ex99-1.htm

	Three months ended						Nine months ended
	September 30,						September 30,
(in thousands, except per share data)	2008			2007			2008			2007
Operating income	$	6,405		$	5,079		$	17,971		$	11,567
Realized investment gains (losses) after tax		(5,154	)		99			(3,239	)		(2	)
Income from continuing operations		1,251			5,178			14,732			11,565
Loss from discontinued operations after tax		(2,310	)		(13,981	)		(4,937	)		(16,531	)
Net income (loss)	$	(1,059	)	$	(8,803	)	$	9,795		$	(4,966	)

Diluted per share amounts:
Operating income	$	0.20		$	0.16		$	0.56		$	0.35
Realized investment gains (losses) after tax		(0.16	)		-			(0.10	)		-
Income from continuing operations		0.04			0.16			0.46			0.35
Loss from discontinued operations after tax		(0.07	)		(0.43	)		(0.15	)		(0.50	)
Net income (loss)	$	(0.03	)	$	(0.27	)	$	0.31		$	(0.15	)

Vincent T. Donnelly, President and Chief Executive Officer commented, “PMA Capital produced another quarter of improved operating results, with profitable growth in both our insurance and fee-based businesses, while continuing to maintain our underwriting standards. Our focus on outstanding customer service and continued diversification of products and services has contributed to our financial performance.”

·	Direct premium production, excluding premium adjustments and fronting premiums, increased 10% in the third quarter to $150.5 million and increased 5% during the first nine months of 2008 to $393.9 million, due to increases in larger account business, primarily captive accounts; and
·	The execution of two fronting arrangements, which we expect will generate fees that will fully replace those from the expiring agreement with Midwest Insurance Companies.

“Our fee-based business revenue increased by $28.2 million to $51.5 million, which represented 14% of our total operating revenues for the first nine months of 2008, compared to 7% during the same period in 2007. Organic revenue growth at PMA Management Corp. was 34% during the third quarter and 25% year-to-date. Our current year growth was also due to the inclusion of Midlands Management Corporation, which contributed $6.7 million and $20.6 million of revenue growth for the third quarter and first nine months of 2008, and PMA Management Corp. of New England, which we acquired in June 2008, added $1.7 million in revenues.”

Mr. Donnelly concluded, “Despite the recent volatility and uncertainty in the financial markets, our operating returns continued to improve and our financial condition remains strong. Our conservative investment strategy helped mitigate the impact of market disruptions on our investment portfolio. During the third quarter, we recorded after-tax realized losses for other than temporary impairment investment losses of $5.9 million, or 19 cents per diluted share.”

PMA Capital Corporation (the “Company”) previously announced the execution of a definitive stock purchase agreement to sell its Run-off Operations and the filing of the Form A with the Pennsylvania Insurance Department. PMA is assisting the buyer to ensure the Pennsylvania Insurance Department has the information it needs to review the transaction. The Company and the buyer agreed to extend the termination date in the stock purchase agreement to December 15, 2008 or such later date as may be mutually agreed. During the third quarter, the Company reduced the amount of cash it expects to receive at closing by $3.5 million, to $2.5 million, to reflect development of loss reserves at the Run-off Operations.

Total assets were $2.6 billion as of September 30, 2008 and December 31, 2007. Assets of discontinued operations represented 12% of total assets at September 30, 2008, compared to 15% at December 31, 2007. At September 30, 2008, we had $29.5 million in cash and short-term investments at our holding company and non-regulated subsidiaries.

Shareholders’ equity was $358.0 million as of September 30, 2008, compared to $378.6 million as of December 31, 2007. Book value per share was $11.20 at September 30, 2008, compared to $11.92 at December 31, 2007. The decreases in both shareholders’ equity and book value per share were primarily due to a decline of $26.1 million, or 82 cents per share, related to the change in the unrealized position on our available for sale fixed income portfolio, of which $14.9 million, or 57% of this decrease, occurred in the third quarter of 2008. The unrealized position on our investment portfolio decreased largely due to widening credit spreads on fixed income securities. Shareholders’ equity and book value per share were also reduced by $7.4 million, or 23 cents per share, as a result of a decrease in value of the investments in our pension plan. The impact of the decline in the unrealized position of our portfolio and pension investments was partially offset by net income. Details of the Company’s investment portfolio at September 30, 2008 and December 31, 2007 are posted on our website at www.pmacapital.com.

