “extraordinary” dividend in the amount of $37.5 million from PMACIC.  Given the anticipated sale of PMACIC, we do not expect to receive any dividends from this operation in 2008.  For additional information on these restrictions, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

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Comparison of Total Return on our Class A Common Stock with Certain Indices

The following graph provides an indicator of cumulative total shareholder return on our Class A Common Stock for the last five fiscal years compared with the cumulative total return of the Standard & Poor’s 500 Stock Index (the “S&P 500”), the Standard & Poor’s Supercomposite Property/Casualty Insurance Index (the “S&P Super P/C”) and the Standard & Poor’s 600 Insurance Property/Casualty Index (the “S&P 600 P/C”) for the same periods.  The graph assumes that with respect to our Class A Common Stock, the S&P 500, the S&P Super P/C and the S&P 600 P/C, $100 was invested on December 31, 2002, and all dividends were reinvested.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs
10/1/07-10/31/07		-	$	-		-	$	-
11/1/07-11/30/07
Share repurchases (1)		159,380		8.72		159,380		-
12/1/07-12/31/07
6.50% Convertible Debt repurchases (2)		203,446		19.15
Total		362,826	$	14.57		159,380

(1)  On May 15, 2007, the Company announced that it received authorization from its Board of Directors to purchase up to $10 million of its Class A Common Stock from time to time in the open market at prevailing prices or in privately negotiated transactions.

(2)  We repurchased $3.3 million principal amount of our 6.50% Convertible Debt in December 2007.  The average price paid per share for the open market purchases was calculated by dividing the total cash paid, exclusive of accrued interest payments, by the number of shares of Class A Common Stock into which the debt was convertible.

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Item 6.  Selected Financial Data.

(dollar amounts in thousands, except per share data)		2007			2006			2005			2004			2003 (4)
Gross Premiums Written (1)		$	524,172		$	455,756		$	420,787		$	422,229		$	677,646
Net Premiums Written (1)		$	394,698		$	373,001		$	374,975		$	376,970		$	602,805
Consolidated Revenues (1):
Net premiums earned		$	378,243		$	367,403		$	357,824		$	441,518		$	569,243
Claims service revenues and commission income			37,039			27,853			23,591			22,886			20,868
Net investment income			39,592			35,851			32,235			32,396			34,899
Net realized investment gains			563			1,239			372			3,436			6,871
Other revenues			340			244			406			6,933			386
	Total consolidated revenues	$	455,777		$	432,590		$	414,428		$	507,169		$	632,267
Components of net income (loss) (2):
Pre-tax operating income (loss):
	The PMA Insurance Group (3)	$	38,045		$	26,082		$	19,511		$	11,873		$	20,871
	Fee-based Business (3)		3,724			2,802			2,509			1,293			670
	Corporate and Other		(19,564	)		(21,580	)		(24,598	)		(21,747	)		(22,657	)
Pre-tax operating income (loss) (1)			22,205			7,304			(2,578	)		(8,581	)		(1,116	)
Income tax expense (benefit) (1)			7,822			2,783			2,559			(2,270	)		49,144
Operating income (loss) (1)			14,383			4,521			(5,137	)		(6,311	)		(50,260	)
Realized gains after tax (1)			366			805			242			2,233			4,466
Income (loss) from continuing operations			14,749			5,326			(4,895	)		(4,078	)		(45,794	)
Income (loss) from discontinued operations, net of tax			(57,277	)		(1,275	)		(16,125	)		5,908			(47,775	)
Net income (loss)		$	(42,528	)	$	4,051		$	(21,020	)	$	1,830		$	(93,569	)
Per Share Data:
Weighted average shares:
	Basic		32,169,287			32,238,278			31,682,648			31,344,858			31,330,183
	Diluted		32,578,025			32,731,360			31,682,648			31,344,858			31,330,183
Net income (loss) per share:
Basic:
	Continuing Operations	$	0.46		$	0.17		$	(0.15	)	$	(0.13	)	$	(1.47	)
	Discontinued Operations		(1.78	)		(0.04	)		(0.51	)		0.19			(1.52	)
		$	(1.32	)	$	0.13		$	(0.66	)	$	0.06		$	(2.99	)
Diluted:
	Continuing Operations	$	0.45		$	0.16		$	(0.15	)	$	(0.13	)	$	(1.47	)
	Discontinued Operations		(1.76	)		(0.04	)		(0.51	)		0.19			(1.52	)
		$	(1.31	)	$	0.12		$	(0.66	)	$	0.06		$	(2.99	)
Dividends declared per Class A Common share		$	-		$	-		$	-		$	-		$	0.315
Shareholders' equity per share		$	11.92		$	12.83		$	12.70		$	14.06		$	14.80
Consolidated Financial Position:
Total investments (1)		$	807,151		$	780,045		$	757,813		$	788,723		$	799,589
Total assets from continuing operations (1)			2,205,985			1,991,709			1,955,085			2,009,407			2,116,377
Total assets			2,581,641			2,666,407			2,888,045			3,250,302			4,187,958
Reserves for unpaid losses and LAE (1)			1,212,956			1,152,704			1,169,338			1,226,781			1,259,737
Debt			131,262			131,211			196,181			210,784			187,566
Shareholders' equity			378,584			419,093			406,223			445,451			463,667

(1) Excludes discontinued operations.

(2) Operating income (loss), which is GAAP net income (loss) excluding net realized investment gains (losses) and results from discontinued operations, is the financial performance measure used by our management and Board of Directors to evaluate and assess the results of our businesses.  Net realized investment activity is excluded because (i) net realized investment gains and losses are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments 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 and losses that do not relate to the operations of the individual segments.  Accordingly, we report operating income (loss) by segment in Note 16 of our Consolidated Financial Statements.  Operating income (loss) does not replace net income (loss) as the GAAP measure of our consolidated results of operations.

(3) As a result of our acquisition of Midlands in 2007, the combined operating results of PMA Management Corp. and Midlands have been reported in a new reporting segment, Fee-based Business. The results of PMA Management Corp. were previously included with the results of The PMA Insurance Group.  For comparative purposes, the financial results of The PMA Insurance Group and PMA Management Corp. have been reclassified in all prior periods to reflect this change.

(4) Results for 2003 were impacted by $49 million from the recording of a valuation allowance on the Company’s deferred tax asset.

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Item 7.  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, 2007, compared with December 31, 2006, and the results of operations of PMA Capital for 2007 and 2006, compared with the immediately preceding year.  The balance sheet information 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.

In 2007, we reported the results of our Run-off Operations as discontinued operations.  In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), the Balance Sheets have been presented with the gross assets and liabilities of discontinued operations in separate lines and the Statements of Operations have been presented with the net results from discontinued operations, shown after the results from continuing operations.  For comparative purposes, we have reclassified our prior period financial presentation to conform to these changes.

This discussion and analysis should be read in conjunction with our audited Consolidated Financial Statements and Notes thereto presented in Item 8 of this Form 10-K (“Consolidated Financial Statements”).  You should also read our discussion of Critical Accounting Estimates beginning on page 56 for an explanation of those accounting estimates 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 judgments.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains forward-looking statements, which involve inherent risks and uncertainties.  Statements that are not historical facts, including statements about our beliefs and expectations, and statements containing words such as “believe,” “estimate,” “anticipate,” “expect” or similar words are forward-looking statements.  These forward-looking statements may include estimates, assumptions or projections and are based on currently available financial, competitive and economic data and our current operating plans.  Although management believes that our expectations are reasonable, there can be no assurance that our actual results will not differ materially from those expected, and therefore, you should not place undue reliance on such forward-looking statements.  See “Cautionary Statements” on page 63 for a list of factors that could cause our actual results to differ materially from those contained in any forward-looking statement.  Also, see “Item 1A – Risk Factors” for a further discussion of risks that could materially affect our business.

OVERVIEW

We are a holding company whose operating subsidiaries provide insurance and fee-based services.  Our insurance products include workers’ compensation and other commercial property and casualty lines of insurance, which are marketed primarily in the eastern part of the United States.  These products are written through The PMA Insurance Group business segment.  Fee-based services include third party administrator (“TPA”), managing general agent and program administrator services.  Our Fee-based Business segment consists of the results of PMA Management Corp. and Midlands Management Corporation (“Midlands”), and is a new reporting segment, resulting from our acquisition of Midlands on October 1, 2007.  PMA Management Corp. is a TPA whose results were previously included in The PMA Insurance Group segment.  Midlands is an Oklahoma City-based managing general agent, program administrator and provider of TPA services.

In November 2007, we announced that we were actively pursuing the sale of our Run-off Operations.  Our Run-off Operations include our reinsurance and excess and surplus lines businesses which we placed into run-off in 2003 and 2002, respectively.  In February 2008, we announced that we entered into a non-binding letter of intent with a third party and expect to execute a definitive stock purchase agreement in the first quarter of 2008.  The transfer of ownership will be subject to regulatory approval.  Because of the expected divestiture, we determined that these operations should be reflected as discontinued operations.  As such, we recorded an after-tax impairment loss of $40.0 million in the fourth quarter of 2007, as the book value of our Run-off Operations was greater than the estimated net proceeds we expect to receive in a sale.

The Pennsylvania Insurance Department approved our requests for extraordinary dividends of $73.5 million in 2006 and $37.5 million in 2007 from PMA Capital Insurance Company (“PMACIC”), our reinsurance subsidiary in run-off.  As a result of the extraordinary dividends received from PMACIC, we were able to significantly reduce our outstanding debt, acquire Midlands, repurchase shares of our Class A Common Stock and improve liquidity at our holding company.

Over the past two years, we reduced our outstanding debt by $64.9 million, or 33%.  During this period, we retired $72.2 million principal amount of our 6.50% Senior Secured Convertible Debt (“6.50% Convertible Debt”) which could have been put to us on June 30, 2009 at 114% of the principal amount.  This debt also contained restrictive covenants regarding

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uses of holding company cash.  In January 2008, we retired the remaining $1.3 million principal amount of our 6.50% Convertible Debt.

On October 1, 2007, we entered into a Stock Purchase Agreement under which we acquired all of the stock of Midlands Holding Corporation.  Under the Stock Purchase Agreement, we paid cash of $19.8 million for the company’s stock on the closing date.  The ultimate purchase price for the stock, which could range from $22.8 million to $44.5 million, will be based on the future earnings growth of Midlands, the operating subsidiary of Midlands Holding Corporation, over the next four years.

In May 2007, our Board of Directors authorized us to repurchase up to $10.0 million of our Class A Common Stock from time to time in the open market at prevailing prices or in privately negotiated transactions.  In 2007, we repurchased 986,522 shares, or 3%, of our Class A Common Stock at a cost of $10.0 million under this authorization.

The PMA Insurance Group earns revenue and generates cash primarily by writing insurance policies and collecting insurance premiums.  We also earn revenues by providing claims adjusting, managed care and risk control services to customers and by placing insurance business with other third party insurance and reinsurance companies.  As time normally elapses between the receipt of premiums and the payment of claims and certain related expenses, we are able to invest the available premiums and earn investment income.  The types of payments that we make are:

·   losses we pay under insurance policies that we write;

·   loss adjustment expenses (“LAE”), which are the expenses of settling claims;

·   acquisition and operating expenses, which are direct and indirect costs of acquiring both new and renewal business, including commissions paid to agents, brokers and sub-producers and the internal expenses to operate the business segment; and

·   dividends and premium adjustments that are paid to policyholders of certain of our insurance products.

These items are further described elsewhere in the MD&A and in “Item 1–Business.”

Losses and LAE are the most significant payment items affecting our insurance business and represent the most significant accounting estimates in our consolidated financial statements.  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 LAE, which represent the estimated expenses of settling claims, including legal and other fees, and general expenses of administering the claims adjustment process.  Reserves are estimates of amounts to be paid in the future for losses and LAE and do not and cannot represent an exact measure of liability.  If actual losses and LAE are higher than our loss reserve estimates, if actual claims reported to us exceed our estimate of the number of claims to be reported to us, or if we increase our estimate of the severity of claims previously reported to us, then we have to increase reserve estimates with respect to prior periods.  Changes in reserve estimates may be caused by a wide range of factors, including inflation, changes in claims and litigation trends and legislative or regulatory changes.  We incur a charge to earnings in the period the reserves are increased.  In 2007, we recorded a $22 million pre-tax charge to increase loss reserves for prior years in our discontinued operations, as discussed under “Discontinued Operations” beginning on page 40 of this MD&A.

RESULTS OF OPERATIONS

Consolidated Results

We recorded a net loss of $42.5 million in 2007, compared to net income of $4.1 million in 2006 and a net loss of $21.0 million in 2005.  The net loss in 2007 included an after-tax impairment charge of $40.0 million ($61.5 million pre-tax) related to the anticipated sale of our Run-off Operations.  It also included an after-tax charge of $14.3 million ($22 million pre-tax) for prior year loss development at our discontinued operations.  The net loss in 2005 included an after-tax charge of $23 million ($30 million pre-tax) for prior year loss development at our discontinued operations.  These charges recorded in 2007 and 2005 are reflected in our loss from discontinued operations.

Operating income, which we define as net income (loss) excluding realized gains (losses) and the results from discontinued operations, increased to $14.4 million for 2007, compared to $4.5 million in 2006 and an operating loss of $5.1 million in 2005.

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Income (loss) from continuing operations included the following after-tax net realized gains:

(dollar amounts in thousands)	2007			2006			2005
Net realized gains (losses) after tax:
Sales of investments	$	(1,220	)	$	570		$	2,509
Change in fair value of trading securities		2,093			-			-
Change in fair value of debt derivative		(314	)		303			(2,400	)
Other		(193	)		(68	)		133
Net realized gains after tax	$	366		$	805		$	242

Consolidated revenues were $455.8 million, $432.6 million and $414.4 million in 2007, 2006 and 2005, respectively.  The increases in consolidated revenues in 2007 and 2006, compared to the immediately preceding year, primarily reflected premium growth at The PMA Insurance Group and, to a lesser extent, increased claims service revenues at our Fee-based Business.

In this MD&A, in addition to providing consolidated net income (loss), we also provide segment operating income (loss) because we believe that it is a meaningful measure of the profit or loss generated by our operating segments.  Operating income (loss), which is GAAP net income (loss) excluding net realized investment gains (losses) and results from discontinued operations, is the financial performance measure used by our management and Board of Directors to evaluate and assess the results of our businesses.  Net realized investment activity is excluded because (i) net realized investment gains and losses are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments 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 and losses that do not relate to the operations of the individual segments.  Operating income (loss) does not replace net income (loss) as the GAAP measure of our consolidated results of operations.

The following is a reconciliation of our segment operating results to GAAP net income (loss).  See Note 16 of our Consolidated Financial Statements for additional information.

(dollar amounts in thousands)	2007			2006			2005
Components of net income (loss):
Pre-tax operating income (loss):
The PMA Insurance Group (1)	$	38,045		$	26,082		$	19,511
Fee-based Business (2)		3,724			2,802			2,509
Corporate and Other (3)		(19,564	)		(21,580	)		(24,598	)
Pre-tax operating income (loss)		22,205			7,304			(2,578	)
Income tax expense		7,822			2,783			2,559
Operating income (loss)		14,383			4,521			(5,137	)
Realized gains after tax		366			805			242
Income (loss) from continuing operations		14,749			5,326			(4,895	)
Loss from discontinued operations, net of tax (3)		(57,277	)		(1,275	)		(16,125	)
Net income (loss)	$	(42,528	)	$	4,051		$	(21,020	)

(1)   Beginning in the fourth quarter of 2007, the results of The PMA Insurance Group no longer include those of PMA Management Corp.  The results of PMA Management Corp. are currently included within the segment results of our Fee-based Business.  For comparative purposes, the financial results of The PMA Insurance Group and PMA Management Corp. have been reclassified in all prior periods to reflect this change.

(2)   As a result of our acquisition of Midlands in 2007, the combined operating results of PMA Management Corp. and Midlands have been reported in a new reporting segment, Fee-based Business.

(3)   Effective in the fourth quarter of 2007, we reported the results of our former Run-off Operations segment as discontinued operations.  As a result of this change, the Corporate and Other segment was impacted by investment income previously eliminated in the Corporate and Other segment.  For comparative purposes, all prior periods have been reclassified to reflect this change.

We provide combined ratios and operating ratios for The PMA Insurance Group below.  The “combined ratio” is a measure of property and casualty underwriting performance.  The combined ratio computed on a GAAP basis is equal to losses and loss adjustment expenses, plus acquisition and operating expenses and policyholders’ dividends, all divided by net

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premiums earned.  A combined ratio of less than 100% reflects an underwriting profit.  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 equal to the combined ratio less the net investment income ratio, which is computed by dividing net investment income by net premiums earned.

Segment Results

The PMA Insurance Group

Beginning in 2007, the results of The PMA Insurance Group no longer include those of PMA Management Corp.  The results of PMA Management Corp. are now included within the segment results of our Fee-based Business.  For comparative purposes, the financial results of The PMA Insurance Group and PMA Management Corp. have been reclassified in all prior periods to reflect this change.

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

(dollar amounts in thousands)	2007			2006			2005
Net premiums written	$	395,325		$	373,697		$	375,793
Net premiums earned		378,870			368,099			358,642
Net investment income		37,936			34,855			31,659
Total revenues		416,806			402,954			390,301
Losses and LAE		263,199			262,297			260,276
Acquisition and operating expenses		106,771			110,065			105,114
Dividends to policyholders		7,790			3,532			5,174
Total losses and expenses		377,760			375,894			370,564
Operating income before income
taxes and interest expense		39,046			27,060			19,737
Interest expense		1,001			978			226
Pre-tax operating income	$	38,045		$	26,082		$	19,511
Combined ratio		99.7	%		102.1	%		103.3	%
Less:  net investment income ratio		10.0	%		9.5	%		8.8	%
Operating ratio		89.7	%		92.6	%		94.5	%

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Premiums

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

(dollar amounts in thousands)	2007			2006			2005
Workers' compensation:
Direct premiums written	$	457,360		$	382,945		$	347,681
Premiums assumed		14,250			24,342			22,272
Premiums ceded		(109,940	)		(62,908	)		(35,245	)
Net premiums written	$	361,670		$	344,379		$	334,708
Commercial lines:
Direct premiums written	$	52,963		$	48,682		$	50,195
Premiums assumed		226			483			1,457
Premiums ceded		(19,534	)		(19,847	)		(10,567	)
Net premiums written	$	33,655		$	29,318		$	41,085
Total:
Direct premiums written	$	510,323		$	431,627		$	397,876
Premiums assumed		14,476			24,825			23,729
Premiums ceded		(129,474	)		(82,755	)		(45,812	)
Net premiums written	$	395,325		$	373,697		$	375,793

Direct workers’ compensation premiums written were $457.4 million in 2007, compared to $382.9 million in 2006 and $347.7 million in 2005.  New workers’ compensation business was $152.6 million in 2007, compared to $98.3 million for 2006 and $92.7 million for 2005.  Included in new business for 2007 was $51.5 million of California workers’ compensation business written under our agreement with Midwest Insurance Companies (“Midwest”), compared to $14.8 million in 2006.  Our agreement with Midwest became effective September 1, 2006 and terminated on March 2, 2008.  Our renewal retention rate on existing workers’ compensation accounts was 87% for 2007, compared to 85% for 2006 and 76% for 2005.  Pricing on our rate-sensitive workers’ compensation business decreased by 4% in 2007, 2% in 2006, and increased by 4% in 2005.  In early 2006, we stopped writing integrated disability business.

For workers’ compensation coverages, the premium charged on fixed-cost policies is primarily based upon the manual rates filed with state insurance departments.  Workers’ compensation manual rates for business in our principal marketing territories decreased by 4% in 2007 and 3% in 2006, and increased by 2% in 2005.  These changes in manual rates generally reflect the effects of average medical and indemnity cost fluctuations in recent years.  Manual rate changes directly affect the prices that we can charge for our rate-sensitive workers’ compensation products, which comprised 59% of workers’ compensation premiums written in 2007.

In September 2006, we entered into an agreement with Midwest General Insurance Agency (“MGIA”) under which MGIA underwrites and services workers’ compensation policies in California using our approved forms and rates.  Upon inception, we ceded 100% of the direct premiums and related losses on this business to non-affiliated reinsurers selected by us, including Midwest, an affiliate of MGIA.  Effective April 1, 2007, we retained 5% of the direct premiums and related losses on this business.  Our retention of this business increased to 10%, effective September 1, 2007.  All of the participating reinsurers, except for Midwest, have current A.M. Best Company, Inc. (“A.M. Best”) financial strength ratings of “A-” (Excellent) or higher.  Midwest does not have an A.M. Best financial strength rating.  We mitigated our credit risk with Midwest by requiring them to secure amounts owed to us by holding cash in trust.  We earn an administrative fee based upon the actual amount of premiums earned pursuant to the agreement.  Total direct premiums written under this agreement were $59.8 million in 2007 and $14.8 million in 2006.  Our agreement with Midwest terminated in March 2008.  We will continue to earn fees and service the business previously written, but no additional business will be written or renewed after the termination date.  We have entered into one fronting arrangement smaller than Midwest in the first quarter of 2008 and believe that we will write more of these programs in the coming year.

In February 2008, the Pennsylvania Compensation Rating Bureau recommended a reduction in loss costs of 10.2%, which was approved by the Pennsylvania Insurance Department and will become effective on April 1, 2008.  While this will result in lower filed loss costs in Pennsylvania, we will continue our practice of underwriting our business with a goal of achieving a reasonable level of profitability on each account.  We do not expect that the filed loss costs will result in a reduction in premiums in Pennsylvania at the same level of the loss cost reduction, based on our current views of the

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experience modification factors and potential future experience of our book of business.  We will continue to determine our business pricing through schedule charges/credits that we file and use to limit the effect of filed loss cost changes.  We also believe that the loss cost change should not significantly affect the results or the profitability of our loss-sensitive and alternative market books of business, which represent approximately 42% of our Pennsylvania workers’ compensation business.

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 $4.3 million in 2007, compared to 2006.  Our renewal retention rate on existing commercial lines accounts in 2007 was 89% and new business premium was $13.4 million.  Direct writings of commercial lines premiums decreased by $1.5 million in 2006, compared to 2005.  Our renewal retention rate on existing accounts in 2006 was 84% and new business premium was $6.9 million, compared to 80% and $15.8 million, respectively, in 2005.  Overall pricing on other commercial lines decreased by 2% in 2007, compared to prior year.  In 2006, overall pricing increased modestly, compared to 2005, and it increased by 4% in 2005.

Premiums assumed decreased by $10.3 million in 2007, compared to 2006, primarily due to a reduction in the involuntary residual market business assigned to us.  Although our direct premiums written in 2007 increased, we believe the decline in assumed premiums assigned to us was a result of more business written in the traditional market and less business assigned to the total involuntary market pool.  In 2006, premiums assumed increased by $1.1 million, compared to 2005, due to an increase in the involuntary residual market business assigned to us, which mainly resulted from the fluctuation in our direct premiums written.  Companies that write premiums in certain states generally must share in the risk of insuring entities that cannot obtain insurance in the voluntary market.  Typically, an insurer’s share of this residual market business is assigned on a lag based on its market share in terms of direct premiums in the voluntary market.  These assignments are accomplished either by direct assignment or by assumption from pools of residual market business.

Premiums ceded increased by $46.7 million in 2007 and by $36.9 million in 2006, compared to the immediately preceding year.  Premiums ceded for workers’ compensation increased by $47.0 million in 2007, compared to 2006, primarily due to our agreement with Midwest, under which we ceded $57.3 million in 2007, compared to $14.8 million in 2006.  The increase in 2007 was also attributable to an increase in the amount of workers’ compensation business sold to captive accounts, where a substantial portion of the direct premiums are ceded.  Premiums ceded for workers’ compensation increased by $27.7 million in 2006, compared to 2005, primarily due to the increase in our captive accounts business and our agreement with Midwest and, to a lesser extent, the increase in direct premiums earned and the additional terrorism coverage purchased in 2006.  Premiums ceded for commercial lines slightly declined in 2007, compared to 2006, mainly resulting from changes in the contractual terms of our property quota share treaty.  Premiums ceded for commercial lines increased by $9.3 million in 2006, compared to 2005, resulting primarily from the increase in our captive accounts business and changes in our reinsurance program.  During 2006, we lowered our retentions on casualty-related business and converted our property reinsurance protection from an excess of loss to a pro rata basis.

Net premiums written and net premiums earned increased by 6% and 3%, respectively, in 2007, compared to 2006, and decreased by 1% and increased by 3%, respectively, in 2006, compared to 2005.  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.  In periods of increasing premium writings, the dollar increase in premiums written will typically be greater than the increase in premiums earned, as was the case in 2007.  The increase in net premiums earned in 2006, compared to 2005, reflected the effects of higher net premiums written in the last half of 2005, compared to the same period in 2006.  Direct premiums are earned principally on a pro rata basis over the terms of the policies.  However, with respect to policies that provide for premium adjustments, such as experience-rated or exposure-based adjustments, such premium adjustment may be made subsequent to the end of the policy’s coverage period and will be recorded as earned premium in the period in which the adjustment is made.

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Losses and Expenses

The components of the GAAP combined ratios were as follows:

	2007			2006			2005
Loss and LAE ratio		69.5	%		71.3	%		72.6	%
Expense ratio:
Acquisition expense		19.4	%		20.0	%		19.9	%
Operating expense		8.7	%		9.8	%		9.4	%
Total expense ratio		28.1	%		29.8	%		29.3	%
Policyholders' dividend ratio		2.1	%		1.0	%		1.4	%
Combined ratio		99.7	%		102.1	%		103.3	%

The loss and LAE ratio improved 1.8 points in 2007, compared to 2006.  The improved loss and LAE ratio primarily reflected a lower current accident year loss and LAE ratio in 2007, compared to 2006.  While our underwriting criteria remained consistent in 2007, our current accident year loss and LAE ratio continued to benefit from changes in the type of workers’ compensation products selected by our insureds and a reduced amount of integrated disability and assumed premiums in 2007.  Pricing changes coupled with payroll inflation for rate-sensitive workers’ compensation were slightly below overall estimated loss trends.  We estimated our medical cost inflation to be 7% during 2007, compared to our estimate of 8.5% in 2006.  We believe workers’ compensation medical inflationary trends are generally lower in 2007 relative to 2006.  In addition, the medical cost inflation rate has declined due to our enhanced network and managed care initiatives.  However, we expect that medical cost inflation will continue to be a significant component of our overall loss experience.

The loss and LAE ratio improved 1.3 points in 2006, compared to 2005.  The improved loss and LAE ratio primarily reflected a lower current accident year loss and LAE ratio in 2006, compared to 2005.  Our loss and LAE ratio benefited from changes in the type of workers’ compensation products selected by insureds, modest changes in our geographic mix and a reduction in our estimate of medical cost inflation.  Our medical cost inflation estimate was 8.5% in 2006, compared to 9% in 2005.

The policyholders’ dividend ratio increased 1.1 points in 2007, compared to 2006.  The current year reflected better loss experience, which resulted in larger dividends on participating products where the policyholders may receive a dividend based, to a large extent, on their loss experience.

The total expense ratio improved 1.7 points in 2007, compared to 2006.  Overall operating expenses decreased in 2007, compared to 2006, reflecting lower loss based state assessments and a reduction in the allowance for uncollectible reinsurance.  We earn an administration fee under our agreement with Midwest based on the amount of premiums earned.  The fees earned under our agreement with Midwest reduced our 2007 acquisition expense ratio by 0.7 points.  Although our agreement with Midwest terminated in March 2008, we will continue to earn fee income on this business until the underlying policies expire.

Net Investment Income

Net investment income increased by $3.1 million and $3.2 million in 2007 and 2006, respectively, compared to the immediately preceding year.  The improvements in 2007 and 2006 were primarily due to higher yields on increased average invested asset bases.

Fee-based Business

On October 1, 2007, we acquired Midlands, an Oklahoma City-based managing general agent, program administrator and provider of TPA services.  As a result of this acquisition, we reported the combined operating results of Midlands and PMA Management Corp. as our Fee-based Business segment.  The results of PMA Management Corp. were previously included in The PMA Insurance Group segment.  PMA Management Corp. provides claims administration, risk management and managed care related services to self-insured clients and large deductible and captive clients.  For comparative purposes, we have reclassified our prior period financial presentation to conform to these changes.  Our operating results for 2007 include only the operating results of Midlands from the date of acquisition.

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Summarized financial results of the Fee-based Business were as follows:

(dollar amounts in thousands)	2007		2006		2005
Claims service revenues	$	34,034	$	27,853	$	23,591
Commission income		3,005		-		-
Net investment income		972		669		375
Other revenues		113		-		-
Total revenues		38,124		28,522		23,966
Operating expenses		34,400		25,720		21,457
Pre-tax operating income	$	3,724	$	2,802	$	2,509

Pre-tax operating income for the Fee-based Business was $3.7 million in 2007, compared to $2.8 million in 2006 and $2.5 million in 2005.  The increase in pre-tax operating income in 2007, compared to 2006, primarily related to the inclusion of Midlands’ results for the quarter ended December 31, 2007.

Fee-based Revenues

Fee-based revenues, excluding net investment income, were $37.2 million in 2007, compared to $27.9 million in 2006.  The increase was primarily due to the inclusion of Midlands’ revenues in 2007, and also reflected higher fees for managed care services of $1.4 million and increases in fees of $803,000 and $746,000, respectively, for claims service provided to self-insured clients and large deductible and captive clients.  Managed care services include medical bill review services and access to our preferred provider network partnerships.

Fee-based revenues, excluding net investment income, increased by $4.3 million in 2006, compared to 2005.  The increase primarily reflected higher fees of $1.9 million for claims, risk management and related services provided to self-insured clients.  Also, fees attributable to large deductible and captive clients and managed care services were each higher by $1.2 million.

Expenses

Operating expenses increased to $34.4 million in 2007, up from $25.7 million in 2006.  The increase in operating expenses primarily reflected the inclusion of Midlands’ operating expenses in 2007, which included $1.1 million in commission expense and $167,000 related to the amortization of intangible assets.  The increase also reflected higher direct costs of $2.2 million associated with the claims and managed care services provided to self-insured clients, as well as higher direct costs of $746,000 attributable to large deductible and captive clients.

Operating expenses were $4.3 million higher in 2006 than in 2005.  Of this increase, $2.2 million related to direct costs associated with the claims and managed care services provided to self-insured clients, and $1.2 million was attributable to large deductible and captive clients.

Net Investment Income

Net investment income increased by $303,000 and $294,000 in 2007 and 2006, respectively, compared to the immediately preceding year.  The improvements in 2007 and 2006 were primarily attributable to increased average invested asset bases, which mainly resulted from increased claims service revenues.  The increase in 2007 also reflected the inclusion of Midlands’ net investment income.

Corporate and Other

Effective in 2007, we reported the results of our former Run-off Operations segment as discontinued operations.  As a result of this change, the Corporate and Other segment was impacted by investment income previously eliminated in the Corporate and Other segment.  For comparative purposes, all prior periods have been reclassified to reflect this change.

The Corporate and Other segment primarily includes corporate expenses and debt service.  Corporate and Other recorded net expenses of $19.6 million, $21.6 million and $24.6 million in 2007, 2006 and 2005, respectively.  The reductions in 2007 and 2006, compared to the immediately preceding year, were primarily due to lower interest expense.  The reduced

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interest expense in 2006, compared to 2005, was partially offset by higher stock-based compensation expense.  The lower interest expense for both periods resulted from a lower average level of debt outstanding.

For segment reporting purposes, we allocate interest income for the portion of our debt held at The PMA Insurance Group back to this segment and reduce investment income in the Corporate and Other segment.  Although the Corporate and Other segment did not benefit from the reduced level of consolidated interest expense on the $9.1 million principal amount of our 6.50% Convertible Debt held at The PMA Insurance Group at December 31, 2007 and 2006, it did benefit from the reduced level of 6.50% Convertible Debt due to the $35 million mandatory redemption which occurred in June 2006, as well as the $18.1 million and $25.4 million of open market purchases made by PMA Capital Corporation in 2007 and 2006, respectively.

Discontinued Operations

Discontinued operations, formerly reported as our Run-off Operations, include the results of our former reinsurance and excess and surplus lines businesses, from which we withdrew in November 2003 and May 2002, respectively.  In February 2008, we announced that we entered into a non-binding letter of intent with a third party and expect to execute a definitive stock purchase agreement in the first quarter of 2008.  The transfer of ownership will be subject to regulatory approval.  Because of the expected divestiture of these businesses, we have determined that these operations should be reflected as discontinued operations.  As such, we recorded an after-tax impairment loss of $40.0 million in the fourth quarter of 2007, as the book value of our Run-off Operations was greater than the estimated net proceeds we expect to receive in a sale.

Summarized financial results from discontinued operations, which are reported as a single line, net of tax, below income from continuing operations in our consolidated statements of operations, were as follows:

(dollar amounts in thousands)	2007			2006			2005
Net premiums earned	$	3,471		$	2,778		$	10,206
Net investment income		2,844			7,710			16,717
Net realized investment gains (losses)		(541	)		(2,224	)		1,744
		5,774			8,264			28,667
Losses and loss adjustment expenses		24,013			(3,076	)		34,798
Acquisition and operating expenses		8,398			13,302			18,679
Impairment charge		61,482			-			-
		93,893			10,226			53,477
Income tax benefit		(30,842	)		(687	)		(8,685	)
Loss from discontinued operations, net of tax	$	(57,277	)	$	(1,275	)	$	(16,125	)

Discontinued operations recorded after-tax losses of $57.3 million in 2007, $1.3 million in 2006 and $16.1 million in 2005.  The results for 2007 included an after-tax impairment loss of $40.0 million related to the expected sale of these operations and an after-tax charge of $14.3 million for prior year loss development.  The results for 2005 included an after-tax charge of $23 million for prior year loss development.  Net investment income and acquisition and operating expenses decreased significantly in 2007, 2006 and 2005 due to our exit from the reinsurance business.

Premiums, Losses and Expenses

Premiums earned in 2007, 2006 and 2005 were primarily attributable to retrospective adjustments of policies written prior to our exit from the reinsurance business.  Premiums are earned principally on a pro rata basis over the coverage periods of the underlying policies.  However, with respect to policies that provide for premium adjustments, such as experience-rated or exposure-based adjustments, such premium adjustments may be made subsequent to the end of the policy’s coverage period and will be recorded as earned premiums in the period in which the adjustment is made, as was the case in 2007, 2006 and 2005.

In 2007, we increased the net loss reserves at our discontinued operations for prior accident years by $22 million.  During the third quarter, our actuaries conducted their periodic comprehensive reserve review.  Based on the actuarial work performed, our actuaries observed increased loss development from a limited number of ceding companies on our claims-made general liability business, primarily related to professional liability claims.  This increase in 2007 loss trends caused management to determine that reserve levels, primarily for accident years 2001 to 2003, needed to be increased by $22 million.

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The losses and LAE incurred benefit reported in 2006 was mainly attributable to favorable loss development and the amortization of the deferred gain on retroactive reinsurance.  During 2006, we recorded $1.3 million in favorable development, net of discount accretion, largely due to commutations of reinsurance treaties with some of our ceding companies.  Amortization of the deferred gain on retroactive reinsurance reduced losses and LAE incurred by $1.8 million in 2007, $1.7 million in 2006 and $2.8 million in 2005.

The timing of commutations and novations is unpredictable as each agreement is an individually negotiated transaction with one of our ceding companies.  We will only execute commutation or novation agreements when we believe the result is economically beneficial.  Due to these uncertainties, we do not have an expected level of commutation or novation activity in any year, and as such, the future timing of these agreements and their financial impact cannot be reasonably estimated.

Losses and LAE incurred in 2005 also included a first quarter charge of $30 million for adverse prior year loss development.  In the first quarter of 2005, our actuaries identified higher than expected claim frequency and severity on policies covering contractors’ liability for construction defects from accident years 1998 to 2001 written by our former excess and surplus lines operation and an increase in reported losses and continued volatility in pro rata professional liability reinsurance business written from accident years 1997 to 2001.

Acquisition and operating expenses for 2007, 2006 and 2005 were significantly lower compared to the immediately preceding year due to our exit from the reinsurance business.  In accordance with our exit plan, 109 employees have been terminated and 21 positions, primarily claims and financial personnel, remain at December 31, 2007.  We have established an employee retention arrangement for the remaining employees.  Under this arrangement, we have recorded expenses of $838,000, $1.0 million and $1.4 million, which included retention bonuses and severance, in 2007, 2006 and 2005, respectively.

Impairment Charge

In 2007, we recognized an after-tax impairment loss of $40.0 million related to the expected sale of the Run-off Operations.  The components of the loss were as follows:

(dollar amounts in millions)
Estimated sales proceeds 1		$	10.0
Less:	Book value of Run-off Operations 2		(71.0	)
	Estimated transaction costs		(0.5	)
Add:	Income tax benefit 3		21.5
Impairment loss, net of tax		$	(40.0	)

(1)   Estimated sales proceeds are based on a non-binding letter of intent received from an interested third party.  This estimate reflects amounts anticipated at closing, subject to adjustments following the third party’s review of the final purchase price calculation, but excludes future contingent payments that may be received from the third party.

(2)   Shareholder’s equity of the Run-off Operations as of December 31, 2007, prior to the impact of the impairment loss.

(3)   At December 31, 2007, we recorded an income tax benefit on the impairment loss as we believe we will be able to use the loss to offset future operating earnings.

Net Investment Income

Net investment income was $2.8 million, $7.7 million and $16.7 million in 2007, 2006 and 2005, respectively.  The decreases in net investment income were mainly due to reductions in the average invested asset base of approximately $155 million, or 52%, in 2007, compared to 2006, and approximately $260 million, or 47%, in 2006, compared to 2005.  These reductions were largely impacted by continued loss payments as well as the extraordinary dividends of $37.5 million and $73.5 million paid by PMACIC to PMA Capital Corporation in April 2007 and May 2006, respectively.  During 2007, the discontinued operations’ insurance liabilities decreased by $143 million, or 30%, since prior year end, despite the $22 million increase to reserves during the third quarter.  Included in the 2007 reduction was $30.6 million from commutations with ceding companies.

Partially offsetting the reduced asset base in 2006, compared to 2005, were higher yields of approximately 30 basis points and lower net interest credited on funds held arrangements of $1.5 million.  In a funds held arrangement, the ceding

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company normally retains premiums in an experience account.  Losses are offset against these amounts and interest is normally credited to the experience account based upon the account balance and a predetermined credited interest rate.

LOSS RESERVES AND REINSURANCE

Loss Reserves

The following table represents the reserve levels as of December 31, 2007 for The PMA Insurance Group and the significant lines of business within this segment:

(dollar amounts in thousands)	Case		IBNR		Total
The PMA Insurance Group:
Workers' compensation and integrated disability	$	493,679	$	533,628	$	1,027,307
Commercial multi-peril/ General liability		88,515		58,359		146,874
Commercial automobile		16,384		22,391		38,775
Unpaid losses and loss adjustment expenses	$	598,578	$	614,378	$	1,212,956

Our unpaid losses and LAE, net of reinsurance, at December 31, 2007 and 2006 were $444.8 million and $456.8 million, respectively, net of discount of $21.5 million and $29.7 million, respectively.  Included in unpaid losses and LAE were amounts related to our workers’ compensation claims of $379.5 million and $362.8 million, net of discount of $21.4 million and $17.8 million at December 31, 2007 and 2006, respectively.  The discount rate used was approximately 5% at December 31, 2007 and 2006.

Unpaid losses and LAE reflect our 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.  Due to the “long-tail” nature of a significant portion of our business, 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.  We define long-tail business as those lines of business in which a majority of coverage involves average loss payment lags of several years beyond the expiration of the policy.  Our major long-tail lines primarily include our workers’ compensation business.  This business is subject to more unforeseen development than shorter tailed lines of business.

At December 31, 2007, 2006 and 2005, our gross reserves for asbestos-related losses were $25.7 million, $17.3 million and $22.3 million, respectively ($10.8 million, $9.8 million and $12.6 million, net of reinsurance, respectively).  At December 31, 2007, 2006 and 2005, our gross reserves for environmental-related losses were $10.3 million, $11.9 million and $14.0 million, respectively ($0, $3.0 million and $4.1 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.  We believe that our reserves for asbestos and environmental claims have been appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies.  However, the potential exists for changes in federal and state standards for clean-up and liability and changing interpretations by courts resulting from the resolution of coverage issues.  Coverage issues in cases in which we are a party include disputes concerning proof of insurance coverage, questions of allocation of liability and damages among the insured and participating insurers, assertions that asbestos claims are not products or completed operations claims subject to an aggregate limit and contentions that more than a single occurrence exists for purposes of determining the available coverage.  Therefore, our ultimate exposure for these claims may vary significantly from the amounts currently recorded, resulting in potential future adjustments that could be material to our financial condition, results of operations and liquidity.

