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 SEPTEMBER 30, 2008

/ /	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		19422
Blue Bell, Pennsylvania		(Zip Code)
(Address of principal executive offices)

(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 31,965,806 shares outstanding of the registrant’s Class A Common Stock, $5 par value per share, as of the close of business on October 31, 2008.

INDEX

		Page

Part I.	Financial Information

Item 1.	Financial Statements.

	Condensed Consolidated Balance Sheets as of September 30, 2008 and
	December 31, 2007 (unaudited)	1

	Condensed Consolidated Statements of Operations for the three and nine months
	ended September 30, 2008 and 2007 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the nine months ended
	September 30, 2008 and 2007 (unaudited)	3

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three	4
	and nine months ended September 30, 2008 and 2007 (unaudited)

	Notes to the Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations.	17

Item 3.	Quantitative and Qualitative Disclosure About Market Risk.	34

Item 4.	Controls and Procedures.	34

Part II.	Other Information

Item 1A.	Risk Factors.	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	34

Item 6.	Exhibits.	34

Signatures		35

Exhibit Index		36

Part I. Financial Information

Item 1. Financial Statements.

PMA Capital Corporation

Condensed Consolidated Balance Sheets

(Unaudited)


	As of			As of
	September 30,			December 31,
(in thousands, except share data)	2008			2007

Assets:
Investments:
Fixed maturities available for sale, at fair value (amortized cost:
2008 - $734,886; 2007 - $722,587)	$	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 (net of valuation allowance: 2008 - $9,988; 2007 - $9,341)		226,709			222,140
Reinsurance receivables (net of valuation allowance: 2008 - $4,608; 2007 - $4,608)		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
Long-term 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

Commitments and contingencies (Note 10)

Shareholders' Equity:
Class A Common Stock, $5 par value, 60,000,000 shares authorized
(2008 - 34,217,945 shares issued and 31,965,806 outstanding;
2007 - 34,217,945 shares issued and 31,761,106 outstanding)		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 (2008 - 2,252,139 shares; 2007 - 2,456,839 shares)		(29,660	)		(33,558	)
Total shareholders' equity		357,994			378,584
Total liabilities and shareholders' equity	$	2,599,167		$	2,581,641

See accompanying notes to the unaudited condensed consolidated financial statements.

PMA Capital Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except per share data)	2008			2007			2008			2007

Revenues:
Net premiums written	$	123,995		$	116,116		$	316,924		$	323,509
Change in net unearned premiums		(26,021	)		(22,343	)		(30,434	)		(38,883	)
Net premiums earned		97,974			93,773			286,490			284,626
Claims service revenues		15,696			7,595			40,585			22,795
Commission income		2,637			-			9,549			-
Net investment income		8,870			9,914			27,345			29,619
Net realized investment gains (losses)		(7,929	)		153			(4,983	)		(3	)
Other revenues		125			33			2,485			172
Total revenues		117,373			111,468			361,471			337,209

Losses and expenses:
Losses and loss adjustment expenses		68,660			63,163			200,154			197,047
Acquisition expenses		15,898			18,182			50,114			55,720
Operating expenses		26,906			16,900			76,586			51,912
Dividends to policyholders		1,169			2,205			3,544			5,874
Interest expense		2,734			3,075			8,209			8,734
Total losses and expenses		115,367			103,525			338,607			319,287
Income from continuing operations before income taxes		2,006			7,943			22,864			17,922
Income tax expense		755			2,765			8,132			6,357
Income from continuing operations		1,251			5,178			14,732			11,565
Loss from discontinued operations, net of tax		(2,310	)		(13,981	)		(4,937	)		(16,531	)
Net income (loss)	$	(1,059	)	$	(8,803	)	$	9,795		$	(4,966	)


Income (loss) per share:
Basic:
Continuing Operations	$	0.04		$	0.16		$	0.46		$	0.36
Discontinued Operations		(0.07	)		(0.44	)		(0.15	)		(0.51	)
	$	(0.03	)	$	(0.28	)	$	0.31		$	(0.15	)
Diluted:
Continuing Operations	$	0.04		$	0.16		$	0.46		$	0.35
Discontinued Operations		(0.07	)		(0.43	)		(0.15	)		(0.50	)
	$	(0.03	)	$	(0.27	)	$	0.31		$	(0.15	)

See accompanying notes to the unaudited condensed consolidated financial statements.