The insurance companies within The PMA Insurance Group had statutory capital and surplus of $336.4 million as of September 30, 2008, compared to $335.4 million as of December 31, 2007. The PMA Insurance Group has the ability to pay $29.2 million in dividends during 2008 without the prior approval of the Pennsylvania Insurance Department. The statutory capital and surplus of PMA Capital Insurance Company, the Company’s wholly-owned run-off reinsurance subsidiary which is being reported as discontinued operations, was $26.1 million as of September 30, 2008, compared to $47.6 million as of December 31, 2007.

Operating income, which we define as net income (loss) under accounting principles generally accepted in the United States (“GAAP”) excluding net realized investment gains (losses) and results from discontinued operations, is the financial performance measure used by our management and Board of Directors to evaluate and assess the results of our businesses. Net realized investment activity is excluded because (i) net realized investment gains and losses are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments and (ii) in many instances, decisions to buy and sell securities are made at the holding company level, and such decisions result in net realized gains and losses that do not relate to the operations of the individual segments. Operating income does not replace net income (loss) as the GAAP measure of our consolidated results of operations.

	Three months ended						Nine months ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007
Pre-tax operating income (loss):
The PMA Insurance Group	$	13,325		$	11,702		$	38,285		$	30,431
Fee-based Business		1,929			661			5,316			2,055
Corporate & Other		(5,319	)		(4,573	)		(15,754	)		(14,561	)
Pre-tax operating income		9,935			7,790			27,847			17,925
Income tax expense		3,530			2,711			9,876			6,358
Operating income		6,405			5,079			17,971			11,567
Realized investment gains (losses) after tax		(5,154	)		99			(3,239	)		(2	)
Income from continuing operations		1,251			5,178			14,732			11,565
Loss from discontinued operations after tax 1		(2,310	)		(13,981	)		(4,937	)		(16,531	)
Net income (loss)	$	(1,059	)	$	(8,803	)	$	9,795		$	(4,966	)

	Three months ended						Nine months ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007
Net realized gains (losses) after tax:
Sales of investments	$	792		$	(1,899	)	$	2,725		$	(1,661	)
Other than temporary impairments		(5,946	)		-			(5,946	)		-
Change in fair value of trading securities		-			2,106			-			2,093
Other		-			(108	)		(18	)		(434	)
Net realized gains (losses) after tax	$	(5,154	)	$	99		$	(3,239	)	$	(2	)

The PMA Insurance Group reported pre-tax operating income of $13.3 million for the third quarter of 2008, compared to $11.7 million for the same period last year. Year-to-date pre-tax operating income increased to $38.3 million, compared to $30.4 million for the first nine months of 2007. The year-to-date increase included a gain of $2.1 million for the sale of a property that previously housed one of our branch offices, which now leases a more modern facility.

Direct premium production increased during the third quarter and first nine months of 2008, compared to the same periods last year. We define direct premium production as direct premiums written, excluding fronting premiums and premium adjustments. The increase in direct premium production for both periods primarily reflected increases in larger account business, primarily captive accounts. Captive account business provides us with a greater degree of certainty in achieving our profit margin on an account by account basis as opposed to traditional first dollar business. The following is a reconciliation of our direct premium production to direct premiums written:

	Three months ended						Nine months ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007

Direct premium production	$	150,547		$	137,144		$	393,891		$	376,849
Fronting premiums		2,776			13,707			13,032			47,044
Premium adjustments		(5,008	)		(4,149	)		(18,836	)		(5,142	)
Direct premiums written	$	148,315		$	146,702		$	388,087		$	418,751

