-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NULkSg4U6D5URqVLLxF+vbz/ZmMA/Fjmn+CkC7SFxNuxHc1qHGd8CDwa0Hx4R/LO MAE+TSmA4n4lU0ynNIPWsA== 0000950159-08-001134.txt : 20080804 0000950159-08-001134.hdr.sgml : 20080804 20080804163154 ACCESSION NUMBER: 0000950159-08-001134 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080804 DATE AS OF CHANGE: 20080804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PMA CAPITAL CORP CENTRAL INDEX KEY: 0001041665 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 232217932 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31706 FILM NUMBER: 08988434 BUSINESS ADDRESS: STREET 1: 380 SENTRY PARKWAY CITY: BLUE BELL STATE: PA ZIP: 19422 BUSINESS PHONE: 610-397-5298 MAIL ADDRESS: STREET 1: 380 SENTRY PARKWAY CITY: BLUE BELL STATE: PA ZIP: 19422 FORMER COMPANY: FORMER CONFORMED NAME: PENNSYLVANIA MANUFACTURERS CORP DATE OF NAME CHANGE: 19970702 10-Q 1 pma10q.htm PMA CAPITAL CORPORATION FROM 10-Q pma10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(MARK ONE)
/X/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

OR

/  /
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)

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

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


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

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.

 
Large accelerated filer /  /
Accelerated filer /X/
 
Non-accelerated filer /  / (Do not check if a smaller reporting company)
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/

There were 31,940,651 shares outstanding of the registrant’s Class A Common Stock, $5 par value per share, as of the close of business on August 1, 2008.

 
 
 

INDEX

 
 
 
 
    
   
Page
     
Part I.
Financial Information
  
     
Item 1.
Financial Statements.
  
     
 
Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and
  
 
December 31, 2007
  1
     
 
Condensed Consolidated Statements of Operations for the three and six months
  
 
ended June 30, 2008 and 2007 (unaudited)
     
 
Condensed Consolidated Statements of Cash Flows for the six months ended
  
 
June 30, 2008 and 2007 (unaudited)
  3
     
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three
  
 
and six months ended June 30, 2008 and 2007 (unaudited)
     
 
Notes to the Unaudited Condensed Consolidated Financial Statements
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and
  
 
Results of Operations.
     
Item 3.
Quantitative and Qualitative Disclosure About Market Risk.
     
Item 4
Controls and Procedures.
     
Part II.
Other Information
  
     
Item 1A.
Risk Factors.
     
Item 4
Submission of Matters to a Vote of Security Holders.
.
    
Item 6
Exhibits
     
Signatures
  
     
Exhibit Index
  
 35
     




 
 
 

Part I.                      Financial Information
Item 1.                      Financial Statements.

PMA Capital Corporation
(Unaudited)

 
 
     
As of
    
As of
  
     
June 30,
    
December 31,
  
(in thousands, except share data)
    
2008
    
2007
  
               
Assets:
              
Investments:
              
Fixed maturities available for sale, at fair value (amortized cost:
              
2008 - $741,129; 2007 - $722,587)
   $ 730,466     $ 728,725  
Short-term investments
       59,785       78,426  
  Total investments
       790,251       807,151  
                   
Cash
       10,557       15,828  
Accrued investment income
       5,762       5,768  
Premiums receivable (net of valuation allowance: 2008 - $9,866; 2007 - $9,341)
       215,030       222,140  
Reinsurance receivables (net of valuation allowance: 2008 - $4,608; 2007 - $4,608)
       817,182       795,938  
Prepaid reinsurance premiums
       21,414       32,361  
Deferred income taxes, net
       117,983       118,857  
Deferred acquisition costs
       38,739       37,404  
Funds held by reinsureds
       46,980       42,418  
Intangible assets
       30,013       22,779  
Other assets
       125,533       105,341  
Assets of discontinued operations
       317,189       375,656  
Total assets
   $ 2,536,633     $ 2,581,641  
                   
Liabilities:
                  
Unpaid losses and loss adjustment expenses
     $ 1,240,224     $ 1,212,956  
Unearned premiums
       219,643       226,178  
Long-term debt
       129,790       131,262  
Accounts payable, accrued expenses and other liabilities
       193,342       195,895  
Reinsurance funds held and balances payable
       31,947       39,324  
Dividends to policyholders
       5,459       5,839  
Liabilities of discontinued operations
       335,633       391,603  
Total liabilities
       2,156,038       2,203,057  
                   
Commitments and contingencies (Note 9)
                  
                   
Shareholders' Equity:
                  
Class A Common Stock, $5 par value, 60,000,000 shares authorized
                  
(2008 - 34,217,945 shares issued and 31,940,651 outstanding;
                  
2007 - 34,217,945 shares issued and 31,761,106 outstanding)
       171,090       171,090  
Additional paid-in capital
       111,754       111,088  
Retained earnings
       145,638       136,627  
Accumulated other comprehensive loss
       (17,743 )     (6,663 )
Treasury stock, at cost (2008 - 2,277,294 shares; 2007 - 2,456,839 shares)
       (30,144 )     (33,558 )
Total shareholders' equity
       380,595       378,584  
Total liabilities and shareholders' equity
     $ 2,536,633     $ 2,581,641  


See accompanying notes to the unaudited condensed consolidated financial statements.

 
1
 

PMA Capital Corporation
(Unaudited)
 

     
Three Months Ended
    
Six Months Ended
     
June 30,
    
June 30,
(in thousands, except per share data)
    
2008
2007
    
2008
  
2007
                     
Revenues:
                    
Net premiums written
   $
79,146
  
 $        81,656
   $
192,929
  
 $    207,393
Change in net unearned premiums
    
           23,774
  
            15,358
    
            (4,413)
  
          (16,540)
Net premiums earned
    
         102,920
  
            97,014
    
          188,516
  
         190,853
Claims service revenues
    
            12,937
  
             7,535
    
           24,889
  
            15,200
Commission income
    
              2,631
  
                       -
    
              6,912
  
                       -
Net investment income
    
             9,040
  
              9,951
    
            18,475
  
            19,705
Net realized investment gains (losses)
    
               (572)
  
             (1,134)
    
             2,946
  
                (156)
Other revenues
    
              2,214
  
                   32
    
             2,360
  
                  139
Total revenues
    
          129,170
  
          113,398
    
        244,098
  
         225,741
                     
Losses and expenses:
                    
Losses and loss adjustment expenses
    
            71,572
  
           67,965
    
          131,494
  
         133,884
Acquisition expenses
    
            19,524
  
            18,759
    
            34,216
  
           37,538
Operating expenses
    
           27,347
  
              19,411
    
           49,680
  
            35,012
Dividends to policyholders
    
              1,493
  
             2,047
    
             2,375
  
             3,669
Interest expense
    
             2,688
  
             2,843
    
             5,475
  
             5,659
Total losses and expenses
    
         122,624
  
           111,025
    
        223,240
  
         215,762
Income from continuing operations before income taxes
    
             6,546
  
             2,373
    
           20,858
  
             9,979
Income tax expense
    
             2,335
  
                 866
    
             7,377
  
             3,592
Income from continuing operations
    
               4,211
  
              1,507
    
             13,481
  
             6,387
Loss from discontinued operations, net of tax
    
                (188)
  
             (1,016)
    
           (2,627)
  
           (2,550)
Net income
   $
4,023
  
 $              491
   $
10,854
  
 $         3,837
                     
                     
Income (loss) per share:
                    
Basic:
                    
Continuing Operations
   $
0.13
  
 $            0.05
   $
0.42
  
 $            0.20
Discontinued Operations
    
                     -
  
              (0.03)
    
              (0.08)
  
              (0.08)
    $
0.13
  
 $            0.02
   $
0.34
  
 $             0.12
Diluted:
                    
Continuing Operations
   $
0.13
  
 $            0.04
   $
0.42
  
 $             0.19
Discontinued Operations
    
                     -
  
              (0.03)
    
              (0.08)
  
              (0.07)
    $
0.13
  
 $             0.01
   $
0.34
  
 $             0.12
                     
                     


See accompanying notes to the unaudited condensed consolidated financial statements.
 