We believe that our unpaid losses and LAE are fairly stated at December 31, 2007.  However, estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates, assumptions and judgments using data currently available.  As additional experience and data become available regarding claims payment and reporting patterns, legal and legislative developments, judicial theories of liability, the impact of regulatory trends on benefit levels for both medical and indemnity payments, changes in 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, 2007, then the related adjustments could have a material adverse impact on our financial condition, results of operations and liquidity.  See “Critical Accounting Estimates — Unpaid Losses and Loss Adjustment Expenses” beginning on page 56 for additional information.  In addition, see “Cautionary Statements”

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on page 63 and “Item 1A – Risk Factors” for a discussion of factors that may adversely impact our losses and LAE in the future.

Reinsurance

Under our reinsurance and retrocessional coverages in place for our continuing operations during 2007, 2006 and 2005, we ceded earned premiums totaling $117.6 million, $58.8 million and $46.0 million, and we ceded losses and LAE of $102.8 million, $36.0 million and $42.3 million to reinsurers and retrocessionaires.

At December 31, 2007 and 2006, we had amounts receivable from our reinsurers and retrocessionaires for our continuing operations totaling $795.9 million and $720.1 million, respectively.  As of December 31, 2007, $29.9 million, or 4%, of these amounts were due to us on losses we have already paid, compared to $32.9 million, or 5%, at December 31, 2006.  The remainder of the reinsurance receivables related to unpaid claims.

In the first quarter of 2006, we stopped writing integrated disability business.  Effective August 1, 2007, we purchased reinsurance covering substantially all unpaid losses and LAE related to our integrated disability business.  Under the agreement, the reinsurer also handles the servicing and benefit payments related to this business.  Upon entering into this agreement, we ceded $25.7 million in carried loss and LAE reserves and paid $22.7 million in cash.  Because the coverage is retroactive, we deferred the initial benefit of this cession, which is being amortized over the estimated settlement period of the losses using the interest method. 

At December 31, 2007, we had reinsurance receivables for our continuing operations due from the following unaffiliated reinsurers in excess of 5% of our shareholders’ equity:

	Reinsurance
(dollar amounts in thousands)	Receivables		Collateral
Trabaja Reinsurance Company(1)	$	167,616	$	163,872
PXRE Reinsurance Company		99,032		59,114
Imagine International Reinsurance, Ltd.		94,673		92,791
Houston Casualty Company		53,850		-
Hannover Rueckversicherungs AG		50,091		-
Swiss Reinsurance America Corporation		40,584		-
QBE Reinsurance Corporation		34,669		-
Life Insurance Company of America		24,381		-
Partner Reinsurance Company of the U.S.		23,129		-
Employers Mutual Casualty Company		22,270		-
Munich Reinsurance America, Inc. and affiliates(2)		22,172		110
Toa-Re Insurance Company of America		21,405		-

(1) A member of the London Reinsurance Group.

(2) Includes Munich Reinsurance America, Inc. ($22.0 million) and American Alternative Insurance Company ($178,000).

We perform credit reviews of our reinsurers focusing on, among other things, financial capacity, stability, trends and commitment to the reinsurance business.  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, generally those not authorized to transact business in the applicable jurisdictions.  At December 31, 2007 and 2006, our reinsurance receivables were supported by $351.4 million and $342.0 million of collateral, respectively.  Of the uncollateralized reinsurance receivables at December 31, 2007, approximately 89% was due from reinsurers rated “A-” or better by A.M. Best and is broken down as follows: “A++” – 2%; “A+” – 36%; “A” – 41% and “A-” – 10%.  We believe that our reinsurance receivables, net of the valuation allowance, are fully collectible.  The timing of payments and the collectibility of reinsurance receivables have not had a material adverse effect on our liquidity.

In February 2006, A.M. Best downgraded the rating of PXRE Reinsurance Company (“PXRE”) to “B+” from “A-,” and in April 2006, PXRE’s rating was further downgraded to “B” and subsequently withdrawn shortly thereafter.  In 2007, PXRE was acquired by the Argonaut Insurance Group, which is rated “A” by A.M. Best, and PXRE now has an A.M. Best rating of “B+.”  Our collateral from PXRE is in the form of an investment portfolio that is held in trust for our benefit, and we believe that the investment securities, together with the interest earned thereon, will be sufficient to pay all billings that we submit.

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The PMA Insurance Group had recorded reinsurance receivables of $13.9 million at December 31, 2006, related to certain umbrella policies covering years prior to 1977.  The reinsurer had previously disputed the extent of coverage under these policies.  We settled this dispute with the reinsurer in 2007.

At December 31, 2007, our reinsurance and retrocessional protection for major lines of business that we write was as follows:

				Retention			Limits (1)
The PMA Insurance Group
	Per Occurrence:
		Workers' compensation	$	250,000	(2)	$	129.8 million	(3)
		Other casualty lines	$	500,000		$	49.5 million
	Per Risk: (4)
		Property lines	$	750,000		$	49.3 million
		Auto physical damage	$	750,000		$	2.3 million

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

(2) The PMA Insurance Group retains an aggregate $13.8 million deductible on the first layer of its workers’ compensation reinsurance, which is $750,000 excess of $250,000.  Effective January 1, 2008, the aggregate deductible decreased to $12.9 million.

(3) Our maximum limit for any one claimant is $5.8 million.  Effective January 1, 2008, our maximum limit increased to $7.5 million in layers excess of $10 million.

(4) The PMA Insurance Group retains 25% of the first $3 million in property losses (including auto physical damage) on a quota share basis.  Excess of loss reinsurance extends our per risk limits as shown above.

The PMA Insurance Group, exclusive of the business written by Midwest, does not write a significant amount of natural catastrophe exposed business.  We actively manage our exposure to catastrophes through our underwriting process, where we generally monitor the accumulation of insurable values in catastrophe-prone regions.  Our geographic exposure to loss is principally confined to the Northeast, the Mid-Atlantic States and the Southeast corresponding to the locations of our branch operations.  The PMA Insurance Group, exclusive of the business written by Midwest, maintains property catastrophe reinsurance protection of 95% of $18.0 million excess of $2.0 million per occurrence.

Midwest underwrites and services workers’ compensation policies in California, which is exposed to earthquake peril.  Upon inception, this business was 100% ceded to non-affiliated reinsurers.  Effective April 1, 2007 and September 1, 2007, we retained 5% and 10%, respectively, of this business.  Included as part of our reinsurance program for this business, but not included in our table above, is workers’ compensation catastrophe protection up to a limit of $100.0 million.

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, or a terrorist event, could exceed our reinsurance and/or retrocessional protection and may have a material adverse impact on our financial condition, results of operations and liquidity.  In 2007, 2006 and 2005, our loss and LAE ratios were not significantly impacted by catastrophes.

Certain portions of The PMA Insurance Group’s workers’ compensation reinsurance include coverage for terrorist acts.  Effective January 1, 2008, our reinsurance of $129 million excess of $1 million includes coverage for certified and non-certified terrorist acts, except for nuclear, biological, chemical and radiological (“NBCR”) events.  In all cases, at least two full limits of coverage are available in the aggregate.  For NBCR events, our coverage includes domestic and non-certified events for $5 million excess of $1 million.

Except as noted in the preceding paragraph, our treaties with respect to the workers’ compensation reinsurance and retrocessional protection shown in the table above do not cover us for losses sustained from terrorist activities.  Therefore, if future terrorist attacks occur, they may result in losses that have a material adverse effect on our financial condition, results of operations and liquidity.

Terrorism

In January 2006, the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) became effective.  TRIEA, which extended most of the original provisions of TRIA, expired on December 31, 2007.  In December 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) became effective.  TRIPRA, which extends the program established under TRIA, provides a seven-year extension through December 31, 2014.  For terrorist acts to be covered under TRIPRA, they must be certified as such by the United States Government and may be committed by individuals

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acting on behalf of a foreign or domestic person or interest.  TRIPRA contains a “make available” provision, which requires insurers subject to the Act to offer coverage for acts of terrorism that does not differ materially from the terms (other than price), amounts and other coverage limitations offered to the policyholder for losses from events other than acts of terrorism.  The “make available” provision permits exclusions for certain types of losses, if a state permits exclusions for such losses.  TRIPRA requires insurers to pay a deductible equal to 20% of commercial lines (as defined by TRIPRA) direct earned premiums.  The federal government covers 85% of the losses above the deductible, while a company retains 15% of the losses.  TRIPRA contains an annual limit of $100 billion of covered industry-wide losses.  TRIPRA applies to certain commercial lines of property and casualty insurance, including workers’ compensation insurance, offered by The PMA Insurance Group, but does not apply to reinsurance.  The PMA Insurance Group would be subject to a deductible of approximately $90 million in 2008 if a covered terrorist act were to occur.  Such deductible would be covered by our existing reinsurance program.

Workers’ compensation insurers were not permitted to exclude terrorism from coverage prior to the enactment of TRIA, and continue to be subject to this prohibition.  When underwriting new and renewal commercial insurance business, The PMA Insurance Group considers the added potential risk of loss due to terrorist activity, and this has lead us to decline to write or renew certain business.  Additional rates may be charged for terrorism coverage, and as of January 1, 2004, The PMA Insurance Group had adopted such premium charges for terrorism coverage under workers’ compensation insurance in all states.  The PMA Insurance Group has also refined its underwriting procedures in consideration of terrorism risks.

Because of the unpredictable nature of terrorism, and the deductibles that The PMA Insurance Group would be subject to under TRIPRA, if future terrorist attacks occur, they may result in losses that could have a material adverse effect on our financial condition, results of operations and liquidity.  For additional information regarding the underwriting criteria of our insurance operating segment, see “Item 1 – Business – The PMA Insurance Group, Underwriting.”

Discontinued Operations

Loss Reserves

The following table represents the reserve levels as of December 31, 2007 for our discontinued operations and the significant types of business within these operations:

(dollar amounts in thousands)	Case		IBNR		Total
Discontinued Operations:
Excess of loss reinsurance	$	155,199	$	21,786	$	176,985
Pro rata reinsurance		92,239		23,840		116,079
Other		23,938		22,075		46,013
	$	271,376	$	67,701	$	339,077

Unpaid losses and LAE of our discontinued operations are presented with the gross liabilities of discontinued operations in a separate line on the Balance Sheet.  The unpaid losses and LAE for these operations, net of reinsurance, at December 31, 2007 and 2006 were $195.8 million and $193.4 million, respectively, net of discount of $22.1 million and $26.3 million, respectively.  Included in the unpaid losses and LAE of these operations were amounts related to our workers’ compensation claims of $48.8 million and $47.8 million, net of discount of $19.5 million and $22.2 million at December 31, 2007 and 2006, respectively.  The discount rate used was approximately 5% at December 31, 2007 and 2006.

Reinsurers are dependent on their ceding companies for reporting information regarding incurred losses.  The nature and extent of information provided to reinsurers may vary depending on the ceding company as well as the type of reinsurance purchased by the ceding company.  Ceding companies may also independently adjust their reserves over time as they receive additional data on claims and go through their own actuarial process for evaluating reserves.  For casualty lines of reinsurance, significant periods of time may elapse between when a loss is incurred and reported by the ceding company’s insured, the investigation and recognition of such loss by the ceding insurer, and the reporting of the loss and evaluation of coverage by a reinsurer.  As all of our reinsurance business was produced through independent brokers, an additional lag occurs because the ceding companies report their experience to the placing broker, who then reports such information to the reinsurer.  Because of these time lags, and because of the variability in reserving and reporting by ceding companies, it takes longer for reinsurers to find out about reported claims than for primary insurers and such claims are subject to more unforeseen development and uncertainty.

We rely on various data in making our estimate of loss reserves for reinsurance.  As described above, the reinsurer receives certain information from ceding companies through the reinsurance brokers.  We assess the quality and timeliness of claims

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reporting by our ceding companies.  The reinsurer also may supplement the reported information by requesting additional information and conducting reviews of certain of its ceding companies’ reserving and reporting practices.  It also reviews its internal operations to assess its capabilities to timely receive and process reported claims information from ceding companies.  It assesses its claims data and loss projections in light of historical trends of claims developments, claims payments, and also as compared to industry data as a means of noticing unusual trends in claims development or payment.  Based on the data reported by ceding companies, the results of the reviews and assessments noted above, as well as actuarial analysis and judgment, we will develop our estimate of reinsurance reserves.

In the ordinary course of the claims review process, we independently verify that reported claims are covered under the terms of the reinsurance policy or treaty purchased by the ceding company.  In the event that we do not believe coverage has been provided, we will deny payment for such claims.  Most contracts contain a dispute resolution process that relies on arbitration to resolve any contractual differences.  At December 31, 2007, our discontinued operations did not have any material claims that were in the process of arbitration that have not been recorded as liabilities on the accompanying consolidated financial statements.

We believe that the potential for adverse reserve development is increased because our former reinsurance business is in run-off and we no longer have ongoing business relationships with most of our ceding companies.  As a result, to the extent that there are disputes with our ceding companies over claims coverage or other issues, we believe that it is more likely that we will be required to arbitrate these disputes.  Although we believe that we have incorporated this potential in our reserve analyses, we also believe that as a result of the nature of the reinsurance business and the fact that the reinsurance business is in run-off, there exists a greater likelihood that reserves may develop adversely in this segment.  See the discussion under “Discontinued Operations – Premiums, Losses and Expenses” beginning on page 40 for additional information regarding increases in loss reserves for prior years.

At December 31, 2007, 2006 and 2005, our discontinued operations’ gross reserves for asbestos-related losses were $7.5 million, $5.9 million and $4.6 million, respectively ($1.6 million, $825,000 and $560,000, net of reinsurance, respectively).  At December 31, 2007, 2006 and 2005, our discontinued operations’ gross reserves for environmental-related losses were $877,000, $1.5 million and $1.3 million, respectively ($364,000, $1.1 million and $900,000, net of reinsurance, respectively).

Reinsurance

For our discontinued operations during 2007, 2006 and 2005, we ceded earned premiums totaling ($582,000), ($157,000) and $2.9 million, and we ceded losses and LAE of ($3.6) million, $9.2 million and $28.3 million to reinsurers and retrocessionaires.

Amounts receivable from our reinsurers and retrocessionaires for our discontinued operations are presented with the gross assets of discontinued operations in a separate line on the Balance Sheet.  At December 31, 2007 and 2006, we had amounts receivable from our reinsurers and retrocessionaires totaling $150.1 million and $319.9 million, respectively.  As of December 31, 2007, $10.0 million, or 7%, of these amounts were due to us on losses we have already paid, compared to $10.0 million, or 3%, at December 31, 2006.  The remainder of the reinsurance receivables related to unpaid claims.

At December 31, 2007, our assets of discontinued operations included reinsurance receivables due from the following unaffiliated reinsurers in excess of 5% of our shareholders’ equity:

	Reinsurance
(dollar amounts in thousands)	Receivables		Collateral
St. Paul Travelers and affiliates (1)	$	48,863	$	40,698
Essex Insurance Company		24,386		-

(1) Includes St. Paul Fire and Marine InsuranceCompany ($40.8 million), Mountain Ridge Insurance Company ($7.9 million) and other affiliated entities ($124,000).

At December 31, 2007 and 2006, our assets of discontinued operations with respect to reinsurance receivables were supported by $56.7 million and $83.6 million of collateral, respectively.  Of the uncollateralized reinsurance receivables at December 31, 2007, approximately 95% was due from reinsurers rated “A-” or better by A.M. Best and is broken down as follows: “A++” – 11%; “A+” – 29%; “A” – 54% and “A-” – 1%.  We believe that our assets of discontinued operations with respect to reinsurance receivables, net of the valuation allowance, are fully collectible.  The timing of payments and the collectibility of reinsurance receivables have not had a material adverse effect on our liquidity.

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In 2004, we purchased reinsurance covering potential adverse loss development of the loss and LAE reserves of our reinsurance and excess and surplus lines businesses.  Upon entering into the agreement, we ceded $100 million in carried loss and LAE reserves and paid $146.5 million in cash.  In 2005, we ceded $30 million in losses and LAE under this agreement.  In 2007, an additional $22 million in losses and LAE were ceded under this agreement.  See Note 4 to our Consolidated Financial Statements for additional information about the prior year loss development at the discontinued operations recorded in 2005 and 2007.  Because the coverage was retroactive, we deferred the initial benefit of these cessions, which was being amortized over the estimated settlement period of the losses using the interest method.  Accordingly, we had a deferred gain on retroactive reinsurance of $25.4 million at December 31, 2006, which was included in liabilities of discontinued operations on the Balance Sheet.  Amortization of the deferred gain reduced our loss from discontinued operations by $1.8 million in 2007, $1.7 million in 2006 and $2.8 million in 2005.  As of December 31, 2006, we also had $56.6 million included in assets of discontinued operations for other receivables due under the contract.

The retroactive reinsurance purchased for adverse development protection was executed to protect the statutory capital of our reinsurance and excess and surplus lines businesses.  As this contract was considered retroactive under Statement of Financial Accounting Standards No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” it did not protect GAAP capital or earnings volatility associated with adverse development.

In 2007, we commuted the reinsurance agreement covering potential adverse loss development.  As a result, we received $171.9 million in cash and our assets of discontinued operations declined by $152.0 million for amounts collected against reinsurance receivables.  Assets of discontinued operations also decreased by $65.6 million related to the reduction of prepaid and other assets, and liabilities of discontinued operations declined by $45.6 million related to the reduction of the deferred gain on retroactive reinsurance.  The commutation did not have a material impact on our loss from discontinued operations.

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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.  Our insurance operations generate cash by writing insurance policies and collecting premiums.  The cash generated is used to pay losses and LAE and operating expenses.  Any excess cash is invested and earns investment income.  Our fee-based businesses generate cash by providing services to clients.  The cash generated is used to pay operating expenses, including commissions to sub-producers.

Operating cash flows were $86.8 million in 2007 due primarily to positive cash flows generated from the operating activities at The PMA Insurance Group and discontinued operations.  The positive operating cash flows at The PMA Insurance Group were reduced by $22.7 million for retroactive reinsurance purchased to cover substantially all of the unpaid losses and LAE related to its integrated disability business.  The positive operating cash flows at our discontinued operations were due to cash received of $171.9 million related to the commutation of the reinsurance agreement covering potential adverse loss development, which was partially offset by loss and expense payments.  Operating cash flows were negative in 2006 and 2005, primarily due to the run-off of our reinsurance business, including the commutation and novation of certain reinsurance and retrocessional contracts.

We expect that the cash flows generated from the operating activities of The PMA Insurance Group and our Fee-based Business will be positive for the foreseeable future as we anticipate premium and other service revenue collections to exceed losses and LAE and operating expense payments.  We intend to invest these positive cash flows and earn investment income.

As a result of our decision to exit from the reinsurance and excess and surplus lines of business, we expect that we will continue to use cash from the operating activities of these operations into the foreseeable future.  In 2008, we entered into a non-binding letter of intent to sell our Run-off Operations to a third party.  We expect to execute a definitive stock purchase agreement in the first quarter of 2008.  The transfer of ownership will be subject to regulatory approval.  Based on the letter of intent, we expect to receive cash at closing of $10 million and a $10 million, 5-year note, whose ultimate value is based on the future development of the loss reserves.  We also expect to pay closing costs of approximately $500,000 related to the sale.

At the holding company level, our primary sources of liquidity are dividends, tax payments received from subsidiaries and capital raising activities.  We utilize cash to pay debt obligations, including interest costs, taxes to the federal government, corporate expenses and dividends to shareholders.  At December 31, 2007, we had $38.2 million of cash and short-term investments at the holding company, which we believe combined with our other capital sources, will continue to provide us with sufficient funds to meet our foreseeable ongoing expenses and interest payments.  We do not currently pay dividends on our Class A Common Stock.

In a 2004 order (the “2004 Order”) approving the transfer of the Pooled Companies from PMACIC to PMA Capital Corporation, the Pennsylvania Insurance Department (the “Department”) prohibited PMACIC from declaring or paying any dividends, return of capital or other types of distributions to PMA Capital Corporation prior to 2006.  Under the terms of the 2004 Order, PMACIC was permitted to request an “extraordinary” dividend, as defined under Pennsylvania law, in 2006 provided that immediately after giving effect to the dividend or return of capital, PMACIC’s risk-based capital equaled or exceeded 225% of Authorized Control Level Capital, as defined by the National Association of Insurance Commissioners.  In 2006, the Department approved our request for an “extraordinary” dividend in the amount of $73.5 million from PMACIC.  We used the proceeds to reduce our debt obligations and to maintain liquidity at the holding company.  In 2007, the Department approved our request for an additional “extraordinary” dividend in the amount of $37.5 million from PMACIC.  We used the proceeds to purchase Midlands, to repurchase shares of our Class A Common Stock and to maintain liquidity at the holding company.  Given the anticipated sale of PMACIC, we do not expect to receive any dividends from this operation in 2008.  As of December 31, 2007, the statutory surplus of PMACIC was $47.6 million.

The Pooled Companies, which are not subject to the Department’s 2004 Order, did not pay dividends to PMA Capital Corporation in 2007 or 2006.  The Pooled Companies paid dividends of $7.0 million to PMA Capital Corporation in 2005.  As of December 31, 2007, the Pooled Companies can pay up to $29.2 million in dividends to PMA Capital Corporation during 2008 without the prior approval of the Department.  In considering their future dividend policy, the Pooled Companies will consider, among other things, the impact of paying dividends on their financial strength ratings.  The Pooled Companies had statutory surplus of $335.4 million as of December 31, 2007, including $10.0 million relating to surplus notes.

Net tax payments received from subsidiaries were $37.7 million, $9.4 million and $5.6 million in 2007, 2006 and 2005, respectively.  Net tax payments received in 2007 included tax payments related to off-shore reinsurance.

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On October 1, 2007, we entered into a Stock Purchase Agreement with the shareholders of Midlands Holding Corporation, pursuant to which we acquired all of the stock of Midlands Holding Corporation.  Under the Stock Purchase Agreement, we paid cash of $19.8 million for the company’s stock on the closing date.  The ultimate purchase price for the stock, which could range from $22.8 million to $44.5 million, will be based on the future earnings growth of Midlands over the next four years.  At December 31, 2007, we accrued $837,000 for estimated earnings growth payments.  We expect to be able to pay most of any future earn-out payments through cash generated from Midlands’ operations.  We also used holding company cash of $3.4 million for the return of estimated net worth on the closing date, which is subject to final adjustment in April 2008.

On May 9, 2007, our Board of Directors authorized us to repurchase shares of our Class A Common Stock in an amount not to exceed $10.0 million.  In 2007, we repurchased 986,522 shares of our Class A Common Stock at a cost of $10.0 million under this authorization.

Our contractual obligations by payment due period are as follows:

(dollar amounts in thousands)		2008			2009-2010		2011-2013	Thereafter		Total
Long-term debt (principal and interest):
	6.50% Convertible Debt (1)	$	1,510	$	-	$	-	$	-	$	1,510
	4.25% Convertible Debt (2)		470		-		-		-		470
	Junior subordinated debt (3)		5,725		11,373		17,134		184,335		218,567
	Surplus Notes (3)		993		1,977		2,818		30,431		36,219
	8.50% Senior Notes		4,667		9,333		13,999		75,899		103,898
Total long-term debt			13,365		22,683		33,951		290,665		360,664
Operating leases (4)			6,313		9,382		6,796		2,364		24,855
Pension and other postretirement benefits (5)			1,217		2,917		4,850		6,382		15,366
Unpaid losses and loss adjustment expenses (6)			262,284		314,000		228,012		563,195		1,367,491
Discontinued operations' unpaid losses and LAE (7)			112,213		105,673		64,999		78,287		361,172
Total		$	395,392	$	454,655	$	338,608	$	940,893	$	2,129,548

(1) This debt was repurchased in January 2008.

(2) Assumes holders of this debt require us to repurchase all of this debt on the next put date.  Holders, at their option, may require us to repurchase all or a portion of their debt on September 30, 2008, 2010, 2012 and 2017.  This debt may be converted at any time, at the holder’s option, at a current price of $16.368 per share.

(3) See discussion below for the variable interest rates on the junior subordinated debt and Surplus Notes.  The obligations related to the junior subordinated debt and the Surplus Notes have been calculated using the interest rates in effect at December 31, 2007.  This calculation includes the impact of interest rate swap agreements.

(4) The operating lease obligations referred to in the table above are primarily obligations of our insurance subsidiaries and are net of sublease rentals of $1.8 million in 2008, $1.6 million in 2009 and 2010, $1.7 million in 2011, 2012 and 2013, and $1.1 million thereafter.  The operating lease obligations also include amounts for our discontinued operations of $388,000 in 2008, $474,000 in 2009 and $473,000 in 2010 and 2011, respectively.

(5) Includes expected benefit payments on our non-qualified pension and other postretirement benefit plans, which will be paid from the general assets of the Company.

(6) Our unpaid losses and LAE do not have contractual maturity dates and the exact timing of payments cannot be predicted with certainty.  However, based on historical payment patterns, we have included an estimate, gross of discount of $154.5 million, of when we expect our unpaid losses and LAE (without the benefit of reinsurance recoveries) to be paid.  We maintain an investment portfolio with varying maturities that we believe will provide adequate cash for the payment of claims.

(7) Unpaid losses and LAE of our discontinued operations are presented with the gross liabilities of discontinued operations in a separate line on the Balance Sheet.  Based on historical payment patterns, we have included an estimate, gross of discount of $22.1 million, of when we expect these unpaid losses and LAE (without the benefit of reinsurance recoveries) to be paid.

As of December 31, 2007, our total outstanding debt was $131.3 million, compared to $131.2 million at December 31, 2006.  During 2007, we purchased $18.1 million of our 6.50% Convertible Debt in the open market and issued $20.6 million of junior subordinated debt.  These transactions extended the average maturity of our debt from 15 years to 20 years.

During 2007, we retired $18.1 million principal amount of our 6.50% Convertible Debt through open market purchases by PMA Capital Corporation.  We paid $21.2 million for these bond purchases, exclusive of accrued interest.  As the derivative component of the bonds was already reflected in the debt balance, the purchase activity did not result in any significant realized gain or loss.

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The 6.50% Convertible Debt is secured equally and ratably with our $54.9 million 8.50% Monthly Income Senior Notes due 2018 (“8.50% Senior Notes”) by a first lien on 20% of the capital stock of our principal operating subsidiaries.  This lien is released if the 6.50% Convertible Debt is no longer outstanding.  The indenture governing the 6.50% Convertible Debt contains restrictive covenants with respect to limitations on our ability to incur indebtedness, enter into transactions with affiliates or engage in a merger or sale of all or substantially all of our assets.  Subsequent to December 31, 2007, we retired the remaining $1.3 million principal amount of our 6.50% Convertible Debt for which we paid $1.5 million, exclusive of accrued interest.  We are currently in the process of releasing the lien and restrictive covenants.

In June 2007, we issued $20.6 million of 30-year floating rate junior subordinated securities to a wholly-owned statutory trust subsidiary.  We used the $20.0 million net proceeds to purchase, in the open market, our 6.50% Convertible Debt.  The junior subordinated debt matures in 2037 and is redeemable, in whole or in part, immediately at 107.5% of par, or in 2012 at par, plus accrued and unpaid interest.  The interest rate on the junior subordinated debt equals the three-month London InterBank Offered Rate (“LIBOR”) plus 3.55%, and interest on this debt is payable on a quarterly basis.

Our remaining junior subordinated debt of $43.8 million matures in 2033 and is redeemable, in whole or in part, in 2008 at the stated liquidation amount plus accrued and unpaid interest.  The weighted average interest rates on this junior subordinated debt equal the three-month LIBOR plus 4.12%, and interest on this debt is also payable on a quarterly basis.  At December 31, 2007, the weighted average interest rate on all of our junior subordinated securities was 8.90%.

We have the right to defer interest payments on the junior subordinated securities for up to twenty consecutive quarters but, if so deferred, we may not declare or pay cash dividends or distributions on our Class A Common Stock.  We have guaranteed the obligations of these statutory trust subsidiaries with respect to distributions and payments on the trust preferred securities issued by these trusts.

We had previously entered into interest rate swaps with an aggregated notional amount of $52.5 million that we had designated as cash flow hedges to manage interest costs and cash flows associated with the variable interest rates on our junior subordinated debt and our Floating Rate Surplus Notes due 2035 (“Surplus Notes”).  During 2007, we settled these interest rate swaps and received net proceeds of $578,000.

In June 2007, we entered into new interest rate swaps that we have designated as cash flow hedges to manage interest costs and cash flows associated with the variable interest rates on a portion of our junior subordinated debt and our Surplus Notes.  There was no consideration paid or received for these swaps.  The swaps will effectively convert $10.0 million of the junior subordinated debt and $10.0 million of Surplus Notes to fixed rate debt with interest rates of 9.40% and 9.93%, respectively.

In September 2007, we entered into a new interest rate swap that we have designated as a cash flow hedge to manage interest costs and cash flows associated with the variable interest rates on a portion of our junior subordinated debt.  There was no consideration paid or received for this swap.  The swap will effectively convert $20.0 million of the junior subordinated debt to fixed rate debt with an interest rate of 8.29%.

During 2006, we retired $28.7 million principal amount of our 6.50% Convertible Debt.  All of the open market purchases were made by the holding company, except for $3.3 million, which was made by one of our consolidated operating companies.  We paid $32.3 million for these bond purchases, exclusive of accrued interest.  In 2006, we also retired $2.6 million principal amount of our 8.50% Senior Notes through open market purchases.  We paid $2.6 million for these bond purchases, exclusive of accrued interest.  We have the right to call our 8.50% Senior Notes beginning in June 2008.

In June 2006, we completed the redemption of $35 million principal amount, including $9.6 million held by our consolidated operating companies, of our 6.50% Convertible Debt.  The mandatory redemption was triggered by the extraordinary dividend we received from PMACIC.  Under the terms of the indenture, we were required to redeem the debt at par plus a premium of $100 per $1,000 of principal amount.  The premium was due in cash, or at the election of the holder, in shares of our Class A Common Stock, valued at $8 per share.  In conjunction with the redemption, we paid $36.0 million, including $10.6 million to our consolidated operating companies, and issued 307,990 shares of our Class A Common Stock, with a fair value of $3.1 million, from our treasury.

During 2007, 2006 and 2005, we incurred $11.7 million, $13.5 million and $16.1 million of interest expense, and paid interest of $11.8 million, $13.7 million and $13.9 million in each respective year.  The reduction in interest expense and interest paid in 2007, compared to 2006, was due to a lower average amount of debt outstanding.  The reduction in interest expense and interest paid in 2006, compared to 2005, was due to a lower average amount of debt outstanding, which was partially offset by higher interest rates on our debt.  The 2006 decline in interest paid was not as significant as the decline in interest expense due to timing of interest payments and debt retirements.

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We did not make a contribution to our qualified pension plan in 2007, 2006 or 2005.  Our accumulated benefit obligation was greater than the fair value of plan assets by $4.9 million and $10.8 million at December 31, 2007 and December 31, 2006, respectively.  The funded status of our qualified pension plan improved in 2007, due primarily to the increase in interest rates.  In 2007 and 2006, we were not required to make any contribution to the pension plan under the minimum funding requirements of the Employee Retirement Income Security Act (“ERISA”) of 1974.  In August 2006, the Pension Protection Act of 2006 (“PPA”) became law.  Although we are not required to make any minimum funding contributions to our pension plan in 2007, we believe that the PPA will accelerate the timing of our future contributions.  Our plan assets are composed of 35% fixed maturities, 55% equities and 10% other investments at December 31, 2007.  We currently estimate that the pension plan’s assets will generate a long-term rate of return of 8.25%, which we believe is a reasonable long-term rate of return, in part because of the historical performance of the broad financial markets.  We also maintain non-qualified pension plans with respect to which we pay benefits from the general assets of the Company.  We expect benefit payments related to these non-qualified plans to be less than $500,000 in 2008.  Pension expense in 2007, 2006 and 2005 was $59,000, $593,000 and $5.4 million, respectively.

In 2005, we decided to “freeze” our Qualified Pension Plan and Non-qualified Pension Plans as of December 31, 2005.  Under the terms of the freeze, eligible employees retained all of the rights under these plans that they had vested as of December 31, 2005.  We incurred a one-time non-cash charge of $229,000 in 2005 due to these changes.  Effective January 1, 2006, our 401(k) and 401(k) Excess Plans were renamed The PMA Capital Corporation Retirement Savings Plan and The PMA Capital Retirement Savings Excess Plan and were enhanced to include quarterly age-based employer contributions.

Off-Balance Sheet Arrangements

Under the terms of the sale of one of our insurance subsidiaries, PMA Insurance Cayman, Ltd. (renamed Trabaja Reinsurance Company), to London Life and Casualty Reinsurance Corporation in 1998, we have 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, we will participate in such favorable loss reserve development.  Trabaja Reinsurance Company is our largest reinsurer.  As of December 31, 2007, we are not aware of any significant changes from our original estimate.  See Note 7 to the Consolidated Financial Statements for additional information.

INVESTMENTS

Our investment objectives are to (i) seek competitive after-tax income and total returns, (ii) maintain 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 setting guidelines for asset quality standards, allocating assets among investment types and issuers, and other relevant criteria for our portfolio.  In addition, invested asset cash flows, which include both current interest income received and investment maturities, are structured to consider projected liability cash flows of loss reserve payouts that are based on 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 while maintaining appropriate portfolio quality and diversity.  Liquidity requirements are met primarily through operating cash flows and by maintaining a portfolio with maturities that reflect expected cash flow requirements.

Investment grade fixed income securities, substantially all of which are publicly traded, constitute substantially all of our invested assets.  The market values of these investments are subject to fluctuations in interest rates.

We have structured our investment portfolio to provide an appropriate matching of maturities with anticipated claims payments.  If we decide or are required in the future to sell securities in a rising interest rate environment, we would expect to incur losses from such sales.  As of December 31, 2007, the duration of our investments that support the insurance reserves was 3.7 years, which approximates the duration of our insurance reserves of 3.9 years.

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Our investments at December 31 were as follows:

	2007					2006
(dollar amounts in millions)	Fair Value		Percent			Fair Value		Percent
U.S. Treasury securities and obligations of U.S. Government agencies	$	79.2		10	%	$	71.6		9	%
States, political subdivisions and foreign government securities		9.3		1	%		5.5		1	%
Corporate debt securities		157.1		19	%		187.9		24	%
Mortgage-backed and other asset-backed securities		483.2		60	%		453.8		58	%
Total fixed maturities available for sale	$	728.8		90	%	$	718.8		92	%
Short-term investments		78.4		10	%		61.2		8	%
Total	$	807.2		100	%	$	780.0		100	%

Our investment portfolio includes only fixed maturities, short-term investments and cash.  The portfolio is diversified and does not contain any significant concentrations in single issuers other than U.S. Treasury and agency obligations.  Our largest exposure to a single corporate issuer is $14.8 million, or 2% of total invested assets.  In addition, we do not have a significant concentration of our investments in any single industry segment other than finance companies, which comprised 10% of invested assets at December 31, 2007.  Included in this industry segment are diverse financial institutions, including banks and insurance companies, with no single issuer exceeding 2% of the total investment portfolio.  All of our investments as of December 31, 2007 are dollar denominated.

Mortgage-backed and other asset-backed securities in the table above include collateralized mortgage obligations (“CMOs”) of $318.2 million and $275.6 million carried at fair value as of December 31, 2007 and 2006, respectively.  CMO holdings are all AAA rated and concentrated in tranches with limited prepayment, extension and default risk, such as planned amortization class bonds.

Of the $807.2 million in our investment portfolio, $21.8 million, or 3%, were residential mortgage-backed securities whose underlying collateral was either a sub-prime or alternative A mortgage.  The $21.8 million, which includes $19.7 million of alternative A collateral and $2.1 million of sub-prime collateral, had an estimated weighted average life of 3.1 years, with $6.6 million of that balance expected to pay off within one year, and an average credit quality of AAA.  The portfolio also held securities with a fair value of $23.0 million, or 3%, whose credit ratings were enhanced by various financial guaranty insurers.  Of the credit enhanced securities, $17.9 million were asset-backed securities with a weighted average life of 3.7 years and whose underlying collateral had an imputed internal rating of “A”.  None of these securities were wrapped asset backed security collateralized debt obligation exposures.

The net unrealized gain on our investments at December 31, 2007 was $6.1 million, or 1% of the amortized cost basis.  The net unrealized gain included gross unrealized gains of $9.7 million and gross unrealized losses of $3.6 million.

For all but two securities, which were carried at a fair value of $1.5 million at December 31, 2007, we obtained the fair value of fixed income securities from independent pricing services which use prices obtained in the public markets.  For one security, a privately placed $1.0 million 18-month construction bridge loan with no secondary market, we considered its current fair value to approximate original cost.  The second security, which was carried at a fair value of $545,000 at December 31, 2007, is priced utilizing the services of the investment banking firm that originally underwrote the security.  The investment banker determines the fair value of the security by using a discounted present value of the estimated future cash flows (interest and principal repayment).

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At December 31, our fixed maturities had an overall average credit quality of AAA-, broken down as follows:

	2007					2006
(dollar amounts in millions)	Fair Value		Percent			Fair Value		Percent
U.S. Treasury securities and AAA	$	603.5		83	%	$	583.7		81	%
AA		44.3		6	%		35.1		5	%
A		57.3		8	%		71.5		10	%
BBB		23.7		3	%		28.5		4	%
Total	$	728.8		100	%	$	718.8		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 income and net effective yield were as follows:

(dollar amounts in millions)	2007			2006			2005
Average invested assets(1)	$	812.7		$	763.5		$	754.7
Investment income(2)	$	41.8		$	37.4		$	34.0
Net effective yield(3)		5.14	%		4.90	%		4.50	%

(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.  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.

We review the securities in our fixed income portfolio on a periodic basis to specifically identify individual securities for any meaningful decline in fair value below amortized cost.  Our analysis includes all securities whose fair value is significantly below amortized cost at the time of the analysis, with additional emphasis placed on securities whose fair value has been below amortized cost for an extended period of time.  As part of our periodic review process, we utilize information received from our outside professional asset manager to assess each issuer’s current credit situation.  This review contemplates recent issuer activities, such as quarterly earnings announcements or other pertinent financial news for the company, recent developments in a particular industry, economic outlook for a particular industry and rating agency actions.  For structured securities, we analyze the quality of the underlying collateral of the security.  We do not believe that there are credit related risks associated with our U.S. Treasury and agency securities.

In addition to company-specific financial information and general economic data, we also consider our ability and intent to hold a particular security to maturity or until the fair value of the security recovers to a level at least equal to the amortized cost.  Our ability and intent to hold securities to such time is evidenced by our strategy and process to match the cash flow characteristics of the invested asset portfolio, both interest income and principal repayment, to the actuarially determined estimated liability payout patterns of each insurance company’s claims liabilities.  Where we determine that a security’s unrealized loss is other than temporary, a realized loss is recognized in the period in which the decline in value is determined to be other than temporary.

In 2007, we recorded a pre-tax impairment loss of $209,000 on a security issued by a national provider of higher education loans.  In 2005, we recorded impairment losses for securities issued by two auto manufacturers, resulting in a pre-tax impairment charge of $773,000.  The write-downs were measured based on public market prices at the time we determined the decline in value was other than temporary.