The declines 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. Excluding fronting business, we wrote $39.4 million of new business in the third quarter of 2008, up from $26.9 million in the third quarter of 2007, and $99.8 million for the first nine months of 2008, up from $91.5 million during the same period last year. The year-to-date increase in premium adjustments relates primarily to higher return premium adjustments which occurred in the first quarter of 2008. These premium adjustments primarily reflect favorable loss experience on loss-sensitive products where the insured shares in the underwriting result of the

policy. Pricing on our workers’ compensation rate-sensitive business declined 7% during the first nine months of 2008, compared to a 4% decrease during the first nine months of 2007. Our renewal retention rate on existing workers’ compensation accounts was 88% in the third quarter of 2008, compared to 89% for the same period last year, while our renewal retention rate for the first nine months of 2008 was 86%, compared to 87% for the same period in 2007.

During the third quarter of 2008, we entered into fronting arrangements with Appalachian Underwriters (“Appalachian”) and Arrowhead General Insurance Agency (“Arrowhead”), who underwrite and service workers’ compensation policies using our approved forms and guidelines. The business produced with Appalachian is primarily located in the southeastern part of the United States, while the production with Arrowhead is limited to California. We retain approximately 10% of the underwriting results on the business written with Appalachian and 20% of underwriting results on the business produced with Arrowhead. We also earn an administrative fee based upon the direct premiums earned under each agreement as well as fees for providing claims services on the business placed through Appalachian. Total direct premiums written under these agreements were $2.0 million during the third quarter of 2008. We expect that direct premiums written under these arrangements will be between $70 million and $100 million on an annualized basis.

Net premiums written were $124.1 million and $317.3 million for the third quarter and first nine months of 2008, compared to $116.3 million and $324.0 million during the same periods last year. Ceded premiums written decreased in the third quarter and first nine months of 2008, compared to the same periods in 2007, primarily due to lower premiums ceded under the Midwest agreement. The declines were 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, and an increase in premiums ceded under other fronting arrangements.

For the third quarter and first nine months of 2008, the combined ratios on a GAAP basis were 95.2% and 96.5%, compared to 97.3% and 99.0% for the same periods in 2007. These improvements primarily reflected lower acquisition expense and policyholders’ dividend ratios, partially offset by higher loss and LAE ratios.

The loss and LAE ratios increased for both periods as pricing changes, coupled with payroll inflation for rate-sensitive workers’ compensation business were below overall estimated loss trends. Our current accident year loss and LAE ratio benefited in 2008 from changes in the type of workers’ compensation products selected by our insureds. We estimate our medical cost inflation to be 6.5% in the first nine months of 2008, compared to our estimate of 8% in the first nine months of 2007. This decline reflects a decrease in utilization as well as our enhanced network and managed care initiatives. The year-to-date loss and LAE ratio benefited from favorable development in our loss-sensitive business which resulted in the first quarter retrospective premium adjustments. We write these retrospective products because we believe they provide us with greater certainty of achieving our targeted underwriting results.

Commissions earned under our fronting agreements reduced the current year acquisition expense ratios by 0.4 points for the quarter and 0.7 points for the first nine months, compared to 0.8 points and 0.7 points for the same periods in 2007. Although our agreement with Midwest was terminated, we continue to earn commissions on this business until the underlying policies expire. The 2008 acquisition expense ratios also benefited by 2.5 points in the quarter and 1.9 points year-to-date from reductions in premium-based state assessments.

The policyholders’ dividend ratios were lower in the third quarter and first nine months of 2008 than in the prior year periods. The current year periods reflected slightly higher than expected losses which

Net investment income for the third quarter and first nine months of 2008 was $8.8 million and $26.8 million, compared to $9.4 million and $28.5 million for the same periods last year. The decreases were due primarily to lower yields of approximately 40 basis points for the quarter and 30 basis points year-to-date. The declines for both periods were partially offset by an increased invested asset base.

Our Fee-based Business reported pre-tax operating income of $1.9 million for the third quarter of 2008, compared to $661,000 for the same period last year. Year-to-date pre-tax operating income increased to $5.3 million, compared to $2.1 million for the first nine months of 2007. The increases related primarily to the inclusion of the results of Midlands Management Corporation (“Midlands”), which we acquired on October 1, 2007.