2
PMA Capital Corporation
(Unaudited)

   
Six Months Ended
  
   
June 30,
  
(in thousands)
  
2008
2007
  
             
Cash flows from operating activities:
            
Net income
   $ 10,854     $ 3,837  
Less: Loss from discontinued operations
     (2,627 )     (2,550 )
Income from continuing operations, net of tax
     13,481       6,387  
Adjustments to reconcile income from continuing
                
operations to net cash flows used in operating activities:
                
Deferred income tax expense
     7,226       3,392  
Net realized investment (gains) losses
     (2,946 )     156  
Stock-based compensation
     1,222       1,014  
Depreciation and amortization
     2,439       1,820  
Change in:
                
Premiums receivable and unearned premiums, net
     575       (15,502 )
Dividends to policyholders
     (380 )     (271 )
Reinsurance receivables
     (21,244 )     (25,159 )
Prepaid reinsurance premiums
     10,947       (15,844 )
Unpaid losses and loss adjustment expenses
     27,268       28,439  
Funds held by reinsureds
     (4,562 )     (4,447 )
Reinsurance funds held and balances payable
     (7,377 )     25,629  
Accrued investment income
     6       57  
Deferred acquisition costs
     (1,335 )     (1,650 )
Accounts payable, accrued expenses and other liabilities
     590       12,051  
Other, net
     (19,325 )     (9,757 )
Discontinued operations
     (54,573 )     (57,825 )
Net cash flows used in operating activities
     (47,988 )     (51,510 )
                 
Cash flows from investing activities:
                
Fixed maturities available for sale:
                
Purchases
     (241,976 )     (137,756 )
Maturities and calls
     44,333       35,193  
Sales
     182,511       86,118  
Net sales (purchases) of short-term investments
     18,659       (18,452 )
Purchase of subsidiaries, net of cash received
     (7,402 )     -  
Sale of other assets
     2,120       -  
Other, net
     (4,514 )     (2,465 )
Discontinued operations
     48,388       73,219  
Net cash flows provided by investing activities
     42,119       35,857  
                 
Cash flows from financing activities:
                
Repayments of long-term debt
     (5,356 )     (3,872 )
Proceeds from exercise of stock options
     1,023       444  
Shares purchased under stock-based compensation plans
     (8 )     (273 )
Proceeds from issuance of long-term debt
     -       20,619  
Debt issuance costs
     -       (604 )
Purchase of treasury stock
     -       (6,272 )
Dividend from discontinued operations
     -       17,500  
Other payments to discontinued operations
     (1,246 )     (765 )
Discontinued operations
     1,246       (16,735 )
Net cash flows provided by (used in) financing activities
     (4,341 )     10,042  
                 
Net decrease in cash
     (10,210 )     (5,611 )
Cash - beginning of year
     21,493       14,105  
Cash - end of period (a)
   $ 11,283     $ 8,494  
                 
Supplementary cash flow information (all continuing operations):
                
Interest paid
   $ 5,606     $ 5,528  
Income tax paid
   $ 151     $ 200  
Non-cash financing activities:
                
Investment security transferred in dividend from discontinued operations
   $ -     $ 16,780  
                 
(a)  Includes cash from discontinued operations of $726,000 and $3.3 million as of June 30, 2008 and 2007, respectively.          
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
3
 
PMA Capital Corporation
(Unaudited)
 
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(in thousands)
  
2008
    
2007
    
2008
    
2007
  
                         
Net income
   $ 4,023     $ 491     $ 10,854     $ 3,837  
                                 
Other comprehensive loss, net of tax:
                                
Unrealized losses on securities:
                                
Holding losses arising during the period
     (10,003 )     (8,214 )     (9,213 )     (6,830 )
Less:  reclassification adjustment for (gains) losses
                                
included in net income, net of tax (expense)
                                
benefit: $200 and $64 for the three months
                                
ended June 30, 2008 and 2007; ($1,041) and
                                
($128) for the six months ended June 30, 2008
                                
and 2007
     372       119       (1,933 )     (238 )
                                 
Total unrealized losses on securities
     (9,631 )     (8,095 )     (11,146 )     (7,068 )
                                 
Net periodic benefit cost, net of tax expense: $12 and
                                
$27 for the three months ended June 30, 2008 and 2007;
     23       50       44       122  
$24 and $66 for the six months ended June 30, 2008
                                
and 2007
                                
Unrealized gains from derivative instruments designated
                                
as cash flow hedges, net of tax expense: $421 and
                                
$80 for the three months ended June 30, 2008 and 2007;
                                
$13 and $40 for the six months ended June 30, 2008
                                
and 2007
     782       149       25       74  
Foreign currency translation gains (losses), net of tax
                                
expense (benefit): $1 for the three months ended
                                
June 30, 2007; ($2) and ($1) for the six months ended
                                
June 30, 2008 and 2007
     -       2       (3 )     (1 )
                                 
Other comprehensive loss, net of tax
     (8,826 )     (7,894 )     (11,080 )     (6,873 )
                                 
Comprehensive loss
   $ (4,803 )   $ (7,403 )   $ (226 )   $ (3,036 )
                                 

See accompanying notes to the unaudited condensed consolidated financial statements.
 
4
 

PMA Capital Corporation

1.  BUSINESS DESCRIPTION

The accompanying condensed 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 reinsurance and excess and surplus lines operations, which have 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 90% of The PMA Insurance Group’s business is 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”).  PMA Management Corp. is a TPA that provides various claims administration, risk management, loss prevention and related services, primarily to self-insured clients under fee for service arrangements.  Midlands is an Oklahoma City-based managing general agent, program administrator and provider of TPA services, which the Company acquired on October 1, 2007.  On June 30, 2008, the Company acquired Webster Risk Services (“Webster”), which will operate as PMA Management Corp. of New England, Inc.  PMA Management Corp. of New England, Inc. is a Connecticut-based provider of risk management and 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.  On March 28, 2008, the Company entered into a stock purchase agreement to sell this business.  The sale is currently pending regulatory approval from the Pennsylvania Insurance Department.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

In the fourth quarter of 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 year financial presentation to conform to these changes.  See Note 5 for additional information regarding the Company’s discontinued operations.

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.  Due to this and certain other factors, such as the seasonal nature of portions of the insurance business, as well as competitive and other market conditions, operating results for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year.

The information included in this Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in its 2007 Annual Report on Form 10-K.
 
5

B.  Recent Accounting Pronouncements – In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 161”), which requires additional disclosures about an entity’s derivative instruments and hedging activities.  Entities are required to provide additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  SFAS 161 is a disclosure standard and as such will not impact the Company’s financial position, results of operations or cash flows.

3.   ACQUISITION

On April 21, 2008, the Company entered into a Stock Purchase Agreement with Webster Financial Corporation, pursuant to which the Company acquired all of the stock of Webster Risk Services.  Under the Stock Purchase Agreement, the Company paid $7.3 million for the stock of Webster on June 30, 2008.

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
   $ 2,186  
Identifiable intangible assets
     2,200  
Total assets
     4,386  
         
Total liabilities
     2,456  
         
Estimated fair value of net assets acquired
     1,930  
Purchase price
     7,321  
Goodwill
   $ 5,391  
         
 
Identifiable intangible assets consist of non-contractual customer relationships, which were calculated using a 10% annual attrition rate.  The non-contractual customer relationships will be amortized on a straight-line basis over 15 years.  The Company expects to recognize $147,000 of amortization expense per year over the next five years, including $73,000 for the remainder of 2008, and $1.5 million thereafter.

4.  INTANGIBLE ASSETS

Changes in the net carrying amounts of the Company’s intangible assets were as follows:
 
(dollar amounts in thousands)
  
Intangible
assets with
 finite lives
    
Intangible
assets with
 indefinite lives
    
Goodwill
    
Total
  
                         
Gross balance at December 31, 2007
   $ 6,690     $ 4,312     $ 11,944     $ 22,946  
Accumulated amortization
     (167 )     -       -       (167 )
Net balance at December 31, 2007
     6,523       4,312       11,944       22,779  
                                 
Assets acquired
     2,200       -       5,391       7,591  
Amortization
     (335 )     -       -       (335 )
Other adjustments
     -       -       (22 )     (22 )
Net balance at June 30, 2008
   $ 8,388     $ 4,312     $ 17,313     $ 30,013  
                                 

On April 1, 2008, the Company paid $817,000 to the former shareholders of Midlands for contractual earn-out payments related to the fourth quarter of 2007.  This amount was reflected in goodwill at December 31, 2007.
 
Annual impairment testing was performed during the second quarter of 2008 on the intangible assets that relate to the prior year acquisition of Midlands.  Based upon this review, these assets were not impaired.
 
6
 
5.  DISCONTINUED OPERATIONS
 
On March 28, 2008, the Company entered into a Stock Purchase Agreement (the “Agreement”) to sell its Run-off Operations to Armour Reinsurance Group Limited (“Armour”), a Bermuda-based corporation.  Armour is an indirect wholly-owned subsidiary of Brevan Howard P&C Master Fund Limited, a Cayman-based fund, which specializes in insurance and reinsurance investments.  On May 22, 2008, Armour filed the Form A application with the Pennsylvania Insurance Department, which formally started the regulatory review process.  The closing of the sale and transfer of ownership are subject to regulatory approval by the Pennsylvania Insurance Department.  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.

The Agreement may be terminated by either the Company or Armour if the closing of the transaction does not occur within six months of the execution of the Agreement or such later date as the parties mutually agree.  Under the Agreement, the Company can receive up to $10 million in cash and a $10 million promissory note, subject to certain adjustments at closing.  The promissory note is also subject to certain downward adjustments based on the future development of the business’ loss reserves over the next five years.  As a result of first quarter adverse loss development, the cash to be received and the value of the promissory note at closing will each be reduced by $4 million.  Only the expected cash amount is reflected in the Company’s financial statements.

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 table provides detailed information regarding the after-tax losses from discontinued operations included in the Company’s Statements of Operations.