PMA Capital Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
(in thousands)	2008			2007

Cash flows from operating activities:
Net income (loss)	$	9,795		$	(4,966	)
Less: Loss from discontinued operations		(4,937	)		(16,531	)
Income from continuing operations, net of tax		14,732			11,565
Adjustments to reconcile income from continuing operations
to net cash flows used in operating activities:
Deferred income tax expense		7,216			5,620
Net realized investment losses		4,983			3
Stock-based compensation		1,917			1,413
Depreciation and amortization		3,854			2,523
Change in:
Premiums receivable and unearned premiums, net		16,555			(15	)
Dividends to policyholders		(689	)		280
Reinsurance receivables		(28,574	)		(75,008	)
Prepaid reinsurance premiums		9,310			(15,743	)
Unpaid losses and loss adjustment expenses		34,113			53,846
Funds held by reinsureds		(6,874	)		(6,718	)
Reinsurance funds held and balances payable		(5,139	)		17,884
Accrued investment income		(336	)		(294	)
Deferred acquisition costs		(5,913	)		(6,387	)
Accounts payable, accrued expenses and other liabilities		(4,892	)		17,067
Other, net		(19,235	)		(4,685	)
Discontinued operations		(67,809	)		(75,999	)
Net cash flows used in operating activities		(46,781	)		(74,648	)

Cash flows from investing activities:
Fixed maturities available for sale:
Purchases		(304,476	)		(209,316	)
Maturities and calls		33,212			53,241
Sales		277,601			147,900
Sales of fixed maturities trading		-			17,458
Net purchases of short-term investments		(9,911	)		(22,410	)
Purchase of subsidiaries, net of cash received		(7,402	)		-
Sale of other assets		2,120			-
Other, net		(9,085	)		(3,416	)
Discontinued operations		61,005			91,495
Net cash flows provided by investing activities		43,064			74,952

Cash flows from financing activities:
Repayments of long-term debt		(5,766	)		(17,297	)
Proceeds from exercise of stock options		1,195			444
Shares purchased under stock-based compensation plans		(11	)		(273	)
Proceeds from issuance of long-term debt		-			20,619
Debt issuance costs		-			(604	)
Purchase of treasury stock		-			(8,611	)
Dividend from discontinued operations		-			17,500
Other payments to discontinued operations		(1,831	)		(1,921	)
Discontinued operations		1,831			(15,579	)
Net cash flows used in financing activities		(4,582	)		(5,722	)

Net decrease in cash		(8,299	)		(5,418	)
Cash - beginning of year		21,493			14,105
Cash - end of period (a)	$	13,194		$	8,687

Supplementary cash flow information (all continuing operations):
Interest paid	$	8,306		$	8,416
Income tax paid	$	345		$	737
Non-cash financing activities:
Investment security transferred in dividend from discontinued operations	$	-		$	16,780

(a) Includes cash from discontinued operations of $692,000 and $4.5 million as of September 30, 2008 and 2007, respectively.

See accompanying notes to the unaudited condensed consolidated financial statements.

PMA Capital Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2008			2007			2008			2007

Net income (loss)	$	(1,059	)	$	(8,803	)	$	9,795		$	(4,966	)

Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during the period		(20,102	)		6,798			(29,315	)		(32	)
Less: reclassification adjustment for losses
included in net income (loss), net of tax benefit:
$2,775 and $131 for the three months ended
September 30, 2008 and 2007; $1,734 and $3
for the nine months ended September 30, 2008
and 2007		5,154			243			3,221			5

Total unrealized gains (losses) on securities		(14,948	)		7,041			(26,094	)		(27	)

Net pension plan liability adjustment, net of tax expense
(benefit): ($3,985) and $16 for the three months ended
September 30, 2008 and 2007; ($3,961) and $82 for
the nine months ended September 30, 2008 and 2007		(7,401	)		30			(7,357	)		152
Unrealized losses from derivative instruments designated
as cash flow hedges, net of tax benefit: $31 and $87 for
the three months ended September 30, 2008 and 2007;
$17 and $47 for the nine months ended September 30,
2008 and 2007		(57	)		(162	)		(32	)		(88	)
Foreign currency translation losses, net of tax benefit: $7 for
the three months ended September 30, 2007; $2 and $8
for the nine months ended September 30, 2008 and 2007		-			(13	)		(3	)		(14	)

Other comprehensive income (loss), net of tax		(22,406	)		6,896			(33,486	)		23

Comprehensive loss	$	(23,465	)	$	(1,907	)	$	(23,691	)	$	(4,943	)

See accompanying notes to the unaudited condensed consolidated financial statements.