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For securities that were in an unrealized loss position, the length of time that such securities have been in an unrealized loss position, as measured by their month end fair values, was as follows:

										Percentage
	Number of		Fair		Amortized		Unrealized			Fair Value to
(dollar amounts in millions)	Securities		Value		Cost		Loss			Amortized Cost
December 31, 2007
Less than 6 months		26	$	49.4	$	49.8	$	(0.4	)		99	%
6 to 9 months		3		1.4		1.5		(0.1	)		93	%
9 to 12 months		6		29.3		29.4		(0.1	)		100	%
More than 12 months		71		101.8		104.1		(2.3	)		98	%
Subtotal		106		181.9		184.8		(2.9	)		98	%
U.S. Treasury and Agency securities		40		52.8		53.5		(0.7	)		99	%
Total		146	$	234.7	$	238.3	$	(3.6	)		98	%
December 31, 2006
Less than 6 months		50	$	181.8	$	182.5	$	(0.7	)		100	%
6 to 9 months		2		0.6		0.6		-			100	%
9 to 12 months		10		23.7		23.9		(0.2	)		99	%
More than 12 months		107		104.9		108.2		(3.3	)		97	%
Subtotal		169		311.0		315.2		(4.2	)		99	%
U.S. Treasury and Agency securities		94		139.5		142.4		(2.9	)		98	%
Total		263	$	450.5	$	457.6	$	(7.1	)		98	%

At December 31, 2007, of the 71 securities that have been in an unrealized loss position for more than 12 months, 70 securities have a total fair value of 99% of the amortized cost basis at December 31, 2007, and the average unrealized loss per security is approximately $22,000.  The one security with an unrealized loss greater than 20% of its amortized cost at December 31, 2007 has a fair value of $545,000 and an amortized cost of $1.4 million.  This security, which matures in 2033, is rated AAA, and its $1.4 million principal is backed and guaranteed at maturity by discounted agency securities.  We have both the ability and intent to hold this security until it matures.

The contractual maturity of securities in an unrealized loss position at December 31, 2007 was as follows:

								Percentage
	Fair		Amortized		Unrealized			Fair Value to
(dollar amounts in millions)	Value		Cost		Loss			Amortized Cost
2008	$	4.6	$	4.6	$	-			100	%
2009-2012		21.8		21.9		(0.1	)		100	%
2013-2017		12.6		12.9		(0.3	)		98	%
2018 and thereafter		5.1		5.2		(0.1	)		98	%
Non-agency mortgage and other asset-backed securities		137.8		140.2		(2.4	)		98	%
Subtotal		181.9		184.8		(2.9	)		98	%
U.S. Treasury and Agency securities		52.8		53.5		(0.7	)		99	%
Total	$	234.7	$	238.3	$	(3.6	)		98	%

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Net Realized Investment Gains and Losses

Net realized investment gains were comprised of the following:

(dollar amounts in thousands)	2007			2006			2005
Sales of investments:
Realized gains	$	2,016		$	5,597		$	6,700
Realized losses		(3,893	)		(4,720	)		(2,841	)
Change in fair value of trading securities		3,220			-			-
Change in fair value of debt derivative		(483	)		466			(3,692	)
Other		(297	)		(104	)		205
Total net realized investment gains	$	563		$	1,239		$	372

We had pre-tax net realized investment gains of $563,000 in 2007, compared to investment gains of $1.2 million in 2006 and $372,000 in 2005.  During 2007, we recorded gross realized investment gains and losses of $2.0 million and $3.9 million, respectively, on sales from our invested asset portfolio.  The gross realized gains and losses primarily related to general duration management trades, which focused on maintaining our bias towards shorter duration and higher credit quality securities in the investment portfolio.  Gross realized losses also included an impairment loss of $209,000 on a fixed income security.  The change in fair value of trading securities related to a security that was previously held at our discontinued operations and transferred to our holding company as part of the $37.5 million dividend in April 2007.

During 2006, we had gross realized investment gains and losses of $5.6 million and $4.7 million, respectively, on sales from our invested asset portfolio.  The gross realized gains and losses resulted primarily from the repositioning of invested assets out of lower yielding sectors, such as corporate bonds, and into higher yielding sectors, such as structured securities, and reducing our overall risk in the portfolio by improving credit quality and shortening duration.

Results for 2005 included gross realized gains and losses of $6.7 million and $2.8 million, respectively, from investment sales.  Gross realized losses reflected sales reducing our per issuer exposure, general duration management trades and impairment losses of $773,000 on fixed income securities.

See “Item 1 – Business – Investments” and Notes 2B, 4 and 5 to our Consolidated Financial Statements for additional discussion about our investment portfolio.

Discontinued Operations

The fair value of the investment portfolio at our discontinued operations at December 31, 2007 and 2006 was $219.7 million and $178.4 million, respectively, and had an amortized cost of $219.2 million and $184.4 million, respectively.  The investment portfolio consisted of 85% and 14% in short-term investments at December 31, 2007 and 2006, respectively.

Effective January 1, 2007, we reclassified securities, which are currently reported as part of our assets of discontinued operations on the Balance Sheet, from fixed maturities available for sale to the trading category in conjunction with our adoption of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  The securities selected had gross unrealized gains of $530,000 and gross unrealized losses of $6.6 million at the time of our adoption.

See Note 4 to our Consolidated Financial Statements for additional discussion about investments at our discontinued operations.

OTHER MATTERS

Other Factors Affecting Our Business

In general, our businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could materially 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

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provide coverage unanticipated by us.  The eventual effect on us of the changing environment in which we operate remains uncertain.

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 (collectively “SAP”).  Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of National Association of Insurance Commissioners publications.  Permitted SAP encompasses all accounting practices that are not prescribed.  Our domestic insurance subsidiaries use SAP to prepare various financial reports for use by insurance regulators.

Recent Accounting Pronouncements

Effective January 1, 2007, we early adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), and SFAS 159.  See Notes 4 and 13 to our Consolidated Financial Statements for the impact of our adoption of these Statements.

Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”).  See Note 14 to our Consolidated Financial Statements for the impact of this adoption.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).  SFAS 141R replaces Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”), although it retains the fundamental requirement in SFAS 141 that the purchase method of accounting be used for all business combinations.  SFAS 141R establishes principles and requirements for how the acquirer in a business combination (a) recognizes and measures the assets acquired, liabilities assumed and any non-controlling interest in the acquiree, (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase and (c) determines what information to disclose regarding the business combination.  SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of our 2009 fiscal year, and therefore, has no impact on the accounting for our 2007 acquisition of Midlands.

Critical Accounting Estimates

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 in Note 2 to 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 estimates, which are those accounting estimates 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 judgments.

Unpaid losses and loss adjustment expenses

At December 31, 2007, we estimated that under all insurance policies and reinsurance contracts issued by our ongoing insurance business, our liability for all events that occurred as of December 31, 2007 was $1,213.0 million.  This amount included estimated losses from claims plus estimated expenses to settle claims.  Our estimate also included estimated amounts for losses occurring on or prior to December 31, 2007 whether or not these claims had been reported to us.  At December 31, 2007, our estimate for such amounts recorded as liabilities of discontinued operations was $339.1 million.

Our actuaries utilize a variety of actuarial techniques based on various assumptions to derive reserve estimates on subsets of the business within our operations.  The techniques and assumptions vary depending upon the characteristics particular to the business.  Our actuaries periodically perform detailed studies of historical data on incurred claims, reported claims and paid claims for each major line of business and by accident year and also analyze data for the current accident year.  The actuarial techniques typically used by our actuaries are as follows:

Incurred Loss Development – This method projects ultimate losses based on historical development trends of incurred losses.

Paid Loss Development – This method projects ultimate losses based on historical development trends of paid losses.

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Bornhuetter-Ferguson – This method projects future incurred or paid losses based upon expected losses.  The expected future paid or incurred losses are added to actual paid or incurred losses to determine ultimate losses.

Claim Count Times Average – This method projects the ultimate number of claims based on the historical development trends of incurred or closed claims and projects the average size of a claim based on the historical development of the average incurred or the average paid claim.  The projected ultimate loss equals the ultimate number of claims multiplied by the average size of a claim.

The data generated by application of these various actuarial methods generally reflect various development patterns and trends that assume historical patterns will be predictive of future patterns.  Our actuaries analyze the various sets of data generated by these actuarial methods and also consider the impact of legal and legislative developments, regulatory trends including state benefit levels, changes in social attitudes and economic conditions in order to develop various sets of assumptions that we believe are reasonable and valid and can be used to assist us in predicting future claim trends.  These assumptions are used in conjunction with the various development patterns and trends generated by the actuarial methods described above to produce various reserve estimates.  Our actuaries consider these estimates and, utilizing their judgment, select a reasonable range of possible outcomes of the ultimate claims to be paid by us in the future.  Because reported claims and paid claims activity can vary significantly between periods, our actuaries do not routinely rely on the same actuarial techniques and assumptions to develop their range of reasonable outcomes; instead, they will use their judgment to understand the effect that paid and reported claim activity has on the various actuarial techniques in a particular accident year, and consider this effect in determining their reasonable range.

In estimating our reserves for unpaid losses and LAE, our actuaries also consider the fact that each of our businesses has a different potential for reserve development.  We believe that the potential for adverse reserve development is increased at our former reinsurance business because of the nature of the reinsurance business itself and because of the fact that it is in run-off.  Reinsurers rely on their ceding companies to provide them with information regarding incurred losses.  Therefore, it takes longer for reinsurers to find out about reported claims than for primary insurers and such claims are more subject to unforeseen development and uncertainty.  Additionally, the potential for adverse reserve development in our former reinsurance operation has increased because we have ceased ongoing business relationships with most of our ceding companies.  As a result, to the extent that there are disputes with its ceding companies over claims coverage or other issues, we believe that it is more likely that we will be required to arbitrate these disputes.

With respect to The PMA Insurance Group, our actuaries separately review the reserves for our workers’ compensation and integrated disability, commercial automobile and commercial multi-peril/general liability lines of business.  The PMA Insurance Group’s loss reserves are comprised primarily of reserves for our workers’ compensation and integrated disability business (85% of the segment loss reserves).  Commercial multi-peril/general liability reserves comprise 12% of this segment’s carried reserves, with 24% of such commercial multi-peril/general liability reserves being asbestos and environmental reserves (see page 42 of this Report on Form 10-K for more detail regarding asbestos and environmental loss reserves).

Within the workers’ compensation line of business, we review medical and indemnity costs separately.  We undertake this review because we believe that the medical cost component of workers’ compensation claims has a different development pattern than the indemnity payments, and also because we believe that certain assumptions within the medical cost component, such as the rate of medical cost inflation, can lead to more volatility as compared to the indemnity component.  For example, a one percentage-point change in current year medical inflation would result in about three tenths of a point change in our overall loss and LAE ratio.  At December 31, 2007, our medical loss reserves were approximately 48% of the workers’ compensation loss reserves, with the balance being indemnity costs.  We also review the workers’ compensation line of business by state for some of our larger states.  We undertake this review because workers’ compensation benefits vary by state and this can cause loss development patterns to vary by state.

Our discontinued operations’ loss reserves are comprised primarily of excess of loss and pro rata reinsurance reserves (86% of the loss reserves).  The excess of loss and pro rata reinsurance reserves are primarily casualty reserves, as only 8% of such reserves are for property business at December 31, 2007.  The discontinued operations’ pro rata business is mainly quota share reinsurance of ceding companies’ excess or umbrella insurance.  Therefore, our actuarial analysis of our excess of loss and pro rata reinsurance business is generally based upon similar assumptions and loss development patterns.

After our actuaries complete the analyses described above, management reviews the data along with various industry benchmarks, and using its informed judgment, selects its best estimate of the amounts needed to pay all pending and future claims and related expenses, including those not yet reported to us.  This best estimate is recorded as a loss and LAE reserve on our balance sheet.  Our practice is to establish reserves for unpaid losses and LAE at a level where we believe it is likely that such unpaid losses and LAE could ultimately settle at similar amounts either above or below management’s

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best estimate.  At December 31, 2007, management’s best estimate reflects an estimate of loss and LAE reserves that is approximately the mid-point of our actuaries’ range of loss reserves.

It is important to 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, assumptions and judgments using data currently available.  The assumptions we utilize in developing a range of loss reserves are based on the premise that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for establishing our reserve ranges.  As more current and additional experience and data become available regarding the existence and the dollar amounts of claims, claims payment and reporting patterns, legal and legislative developments, judicial theories of liability, the impact of regulatory trends on benefit levels for both medical and indemnity payments, and changes in social attitudes and economic conditions, we revise our actuarially determined range of estimates accordingly.  Because of the aforementioned factors, actual results can differ from our current estimates in both The PMA Insurance Group and in our discontinued operations.  While all of these factors affect the reserving process and results, we believe that the major factors that can cause actual results to vary from our estimates for The PMA Insurance Group are a change in frequency of reported claims, a change in the severity of claims reported to us, and in particular for workers’ compensation, a change in the rate of medical cost inflation.

We believe that the major factors that can cause actual results to vary from our estimates on our reinsurance business are changes in the experience and case reserving methodologies of our various ceding companies.  This would affect the claims being reported to us, which, in turn, would affect our estimate of the frequency and severity of claims for the discontinued operations.  The long-tail nature of a significant portion of this business (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) is also a major factor that could impact reserve development.

Any changes to our range of loss reserve estimates, as discussed above, would also affect our assumptions regarding ceded reserves.  To the extent that changes in our range of estimates resulted in a change to our carried reserves and the amount of reinsurance receivable against such carried reserves, the net result of these changes would directly affect our pre-tax income.

For additional factors that could impact our reserve estimates please see the risk factor entitled “Reserves are estimates and do not and cannot represent an exact measure of liability.  If our actual losses from insureds exceed our loss reserves, our financial results would be adversely affected” on page 21 of this Report on Form 10-K.

We have established a carried loss and LAE reserve for unpaid claims at December 31, 2007 that we believe is a reasonable and adequate provision based on the information then available to us and we believe such amounts are fairly stated at December 31, 2007.  However, based upon our actuarial analysis at December 31, 2007, and as discussed in the previous paragraphs, there is a reasonable probability that the range of reserve estimates (which represents various estimations of the amount required to ultimately settle all losses and LAE for unpaid claims) at The PMA Insurance Group and the discontinued operations could be approximately five percent (5%) and seven percent (7%), respectively, greater or less than the loss and LAE reserve recorded for each such business on our consolidated financial statements at December 31, 2007, if significant assumptions, such as frequency, severity and medical cost inflation, which are components of our actuarial analysis develop differently than we currently anticipate.  Because our carried reserves reflect management’s best estimate and are not determined by a formula that is automatically the direct product of the actuarial methods used to develop our range of reserves, we are unable to quantify in any meaningful way the effect of a change to any one of these significant assumptions underlying our actuarial process on our carried reserves.  It is also possible that the amount required to settle all losses and LAE for unpaid claims or our estimates in future periods could exceed or be less than the reasonable range of possible outcomes that we can currently estimate.

If our future estimate of ultimate unpaid losses is greater than the recorded amounts, we would have to increase our reserves in subsequent periods.  Any increase in our net reserves would result in a charge to earnings in the period recorded.  For example, during the third quarter of 2007 and first quarter of 2005, we increased net reserves for our discontinued operations by $22 million and $30 million, respectively, and took earnings charges as a result.  Accordingly, any reserve adjustment could have a material adverse effect on our financial condition, results of operations and liquidity.

At December 31, 2007, unpaid losses and loss adjustment expenses at the continuing operations were $1,213.0 million, which included case reserves of $598.6 million and IBNR reserves of $614.4 million.  At December 31, 2007, unpaid losses and loss adjustment expenses at the discontinued operations were $339.1 million, which included case reserves of $271.4 million and IBNR reserves of $67.7 million.

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At our continuing operations, the components of our favorable development of reserves for losses and LAE for prior accident years by accident year, excluding accretion of discount, were as follows:

(dollar amounts in millions)	2007			2006			2005
Accident Year
1997 and prior	$	3.5		$	2.1		$	4.5
1998		(0.5	)		-			1.2
1999		0.3			(0.1	)		0.9
2000		(0.9	)		0.4			4.4
2001		0.2			1.7			(5.2	)
2002		0.6			2.0			(4.5	)
2003		0.5			(0.3	)		(1.7	)
2004		(3.2	)		(3.3	)		(1.6	)
2005		(1.0	)		(4.8	)		n/a
2006		(1.2	)		n/a			n/a
Total net favorable development	$	(1.7	)	$	(2.3	)	$	(2.0	)

The PMA Insurance Group recorded favorable prior year loss development of $1.7 million, $2.3 million and $2.0 million in 2007, 2006 and 2005, respectively, primarily reflecting better than expected loss experience from rent-a-captive workers’ compensation business.  Dividends to policyholders 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.

At our discontinued operations, the components of our (favorable) unfavorable development of reserves for losses and LAE for prior accident years by accident year, excluding accretion of discount, were as follows:

(dollar amounts in millions)	2007			2006			2005
Accident Year
1997 and prior	$	1.0		$	0.6		$	(3.9	)
1998		(0.1	)		(1.0	)		(0.2	)
1999		1.2			(1.2	)		8.2
2000		(0.5	)		(0.7	)		5.2
2001		5.4			2.0			17.9
2002		9.2			(3.1	)		4.8
2003		5.6			(0.1	)		(3.3	)
2004		1.0			(1.6	)		0.1
2005		(1.2	)		(0.2	)		n/a
2006		-			n/a			n/a
Total net (favorable) unfavorable development	$	21.6		$	(5.3	)	$	28.8

During 2007, the discontinued operations recorded unfavorable prior year loss development of $21.6 million, which included a $22 million charge taken in the third quarter.  In the third quarter of 2007, our actuaries conducted their periodic comprehensive reserve review.  Based on the actuarial work performed, our actuaries observed increased loss development from a limited number of ceding companies on our claims-made general liability business, primarily related to professional liability claims.  Specifically, we experienced higher than expected severity on general liability claims-made losses at our discontinued operations during the third quarter causing our actuaries to increase the average expected size of future loss payments on these types of claims.  This increase in 2007 loss trends caused management to determine that reserve levels, primarily for accident years 2001 to 2003, needed to be increased by $22 million.

During 2006, the discontinued operations recorded $5.3 million in favorable development, largely due to commutations of structured reinsurance treaties with some of our ceding companies.  The discontinued operations do not typically record favorable prior year loss development on commutations unless the treaties are structured reinsurance, where IBNR reserves are directly attributable to a treaty.

During 2005, the discontinued operations recorded unfavorable prior year loss development of $28.8 million, which included a $30 million charge taken in first quarter.  In the first quarter of 2005, our actuaries identified higher than expected claim frequency and severity on policies covering contractors’ liability for construction defects from accident years 1998 to 2001 written by our former excess and surplus lines operation and an increase in reported losses and

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continued volatility in pro rata professional liability reinsurance business written from accident years 1997 to 2001.  Specifically on policies covering contractors’ liability for construction defects, our discontinued operations experienced higher than expected reported claim frequency and slightly higher severity during the first quarter causing our actuaries to increase the number of expected claims to be reported in the future and slightly increase the average size of the future expected claims.

A significant portion of the business at our discontinued operations is “long-tailed” in nature and is dependent on its ceding companies for reporting information regarding incurred losses, most of which it no longer has ongoing relationships with due to its businesses being in run-off.  The loss reserves recorded represent management’s best estimate of future amounts needed to pay claims and related settlement costs with respect to insured events that have occurred, including events that have not been reported to us; as such, these estimates have contemplated the effect of prior adverse development when developing new loss reserve estimates.  As the amounts recorded represent our best estimate, we believe that the past loss development which we recorded is not indicative of expected future loss development in our discontinued operations.

For additional information about our liability for unpaid losses and loss adjustment expenses, see Notes 4 and 6 to the Consolidated Financial Statements as well as “Item 1 – Business - Loss Reserves.”

Investments

All investments in our portfolio are carried at fair value.  For all but two of our investment securities, we obtain the values from independent pricing services which use prices obtained in the public markets.  These market prices reflect publicly reported values of recent purchase and sale transactions for each specific, individual security.  

As part of determining the fair 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 overall average credit quality of AAA-, and all 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.

Based on our evaluation of securities with an unrealized loss at December 31, 2007, we do not believe that any additional other-than-temporary impairment losses, other than those already reflected in the consolidated financial statements, are necessary at the balance sheet date.  However, if we were to have determined that all securities that were in an unrealized loss position at December 31, 2007 should have been written-down to their fair value, then we would have recorded an additional other-than-temporary impairment loss of $3.6 million pre-tax at our continuing operations.

For additional information about our investments, see Notes 2-B, 4, 5 and 13 to the Consolidated Financial Statements as well as “Investments” beginning on page 51.

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 subsidiaries.  Our reinsurance receivables total $795.9 million at December 31, 2007.  We have estimated that $4.6 million of our reinsurance receivables will be uncollectible, and we have provided a valuation allowance for that amount.  Our assets of discontinued operations include $150.1 million for reinsurance receivables at December 31, 2007, and these receivables are recorded net of a valuation allowance of $3.3 million.

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 remit 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

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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.

Based on our evaluation of reinsurance receivables at December 31, 2007, we have established an allowance for amounts that we have concluded are uncollectible at the balance sheet date.  In evaluating collectibility, we considered historical payment performance of our reinsurers, the fact that our reinsurers are current on their obligations to our insurance subsidiaries, and any known disputes or collection issues as of the balance sheet date.  To these factors, we applied our informed judgment in ascertaining the appropriate level of allowance for uncollectible amounts.  At December 31, 2007, approximately $48.9 million of uncollateralized reinsurance receivables at our continuing operations, including $29.0 million due for ceded IBNR, are due from reinsurers who have ratings that declined to below “Adequate,” defined as B++ or below by A.M. Best, or who were under regulatory supervision or in liquidation.

For additional information about reinsurance receivables, see Notes 4 and 7 to the Consolidated Financial Statements as well as “Reinsurance” beginning on page 43.

Deferred Tax Assets

We record 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.  The recoverability of deferred tax assets is evaluated based upon management’s estimates of the future profitability of our taxable entities based on current forecasts.  We establish a valuation allowance for deferred tax assets where it appears more likely than not that we will not be able to recover the deferred tax asset.  At December 31, 2007, PMA Capital has a net deferred tax asset of $118.9 million, resulting from $211.2 million of gross deferred tax assets reduced by a deferred tax asset valuation allowance of $60.5 million and by $31.9 million of deferred tax liabilities.  In establishing the appropriate value of this asset, management must make judgments about our ability to utilize the net tax benefit from the reversal of temporary differences and the utilization of operating loss carryforwards that expire mainly from 2018 through 2027.

Prior to 2005, we established a valuation allowance in the amount of $57 million.  This was based upon our assessment that it was more likely than not that a portion of the gross deferred tax assets related to the NOL carryforward and all of the deferred tax asset related to the AMT credit carryforward would not be realized.  We periodically reassess the valuation allowance previously established against the net deferred tax assets.  Factors considered in our reassessment included historical earnings, scheduled reversal of deferred tax liabilities and revised projections of future earnings.  Based upon our consideration of these factors in conjunction with the current level of valuation allowance recorded, we increased the valuation allowance with respect to our net deferred tax asset by $3.5 million in 2005.  The increase was primarily due to the future earnings projections for our discontinued operations which were revised downward from previous projections.

The valuation allowance of $60.5 million reserves against $50.9 million of gross deferred tax assets related to the NOL carryforward and the $9.6 million projected deferred tax asset related to the AMT credit carryforward because we believe it is more likely than not that this portion of the benefit will not be realized.  We will continue to periodically assess the realizability of our net deferred tax asset.  If our estimates of future income were to be revised downward and we determined that it was then more likely than not that we would not be able to realize the value of our net deferred tax asset, then this could have a material adverse effect on our results of operations and financial condition.  For additional information, see Note 14 to our Consolidated Financial Statements.

Intangible Assets

On October 1, 2007, we entered into a Stock Purchase Agreement, pursuant to which we acquired all of the stock of Midlands Holding Corporation.  As a result of this acquisition, we recorded $11.0 million and $11.1 million of identifiable intangible assets and goodwill, respectively.  Intangible assets consist of non-contractual customer relationships, licenses and a trade name.  Goodwill represents the excess of the fair value of the net identifiable assets over the purchase price.  At December 31, 2007, we accrued $837,000 for estimated earnings growth payments, which increased goodwill.

Goodwill and indefinite-lived intangible assets will remain on the balance sheet and will be tested for impairment on an annual basis, or when there is a reason to suspect that their values may have been diminished or impaired.  Other intangible assets that are not deemed to have an indefinite useful life will be amortized over their estimated useful lives.

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Net assets of discontinued operations

As a result of the expected sale of our Run-off Operations in 2007, we reported the results of this business as discontinued operations.  In conjunction with this change and in accordance with SFAS 144, we recorded a pre-tax impairment loss of $61.5 million to reduce the net assets of this business to estimated fair value less costs to sell.  The estimated fair value of the business was based on a non-binding letter of intent that we received from an interested third party.  Our estimate reflected amounts anticipated at closing, which are subject to adjustments following the third party’s review of the final purchase price calculation, but excluded future contingent payments that may be received from the third party.

Premiums

Premiums, including estimates of additional premiums resulting from audits of insureds’ records, are earned principally on a pro rata basis over the terms of the policies.  Under The PMA Insurance Group’s loss-sensitive rating plans, we adjust the amount of the insured’s premiums after the policy period expires based, to a large extent, upon the insured’s actual loss experience during the policy period.  Retrospectively rated premium adjustments and audit premium adjustments are recorded as earned in the period in which the adjustment is made.

The premiums on reinsurance business ceded are recorded as incurred on a pro rata basis over the contract period.  Certain ceded reinsurance contracts contain provisions requiring us to pay additional premiums based on a percentage of ceded losses or reinstatement premiums in the event that losses of a significant magnitude are ceded under such contracts.  Under accounting rules, we are not permitted to establish reserves for potential additional premiums or record such amounts until a loss occurs that would obligate us to pay such additional or reinstatement premiums.  As a result, the net benefit to our results from ceding losses to our retrocessionaires in the event of a loss may be reduced by the payment of additional premiums and reinstatement premiums to our retrocessionaires.

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CAUTIONARY STATEMENTS

Except for historical information provided in Management’s Discussion and Analysis and otherwise in this report, statements made throughout are forward-looking and contain information about financial results, economic conditions, trends and known uncertainties.  Words such as “believe,” “estimate,” “anticipate,” “expect” or similar words are intended to identify forward-looking statements.  These forward-looking statements may include estimates, assumptions or projections and are based on currently available financial, competitive and economic data and our current operating plans.  Although management believes that our expectations are reasonable, there can be no assurance that our actual results will not differ materially from those expected.

The factors that could cause actual results to differ materially from those in the forward-looking statements, include, but are not limited to:

·   adverse property and casualty loss development for events that we insured in prior years, including unforeseen increases in medical costs and changing judicial interpretations of available coverage for certain insured losses;

·   our ability to increase the amount of new and renewal business written by The PMA Insurance Group at adequate prices or revenues of our fee-based businesses;

·   our ability to have sufficient cash at the holding company to meet our debt service and other obligations, including any restrictions such as those imposed by the Pennsylvania Insurance Department on receiving dividends from our insurance subsidiaries in an amount sufficient to meet such obligations;

·   any future lowering or loss of one or more of our financial strength and debt ratings, and the adverse impact that any such downgrade may have on our ability to compete and to raise capital, and our liquidity and financial condition;

·   our ability to effect an efficient withdrawal from and divestiture of the reinsurance business, including the sale of the entity and commutation of reinsurance business with certain large ceding companies, without incurring any significant additional liabilities;

·   adequacy and collectibility of reinsurance that we purchased;

·   adequacy of reserves for claim liabilities;

·   whether state or federal asbestos liability legislation is enacted and the impact of such legislation on us;

·   regulatory changes in risk-based capital or other standards that affect the cost of, or demand for, our products or otherwise affect our ability to conduct business, including any future action with respect to our business taken by the Pennsylvania Insurance Department or any other state insurance department;

·   the impact of future results on the recoverability of our deferred tax asset;

·   the outcome of any litigation against us;

·   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;

·   our 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;

·   uncertainty as to the price and availability of reinsurance on business we intend to write in the future, including reinsurance for terrorist acts;

·   severity of natural disasters and other catastrophes, including the impact of future acts of terrorism, in connection with insurance and reinsurance policies;

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

·   uncertainties related to possible terrorist activities or international hostilities and whether TRIPRA is extended beyond its December 31, 2014 termination date; and

·   other factors or uncertainties disclosed from time to time in our filings with the Securities and Exchange Commission.

You should not place undue reliance on any such forward-looking statements in this Form 10-K.  Forward-looking statements are not generally required to be publicly revised as circumstances change and we do not intend to update the forward-looking statements in this Form 10-K to reflect circumstances after the date hereof or to reflect the occurrence of unanticipated events.

63

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk.

Caution should be used when evaluating our overall market risk based on the information below.  Actual results could differ materially due to the fact that this 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 65% of our total liabilities and reinsurance receivables represent 31% of our total assets).

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 asset quality standards, asset allocation strategies and other relevant criteria for our investment portfolio.

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 approximately 10% of invested assets at December 31, 2007.  Included in this industry segment are diverse financial institutions, including banks and insurance companies.  See Notes 2-B, 2-G, 5, 8 and 13 to our Consolidated Financial Statements for additional information about financial instruments.

The hypothetical effects of changes in market rates or prices on the fair values of financial instruments as of December 31, 2007, excluding insurance liabilities 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 decreased by 100 basis points, there would have been an increase of approximately $4 million in the fair value of our debt.  The change in fair value 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 $32 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.

64

Item 8.  Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements
	Consolidated Balance Sheets at December 31, 2007 and 2006	66
	Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005	67
	Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005	68
	Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006 and 2005	69
	Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2007, 2006 and 2005	70
	Notes to Consolidated Financial Statements	71
	Report of Independent Registered Public Accounting Firm	100
	Quarterly Financial Information	102

65

PMA CAPITAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)		2007			2006
Assets:
Investments:
	Fixed maturities available for sale, at fair value (amortized cost:
	2007 - $722,587; 2006 - $722,219)	$	728,725		$	718,865
	Short-term investments		78,426			61,180
	Total investments		807,151			780,045
Cash			15,828			9,498
Accrued investment income			5,768			5,495
Premiums receivable (net of valuation allowance: 2007 - $9,341; 2006 - $9,363)			222,140			200,164
Reinsurance receivables (net of valuation allowance: 2007 - $4,608; 2006 - $8,630)			795,938			720,110
Prepaid reinsurance premiums			32,361			25,611
Deferred income taxes, net			118,857			100,019
Deferred acquisition costs			37,404			36,239
Funds held by reinsureds			42,418			33,432
Intangible assets			22,779			-
Other assets			105,341			81,096
Assets of discontinued operations			375,656			674,698
	Total assets	$	2,581,641		$	2,666,407
Liabilities:
Unpaid losses and loss adjustment expenses		$	1,212,956		$	1,152,704
Unearned premiums			226,178			202,973
Long-term debt			131,262			131,211
Accounts payable, accrued expenses and other liabilities			195,895			156,745
Reinsurance funds held and balances payable			39,324			27,000
Dividends to policyholders			5,839			4,450
Liabilities of discontinued operations			391,603			572,231
	Total liabilities		2,203,057			2,247,314
Commitments and contingencies (Note 9)
Shareholders' Equity:
Class A Common Stock, $5 par value, 60,000,000 shares authorized
	(2007 - 34,217,945 shares issued and 31,761,106 outstanding;
	2006 - 34,217,945 shares issued and 32,659,194 outstanding)		171,090			171,090
Additional paid-in capital			111,088			109,922
Retained earnings			136,627			184,216
Accumulated other comprehensive loss			(6,663	)		(20,624	)
Treasury stock, at cost (2007 - 2,456,839 shares; 2006 - 1,558,751 shares)			(33,558	)		(25,511	)
	Total shareholders' equity		378,584			419,093
	Total liabilities and shareholders' equity	$	2,581,641		$	2,666,407

See accompanying notes to the consolidated financial statements.

66

PMA CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)	2007			2006			2005
Revenues:
Net premiums written	$	394,698		$	373,001		$	374,975
Change in net unearned premiums		(16,455	)		(5,598	)		(17,151	)
Net premiums earned		378,243			367,403			357,824
Claims service revenues		34,034			27,853			23,591
Commission income		3,005			-			-
Net investment income		39,592			35,851			32,235
Net realized investment gains		563			1,239			372
Other revenues		340			244			406
Total revenues		455,777			432,590			414,428
Losses and Expenses:
Losses and loss adjustment expenses		263,199			262,297			260,276
Acquisition expenses		73,747			73,726			71,298
Operating expenses		76,541			70,971			63,775
Dividends to policyholders		7,790			3,532			5,174
Interest expense		11,732			13,521			16,111
Total losses and expenses		433,009			424,047			416,634
Income (loss) from continuing operations before income taxes		22,768			8,543			(2,206	)
Income tax expense		8,019			3,217			2,689
Income (loss) from continuing operations		14,749			5,326			(4,895	)
Loss from discontinued operations, net of tax		(57,277	)		(1,275	)		(16,125	)
Net income (loss)	$	(42,528	)	$	4,051		$	(21,020	)
Income (loss) per share:
Basic:
Continuing Operations	$	0.46		$	0.17		$	(0.15	)
Discontinued Operations		(1.78	)		(0.04	)		(0.51	)
	$	(1.32	)	$	0.13		$	(0.66	)
Diluted:
Continuing Operations	$	0.45		$	0.16		$	(0.15	)
Discontinued Operations		(1.76	)		(0.04	)		(0.51	)
	$	(1.31	)	$	0.12		$	(0.66	)

See accompanying notes to the consolidated financial statements.

67

PMA CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)			2007			2006			2005
Cash flows from operating activities:
	Net income (loss)		$	(42,528	)	$	4,051		$	(21,020	)
	Less: Loss from discontinued operations			(57,277	)		(1,275	)		(16,125	)
	Income (loss) from continuing operations, net of tax			14,749			5,326			(4,895	)
	Adjustments to reconcile income (loss) before loss from discontinued
	operations to net cash flows provided by (used in) operating activities:
		Deferred income tax expense		7,603			3,217			2,688
		Net realized investment gains		(563	)		(1,239	)		(372	)
		Stock-based compensation		1,814			2,371			865
		Depreciation and amortization		3,633			5,326			8,351
		Change in:
		Premiums receivable and unearned premiums, net		1,229			11,796			12,270
		Dividends to policyholders		1,389			(2	)		(1,525	)
		Reinsurance receivables		(75,828	)		15,072			27,682
		Prepaid reinsurance premiums		(6,750	)		(23,943	)		203
		Unpaid losses and loss adjustment expenses		60,252			(16,634	)		(57,443	)
		Funds held by reinsureds		(8,986	)		(7,243	)		(10,136	)
		Reinsurance funds held and balances payable		12,324			17,941			(3,252	)
		Accrued investment income		(273	)		875			1,215
		Deferred acquisition costs		(1,165	)		(2,003	)		(3,252	)
		Accounts payable, accrued expenses and other liabilities		18,669			(2,641	)		(1,835	)
		Other, net		(8,449	)		8,658			11,309
		Discontinued operations		67,180			(113,041	)		(254,194	)
Net cash flows provided by (used in) operating activities				86,828			(96,164	)		(272,321	)
Cash flows from investing activities:
	Fixed maturities available for sale:
	Purchases			(265,838	)		(350,718	)		(323,231	)
	Maturities and calls			86,114			82,296			72,729
	Sales			179,576			264,038			216,338
	Sales of fixed maturities trading			17,458			-			-
	Net sales (purchases) of short-term investments			(17,205	)		(25,871	)		44,994
	Purchase of subsidiary, net of cash received			(10,643	)		-			-
	Other, net			(10,527	)		(2,220	)		(2,726	)
	Discontinued operations			(51,237	)		171,813			276,006
Net cash flows provided by (used in) investing activities				(72,302	)		139,338			284,110
Cash flows from financing activities:
	Proceeds from issuance of long-term debt			20,619			-			10,000
	Debt issuance costs			(604	)		-			(256	)
	Repayments of long-term debt			(17,324	)		(60,622	)		(28,202	)
	Proceeds from exercise of stock options			444			1,403			1,800
	Shares purchased under stock-based compensation plans			(273	)		(89	)		(429	)
	Purchase of treasury stock			(10,000	)		-			-
	Dividend from discontinued operations			17,500			73,500			-
	Other payments from (to) discontinued operations			(2,615	)		(7,015	)		15,681
	Discontinued operations			(14,885	)		(66,485	)		(15,681	)
Net cash flows used in financing activities				(7,138	)		(59,308	)		(17,087	)
Net increase (decrease) in cash				7,388			(16,134	)		(5,298	)
Cash - beginning of year				14,105			30,239			35,537
Cash - end of year (a)			$	21,493		$	14,105		$	30,239
Supplementary cash flow information (all continuing operations):
	Income tax paid (refunded)		$	717		$	-		$	(651	)
	Interest paid		$	11,812		$	13,687		$	13,898
Non-cash financing activities:
	Common Stock issued to redeem convertible debt		$	-		$	3,074		$	-
	Investment security transferred in dividend from discontinued operations		$	16,780		$	-		$	-
(a)	Includes cash from discontinued operations of $5.7 million, $4.6 million and $12.3 million as of December 31, 2007, 2006 and 2005, respectively.

See accompanying notes to the consolidated financial statements.

68

PMA CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)	2007			2006			2005
Class A Common Stock	$	171,090		$	171,090		$	171,090
Additional paid-in capital - Class A Common Stock:
Balance at beginning of year		109,922			109,331			109,331
Stock-based compensation		1,814			2,371			-
Reissuance of treasury shares under stock-based compensation plans		(648	)		(1,507	)		-
Reclassification of unearned restricted stock under SFAS 123(R)		-			(273	)		-
Balance at end of year		111,088			109,922			109,331
Retained earnings:
Balance at beginning of year		184,216			187,538			213,313
Cumulative effect of adjustment to initially apply SFAS 159, net of tax		(3,928	)		-			-
Adjusted balance at beginning of year		180,288			187,538			213,313
Net income (loss)		(42,528	)		4,051			(21,020	)
Reissuance of treasury shares under stock-based compensation plans		(1,133	)		(4,559	)		(4,755	)
Reissuance of treasury shares to redeem convertible debt		-			(2,814	)		-
Balance at end of year		136,627			184,216			187,538
Accumulated other comprehensive loss:
Balance at beginning of year		(20,624	)		(22,684	)		(1,959	)
Cumulative effect of adjustment to initially apply SFAS 159, net of tax		3,928			-			-
Adjusted balance at beginning of year		(16,696	)		(22,684	)		(1,959	)
Other comprehensive income (loss), net of tax expense (benefit):
2007 - $5,402; 2006 - $513; 2005 -($11,160)		10,033			952			(20,725	)
Adjustment to initially apply SFAS 158, net of tax expense:
2006 - $597		-			1,108			-
Balance at end of year		(6,663	)		(20,624	)		(22,684	)
Treasury stock - Class A Common:
Balance at beginning of year		(25,511	)		(38,779	)		(45,573	)
Purchase of treasury shares		(10,000	)		-			-
Reissuance of treasury shares under stock-based compensation plans		1,953			7,380			6,794
Reissuance of treasury shares to redeem convertible debt		-			5,888			-
Balance at end of year		(33,558	)		(25,511	)		(38,779	)
Unearned restricted stock compensation:
Balance at beginning of year		-			(273	)		(751	)
Issuance of restricted stock, net of cancellations		-			-			(363	)
Amortization of unearned restricted stock compensation		-			-			841
Reclassification of unearned restricted stock under SFAS 123(R)		-			273			-
Balance at end of year		-			-			(273	)
Total shareholders' equity:
Balance at beginning of year		419,093			406,223			445,451
Net income (loss)		(42,528	)		4,051			(21,020	)
Purchase of treasury shares		(10,000	)		-			-
Stock-based compensation		1,814			2,371			841
Reissuance of treasury shares under stock-based compensation plans		172			1,314			1,676
Reissuance of treasury shares to redeem convertible debt		-			3,074			-
Other comprehensive income (loss)		10,033			952			(20,725	)
Adjustment to initially apply SFAS 158		-			1,108			-
Balance at end of year	$	378,584		$	419,093		$	406,223

See accompanying notes to the consolidated financial statements.

69

PMA CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)	2007			2006			2005
Net income (loss)	$	(42,528	)	$	4,051		$	(21,020	)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during the period		6,510			(4,117	)		(13,196	)
Less: reclassification adjustment for (gains) losses
included in net income (loss), net of tax (expense)
benefit: 2007 - ($226); 2006 - $471; 2005 - ($1,735)		(420	)		874			(3,222	)
Total unrealized gains (losses) on securities		6,090			(3,243	)		(16,418	)
Pension plan liability adjustment, net of tax expense (benefit):
2007 - $2,465; 2006 - $2,219; 2005 - ($1,790)		4,577			4,121			(3,325	)
Unrealized gains (losses) on derivative instruments designated
as cash flow hedges, net of tax expense (benefit):
2007 - ($337); 2006 - $33; 2005 - ($82)		(625	)		62			(152	)
Foreign currency translation gains (losses), net of tax expense
(benefit): 2007 - ($5); 2006 - $6; 2005 - ($447)		(9	)		12			(830	)
Other comprehensive income (loss), net of tax		10,033			952			(20,725	)
Comprehensive income (loss)	$	(32,495	)	$	5,003		$	(41,745	)

See accompanying notes to the consolidated financial statements.