 
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
    
2007
    
2008
    
2007
  
                         
Net premiums earned
   $ 11     $ 517     $ 1,037     $ 1,710  
Net investment income
     (451 )     1,221       (323 )     2,007  
Net realized investment gains (losses)
     (729 )     (620 )     31       (2,028 )
      (1,169 )     1,118       745       1,689  
                                 
Losses and loss adjustment expenses
     550       185       9,830       1,292  
Acquisition and operating expenses
     2,120       2,496       4,987       4,320  
Valuation adjustment
     (3,550 )     -       (10,030 )     -  
      (880 )     2,681       4,787       5,612  
                                 
Income tax benefit
     (101 )     (547 )     (1,415 )     (1,373 )
Loss from discontinued operations, net of tax
   $ (188 )   $ (1,016 )   $ (2,627 )   $ (2,550 )
                                 
                                 
                                 
The loss from discontinued operations for the six months ended June 30, 2008 included a first quarter after-tax charge of $2.6 million for adverse loss development at the discontinued operations.  The valuation adjustment reflects operating activity at the discontinued operations which is not expected to reduce the sale proceeds at closing.

 
7
 

Condensed balance sheet information of the discontinued operations is included below:

   
As of
    
As of
  
   
June 30,
    
December 31,
  
(dollar amounts in thousands)
  
2008
    
2007
  
             
Assets:
            
Investments
   $ 172,732     $ 219,678  
Cash
     726       5,665  
Reinsurance receivables
     136,212       150,097  
Other assets
     7,519  1     216  1
Assets of discontinued operations
   $ 317,189     $ 375,656  
                 
Liabilities:
                
Unpaid losses and loss adjustment expenses
   $ 289,190     $ 339,077  
Other liabilities
     46,443       52,526  
Liabilities of discontinued operations
   $ 335,633     $ 391,603  
                 
 
(1)
Includes write-down of net assets of Run-off Operations to fair value less cost to sell.

6.  UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

At June 30, 2008, the Company estimated that its liability for unpaid losses and loss adjustment expenses (“LAE”) for all insurance policies and reinsurance contracts issued by its ongoing insurance business was $1,240 million.  This amount included estimated losses from claims plus estimated expenses to settle claims.  This estimate also included estimated amounts for losses occurring on or prior to June 30, 2008 whether or not these claims had been reported to the Company.  At June 30, 2008, the estimate for such amounts recorded as liabilities of discontinued operations was $289.2 million.

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 primary long-tail line is 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 those in claims severity, frequency and settlements.  Also considered are legal developments, regulatory trends, legislative developments, changes in social attitudes and economic conditions.

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 June 30, 2008.  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,
 
8
 
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 June 30, 2008, then the related adjustments could have a material adverse impact on the Company’s financial condition, results of operations and liquidity.
 
7.  REINSURANCE

The Company follows the customary practice of reinsuring with other insurance companies a portion of the risks under the policies written by its insurance subsidiaries.  The Company’s insurance subsidiaries maintain reinsurance to protect themselves against the severity of losses on individual claims and unusually serious occurrences in which a number of claims in the aggregate produce a significant loss.  Although reinsurance does not discharge the insurance subsidiaries from their primary liabilities to their policyholders for losses insured under the insurance policies, it does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk.

The components of net premiums written and earned, and losses and LAE incurred were as follows:
 
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
    
2007
    
2008
    
2007
  
                         
Premiums written:
                        
Direct
   $ 99,092     $ 110,958     $ 239,523     $ 271,733  
Assumed
     2,567       4,300       5,677       8,089  
Ceded
     (22,513 )     (33,602 )     (52,271 )     (72,429 )
Net
   $ 79,146     $ 81,656     $ 192,929     $ 207,393  
Premiums earned:
                                
Direct
   $ 129,135     $ 121,013     $ 244,201     $ 234,583  
Assumed
     3,861       5,789       7,532       10,067  
Ceded
     (30,076 )     (29,788 )     (63,217 )     (53,797 )
Net
   $ 102,920     $ 97,014     $ 188,516     $ 190,853  
Losses and LAE:
                                
Direct
   $ 94,235     $ 85,649     $ 181,090     $ 172,306  
Assumed
     3,090       3,903       6,027       8,139  
Ceded
     (25,753 )     (21,587 )     (55,623 )     (46,561 )
Net
   $ 71,572     $ 67,965     $ 131,494     $ 133,884  
                                 
                                 
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 $1.4 million and $8.8 million during the three and six months ended June 30, 2008, compared to $14.9 million and $33.3 million in the second quarter and first six months 2007, respectively.  The Company’s agreement with Midwest was terminated in March 2008.
 
9
 
8.  DEBT

In January 2008, the Company retired the remaining $1.3 million principal amount of its 6.50% Senior Secured Convertible Debt due 2022.  The Company paid $1.5 million for these bond purchases, exclusive of accrued interest, and the liens and restrictive covenants associated with this debt have since been released.  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.

9.  COMMITMENTS AND CONTINGENCIES

The Company’s 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 provide coverage unanticipated by the Company.  The eventual effect on the Company of the changing environment in which it operates remains uncertain.

In the event a property and casualty insurer operating in a jurisdiction where the Company’s insurance subsidiaries also operate becomes or is declared insolvent, state insurance regulations provide for the assessment of other insurers to fund any capital deficiency of the insolvent insurer.  Generally, this assessment is based upon the ratio of an insurer’s voluntary premiums written to the total premiums written for all insurers in that particular jurisdiction.  As of June 30, 2008 and December 31, 2007, the Company had recorded liabilities of $7.4 million and $6.7 million for these assessments, which are included in accounts payable, accrued expenses and other liabilities on the Balance Sheet.

Under the terms of the sale of one of the Company’s insurance subsidiaries in 1998, the Company has agreed to indemnify the buyer, up to a maximum of $15 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, then the Company will participate in such favorable loss reserve development.

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.
 
10

 
10.  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, the Company grants restricted shares of its Class A Common Stock and, in the past, has granted 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 (the “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) over periods ranging between one and three years.  The Company recognized stock-based compensation expense of $701,000 and $392,000 for the second quarters of 2008 and 2007 and $1.2 million and $1.0 million for the six month periods ended June 30, 2008 and 2007, respectively.  The stock-based compensation expense for the first six months of 2007 included amounts related to stock options of $44,000.

Information regarding the Company’s stock option plans was as follows:

               
Weighted
        
               
Average
        
         
Weighted
    
Remaining
    
Aggregate
  
         
Average
    
Life
    
Intrinsic
  
   
Shares
    
Price
    
(in years)
    
Value
  
                         
Options outstanding, January 1, 2008
     1,522,227     $ 10.34              
Options exercised
     (134,962 )     7.58              
Options forfeited or expired
     (146,000 )     18.40              
Options outstanding, June 30, 2008
     1,241,265     $ 9.65       5.21     $ 1,973,690  
Options exercisable, June 30, 2008
     1,241,265     $ 9.65       5.21     $ 1,973,690  
Option price range at June 30, 2008
     $5.78 to $21.50            
                                 
                                 
                                 
Information regarding the Company’s restricted stock activity was as follows:

             
         
Weighted
  
         
Average
  
         
Grant Date
  
   
Shares
    
Fair Value
  
             
Restricted stock at January 1, 2008
     78,974     $ 9.99  
   Granted
     48,500       9.34  
   Vested
     (60,557 )     9.94  
   Forfeited
     (3,000 )     9.39  
Restricted stock at June 30, 2008
     63,917     $ 9.57  
                 
                 

The Company recognizes compensation expense for restricted stock awards over the vesting period of the award.  Compensation expense recognized for restricted stock was $126,000 and $272,000 for the three and six months ended June 30, 2008, compared to $139,000 and $470,000 for the same periods last year.  At June 30, 2008, unrecognized compensation expense for non-vested restricted stock was $445,000.

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 the first six months of 2008, employees remitted 917 shares to the Company to satisfy their payment of withholding taxes for vested awards.

In March 2006 and 2007 and February 2008, the Compensation Committee approved the 2006, 2007 and 2008 Officer Long Term Incentive Plans pursuant to which stock may be awarded to all officers in 2009, 2010 and 2011 if the after-tax return on
 
11
 
equity in 2008, 2009 and 2010 is within a specified range.  The Company recognized expenses related to these plans of $575,000 and $950,000 for the three and six month periods ended June 30, 2008, compared to $250,000 and $500,000 for the same periods last year.
 
11.  EARNINGS PER SHARE

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

   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
   
2008
  
2007
  
2008
  
2007
  
                         
Denominator:
                        
Basic shares
     31,801,059       32,418,525       31,744,055       32,458,259  
Dilutive effect of:
                                
Stock options
     237,825       342,123       209,189       298,372  
Restricted stock
     65,894       77,398       70,476       116,170  
Convertible debt
     27,798       -       27,798       -  
Total diluted shares
     32,132,576       32,838,046       32,051,518       32,872,801  
   
 
The effects of 234,000 and 332,000 stock options were excluded from the computations of diluted earnings per share for the three and six months ended June 30, 2008, respectively, and the effects of 408,000 stock options were excluded from the computations of diluted earnings per share for both the three and six months ended June 30, 2007, respectively, because they were anti-dilutive.