For the third quarter of 2008, total revenues increased to $18.8 million, up $11.0 million from the same period last year. For the nine months ended September 30, 2008, total revenues increased to $51.5 million, compared to $23.3 million for the first nine months of 2007. The growth in revenues for both periods was primarily due to revenues resulting from our acquisition of Midlands. Also contributing to the increase were revenues from PMA Management Corp., which increased 34% in the third quarter and 25% in the first nine months of 2008, compared to the same periods last year. The total increase in revenues in the third quarter of 2008 primarily reflected an $8.4 million increase in claims service revenues and a $2.7 million increase in commission income, compared to the third quarter of last year. The total increase in revenues during the first nine months of 2008 primarily reflected an $18.5 million increase in claims service revenues and a $9.6 million increase in commission income, compared to the same period last year. The segment’s operating results for the third quarter of 2008 also reflect those of PMA Management Corp. of New England, Inc. (formerly Webster Risk Services), which we acquired on June 30, 2008.

The Corporate and Other segment, which includes primarily corporate expenses and debt service, recorded net expenses of $5.3 million during the third quarter of 2008, compared to $4.6 million in the third quarter of 2007. Net expenses were $15.8 million during the first nine months of 2008, compared to $14.6 million for the same period in 2007. We incurred $655,000 in contract severance costs associated with the March 2008 retirement of an executive officer. The increase in net expenses in both periods also relates to certain intercompany transactions which are eliminated in the Corporate and Other segment.

Discontinued operations, formerly our Run-off Operations which consists of our former reinsurance and excess and surplus lines businesses, recorded after-tax losses of $2.3 million and $4.9 million for the three and nine months ended September 30, 2008, compared to after-tax losses of $14.0 million and $16.5 million for the same periods in 2007. The loss for the first nine months of 2008 was due to an after-tax charge of $4.9 million for adverse loss development, including $2.3 million recorded in the third quarter, which contractually reduces the amount of cash and contingent consideration that we will receive at closing. The expected cash to be received has been reduced to $2.5 million and the value of the contingent consideration has been reduced to a face amount of $2.5 million. We have reflected

As a reminder, we will hold a conference call with investors beginning at 10:30 a.m. Eastern Time on Monday, November 3rd to review our third quarter 2008 results. The conference call will be available via a live webcast over the Internet at www.pmacapital.com. To access the webcast, enter the Investor Information section, click on Current Investor Information and then click on the microphone icon. Please note that by accessing the conference call via the Internet, you will be in a listen-only mode.

Pre-registering is not mandatory but is recommended as it will provide you immediate entry into the call and will facilitate the timely start of the conference. Pre-registration only takes a few moments and you may pre-register at anytime, including up to and after the call start time. Alternatively, if you would rather be placed into the call by an operator, please use the dial-in information above at least 5 minutes prior to the call start time.

The statements contained in this press release that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include estimates, assumptions or projections and are based on currently available financial, competitive and economic data and the Company’s current operating plans. Although the Company’s management believes that its expectations are reasonable, there can be no assurance that the Company’s 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:

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;

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;

You should not place undue reliance on any forward-looking statements in this press release. 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 press release to reflect circumstances after the date hereof or to reflect the occurrence of unanticipated events.

	Three months ended September 30,
(dollar amounts in thousands, except per share data)	2008			2007

Gross premiums written	$	151,498		$	149,436

Net premiums written	$	123,995		$	116,116

Revenues:
Net premiums earned	$	97,974		$	93,773
Claims service revenues		15,696			7,595
Commission income		2,637			-
Net investment income		8,870			9,914
Net realized investment gains (losses)		(7,929	)		153
Other revenues		125			33
Total revenues		117,373			111,468

Expenses:
Losses and loss adjustment expenses		68,660			63,163
Acquisition expenses		15,898			18,182
Operating expenses		26,906			16,900
Dividends to policyholders		1,169			2,205
Interest expense		2,734			3,075
Total losses and expenses		115,367			103,525