70

Notes to Consolidated Financial Statements

Note 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 Corporation is a holding company whose operating subsidiaries provide insurance and fee-based services.  Insurance products are underwritten and marketed under the trade name The PMA Insurance Group.  Fee-based services include third party administrator (“TPA”), managing general agent and program administrator services.  The Company also manages the run-off of its former reinsurance and excess and surplus lines operations, for which the related activity of these businesses has been recorded as discontinued operations.

The PMA Insurance Group — The PMA Insurance Group writes workers’ compensation and other commercial property and casualty lines of insurance, which are marketed primarily in the eastern part of the United States.  Approximately 92% of The PMA Insurance Group’s business for 2007 was produced through independent agents and brokers.

Fee-based Business — Fee-based Business consists of the results of PMA Management Corp. and Midlands Management Corporation (“Midlands”), and is a new reporting segment, resulting from the Company’s acquisition of Midlands on October 1, 2007.  PMA Management Corp. is a TPA whose results were previously included in The PMA Insurance Group segment.  Midlands is an Oklahoma City-based managing general agent, program administrator and provider of TPA services.

Discontinued operations — Discontinued operations, formerly the Company’s Run-off Operations segment, consist of the results of the Company’s former reinsurance and excess and surplus lines businesses.  The Company’s former reinsurance operations offered excess of loss and pro rata property and casualty reinsurance protection mainly through reinsurance brokers.  The Company withdrew from the reinsurance business in November 2003 and from the excess and surplus lines business in May 2002.

Note 2.  Summary of Significant Accounting Policies

A. Basis of Presentation — The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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.

Certain prior year amounts have been reclassified to conform to the current year classification.  In 2007, the Company determined that the results of its Run-off Operations should be reported as discontinued operations.  In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), the Balance Sheets have been presented with the gross assets and liabilities of discontinued operations in separate lines and the Statements of Operations have been presented with the net results from discontinued operations, shown after the results from continuing operations.  For comparative purposes, the Company has reclassified its prior period financial presentation to conform to these changes.  See Note 4 for additional information regarding the Company’s discontinued operations.

The balance sheet information presented in these consolidated financial statements and notes thereto is as of December 31 for each respective year.  The statements of operations, cash flows, changes in shareholders’ equity and changes in comprehensive income (loss) information are for the year ended December 31 for each respective year.

B. Investments — All fixed maturities in the Company’s investment portfolio are carried at fair value.  Changes in fair value of fixed maturities classified as available for sale, net of income tax effects, are reflected in accumulated other comprehensive income (loss).  Changes in fair value of fixed maturities classified as trading are reported in the loss from discontinued operations as realized investment gains (losses).  All short-term, highly liquid investments, which have original maturities of one year or less from acquisition date, are treated as short-term investments and are carried at amortized cost, which approximates fair value.  Effective January 1, 2007, the Company reclassified securities, which are currently reported as part of discontinued operations, from fixed maturities available for sale to the trading category in conjunction with its adoption of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).

71

Realized gains and losses, determined by the first-in, first-out method, are reflected in income in the period in which the sale transaction occurs.  For all securities that are in an unrealized loss position for an extended period of time and for all securities whose fair value is significantly below amortized cost, the Company performs an evaluation of the specific events attributable to the market decline of the security.  The Company considers the length of time and extent to which the security’s fair value has been below amortized cost as well as the general market conditions, industry characteristics, the fundamental operating results of the issuer and, for structured securities, the quality of the underlying collateral to determine if the decline is other than temporary.  The Company also considers as part of the evaluation its intent and ability to hold the security until its fair value has recovered to a level at least equal to the amortized cost.  When the Company determines that a security’s unrealized loss is other than temporary, a realized loss is recognized in the period in which the decline in value is determined to be other than temporary.  The write-downs are measured based on public market prices at the time the Company determines the decline in value was other than temporary.

C. Premiums — Premiums, including estimates of premiums resulting from audits of insureds’ records are earned principally on a pro rata basis over the terms of the policies.  Any changes occurring or reported to the Company after the policy term are recorded as earned premiums in the period in which the adjustment is made.  With respect to policies that provide for premium adjustments, such as experience-rated or exposure-based adjustments, such premium adjustments may be made subsequent to the end of the policy’s coverage period and will be recorded as earned premiums in the period in which the adjustment is made.  Premiums applicable to the unexpired terms of policies in force are reported as unearned premiums.  The estimated premiums receivable on experience-rated or exposure-based policies are reported as a component of premiums receivable.  For reinsurance premiums assumed at the Company’s discontinued operations, management must estimate the subject premiums associated with the treaties in order to determine the level of written and earned premiums for a reporting period.  Such estimates are based on information from brokers and ceding companies, which can be subject to change as new information becomes available.

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 LAE on known claims and estimates of losses and LAE 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.  The Company also discounts unpaid losses and LAE for certain other claims at rates permitted by domiciliary regulators or if the timing and amount of such claims are fixed and determinable.  The methods of making such estimates and establishing the resulting reserves are continually reviewed and updated and any adjustments resulting there from are reflected in earnings in the period identified.  See Note 6 for additional information.

E. Reinsurance — In the ordinary course of business, PMA Capital’s insurance subsidiaries assume and cede premiums with other insurance companies and are members of various insurance pools and associations.  The Company’s insurance subsidiaries cede business in order to limit the maximum net loss and limit the accumulation of many smaller losses from a catastrophic event.  The insurance subsidiaries remain primarily liable to their clients in the event their reinsurers are unable to meet their financial obligations.  Reinsurance receivables include claims paid by the Company and estimates of unpaid losses and LAE that are subject to reimbursement under reinsurance and retrocessional contracts.  The method for determining the reinsurance receivable for unpaid losses and LAE involves reviewing actuarial estimates of unpaid losses and LAE to determine the Company’s ability to cede unpaid losses and LAE under its existing reinsurance contracts.  This method is continually reviewed and updated and any adjustments resulting there from are reflected in earnings in the period identified.  Under certain of the Company’s reinsurance and retrocessional contracts, additional premium and interest may be required if predetermined loss and LAE thresholds are exceeded.

Certain of the Company’s reinsurance contracts are retroactive in nature.  Any benefit derived from retroactive reinsurance contracts is deferred and amortized into income over the estimated settlement period of the underlying claim liabilities unless the contracts call for immediate recovery by the Company from reinsurers as ceded losses are incurred.

Certain of the Company’s assumed and ceded reinsurance contracts are funds held arrangements.  In a typical funds held arrangement, the ceding company retains the premiums instead of paying them to the reinsurer and losses are offset against these funds in an experience account.  Because the reinsurer is not in receipt of the funds, the reinsurer will generally earn interest on the experience fund balance at a predetermined credited rate of interest.  The interest earned or credited on funds held arrangements is included in net investment income in the Statement of Operations.  In addition, interest on funds held arrangements will continue to be earned or credited until the experience account is fully depleted, which can extend many years beyond the expiration of the coverage period.

F. Deferred Acquisition Costs — Costs that directly relate to and vary with the 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 or brokerage and premium taxes, as well as other policy issuance costs and underwriting expenses.  The

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Company determines whether acquisition costs are recoverable considering future losses and LAE, maintenance costs and anticipated investment income.  To the extent that acquisition costs are not recoverable, the deficiency is charged to income in the period identified.

G. Derivatives — The derivative component of the Company’s 6.50% Senior Secured Convertible Debt due 2022 (“6.50% Convertible Debt”) is bifurcated and recorded at fair value in long-term debt on the Balance Sheet.  Changes in fair value are recorded in net realized investment gains (losses) on the Statement of Operations.  See Note 8 for additional information.

H. Dividends to Policyholders — The Company sells certain workers’ compensation insurance policies with dividend payment features.  These policyholders share in the underwriting results of their respective policies in the form of dividends.  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.

I. 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.  See Note 14 for additional information.

J. Claims Service Revenues — Claims service revenues primarily include revenues related to claims administration, risk management and related services primarily to self-insured clients provided by the Company’s Fee-based Business, which are earned over the term of the related contracts in proportion to the actual services rendered.

K. Commission Income — Commission income primarily includes income related to managing general agency and program administrator services provided by the Company’s Fee-based Business.  Commission income, which is generally reported gross of sub-producer fees, is recognized at the later of the date billed or the effective date of the related insurance policy.  Adjustments due to payroll, audits, cancellations, and endorsements are recorded in the period in which they occur.

L. Intangible Assets — Identifiable intangible assets consist of non-contractual customer relationships, licenses and a trade name.  Goodwill represents the excess of the fair value of the net identifiable assets over the purchase price.  Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or when there is a reason to suspect that their values may have been diminished or impaired.  Other identifiable intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives.  The identifiable intangible assets and goodwill are reported as Intangible assets on the Balance Sheet.  

M. Recent Accounting Pronouncements — Effective January 1, 2007, the Company early adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), and Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  See Notes 4 and 13 for the impact of the Company’s adoption of these Statements.

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“SFAS 109”)” (“FIN 48”).  See Note 14 for the impact of this adoption.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).  SFAS 141R replaces Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”), although it retains the fundamental requirement in SFAS 141 that the purchase method of accounting be used for all business combinations.  SFAS 141R establishes principles and requirements for how the acquirer in a business combination (a) recognizes and measures the assets acquired, liabilities assumed and any non-controlling interest in the acquiree, (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase and (c) determines what information to disclose regarding the business combination.  SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the Company’s 2009 fiscal year, and therefore, has no impact on the accounting for the Company’s 2007 acquisition of Midlands.

Note 3.  Acquisition

On October 1, 2007, the Company entered into a Stock Purchase Agreement with the shareholders of Midlands Holding Corporation, pursuant to which the Company acquired all of the stock of Midlands Holding Corporation.  Under the Stock Purchase Agreement, the Company paid cash of $19.8 million for the stock of Midlands Holding Corporation on the closing date.  The ultimate purchase price for the stock, which could range from $22.8 million to $44.5 million, will be

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based on the future earnings growth of Midlands, the operating subsidiary of Midlands Holding Corporation, over the next four years.  At December 31, 2007, the Company accrued $837,000 for estimated earnings growth payments.

The purchase price has been allocated to the estimated fair values of the acquired assets and liabilities as follows:

(dollar amounts in thousands)	Amount
Tangible assets	$	25,869
Identifiable intangible assets		11,002
Total assets		36,871
Total liabilities		24,846
Estimated fair value of net assets acquired		12,025
Purchase price		23,132
Goodwill	$	11,107

Acquired intangible assets, other than goodwill, consist of the following:

			Estimated
(dollar amounts in thousands)	Amount		Useful Life
Non-contractual customer relationships	$	6,690	10 years
Trade name		3,812	indefinite
Licenses		500	indefinite
	$	11,002

The value of the non-contractual customer relationships was calculated using a 15% annual attrition rate.  The non-contractual customer relationships will be amortized on a straight-line basis over 10 years.  In 2007, the Company recognized $167,000 of expenses related to the amortization of non-contractual customer relationships.  The Company expects to recognize $669,000 of amortization expense per year over the next five years and $3.2 million thereafter.

Note 4.  Discontinued Operations

In 2007, the Company announced that it was actively pursuing the sale of its Run-off Operations.  The Company’s Run-off Operations include its reinsurance and excess and surplus lines businesses which were placed into run-off in 2003 and 2002, respectively.  In February 2008, the Company announced that it entered into a non-binding letter of intent with a third party and expects to execute a definitive stock purchase agreement in the first quarter of 2008.  The transfer of ownership will be subject to regulatory approval.  Because of the expected divestiture, the Company has determined that its Run-off Operations should be reflected as discontinued operations in accordance with SFAS 144.  As such, the Company recognized an after-tax impairment loss of $40.0 million in 2007, as the book value of its Run-off Operations was greater than the estimated net proceeds it expects to receive in a sale.

The components of the loss were as follows:

(dollar amounts in millions)
Estimated sales proceeds 1		$	10.0
Less:	Book value of Run-off Operations 2		(71.0	)
	Estimated transaction costs		(0.5	)
Add:	Income tax benefit 3		21.5
Impairment loss, net of tax		$	(40.0	)

(1)   Estimated sales proceeds are based on a non-binding letter of intent received from an interested third party.  This estimate reflects amounts anticipated at closing, subject to adjustments following the third party’s review of the final purchase price calculation, but excludes future contingent payments that may be received from the third party.

(2)   Shareholder’s equity of the Run-off Operations as of December 31, 2007, prior to the impact of the impairment loss.

(3)   At December 31, 2007, the Company recorded an income tax benefit on the impairment loss as it believes it will be able to use the loss to offset future operating earnings.

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The Company has reclassified the results of operations, including the related tax effects, and the assets and liabilities related to its Run-off Operations to discontinued operations, in accordance with SFAS 144.  The following tables provide detailed information regarding the financial statement lines identified as discontinued operations.

(dollar amounts in thousands)	2007			2006			2005
Net premiums earned	$	3,471		$	2,778		$	10,206
Net investment income		2,844			7,710			16,717
Net realized investment gains (losses)		(541	)		(2,224	)		1,744
		5,774			8,264			28,667
Losses and loss adjustment expenses		24,013			(3,076	)		34,798
Acquisition expenses		891			787			4,583
Operating expenses		7,507			12,515			14,096
Impairment charge		61,482			-			-
		93,893			10,226			53,477
Income tax benefit		(30,842	)		(687	)		(8,685	)
Loss from discontinued operations, net of tax	$	(57,277	)	$	(1,275	)	$	(16,125	)

	As of			As of
	December 31,			December 31,
(dollar amounts in thousands)	2007			2006
Assets:
Investments	$	219,678		$	178,354
Cash		5,665			4,607
Reinsurance receivables		150,097			319,869
Other assets		216	1		171,868
Assets of discontinued operations	$	375,656		$	674,698
Liabilities:
Unpaid losses and loss adjustment expenses	$	339,077		$	482,161
Other liabilities		52,526			90,070
Liabilities of discontinued operations	$	391,603		$	572,231

(1)   Includes write-down of net assets of Run-off Operations to fair value less cost to sell.

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The amortized cost and fair value of the discontinued operations’ investment portfolio were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollar amounts in thousands)	Cost		Gains		Losses		Value
December 31, 2007
Fixed maturities trading:
U.S. Treasury securities and obligations of U.S. Government agencies	$	16,401	$	690	$	2	$	17,089
States, political subdivisions and foreign government securities		321		-		9		312
Corporate debt securities		2,222		2		14		2,210
Mortgage-backed and other asset-backed securities		12,728		39		233		12,534
Total fixed maturities trading		31,672		731		258		32,145
Short-term investments		187,533		-		-		187,533
Total investments	$	219,205	$	731	$	258	$	219,678
December 31, 2006
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S. Government agencies	$	40,681	$	343	$	886	$	40,138
States, political subdivisions and foreign government securities		355		-		15		340
Corporate debt securities		43,365		1		1,075		42,291
Mortgage-backed and other asset-backed securities		74,728		186		4,597		70,317
Total fixed maturities available for sale		159,129		530		6,573		153,086
Short-term investments		25,268		-		-		25,268
Total investments	$	184,397	$	530	$	6,573	$	178,354

In February 2007, the FASB issued SFAS 159.  The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently.  This Statement permits entities to choose, at specified election dates, to measure eligible items at fair value (i.e., the fair value option).  Items eligible for the fair value option include certain recognized financial assets and liabilities, rights and obligations under certain insurance contracts that are not financial instruments, host financial instruments resulting from the separation of an embedded non-financial derivative instrument from a non-financial hybrid instrument, and certain commitments.  Business entities are required to report unrealized gains and losses on items for which the fair value option has been elected in net income.  The fair value option may be applied instrument by instrument, with certain exceptions, is irrevocable (unless a new election date occurs), and is applied only to entire instruments and not to portions of instruments.

SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice within the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157.  The Company early adopted SFAS 159, effective January 1, 2007.  Upon adoption of SFAS 159, the Company elected to reclassify all of the fixed income securities in its discontinued operations’ investment portfolio from available for sale to trading.  Although the Company’s adoption of this Statement had no net impact on shareholders’ equity, it may result in future volatility in net income as changes in fair value will be recorded through realized gains and losses rather than other comprehensive income.  The Company’s discontinued operations recognized pre-tax net realized gains of $1.1 million in 2007 for subsequent changes in fair value on these trading securities.

The Company adopted SFAS 159 because the investment portfolio at the discontinued operations decreased by 50% in the first quarter of 2007, compared to the first quarter of 2006.  The Company also considered that, given the unpredictability of cash flows for commutations, combined with the shrinking size of the portfolio, trading activity was expected to increase in 2007.  The discontinued operations’ investment portfolio was also reduced significantly during the second quarter as a result of the $37.5 million extraordinary dividend payment to the holding company in April 2007.

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The balance sheet impact of the SFAS 159 adoption on our discontinued operations was as follows:

	Balance Sheet						Balance Sheet
(dollar amounts in thousands)	1/1/07 prior to			Net Change			1/1/07 after
Description	Adoption			upon Adoption			Adoption
Fixed maturities available for sale	$	153,086		$	(153,086	)	$	-
(amortized cost: pre-adoption - $159,129;
post-adoption - $0)
Fixed maturities trading		-			156,828			156,828
(amortized cost and accrued investment income:
pre-adoption - $0; post-adoption - $162,871)
Accrued investment income		3,742			(3,742	)		-
Accumulated other comprehensive loss		(3,928	)		3,928			-
Cumulative effect of adoption of the
fair value option, net of tax expense
of $2,115 (charge to retained earnings)				$	(3,928	)

Activity in the discontinued operations’ liability for unpaid losses and LAE is summarized below.

(dollar amounts in thousands)	2007			2006			2005
Balance at January 1	$	482,161		$	650,705		$	884,817
Less: reinsurance recoverable on unpaid losses and LAE		288,810			325,609			390,728
Net balance at January 1		193,351			325,096			494,089
Losses and LAE incurred, net:
Current year, net of discount		-			-			4,540
Prior years		21,629			(5,332	)		28,818
Accretion of prior years' discount		4,168			3,996			4,269
Net losses ceded - retroactive reinsurance		(1,784	)		(1,740	)		(2,829	)
Total losses and LAE incurred, net		24,013			(3,076	)		34,798
Losses and LAE paid, net:
Current year		-			-			(18	)
Prior years		(21,606	)		(128,669	)		(203,773	)
Total losses and LAE paid, net		(21,606	)		(128,669	)		(203,791	)
Net balance at December 31		195,758			193,351			325,096
Reinsurance recoverable on unpaid losses and LAE		143,319			288,810			325,609
Balance at December 31	$	339,077		$	482,161		$	650,705

Because reinsurers rely on their ceding companies to provide them with information regarding incurred losses, it takes longer for reinsurers to find out about reported claims than for primary insurers and such claims are subject to more unforeseen development and uncertainty.  See Note 6 for additional information regarding management estimates included in unpaid losses and LAE.

During 2007, the discontinued operations recorded unfavorable prior year loss development of $21.6 million, which included a $22 million charge taken in the third quarter.  In the third quarter of 2007, the Company’s actuaries conducted their periodic comprehensive reserve review.  Based on the actuarial work performed, the Company’s actuaries observed increased loss development from a limited number of ceding companies on its claims-made general liability business, primarily related to professional liability claims.  This increase in 2007 loss trends caused management to determine that reserve levels, primarily for accident years 2001 to 2003, needed to be increased by $22 million.  The claims-made book of business represented approximately 25% of the discontinued operations’ gross reserves at December 31, 2007.  Information regarding applicable reinsurance coverage is discussed below.

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During 2006, the discontinued operations recorded $5.3 million in favorable prior year loss development, primarily due to commutations of structured reinsurance treaties with some of its ceding companies.  The discontinued operations do not typically record favorable prior year loss development on commutations unless the treaties are structured reinsurance, where IBNR reserves are directly attributable to a treaty.

During 2005, the discontinued operations recorded unfavorable prior year loss development of $28.8 million, which included a $30 million charge taken in the first quarter.  In the first quarter of 2005, the Company’s actuaries identified higher than expected claim frequency and severity on policies covering contractors’ liability for construction defects from accident years 1998 to 2001 written by the Company’s former excess and surplus lines operation and an increase in reported losses and continued volatility in pro rata professional liability reinsurance business written from accident years 1997 to 2001.  Information regarding applicable reinsurance coverage is discussed below.

Unpaid losses and LAE for the Company’s discontinued operations’ workers’ compensation claims, net of reinsurance, at December 31, 2007 and 2006 were $48.8 million and $47.8 million, net of discount of $19.5 million and $22.2 million, respectively.  The discount rate used was approximately 5% at December 31, 2007 and 2006.

The Company’s discontinued operations’ loss reserves were stated net of salvage and subrogation of $407,000 and $419,000 at December 31, 2007 and 2006, respectively.

At December 31, 2007, 2006 and 2005, the discontinued operations’ gross reserves for asbestos-related losses were $7.5 million, $5.9 million and $4.6 million, respectively ($1.6 million, $825,000 and $560,000, net of reinsurance, respectively).  Of the net asbestos reserves, approximately $350,000 at December 31, 2007 and $38,000 at December 31, 2006 and 2005, respectively, related to IBNR losses.

At December 31, 2007, 2006 and 2005, the discontinued operations’ gross reserves for environmental-related losses were $877,000, $1.5 million and $1.3 million, respectively ($364,000, $1.1 million and $900,000, net of reinsurance, respectively).  Of the net environmental reserves, approximately $373,000 related to IBNR losses at December 31, 2006 and 2005, respectively.  All incurred asbestos and environmental losses were for accident years 1986 and prior.

At December 31, 2007, the assets of discontinued operations included reinsurance receivables due from the following unaffiliated reinsurers in excess of 5% of shareholders’ equity:

	Reinsurance
(dollar amounts in thousands)	Receivables		Collateral
St. Paul Travelers and affiliates (1)	$	48,863	$	40,698
Essex Insurance Company		24,386		-

(1) Includes St. Paul Fire and Marine InsuranceCompany ($40.8 million), Mountain Ridge Insurance Company ($7.9 million) and other affiliated entities ($124,000).

In 2004, the Company purchased reinsurance covering potential adverse loss development of the loss and LAE reserves of its reinsurance and excess and surplus lines businesses.  Upon entering into the agreement, the Company ceded $100 million in carried loss and LAE reserves and paid $146.5 million in cash.  In 2005, these businesses ceded $30 million in losses and LAE under this agreement.  In 2007, an additional $22 million in losses and LAE were ceded under this agreement.  Additional information about the prior year loss development, which resulted in these cessions, is discussed above.  Because the coverage was retroactive, these businesses deferred the initial benefit of these cessions, which was being amortized over the estimated settlement period of the losses using the interest method.  Accordingly, the Company had a deferred gain on retroactive reinsurance of $25.4 million at December 31, 2006, which was included in liabilities of discontinued operations on the Balance Sheet.  Amortization of the deferred gain reduced the Company’s loss from discontinued operations by $1.8 million in 2007, $1.7 million in 2006 and $2.8 million in 2005.  As of December 31, 2006, the Company also had $56.6 million included in assets of discontinued operations for other receivables due under the contract.  In December 2007, the Company commuted the adverse development cover and received $171.9 million in cash.

Note 5.  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 10% of invested assets at December 31, 2007.  Included in this industry segment are diverse financial institutions, including banks and insurance

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companies, with no single issuer exceeding 2% of the total investment portfolio.  The Company does not believe that there are credit related risks associated with its U.S. Treasury and agency securities.

The amortized cost and fair value of the Company’s investment portfolio were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(dollar amounts in thousands)	Cost		Gains		Losses		Value
December 31, 2007
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S. Government agencies	$	76,360	$	2,794	$	4	$	79,150
States, political subdivisions and foreign government securities		9,072		253		24		9,301
Corporate debt securities		154,360		3,277		585		157,052
Mortgage-backed and other asset-backed securities		482,795		3,444		3,017		483,222
Total fixed maturities available for sale		722,587		9,768		3,630		728,725
Short-term investments		78,426		-		-		78,426
Total investments	$	801,013	$	9,768	$	3,630	$	807,151
December 31, 2006
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S. Government agencies	$	71,895	$	586	$	873	$	71,608
States, political subdivisions and foreign government securities		5,230		315		56		5,489
Corporate debt securities		187,597		1,680		1,376		187,901
Mortgage-backed and other asset-backed securities		457,497		1,178		4,808		453,867
Total fixed maturities available for sale		722,219		3,759		7,113		718,865
Short-term investments		61,180		-		-		61,180
Total investments	$	783,399	$	3,759	$	7,113	$	780,045

For securities that were in an unrealized loss position, the length of time that such securities have been in an unrealized loss position, as measured by their month-end fair values, were as follows:

										Percentage
	Number of		Fair		Amortized		Unrealized			Fair Value to
(dollar amounts in millions)	Securities		Value		Cost		Loss			Amortized Cost
December 31, 2007
Less than 6 months		26	$	49.4	$	49.8	$	(0.4	)		99	%
6 to 9 months		3		1.4		1.5		(0.1	)		93	%
9 to 12 months		6		29.3		29.4		(0.1	)		100	%
More than 12 months		71		101.8		104.1		(2.3	)		98	%
Subtotal		106		181.9		184.8		(2.9	)		98	%
U.S. Treasury and Agency securities		40		52.8		53.5		(0.7	)		99	%
Total		146	$	234.7	$	238.3	$	(3.6	)		98	%
December 31, 2006
Less than 6 months		50	$	181.8	$	182.5	$	(0.7	)		100	%
6 to 9 months		2		0.6		0.6		-			100	%
9 to 12 months		10		23.7		23.9		(0.2	)		99	%
More than 12 months		107		104.9		108.2		(3.3	)		97	%
Subtotal		169		311.0		315.2		(4.2	)		99	%
U.S. Treasury and Agency securities		94		139.5		142.4		(2.9	)		98	%
Total		263	$	450.5	$	457.6	$	(7.1	)		98	%

At December 31, 2007, of the 71 securities that have been in an unrealized loss position for more than 12 months, 70 securities have a total fair value of 99% of the amortized cost basis at December 31, 2007, and the average unrealized loss per security is approximately $22,000.  The one security with an unrealized loss greater than 20% of its amortized cost at

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December 31, 2007 has a fair value of $545,000 and an amortized cost of $1.4 million.  This security, which matures in 2033, is rated AAA, and its $1.4 million principal is backed and guaranteed at maturity by discounted agency securities.  The Company has both the ability and intent to hold this security until it matures.

The amortized cost and fair value of fixed maturities at December 31, 2007, by contractual maturity, were as follows:

	Amortized		Fair
(dollar amounts in thousands)	Cost		Value
2008	$	4,884	$	4,852
2009-2012		141,654		144,950
2013-2017		64,426		65,773
2018 and thereafter		28,828		29,928
Mortgage-backed and other asset-backed securities		482,795		483,222
	$	722,587	$	728,725

Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties.

Net investment income consisted of the following:

(dollar amounts in thousands)	2007			2006			2005
Fixed maturities	$	38,348		$	35,917		$	34,408
Short-term investments		3,393			2,193			1,146
Other		3,149			2,118			1,390
Total investment income		44,890			40,228			36,944
Investment expenses		(3,104	)		(2,791	)		(2,882	)
Interest on funds held		(2,194	)		(1,586	)		(1,827	)
Net investment income	$	39,592		$	35,851		$	32,235

Net realized investment gains consisted of the following:

(dollar amounts in thousands)	2007			2006			2005
Sales of investments:
Realized gains	$	2,016		$	5,597		$	6,700
Realized losses		(3,893	)		(4,720	)		(2,841	)
Change in fair value of trading securities		3,220			-			-
Change in fair value of debt derivative		(483	)		466			(3,692	)
Other		(297	)		(104	)		205
Total net realized investment gains	$	563		$	1,239		$	372

Included in realized losses for 2007 and 2005 were impairment losses of $209,000 and $773,000, respectively.  The impairment loss for 2007 was related to a security issued by a national provider of higher education loans.  The impairment losses for 2005 were related to securities issued by two auto manufacturers.  The write-downs were measured based on public market prices at the time when the Company determined the decline in value was other than temporary.

The change in fair value of trading securities during 2007 related to a security that was previously held at the Company’s discontinued operations and transferred to the holding company as part of the $37.5 million dividend in April 2007.  Fixed income securities held at the discontinued operations were selected for the fair value option and reclassified from the

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available for sale to the trading category in conjunction with the Company’s adoption of SFAS 159, effective January 1, 2007.

The realized gains (losses) on the change in fair value of debt derivative related to the decrease (increase) in the fair value of the derivative component of the 6.50% Convertible Debt.  See Note 8 for additional information and for information regarding the 2006 realized loss on the mandatory debt redemption.

On December 31, 2007, the Company had securities with a total amortized cost and fair value of $41.2 million and $42.6 million, respectively, on deposit with various governmental authorities, as required by law.  The securities held on deposit are included in total investments on the Balance Sheet.

Note 6.  Unpaid Losses and Loss Adjustment Expenses

Activity in the liability for unpaid losses and LAE is summarized as follows:

(dollar amounts in thousands)	2007			2006			2005
Balance at January 1	$	1,152,704		$	1,169,338		$	1,226,781
Less: reinsurance recoverable on unpaid losses and LAE		695,863			701,331			722,055
Net balance at January 1		456,841			468,007			504,726
Losses and LAE incurred, net:
Current year, net of discount		257,046			255,525			254,565
Prior years		(1,728	)		(2,348	)		(2,025	)
Accretion of prior years' discount		7,881			9,120			7,736
Total losses and LAE incurred, net		263,199			262,297			260,276
Losses and LAE paid, net:
Current year		(64,780	)		(60,563	)		(55,347	)
Prior years		(210,418	)		(212,900	)		(241,648	)
Total losses and LAE paid, net		(275,198	)		(273,463	)		(296,995	)
Net balance at December 31		444,842			456,841			468,007
Reinsurance recoverable on unpaid losses and LAE		768,114			695,863			701,331
Balance at December 31	$	1,212,956		$	1,152,704		$	1,169,338

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.  Due to the “long-tail” nature of a significant portion of the Company’s business, 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.  The Company defines long-tail business as those lines of business in which a majority of coverage involves average loss payment lags of several years beyond the expiration of the policy.  The Company’s major long-tail lines primarily include its workers’ compensation business.  As part of the process for determining the Company’s unpaid losses and LAE, various 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 and claims settlement trends.  Also considered are legal developments, regulatory trends, legislative developments, changes in social attitudes and economic conditions.

The PMA Insurance Group recorded favorable prior year loss development of $1.7 million, $2.3 million and $2.0 million in 2007, 2006 and 2005, respectively, primarily reflecting better than expected loss experience from rent-a-captive workers’ compensation business.  Dividends to policyholders 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.

Unpaid losses and LAE for the Company’s workers’ compensation claims, net of reinsurance, at December 31, 2007 and 2006 were $379.5 million and $362.8 million, net of discount of $21.4 million and $17.8 million, respectively.  The discount rate used was approximately 5% at December 31, 2007 and 2006.

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The Company’s loss reserves were stated net of salvage and subrogation of $18.0 million and $21.0 million at December 31, 2007 and 2006, respectively.

At December 31, 2007, 2006 and 2005, gross reserves for asbestos-related losses were $25.7 million, $17.3 million and $22.3 million, respectively ($10.8 million, $9.8 million and $12.6 million, net of reinsurance, respectively).  Of the net asbestos reserves, approximately $2.2 million, $6.6 million and $10.1 million related to IBNR losses at December 31, 2007, 2006 and 2005, respectively.

At December 31, 2007, 2006 and 2005, gross reserves for environmental-related losses were $10.3 million, $11.9 million and $14.0 million, respectively ($0, $3.0 million and $4.1 million, net of reinsurance, respectively).  Of the net environmental reserves, approximately $1.0 million and $1.6 million related to IBNR losses at December 31, 2006 and 2005, 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 have been appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies.  However, the potential exists for changes in federal and state standards for clean-up and liability and changing interpretations by courts resulting from the resolution of coverage issues.  Coverage issues in cases in which the Company is a party include disputes concerning proof of insurance coverage, questions of allocation of liability and damages among the insured and participating insurers, assertions that asbestos claims are not products or completed operations claims subject to an aggregate limit and contentions that more than a single occurrence exists for purposes of determining the available coverage.  Therefore, the Company’s ultimate exposure for these claims may vary significantly from the amounts currently recorded, resulting in potential future adjustments that could be material to the Company’s financial condition, results of operations and liquidity.

Management believes that its unpaid losses and LAE are fairly stated at December 31, 2007.  However, estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates, assumptions and judgments using data currently available.  As additional experience and data become available regarding claims payment and reporting patterns, legal and legislative developments, judicial theories of liability, the impact of regulatory trends on benefit levels for both medical and indemnity payments, changes in 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, 2007, then the related adjustments could have a material adverse impact on the Company’s financial condition, results of operations and liquidity.

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Note 7.  Reinsurance

The components of net premiums written and earned, and losses and LAE incurred were as follows:

(dollar amounts in thousands)	2007			2006			2005
Written premiums:
Direct	$	509,696		$	430,931		$	397,058
Assumed		14,477			24,825			23,729
Ceded		(129,475	)		(82,755	)		(45,812	)
Net	$	394,698		$	373,001		$	374,975
Earned premiums:
Direct	$	477,845		$	405,799		$	379,514
Assumed		17,961			20,417			24,325
Ceded		(117,563	)		(58,813	)		(46,015	)
Net	$	378,243		$	367,403		$	357,824
Losses and LAE:
Direct	$	351,494		$	277,626		$	283,456
Assumed		14,522			20,680			19,168
Ceded		(102,817	)		(36,009	)		(42,348	)
Net	$	263,199		$	262,297		$	260,276

In the first quarter of 2006, the Company stopped writing integrated disability business.  Effective August 1, 2007, the Company purchased reinsurance covering substantially all unpaid losses and LAE related to its integrated disability business.  Under the agreement, the reinsurer also handles the servicing and benefit payments related to this business.  Upon entering into this agreement, the Company ceded $25.7 million in carried loss and LAE reserves and paid $22.7 million in cash.  Because the coverage is retroactive, the Company deferred the initial benefit of this cession, which is being amortized over the estimated settlement period of the losses using the interest method. 

In September 2006, the Company entered into an agreement with Midwest General Insurance Agency (“MGIA”) under which MGIA underwrites and services workers’ compensation policies in California using the Company’s approved forms and rates.  Upon inception, the Company ceded 100% of the direct premiums and related losses on this business to non-affiliated reinsurers selected by the Company, including Midwest Insurance Company (“Midwest”), an affiliate of MGIA.  Effective April 1, 2007, the Company retained 5% of the direct premiums and related losses on this business.  The Company’s retention of this business increased to 10%, effective September 1, 2007.  All of the participating reinsurers, except for Midwest, have current A.M. Best Company, Inc. (“A.M. Best”) financial strength ratings of “A-” (Excellent) or higher.  Midwest does not have an A.M. Best financial strength rating.  The Company mitigated its credit risk with Midwest by requiring Midwest to secure amounts owed by holding cash in trust.  The Company earns an administrative fee based upon the actual amount of premiums earned pursuant to the agreement.  Total direct premiums written under this agreement were $59.8 million in 2007 and $14.8 million in 2006.  The Company’s agreement with Midwest terminated in March 2008.

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At December 31, 2007, the Company had reinsurance receivables due from the following unaffiliated reinsurers in excess of 5% of shareholders’ equity:

	Reinsurance
(dollar amounts in thousands)	Receivables		Collateral
Trabaja Reinsurance Company(1)	$	167,616	$	163,872
PXRE Reinsurance Company		99,032		59,114
Imagine International Reinsurance, Ltd.		94,673		92,791
Houston Casualty Company		53,850		-
Hannover Rueckversicherungs AG		50,091		-
Swiss Reinsurance America Corporation		40,584		-
QBE Reinsurance Corporation		34,669		-
Life Insurance Company of America		24,381		-
Partner Reinsurance Company of the U.S.		23,129		-
Employers Mutual Casualty Company		22,270		-
Munich Reinsurance America, Inc. and affiliates(2)		22,172		110
Toa-Re Insurance Company of America		21,405		-

(1) A member of the London Reinsurance Group.

(2) Includes Munich Reinsurance America, Inc. ($22.0 million) and American Alternative Insurance Company ($178,000).

The Company performs credit reviews of its reinsurers focusing on, among other things, financial capacity, stability, trends and commitment to the reinsurance business.  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, generally those not authorized to transact business in the applicable jurisdictions.  At December 31, 2007 and 2006, the Company’s reinsurance receivables of $795.9 million and $720.1 million were supported by $351.4 million and $342.0 million of collateral.  Of the uncollateralized reinsurance receivables as of December 31, 2007, approximately 89% was recoverable from reinsurers rated “A-” or better by A.M. Best.

The PMA Insurance Group had recorded reinsurance receivables of $13.9 million at December 31, 2006, related to certain umbrella policies covering years prior to 1977.  The reinsurer had previously disputed the extent of coverage under these policies.  The Company settled this dispute with the reinsurer in 2007.

The Company’s largest reinsurer is Trabaja Reinsurance Company (“Trabaja”).  Reinsurance receivables from Trabaja were $167.6 million at December 31, 2007, of which 98% were collateralized.

Trabaja, formerly PMA Insurance Cayman, Ltd. (“PMA Cayman”), is a wholly-owned subsidiary of London Life and Casualty Reinsurance Corporation (“London Reinsurance Group”).  The Company sold PMA Cayman to London Reinsurance Group for $1.8 million, and transferred approximately $230 million of cash and invested assets as well as loss reserves to the buyer in 1998.  Under the terms of the sale of PMA Cayman to London Reinsurance Group in 1998, the Company has agreed to indemnify London Reinsurance Group, up to a maximum of $15 million, if the actual claim payments in the aggregate exceed the estimated payments upon which the loss reserves of PMA Cayman were established.  If the actual claim payments in the aggregate are less than the estimated payments upon which the loss reserves have been established, then the Company will participate in such favorable loss reserve development.

In 2002, the Company supplemented its in-force reinsurance programs for The PMA Insurance Group and its former reinsurance business with retroactive reinsurance contracts with Trabaja that provide coverage for adverse loss development on certain lines of business for accident years prior to 2002.  These contracts provide coverage of up to $125 million in losses in return for $55 million of funding, which included $50 million of assets and $5 million in ceded premiums.  Under the terms of the contracts, losses and LAE ceded to Trabaja by the Company’s former reinsurance business for accident years 1996 through 2001 are recoverable as they are incurred by the Company.  Any future cession of losses under these contracts may require the Company to cede additional premiums ranging from 40% to 50% of ceded losses depending on the level of such losses.

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Note 8.  Debt

The Company’s outstanding debt was as follows:

	As of			As of
	December 31,			December 31,
(dollar amounts in thousands)	2007			2006			Maturity
6.50% Convertible Debt	$	1,254		$	19,326		2022
Derivative component of 6.50% Convertible Debt		233			3,115
4.25% Convertible Debt		455			455		2022
8.50% Senior Notes		54,900			54,900		2018
Junior subordinated debt		64,435			43,816		2033 - 2037
Surplus Notes		10,000			10,000		2035
Unamortized debt discount		(15	)		(401	)
Total long-term debt	$	131,262		$	131,211

In June 2007, the Company issued $20.6 million of 30-year floating rate junior subordinated securities to a wholly-owned statutory trust subsidiary.  The junior subordinated debt matures in 2037 and is redeemable, in whole or in part, immediately at 107.5% of par, or in 2012 at par, plus accrued and unpaid interest.  The interest rate on the junior subordinated debt equals the three-month London InterBank Offered Rate (“LIBOR”) plus 3.55%, and interest on this debt is payable on a quarterly basis.

The remaining junior subordinated debt of $43.8 million matures in 2033 and is redeemable, in whole or in part, in 2008 at the stated liquidation amount plus accrued and unpaid interest.  The weighted average interest rates on this junior subordinated debt equal the three-month LIBOR plus 4.12%, and interest on this debt is also payable on a quarterly basis.  At December 31, 2007, the weighted average interest rate on all of the junior subordinated securities was 8.90%.