Diluted shares used in the computation of diluted earnings per share for the six months ended June 30, 2008 also do not assume the effects of the potential conversion of the Company’s convertible debt into 4,000 shares of Class A Common Stock, because they were anti-dilutive.  The effects of the potential conversion of the Company’s convertible debt into 1.1 million and 1.2 million shares of Class A Common Stock were also excluded from the computations of diluted earnings per share for the three and six months ended June 30, 2007, respectively, because they were anti-dilutive.

 
12
 


12.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The following is a description of the Company’s categorization of the fair value of its fixed maturities available for sale:

 
·
Level 1 – Fair value measures are based on unadjusted quoted market prices in active markets for identical securities.  The fair value of fixed maturities included in the Level 1 category were based on quoted prices that are readily and regularly available in an active market.  The Company includes U.S. Treasury securities in the Level 1 category.

 
·
Level 2 – Fair value measures are based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.  The fair value of fixed maturities included in the Level 2 category were based on market values generated by external pricing models that vary by asset class and incorporate available trade, bid and other market information, as well as price quotes from other well-established independent market sources.  The Company includes U.S. Government-sponsored agency obligations, states, political subdivisions and foreign government securities, corporate debt securities, and mortgage-backed and other asset-backed securities in the Level 2 category.

 
·
Level 3 – Fair value measures are based on inputs that are unobservable and significant to the overall fair value measurement, and may involve management judgment.  The Company included private placement securities for which there was no active secondary market in the Level 3 category.

The following table provides the fair value measurements of applicable Company assets by level within the fair value hierarchy as of June 30, 2008.  These assets 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
  
6/30/2008
  
(Level 1)
  
(Level 2)
  
(Level 3)
  
                         
Assets
                        
Fixed maturities available for sale
   $ 730,466     $ 36,056     $ 691,910     $ 2,500  
                                 
 

The following table provides a summary of changes in the fair value of Level 3 assets within the fair value hierarchy for the three and six months ended June 30, 2008.
 
(dollar amounts in thousands)
  
Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3)
  
       
Beginning balance as of January 1, 2008 and April 1, 2008
   $ 1,000  
  Purchases
     1,500  
Ending balance as of June 30, 2008
   $ 2,500  
         


 
13
 
 
13.  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.  In the fourth quarter of 2007, the Company 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 with this change.

Operating income, which is GAAP net income excluding net realized investment gains and 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 does not replace net income as the GAAP measure of the Company’s consolidated results of operations.
 
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
  
2007
  
2008
  
2007
  
                         
Revenues:
                        
The PMA Insurance Group
   $ 114,110     $ 106,752     $ 208,927     $ 210,302  
Fee-based Business
     16,057       7,715       32,709       15,544  
Corporate and Other
     (425 )     65       (484 )     51  
Net realized investment gains (losses)
     (572 )     (1,134 )     2,946       (156 )
Total revenues
   $ 129,170     $ 113,398     $ 244,098     $ 225,741  
                                 
Components of net income:
                                
Pre-tax operating income (loss):
                                
The PMA Insurance Group
   $ 11,341     $ 7,799     $ 24,960     $ 18,729  
Fee-based Business
     1,201       601       3,387       1,394  
Corporate and Other
     (5,424 )     (4,893 )     (10,435 )     (9,988 )
Pre-tax operating income
     7,118       3,507       17,912       10,135  
Income tax expense
     2,535       1,263       6,346       3,647  
Operating income
     4,583       2,244       11,566       6,488  
Realized investment gains (losses) after tax
     (372 )     (737 )     1,915       (101 )
Income from continuing operations
     4,211       1,507       13,481       6,387  
Loss from discontinued operations, net of tax (1)
     (188 )     (1,016 )     (2,627 )     (2,550 )
Net income
   $ 4,023     $ 491     $ 10,854     $ 3,837  
   
 
(1)
Effective in the fourth quarter of 2007, the Company reported the results of its former Run-off Operations segment as discontinued operations.

Net premiums earned by principal line of business were as follows:
 
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
  
2007
  
2008
  
2007
  
                         
The PMA Insurance Group:
                        
Workers' compensation
   $ 93,909     $ 90,636     $ 171,798     $ 176,102  
Commercial automobile
     5,318       4,907       10,587       9,991  
Commercial multi-peril
     2,384       1,573       4,396       2,832  
Other
     1,436       58       1,984       2,244  
Total net premiums earned
     103,047       97,174       188,765       191,169  
Corporate and Other
     (127 )     (160 )     (249 )     (316 )
Consolidated net premiums earned
   $ 102,920     $ 97,014     $ 188,516     $ 190,853  
   
 

 
14
 


The Company’s total assets by principal business segment were as follows:
 
   
As of
    
As of
  
   
June 30,
    
December 31,
  
(dollar amounts in thousands)
  
2008
  
2007
  
             
The PMA Insurance Group
   $ 2,044,998     $ 2,032,848  
Fee-based Business
     95,173       67,313  
Corporate and Other (1)
     79,273       105,824  
Assets of discontinued operations
     317,189       375,656  
Total assets
   $ 2,536,633     $ 2,581,641  
   
 
(1) Corporate and Other includes the effects of eliminating transactions between the ongoing business segments.


 
15
 

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

The following is a discussion of our financial condition as of June 30, 2008, compared with December 31, 2007, and our results of operations for the three and six months ended June 30, 2008, compared with the same periods last year.  This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”), to which the reader is directed for additional information.  The term “GAAP” refers to accounting principles generally accepted in the United States of America.

In the fourth quarter of 2007, we reported the results of our Run-off Operations as discontinued operations.  On March 28, 2008, we entered into a stock purchase agreement to sell this business. The sale is currently pending regulatory approval from the Pennsylvania Insurance Department.  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 with these changes.

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, are forward-looking statements.  These statements are based upon current estimates, assumptions and projections.  Actual results may differ materially from those projected in such forward-looking statements, and therefore, you should not place undue reliance on them.  See the Cautionary Statements on page 31 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” in our 2007 Form 10-K 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”).  PMA Management Corp. is a TPA that provides various claims administration, risk management, loss prevention and related services, primarily to self-insured clients under fee for service arrangements.  Midlands is an Oklahoma City-based managing general agent, program administrator and provider of TPA services, which we acquired on October 1, 2007.  On June 30, 2008, we acquired Webster Risk Services, which we will operate as PMA Management Corp. of New England, Inc.  PMA Management Corp. of New England, Inc. is a Connecticut-based provider of risk management and 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.  On March 28, 2008, we entered into a Stock Purchase Agreement (the “Agreement”) to sell our Run-off Operations to Armour Reinsurance Group Limited (“Armour”), a Bermuda-based corporation.  On May 22, 2008, Armour filed the Form A application with the Pennsylvania Insurance Department, which formally started the regulatory review process.  The closing of the sale and transfer of ownership are subject to regulatory approval by the Pennsylvania Insurance Department.

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,
 
 
 
16
 
 
    including commissions paid to agents, brokers and sub-producers and the internal expenses to operate the business; and
 
·
 dividends and premium adjustments that are paid to policyholders of certain of our insurance products.

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.

RESULTS OF OPERATIONS

Consolidated Results

We recorded net income of $4.0 million for the second quarter of 2008, compared to $491,000 for the second quarter of 2007.  Operating income, which we define as net income excluding realized gains (losses) and results from discontinued operations, was $4.6 million for the three months ended June 30, 2008, compared to $2.2 million for the same period last year.  For the first six months of 2008, we had net income of $10.9 million, compared to $3.8 million for the first half of 2007.  Operating income for the first six months of 2008 was $11.6 million, compared to $6.5 million for the same period last year.  Included in net income and operating income for the three and six months ended June 30, 2008 was an after-tax gain of $1.4 million, which resulted from the sale of a property at The PMA Insurance Group.

Income from continuing operations included the following after-tax net realized gains (losses):
 
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
  
2007
  
2008
  
2007
  
Net realized gains (losses) after tax:
                        
Sales of investments
   $ (372 )   $ (119 )   $ 1,933     $ 238  
Change in fair value of debt derivative
     -       (507 )     -       (228 )
Other
     -       (111 )     (18 )     (111 )
Net realized gains (losses) after tax
   $ (372 )   $ (737 )   $ 1,915     $ (101 )
   
 
Consolidated revenues for the second quarter of 2008 were $129.2 million, compared to $113.4 million for the same period last year.  Consolidated revenues for the first six months of 2008 were $244.1 million, compared to $225.7 million for the same period in 2007.  Net premiums earned for the second quarter increased 6% to $102.9 million, compared to the same period a year ago.  Net premiums earned were $188.5 million for the first six months of 2008, compared to $190.9 million for the same period last year.  Claims service revenues for the second quarter and first six months of 2008 were $12.9 million and $24.9 million, compared to $7.5 million and $15.2 million for the same periods in 2007.  Commission income during the second quarter and first six months of 2008 was $2.6 million and $6.9 million.