Pre-tax income		2,006			7,943

Income tax expense (benefit):
Current		765			537
Deferred		(10	)		2,228
Total income tax expense		755			2,765

Income from continuing operations		1,251			5,178

Loss from discontinued operations after tax		(2,310	)		(13,981	)

Net loss	$	(1,059	)	$	(8,803	)

Earnings (loss) per share:

Basic:
Continuing Operations	$	0.04		$	0.16
Discontinued Operations		(0.07	)		(0.44	)
	$	(0.03	)	$	(0.28	)

Diluted:
Continuing Operations	$	0.04		$	0.16
Discontinued Operations		(0.07	)		(0.43	)
	$	(0.03	)	$	(0.27	)

	Nine months ended September 30,
(dollar amounts in thousands, except per share data)	2008			2007

Gross premiums written	$	396,698		$	429,258

Net premiums written	$	316,924		$	323,509

Revenues:
Net premiums earned	$	286,490		$	284,626
Claims service revenues		40,585			22,795
Commission income		9,549			-
Net investment income		27,345			29,619
Net realized investment losses		(4,983	)		(3	)
Other revenues		2,485			172
Total revenues		361,471			337,209

Expenses:
Losses and loss adjustment expenses		200,154			197,047
Acquisition expenses		50,114			55,720
Operating expenses		76,586			51,912
Dividends to policyholders		3,544			5,874
Interest expense		8,209			8,734
Total losses and expenses		338,607			319,287

Pre-tax income		22,864			17,922

Income tax expense:
Current		916			737
Deferred		7,216			5,620
Total income tax expense		8,132			6,357

Income from continuing operations		14,732			11,565

Loss from discontinued operations after tax		(4,937	)		(16,531	)

Net income (loss)	$	9,795		$	(4,966	)

Earnings (loss) per share:

Basic:
Continuing Operations	$	0.46		$	0.36
Discontinued Operations		(0.15	)		(0.51	)
	$	0.31		$	(0.15	)

Diluted:
Continuing Operations	$	0.46		$	0.35
Discontinued Operations		(0.15	)		(0.50	)
	$	0.31		$	(0.15	)

	September 30,			December 31,
(dollar amounts in thousands, except per share data)	2008			2007
Assets:
Investments:
Fixed maturities available for sale	$	701,738		$	728,725
Short-term investments		88,358			78,426
Total investments		790,096			807,151

Cash		12,502			15,828
Accrued investment income		6,104			5,768
Premiums receivable		226,709			222,140
Reinsurance receivables		824,512			795,938
Prepaid reinsurance premiums		23,051			32,361
Deferred income taxes, net		131,132			118,857
Deferred acquisition costs		43,317			37,404
Funds held by reinsureds		49,292			42,418
Intangible assets		30,518			22,779
Other assets		152,327			105,341
Assets of discontinued operations		309,607			375,656
Total assets	$	2,599,167		$	2,581,641

Liabilities:
Unpaid losses and loss adjustment expenses	$	1,247,069		$	1,212,956
Unearned premiums		247,302			226,178
Debt		129,380			131,262
Accounts payable, accrued expenses
and other liabilities		247,196			195,895
Reinsurance funds held and balances payable		34,185			39,324
Dividends to policyholders		5,150			5,839
Liabilities of discontinued operations		330,891			391,603
Total liabilities		2,241,173			2,203,057

Shareholders' Equity:
Class A Common Stock		171,090			171,090
Additional paid-in capital		112,427			111,088
Retained earnings		144,286			136,627
Accumulated other comprehensive loss		(40,149	)		(6,663	)
Treasury stock, at cost		(29,660	)		(33,558	)
Total shareholders' equity		357,994			378,584
Total liabilities and shareholders' equity	$	2,599,167		$	2,581,641

Shareholders' equity per share	$	11.20		$	11.92

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	PMA Capital Corporation
	380 Sentry Parkway
	Blue Bell, PA 19422
	Attention: Investor Relations