The Company has the right to defer interest payments on the junior subordinated securities for up to twenty consecutive quarters but, if so deferred, it may not declare or pay cash dividends or distributions on its Class A Common Stock.  The Company has guaranteed the obligations of these statutory trust subsidiaries with respect to distributions and payments on the trust preferred securities issued by these trusts.

The Company used the $20.0 million net proceeds from the recently issued junior subordinated debt to purchase, in the open market, its 6.50% Convertible Debt.  In 2007, the Company retired $18.1 million principal amount of its 6.50% Convertible Debt for which it paid $21.2 million, exclusive of accrued interest.  As the derivative component of the debt was already reflected in the debt balance, the purchase activity did not result in any significant realized gain or loss.

The 6.50% Convertible Debt is secured equally and ratably with the Company’s $54.9 million 8.50% Monthly Income Senior Notes due 2018 (“8.50% Senior Notes”) by a first lien on 20% of the capital stock of the Company’s principal operating subsidiaries.  This lien is released if the 6.50% Convertible Debt is no longer outstanding.  The indenture governing the 6.50% Convertible Debt contains restrictive covenants with respect to limitations on the Company’s ability to incur indebtedness, enter into transactions with affiliates or engage in a merger or sale of all or substantially all of the Company’s assets.  Subsequent to December 31, 2007, the Company retired the remaining $1.3 million principal amount of its 6.50% Convertible Debt for which it paid $1.5 million, exclusive of accrued interest.  The Company is currently in the process of releasing the lien and restrictive covenants.

The Company had previously entered into interest rate swaps with an aggregated notional amount of $52.5 million that it had designated as cash flow hedges to manage interest costs and cash flows associated with the variable interest rates on its junior subordinated debt and its Floating Rate Surplus Notes due 2035 (“Surplus Notes”).  During 2007, the Company settled these interest rate swaps and received net proceeds of $578,000.

In June 2007, the Company entered into new interest rate swaps that it has designated as cash flow hedges to manage interest costs and cash flows associated with the variable interest rates on a portion of its junior subordinated debt and its Surplus Notes.  There was no consideration paid or received for these swaps.  The swaps will effectively convert $10.0 million of the junior subordinated debt and $10.0 million of Surplus Notes to fixed rate debt with interest rates of 9.40% and 9.93%, respectively.

In September 2007, the Company entered into a new interest rate swap that it has designated as a cash flow hedge to manage interest costs and cash flows associated with the variable interest rates on a portion of its junior subordinated debt.  

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There was no consideration paid or received for this swap.  The swap will effectively convert $20.0 million of the junior subordinated debt to fixed rate debt with an interest rate of 8.29%.

During 2006, the Company retired $28.7 million principal amount of its 6.50% Convertible Debt through open market purchases.  The Company paid $32.3 million for these bond purchases, exclusive of accrued interest.  In 2006, the Company also retired $2.6 million principal amount of its 8.50% Senior Notes through open market purchases.  The Company paid $2.6 million for these bond purchases, exclusive of accrued interest.  The Company has the right to call its 8.50% Senior Notes beginning in June 2008.

In June 2006, the Company completed the redemption of $35 million principal amount of its 6.50% Convertible Debt.  This redemption reduced the outstanding principal amount of the Company’s consolidated debt by $25.4 million as it included $9.6 million of 6.50% Convertible Debt held by the Company’s consolidated operating companies.  The mandatory redemption was triggered by the extraordinary dividend the Company received from PMA Capital Insurance Company (“PMACIC”), the Company’s wholly-owned run-off reinsurance subsidiary which is reported as discontinued operations.  Under the terms of the indenture, the Company was required to redeem the debt at par plus a premium of $100 per $1,000 of principal amount.  The premium was due in cash, or at the election of the holder, in shares of the Company’s Class A Common Stock, valued at $8 per share.  In conjunction with the redemption, the Company paid $36.0 million, including $10.6 million to its consolidated operating companies, and issued 307,990 shares of its Class A Common Stock, with a fair value of $3.1 million, from its treasury.  As a result of the redemption, the Company recognized a pre-tax loss of $231,000, which was included in net realized investment gains for the year ended December 31, 2006.

The put premium and conversion features of the 6.50% Convertible Debt constitute a derivative which requires bifurcation.  Any change in the fair value of the derivative component of the 6.50% Convertible Debt is recognized in net realized investment gains (losses).  The Company recorded realized investment losses of $483,000, gains of $466,000 and losses of $3.7 million in 2007, 2006 and 2005, respectively, resulting from changes in the fair value of the derivative component of the 6.50% Convertible Debt.

Note 9.  Commitments and Contingencies

The Company leases certain facilities, office equipment and automobiles under non-cancelable operating leases.  Future minimum net operating lease obligations as of December 31, 2007 are as follows:

(dollar amounts in thousands)	Facilities (1)		Office equipment and autos		Total operating leases
2008		4,249		2,064		6,313
2009		3,855		1,396		5,251
2010		3,274		857		4,131
2011		2,750		355		3,105
2012		1,837		-		1,837
2013 and thereafter		4,218		-		4,218
	$	20,183	$	4,672	$	24,855

(1)   Net of sublease rentals of $1.8 million in 2008, $1.6 million in 2009 and 2010, $1.7 million in 2011 and 2012 and $2.8 million thereafter.  Also includes discontinued operations’ obligations of $388,000 in 2008, $474,000 in 2009 and $473,000 in 2010 and 2011, respectively.

Total expenses incurred under operating leases were $6.3 million, $6.2 million and $6.9 million for 2007, 2006 and 2005, respectively.

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, 2007 and 2006, the Company had recorded liabilities of $6.7 million and $5.5 million for these assessments, which are included in accounts payable, accrued expenses and other liabilities on the Balance Sheet.

See Note 7 for information regarding the terms of the sale of PMA Cayman in 1998.

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The Company is frequently 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, such 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.  For additional information about our liability for unpaid losses and loss adjustment expenses, see Note 6.  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.

On December 11, 2007, the U.S. District Court for the Eastern District of Pennsylvania approved the settlement of the securities class action, In re PMA Capital Corporation Securities Litigation (Civil Action No. 03-6121), against the Company and certain of its officers and directors.  The settlement made no admission of liability or wrongdoing by the Company or its officers and directors.  The amounts necessary to fund this settlement have been paid on the Company’s behalf by insurance carriers.

Note 10.  Shareholders’ Equity

Changes in Class A Common Stock shares were as follows:

	2007			2006			2005
Treasury stock - Class A Common Stock:
Balance at beginning of year		1,558,751			2,234,662			2,541,094
Purchase of treasury shares		986,522			-			-
Reissuance of treasury shares under stock-based compensation plans		(88,434	)		(367,921	)		(306,432	)
Reissuance of treasury shares to redeem convertible debt		-			(307,990	)		-
Balance at end of year		2,456,839			1,558,751			2,234,662

In May 2007, the Company’s Board of Directors authorized the Company and its subsidiaries to repurchase up to $10.0 million of its Class A Common Stock from time to time in the open market at prevailing prices or in privately negotiated transactions.  During the year, the Company repurchased 986,522 shares of its Class A Common Stock at a cost of $10.0 million under this authorization.  Decisions regarding share repurchases are subject to prevailing market conditions and an evaluation of the costs and benefits associated with alternative uses of capital.

In 2006, the Company completed the redemption of $35 million principal amount of its 6.50% Convertible Debt.  Under the original terms of this debt, the Company was required to pay a premium to the holders of the debt.  The premium was due in cash, or at the election of the holder, in shares of the Company’s Class A Common Stock.  As a result of this redemption, the Company issued 307,990 shares of Class A Common Stock.  This issuance of shares in lieu of cash resulted in an increase in Shareholders’ equity of $3.1 million.  See Note 8 for additional information regarding this redemption.

See Note 11 for information regarding shares reissued under stock-based compensation plans.

Prior to 2005, the Company’s Board of Directors suspended dividends on the Company’s Class A Common Stock.

The Company has 2,000,000 shares of undesignated Preferred Stock, $0.01 par value per share authorized.  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’s domestic insurance subsidiaries’ ability to pay dividends to PMA Capital Corporation is limited by the insurance laws and regulations of the Commonwealth of Pennsylvania.

In a 2004 order (the “2004 Order”) approving the transfer of the Pooled Companies from PMACIC to PMA Capital Corporation, the Pennsylvania Insurance Department (the “Department”) prohibited PMACIC from declaring or paying any dividends, return of capital or other types of distributions to PMA Capital Corporation prior to 2006.  Under the terms of

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the 2004 Order, PMACIC was permitted to request an “extraordinary” dividend, as defined under Pennsylvania law, in 2006 provided that immediately after giving effect to the dividend or return of capital, PMACIC’s risk-based capital equaled or exceeded 225% of Authorized Control Level Capital, as defined by the National Association of Insurance Commissioners (“NAIC”).  In 2006, the Department approved the Company’s request for an “extraordinary” dividend in the amount of $73.5 million from PMACIC.  The Company used the proceeds to reduce its debt obligations and to maintain liquidity at the holding company.  In 2007, the Department approved the Company’s request for an additional “extraordinary” dividend in the amount of $37.5 million from PMACIC.  Given the anticipated sale of PMACIC, the Company does not expect to receive any dividends from this operation in 2008.  As of December 31, 2007, the statutory surplus of PMACIC was $47.6 million and its risk-based capital ratio was 241% of Authorized Control Level Capital.

The Pooled Companies, which are not subject to the Department’s 2004 Order, paid dividends of $7.0 million to PMA Capital Corporation in 2005.  The Pooled Companies did not pay any dividends to PMA Capital Corporation in 2006 and 2007.  As of December 31, 2007, the Pooled Companies had statutory surplus of $335.4 million and can pay a maximum of $29.2 million in dividends to PMA Capital Corporation during 2008 without the prior approval of the Department.

Note 11.  Stock-based Compensation

The Company currently has stock-based compensation plans in place for directors, officers and other key employees of the Company.  Pursuant to the terms of these plans, under which 4,349,729 shares of Class A Common Stock are reserved for issuance at December 31, 2007, the Company grants restricted shares of its Class A Common Stock and options to purchase the Company’s Class A Common Stock.  Stock-based compensation is granted under terms and conditions determined by the Compensation Committee of the Board of Directors (“Compensation Committee”).  Stock options have a maximum term of ten years, generally vest over periods ranging between one and four years, and are typically granted with an exercise price at least equal to the market value of the Class A Common Stock on the date of grant.  Restricted stock is valued at the market value of the Class A Common Stock on the date of grant and generally vests (restrictions lapse) between one and three years.

On January 1, 2006, the Company adopted SFAS 123R, “Share-Based Payment,” using the modified-prospective transition method.  SFAS 123R requires all share-based payments to employees, including grants of employee stock options, be recognized as compensation expense in the income statement at fair value.  Under the modified-prospective transition method, the Company recognized expense over the remaining required service period for stock options granted prior to January 1, 2006 for the portion of those grants for which the requisite service had not yet been rendered.  No adjustment was made to prior period amounts nor was any expense recorded for options granted prior to January 1, 2006 for which the requisite service had been rendered by that date.  The Company recognized stock-based compensation expense of $1.8 million and $2.4 million for the years ended December 31, 2007 and 2006, respectively.  The stock-based compensation expense included amounts related to stock options of $44,000 in 2007 and $602,000 in 2006.

The Company previously accounted for stock-based compensation using the intrinsic value method.  Accordingly, compensation cost for stock options was 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.  In 2005, the Company expensed $24,000 for stock option compensation costs.  

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The following table illustrates the effect on net income (loss) if the fair value based method had been applied:

(in thousands, except per share data)	2005
Net loss	$	(21,020	)
Stock-based compensation expense already included
in reported net loss, net of tax		562
Total stock-based compensation expense determined
under fair value based method, net of tax		(1,844	)
Pro forma net loss	$	(22,302	)
Net loss per share:
Basic - as reported	$	(0.66	)
Basic - pro forma	$	(0.70	)
Diluted - as reported	$	(0.66	)
Diluted - pro forma	$	(0.70	)

Information regarding the Company’s stock option plans for the year ended December 31, 2007 was as follows:

						Weighted
						Average
				Weighted		Remaining		Aggregate
				Average		Life		Intrinsic
	Shares			Price		(in years)		Value
Options outstanding, beginning of year		1,640,584		$	10.42
Options exercised		(63,426	)		6.99
Options forfeited or expired		(54,931	)		16.69
Options outstanding, end of year		1,522,227		$	10.34		5.37	$	1,175,434
Options exercisable, end of year		1,522,227		$	10.34		5.37	$	1,175,434

Option price range at end of year	$5.78 to $21.50
Option price range for exercised shares	$5.78 to $9.14
Options available for grant at end of year	2,827,502

Information regarding these option plans for prior years was as follows:

	2006					2005
				Weighted					Weighted
				Average					Average
	Shares			Price		Shares			Price
Options outstanding, beginning of year		2,088,936		$	10.55		2,757,205		$	12.09
Options granted		-			-		407,270			7.83
Options exercised		(228,512	)		6.15		(311,272	)		5.78
Options forfeited or expired		(219,840	)		16.06		(764,267	)		16.61
Options outstanding, end of year		1,640,584		$	10.42		2,088,936		$	10.55
Options exercisable, end of year		1,436,613		$	10.75		1,268,926		$	12.04

Option price range at end of year	$5.78 to $21.50	$5.78 to $21.50
Option price range for exercised shares	$5.78 to $9.14	$5.78
Options available for grant at end of year	2,826,104	2,754,504

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The total intrinsic value of stock options exercised was $241,000 in 2007, $843,000 in 2006 and $757,000 in 2005.  The Company reissued shares from its treasury for options exercised during 2007, 2006 and 2005.

All options granted in 2005 were granted with an exercise price that equaled or exceeded the market value of the Class A Common Stock on the grant date (“out-of-the-money”).  The weighted average fair value of options granted in 2005 was $3.62 per share.  The Company did not grant any options in 2007 and 2006.

The fair value of options at date of grant was estimated using an option-pricing model with the following weighted average assumptions:

	2005
Expected life (years)	5
Risk-free interest rate	4.1%
Expected volatility	47.0%
Expected dividend yield	0.0%

Stock options outstanding and options exercisable at December 31, 2007 were as follows:

	Options Outstanding and Exercisable
		Weighted
		Average	Weighted
	Number	Remaining	Average
	of Shares	Life	Exercise Price
$5.78 to $8.00	1,019,627	6.56	$            7.07
$8.01 to $14.00	122,600	5.41	$            9.14
$14.01 to $20.00	292,000	2.18	$          18.95
$20.01 to $21.50	88,000	2.02	$          21.38

Information regarding the Company’s restricted stock activity was as follows:

	2007					2006					2005
				Weighted					Weighted					Weighted
				Average					Average					Average
				Grant Date					Grant Date					Grant Date
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
Restricted stock at January 1		174,340		$	9.55		136,852		$	7.04		342,448		$	6.38
Granted		56,533			10.38		157,113			9.93		52,754			7.21
Vested		(151,899	)		9.63		(110,752	)		6.94		(255,450	)		6.21
Forfeited		-			-		(8,873	)		10.06		(2,900	)		5.78
Restricted stock at December 31		78,974		$	9.99		174,340		$	9.55		136,852		$	7.04

In 2007, the Company issued 3,000 and 5,000 shares of restricted Class A Common Stock to employees under the Company’s 2002 and 2007 Equity Incentive Plans, respectively, and 48,533 shares of restricted Class A Common Stock to its Directors under the 2004 Directors Plan.  In 2006, the Company issued 101,013 shares of restricted Class A Common Stock to employees under the Company’s 2002 Equity Incentive Plan and 56,100 shares of restricted Class A Common Stock to its Directors under the 2004 Directors Plan.  In 2005, the Company issued 52,754 shares of restricted Class A Common Stock to its Directors.  Restricted stock issued to the Company’s Directors under the 2004 Directors Plan includes shares granted to new Directors and shares awarded to all Directors in lieu of a portion of their retainer.  The restricted stock vests (restrictions lapse) between one and three years.

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During the vesting period, restricted shares issued are nontransferable and subject to forfeiture, but the shares are entitled to all of the other rights of the outstanding shares.  Restricted shares are forfeited if employees terminate employment, or Directors resign from the Board, prior to the lapse of restrictions except upon death or permanent disability.

Upon vesting of a restricted stock award, employees may remit cash or shares of Class A Common Stock to satisfy their tax obligations relating to the award.  During 2007, 2006 and 2005, employees remitted 31,525 shares, 8,831 shares and 54,694 shares, respectively, to the Company to satisfy their payment of withholding taxes for vested awards.

The Company recognizes compensation expense for restricted stock awards over the vested period of the award.  Compensation expense recognized for restricted stock was $771,000 in 2007, $1.3 million in 2006 and $841,000 in 2005.  At December 31, 2007, unrecognized compensation expense for non-vested restricted stock was $292,000, which is expected to be recognized over a weighted average period of 6 months.

In March 2006 and 2007, the Compensation Committee approved the 2006 and 2007 Officer Long Term Incentive Plans, pursuant to which stock may be awarded to all officers in 2009 and 2010 if the return on equity (“ROE”) in 2008 and 2009 is within a specified range.  Award amounts are calculated as a percentage of the participants’ base salaries.  The 2006 and 2007 Officer Long Term Incentive Plans link compensation to performance under the Company’s three-year strategic plan and recognize the long-term nature of improvement in ROE and the value ROE growth creates for shareholders.  The Company recognized expenses related to these plans of $1.0 million in 2007 and $500,000 in 2006.

Note 12.  Earnings Per Share

Shares used as the denominator in the computations of basic and diluted earnings per share were as follows:

	2007		2006		2005
Denominator:
Basic shares		32,169,287		32,238,278		31,682,648
Dilutive effect of:
Restricted stock		97,009		176,664		-
Stock options		283,931		316,418		-
Convertible debt		27,798		-		-
Total diluted shares		32,578,025		32,731,360		31,682,648

The effects of 380,000, 426,000 and 2.1 million stock options were excluded from the computations of diluted earnings per share for 2007, 2006 and 2005, respectively, because they were anti-dilutive.  The effects of 177,000 shares of restricted stock were also excluded from the computation of diluted earnings per share for 2005 because they were anti-dilutive.

Diluted shares for 2007, 2006 and 2005 do not assume the effects of conversion of the Company’s convertible debt into 736,000, 2.8 million and 5.8 million shares of Class A Common Stock, respectively, because they were anti-dilutive.

Note 13.  Fair Value of Financial Instruments

As of December 31, 2007 and 2006, the carrying amounts for the Company’s financial instruments approximated their estimated fair value.  The Company measures the fair value of fixed maturities, the Convertible Debt and the Senior Notes based upon quoted market prices or by obtaining quotes from dealers.  Certain financial instruments, specifically amounts relating to insurance and reinsurance contracts, are excluded from this disclosure.

In September 2006, the FASB issued SFAS 157.  This Statement defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements.  SFAS 157 is applicable in conjunction with other accounting pronouncements that require or permit fair value measurements, but does not expand the use of fair value to any new circumstances.  More specifically, SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority given to quoted prices in active markets and the lowest priority to unobservable inputs.  Further, SFAS 157 requires tabular disclosures of the fair value measurements by level within the fair value hierarchy.  This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  However, early adoption is permitted as of the beginning of a fiscal year.  The Company early adopted SFAS 157, effective January 1, 2007.  The Company’s adoption of SFAS 157 did not have an impact on its financial condition or results of operations.

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The following table provides the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of December 31, 2007.  These assets and liabilities are measured on a recurring basis.

			Fair Value Measurements at Reporting Date Using
(dollar amounts in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	12/31/2007		(Level 1)		(Level 2)		(Level 3)
Assets
Fixed maturities available for sale	$	728,725	$	727,725	$	-	$	1,000
Liabilities
Derivative component of 6.50% Convertible Debt	$	233	$	-	$	233	$	-

The Company recognized pre-tax net realized losses of $483,000 in 2007, gains of $466,000 in 2006 and losses of $3.7 million in 2005, resulting from changes in the fair value of the derivative component of its 6.50% Convertible Debt.

The following table provides the fair value of assets re-measured on a nonrecurring basis.

			Fair Value Measurements at Reporting Date Using
(dollar amounts in thousands)	Year Ended		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	12/31/2007		(Level 1)		(Level 2)		(Level 3)
Intangible assets, other than goodwill	$	10,835	$	-	$	-	$	10,835
Goodwill		11,944		-		-		11,944

Note 14.  Income Taxes

The components of the federal income tax expense were:

(dollar amounts in thousands)	2007		2006		2005
Current	$	416	$	-	$	-
Deferred		7,603		3,217		2,689
Income tax expense	$	8,019	$	3,217	$	2,689

Reconciliations between the total income tax expense and the amounts computed at the statutory federal income tax rate of 35% were as follows:

(dollar amounts in thousands)	2007		2006		2005
Federal income tax expense (benefit) at the statutory rate	$	7,969	$	2,990	$	(772	)
Change in valuation allowance		-		-		3,500
Other		50		227		(39	)
Income tax expense	$	8,019	$	3,217	$	2,689

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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 were as follows:

(dollar amounts in thousands)	2007			2006
Net operating loss and tax credit carryforwards	$	97,321		$	109,696
Foreign reinsurance affiliates		25,146			15,115
Impairment charge		21,519			-
Discounting of unpaid losses and LAE		20,339			13,453
Unearned premiums		13,205			12,415
Postretirement benefit obligation		7,778			10,853
Allowance for uncollectible accounts		6,611			6,635
Depreciation		4,152			3,177
Unrealized depreciation of investments		-			3,253
Other		15,176			14,115
Gross deferred tax assets		211,247			188,712
Valuation allowance		(60,500	)		(60,500	)
Deferred tax assets, net of valuation allowance		150,747			128,212
Deferred acquisition costs		(13,091	)		(12,684	)
Capitalized software		(4,678	)		(4,678	)
Unrealized appreciation of investments		(2,193	)		-
Other		(11,928	)		(10,831	)
Gross deferred tax liabilities		(31,890	)		(28,193	)
Net deferred tax assets	$	118,857		$	100,019

At December 31, 2007, the Company had a net operating loss (“NOL”) carryforward of $250.5 million, which will expire in years 2018 through 2027, and a $9.6 million tax credit carryforward primarily related to alternative minimum tax (“AMT”) credits, which do not expire.  The NOL carryforward, which produces a gross deferred tax asset of $87.7 million, will be applied to reduce taxable income of the Company.

Prior to 2005, the Company established a valuation allowance in the amount of $57 million.  This was based upon management’s assessment that it was more likely than not that a portion of the gross deferred tax assets related to the NOL carryforward and all of the deferred tax asset related to the AMT credit carryforward would not be realized.  During 2005, the Company reassessed the valuation allowance previously established against its net deferred tax assets.  Factors considered by management in this reassessment included historical earnings, scheduled reversal of deferred tax liabilities and revised projections of future earnings.  Based upon management’s consideration of these factors in conjunction with the current level of valuation allowance recorded, the Company increased the valuation allowance with respect to its net deferred tax asset by $3.5 million in 2005.  The increase was primarily due to the future earnings projections for the Company’s discontinued operations which were revised downward from previous projections.

The valuation allowance of $60.5 million reserves against $50.9 million of gross deferred tax assets related to the NOL carryforward and all of the projected deferred tax asset related to the AMT credit carryforward because it is more likely than not that this portion of the benefit will not be realized.  The Company will continue to periodically assess the realizability of its net deferred tax asset.

The Company adopted the provisions of FIN 48, effective January 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109.  FIN 48 requires that an uncertain tax position should be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.  Recognizable tax positions should then be measured to determine the amount of benefit recognized in the financial statements.  The Company’s adoption of FIN 48 did not have a material impact on its financial condition or results of operations.

The Company files income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003.  The Company is currently not under examination by any tax authority.  The

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Company does not anticipate any significant changes to its total unrecognized tax benefits within the next 12 months.  The Company will recognize, as applicable, interest and penalties related to unrecognized tax positions as part of income taxes.

The Company’s federal income tax returns are subject to audit by the Internal Revenue Service (“IRS”).  No tax years are currently under audit by the IRS.

Note 15.  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”) which, prior to January 1, 2006, covered substantially all employees.  After meeting certain requirements under the Qualified Pension Plan, an employee acquired 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”) which, prior to January 1, 2006, covered certain key employees.  The projected benefit obligation and accumulated benefit obligation for the Non-qualified Pension Plans were $7.1 million and $7.1 million, respectively, as of December 31, 2007.

In 2005, the Company decided to “freeze” its Qualified Pension Plan and Non-qualified Pension Plans as of December 31, 2005.  Under the terms of the freeze, eligible employees retained all of the rights under these plans that they had vested as of December 31, 2005.  The Company incurred a one-time non-cash charge of $229,000 in 2005 due to these changes.  Effective January 1, 2006, the Company’s 401(k) and 401(k) Excess Plans were renamed The PMA Capital Corporation Retirement Savings Plan and The PMA Capital Retirement Savings Excess Plan and were enhanced to include quarterly age-based employer contributions.

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 was required to adopt SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” in 2006.  SFAS 158 requires that an employer recognize the overfunded or underfunded status of each defined benefit postretirement plan as an asset or liability on the Balance Sheet.  Changes in the funded status during any given period of time shall be recognized as a change in comprehensive income.  The statement has no impact on the recognition of benefit costs.  The Company’s 2006 adoption of this statement resulted in a $13.5 million decrease in Other assets, a $15.2 million decrease in Accounts payable, accrued expenses and other liabilities, and a $1.1 million increase in Accumulated other comprehensive income.

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The following tables set forth the amounts recognized in the Company’s consolidated financial statements with respect to pension benefits and other postretirement benefits:

	Pension Benefits						Other Postretirement Benefits
(dollar amounts in thousands)	2007			2006			2007			2006
Change in benefit obligation:
Benefit obligation at beginning of year	$	90,872		$	92,210		$	12,090		$	11,964
Service cost		93			119			603			508
Interest cost		5,331			5,241			698			695
Actuarial (gain) loss		(7,452	)		(3,804	)		(1,300	)		(301	)
Benefits paid		(2,752	)		(2,894	)		(790	)		(776	)
Benefit obligation at end of year	$	86,092		$	90,872		$	11,301		$	12,090
Change in plan assets:
Fair value of plan assets at beginning of year	$	72,684		$	67,709		$	-		$	-
Actual return on plan assets		4,212			7,869			-			-
Benefits paid		(2,752	)		(2,894	)		-			-
Fair value of plan assets at end of year	$	74,144		$	72,684		$	-		$	-
Benefit obligation greater than the fair value of plan assets,
recognized in other liabilities on the balance sheet	$	(11,948	)	$	(18,188	)	$	(11,301	)	$	(12,090	)
Amounts recognized in accumulated other comprehensive
loss, pre-tax, consist of:
Net actuarial (gain) loss	$	18,083		$	23,981		$	(2,872	)	$	(1,661	)
Prior service cost (benefit)		152			179			(128	)		(247	)
Transition obligation		49			74			-			-
Amount recognized, end of year	$	18,284		$	24,234		$	(3,000	)	$	(1,908	)

	Pension Benefits									Other Postretirement Benefits
(dollar amounts in thousands)	2007			2006			2005			2007			2006			2005
Components of net periodic benefit cost:
Service cost	$	93		$	119		$	3,727		$	603		$	508		$	443
Interest cost		5,331			5,241			5,203			698			696			634
Expected return on plan assets		(5,885	)		(5,475	)		(5,420	)		-			-			-
Amortization of transition (asset) obligation		25			25			(4	)		-			-			-
Amortization of prior service cost (benefit)		27			27			5			(119	)		(119	)		(119	)
Recognized actuarial (gain) loss		468			656			1,656			(90	)		(11	)		(94	)
Curtailment charge		-			-			229			-			-			-
Net periodic pension cost	$	59		$	593		$	5,396		$	1,092		$	1,074		$	864
Weighted average assumptions:
Discount rate		6.50	%		6.00	%		5.75	%		6.50	%		6.00	%		5.75	%
Expected return on plan assets		8.25	%		8.25	%		8.25	%		-			-			-
Rate of compensation increase		N/A			N/A			3.75	%		-			-			-

The Company uses a January 1 measurement date for its Plans.  Under SFAS 158, the Company will be required to change its measurement date to December 31, effective in 2008.  The impact of this change will be recorded through Shareholders’ equity.

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For the measurement of other postretirement benefits, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2007.  The rate was assumed to decrease gradually to 5% by 2014 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.

Benefits paid in the table above include only those amounts paid directly from plan assets.

The decline in Qualified Pension Plan asset performance prior to 2005, combined with historically low interest rates (which are the key assumption in estimating plan liabilities) caused the Company to record a $25.2 million increase in its accrued Qualified Pension Plan liability and record a $16.4 million charge to equity.  The Company further increased its pension liability by $5.1 million in 2005 and recorded a charge to equity of $3.3 million.  In 2006 and 2007, the Company reversed $5.7 million and $5.4 million of its pension liability and increased equity by $3.7 million and $3.5 million, respectively, due primarily to the increases in interest rates and higher than expected returns on plan assets.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the Qualified Pension Plan were $79.0 million, $79.0 million and $74.1 million, respectively, at December 31, 2007, and $83.5 million, $83.5 million and $72.7 million, respectively, at December 31, 2006.

The asset allocation for the Company’s Qualified Pension Plan at the end of 2007 and 2006, and the target allocation for 2008, by asset category, are as follows:

		Percentage of plan assets
	Target allocation	As of December 31,
Asset Category	2008	2007	2006
Equity Securities	55%	55%	75%
Debt Securities	35%	35%	25%
Other	10%	10%	0%
Total	100%	100%	100%

The Company’s Qualified Pension Plan assets are managed by outside investment managers and are rebalanced periodically.  The Company’s investment strategy with respect to Qualified Pension Plan assets includes guidelines for asset quality standards, asset allocations among investment types and issuers, and other relevant criteria for the portfolio.

Following are expected cash flows for the Company’s pension and other postretirement benefit plans:

	Qualified Pension		Non-Qualified		Other Postretirement
(dollar amounts in thousands)	Benefits		Pension Benefits		Benefits
Expected Employer Contributions:
2008	$	-	$	442	$	775
Expected Benefit Payments:
2008	$	2,866	$	442	$	775
2009		3,010		613		823
2010		3,238		606		875
2011		3,454		598		917
2012		3,678		650		958
2013-2017		22,188		2,880		5,229
	$	38,434	$	5,789	$	9,577

Qualified Pension Plan benefits will be paid from the pension trust assets which have a fair value of $74.1 million at December 31, 2007.  Non-qualified Pension Plan and other postretirement benefits will be paid from the general assets of the Company.

B.  Defined Contribution Savings Plan — The Company also maintains defined contribution savings plans covering substantially all employees.  These plans include a voluntary employee contribution component, in which the Company matches employee contributions, up to 5% of compensation and, effective January 1, 2006, an aged-based company contribution.  Contributions expensed under these plans in 2007, 2006 and 2005 were $5.3 million, $4.9 million and $2.3 million, respectively.

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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.

Note 16.  Business Segments

The Company’s total revenues, substantially all of which are generated within the U.S., and pre-tax operating income (loss) by principal business segment are presented in the table below.

As a result of the Company’s acquisition of Midlands in 2007, the combined operating results of PMA Management Corp. and Midlands have been reported in a new reporting segment, Fee-based Business.  The results of PMA Management Corp. were previously included in The PMA Insurance Group segment.  In 2007, the Company also reported the results of its Run-off Operations as discontinued operations.  For comparative purposes, the Company has reclassified its prior period financial presentation to conform to these changes.

Operating income (loss), which is GAAP net income (loss) excluding net realized investment gains (losses) and results from discontinued operations, is the financial performance measure used by the Company’s management and Board of Directors to evaluate and assess the results of its businesses.  Net realized investment activity is excluded because (i) net realized investment gains and losses are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments 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 and losses that do not relate to the operations of the individual segments.  Operating income (loss) does not replace net income (loss) as the GAAP measure of the Company’s consolidated results of operations.

(dollar amounts in thousands)	2007			2006			2005
Revenues:
The PMA Insurance Group (1)	$	416,806		$	402,954		$	390,301
Fee-based Business		38,124			28,522			23,966
Corporate and Other (2)		284			(125	)		(211	)
Net realized investment gains		563			1,239			372
Total revenues	$	455,777		$	432,590		$	414,428
Components of net income (loss):
Pre-tax operating income (loss):
The PMA Insurance Group (1)	$	38,045		$	26,082		$	19,511
Fee-based Business		3,724			2,802			2,509
Corporate and Other (2)		(19,564	)		(21,580	)		(24,598	)
Pre-tax operating income (loss)		22,205			7,304			(2,578	)
Income tax expense		7,822			2,783			2,559
Operating income (loss)		14,383			4,521			(5,137	)
Realized gains after tax		366			805			242
Income (loss) from continuing operations		14,749			5,326			(4,895	)
Loss from discontinued operations, net of tax (2)		(57,277	)		(1,275	)		(16,125	)
Net income (loss)	$	(42,528	)	$	4,051		$	(21,020	)

(1)   Beginning in the fourth quarter of 2007, the results of The PMA Insurance Group no longer include those of PMA Management Corp.  The results of PMA Management Corp. are currently included within the segment results of the Company’s Fee-based Business.  For comparative purposes, the financial results of The PMA Insurance Group and PMA Management Corp. have been reclassified in all prior periods to reflect this change.

(2)   Effective in the fourth quarter of 2007, the Company reported the results of its former Run-off Operations segment as discontinued operations.  As a result of this change, the Corporate and Other segment was impacted by investment income previously eliminated in the Corporate and Other segment.  For comparative purposes, all prior periods have been reclassified to reflect this change.

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Net premiums earned by principal business segment were as follows:

(dollar amounts in thousands)	2007			2006			2005
The PMA Insurance Group:
Workers' compensation	$	347,990		$	333,943		$	320,443
Commercial automobile		20,700			21,670			22,061
Commercial multi-peril		5,702			7,476			11,106
Other		4,478			5,010			5,032
Total net premiums earned		378,870			368,099			358,642
Corporate and Other		(627	)		(696	)		(818	)
Consolidated net premiums earned	$	378,243		$	367,403		$	357,824

The Company’s amortization and depreciation expense by principal business segment were as follows:

(dollar amounts in thousands)	2007		2006		2005
The PMA Insurance Group	$	3,251	$	4,596	$	7,519
Fee-based Business		245		-		-
Corporate and Other		137		730		832
Total depreciation and amortization expense	$	3,633	$	5,326	$	8,351

The Company’s total assets by principal business segment were as follows:

(dollar amounts in thousands)	2007		2006
The PMA Insurance Group	$	2,032,848	$	1,890,714
Fee-based Business		67,313		23,330
Corporate and Other (1)		105,824		77,665
Assets of discontinued operations		375,656		674,698
Total assets	$	2,581,641	$	2,666,407

(1)   Corporate and Other includes the effect of eliminating transactions between the ongoing business segments.

The PMA Insurance Group’s operations are concentrated in twelve contiguous states in the eastern part of the U.S.  The economic trends in these 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 most 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.  Since November 2003, The PMA Insurance Group has been the Company’s sole remaining ongoing insurance segment.  In 2007, 2006 and 2005, workers’ compensation net premiums written represented 92%, 90% and 86%, respectively, of The PMA Insurance Group’s net premiums written.

Note 17.  Transactions with Related Parties

The Company incurred legal and consulting expenses aggregating approximately $810,000, $3.0 million and $3.3 million in 2007, 2006 and 2005, respectively, from firms in which directors of the Company are partners or principals.

Note 18.  Statutory Financial Information

These consolidated financial statements vary in certain respects from financial statements prepared using statutory accounting practices (“SAP”) that are prescribed or permitted by the Pennsylvania Insurance Department.  Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of NAIC publications.  Permitted SAP encompasses all accounting practices that are not prescribed.  The Codification of Statutory Accounting Principles guidance is the NAIC’s primary guidance on statutory accounting.  The principal differences between GAAP and SAP are in the treatment of acquisition expenses, reinsurance, deferred income taxes, fixed assets and investments.

98

SAP net income (loss) and capital and surplus for PMA Capital’s domestic insurance subsidiaries were as follows:

(dollar amounts in thousands)	2007			2006			2005
SAP net income (loss):
The Pooled Companies (1)	$	9,592		$	4,458		$	12,046
PMA Capital Insurance Company		(50,743	)		(10,637	)		(8,009	)
Total	$	(41,151	)	$	(6,179	)	$	4,037
SAP capital and surplus:
The Pooled Companies (1)	$	335,394		$	321,245		$	315,056
PMA Capital Insurance Company (2)		47,580			121,566			204,920
Total	$	382,974		$	442,811		$	519,976

(1)   The Pooled Companies are comprised of Pennsylvania Manufacturers’ Association Insurance Company, Manufacturers Alliance Insurance Company and Pennsylvania Manufacturers Indemnity Company.

(2)   PMA Capital Insurance Company paid “extraordinary” dividends in the amounts of $37.5 million and $73.5 million in 2007 and 2006, respectively, to its parent, PMA Capital Corporation.

The Company’s statutory financial statements are presented on the basis of accounting practices prescribed or permitted by the Pennsylvania Insurance Department.

99

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

PMA Capital Corporation

Blue Bell, Pennsylvania

We have audited the accompanying consolidated balance sheets of PMA Capital Corporation and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, cash flows, shareholders’ equity and comprehensive income (loss) for each of the years in the three-year period ended December 31, 2007. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit 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.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PMA Capital Corporation and subsidiaries as of December 31, 2007 and 2006 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company reclassified as trading, certain marketable securities previously designated as available-for-sale and changed the manner in which changes in unrealized gains and losses on these securities get recognized in 2007.

As discussed in Notes 11 and 15, respectively, to the consolidated financial statements, the Company changed its method of accounting for share-based payments and its defined benefit pension and other retirement plans in 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PMA Capital Corporation's internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2008 expressed an unqualified opinion.

/s/ Beard Miller Company LLP

Beard Miller Company LLP

Harrisburg, Pennsylvania

March 10, 2008

100

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

PMA Capital Corporation

Blue Bell, Pennsylvania

We have audited PMA Capital Corporation’s (the Company) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  PMA Capital Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, PMA Capital Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of operations, cash flows, shareholders’ equity, comprehensive income (loss) and financial statement schedules of PMA Capital Corporation, and our reports dated March 10, 2008 expressed an unqualified opinion.

/s/ Beard Miller Company LLP

Beard Miller Company LLP

Harrisburg, Pennsylvania

March 10, 2008

101

QUARTERLY FINANCIAL INFORMATION (unaudited)
		First			Second			Third			Fourth
(dollar amounts in thousands, except per share data)		Quarter			Quarter			Quarter			Quarter
2007
Income Statement Data:
Total revenues		$	112,343		$	113,398		$	111,468		$	118,568
Income from continuing operations before income taxes			7,606			2,373			7,943			4,846
Income from continuing operations		$	4,880		$	1,507		$	5,178		$	3,184
Loss from discontinued operations, net of tax			(1,534	)		(1,016	)		(13,981	)		(40,746	)
Net income (loss)		$	3,346		$	491		$	(8,803	)	$	(37,562	)
Per Share Data:
	Net income (loss) (Basic)
	Continuing Operations	$	0.15		$	0.05		$	0.16		$	0.10
	Discontinued Operations		(0.05	)		(0.03	)		(0.44	)		(1.28	)
		$	0.10		$	0.02		$	(0.28	)	$	(1.18	)
	Net income (loss) (Diluted)
	Continuing Operations	$	0.15		$	0.04		$	0.16		$	0.10
	Discontinued Operations		(0.05	)		(0.03	)		(0.43	)		(1.27	)
		$	0.10		$	0.01		$	(0.27	)	$	(1.17	)
2006
Income Statement Data:
Total revenues		$	108,490		$	110,527		$	109,877		$	103,696
Income from continuing operations before income taxes			4,136			544			2,998			865
Income from continuing operations		$	2,582		$	246		$	1,688		$	810
Income (loss) from discontinued operations, net of tax			(101	)		(1,008	)		(187	)		21
Net income (loss)		$	2,481		$	(762	)	$	1,501		$	831
Per Share Data:
	Net income (loss) (Basic)
	Continuing Operations	$	0.08		$	0.01		$	0.05		$	0.03
	Discontinued Operations		-			(0.03	)		-			-
		$	0.08		$	(0.02	)	$	0.05		$	0.03
	Net income (loss) (Diluted)
	Continuing Operations	$	0.08		$	0.01		$	0.05		$	0.03
	Discontinued Operations		-			(0.03	)		-			-
		$	0.08		$	(0.02	)	$	0.05		$	0.03

Effective in the fourth quarter of 2007, the Company reported the results of its former Run-off Operations segment as discontinued operations.  For comparative purposes, all prior periods have been reclassified to reflect this change.