In this MD&A, in addition to providing consolidated net income, 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, which is GAAP net income excluding net realized investment gains and 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
 
 
17
 
decisions result in net realized gains and losses that do not relate to the operations of the individual segments.  Operating income does not replace net income as the GAAP measure of our consolidated results of operations.
 
The following is a reconciliation of our segment operating results and operating income to GAAP net income:

 
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
  
2007
  
2008
  
2007
  
                         
Components of net income:
                        
Pre-tax operating income (loss):
                        
The PMA Insurance Group
   $ 11,341     $ 7,799     $ 24,960     $ 18,729  
Fee-based Business
     1,201       601       3,387       1,394  
Corporate and Other
     (5,424 )     (4,893 )     (10,435 )     (9,988 )
Pre-tax operating income
     7,118       3,507       17,912       10,135  
Income tax expense
     2,535       1,263       6,346       3,647  
Operating income
     4,583       2,244       11,566       6,488  
Realized investment gains (losses) after tax
     (372 )     (737 )     1,915       (101 )
Income from continuing operations
     4,211       1,507       13,481       6,387  
Loss from discontinued operations, net of tax (1)
     (188 )     (1,016 )     (2,627 )     (2,550 )
Net income
   $ 4,023     $ 491     $ 10,854     $ 3,837  
   
 
(1)
Effective in the fourth quarter of 2007, we reported the results of our former Run-off Operations segment as discontinued operations.

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 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.


 
18
 

Segment Results

The PMA Insurance Group

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

   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
  
2007
  
2008
  
2007
  
                         
Net premiums written
   $ 79,273     $ 81,816     $ 193,178     $ 207,709  
                                 
Net premiums earned
     103,047       97,174       188,765       191,169  
Net investment income
     8,943       9,578       18,042       19,133  
Other revenues
     2,120       -       2,120       -  
Total revenues
     114,110       106,752       208,927       210,302  
                                 
Losses and LAE
     71,572       67,965       131,494       133,884  
Acquisition and operating expenses
     29,516       28,690       49,696       53,520  
Dividends to policyholders
     1,493       2,047       2,375       3,669  
Total losses and expenses
     102,581       98,702       183,565       191,073  
                                 
Operating income before income
                                
  taxes and interest expense
     11,529       8,050       25,362       19,229  
                                 
Interest expense
     188       251       402       500  
                                 
Pre-tax operating income
   $ 11,341     $ 7,799     $ 24,960     $ 18,729  
                                 
Combined ratio
     99.5 %     101.6 %     97.2 %     99.9 %
Less:  net investment income ratio
     8.7 %     9.9 %     9.6 %     10.0 %
Operating ratio
     90.8 %     91.7 %     87.6 %     89.9 %
 
 
The PMA Insurance Group recorded pre-tax operating income of $11.3 million for the second quarter of 2008, compared to $7.8 million for the same period last year.  Year-to-date pre-tax operating income increased to $25.0 million, compared to $18.7 million for the first half of 2007.  The increases for both the second quarter and first six months of 2008 were due primarily to improved underwriting results, as reflected in our lower combined ratios, as well as a pre-tax gain of $2.1 million on the sale of a property that housed one of our branch offices.  The second quarter increase was also impacted by an increase in net premiums earned.

Premiums

Direct premium production was up during the second quarter and first six months of 2008, compared to the same periods last year.  We define direct premium production as direct premiums written, excluding premium adjustments and fronting premiums.  The following is a reconciliation of our direct premium production to direct premiums written:

 
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
  
2007
  
2008
  
2007
  
                         
Direct premium production
   $ 96,736     $ 96,316     $ 243,344     $ 239,705  
Fronting premiums
     2,113       14,936       10,256       33,337  
Premium adjustments
     370       (134 )     (13,828 )     (993 )
Direct premiums written
   $ 99,219     $ 111,118     $ 239,772     $ 272,049  
   
 
 
19
 
The PMA Insurance Group’s premiums written were as follows:

   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
    
2007
    
2008
    
2007
  
                         
Workers' compensation:
                        
Direct premiums written
   $ 84,714     $ 98,266     $ 208,426     $ 242,477  
Premiums assumed
     2,536       4,248       5,607       7,988  
Premiums ceded
     (17,064 )     (28,072 )     (41,031 )     (60,714 )
Net premiums written
   $ 70,186     $ 74,442     $ 173,002     $ 189,751  
Commercial lines:
                                
Direct premiums written
   $ 14,505     $ 12,852     $ 31,346     $ 29,572  
Premiums assumed
     31       52       70       101  
Premiums ceded
     (5,449 )     (5,530 )     (11,240 )     (11,715 )
Net premiums written
   $ 9,087     $ 7,374     $ 20,176     $ 17,958  
Total:
                                
Direct premiums written
   $ 99,219     $ 111,118     $ 239,772     $ 272,049  
Premiums assumed
     2,567       4,300       5,677       8,089  
Premiums ceded
     (22,513 )     (33,602 )     (52,271 )     (72,429 )
Net premiums written
   $ 79,273     $ 81,816     $ 193,178     $ 207,709  
 
 
Direct workers’ compensation premiums written were $84.7 million in the second quarter of 2008, compared to $98.3 million during the same period last year.  These premium writings during the first six months of 2008 were $208.4 million, compared to $242.5 million during the first half of the prior year.  Our renewal retention rate on existing workers’ compensation accounts was 84% for both the second quarters of 2008 and 2007, and our renewal retention rate was 85% for the first six months of 2008 and 2007.  Direct workers’ compensation premiums written for both periods were down due to a reduction in fronting premiums, and were also down for the first six months of 2008 due to higher return premium adjustments of $13.1 million.  The premium adjustments primarily reflect favorable loss experience on loss-sensitive products where the insured shares in the underwriting result of the policy.  Fronting premiums were $2.1 million and $10.3 million in the second quarter and first six months of 2008, compared to $14.9 million and $33.3 million for the same periods a year ago.  The decreases in fronting premiums are the result of the termination of our agreement with Midwest Insurance Companies (“Midwest”) in March 2008.  We continue to earn commissions from the Midwest agreement and service the business previously written, but no additional business has been written or renewed since the termination date.  As discussed further below, we recently entered into a fronting arrangement which will begin producing workers’ compensation business in the third quarter.  Excluding fronting business, we wrote $19.9 million of new workers’ compensation business in the second quarter of 2008 and $51.5 million for the first half of 2008, compared to $20.2 million and $57.4 million during the same periods last year.
 
We entered into a fronting agreement considerably smaller than Midwest in February 2008, and we also recently entered into a fronting arrangement in July 2008 with Appalachian Underwriters (“Appalachian”), who will underwrite and service workers’ compensation policies using our approved forms and guidelines.  The workers’ compensation business produced with Appalachian will be primarily located in the southeastern part of the United States.  We will retain approximately 10% of the direct premiums and related losses on this business.  We will also earn an administrative fee based upon the direct premiums earned under the agreement as well as fees for providing claims services on the business.  All of the participating reinsurers, except for Accident Insurance Company (“AIC”), an affiliate of Appalachian, have current A.M. Best Company, Inc. (“A.M. Best”) financial strength ratings of “A-” (Excellent) or higher.  AIC does not have an A.M. Best financial strength rating.  We are mitigating our credit risk with AIC by requiring them to secure amounts owed by holding cash in trust.  We expect that direct premiums written under this agreement will be between $20 million and $30 million on an annualized basis.
 
Pricing on our rate-sensitive workers’ compensation business declined 7% during the first six months of 2008, compared to a 4% decrease during the first six months of 2007.  Our pricing on this business during the first six months of 2008 decreased 26% in New York and 17% in Florida.  The pricing reductions in both New York and Florida were mainly driven by manual
 
 
20
 
 
 
loss cost changes filed by each respective state’s rating bureau, which we believe were consistent with loss trends in each state.  These two states collectively represent about 16% of our overall rate-sensitive workers’ compensation business written during the first six months of 2008.  Exclusive of business written in New York and Florida, our pricing on rate-sensitive workers’ compensation business decreased 4% for the six months ended June 30, 2008.

Pricing on our rate-sensitive workers’ compensation business in Pennsylvania declined 5% during the first six months of 2008.  In Pennsylvania, we are affected by a 10.2% reduction in loss costs that the Pennsylvania Insurance Department approved earlier this year.  While this resulted 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 continue to determine our business pricing through schedule charges and credits that we file and use to limit the effect of filed loss cost changes and have not experienced a decrease in premiums equal to the level of the loss costs reduction.  We also believe that the loss cost change should not significantly affect the profitability of our loss-sensitive book of business, which represents about 42% of our Pennsylvania workers’ compensation business.

Direct premiums written for commercial lines of business other than workers’ compensation, such as commercial auto, general liability, umbrella, multi-peril and commercial property lines (collectively, “Commercial Lines”) were $14.5 million in the second quarter of 2008, compared to $12.9 million for the same period last year.  For the first six months of the year, direct premiums written for Commercial Lines were $31.3 million in 2008, compared to $29.6 million in 2007.  New business increased to $5.8 million in the second quarter of 2008, up from $5.4 million in the second quarter of 2007, and new business for the first six months increased to $8.9 million in 2008, compared to $7.2 million for the same period last year.  Our renewal retention rate on existing Commercial Lines accounts was 84% and 85% for the three and six months ended June 30, 2008, compared to 90% and 91% for the three and six months ended June 30, 2007.

Total premiums assumed decreased by $1.7 million and $2.4 million during the second quarter and first six months of 2008, compared to the same periods last year.  The decline in both periods was primarily due to a reduction in the involuntary residual market business assigned to us.  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 upon its market share in terms of direct premiums in the voluntary market.  These assignments are accomplished either directly or by assumption from pools of residual market business.

Premiums ceded for workers’ compensation decreased by $11.0 million and $19.7 million during the three and six months ended June 30, 2008, compared to the same periods a year ago.  The declines were primarily due to lower premiums ceded under the Midwest agreement. The year-to-date decline was partially offset by 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 other commercial lines decreased by $475,000 during the first six months of 2008, compared to the same period in 2007, mainly resulting from a decrease in casualty treaty rates.

In total, net premiums written decreased by 3% during the second quarter of 2008, compared to the same period last year, while year-to-date net premiums written decreased by 7%, compared to the same period in 2007, and net premiums earned increased by 6% during the second quarter of 2008 and decreased by 1% for the first six months of 2008, compared to the same periods last year.  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.  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 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 premiums in the period in which the adjustment is made.


 
21
 

Losses and Expenses

The components of the GAAP combined ratios were as follows:

   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
   
2008
  
2007
  
2008
  
2007
  
                         
Loss and LAE ratio
     69.4 %     69.9 %     69.6 %     70.0 %
Expense ratio:
                                
  Acquisition expense     19.0 %     19.3 %     18.1 %     19.6 %
  Operating expense     9.7 %     10.3 %     8.2 %     8.4 %
Total expense ratio
     28.7 %     29.6 %     26.3 %     28.0 %
Policyholders' dividend ratio
     1.4 %     2.1 %     1.3 %     1.9 %
Combined ratio
     99.5 %     101.6 %     97.2 %     99.9 %
   
 
The loss and LAE ratios improved by 0.5 points during the second quarter of 2008 and by 0.4 points during the first six months of 2008, compared to the same periods last year.  The improved loss and LAE ratios for both periods were primarily due to lower current accident year loss and LAE ratios, compared to 2007.  The year-to-date loss and LAE ratio also benefited from favorable development in our loss-sensitive business which resulted in the retrospective premium adjustments reflected in our first quarter results.  Our current accident year loss and LAE ratios benefited in 2008 from changes in the type of workers’ compensation products selected by our insureds.  Pricing changes coupled with payroll inflation for rate-sensitive workers’ compensation business were below overall estimated loss trends.  We estimated our medical cost inflation to be 6.5% in the first six months of 2008, compared to our estimate of 8% in the first six months of 2007.  The medical cost inflation rate has declined due to a decrease in utilization as well as 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 total expense ratios improved by 0.9 points and 1.7 points in the second quarter and first six months of 2008, compared to the same periods last year. Commissions earned under our fronting agreements reduced the year-to-date acquisition expense ratio by 0.9 points, compared to 0.6 points for the same period in 2007.  Although our agreement with Midwest was terminated, we continue to earn commissions on this business until the underlying policies expire.  Our year-to-date acquisition expense ratio also benefited from reductions in premium-based state assessments.

The policyholders’ dividend ratios were lower by 0.7 points and 0.6 points in the second quarter and first six months of 2008, compared to the same periods last year.  The prior year periods reflected better loss experience on participating policies, which resulted in larger dividends on participating products where the policyholders may receive a dividend based, to a large extent, on their loss experience.

Net Investment Income

Net investment income was $8.9 million for the second quarter of 2008, compared to $9.6 million for the same period a year ago.  For the first six months of 2008, net investment income decreased $1.1 million to $18.0 million, compared to the first half of 2007.  The decreases were due primarily to lower yields of approximately 40 basis points for the quarter and 30 basis points year-to-date.

Other Revenues

Other revenues for the second quarter and first six months of 2008 reflected a pre-tax gain of $2.1 million on the sale of a property that housed one of our branch offices.  We are leasing a new, more modern facility for the branch office.


 
22
 

Fee-based Business

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

 
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
  
2007
  
2008
  
2007
  
                         
Claims service revenues
   $ 13,213     $ 7,535     $ 25,321     $ 15,200  
Commission income
     2,644       -       6,925       -  
Net investment income
     118       180       279       344  
Other revenues
     82       -       184       -  
Total revenues
     16,057       7,715       32,709       15,544  
                                 
Operating expenses
     14,856       7,114       29,322       14,150  
                                 
Pre-tax operating income
   $ 1,201     $ 601     $ 3,387     $ 1,394  
   
 
Pre-tax operating income for the Fee-based Business was $1.2 million for the second quarter of 2008, compared to $601,000 for the same period in 2007.  Year-to-date pre-tax operating income was $3.4 million, compared to $1.4 million for the first half of 2007.  The increases for both the second quarter and first six months of 2008 were due primarily to the inclusion of Midlands’ results.  We acquired this business on October 1, 2007.

On April 21, 2008, we entered into a Stock Purchase Agreement with Webster Financial Corporation, pursuant to which we acquired all of the stock of Webster Risk Services, which will operate as PMA Management Corp. of New England, Inc.  Under the Stock Purchase Agreement, we paid $7.3 million for the stock of PMA Management Corp. of New England, Inc. on June 30, 2008.  Beginning in the third quarter of 2008, we will report the operating results of PMA Management Corp. of New England, Inc. within our Fee-based Business segment. We expect to continue to grow the newly acquired business, which currently generates $6 million in annual revenues.

Fee-based Revenues

Fee-based revenues, excluding net investment income, were $15.9 million and $32.4 million for the second quarter and first six months of 2008, compared to $7.5 million and $15.2 million for the same periods in 2007.  The increases were primarily due to the inclusion of Midlands’ revenues, which accounted for $6.4 million and $14.0 million of this growth for the second quarter and first six months of 2008.  The increases also reflected higher fees for managed care services of $1.1 million and $1.7 million for the second quarter and year-to-date periods in 2008, compared to 2007.  The increase in the first six months of 2008, compared to the same period last year, also included an increase in fees of $1.1 million for claims services provided to self-insured clients.  Managed care services include medical bill review services and access to our preferred provider network partnerships.  Commission income is primarily derived from producing excess workers’ compensation business and providing program administrator services to self-insured clients.  We have experienced an increase in the competitiveness in the excess workers’ compensation business during 2008.

Expenses

Operating expenses increased to $14.9 million in the second quarter of 2008, up from $7.1 million in the second quarter of 2007.  Year-to-date operating expenses increased to $29.3 million, compared to $14.2 million during the same period last year.  The increases in operating expenses for both periods primarily reflected the inclusion of Midlands’ operating expenses, which included $1.2 million and $3.2 million in commission expenses and $168,000 and $335,000 related to the amortization of intangible assets for the second quarter and six months ended June 30, 2008, respectively.  The increases also reflected higher direct costs of $1.2 million and $2.0 million associated with the claims and managed care services provided to self-insured clients for the second quarter and first six months of 2008, compared to the same periods for 2007.


 
23
 

Corporate and Other

The Corporate and Other segment primarily includes corporate expenses and debt service.  Corporate and Other recorded net expenses of $5.4 million during the second quarter of 2008, compared to $4.9 million during the same period last year.  Net expenses were $10.4 million during the first six months of 2008, compared to $10.0 million during the first six months of 2007.  We incurred $655,000 in contract severance costs associated with the March 2008 retirement of an executive officer.

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.

On March 28, 2008, we entered into a Stock Purchase Agreement to sell our Run-off Operations to Armour Reinsurance Group Limited, a Bermuda-based corporation.  Armour is an indirect wholly-owned subsidiary of Brevan Howard P&C Master Fund Limited, a Cayman-based fund, which specializes in insurance and reinsurance investments.  On May 22, 2008, Armour filed the Form A application with the Pennsylvania Insurance Department, which formally started the regulatory review process.  The closing of the sale and transfer of ownership are subject to regulatory approval by the Pennsylvania Insurance Department.

The Agreement may be terminated either by us or Armour if the closing of the transaction does not occur within six months of the execution of the Agreement or such later date as the parties mutually agree.  Under the Agreement, we can receive up to $10 million in cash and a $10 million promissory note, subject to certain adjustments at closing.  The promissory note is also subject to certain downward adjustments based on the future development of the business’ loss reserves over the next five years.  Because of the expected divestiture, we determined that these operations should be reflected as discontinued operations.  As a result of first quarter adverse loss development, the cash to be received and the value of the promissory note at closing will each be reduced by $4 million.  Only the expected cash amount is reflected in our financial statements.