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

Not applicable.

Item 9A.  Controls and Procedures.

Disclosure Controls and Procedures

As of the end of the period covered by this report on Form 10-K, we, under the supervision and with the participation of our management, including our President and Chief Executive Officer, and our Executive Vice President and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, the Chief Executive Officer and

102

Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be disclosed in our periodic filings with the Securities and Exchange Commission.  During the period covered by this report, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company’s internal control over financial reporting was conducted based upon the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based upon that evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007.  Beard Miller Company LLP audited the Company’s financial statements in this Annual Report – Form 10-K and issued an attestation report on the Company’s internal control over financial reporting.

Item 9B.  Other Information.

There is no information required to be disclosed in a report on Form 8-K that has not been reported.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance.

See “Executive Officers of the Registrant” in Part I.  The information under the captions “The Board of Directors and Corporate Governance,” “Nominees For Election,” “Directors Continuing in Office,” “Committees of the Board – Audit Committee,” “Committees of the Board – Nominating and Corporate Governance Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2008 Annual Meeting of Shareholders (“Proxy Statement”) is incorporated herein by reference.

We have a Business Ethics and Practices Policy in place, which covers all officers and employees.  This policy expresses our commitment to maintaining high legal and ethical standards in the conduct of our business.  In 2003, we enhanced our Business Ethics and Practices Policy by adopting a Code of Ethics for the Chief Financial Officer and Senior Financial Officers.  In addition, in early 2004, our Board of Directors adopted a separate Code of Ethics for Directors.  Copies of our ethics policies can be found on our website www.pmacapital.com.  Any amendment to or waiver from the provisions of the Code of Ethics for the Chief Financial Officer and Senior Financial Officers will be disclosed on our website www.pmacapital.com.

Item 11.  Executive Compensation.

The information under the captions “Compensation Discussion and Analysis,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Proxy Statement is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information under the caption “Beneficial Ownership of Class A Common Stock” and under the caption “Equity Compensation Plan Information” in the Proxy Statement is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

The information under the caption “Certain Relationships and Related Transactions” and under the caption “The Board of Directors and Corporate Governance” in the Proxy Statement is incorporated herein by reference.

Item 14.  Principal Accounting Fees and Services.

The information under the caption “Ratification of the Appointment of the Independent Registered Public Accounting Firm” in the Proxy Statement is incorporated herein by reference.

103

PART IV

Item 15.  Exhibits, Financial Statement Schedules.

FINANCIAL STATEMENTS AND SCHEDULES

(a) (1)	Index to Consolidated Financial Statements	Page
	Consolidated Balance Sheets at December 31, 2007 and 2006	66
	Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005	67
	Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005	68
	Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006
	and 2005	69
	Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2007, 2006
	and 2005	70
	Notes to Consolidated Financial Statements	71
	Report of Independent Registered Public Accounting Firm	100
(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 beginning on page E-1.

104

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 by the undersigned, thereunto duly authorized.

	PMA CAPITAL CORPORATION
Date:   March 11, 2008	By: /s/ William E. Hitselberger
	William E. Hitselberger
	Executive Vice President and
	Chief Financial 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 11, 2008.

Signature	Title
/s/ William E. Hitselberger
William E. Hitselberger	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)
/s/ Vincent T. Donnelly
Vincent T. Donnelly	President and Chief Executive Officer and a Director
	(Principal Executive Officer)
Neal C. Schneider*	Non-Executive Chairman of the Board and a Director
Peter S. Burgess*	Director
Patricia Drago*	Director
J. Gregory Driscoll*	Director
Charles T. Freeman*	Director
James C. Hellauer*	Director
Richard Lutenski*	Director
James F. Malone III*	Director
John D. Rollins*	Director
Roderic H. Ross*	Director
L. J. Rowell, Jr.*	Director

*By:	/s/ William E. Hitselberger
	William E. Hitselberger
	Attorney-in-Fact

105

PMA Capital Corporation

Index to Financial Statement Schedules

Description	Page
Schedule II - Condensed Financial Information of Registrant as of December 31, 2007
and 2006 and for the years ended December 31, 2007, 2006 and 2005	FS-2
Schedule III - Supplementary Insurance Information for the years ended December 31, 2007, 2006 and 2005	FS-5
Schedule IV - Reinsurance for the years ended December 31, 2007, 2006 and 2005	FS-6
Schedule V - Valuation and Qualifying Accounts for the years ended December 31, 2007, 2006 and 2005	FS-7
Schedule VI - Supplemental Information Concerning Property and Casualty Insurance Operations
for the years ended December 31, 2007, 2006 and 2005	FS-8
Report of Independent Registered Public Accounting Firm 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 2007 Consolidated Financial Statements and notes thereto.

FS-1

PMA Capital Corporation
Schedule II - Registrant Only Financial Statements
Balance Sheets
(Parent Company Only)
(dollar amounts in thousands)		2007			2006
Assets
Cash		$	83		$	46
Short-term investments			3			26
Investment in subsidiaries			504,461			553,657
Related party receivables			19,565			-
Deferred income taxes, net			31,755			49,004
Other assets			7,587			6,138
	Total assets	$	563,454		$	608,871
Liabilities
Long-term debt		$	144,043		$	143,351
Related party payables			-			6,811
Other liabilities			40,827			39,616
	Total liabilities		184,870			189,778
Shareholders' Equity
Class A Common Stock, $5 par value, 60,000,000 shares authorized
(2007 - 34,217,945 shares issued and 31,761,106 outstanding;
2006 - 34,217,945 shares issued and 32,659,194 outstanding)			171,090			171,090
Additional paid-in capital			111,088			109,922
Retained earnings			136,627			184,216
Accumulated other comprehensive loss			(6,663	)		(20,624	)
Treasury stock, at cost (2007 - 2,456,839 shares; 2006 - 1,558,751 shares)			(33,558	)		(25,511	)
	Total shareholders' equity		378,584			419,093
	Total liabilities and shareholders' equity	$	563,454		$	608,871

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)
(dollar amounts in thousands)	2007			2006			2005
Revenues:
Net investment income	$	1,170		$	407		$	89
Net realized investment gains (losses)		(586	)		917			(4,149	)
Other revenues		157			137			119
Total revenues		741			1,461			(3,941	)
Expenses:
General expenses		9,738			9,602			9,142
Interest expense		12,289			14,665			16,706
Total expenses		22,027			24,267			25,848
Loss before income taxes and equity in earnings
(loss) of subsidiaries		(21,286	)		(22,806	)		(29,789	)
Income tax benefit		(14,061	)		(21,653	)		(20,135	)
Loss before equity in earnings (loss)
of subsidiaries		(7,225	)		(1,153	)		(9,654	)
Equity in earnings (loss) of subsidiaries		(35,303	)		5,204			(11,366	)
Net income (loss)	$	(42,528	)	$	4,051		$	(21,020	)

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)
(dollar amounts in thousands)	2007			2006			2005
Cash Flows from Operating Activities:
Net income (loss)	$	(42,528	)	$	4,051		$	(21,020	)
Adjustments to reconcile net income (loss) to net cash flows
provided by (used in) operating activities:
Equity in (earnings) loss of subsidiaries		35,303			(5,204	)		11,366
Dividends received from subsidiaries		17,500			73,500			7,000
Net tax sharing payments received from subsidiaries		37,729			9,834			5,595
Stock-based compensation		1,814			2,371			865
Net realized investment (gains) losses		586			(917	)		4,149
Deferred income tax expense (benefit)		15,120			(5,359	)		(13,025	)
Other, net		(30,109	)		(15,809	)		(4,717	)
Net cash flows provided by (used in) operating activities		35,415			62,467			(9,787	)
Cash Flows from Investing Activities:
Sales of fixed maturities trading		17,458			-			-
Net sales of short-term investments		25			24			236
Purchase of subsidiary		(23,532	)		-			-
Other, net		(26	)		(20	)		(152	)
Net cash flows provided by (used in) investing activities		(6,075	)		4			84
Cash Flows from Financing Activities:
Repurchases of debt		(17,324	)		(67,433	)		(270	)
Proceeds from issuance of long-term debt		20,619			-			-
Debt issuance costs		(604	)		-			-
Proceeds from exercise of stock options		444			1,403			1,800
Shares purchased under stock-based compensation plans		(273	)		(89	)		(429	)
Purchase of treasury stock		(10,000	)		-			-
Receipts (payments) from (to) related parties		(22,165	)		3,694			8,168
Net cash flows provided by (used in) financing activities		(29,303	)		(62,425	)		9,269
Net increase (decrease) in cash		37			46			(434	)
Cash - beginning of year		46			-			434
Cash - end of year	$	83		$	46		$	-
Supplementary cash flow information:
Income taxes paid (refunded)	$	717		$	-		$	(651	)
Interest paid	$	12,074		$	14,286		$	14,320
Investment security transferred in dividend from discontinued operations	$	16,780		$	-		$	-
Non-cash financing activities:
Common Stock issued to redeem convertible debt	$	-		$	3,074		$	-

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
Continuing Operations
December 31, 2007:
The PMA Insurance Group	$  37,404	$ 1,212,956	$ 226,178	$ 378,870	$   37,936	$ 263,199	$   73,747	$   33,024	$ 395,325
Fee-based Business	-	-	-	-	972	-	-	34,400	-
Corporate and Other (2)	-	-	-	(627)	684	-	-	9,117	(627)
Total	$  37,404	$ 1,212,956	$ 226,178	$ 378,243	$   39,592	$ 263,199	$   73,747	$   76,541	$ 394,698
December 31, 2006:
The PMA Insurance Group	$  36,239	$ 1,152,704	$ 202,973	$ 368,099	$   34,855	$ 262,297	$   73,726	$   36,339	$ 373,697
Fee-based Business	-	-	-	-	669	-	-	25,720	-
Corporate and Other (2)	-	-	-	(696)	327	-	-	8,912	(696)
Total	$  36,239	$ 1,152,704	$ 202,973	$ 367,403	$   35,851	$ 262,297	$   73,726	$   70,971	$ 373,001
December 31, 2005:
The PMA Insurance Group	$  34,236	$ 1,169,338	$ 173,432	$ 358,642	$   31,659	$ 260,276	$   71,298	$   33,816	$ 375,793
Fee-based Business	-	-	-	-	375	-	-	21,457	-
Corporate and Other (2)	-	-	-	(818)	201	-	-	8,502	(818)
Total	$  34,236	$ 1,169,338	$ 173,432	$ 357,824	$   32,235	$ 260,276	$   71,298	$   63,775	$ 374,975

(1)   Net investment income is based on each segment’s invested assets.  Also, certain prior year amounts have been reclassified to conform to the current year classification.

(2)   Corporate and Other includes unallocated investment income and expenses, including debt service.  Corporate and Other also includes the effect of eliminating intercompany transactions.

(dollar amounts in thousands)	Deferred acquisition costs	Unpaid losses and loss adjustment expenses	Unearned premiums	Net premiums earned	Net investment income	Losses and loss adjustment expenses	Acquisition expenses	Operating expenses	Net premiums written
Discontinued Operations:
December 31, 2007:	$         -	$    339,077	$           -	$     3,471	$     2,844	$   24,013	$        891	$     7,507	$     5,385
December 31, 2006:	-	482,161	-	2,778	7,710	(3,076)	787	12,515	2,143
December 31, 2005:	-	650,705	-	10,206	16,717	34,798	4,583	14,096	10,250

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
Continuing Operations:
Year Ended December 31, 2007:
Property and liability insurance premiums	$	477,845		$	117,563		$	17,961	$	378,243		5	%
Year Ended December 31, 2006:
Property and liability insurance premiums	$	405,799		$	58,813		$	20,417	$	367,403		6	%
Year Ended December 31, 2005:
Property and liability insurance premiums	$	379,514		$	46,015		$	24,325	$	357,824		7	%
(dollar amounts in thousands)	Direct amount			Ceded to other companies			Assumed from other companies		Net amount		Percentage of amount assumed to net
Discontinued Operations:
Year Ended December 31, 2007:
Property and liability insurance premiums	$	50		$	(582	)	$	2,839	$	3,471		82	%
Year Ended December 31, 2006:
Property and liability insurance premiums	$	(47	)	$	(157	)	$	2,668	$	2,778		96	%
Year Ended December 31, 2005:
Property and liability insurance premiums	$	208		$	2,878		$	12,876	$	10,206		126	%

FS-6

PMA Capital Corporation
Schedule V
Valuation and Qualifying Accounts
(dollar amounts in thousands)	Balance at beginning of period		Charged (credited) to costs and expenses			Deductions - write-offs of uncollectible accounts		Balance at end of period
Continuing Operations:
Year ended December 31, 2007:
Valuation allowance:
Premiums receivable	$	9,363	$	(22	)	$	-	$	9,341
Reinsurance receivable		8,630		(4,022	)		-		4,608
Deferred income taxes, net		60,500		-			-		60,500
Year ended December 31, 2006:
Valuation allowance:
Premiums receivable	$	8,142	$	1,221		$	-	$	9,363
Reinsurance receivable		8,291		339			-		8,630
Deferred income taxes, net		60,500		-			-		60,500
Year ended December 31, 2005:
Valuation allowance:
Premiums receivable	$	6,849	$	1,293		$	-	$	8,142
Reinsurance receivable		7,741		550			-		8,291
Deferred income taxes, net		57,000		3,500			-		60,500
(dollar amounts in thousands)	Balance at beginning of period			Charged (credited) to costs and expenses			Deductions - write-offs of uncollectible accounts	Balance at end of period
Discontinued Operations:
Year ended December 31, 2007:
Valuation allowance:
Premiums receivable	$	200	$	-		$	-	$	200
Reinsurance receivable		4,261		(1,000	)		-		3,261
Year ended December 31, 2006:
Valuation allowance:
Premiums receivable	$	200	$	-		$	-	$	200
Reinsurance receivable		4,261		-			-		4,261
Year ended December 31, 2005:
Valuation allowance:
Premiums receivable	$	2,500	$	(2,300)		$	-	$	200
Reinsurance receivable		4,261		-			-		4,261

FS-7

PMA Capital Corporation
Schedule VI
Supplemental Information Concerning Property and Casualty Insurance Operations
													Losses and loss adjustment expenses incurred related to
(dollar amounts in thousands)	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		Current year		Prior years(2)			Acquisition expenses		Paid losses and loss adjustment expenses		Net premiums written
Continuing Operations:
December 31, 2007	$	37,404	$	1,212,956	$	21,488	$	226,178	$	378,243	$	39,592	$	257,046	$	(1,728	)	$	73,747	$	275,198	$	394,698
December 31, 2006		36,239		1,152,704		29,691		202,973		367,403		35,851		255,525		(2,348	)		73,726		273,463		373,001
December 31, 2005		34,236		1,169,338		29,452		173,432		357,824		32,235		254,565		(2,025	)		71,298		296,995		374,975

(1)   Reserves discounted at approximately 5%.

(2)   Excludes accretion of loss reserve discount of $7,881, $9,120, and $7,736 in 2007, 2006 and 2005, respectively.

													Losses and loss adjustment expenses incurred related to
(dollar amounts in thousands)	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		Current year		Prior years(2)			Acquisition expenses		Paid losses and loss adjustment expenses		Net premiums written
Discontinued Operations:
December 31, 2007	$	-	$	339,077	$	22,095	$	-	$	3,471	$	2,844	$	-	$	21,629		$	891	$	21,606	$	5,385
December 31, 2006		-		482,161		26,274		-		2,778		7,710		-		(5,332	)		787		128,669		2,143
December 31, 2005		-		650,705		30,395		-		10,206		16,717		4,540		28,818			4,583		203,791		10,250

(1)   Reserves discounted at approximately 5%.

(2)   Excludes accretion of loss reserve discount of $4,168, $3,996, and $4,269 in 2007, 2006 and 2005, respectively, and net losses ceded under retroactive reinsurance agreement of $1,784, $1,740 and $2,829 in 2007, 2006 and 2005, respectively.

FS-8

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

PMA Capital Corporation

Blue Bell, Pennsylvania

We have audited the consolidated financial statements of PMA Capital Corporation and subsidiaries (the Company) as of December 31, 2007 and 2006, and for each of the years in the three-year period ended December 31, 2007, and the Company’s internal control over financial reporting as of December 31, 2007, and have issued our reports thereon dated March 10, 2008; such reports are included elsewhere in the Form 10-K.  Our audits included the consolidated financial statement schedules of the Company listed in Item 15.  These consolidated financial statement schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinion based on our audits.  In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth herein.

/s/ Beard Miller Company LLP

Beard Miller Company LLP

Harrisburg, Pennsylvania

March 10, 2008

FS-9

INDEX TO EXHIBITS

Exhibit No.		Description of Exhibit	Method of Filing
(2)		Plan of acquisition, reorganization, arrangement, liquidation or succession:
	2.1	Stock Purchase Agreement among PMA Capital Corporation, Charles C. Caldwell, Thomas G. Hamill, Colin D. O’Connor and J. Mark Davis dated as of October 1, 2007.	Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 2, 2007 and incorporated herein by reference.
(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 for the quarter ended June 30, 2003 and incorporated herein by reference.
	3.2	Amended and Restated Bylaws of the Company.	Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 28, 2007 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 (File No. 000-22761) and incorporated herein by reference.
	4.2	Senior Indenture, dated as of October 21, 2002, between the Company and State Street Bank and Trust Company, as Trustee.	Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on October 21, 2002 and incorporated herein by reference.
	4.3	First Supplemental Indenture, dated as of October 21, 2002, between the Company and State Street Bank and Trust Company (predecessor of U.S. Bank National Association), as Trustee.	Filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on October 21, 2002 and incorporated herein by reference.
	4.4	Form of 4.25% Convertible Senior Debenture due September 30, 2022.	Filed as Exhibit 4.3 to the Company's Current Report on Form 8-K filed on October 21, 2002 and incorporated herein by reference.

4.5 Second Supplemental Indenture, dated as of June 5, 2003, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company), as Trustee.   Filed as Exhibit 4.3 to the Company's Current Report on Form 8-K filed on June 5, 2003 and incorporated herein by reference.  

E-1

	4.6	Third Supplemental Indenture, dated as of November 15, 2004, between the Company and U.S. Bank National Association (successor to State Street Bank and Trust Company), as Trustee.	Filed as Exhibit 4.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
	4.7	Form of 8.50% Monthly Income Senior Note due June 15, 2018.	Filed as Exhibit 4.4 to the Company's Current Report on Form 8-K filed on June 5, 2003 and incorporated herein by reference.
	4.8	Indenture, dated November 15, 2004, between the Company and U.S. Bank National Association, as Trustee.	Filed as Exhibit 4.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
	4.9	First Supplemental Indenture, dated November 15, 2004, between the Company and U.S. Bank National Association, as Trustee.	Filed as Exhibit 4.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
	4.10	Registration Rights Agreement, dated as of November 15, 2004, between the Company and Banc of America Securities, LLC.	Filed as Exhibit 4.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
	4.11	Indenture dated as of September 29, 2005, between Pennsylvania Manufacturers’ Association Insurance Company and JP Morgan Chase Bank, National Association as Trustee.	Filed as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference.
	4.12	Indenture dated as of June 21, 2007 between the Company and Wilmington Trust Company as Trustee.	Filed herewith.
(10)		Material Contracts:
		Exhibits 10.1 through 10.36 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 (File No. 000-22761) and incorporated herein by reference.
10.2	PMA Capital Corporation 401(k) Excess Plan (as Amended and Restated effective January 1, 2000).	Filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.

E-2

10.3	First Amendment to PMA Capital Corporation 401(k) Excess Plan dated May 12, 2003.	Filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10.4	Second Amendment to PMA Capital Corporation 401(k) Excess Plan dated July 1, 2004.	Filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10.5	Third Amendment to PMA Capital Corporation 401(k) Excess Plan dated October 24, 2005.	Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference.
10.6	Fourth Amendment to PMA Capital Corporation Retirement Savings Excess Plan (formerly known as 401(k) Excess Plan).	Filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10.7	Amendment 2007-1 to the PMA Capital Corporation Retirement Savings Excess Plan.	Filed herewith.
10.8	PMA Capital Corporation Supplemental Executive Retirement Plan (as Amended and Restated effective January 1, 2000).	Filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
10.9	First Amendment to PMA Capital Corporation Supplemental Executive Retirement Plan dated May 12, 2003.	Filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

10.10	Second Amendment to PMA Capital Corporation Supplemental Executive Retirement Plan dated October 24, 2005.	Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference.
10.11	PMA Capital Corporation Executive Deferred Compensation Plan (as Amended and Restated Effective January 1, 2000).	Filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
10.12	First Amendment to Executive Deferred Compensation Plan dated May 12, 2003.	Filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

E-3

10.13	Second Amendment to Executive Deferred Compensation Plan dated July 1, 2004.	Filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10.14	Third Amendment to Executive Deferred Compensation Plan dated September 30, 2005.	Filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10.15	Deferred Compensation Plan for Non-Employee Directors of PMA Capital Corporation (Amended and Restated November 1, 2000).	Filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 000-22761) and incorporated herein by reference.
10.16	First Amendment to the PMA Capital Corporation Deferred Compensation Plan for Non-Employee Directors dated November 21, 2005.	Filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10.17	PMA Capital Corporation Executive Management Pension Plan (as Amended and Restated effective January 1, 2000).	Filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
10.18	First Amendment to PMA Capital Corporation Executive Management Pension Plan dated May 2003.	Filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

10.19	Second Amendment to PMA Capital Corporation Executive Management Pension Plan dated October 24, 2005.	Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference.
10.20	Amended and Restated Employment Agreement by and between the Company and Vincent T. Donnelly.	Filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March 23, 2006 and incorporated herein by reference.
10.21	Amended and Restated Employment Agreement by and between the Company and William E. Hitselberger.	Filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on March 23, 2006 and incorporated herein by reference.

E-4

10.22	Amended and Restated Employment Agreement by and between the Company and Robert L. Pratter.	Filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on March 23, 2006 and incorporated herein by reference.
10.23	Amended and Restated 1993 Equity Incentive Plan.	Filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
10.24	Amended and Restated 1994 Equity Incentive Plan.	Filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
10.25	Amendment No. 1 to the Amended and Restated 1994 Equity Incentive Plan dated May 5, 1999.	Filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
10.26	1995 Equity Incentive Plan.	Filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.

10.27	Amendment No. 1 to the 1995 Equity Incentive Plan dated May 5, 1999.	Filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
10.28	1996 Equity Incentive Plan.	Filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
10.29	Amendment No. 1 to the 1996 Equity Incentive Plan dated May 5, 1999.	Filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
10.30	1999 Equity Incentive Plan.	Filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.

E-5

10.31	2002 Equity Incentive Plan.	Filed as Appendix A to the Company's Proxy Statement on Schedule 14A dated March 22, 2002 and incorporated herein by reference.
10.32	Amendment No. 1 to Company's 2002 Equity Incentive Plan.	Filed as Exhibit 10.25 to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2003 and incorporated herein by reference.
10.33	PMA Capital Corporation Director Stock Compensation Plan, effective May 12, 2004.	Filed as Appendix A to the Company’s Proxy Statement on Schedule 14A dated March 22, 2002 and incorporated herein by reference.
10.34	Agreement and Release dated August 25, 2006 between the Company and Henry O. Schramm.	Filed as Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10.35	Agreement and Release dated January 31, 2007 between the Company and Richard DeCoux.	Filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

10.36	June 24, 2005 Retention Letter Agreement between PMA Capital Insurance Company and Richard DeCoux.	Filed as Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
10.37	Transfer and Purchase Agreement dated December 2, 2003, between PMACIC and Imagine Insurance Company Limited, a wholly-owned subsidiary of Imagine Group Holdings Limited.	Filed as Exhibit 10.33 to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2003 and incorporated herein by reference.
10.38	Office Lease by and between Nine Penn Center Associates, L.P., as Landlord, and Lorjo Corp. as Tenant, covering the premises located at Mellon Bank, 1735 Market St, Philadelphia, Pennsylvania dated May 26, 1994.	Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.
10.39	First Amendment of Office Lease by and between Nine Penn Center Associates, L.P., as Landlord and Lorjo Corp., as Tenant, covering premises located at Mellon Bank Center, 1735 Market St., Philadelphia, Pennsylvania, made as of October 30, 1996.	Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.

E-6

10.40	Second Amendment of Office Lease by and between Nine Penn Center Associates, L.P., as Landlord and Lorjo Corp., as Tenant, covering premises located at Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania, made as of December 11, 1998.	Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.
10.41	Third Amendment of Office Lease by and between Nine Penn Center Associates, L.P., as Landlord and PMA Capital Insurance Company, as Tenant, covering premises located at Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania, retroactively as of May 16, 2001.	Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.
10.42	Fourth Amendment of Office Lease by and between Nine Penn Center Associates, L.P., as Landlord and PMA Capital Insurance Company, as Tenant, covering premises located at Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania, made and entered into effective as of July 2, 2003.	Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and incorporated herein by reference.

	10.43	Fifth Amendment of Office Lease by and between Nine Penn Center Associates, L.P., as Landlord, and PMA Capital Insurance Company, as Tenant, covering the premises located at Mellon Bank Center, 1735 Market Street, Philadelphia, Pennsylvania, made and entered into effective as of April 30, 2004.	Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.
	10.44	Sixth Amendment of Office Lease by and between Nine Penn Center Associates, L.P., as Landlord, and PMA Capital Insurance Company, as Tenant, covering the premises located at Mellon Bank, 1735 Market Street, Philadelphia, Pennsylvania, made and entered into effective as of June 14, 2004.	Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated herein by reference.
	10.45	Seventh Amendment of Office Lease by and between Nine Penn Center Associates, L.P., as Landlord, and PMA Capital Insurance Company, as Tenant, covering the premises located at Mellon Bank, 1735 Market Street, Philadelphia, Pennsylvania, made and entered into effective as of January 25, 2007.	Filed as Exhibit 10.44 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.
(12)		Computation of Ratio of Earnings to Fixed Charges.	Filed herewith.
(21)		Subsidiaries of the Company.	Filed herewith.

E-7

(23)		Consent of Independent Registered Public Accounting Firm:
	23	Consent of Beard Miller Company LLP.	Filed herewith.
(24)		Power of Attorney:
	24.1	Powers of Attorney.	Filed herewith.
	24.2	Certified Resolutions.	Filed herewith.
(31)		Rule 13a-14(a) Certifications:
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.	Filed herewith.
	31.2	Certification of CFO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.	Filed herewith.
(32)		Section 1350 Certifications:
	32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.
	32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.
(99)		Additional Exhibits:
	99.1	Letter Agreement, dated December 22, 2003, between PMA Capital Insurance Company and the Pennsylvania Department of Insurance.	Filed as Exhibit 99 to the Company's Current Report on Form 8-K dated December 22, 2003 and incorporated herein by reference.

* The registrant will furnish to the Commission, upon request, a copy of any of the registrant’s agreements with respect to its long-term debt not otherwise filed with the Commission.

Shareholders may obtain copies of exhibits by writing to the Company at PMA Capital Corporation, 380 Sentry Parkway, Blue Bell, PA  19422, Attention: Secretary

E-8

EX-4.12

Exhibit 4.12   Execution Copy

PMA CAPITAL CORPORATION,

as Issuer

INDENTURE

Dated as of June 21, 2007

WILMINGTON TRUST COMPANY,

as Trustee

FLOATING RATE JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

DUE 2037

TABLE OF CONTENTS

Page

ARTICLE I. DEFINITIONS 1

Section 1.1. Definitions 1

ARTICLE II. DEBENTURES 7

Section 2.1.	Authentication and Dating	7
Section 2.2.	Form of Trustee’s Certificate of Authentication	8
Section 2.3.	Form and Denomination of Debentures	8
Section 2.4.	Execution of Debentures	8
Section 2.5.	Exchange and Registration of Transfer of Debentures.	9
Section 2.6.	Mutilated, Destroyed, Lost or Stolen Debentures	11
Section 2.7.	Temporary Debentures	12
Section 2.8.	Payment of Interest and Additional Interest	13
Section 2.9.	Cancellation of Debentures Paid, etc	14
Section 2.10.	Computation of Interest	14
Section 2.11.	Extension of Interest Payment Period	16
Section 2.12.	CUSIP Numbers	17

ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY 18

Section 3.1.	Payment of Principal, Premium and Interest; Agreed Treatment of the Debentures.	18
Section 3.2.	Offices for Notices and Payments, etc	19
Section 3.3.	Appointments to Fill Vacancies in Trustee’s Office	19
Section 3.4.	Provision as to Paying Agent.	19
Section 3.5.	Certificate to Trustee	20
Section 3.6.	Additional Sums	20
Section 3.7.	Compliance with Consolidation Provisions	21
Section 3.8.	Limitation on Dividends	21
Section 3.9.	Covenants as to the Trust	22
Section 3.10.	Additional Junior Indebtedness	22

ARTICLE IV. SECURITYHOLDERS LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE 22

Section 4.1.	Securityholders Lists	22
Section 4.2.	Preservation and Disclosure of Lists.	23

ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT 24

Section 5.1.	Events of Default	24
Section 5.2.	Payment of Debentures on Default; Suit Therefor	26
Section 5.3.	Application of Moneys Collected by Trustee	27

i

Section 5.4.	Proceedings by Securityholders	28
Section 5.5.	Proceedings by Trustee	28
Section 5.6.	Remedies Cumulative and Continuing; Delay or Omission Not a Waiver	29
Section 5.7.	Direction of Proceedings and Waiver of Defaults by Majority of Securityholders	29
Section 5.8.	Notice of Defaults	30
Section 5.9.	Undertaking to Pay Costs	30

ARTICLE VI. CONCERNING THE TRUSTEE 30

Section 6.1.	Duties and Responsibilities of Trustee	30
Section 6.2.	Reliance on Documents, Opinions, etc	31
Section 6.3.	No Responsibility for Recitals, etc	32
Section 6.4.	Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debentures	33
Section 6.5.	Moneys to be Held in Trust	33
Section 6.6.	Compensation and Expenses of Trustee	33
Section 6.7.	Officers’ Certificate as Evidence	34
Section 6.8.	Eligibility of Trustee	34
Section 6.9.	Resignation or Removal of Trustee.	35
Section 6.10.	Acceptance by Successor Trustee	36
Section 6.11.	Succession by Merger, etc	37
Section 6.12.	Authenticating Agents	37

ARTICLE VII. CONCERNING THE SECURITYHOLDERS 38

Section 7.1.	Action by Securityholders	38
Section 7.2.	Proof of Execution by Securityholders	39
Section 7.3.	Who Are Deemed Absolute Owners	39
Section 7.4.	Debentures Owned by Company Deemed Not Outstanding	39
Section 7.5.	Revocation of Consents; Future Holders Bound	40

ARTICLE VIII. SECURITYHOLDERS MEETINGS 40

Section 8.1.	Purposes of Meetings	40
Section 8.2.	Call of Meetings by Trustee	40
Section 8.3.	Call of Meetings by Company or Securityholders	41
Section 8.4.	Qualifications for Voting	41
Section 8.5.	Regulations	41
Section 8.6.	Voting	41
Section 8.7.	Quorum; Actions	42

ARTICLE IX. SUPPLEMENTAL INDENTURES 43

Section 9.1.	Supplemental Indentures without Consent of Securityholders	43
Section 9.2.	Supplemental Indentures with Consent of Securityholders	44
Section 9.3.	Effect of Supplemental Indentures	45
Section 9.4.	Notation on Debentures	45

ii

Section 9.5. Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee 45

ARTICLE X. REDEMPTION OF SECURITIES 45

Section 10.1.	Optional Redemption	45
Section 10.2.	Special Event Redemption	46
Section 10.3.	Notice of Redemption; Selection of Debentures	46
Section 10.4.	Payment of Debentures Called for Redemption	47

ARTICLE XI.	CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE	47
Section 11.1.	Company May Consolidate, etc., on Certain Terms	47
Section 11.2.	Successor Entity to be Substituted	47
Section 11.3.	Opinion of Counsel to be Given to Trustee	48

ARTICLE XII. SATISFACTION AND DISCHARGE OF INDENTURE 48

Section 12.1.	Discharge of Indenture.	48
Section 12.2.	Deposited Moneys to be Held in Trust by Trustee	49
Section 12.3.	Paying Agent to Repay Moneys Held	49
Section 12.4.	Return of Unclaimed Moneys	49

ARTICLE XIII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS 49

Section 13.1. Indenture and Debentures Solely Corporate Obligations 49

ARTICLE XIV. MISCELLANEOUS PROVISIONS 50

Section 14.1.	Successors	50
Section 14.2.	Official Acts by Successor Entity	50
Section 14.3.	Surrender of Company Powers	50
Section 14.4.	Addresses for Notices, etc	50
Section 14.5.	Governing Law	50
Section 14.6.	Evidence of Compliance with Conditions Precedent	51
Section 14.7.	Table of Contents, Headings, etc	51
Section 14.8.	Execution in Counterparts	51
Section 14.9.	Severability	51
Section 14.10.	Assignment	51
Section 14.11.	Acknowledgment of Rights	51

ARTICLE XV. SUBORDINATION OF DEBENTURES 52

Section 15.1.	Agreement to Subordinate	52
Section 15.2.	Default on Senior Indebtedness	52
Section 15.3.	Liquidation, Dissolution, Bankruptcy	53
Section 15.4.	Subrogation	54
Section 15.5.	Trustee to Effectuate Subordination	55
Section 15.6.	Notice by the Company	55

iii

Section 15.7.	Rights of the Trustee; Holders of Senior Indebtedness	55
Section 15.8.	Subordination May Not Be Impaired	56

Exhibit A                      Form of Floating Rate Junior Subordinated Deferrable Interest Debenture

iv

THIS INDENTURE, dated as of June 21, 2007, between PMA Capital Corporation, a Pennsylvania corporation (the “Company”), and Wilmington Trust Company, a banking corporation organized under the laws of the State of Delaware, as debenture trustee (the “Trustee”).

WITNESSETH:

WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Floating Rate Junior Subordinated Deferrable Interest Debentures due 2037 (the “Debentures”) under this Indenture to provide, among other things, for the execution and authentication, delivery and administration thereof, and the Company has duly authorized the execution of this Indenture; and

WHEREAS, all acts and things necessary to make this Indenture a valid agreement according to its terms, have been done and performed;

NOW, THEREFORE, in consideration of the premises, and the purchase of the Debentures by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debentures as follows:

ARTICLE I.

DEFINITIONS

Section 1.1.  Definitions.The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1.  All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term “generally accepted accounting principles” means such accounting principles as are generally accepted in the United States at the time of any computation.  The words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

“Additional Interest” has the meaning set forth in Section 2.11.

“Additional Junior Indebtedness” means, without duplication and other than the Debentures, (a) any indebtedness, liabilities or obligations of the Company, or any Subsidiary of the Company, under debt securities (or guarantees in respect of debt securities) initially issued on or after the date of this Indenture to any trust, or a trustee of a trust, partnership or other entity that is, directly or indirectly, a finance subsidiary (as such term is defined in Rule 3a-5 under the Investment Company Act of 1940) or other financing vehicle of the Company or any Subsidiary of the Company in connection with the issuance by that entity of preferred securities, (b) other securities that are issued either junior and subordinate to or on a pari passu basis with the Debentures or (c) any guarantees of the Company in respect of the equity or other securities of any entity referred to in clause (a).

“Additional Sums” has the meaning set forth in Section 3.6.

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“Affiliate” has the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder.

“Authenticating Agent” means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.12.

“Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.

“Board of Directors” means the board of directors or the executive committee or any other duly authorized designated officers of the Company.

“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee.

“Business Day” means any day other than a Saturday, Sunday or any other day on which banking institutions in New York City or Wilmington, Delaware are permitted or required by any applicable law to close.

“Capital Securities” means undivided beneficial interests in the assets of the Trust which rank pari passu with Common Securities issued by the Trust; provided, however, that upon the occurrence and during the continuation of an Event of Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities.

“Capital Securities Guarantee” means the guarantee agreement that the Company enters into with Wilmington Trust Company, as guarantee trustee, or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of the Trust.

“Capital Stock” means any and all shares, interests, rights to purchase, warrants, options, participations or interests in (however designated) equity of such Person, including without limitation any common stock, preferred stock and Trust Preferred Securities.

“Certificate” means a certificate signed by any one of the principal executive officer, the principal financial officer or the principal accounting officer of the Company.

“Common Securities” means undivided beneficial interests in the assets of the Trust which rank pari passu with Capital Securities issued by the Trust; provided, however, that upon the occurrence and during the continuation of an Event of Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities.

“Company” means PMA Capital Corporation, a Pennsylvania corporation, and, subject to the provisions of Article XI, shall include its successors and assigns.

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“Coupon Rate” has the meaning set forth in Section 2.8.

“Debenture” or “Debentures” has the meaning stated in the first recital of this Indenture.

“Debenture Register” has the meaning specified in Section 2.5.

“Declaration” means the Amended and Restated Declaration of Trust of the Trust, as amended or supplemented from time to time.

“Default” means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default.

“Defaulted Interest” has the meaning set forth in Section 2.8.

“Determination Date” has the meaning set forth in Section 2.10.

“Distribution Period” means (i) with respect to the first Interest Payment Date, the period beginning on (and including) the date of original issuance and ending on (but excluding) the Interest Payment Date in September 2007 and (ii) thereafter, with respect to each Interest Payment Date, the period beginning on (and including) the preceding Interest Payment Date and ending on (but excluding) such current Interest Payment Date.

“Event of Default” means any event specified in Section 5.1, continued for the period of time, if any, and after the giving of the notice, if any, therein designated.

“Exchange Act” means the Securities Exchange Act of 1934, and any successor statute thereto, in each case as amended from time to time.

“Extension Period” has the meaning set forth in Section 2.11.

“Indenture” means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both.

“Institutional Trustee” has the meaning set forth in the Declaration.

“Interest Payment Date” means each March 15, June 15, September 15 and December 15 of each year during the term of this Indenture, or if any such day is not a Business Day, then the next succeeding Business Day, commencing in September 2007.

“Interest Rate” means for the period beginning on (and including) the date of original issuance and ending on (but excluding) the Interest Payment Date in September 2007 the rate per annum of 8.91% and for each Distribution Period thereafter, the Coupon Rate.

“Investment Company Event” means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or written change (including any announced prospective change) in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within

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90 days of the date of such opinion will be considered an “investment company” that is required to be registered under the Investment Company Act of 1940, as amended which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Debentures.

“Liquidation Amount” means the stated amount of $1,000.00 per Trust Security.

“Maturity Date” means June 15, 2037.

“Officers’ Certificate” means a certificate signed by the Chief Executive Officer, the Vice Chairman, the President, or any Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee.  Each such certificate shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section.

“Opinion of Counsel” means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or may be other counsel reasonably satisfactory to the Trustee.  Each such opinion shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section.

“Optional Redemption Date” has the meaning set forth in Section 10.1.

“Optional Redemption Price” means 100% of the principal amount of the Debentures being redeemed, plus accrued and unpaid interest (including any Additional Interest) on such Debentures to the Optional Redemption Date.

The term “outstanding,” when used with reference to Debentures, means, subject to the provisions of Section 7.4, as of any particular time, all Debentures authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except:

(a)           Debentures theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation;

(b)           Debentures, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, however, that, if such Debentures, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Section 10.3 or provision satisfactory to the Trustee shall have been made for giving such notice; and

(c)           Debentures paid pursuant to Section 2.6 or in lieu of or in substitution for which other Debentures shall have been authenticated and delivered pursuant to the terms of Section 2.6 unless proof satisfactory to the Company and the Trustee is presented that any such Debentures are held by bona fide holders in due course.

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“Person” means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Pooled Companies” means Pennsylvania Manufacturers’ Association Insurance Company, Manufacturers Alliance Insurance Company and Pennsylvania Manufacturers Indemnity Company, collectively.

“Predecessor Security” of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for purposes of this definition, any Debenture authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or stolen Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Debenture.

“Principal Office of the Trustee,” or other similar term, means the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which at the time of the execution of this Indenture shall be 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration.

“Responsible Officer” means, with respect to the Trustee, any officer within the Principal Office of the Trustee, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer, financial services officer or other officer of the Principal Trust Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer’s knowledge of and familiarity with the particular subject.