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:
 
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
  
2007
  
2008
  
2007
  
                         
Net premiums earned
   $ 11     $ 517     $ 1,037     $ 1,710  
Net investment income
     (451 )     1,221       (323 )     2,007  
Net realized investment gains (losses)
     (729 )     (620 )     31       (2,028 )
      (1,169 )     1,118       745       1,689  
                                 
Losses and loss adjustment expenses
     550       185       9,830       1,292  
Acquisition and operating expenses
     2,120       2,496       4,987       4,320  
Valuation adjustment
     (3,550 )     -       (10,030 )     -  
      (880 )     2,681       4,787       5,612  
                                 
Income tax benefit
     (101 )     (547 )     (1,415 )     (1,373 )
Loss from discontinued operations, net of tax
   $ (188 )   $ (1,016 )   $ (2,627 )   $ (2,550 )
   

The loss from discontinued operations for the six months ended June 30, 2008 included a first quarter after-tax charge of $2.6 million for adverse loss development at the discontinued operations. The valuation adjustment reflects operating activity at the discontinued operations which is not expected to reduce the sale proceeds at closing.  Acquisition and operating expenses in the first six months of 2007 were reduced by $1.0 million due to a reduction in the allowance for uncollectible reinsurance.

Loss Reserves

At June 30, 2008, we estimated that under all insurance policies and reinsurance contracts issued by our ongoing insurance business, our liability for unpaid losses and LAE for all events that occurred as of June 30, 2008 was $1,240 million.  This
 

24
 
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 June 30, 2008 whether or not these claims had been reported to us.
 
Unpaid losses and LAE reflect management’s best estimate of future amounts needed to pay claims and related settlement costs with respect to insured events which have occurred, including events that have not been reported to us.  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 primary long-tail line is our workers’ compensation business.  This business is subject to more unforeseen development than shorter tailed lines of business.  As part of the process for determining our unpaid losses and LAE, various actuarial models are used that analyze historical data and consider the impact of current developments and trends, such as those in claims severity, frequency and settlements.  Also considered are legal developments, regulatory trends, legislative developments, changes in social attitudes and economic conditions.

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 June 30, 2008.  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 June 30, 2008, then the related adjustments could have a material adverse impact on our financial condition, results of operations and liquidity.

Discontinued Operations

At June 30, 2008, our estimate for unpaid losses and LAE for such amounts recorded as liabilities of discontinued operations was $289.2 million.

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 us on our reinsurance business.  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, we receive certain information from ceding companies through the reinsurance brokers.  We assess the quality and timeliness of claims reporting by our ceding companies.  We also may supplement the reported information by requesting additional information and conducting reviews of certain of our ceding companies’ reserving and reporting practices.  We also review our internal operations to assess our capabilities to timely receive and process reported claims information from ceding companies.  We
 
 
25
 
 
assess our 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 reinsurance contracts contain a dispute resolution process that relies on arbitration to resolve any contractual differences.  At June 30, 2008, 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 condensed 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 business.

For additional discussion of loss reserves and reinsurance, see discussion beginning on pages 10, 42 and 56 of our 2007 Form 10-K.

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.
 
Net cash flows used in operating activities were $48.0 million in the first six months of 2008, compared to $51.5 million for the same period last year.  The decrease in operating cash flows used was primarily due to a decrease in cash used at our discontinued operations.
 
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 March 2008, we entered into a Stock Purchase Agreement with Armour to sell our Run-off Operations.  The closing of the sale and transfer of ownership are subject to regulatory approval by the Pennsylvania Insurance Department.  Under the Agreement, we can receive up to $10 million in cash and a $10 million promissory note, subject to certain adjustments at closing.  The promissory note is also subject to certain downward adjustments based on the future development of the business’ loss reserves over the next five years.  As a result of first quarter adverse loss development, the cash to be received and the value of the promissory note at closing will each be reduced by $4 million.  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 June 30, 2008, we had $27.5 million of cash and short-term investments at the holding company and non-regulated subsidiaries, 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.

The PMA Insurance Group’s principal insurance subsidiaries (the “Pooled Companies”) have the ability to pay $29.2 million in dividends to PMA Capital Corporation during 2008 without the prior approval of the Pennsylvania Insurance Department.  
 
 
26
 
 
In considering their future dividend policy, the Pooled Companies will evaluate, among other things, the impact of paying dividends on their financial strength ratings.  The Pooled Companies had statutory surplus of $352.1 million as of June 30, 2008, including $10.0 million relating to surplus notes.  Given the anticipated sale of PMA Capital Insurance Company (“PMACIC”), our reinsurance subsidiary in run-off, we do not expect to receive any dividends from this operation in 2008.  As of June 30, 2008, the statutory surplus of PMACIC was $37.8 million.

Net tax payments received from subsidiaries were $5.8 million during the second quarter of 2008, compared to $4.9 million during the same period last year.  Net tax payments received from subsidiaries during the first six months of 2008 were $7.8 million, compared to $16.2 million for the same period in 2007.

On April 21, 2008, we entered into a Stock Purchase Agreement with Webster Financial Corporation, pursuant to which we acquired all of the stock of Webster Risk Services, which will operate as PMA Management Corp. of New England, Inc.  Under the Stock Purchase Agreement, we paid $7.3 million for the stock of PMA Management Corp. of New England, Inc. on June 30, 2008.  The purchase price adjusted for certain closing adjustments and net of cash received on the sale resulted in a net cash outflow on this transaction of $5.8 million.

As of June 30, 2008, our total outstanding debt was $129.8 million, compared to $131.3 million at December 31, 2007.  In January 2008, we retired the remaining $1.3 million principal amount of our 6.50% Senior Secured Convertible Debt due 2022 for which we paid $1.5 million, exclusive of accrued interest, and the liens and restrictive covenants associated with this debt have since been released.  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.

We incurred interest expense of $2.7 million during the second quarter of 2008, compared to $2.8 million during the same period last year.  Interest expense for the first six months of 2008 totaled $5.5 million, compared to $5.7 million during the first six months of 2007.  We paid interest of $2.7 million during the second quarter of 2008, compared to $2.4 million during the same period last year.  We have paid $5.6 million in interest through the first six months of 2008, compared to $5.5 million during the first six months of 2007.  We expect to pay interest of $5 million for the remainder of 2008.

Our investment strategy includes guidelines for asset quality standards, asset allocations among investment types and issuers, and other relevant criteria for our portfolio.  In addition, invested asset cash flows, 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 payment 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.  Although 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, then we would expect to incur losses from such sales.  As of June 30, 2008, the duration of our investments that support the insurance reserves was 3.8 years, which approximates the duration of our reserves of 3.7 years.

INVESTMENTS

At June 30, 2008, our investments were carried at a fair value of $790.3 million and had an amortized cost of $800.9 million.  The average credit quality of our portfolio was AAA-.  All but four of our fixed income securities were publicly traded and rated by at least one nationally recognized credit rating agency.  At June 30, 2008, all but two of the publicly traded securities in our fixed income portfolio were of investment grade credit quality.  The two below investment grade securities had an aggregate fair value of $4.2 million and an aggregate unrealized loss of $423,000.  

At June 30, 2008, $439.3 million, or 56% of our investment portfolio, was invested in mortgage-backed and other asset-backed securities and collateralized mortgage obligations.  Of this $439.3 million, $18.2 million, or 4%, were residential mortgage-backed securities whose underlying collateral was either a sub-prime or alternative A mortgage.  The $18.2 million, which includes $16.4 million of alternative A collateral and $1.8 million of sub-prime collateral, had an estimated weighted average life of 2.9 years, with $5.7 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 $18.4 million, or 2%, whose credit ratings were enhanced by various financial guaranty insurers.  Of the credit enhanced securities, $13.6 million were asset-backed
 
 
27
 
securities with a weighted average life of 4.1 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.  Based upon our high quality collateral and short average life, we do not expect to incur material losses of principal from these holdings.

We have also recently reviewed our exposure to Freddie Mac (“FHLMC”) and Fannie Mae (“FNMA”) securities in our investment portfolio.  At June 30, 2008, we had preferred stock issued by those entities that we carried at $918,000.  We have no other equity exposure to those entities.  We hold $10.2 million of general obligation debt issued by these two agencies, substantially all of which has a maturity date in 2014 or sooner.  We also hold $172.1 million of FHLMC and FNMA backed collateralized mortgage obligations and mortgage-backed securities.  The average credit quality of these securities is “AAA” and we currently do not believe there are any material impairment issues related to these securities.

The net unrealized loss on our investments at June 30, 2008 was $10.6 million, or 1.3% of the amortized cost basis.  The net unrealized loss included gross unrealized gains of $4.6 million and gross unrealized losses of $15.2 million.

For all but three securities, which were carried at a fair value of $2.5 million at June 30, 2008, we determined the fair values of fixed income securities from prices obtained in the public markets.  Prices obtained in the public market include quoted prices that are readily and regularly available in an active market, market values generated by external pricing models that vary by asset class and incorporate available trade, bid and other market information, as well as price quotes from other well-established independent market sources.  For the three securities whose prices were not obtained from the public markets, which were privately placed 18-month construction bridge loans totaling $2.5 million with no secondary market, we considered their current fair value to approximate original cost.

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.

Net realized investment gains (losses) were comprised of the following:

   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
(dollar amounts in thousands)
  
2008
  
2007
  
2008
  
2007
  
                         
Sales of investments:
                        
Realized gains
   $ 248     $ 88     $ 4,166     $ 821  
Realized losses
     (820 )     (271 )     (1,192 )     (455 )
Change in fair value of debt derivative
     -       (780 )     -       (351 )
Other
     -       (171 )     (28 )     (171 )
Total net realized investment gains (losses)
   $ (572 )   $ (1,134 )   $ 2,946     $ (156 )
   
 
The gross realized gains and losses on sales of investments for the three and six months ended June 30, 2008 primarily related to general duration management trades.  The gross realized gains and losses on sales of investments for the three and six months ended June 30, 2007 primarily related to the repositioning of invested assets out of lower yielding sectors, such as
 
 
28
 

corporate bonds, and into higher yielding sectors, such as structured securities.  The sales of investments for all periods focused on maintaining our bias towards shorter duration and higher credit quality securities in the investment portfolio.
 
As of June 30, 2008, our investment portfolio had gross unrealized losses of $15.2 million.  For securities that were in an unrealized loss position at June 30, 2008, the length of time that such securities were in an unrealized loss position, as measured by their month end market value, was as follows:
                           
Percentage
  
   
Number of
    
Fair
    
Amortized
    
Unrealized
    
Fair Value to
  
(dollar amounts in millions)
  
Securities
  
Value
  
Cost
  
Loss
  
Amortized Cost
  
                               
Less than 6 months
     116     $ 311.9     $ 320.8     $ (8.9 )     97 %
6 to 9 months
     3       13.9       14.5       (0.6 )     96 %
9 to 12 months
     4       3.1       3.2       (0.1 )     97 %
More than 12 months
     28       49.3       52.9       (3.6 )     93 %
Subtotal
     151       378.2       391.4       (13.2 )     97 %
U.S. Treasury and Agency securities
     55       111.2       113.2       (2.0 )     98 %
Total
     206     $ 489.4     $ 504.6     $ (15.2 )     97 %
   
 
Of the 28 securities that have been in an unrealized loss position for more than 12 months, 27 securities have a total fair value of 95% of their combined amortized cost basis at June 30, 2008, and an average unrealized loss per security of approximately $101,000.  The one security with an unrealized loss greater than 20% of its amortized cost at June 30, 2008 has a fair value of $477,000 and an amortized cost of $1.4 million.  This security, whose $1.4 million principal is backed and guaranteed at maturity by discounted agency securities, matures in 2033.  We have both the ability and intent to hold this security until it matures.

The contractual maturities of securities in an unrealized loss position at June 30, 2008 were as follows:

   
Fair
    
Amortized
    
Unrealized
    
Percentage
Fair Value to
  
(dollar amounts in millions)
  
Value
  
Cost
  
Loss
  
Amortized Cost
  
                           
2008
     $ -     $ -     $ -       0 %
2009-2012       86.0       87.5       (1.5 )     98 %
2013-2017       48.5       50.0       (1.5 )     97 %
2018 and thereafter
       27.6       28.4       (0.8 )     97 %
Non-agency mortgage and other asset-backed securities
       216.1       225.5       (9.4 )     96 %
Subtotal
       378.2       391.4       (13.2 )     97 %
U.S. Treasury and Agency securities
       111.2       113.2       (2.0 )     98 %
Total
     $ 489.4     $ 504.6     $ (15.2 )     97 %
   
 
Discontinued Operations

At June 30, 2008, the fair value of the investment portfolio at our discontinued operations was $172.7 million, which included accrued investment income of $324,000 related to trading securities in the portfolio, and had an amortized cost of $172.0 million.  At June 30, 2008, 82% of the investment portfolio was comprised of short-term investments.

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 provide
 
 
29
 

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

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 161”), which requires additional disclosures about an entity’s derivative instruments and hedging activities.  Entities are required to provide additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  SFAS 161 is a disclosure standard and as such will not impact our financial position, results of operations or cash flows.

Critical Accounting Estimates

Our critical accounting estimates can be found beginning on page 56 of our 2007 Form 10-K.


 
30
 

CAUTIONARY STATEMENTS

Except for historical information provided in Management’s Discussion and Analysis and otherwise in this report, statements made throughout this report 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 the Terrorism Risk Insurance Program Reauthorization Act of 2007 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 forward-looking statements in this Form 10-Q.  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-Q to reflect circumstances after the date hereof or to reflect the occurrence of unanticipated events.


 
31
 


There has been no material change regarding our market risk position from the information provided on page 64 of our 2007 Form 10-K.


As of the end of the period covered by this report, 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) or 15d-15(e) of the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, the Chief Executive Officer and 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) that is required to be disclosed in our periodic filings with the U.S. Securities and Exchange Commission.  During the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II.  Other Information


There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007.


Our 2008 Annual Meeting of Shareholders (“Annual Meeting”) was held on May 7, 2008.  At the Annual Meeting, the shareholders acted upon the following matters:

 
1.
Proposal to elect three nominees as members of our Board of Directors to serve for terms expiring at the 2011 Annual Meeting and until their successors are elected:
 
Name of Nominee
Votes Cast For
Votes Withheld
Peter S. Burgess
                                24,715,024
                                     667,864
Charles T. Freeman
                                24,715,024
                                     667,864
James C. Hellauer
                                24,714,424
                                     668,464

The following members of our Board of Directors continue to serve the remainder of their existing terms in office:

 
Vincent T. Donnelly
 
Patricia A. Drago
 
J. Gregory Driscoll
 
Richard Lutenski
 
James F. Malone, III *
 
John D. Rollins
 
L.J. Rowell, Jr.
 
Neal C. Schneider
 
 
* Effective May 15, 2008, Mr. Malone retired from his position as a member of our Board of Directors.
 
32
 
 
 2.
  Proposal to ratify the appointment of Beard Miller Company LLP as our independent registered public accounting firm for 2008 was approved as follows:

 
 
Total Votes
Votes in favor
25,352,265
Votes against
25,848
Abstentions
4,774
Broker non-votes
                                              -


The Exhibits are listed in the Exhibit Index on page 35.

 
33
 


Pursuant to the requirements 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:  August 4, 2008
  
By: /s/ William E. Hitselberger
   
William E. Hitselberger
   
Executive Vice President and
   
Chief Financial Officer
   
(Principal Financial Officer)

 
34
 


Exhibit No.
Description of Exhibit
  
Method of Filing
       
Computation of Ratio of Earnings to Fixed Charges
 
  
Filed herewith.
(31)
Rule 13a - 14(a)/15d - 14 (a) Certificates
 
    
Certification of Chief Executive Officer Pursuant to Rule 13a -14(a) of the Securities Exchange Act of 1934
  
Filed herewith.
       
Certification of Chief Financial Officer Pursuant to Rule 13a -14(a) of the Securities Exchange Act of 1934
  
Filed herewith.
       
(32)
Section 1350 Certificates
    
       
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
Filed herewith.
       
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
Filed herewith.


 
 
35



EX-12 2 ex12.htm EXHIBIT 12 ex12.htm
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)


   
For the Six Months Ended
  
   
June 30,
  
   
2008
    
2007
  
             
EARNINGS
            
Pre-tax income from continuing operations
   $ 20,858     $ 9,979  
Fixed charges
     6,210       6,258  
Total
   $ 27,068     $ 16,237  
                 
FIXED CHARGES
                
Interest expense and amortization of debt discount
                
and premium on all indebtedness
   $ 5,475     $ 5,659  
Interest portion of rental expenses
     735       599  
Total fixed charges
   $ 6,210     $ 6,258  
                 
                 
Ratio of earnings to fixed charges
     4.4 x     2.6 x
                 



EX-31.1 3 ex31-1.htm EXHIBIT 31.1 ex31-1.htm
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 quarterly report on Form 10-Q for the quarter ended June 30, 2008 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 13a-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:   August 4, 2008
/s/ Vincent T. Donnelly
 
Vincent T. Donnelly
 
President and Chief Executive Officer
   
   


 

 EX-31.2 4 ex31-2.htm EXHIBIT 31.2 ex31-2.htm
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 quarterly report on Form 10-Q for the quarter ended June 30, 2008 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 13a-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:   August 4, 2008
/s/ William E. Hitselberger
 
William E. Hitselberger
 
Executive Vice President and
 
Chief Financial Officer
   
   


 

 EX-32.1 5 ex32-1.htm EXHIBIT 32.1 ex32-1.htm
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 Quarterly Report of PMA Capital Corporation on  Form 10-Q for the quarter ended June 30, 2008, 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
 
August 4, 2008
 
 

 

 EX-32.2 6 ex32-2.htm EXHIBIT 32.2 ex32-2.htm
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 Quarterly Report of PMA Capital Corporation on Form 10-Q for the quarter ended June 30, 2008, 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
 
August 4, 2008





-----END PRIVACY-ENHANCED MESSAGE-----