“Securities Act” means the Securities Act of 1933, as amended from time to time or any successor legislation.

“Securityholder,” “holder of Debentures,” or other similar terms, means any Person in whose name at the time a particular Debenture is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof.

“Senior Indebtedness” means, with respect to the Company, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement; (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker’s acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any lien on any property

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or asset of the Company (whether or not such obligation is assumed by the Company), whether incurred on or prior to the date of this Indenture or thereafter incurred.  Notwithstanding the foregoing, “Senior Indebtedness” shall not include (1) any Additional Junior Indebtedness, (2) Debentures issued pursuant to this Indenture and guarantees in respect of such Debentures, (3) trade accounts payable of the Company arising in the ordinary course of business (such trade accounts payable being pari passu in right of payment to the Debentures), or (4) obligations with respect to which (a) in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are pari passu, junior or otherwise not superior in right of payment to the Debentures and (b) the Company, prior to the issuance thereof, has, if required, notified the relevant state insurance regulatory agency.  Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the subordination provisions irrespective of any amendment, modification or waiver of any term of such Senior Indebtedness.

“Special Event” means either of an Investment Company Event or a Tax Event.

“Special Redemption Date” has the meaning set forth in Section 10.2.

“Special Redemption Price” means (i) 107.5% of the principal amount of the Debentures being redeemed on a Special Redemption Date that occurs before the Interest Payment Date in June, 2012 and (ii) 100% of the principal amount of the Debentures being redeemed on a Special Redemption Date that occurs on or after the Interest Payment Date in June, 2012, plus accrued and unpaid interest (including any Additional Interest) on such Debentures to the Special Redemption Date.

“Subsidiary” means with respect to any Person, (i) any corporation or limited liability company at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner.  For the purposes of this definition, “voting stock” means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency.

“Tax Event” means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, field service advice, regulatory procedure, notice or announcement, including any notice or announcement of intent to adopt such procedures or regulations (an “Administrative Action”)) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a

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proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that:  (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures; (ii) interest payable by the Company on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes (excluding withholding taxes), duties or other governmental charges.

“Telerate Page 3750” has the meaning set forth in Section 2.10.

“3-Month LIBOR” has the meaning set forth in Section 2.10.

“Trust” shall mean PMA Capital Statutory Trust VII, a Delaware statutory trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debentures under this Indenture, of which the Company is the sponsor.

“Trust Preferred Securities” means any preferred securities issued by an entity that is, directly or indirectly, a finance subsidiary (as such term is defined in Rule 3a-5 under the Investment Company Act of 1940) or other financing vehicle of the Company or any Subsidiary of the Company.

“Trustee” means Wilmington Trust Company, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder.

“Trust Securities” means Common Securities and Capital Securities of the Trust.

ARTICLE II.

DEBENTURES

Section 2.1.  Authentication and Dating.  Upon the execution and delivery of this Indenture, or from time to time thereafter, Debentures in an aggregate principal amount not in excess of $20,619,000.00 may be executed and delivered by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Debentures to or upon the written order of the Company, signed by its Chief Executive Officer, the President, or one of its Vice Presidents without any further action by the Company hereunder.  In authenticating such Debentures, and accepting the additional responsibilities under this Indenture in relation to such Debentures, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon:

(a)           a copy of any Board Resolution or Board Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company, as the case may be; and

(b)           an Opinion of Counsel prepared in accordance with Section 14.6 which shall also state:

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(1)           that such Debentures, when authenticated and delivered by the Trustee and issued by the Company in each case in the manner and subject to any conditions specified in such Opinion of Counsel, will have been duly authorized, executed and delivered by the Company, will be entitled to the benefits of this Indenture and will be legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other laws affecting the rights and remedies of creditors generally and of general principles of equity; and

(2)           that all laws and requirements in respect of the execution and delivery by the Company of the Debentures have been complied with and that authentication and delivery of the Debentures by the Trustee will not violate the terms of this Indenture.

The Trustee shall have the right to decline to authenticate and deliver any Debentures under this Section if the Trustee, being advised in writing by counsel, determines that such action may not lawfully be taken or if a Responsible Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing holders.

The definitive Debentures shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debentures, as evidenced by their execution of such Debentures.

Section 2.2.  Form of Trustee’s Certificate of Authentication.  The Trustee’s certificate of authentication on all Debentures shall be in substantially the following form:

This is one of the Debentures referred to in the within-mentioned Indenture.

WILMINGTON TRUST COMPANY, as Trustee

By

Authorized Signer

Section 2.3.  Form and Denomination of Debentures.  The Debentures shall be substantially in the form of Exhibit A attached hereto.  The Debentures shall be in registered, certificated form without coupons and in minimum denominations of $100,000.00 and any multiple of $1,000.00 in excess thereof.  Any attempted transfer of the Debentures in a block having an aggregate principal amount of less than $100,000.00 shall be deemed to be void and of no legal effect whatsoever.  Any such purported transferee shall be deemed not to be a holder of such Debentures for any purpose, including, but not limited to the receipt of payments on such Debentures, and such purported transferee shall be deemed to have no interest whatsoever in such Debentures.  The Debentures shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof.

Section 2.4.  Execution of Debentures.  The Debentures shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chief Executive Officer, President, or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents.  Only such Debentures as shall bear thereon a certificate of authentication

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substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized signer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose.  Such certificate by the Trustee or the Authenticating Agent upon any Debenture executed by the Company shall be conclusive evidence that the Debenture so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture.

In case any officer of the Company who shall have signed any of the Debentures shall cease to be such officer before the Debentures so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debentures nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debentures had not ceased to be such officer of the Company; and any Debenture may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debenture, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer.

Every Debenture shall be dated the date of its authentication.

Section 2.5.  Exchange and Registration of Transfer of Debentures.  The Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.2, a register (the “Debenture Register”) for the Debentures issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debentures as in this Article II provided.  The Debenture Register shall be in written form or in any other form capable of being converted into written form within a reasonable time.

Debentures to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.2, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Debenture or Debentures which the Securityholder making the exchange shall be entitled to receive.  Upon due presentment for registration of transfer of any Debenture at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.2, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debenture for a like aggregate principal amount.  Registration or registration of transfer of any Debenture by the Trustee or by any agent of the Company appointed pursuant to Section 3.2, and delivery of such Debenture, shall be deemed to complete the registration or registration of transfer of such Debenture.

All Debentures presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee or the Authenticating Agent duly executed by the holder or his attorney duly authorized in writing.

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No service charge shall be made for any exchange or registration of transfer of Debentures, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith.

The Company or the Trustee shall not be required to exchange or register a transfer of any Debenture for a period of 15 days next preceding the date of selection of Debentures for redemption.

Notwithstanding anything herein to the contrary, Debentures may not be transferred except in compliance with the restricted securities legend set forth below, unless otherwise determined by the Company, upon the advice of counsel expert in securities law, in accordance with applicable law:

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW.  NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.  THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY.

THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF

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1974, AS AMENDED (“ERISA”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING.  ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF.  ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER.

THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.

THIS SECURITY IS IN REGISTERED FORM WITHIN THE MEANING OF TREASURY REGULATIONS SECTION 1.871-14(c)(1)(i) FOR U.S. FEDERAL INCOME AND WITHHOLDING TAX PURPOSES.

IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

Section 2.6.  Mutilated, Destroyed, Lost or Stolen Debentures.  In case any Debenture shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debenture bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debenture, or in lieu of and in substitution for the Debenture so destroyed, lost or stolen.  In every case the applicant for a substituted Debenture shall furnish to the Company and the Trustee

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such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debenture and of the ownership thereof.

The Trustee may authenticate any such substituted Debenture and deliver the same upon the written request or authorization of any officer of the Company.  Upon the issuance of any substituted Debenture, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith.  In case any Debenture which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debenture) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Debenture and of the ownership thereof.

Every substituted Debenture issued pursuant to the provisions of this Section 2.6 by virtue of the fact that any such Debenture is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debenture shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder.  All Debentures shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender.

Section 2.7.  Temporary Debentures.  Pending the preparation of definitive Debentures, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debentures that are typed, printed or lithographed.  Temporary Debentures shall be issuable in any authorized denomination, and substantially in the form of the definitive Debentures in lieu of which they are issued but with such omissions, insertions and variations as may be appropriate for temporary Debentures, all as may be determined by the Company.  Every such temporary Debenture shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Debentures.  Without unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debentures and thereupon any or all temporary Debentures may be surrendered in exchange therefor, at the principal corporate trust office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.2, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debentures a like aggregate principal amount of such definitive Debentures.  Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax,

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fee or other governmental charge that may be imposed in relation thereto.  Until so exchanged, the temporary Debentures shall in all respects be entitled to the same benefits under this Indenture as definitive Debentures authenticated and delivered hereunder.

Section 2.8.  Payment of Interest and Additional Interest.  Interest at the Interest Rate and any Additional Interest on any Debenture that is payable, and is punctually paid or duly provided for, on any Interest Payment Date for Debentures shall be paid to the Person in whose name said Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment except that interest and any Additional Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid.  

Each Debenture shall bear interest for the period beginning on (and including) the date of original issuance and ending on (but excluding) the Interest Payment Date in September 2007 at a rate per annum of 8.91%, and shall bear interest for each successive period beginning on or after the Interest Payment Date in September 2007 at a rate per annum equal to the 3-Month LIBOR, determined as described in Section 2.10, plus 3.55% (the “Coupon Rate”), applied to the principal amount thereof, until the principal thereof becomes due and payable, and on any overdue principal and to the extent that payment of such interest is enforceable under applicable law (without duplication) on any overdue installment of interest (including Additional Interest) at the Interest Rate in effect for each applicable period compounded quarterly.  Interest shall be payable (subject to any relevant Extension Period) quarterly in arrears on each Interest Payment Date with the first installment of interest to be paid on the Interest Payment Date in September 2007.

Any interest on any Debenture, including Additional Interest, that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing at least 25 days prior to the date of the proposed payment of the amount of Defaulted Interest proposed to be paid on each such Debenture and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided.  Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment.  The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at its address as it appears in the Debenture Register, not less than 10 days prior to such special record date.  Notice of the proposed payment of such Defaulted Interest and the special record date therefor having

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been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable.

The Company may make payment of any Defaulted Interest on any Debentures in any other lawful manner after notice given by the Company to the Trustee of the proposed payment method; provided, however, the Trustee in its sole discretion deems such payment method to be practical.

Any interest (including Additional Interest) scheduled to become payable on an Interest Payment Date occurring during an Extension Period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debentures.

The term “regular record date” as used in this Section shall mean the close of business on the 15th calendar day next preceding the applicable Interest Payment Date.

Subject to the foregoing provisions of this Section, each Debenture delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debenture.

Section 2.9.   Cancellation of Debentures Paid, etc.  All Debentures surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debentures shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture.  All Debentures canceled by any Authenticating Agent shall be delivered to the Trustee.  The Trustee shall destroy all canceled Debentures unless the Company otherwise directs the Trustee in writing.  If the Company shall acquire any of the Debentures, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are surrendered to the Trustee for cancellation.

Section 2.10.  Computation of Interest.  The amount of interest payable for the Distribution Period commencing on the Interest Payment Date in September 2007 and each succeeding Distribution Period will be calculated by applying the Interest Rate to the principal amount outstanding at the commencement of the Distribution Period and multiplying each such amount by the actual number of days in the Distribution Period concerned divided by 360.  All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or ..09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)).

(a)           “3-Month LIBOR” means the London interbank offered interest rate for three-month, U.S. dollar deposits determined by the Trustee in the following order of priority:

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(1)           the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date (as defined below).  “Telerate Page 3750” means the display designated as “Page 3750” on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers’ Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits;

(2)           if such rate cannot be identified on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks’ offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date.  If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations;

(3)           if fewer than two such quotations are provided as requested in clause (2) above, the Trustee will request four major New York City banks to provide such banks’ offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date.  If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and

(4)           if fewer than two such quotations are provided as requested in clause (3) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period.

If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date.

(b)           The Interest Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law.

(c)           “Determination Date” means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the particular Distribution Period for which a Coupon Rate is being determined.

(d)           The Trustee shall notify the Company, the Institutional Trustee and any securities exchange or interdealer quotation system on which the Capital Securities are listed, of the Coupon Rate and the Determination Date for each Distribution Period, in each case as soon as practicable after the determination thereof but in no event later than the thirtieth (30th) day of the

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relevant Distribution Period.  Failure to notify the Company, the Institutional Trustee or any securities exchange or interdealer quotation system, or any defect in said notice, shall not affect the obligation of the Company to make payment on the Debentures at the applicable Coupon Rate.  Any error in the calculation of the Coupon Rate by the Trustee may be corrected at any time by notice delivered as above provided.  Upon the request of a holder of a Debenture, the Trustee shall provide the Coupon Rate then in effect and, if determined, the Coupon Rate for the next Distribution Period.

(e)           Subject to the corrective rights set forth above, all certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions relating to the payment and calculation of interest on the Debentures and distributions on the Capital Securities by the Trustee or the Institutional Trustee will (in the absence of willful default, bad faith and manifest error) be final, conclusive and binding on the Trust, the Company and all of the holders of the Debentures and the Capital Securities, and no liability shall (in the absence of willful default, bad faith or manifest error) attach to the Trustee or the Institutional Trustee in connection with the exercise or non-exercise by either of them of their respective powers, duties and discretion.

Section 2.11.  Extension of Interest Payment Period.  So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an “Extension Period”), during which Extension Period no interest (including Additional Interest) shall be due and payable (except any Additional Sums that may be due and payable).  No Extension Period may end on a date other than an Interest Payment Date.  During an Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Interest Rate in effect for such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as “Additional Interest”).  At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date; provided further, however, that during any such Extension Period, the Company shall not, and shall not permit any Affiliate of the Company controlled by the Company (including, without limitation, any entity issuing Trust Preferred Securities) to, (i) declare or pay any dividends or distributions on, or repay, repurchase, redeem, acquire, or make a liquidation payment with respect to, any of the Company's or such Affiliates' common stock or preferred stock (other than payments of dividends or distributions to the Company or a Subsidiary of the Company) or make any guarantee payments with respect to the foregoing, (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities or other debt obligations of the Company or any Affiliate of the Company controlled by the Company that rank pari passu in all respects with or junior in interest to the Debentures or (iii) enter into, amend or modify any contract with a shareholder that directly or indirectly beneficially owns (as determined under Rule 13d-3 of the Exchange Act and which shall include securities beneficially owned by (a) all controlled Affiliates of such shareholder and (b) all other Persons with whom such shareholder would constitute a “group” within the meaning of Section 13(d) of the

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Exchange Act and the rules promulgated thereunder) more than 10% of the outstanding shares of common stock of the Company (other than, with respect to clauses (i) and (ii) above, (a) repurchases, redemptions or other acquisitions of shares of Capital Stock of the Company or any Subsidiary of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of Capital Stock of the Company or of such Subsidiary (or securities convertible into or exercisable for such Capital Stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company’s Capital Stock (or any Capital Stock of a Subsidiary of the Company) for any class or series of the Company’s Capital Stock (or in the case of a Subsidiary of the Company, any class or series of such Subsidiary’s Capital Stock) or of any class or series of the Company’s indebtedness for any class or series of the Company’s Capital Stock (or in the case of indebtedness of a Subsidiary of the Company, of any class or series of such Subsidiary’s indebtedness for any class or series of such Subsidiary’s Capital Stock), (c) the purchase of fractional interests in shares of the Company’s Capital Stock (or the Capital Stock of a Subsidiary of the Company) pursuant to the conversion or exchange provisions of such Capital Stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholders’ rights plan, or the issuance of rights, stock or other property under any stockholders’ rights plan, or the redemption or repurchase of rights pursuant thereto, (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (f) payments under the Capital Securities Guarantee).  Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date.  Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements.  No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during an Extension Period shall bear Additional Interest to the extent permitted by applicable law.  The Company must give the Trustee notice of its election to begin or extend an Extension Period at least 5 Business Days prior to the regular record date (as such term is used in Section 2.8) immediately preceding the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend an Extension Period.  The Trustee shall give notice of the Company’s election to begin a new Extension Period to the Securityholders.

Section 2.12.   CUSIP Numbers.  The Company in issuing the Debentures may use “CUSIP” numbers (if then generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a convenience to Securityholders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debentures or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debentures, and any such

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redemption shall not be affected by any defect in or omission of such numbers.  The Company will promptly notify the Trustee in writing of any change in the CUSIP numbers.

Section 2.13.  Ranking.  The Company’s obligations in respect of the Debentures shall rank pari passu with the Company’s obligations under the Indenture dated as of May 15, 2003, in respect of the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures due 2033 issued thereunder and under the Guarantee Agreement by and between the Company and U.S. Bank National Association, dated as of May 15, 2003.

ARTICLE III.

PARTICULAR COVENANTS OF THE COMPANY

Section 3.1.  Payment of Principal, Premium and Interest; Agreed Treatment of the Debentures.

(a)           The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest and any Additional Interest and other payments on the Debentures at the place, at the respective times and in the manner provided in this Indenture and the Debentures. Each installment of interest on the Debentures may be paid (i) by mailing checks for such interest payable to the order of the holders of Debentures entitled thereto as they appear on the registry books of the Company if a request for a wire transfer has not been received by the Company or (ii) by wire transfer to any account with a banking institution located in the United States designated in writing by such Person to the paying agent no later than the related record date.  Notwithstanding the foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made in immediately available funds at such place and to such account as may be designated by the Institutional Trustee.

(b)           The Company will treat the Debentures as indebtedness of the Company that is in registered form within the meaning of Treasury Regulations Section 1.871-14(c)(1)(i).  The Company will further treat the amounts payable in respect of the principal amount of such Debentures as interest for all United States federal income and withholding tax purposes.  All interest payments in respect of such Debentures will be made free and clear of United States withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service Form W-8BEN (or any substitute or successor form) establishing its non-United States status for United States federal income and withholding tax purposes.

(c)           As of the date of this Indenture, the Company has no present intention to exercise its right under Section 2.11 to defer payments of interest on the Debentures by commencing an Extension Period.

(d)           As of the date of this Indenture, the Company believes that the likelihood that it would exercise its right under Section 2.11 to defer payments of interest on the Debentures by commencing an Extension Period at any time during which the Debentures are outstanding is remote because of the restrictions that would be imposed on the Company’s ability to declare or pay dividends or distributions on, or to redeem, purchase or make a liquidation payment with respect to, any of its outstanding equity and on the Company’s ability to make any payments of

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 principal of or interest on, or repurchase or redeem, any of its debt securities that rank pari passu in all respects with (or junior in interest to) the Debentures.

Section 3.2.  Offices for Notices and Payments, etc.So long as any of the Debentures remain outstanding, the Company will maintain in Wilmington, Delaware, an office or agency where the Debentures may be presented for payment, an office or agency where the Debentures may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Debentures or of this Indenture may be served.  The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof.  Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.5, such office or agency for all of the above purposes shall be the office or agency of the Trustee.  In case the Company shall fail to maintain any such office or agency in Wilmington, Delaware, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee.

In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Wilmington, Delaware, where the Debentures may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Wilmington, Delaware, for the purposes above mentioned.  The Company will give to the Trustee prompt written notice of any such designation or rescission thereof.

Section 3.3.  Appointments to Fill Vacancies in Trustee’s Office.  The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.9, a Trustee, so that there shall at all times be a Trustee hereunder.

Section 3.4.  Provision as to Paying Agent.

(a)           If the Company shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.4,

(1)           that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest, if any, on the Debentures (whether such sums have been paid to it by the Company or by any other obligor on the Debentures) in trust for the benefit of the holders of the Debentures;

(2)           that it will give the Trustee prompt written notice of any failure by the Company (or by any other obligor on the Debentures) to make any payment of the principal of and premium, if any, or interest, if any, on the Debentures when the same shall be due and payable; and

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(3)           that it will, at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent.

(b)           If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest or other payments, if any, on the Debentures, set aside, segregate and hold in trust for the benefit of the holders of the Debentures a sum sufficient to pay such principal, premium, interest or other payments so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or by any other obligor under the Debentures) to make any payment of the principal of and premium, if any, or interest or other payments, if any, on the Debentures when the same shall become due and payable.

Whenever the Company shall have one or more paying agents for the Debentures, it will, on or prior to each due date of the principal of and premium, if any, or interest, if any, on the Debentures, deposit with a paying agent a sum sufficient to pay the principal, premium, interest or other payments so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act.

(c)           Anything in this Section 3.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Debentures, or for any other reason, pay, or direct any paying agent to pay to the Trustee all sums held in trust by the Company or any such paying agent, such sums to be held by the Trustee upon the trusts herein contained.

(d)           Anything in this Section 3.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.4 is subject to Sections 12.3 and 12.4.

Section 3.5.  Certificate to Trustee.  The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year, so long as Debentures are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any Default during such fiscal year by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such Default and, if so, specifying each such Default of which the signers have knowledge and the nature and status thereof.

Section 3.6.  Additional Sums.  If and for so long as the Trust or a trustee of the Trust is the holder of all Debentures and the Trust is required to pay any additional taxes (excluding withholding taxes), duties, assessments or other governmental charges as a result of a Tax Event, then the Company will pay such additional amounts (“Additional Sums”) on the Debentures as shall be required so that the net amounts received and retained by the Trust after paying such taxes (excluding withholding taxes), duties, assessments or other governmental charges will be equal to the amounts the Trust would have received if no such taxes (excluding withholding taxes), duties, assessments or other governmental charges had been imposed.  Whenever in this Indenture or the Debentures there is a reference in any context to the payment of principal of or interest on the Debentures, such mention shall be deemed to include mention of payments of the

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Additional Sums provided for in this paragraph to the extent that, in such context, Additional Sums are, were or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Sums (if applicable) in any provisions hereof shall not be construed as excluding Additional Sums in those provisions hereof where such express mention is not made; provided, however, that the deferral of the payment of interest during an Extension Period pursuant to Section 2.11 shall not defer the payment of any Additional Sums that may be due and payable.

Section 3.7.  Compliance with Consolidation Provisions.  The Company will not, while any of the Debentures remain outstanding, consolidate with, or merge into any other Person, or sell, convey, transfer or otherwise dispose of, directly or indirectly through its subsidiaries, in a single transaction or in any series of transactions occurring during any twelve-month period, more than 51% of its assets, unless in each case of a consolidation, merger, sale, conveyance, transfer or other disposition of assets, the provisions of Article XI hereof are complied with.

Section 3.8.  Limitation on Dividends.  If Debentures are initially issued to the Trust or a trustee of such Trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debentures continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default; (ii) the dollar amount of the Company’s premium volume from insurance policies in any calendar year fails to exceed 51% of the Company’s premium volume from insurance policies in the previous calendar year; (iii) the Company sells more than 51% of its rights to renew insurance policies in any single transaction or series of related transactions; (iv) the Pooled Companies or any entity which becomes a significant subsidiary (as defined in Section 1-02(w) of Regulation S-X to the Securities Act) of the Company which is rated by A.M. Best Company, Inc. (x) receives a rating from A.M. Best Company Inc. of B- or lower; or (y) submits a request to withdraw its rating by A.M.Best Company, Inc.; (v) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee; or (vi) the Company shall have given notice of its election to defer payments of interest on the Debentures by extending the interest payment period as provided herein and such period, or any extension thereof, shall be continuing, then the Company shall not, and shall not permit any Affiliate of the Company controlled by the Company (including, without limitation, any entity issuing Trust Preferred Securities) to, (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company’s or such Affiliates’ Capital Stock (other than payments of dividends or distributions to the Company or a Subsidiary of the Company) or make any guarantee payments with respect to the foregoing; (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities or other debt obligations of the Company or any Affiliate of the Company controlled by the Company that rank pari passu in all respects with or junior in interest to the Debentures; or (z) enter into, amend or modify any contract with a shareholder that directly or indirectly beneficially owns (as determined under Rule 13d-3 of the Exchange Act and which shall include securities beneficially owned by (i) all controlled Affiliates of such shareholder and (ii) all other Persons with whom such shareholder would constitute a “group” within the meaning of Section 13(d) of the Exchange Act and the rules promulgated thereunder) more than 10% of the outstanding shares of common stock of the Company (other than, with respect to clauses (x) and (y) above, (1) repurchases, redemptions or other acquisitions of shares of Capital Stock of the

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Company or any Subsidiary of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of Capital Stock of the Company or of such Subsidiary (or securities convertible into or exercisable for such Capital Stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (2) as a result of any exchange or conversion of any class or series of the Company’s Capital Stock (or any Capital Stock of a Subsidiary of the Company) for any class or series of the Company’s Capital Stock (or in the case of a Subsidiary of the Company, any class or series of such Subsidiary’s Capital Stock) or of any class or series of the Company’s indebtedness for any class or series of the Company’s Capital Stock (or in the case of indebtedness of a Subsidiary of the Company, of any class or series of such Subsidiary’s indebtedness for any class or series of such Subsidiary’s Capital Stock), (3) the purchase of fractional interests in shares of the Company’s Capital Stock (or the Capital Stock of a Subsidiary of the Company) pursuant to the conversion or exchange provisions of such Capital Stock or the security being converted or exchanged, (4) any declaration of a dividend in connection with any stockholders’ rights plan, or the issuance of rights, stock or other property under any stockholders’ rights plan, or the redemption or repurchase of rights pursuant thereto, (5) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (6) payments under the Capital Securities Guarantee).

Section 3.9.  Covenants as to the Trust.  For so long as the Trust Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Company under this Indenture may succeed to the Company’s ownership of such Common Securities.  The Company, as owner of the Common Securities, shall, except in connection with a distribution of Debentures to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, cause the Trust  (a) to remain a statutory trust, (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes, and (c) to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Debentures.

Section 3.10.  Additional Junior Indebtedness.The Company shall not, and it shall not cause or permit any Subsidiary of the Company to, incur, issue or be obligated on any Additional Junior Indebtedness, either directly or indirectly, by way of guarantee, suretyship or otherwise, other than Additional Junior Indebtedness that, by its terms, is expressly stated to be either junior and subordinate or pari passu in all respects to the Debentures.

ARTICLE IV.

SECURITYHOLDERS LISTS AND REPORTS

BY THE COMPANY AND THE TRUSTEE

Section 4.1.  Securityholders Lists.  The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee:

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(a)           on each regular record date for the Debentures, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of the Debentures as of such record date; and

(b)           at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished;

except that no such lists need be furnished under this Section 4.1 so long as the Trustee is in possession thereof by reason of its acting as Debenture registrar.

Section 4.2.  Preservation and Disclosure of Lists.

(a)           The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debentures (1) contained in the most recent list furnished to it as provided in Section 4.1 or (2) received by it in the capacity of Debentures registrar (if so acting) hereunder.  The Trustee may destroy any list furnished to it as provided in Section 4.1 upon receipt of a new list so furnished.

(b)           In case three or more holders of Debentures (hereinafter referred to as “applicants”) apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Debenture for a period of at least 6 months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Debentures with respect to their rights under this Indenture or under such Debentures and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within 5 Business Days after the receipt of such application, at its election, either:

(1)           afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, or

(2)           inform such applicants as to the approximate number of holders of Debentures whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application.

If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best

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interests of the holders of all Debentures, as the case may be, or would be in violation of applicable law.  Such written statement shall specify the basis of such opinion.  If said Commission, as permitted or required by applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application.

(c)           Each and every holder of Debentures, by receiving and holding the same, agrees with Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Debentures in accordance with the provisions of subsection (b) of this Section 4.2, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b).

ARTICLE V.

REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS

UPON AN EVENT OF DEFAULT

Section 5.1.   Events of Default.“Event of Default,” wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(a)           the Company defaults in the payment of any interest upon any Debenture when it becomes due and payable, and fails to cure such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms of this Indenture shall not constitute a default in the payment of interest for this purpose; or

(b)           the Company defaults in the payment of all or any part of the principal of (or premium, if any, on) any Debentures as and when the same shall become due and payable either at maturity, upon redemption, by declaration of acceleration or otherwise; or

(c)           the Company defaults in the performance of, or breaches, any of its covenants or agreements in this Indenture or in the terms of the Debentures established as contemplated in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Debentures, a written notice specifying such default or

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breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(d)           a court of competent jurisdiction shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or shall appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or shall order the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or

(e)           the Company shall commence a voluntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or

(f)           the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence except in connection with (i) the distribution of the Debentures to holders of the Trust Securities in liquidation of their interests in the Trust, (ii) the redemption of all of the outstanding Trust Securities or (iii) certain mergers, consolidations or amalgamations, each as permitted by the Declaration.

If an Event of Default occurs and is continuing with respect to the Debentures, then, and in each and every such case, unless the principal of the Debentures shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of the Debentures and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable.

The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Debentures shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, (i) the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debentures and the principal of and premium, if any, on the Debentures which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and Additional Interest) and such amount as shall be sufficient to cover reasonable compensation of the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other amounts due to the Trustee pursuant to Section 6.6, if any, and (ii) all Events of Default under this Indenture, other than the non-payment of the principal of or premium, if any, on the Debentures which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of the Debentures then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or

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rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon.

In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Debentures shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debentures shall continue as though no such proceeding had been taken.

Section 5.2.  Payment of Debentures on Default; Suit Therefor.  The Company covenants that upon the occurrence and during the continuation of an Event of Default pursuant to Section 5.1(a) or Section 5.1(b) then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debentures the whole amount that then shall have become due and payable on all Debentures for principal and premium, if any, or interest, or both, as the case may be, with Additional Interest accrued on the Debentures (to the extent that payment of such interest is enforceable under applicable law and, if the Debentures are held by the Trust or a trustee of such Trust, without duplication of any other amounts paid by the Trust or a trustee of the Trust in respect thereof); and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any other amounts due to the Trustee under Section 6.6.  In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Debentures and collect in the manner provided by law out of the property of the Company or any other obligor on such Debentures wherever situated the moneys adjudged or decreed to be payable.

In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debentures under Bankruptcy Law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debentures, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.2, shall be entitled and empowered, by intervention in such proceedings or otherwise,

  (a)     to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Debentures,

(b)     in case of any judicial proceedings, (i) to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee

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and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.6), and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debentures, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations and (ii) to vote on behalf of the holders of the Debentures in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings,

(c)     to collect and receive any moneys or other property payable or deliverable on any such claims, and

(d)     to distribute the same after the deduction of its charges and expenses.

By its acceptance of any Debentures, each Securityholder shall be deemed to have authorized any receiver, assignee or trustee in bankruptcy or reorganization to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.6.

Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding.

All rights of action and of asserting claims under this Indenture, or under any of the Debentures, may be enforced by the Trustee without the possession of any of the Debentures, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and, subject to Section 5.3, any recovery of judgment shall be for the ratable benefit of the holders of the Debentures.

In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the holders of the Debentures, and it shall not be necessary to make any holders of the Debentures parties to any such proceedings.

Section 5.3.  Application of Moneys Collected by Trustee.  Any moneys collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Debentures in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid:

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First:  To the payment of costs and expenses incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.6;

Second:  To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV;

Third:  To the payment of the amounts then due and unpaid upon the Debentures for principal (and premium, if any), and interest on the Debentures, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on such Debentures for principal (and premium, if any) and interest (including Additional Interest), respectively; and

Fourth:  The balance, if any, to the Company.

Section 5.4.  Proceedings by Securityholders.  No holder of any Debenture shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debentures and unless the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding.

Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Debenture to receive payment of the principal of, premium, if any, and interest, on such Debenture when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder and by accepting a Debenture hereunder it is expressly understood, intended and covenanted by the taker and holder of every Debenture with every other such taker and holder and the Trustee, that no one or more holders of Debentures shall have any right in any manner whatsoever by virtue or by availing itself of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other Debentures, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debentures.  For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity.

Section 5.5.  Proceedings by Trustee.  In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law.

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Section 5.6.  Remedies Cumulative and Continuing; Delay or Omission Not a Waiver.  Except as otherwise provided in Section 2.6 with respect to the replacement of mutilated, destroyed, lost or stolen Debentures, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debentures, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Debentures, and no delay or omission of the Trustee or of any holder of any of the Debentures to exercise any right, remedy or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right, remedy or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.4, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee (in accordance with its duties under Section 6.1) or by the Securityholders.

No delay or omission of the Trustee or any Securityholder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein.  Every right and remedy given by this Article or by law to the Trustee or to any Securityholder may be exercised from time to time, and as often as may be deemed expedient, by the Trustee (in accordance with its duties under Section 6.1 hereof) or by such holder, as the case may be.

Section 5.7.  Direction of Proceedings and Waiver of Defaults by Majority of Securityholders.  The holders of a majority in aggregate principal amount of the Debentures affected (voting as one class) at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such Debentures; provided, however, that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability.

The holders of a majority in aggregate principal amount of the Debentures at the time outstanding may on behalf of the holders of all of the Debentures waive (or modify any previously granted waiver of) any past default or Event of Default, and its consequences, except an Event of Default (a) specified in Sections 5.1(a) and (b), (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debenture affected, or (c) in respect of the covenants contained in Section 3.9; provided, however, that if the Debentures are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of the Trust Securities shall have consented to such waiver or modification to such waiver, provided, further, that if the consent of the holder of each outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities shall have consented to such waiver.  Upon any such waiver, the default covered thereby shall be deemed to

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be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon.  Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section, said default or Event of Default shall for all purposes of the Debentures and this Indenture be deemed to have been cured and to be not continuing.

Section 5.8.  Notice of Defaults.  The Trustee shall, within 90 days after the actual knowledge by a Responsible Officer of the Trustee of the occurrence of a default with respect to the Debentures, mail to all Securityholders, as the names and addresses of such holders appear upon the Debenture Register, notice of all defaults with respect to the Debentures known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term “defaults” for the purpose of this Section 5.8 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 5.1, not including periods of grace, if any, provided for therein); provided, however, that, except in the case of default in the payment of the principal of, premium, if any, or interest on any of the Debentures, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders.

Section 5.9.  Undertaking to Pay Costs.  All parties to this Indenture agree, and each holder of any Debenture by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, however, that the provisions of this Section 5.9 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the Debentures outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Debenture against the Company on or after the same shall have become due and payable.

ARTICLE VI.

CONCERNING THE TRUSTEE

Section 6.1.  Duties and Responsibilities of Trustee.  With respect to the holders of Debentures issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Debentures and after the curing or waiving of all Events of Default which may have occurred, with respect to the Debentures, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee.  In case an Event of Default with respect to the Debentures has occurred (which has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.

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No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that:

(a)           prior to the occurrence of an Event of Default with respect to Debentures and after the curing or waiving of all Events of Default which may have occurred

(1)           the duties and obligations of the Trustee with respect to Debentures shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Debentures as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee, and

(2)           in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture;

(b)           the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and

(c)           the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.7, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture.

None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is ground for believing that the repayment of such funds or liability is not assured to it under the terms of this Indenture or indemnity satisfactory to the Trustee against such risk is not reasonably assured to it.

Section 6.2.  Reliance on Documents, Opinions, etc.  Except as otherwise provided in Section 6.1:

(a)           the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

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(b)           any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers’ Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company;

(c)           the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel;

(d)           the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby;

(e)           the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to the Debentures (that has not been cured or waived) to exercise with respect to Debentures such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs;

(f)           the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of not less than a majority in aggregate principal amount of the outstanding Debentures affected thereby; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding;

(g)           the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care; and

(h)           with the exceptions of defaults under Sections 5.1(a) or 5.1(b), the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Debentures unless a written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Debentures or by any holder of the Debentures.

Section 6.3.  No Responsibility for Recitals, etc.  The recitals contained herein and in the Debentures (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same.  The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debentures.  The Trustee and the Authenticating

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Agent shall not be accountable for the use or application by the Company of any Debentures or the proceeds of any Debentures authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture.

Section 6.4.  Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debentures.  The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Debenture registrar, in its individual or any other capacity, may become the owner or pledgee of Debentures with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Debenture registrar.

Section 6.5.  Moneys to be Held in Trust.  Subject to the provisions of Section 12.4, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law.  The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company.  So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time to the Company upon the written order of the Company, signed by the Chief Executive Officer, the President, a Vice President, the Treasurer or an Assistant Treasurer of the Company.

Section 6.6.  Compensation and Expenses of Trustee.  The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or willful misconduct.  The Company also covenants to indemnify the Trustee and any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, action, suit, claim, liability, cost or expense including taxes (other than taxes based on the income of the Trustee) incurred without negligence or willful misconduct on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability.  The obligations of the Company under this Section 6.6 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder.  Such additional indebtedness shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debentures.

Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.1(d), Section 5.1(e) or Section 5.1(f), the expenses (including the reasonable charges

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and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law.

The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture.

Notwithstanding anything in this Indenture or any Debenture to the contrary, the Trustee shall have no obligation whatsoever to advance funds to pay any principal of or interest on or other amounts with respect to the Debentures or otherwise advance funds to or on behalf of the Company.

Section 6.7.  Officers’ Certificate as Evidence.  Except as otherwise provided in Sections 6.1 and 6.2, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by an Officers’ Certificate delivered to the Trustee, and such certificate, in the absence of negligence or willful misconduct on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof.

Section 6.8.  Eligibility of Trustee.  The Trustee hereunder shall at all times be a banking corporation or national association organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia authorized under such laws to exercise corporate trust powers, having (or whose obligations under this Indenture are guaranteed by an affiliate having) a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000.00) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority.  If such corporation or national association publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.8 the combined capital and surplus of such corporation or national association shall be deemed to be its combined capital and surplus as set forth in its most recent records of condition so published.

The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee.

In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.8, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.9.

If the Trustee has or shall acquire any “conflicting interest” within the meaning of §310(b) of the Trust Indenture Act of 1939, the Trustee shall either eliminate such interest or resign, to the extent and in the manner described by this Indenture.

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Section 6.9.  Resignation or Removal of Trustee.

(a)           The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof, at the Company’s expense, to the holders of the Debentures at their addresses as they shall appear on the Debenture Register.  Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor Trustee.  If no successor Trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, or any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least six months may, subject to the provisions of Section 5.9, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor Trustee.  Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee.

(b)           In case at any time any of the following shall occur --

(1)           the Trustee shall fail to comply with the provisions of Section 6.8 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least 6 months, or

(2)           the Trustee shall cease to be eligible in accordance with the provisions of Section 6.8 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or

(3)           the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.9, any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least 6 months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.  Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee.

(c)           Upon prior written notice to the Company and the Trustee, the holders of a majority in aggregate principal amount of the Debentures at the time outstanding may at any time remove the Trustee and nominate a successor Trustee, which shall be deemed appointed as successor Trustee unless within 10 Business Days after such nomination the Company objects

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thereto, in which case, or in the case of a failure by such holders to nominate a successor Trustee, the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.9 provided, may petition any court of competent jurisdiction for an appointment of a successor Trustee.

(d)           Any resignation or removal of the Trustee and appointment of a successor Trustee pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor Trustee as provided in Section 6.10.

Section 6.10.  Acceptance by Successor Trustee.  Any successor Trustee appointed as provided in Section 6.9 shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.6, execute and deliver an instrument transferring to such successor Trustee all the rights and powers of the Trustee so ceasing to act and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee thereunder.  Upon request of any such successor Trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers.  Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.6.

If a successor Trustee is appointed, the Company, the retiring Trustee and the successor Trustee shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debentures as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the Trust hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee.

No successor Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Trustee shall be eligible under the provisions of Section 6.8.

In no event shall a retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder.

Upon acceptance of appointment by a successor Trustee as provided in this Section 6.10, the Company shall mail notice of the succession of such Trustee hereunder to the holders of Debentures at their addresses as they shall appear on the Debenture Register.  If the Company

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fails to mail such notice within 10 Business Days after the acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Company.

Section 6.11.  Succession by Merger, etc.  Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided that such corporation shall be otherwise eligible and qualified under this Article.

In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debentures shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debentures so authenticated; and in case at that time any of the Debentures shall not have been authenticated, any successor to the Trustee may authenticate such Debentures either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debentures or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debentures in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation.

Section 6.12.  Authenticating Agents.  There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of the Debentures issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debentures; provided, however, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of any Debentures.  Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000.00 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority.  If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.12 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.  If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section.

Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the

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successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.12 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent.

Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company.  The Trustee may at any time terminate the agency of any Authenticating Agent with respect to the Debentures by giving written notice of termination to such Authenticating Agent and to the Company.  Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.12, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.12, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Debentures as the names and addresses of such holders appear on the Debenture Register.  Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein.

The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services.  Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee.

ARTICLE VII.

CONCERNING THE SECURITYHOLDERS

Section 7.1.  Action by Securityholders.  Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Debentures voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders or (d) by any other method the Trustee deems satisfactory.

If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers’ Certificate, fix in advance a record date for such Debentures for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company shall have no obligation to do so.  If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Debentures have

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authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debentures shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than 6 months after the record date.

Section 7.2.  Proof of Execution by Securityholders.  Subject to the provisions of Section 6.1, 6.2 and 8.5, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee.  The ownership of Debentures shall be proved by the Debenture Register or by a certificate of the Debenture registrar.  The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary.

The record of any Securityholders meeting shall be proved in the manner provided in Section 8.6.

Section 7.3.  Who Are Deemed Absolute Owners.  Prior to due presentment for registration of transfer of any Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debenture registrar may deem the Person in whose name such Debenture shall be registered upon the Debenture Register to be, and may treat him as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debenture registrar shall be affected by any notice to the contrary.  All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debenture.

Section 7.4.  Debentures Owned by Company Deemed Not Outstanding.  In determining whether the holders of the requisite aggregate principal amount of Debentures have concurred in any direction, consent or waiver under this Indenture, Debentures which are owned by the Company or any other obligor on the Debentures or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Debentures shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, however, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debentures which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded.  Debentures so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.4 if the pledgee shall establish to the satisfaction of the Trustee the pledgee’s right to vote such Debentures and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor.  In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee.

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Section 7.5.  Revocation of Consents; Future Holders Bound.  At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.1) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.1) of a Debenture (or any Debenture issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debentures the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.2, revoke such action so far as concerns such Debenture (or so far as concerns the principal amount represented by any exchanged or substituted Debenture).  Except as aforesaid any such action taken by the holder of any Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of such Debenture, and of any Debenture issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debenture or any Debenture issued in exchange or substitution therefor.

ARTICLE VIII.

SECURITYHOLDERS MEETINGS

Section 8.1.  Purposes of Meetings.  A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes:

(a)           to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V;

(b)           to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI;

(c)           to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.2; or

(d)           to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Debentures under any other provision of this Indenture or under applicable law.

Section 8.2.  Call of Meetings by Trustee.  The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.1, to be held at such time and at such place as the Trustee shall determine.  Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Debentures affected at their addresses as they shall appear on the Debentures Register and, if the Company is not a holder of Debentures, to the Company.  Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting.

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Section 8.3.  Call of Meetings by Company or Securityholders.  In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debentures, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 8.1, by mailing notice thereof as provided in Section 8.2.

Section 8.4.  Qualifications for Voting.  To be entitled to vote at any meeting of Securityholders a Person shall be (a) a holder of one or more Debentures with respect to which the meeting is being held or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more such Debentures.  The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

Section 8.5.  Regulations.  Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debentures and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit.

The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.3, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman.  A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting.

Subject to the provisions of Section 7.4, at any meeting each holder of Debentures with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000.00 principal amount of Debentures held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debenture challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding.  The chairman of the meeting shall have no right to vote other than by virtue of Debentures held by him or instruments in writing as aforesaid duly designating him as the Person to vote on behalf of other Securityholders.  Any meeting of Securityholders duly called pursuant to the provisions of Section 8.2 or 8.3 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice.

Section 8.6.  Voting.  The vote upon any resolution submitted to any meeting of holders of Debentures with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Debentures held or represented by them.  The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all

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votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting.  A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.2.  The record shall show the serial numbers of the Debentures voting in favor of or against any resolution.  The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.

Any record so signed and verified shall be conclusive evidence of the matters therein stated.

Section 8.7.  Quorum; Actions.  The Persons entitled to vote a majority in aggregate principal amount of the Debentures then outstanding shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in aggregate principal amount of the Debentures then outstanding, the Persons holding or representing such specified percentage in principal amount of the Debentures then outstanding will constitute a quorum.  In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders, be dissolved.  In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting.  In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting.  Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.2, except that such notice need be given only once not less than 5 days prior to the date on which the meeting is scheduled to be reconvened.  Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Debentures then outstanding which shall constitute a quorum.

Except as limited by the provisos in the first paragraph of Section 9.2, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of a majority in aggregate principal amount of the Debentures then outstanding; provided, however, that, except as limited by the provisos in the first paragraph of Section 9.2, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action which this Indenture expressly provides may be given by the holders of not less than a specified percentage in aggregate principal amount of the Debentures then outstanding may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of a not less than such specified percentage in principal amount of the Debentures then outstanding.

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Any resolution passed or decision taken at any meeting of holders of Debentures duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting.

ARTICLE IX.

SUPPLEMENTAL INDENTURES

Section 9.1.  Supplemental Indentures without Consent of Securityholders.  The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Securityholders, for one or more of the following purposes:

(a)           to evidence the succession of another Person to the Company, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Company, pursuant to Article XI hereof;

(b)           to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of Debentures as the Board of Directors shall consider to be for the protection of the holders of such Debentures, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default;

(c)           to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not materially adversely affect the interests of the holders of the Debentures;

(d)           to add to, delete from, or revise the terms of Debentures, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Debentures, including to provide for transfer procedures and restrictions substantially similar to those applicable to the Capital Securities as required by Section 2.5 (for purposes of assuring that no registration of Debentures is required under the Securities Act); provided, however, that any such action shall not adversely affect the interests of the holders of the Debentures then outstanding (it being understood, for purposes of this proviso, that transfer restrictions on Debentures substantially similar to those that were applicable to Capital Securities shall not be deemed to materially adversely affect the holders of the Debentures);

(e)           to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debentures and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee;

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(f)           to make any change (other than as elsewhere provided in this paragraph) that does not adversely affect the rights of any Securityholder in any material respect; or

(g)           to provide for the issuance of and establish the form and terms and conditions of the Debentures, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or the Debentures, or to add to the rights of the holders of Debentures.

The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.

Any supplemental indenture authorized by the provisions of this Section 9.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section 9.2.

Section 9.2.  Supplemental Indentures with Consent of Securityholders.  With the consent (evidenced as provided in Section 7.1) of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall without the consent of the holders of each Debenture then outstanding and affected thereby (i) change the fixed maturity of any Debenture, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debentures, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debentures the holders of which are required to consent to any such supplemental indenture; provided further, however, that if the Debentures are held by a trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities shall have consented to such supplemental indenture; provided further, however, that if the consent of the Securityholder of each outstanding Debenture is required, such supplemental indenture shall not be effective until each holder of the Trust Securities shall have consented to such supplemental indenture.

Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise, in which case the

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Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture.

Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Debenture Register.  Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture.

It shall not be necessary for the consent of the Securityholders under this Section 9.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof.

Section 9.3.  Effect of Supplemental Indentures.  Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debentures shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes.

Section 9.4.  Notation on Debentures.  Debentures authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture.  If the Company or the Trustee shall so determine, new Debentures so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debentures then outstanding.

Section 9.5.  Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee.  The Trustee, subject to the provisions of Sections 6.1 and 6.2, shall, in addition to the documents required by Section 14.6, receive an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX.  The Trustee shall receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof.

ARTICLE X.

REDEMPTION OF SECURITIES

Section 10.1.  Optional Redemption.  The Company shall have the right to redeem the Debentures, in whole or in part, but in all cases in a principal amount with integral multiples of

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$1,000.00, on any Interest Payment Date on or after the Interest Payment Date in June 2012 (an “Optional Redemption Date”), at the Optional Redemption Price.

Section 10.2.  Special Event Redemption.  If a Special Event shall occur and be continuing, the Company shall have the right to redeem the Debentures in whole, but not in part, at any Interest Payment Date, within 120 days following the occurrence of such Special Event (the “Special Redemption Date”) at the Special Redemption Price.

Section 10.3.  Notice of Redemption; Selection of Debentures.  In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debentures, it shall cause to be mailed a notice of such redemption at least 30 and not more than 60 days prior to the Optional Redemption Date or the Special Redemption Date to the holders of Debentures so to be redeemed as a whole or in part at their last addresses as the same appear on the Debenture Register.  Such mailing shall be by first class mail.  The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice.  In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debenture designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debenture.

Each such notice of redemption shall specify the CUSIP number, if any, of the Debentures to be redeemed, the Optional Redemption Date or the Special Redemption Date, as applicable, the Optional Redemption Price or the Special Redemption Price, as applicable, at which Debentures are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debentures, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue.  If less than all the Debentures are to be redeemed the notice of redemption shall specify the numbers of the Debentures to be redeemed.  In case the Debentures are to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion thereof will be issued.

Prior to 10:00 a.m. (New York City time) on the Optional Redemption Date or Special Redemption Date, as applicable, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Optional Redemption Date or the Special Redemption Date, as applicable, all the Debentures so called for redemption at the appropriate Optional Redemption Price or Special Redemption Price, together with accrued interest to the Optional Redemption Date or Special Redemption Date, as applicable.

If all, or less than all, the Debentures are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days, respectively, prior to the Optional Redemption Date or Special Redemption Date, as applicable, as to the aggregate principal amount of Debentures to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debentures or portions thereof (in integral multiples of $1,000.00) to be redeemed.

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Section 10.4.  Payment of Debentures Called for Redemption.  If notice of redemption has been given as provided in Section 10.3, the Debentures or portions of Debentures with respect to which such notice has been given shall become due and payable on the Optional Redemption Date or Special Redemption Date, as applicable, and at the place or places stated in such notice at the applicable Optional Redemption Price or Special Redemption Price, together with interest accrued to the Optional Redemption Date or Special Redemption Date, as applicable, and on and after said date (unless the Company shall default in the payment of such Debentures at the Optional Redemption Price or Special Redemption Price, as applicable, together with interest accrued to said date) interest on the Debentures or portions of Debentures so called for redemption shall cease to accrue.  On presentation and surrender of such Debentures at a place of payment specified in said notice, such Debentures or the specified portions thereof shall be paid and redeemed by the Company at the applicable Optional Redemption Price or Special Redemption Price, together with interest accrued thereon to the Optional Redemption Date or Special Redemption Date, as applicable.

Upon presentation of any Debenture redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debenture or Debentures of authorized denominations, in principal amount equal to the unredeemed portion of the Debenture so presented.

ARTICLE XI.

CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE

Section 11.1.  Company May Consolidate, etc., on Certain Terms.  Nothing contained in this Indenture or in the Debentures shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition, directly or indirectly through the subsidiaries of the Company, in a single transaction or in any series of transactions occurring during any twelve-month period, of more than 51% of the assets of the Company or its successor or successors, to any other Person (whether or not affiliated with the Company, or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that, upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition of assets, the due and punctual payment of the principal of (and premium, if any) and interest on all of the Debentures in accordance with their terms, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company, shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such assets.

Section 11.2.  Successor Entity to be Substituted.  In case of any such consolidation, merger, sale, conveyance, transfer or other disposition and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Debentures and the due and punctual performance and observance of all of

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the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debentures.  Such successor entity thereupon may cause to be signed, and may issue in its own name, any or all of the Debentures issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debentures which previously shall have been signed and delivered by the officers of the Company, to the Trustee or the Authenticating Agent for authentication, and any Debentures which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose.  All the Debentures so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debentures theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debentures had been issued at the date of the execution hereof.

Section 11.3.  Opinion of Counsel to be Given to Trustee.  The Trustee, subject to the provisions of Sections 6.1 and 6.2, shall receive, in addition to the Opinion of Counsel required by Section 9.5, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article XI complies with the provisions of this Article XI.

ARTICLE XII.

SATISFACTION AND DISCHARGE OF INDENTURE

Section 12.1.  Discharge of Indenture.  

When

(a)    the Company shall deliver to the Trustee for cancellation all Debentures theretofore authenticated (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid   as  provided in Section 2.6) and not theretofore canceled, or

(b)    all the Debentures not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within 1 year or are to be called for redemption within 1 year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debentures (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Debentures (1) theretofore repaid to the Company in accordance

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 with the provisions of Section 12.4, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws,

and if in the case of either clause (a) or clause (b) the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.5, 2.6, 2.8, 3.1, 3.2, 3.4, 6.6, 6.8, 6.9, 12.1 and 12.4 hereof shall survive until such Debentures shall mature and be paid.  Thereafter, Sections 6.6 and 12.4 shall survive, and the Trustee, on demand of the Company accompanied by an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture.  The Company agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debentures.

Section 12.2.  Deposited Moneys to be Held in Trust by Trustee.  Subject to the provisions of Section 12.4, all moneys deposited with the Trustee pursuant to Section 12.1 shall be held in trust in a non-interest bearing account and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Debentures for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, and premium, if any, and interest.

Section 12.3.  Paying Agent to Repay Moneys Held.  Upon the satisfaction and discharge of this Indenture all moneys then held by any paying agent of the Debentures (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys.

Section 12.4.  Return of Unclaimed Moneys.  Any moneys deposited with or paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Debentures and not applied but remaining unclaimed by the holders of Debentures for 2 years after the date upon which the principal of, and premium, if any, or interest on such Debentures, as the case may be, shall have become due and payable, shall, subject to applicable escheatment laws, be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Debentures shall thereafter look only to the Company for any payment which such holder may be entitled to collect, and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease.

ARTICLE XIII.

IMMUNITY OF INCORPORATORS, STOCKHOLDERS,

OFFICERS AND DIRECTORS

Section 13.1.  Indenture and Debentures Solely Corporate Obligations.  No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental

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indenture, or in any such Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Company or of any successor Person of the Company, either directly or through the Company or any successor Person of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debentures.

ARTICLE XIV.

MISCELLANEOUS PROVISIONS

Section 14.1.  Successors.  All the covenants, stipulations, promises and agreements of the Company in this Indenture shall bind its successors and assigns whether so expressed or not.

Section 14.2.  Official Acts by Successor Entity.  Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer or other authorized Person of the Company shall and may be done and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company.

Section 14.3.  Surrender of Company Powers.  The Company by instrument in writing executed by authority of at least 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company, and as to any permitted successor.

Section 14.4.  Addresses for Notices, etc.  Any notice, consent, direction, request, authorization, waiver or demand which by any provision of this Indenture is required or permitted to be given, made, furnished or served by the Trustee or by the Securityholders on or to the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company, with the Trustee for the purpose) to the Company, 380 Sentry Parkway, Blue Bell, PA 19422, Attention:  Robert L. Pratter, Esq.  Any notice, consent, direction, request, authorization, waiver or demand by any Securityholder or the Company to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration.  Any notice, consent, direction, request, authorization, waiver or demand on or to any Securityholder shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the address set forth in the Debenture Register.

Section 14.5.  Governing Law.  Pursuant to Section 5-1401 of the General Obligations Law of the State of New York, this Indenture and each Debenture shall be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed in accordance with the law of said State.

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Section 14.6.  Evidence of Compliance with Conditions Precedent.  Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers’ Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.

Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not in the opinion of such person, such condition or covenant has been complied with.

Section 14.7.  Table of Contents, Headings, etc.  The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.

Section 14.8.  Execution in Counterparts.  This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.

Section 14.9.  Severability.  In case any one or more of the provisions contained in this Indenture or in the Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debentures, but this Indenture and such Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein.

Section 14.10.  Assignment.  The Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain liable for all such obligations.  Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns.  This Indenture may not otherwise be assigned by the parties hereto.

Section 14.11.  Acknowledgment of Rights.  The Company agrees that, with respect to any Debentures held by the Trust or the Institutional Trustee of the Trust, if the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the holder of Debentures held as the assets of such Trust after the holders of a majority in Liquidation Amount of the Capital Securities of such Trust have so directed such Institutional Trustee, a holder of record of such Capital Securities may, to the fullest extent permitted by law, institute legal proceedings

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directly against the Company to enforce such Institutional Trustee’s rights under this Indenture without first instituting any legal proceedings against such trustee or any other Person.  Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest (or premium, if any) or principal on the Debentures on the date such interest (or premium, if any) or principal is otherwise payable (or in the case of redemption, on the redemption date), the Company agrees that a holder of record of Capital Securities of the Trust may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of (or premium, if any) or interest on the Debentures having an aggregate principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such holder on or after the respective due date specified in the Debentures.

ARTICLE XV.

SUBORDINATION OF DEBENTURES

Section 15.1.  Agreement to Subordinate.  The Company covenants and agrees, and each holder of Debentures by such Securityholder’s acceptance thereof likewise covenants and agrees, that all Debentures shall be issued subject to the provisions of this Article XV; and each holder of a Debenture, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions.

The payment by the Company of the principal of, and premium, if any, and interest on all Debentures shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred.

No provision of this Article XV shall prevent the occurrence of any default or Event of Default hereunder.

Section 15.2.  Default on Senior Indebtedness.  In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default and such acceleration has not been rescinded or canceled and such Senior Indebtedness has not been paid in full, then, in either case, no payment shall be made by the Company with respect to the principal (including redemption) of, or premium, if any, or interest on the Debentures.

In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.2, such payment shall, subject to Section 15.7, be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the

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Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness.

Section 15.3.  Liquidation, Dissolution, Bankruptcy.  Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company, on account of the principal (and premium, if any) or interest on the Debentures.  Upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money’s worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee.

In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness, remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness.

For purposes of this Article XV, the words “cash, property or securities” shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Debentures to the payment of all Senior Indebtedness, that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such

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reorganization or readjustment.  The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XI of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XI of this Indenture.  Nothing in Section 15.2 or in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6 of this Indenture.

Section 15.4.  Subrogation.  Subject to the payment in full of all Senior Indebtedness, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Debentures shall be paid in full.  For the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debentures be deemed to be a payment or distribution by the Company to or on account of such Senior Indebtedness.  It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand.

Nothing contained in this Article XV or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debentures the principal of (and premium, if any) and interest on the Debentures as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debentures and creditors of the Company, other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, received upon the exercise of any such remedy.

Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the

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amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV.

Section 15.5.  Trustee to Effectuate Subordination.  Each Securityholder by such Securityholder’s acceptance thereof authorizes and directs the Trustee on such Securityholder’s behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder’s attorney-in-fact for any and all such purposes.

Section 15.6.  Notice by the Company.  The Company shall give prompt written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV.  Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least 2 Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Debenture), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within 2 Business Days prior to such date.

The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee or representative on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders.  In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.

Section 15.7.  Rights of the Trustee; Holders of Senior Indebtedness.  The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior

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Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder.

With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee.  The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise.

Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6.

Section 15.8.  Subordination May Not Be Impaired.  No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with.

Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Debentures to the holders of such Senior Indebtedness, do any one or more of the following:  (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company, and any other Person.

Signatures appear on the following page

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

PMA CAPITAL CORPORATION
By:	/s/ William Hitselberger
Name:	William Hitselberger
Title:	Executive Vice President and
	Chief Financial Officer
WILMINGTON TRUST COMPANY,as Trustee
By:	Christopher J. Slaybaugh
Name:	Christopher J. Slaybaugh
Title:	Senior Financial Services Officer

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EXHIBIT A

FORM OF FLOATING RATE JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE

[FORM OF FACE OF SECURITY]

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW.  NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.  THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO PMA CAPITAL CORPORATION (THE “COMPANY”), (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. HEDGING TRANSACTIONS INVOLVING THIS SECURITY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.

THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”),  OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY

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PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING.  ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF.  ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER.

THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.

THIS SECURITY IS IN REGISTERED FORM WITHIN THE MEANING OF TREASURY REGULATIONS SECTION 1.871-14(c)(1)(i) FOR U.S. FEDERAL INCOME AND WITHHOLDING TAX PURPOSES.

IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

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Floating Rate Junior Subordinated Deferrable Interest Debenture

of

PMA CAPITAL CORPORATION

June 21, 2007

PMA Capital Corporation, a corporation duly organized and existing under the laws of Pennsylvania (the “Company,” which term includes any successor Person under the Indenture hereinafter referred to), for value received promises to pay to Wilmington Trust Company, not in its individual capacity but solely as Institutional Trustee for PMA Capital Statutory Trust VII (the “Holder”) or registered assigns, the principal sum of Twenty Million Six Hundred and Nineteen Thousand dollars ($20,619,000.00) on June 15, 2037, and to pay interest on said principal sum from June 21, 2007, or from the most recent Interest Payment Date (defined herein) to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on September 15, December 15, March 15 and June 15 of each year or if such day is not a Business Day, then the next succeeding Business Day (each such date, an “Interest Payment Date”) commencing on the Interest Payment Date in September 2007, at an annual rate equal to 8.91% beginning on (and including) the date of original issuance and ending on (but excluding) the Interest Payment Date in September 2007 and at an annual rate for each successive period beginning on (and including) the Interest Payment Date in September 2007, and each succeeding Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date (each a “Distribution Period”), equal to 3-Month LIBOR, determined as described below, plus 3.55% (the “Coupon Rate”); applied to the principal amount hereof, until the principal hereof is paid or duly provided for or made available for payment, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest (including Additional Interest) at the Interest Rate in effect for each applicable period, compounded quarterly, from the dates such amounts are due until they are paid or made available for payment.  The amount of interest payable for any period will be computed on the basis of the actual number of days in the Distribution Period concerned divided by 360.  The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, which shall be fifteen days prior to the day on which the relevant Interest Payment Date occurs.  Any such interest installment not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such regular record date and may be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on a special record date.

Capitalized terms used and not defined in this Debenture shall have the meanings assigned in the Indenture dated as of the date of original issuance of this Debenture between the Trustee and the Company.

“3-Month LIBOR” as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Trustee in the following order of priority:  (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month

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maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date (“Telerate Page 3750” means the display designated as “Page 3750” on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers’ Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks’ offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date.  If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Trustee will request four major New York City banks to provide such banks’ offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date.  If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period.  If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date.  As used herein, “Determination Date” means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period.

“Interest Rate” means for the period beginning on (and including) the date of original issuance and ending on (but excluding) the Interest Payment Date in September 2007 the rate per annum of 8.91% and for each Distribution Period thereafter, the Coupon Rate.

The Interest Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law.

All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or ..09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)).

The principal of and interest on this Debenture shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made by check mailed to the registered holder at such address as shall appear in the Debenture Register if a request for a wire transfer by such holder has not been received by the Company or by wire transfer to an account appropriately designated by the holder hereof.  Notwithstanding the

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 foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made in immediately available funds at such place and to such account as may be designated by the Trustee.

So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an “Extension Period”), during which Extension Period no interest (including Additional Interest) shall be due and payable (except any Additional Sums that may be due and payable).  No Extension Period may end on a date other than an Interest Payment Date.  During an Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Interest Rate in effect for such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as “Additional Interest”).  At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date; provided further, however, that during any such Extension Period, the Company shall not and shall not permit any Affiliate of the Company controlled by the Company to engage in any of the activities or transactions described on the reverse side hereof and in the Indenture.  Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date.  Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements.  No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during an Extension Period shall bear Additional Interest to the extent permitted by applicable law.  The Company must give the Trustee notice of its election to begin or extend an Extension Period at least 5 Business Days prior to the regular record date (as such term is used in Section 2.8 of the Indenture) immediately preceding the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend an Extension Period.  The Trustee shall give notice of the Company’s election to begin a new Extension Period to the holders of the Debentures.

The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto.  Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes.  Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior

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 Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.

This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee.

The provisions of this Debenture are continued on the reverse side hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place.

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IN WITNESS WHEREOF, the Company has duly executed this certificate.

PMA CAPITAL CORPORATION

By:

Name:

Title:

CERTIFICATE OF AUTHENTICATION

This is one of the Debentures referred to in the within-mentioned Indenture.

WILMINGTON TRUST COMPANY, as Trustee

By:

      Authorized Officer

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[FORM OF REVERSE OF DEBENTURE]

This Debenture is one of the floating rate junior subordinated deferrable interest debentures of the Company, all issued or to be issued under and pursuant to the Indenture dated as of June 21, 2007 (the “Indenture”), duly executed and delivered between the Company and the Trustee, to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures.  The Debentures are limited in aggregate principal amount as specified in the Indenture.

Upon the occurrence and continuation of a Special Event prior to the Interest Payment Date in June 2012, the Company shall have the right to redeem the Debentures in whole, but not in part, at any Interest Payment Date, within 120 days following the occurrence of such Special Event, at the Special Redemption Price.

In addition, the Company shall have the right to redeem the Debentures, in whole or in part, but in all cases in a principal amount with integral multiples of $1,000.00, on any Interest Payment Date on or after the Interest Payment Date in June 2012, at the Optional Redemption Price.

Prior to 10:00 a.m. New York City time on the Optional Redemption Date or Special Redemption Date, as applicable, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Optional Redemption Date or the Special Redemption Date, as applicable, all the Debentures so called for redemption at the appropriate Optional Redemption Price or Special Redemption Price.

If all, or less than all, the Debentures are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days prior to the Optional Redemption Date or Special Redemption Date, as applicable, as to the aggregate principal amount of Debentures to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debentures or portions thereof (in integral multiples of $1,000.00) to be redeemed.

Notwithstanding the foregoing, any redemption of Debentures by the Company shall be subject to the receipt of any and all required regulatory approvals.

In case an Event of Default shall have occurred and be continuing, upon demand of the Trustee, the principal of all of the Debentures shall become due and payable in the manner, with the effect and subject to the conditions provided in the Indenture.

The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall without the consent of the holders of each Debenture then outstanding and affected thereby (i) change the fixed maturity of any Debenture, or reduce the principal amount thereof or any premium thereon,

A-1-8

or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debentures, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debentures the holders of which are required to consent to any such supplemental indenture.

The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debentures at the time outstanding on behalf of the holders of all of the Debentures to waive (or modify any previously granted waiver of) any past default or Event of Default, and its consequences, except an Event of Default (a) specified in Sections 5.1(a) and (b), (b) in respect of covenants or provisions hereof or of the Indenture which cannot be modified or amended without the consent of the holder of each Debenture affected, or (c) in respect of the covenants contained in Section 3.9 of the Indenture; provided, however, that if the Debentures are held by the Trust or a trustee of the Trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of the Trust Securities shall have consented to such waiver or modification to such waiver, provided, further, that if the consent of the holder of each outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities shall have consented to such waiver.  Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of the Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon.  Whenever any default or Event of Default hereunder shall have been waived as permitted by the Indenture, said default or Event of Default shall for all purposes of the Debentures and the Indenture be deemed to have been cured and to be not continuing.

No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest, including Additional Interest, on this Debenture at the time and place and at the rate and in the money herein prescribed.

The Company has agreed that if Debentures are initially issued to the Trust or a trustee of such Trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debentures continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the dollar amount of the Company’s premium volume from insurance policies in any calendar year fails to exceed 51% of the Company’s premium volume from insurance policies in the previous calendar year; (iii) the Company sells more than 51% of its rights to renew insurance policies in any single transaction or series of related transactions; (iv) the Pooled Companies or any entity which becomes a significant subsidiary (as defined in Section 1-02(w) of Regulation S-X to the Securities Act) of the Company which is rated by A.M. Best Company, Inc. (x) receives a rating from A.M. Best Company Inc. of B- or lower; or (y) submits a request to withdraw its rating by A.M Best Company, Inc.; (v) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (vi) the Company shall have given notice of its election to defer payments of interest on the Debentures by extending the interest payment period as provided herein and such Extension

A-1-9

Period, or any extension thereof, shall be continuing, then the Company shall not, and shall not permit any Affiliate of the Company controlled by the Company (including, without limitation, any entity issuing Trust Preferred Securities) to, (x) declare or pay any dividends or distributions on, or repay, repurchase, redeem, acquire, or make a liquidation payment with respect to, any of the Company's or such Affiliates' common stock or preferred stock (other than payments of dividends or distributions to the Company or a Subsidiary of the Company) or make any guarantee payments with respect to the foregoing, (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities or other debt obligations of the Company or any Affiliate of the Company controlled by the Company that rank pari passu in all respects with or junior in interest to the Debentures or (z) enter into, amend or modify any contract with a shareholder that directly or indirectly beneficially owns (as determined under Rule 13d-3 of the Exchange Act and which shall include securities beneficially owned by (i) all controlled Affiliates of such shareholder and (ii) all other Persons with whom such shareholder would constitute a “group” within the meaning of Section 13(d) of the Exchange Act and the rules promulgated thereunder) more than 10% of the outstanding shares of common stock of the Company (other than, with respect to clauses (x) and (y) above, (1) repurchases, redemptions or other acquisitions of shares of Capital Stock of the Company or any Subsidiary of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of Capital Stock of the Company or of such Subsidiary (or securities convertible into or exercisable for such Capital Stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (2) as a result of any exchange or conversion of any class or series of the Company’s Capital Stock (or any Capital Stock of a Subsidiary of the Company) for any class or series of the Company’s Capital Stock (or in the case of a Subsidiary of the Company, any class or series of such Subsidiary’s Capital Stock) or of any class or series of the Company’s indebtedness for any class or series of the Company’s Capital Stock (or in the case of indebtedness of a Subsidiary of the Company, of any class or series of such Subsidiary’s indebtedness or any class or series of such Subsidiary’s Capital Stock), (3) the purchase of fractional interests in shares of the Company’s Capital Stock (or the Capital Stock of a Subsidiary of the Company) pursuant to the conversion or exchange provisions of such Capital Stock or the security being converted or exchanged, (4) any declaration of a dividend in connection with any stockholders’ rights plan, or the issuance of rights, stock or other property under any stockholders’ rights plan, or the redemption or repurchase of rights pursuant thereto, (5) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (6) payments under the Capital Securities Guarantee).

The Debentures are issuable only in registered, certificated form without coupons and in minimum denominations of $100,000.00 and any multiple of $1,000.00 in excess thereof.  As provided in the Indenture and subject to the transfer restrictions and limitations as may be contained herein and therein from time to time, this Debenture is transferable by the holder hereof on the Debenture Register of the Company.  Upon due presentment for registration of transfer of any Debenture at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.2 of the Indenture, the Company

A-1-10

shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debenture for a like aggregate principal amount.  All Debentures presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to, the Company and the Trustee or the Authenticating Agent duly executed by the holder or his attorney duly authorized in writing.  No service charge shall be made for any exchange or registration of transfer of Debentures, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith.

Prior to due presentment for registration of transfer of any Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debenture registrar may deem the Person in whose name such Debenture shall be registered upon the Debenture Register to be, and may treat him as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debenture registrar shall be affected by any notice to the contrary.  All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debenture.

The Debentures are in registered form within the meaning of Treasury Regulations Section 1.871-14(c)(1)(i) for U.S. federal income and withholding tax purposes.

No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or in any supplemental indenture, or in any such Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Company or of any successor Person of the Company, either directly or through the Company or any successor Person of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of the Indenture and the issue of the Debentures.

PURSUANT TO SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, THE INDENTURE AND THIS DEBENTURE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

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EX-10.7

Exhibit 10.7

AMENDMENT 2007-1

TO THE

PMA CAPITAL CORPORATION RETIREMENT SAVINGS EXCESS PLAN

(As Amended and Restated Effective January 1, 2000)

WHEREAS, PMA Capital Corporation (the “Company”) maintains the PMA Capital Corporation Retirement Savings Excess Plan (the “Plan”) for the purpose of providing certain eligible employees of the Company and certain of its participating affiliates with benefits that would be provided under the PMA Capital Corporation Retirement Savings Plan but for the limitations imposed by Sections 401(k), 401(m), 415 and 401(a)(17) of the Internal Revenue Code of 1986, as amended (the “Code”); and

WHEREAS, the Plan was most recently amended and restated effective January 1, 2000 and has since been modified by the First Amendment thereto effective January 1, 2003, by the Second Amendment thereto effective January 1, 2004, by the Third Amendment thereto effective January 1, 2006, and by the Fourth Amendment thereto effective January 1, 2006; and

WHEREAS, the Company desires to clarify the vesting of the Employer Matching Credits, Retirement Credits and investment earnings attributable thereto under the Plan; and

WHEREAS, under Sections 8.1(a) and 10.4 of the Plan, the Company has reserved the right to amend the Plan with respect to all Participating Companies at any time, subject to certain inapplicable limitations;

NOW, THEREFORE, effective as provided herein, the Company hereby amends the Plan as follows:

I.   Section 2.35 of the Plan shall be added effective January 1, 2007 to read as follows:

“2.35       Year of Service shall have the same meaning given to such term under the Qualified Plan.

II.   Section 5.1 of the Plan is amended in its entirety, effective as provided herein, to read as follows:

“5.1         Vesting.

(a)           Pre-Tax Credits.  A Participant shall be 100% vested in the portion of his or her Excess Retirement Savings Plan Account attributable to Pre-Tax Credits and related earnings at all times.

(b)           Employer Matching Credits.  (1)  Participants who first become Eligible Employees prior to June 1, 2007 shall be 100% vested in the portion of their Excess Retirement Savings Plan Accounts attributable to Employer Matching Credits and related earnings at all times.

(2)           For Participants who first become Eligible Employees on or after June 1, 2007, a Participant’s interest in the portion of his or her Excess Retirement Savings Plan Account attributable to Employer Matching Credits and related earnings shall be vested and nonforfeitable as follows:

Number of Years of Service	Vested Percentage
Less than 1	0%
1 but less than 2	10%
2 but less than 3	40%
3 but less than 4	60%
4 but less than 5	80%
5 or more	100%

(c)           Retirement Credits.  A Participant’s interest in the portion of his or her Excess Retirement Savings Plan Account attributable to Retirement Credits and related earnings shall be vested and nonforfeitable as follows:

(1)           For Participants who ceased to be Eligible Employees prior to January 1, 2007, in accordance with the following schedule:

Number of Years of Service	Vested Percentage
Less than 5	0%
5 or more	100%

(2)           For Participants who are or who first become Eligible Employees on or after January 1, 2007, in accordance with the following schedule:

Number of Years of Service	Vested Percentage
Less than 1	0%
1 but less than 2	20%
2 but less than 3	40%
3 but less than 4	60%
4 but less than 5	80%
5 or more	100%

(d)           Notwithstanding the foregoing, a Participant’s interest in his or her entire Excess Retirement Savings Plan Account, including Employer Matching Credits, Retirement Credits and related investment earnings, shall be 100% vested and nonforfeitable if, while an Eligible Employee, the Participant dies, becomes Totally Disabled or attains his or her Normal Retirement Date.”

2

IN WITNESS WHEREOF, PMA CAPITAL CORPORATION has caused these presents to be duly executed, under seal, this 8th day of August, 2007.

Attest:	PMA CAPITAL CORPORATION
[SEAL]
	/s/ Andrew J. McGill
	Andrew J. McGill
	Vice President, Human Resources

3

EX-12

 

Exhibit 12

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(dollar amounts in thousands)

	2007			2006			2005			2004			2003
EARNINGS
Pre-tax income (loss)
from continuing operations	$	22,768		$	8,543		$	(2,206	)	$	(5,145	)	$	5,755
Fixed charges		12,977			14,651			17,231			13,393			10,839
Total	$	35,745		$	23,194		$	15,025		$	8,248		$	16,594
FIXED CHARGES
Interest expense and amortization of
debt discount and premium on all
indebtedness	$	11,732		$	13,521		$	16,111		$	12,354		$	9,887
Interest portion of rental expense		1,245			1,130			1,120			1,039			952
Total fixed charges	$	12,977		$	14,651		$	17,231		$	13,393		$	10,839
Ratio of earnings to fixed
charges		2.8	x		1.6	x	(A)			(A)				1.5	x
(A) Earnings were insufficient to cover fixed charges by $2.2 million and $5.1 million in 2005 and 2004, respectively.

EX-21

Exhibit 21

PMA Capital Corporation

Subsidiaries of Registrant

As of December 31, 2007

PMA Capital Corporation (Pennsylvania)

Pennsylvania Manufacturers’ Association Insurance Company (Pennsylvania)

Pennsylvania Manufacturers Indemnity Company (Pennsylvania)

Manufacturers Alliance Insurance Company (Pennsylvania)

PMA Capital Insurance Company (Pennsylvania)

PMA Holdings Ltd. (Bermuda)

Pennsylvania Manufacturers’ International Insurance Ltd. (Bermuda)

Mid-Atlantic States Investment Company (Delaware)

High Mountain Reinsurance, Ltd. (Cayman)

PMA Insurance SPC, Cayman (Cayman)

Midland Holding Company (Oklahoma)

Midlands Management Corporation (Oklahoma)

American Agency System, Inc. (Oklahoma)

Midlands Claim Administration, Inc. (Oklahoma)

Midlands Intermediaries, Inc. (Oklahoma)

Midlands Management of Texas, Inc. (Texas)

Midlands Management Corp. of NY (New York)

Midlands Injury Management, Inc. (Oklahoma)

Underwriters Adjustment Bureau, Inc. (Texas)

Midlands Underwriting Managers, Inc. (Texas)

American Marine Underwriters, Inc. (Texas)

U.S. Marine Insurance Group, Inc. (Texas)

PMA Re Management Company (Pennsylvania)

PMA Management Corp. (Pennsylvania)

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-84764) and Forms S-8 (No. 333-143578, No. 333-45949, No. 333-68855, No. 333-77111, No. 333-73240, No. 333-86796, and No. 333-115426) of PMA Capital Corporation of our reports dated March 10, 2008, relating to the consolidated financial statements and consolidated financial statement schedules of PMA Capital Corporation and subsidiaries, and internal control over financial reporting, which appear in this Annual Report (Form 10-K) of PMA Capital Corporation for the year ended December 31, 2007.

/s/ Beard Miller Company LLP

Beard Miller Company LLP

Harrisburg, Pennsylvania

March 10, 2008

EX-24.1

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of January, 2008.

/s/ Patricia A. Drago

Name: Patricia A. Drago

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of January, 2008.

/s/ Peter S. Burgess

Name: Peter S. Burgess

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 26th day of January, 2008.

/s/ Vincent T. Donnelly

Name: Vincent T. Donnelly

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 25th day of January, 2008.

/s/ J. Gregory Driscoll

Name: J. Gregory Driscoll

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 26th  day of January, 2008.

/s/ Charles T. Freeman

Name: Charles T. Freeman

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 24th day of January, 2008.

/s/ James C. Hellauer

Name: James C. Hellauer

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 28th  day of January, 2008.

/s/ Richard Lutenski

Name: Richard Lutenski

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of January, 2008.

/s/ John D. Rollins

Name: John D. Rollins

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of January, 2008.

/s/ Roderic H. Ross

Name: Roderic H. Ross

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 26th day of January, 2008.

/s/ L.J. Rowell, Jr.

Name: L.J. Rowell, Jr.

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 30th  day of January, 2008.

/s/ Neil C. Schneider

Name: Neal C. Schneider

Exhibit 24.1

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, William E. Hitselberger and Brad Shofran, and each of them (with full power to act without the others), 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, 2007 and all amendments thereto; and

(ii) any and all 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 333-143578, 333-115426, 333-86796, 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 reports, registration statements, registrations, amendments, qualifications and notifications, to execute and deliver any and all other such 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 March 14, 2009.

IN WITNESS WHEREOF, the undersigned has executed this document as of the 28th  day of January, 2008.

/s/ James F. Malone

Name: James F. Malone

EX-24.2

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 21, 2008, 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, 2007, 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 4th day of March, 2008.

/s/ Robert L. Pratter

Robert L. Pratter

Secretary

PMA Capital Corporation

(SEAL)

EX-31.1

EXHIBIT 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Vincent T. Donnelly, certify that:

1.  I have reviewed this annual report on Form 10-K for the year ended December 31, 2007 of PMA Capital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:  March 11, 2008	/s/ Vincent T. Donnelly
	Vincent T. Donnelly
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William E. Hitselberger, certify that:

1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2007 of PMA Capital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 11, 2008	/s/ William E. Hitselberger
	William E. Hitselberger
	Executive Vice President and
	Chief Financial Officer

EX-32.1

 

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Vincent T. Donnelly, President and Chief Executive Officer of PMA Capital Corporation, do hereby certify, to the best of my knowledge, that, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, the information contained in the Annual Report of PMA Capital Corporation on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of PMA Capital Corporation.  A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ Vincent T. Donnelly

Vincent T. Donnelly

President and Chief Executive Officer

March 11, 2008

 

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, William E. Hitselberger, Executive Vice President and Chief Financial Officer of PMA Capital Corporation, do hereby certify, to the best of my knowledge, that, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, the information contained in the Annual Report of PMA Capital Corporation on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of PMA Capital Corporation.  A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ William E. Hitselberger

William E. Hitselberger

Executive Vice President and

Chief Financial Officer

March 11, 2008