PMA Capital Corporation

Notes to the Unaudited Condensed Consolidated Financial Statements

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., Midlands Management Corporation (“Midlands”), and PMA Management Corp. of New England, Inc. 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 PMA Management Corp. of New England, Inc. (formerly Webster Risk Services), 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 nine month periods ended September 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.

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.

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). The purpose of FSP FAS 157-3 was to clarify the application of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), for a market that is not active. It also allows for the use of management’s internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. FSP FAS 157-3 did not change the objective of SFAS 157 which is the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The Company’s adoption of FSP FAS 157-3 for the period ended September 30, 2008 did not have a material effect on its financial position, results of operations, cash flows or disclosures.

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 (“Webster”). The Company paid $7.3 million for the stock of Webster on June 30, 2008 and renamed the company PMA Management Corp. of New England, Inc.

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	$	2,250
Identifiable intangible assets		2,200
Total assets		4,450

Total liabilities		2,529

Estimated fair value of net assets acquired		1,921
Purchase price		7,321
Goodwill	$	5,400

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 in 2008, and $1.5 million thereafter.

4. INTANGIBLE ASSETS

Changes in the net carrying amounts of the Company’s intangible assets, all of which relate to its Fee-based Business, 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			-		5,400		7,600
Amortization		(539	)		-		-		(539	)
Other adjustments		-			-		678		678
Net balance at September 30, 2008	$	8,184		$	4,312	$	18,022	$	30,518

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, the assets were not impaired.

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 Re”), a Bermuda-based corporation. Armour Re 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 Re filed the Form A application with the Pennsylvania Insurance Department (the “Department”), which formally started the regulatory review process. The closing of the sale and transfer of ownership are subject to regulatory approval by the 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.

As of October 2008, the Department’s public comment period related to the sale remained open. The Department’s financial examination of PMA Capital Insurance Company (“PMACIC”), which includes its review of the loss reserves, was also still in process. PMACIC is the Company’s reinsurance subsidiary in run-off.

Under the original terms of the Agreement, the Agreement could have been terminated by either the Company or Armour Re if the closing of the sale had not occurred within six months of signing the Agreement. The Company and Armour Re amended the Agreement to extend the termination date to December 15, 2008 or such later date as mutually agreed.

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 adverse loss development during the first nine months of 2008, the cash to be received and the value of the promissory note at closing will each be reduced by $7.5 million, which includes $3.5 million for adverse loss development recorded in the third quarter. 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						Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007

Net premiums earned	$	517		$	1,105		$	1,554		$	2,815
Net investment income		(663	)		777			(986	)		2,784
Net realized investment gains (losses)		107			783			138			(1,245	)
		(39	)		2,665			706			4,354

Losses and loss adjustment expenses		10,201			22,447			20,031			23,739
Acquisition and operating expenses		1,908			1,728			6,895			6,048
Valuation adjustment		(8,594	)		-			(18,624	)		-
		3,515			24,175			8,302			29,787

Income tax benefit		(1,244	)		(7,529	)		(2,659	)		(8,902	)
Loss from discontinued operations, net of tax	$	(2,310	)	$	(13,981	)	$	(4,937	)	$	(16,531	)

The loss from discontinued operations for the nine months ended September 30, 2008 was due to an after-tax charge of $4.9 million for adverse loss development at the discontinued operations, including $2.3 million recorded in the third quarter, which contractually reduces the amount of cash and contingent consideration that the Company will receive at closing. The valuation adjustment reflects operating activity at the discontinued operations which is not expected to reduce the sale proceeds at closing.

The loss from discontinued operations for the third quarter and first nine months of 2007 included an after-tax charge of $14.3 million for adverse loss development. During the third quarter of 2007, the Company’s actuaries conducted their periodic comprehensive reserve review. Based on the actuarial work performed, the Company’s actuaries observed increased loss development from a limited number of ceding companies on its claims-made general liability business, primarily related to professional liability claims. This increase in 2007 loss trends caused management to determine that reserve levels, primarily for accident years 2001 to 2003, needed to be increased.

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

	As of		As of
	September 30,		December 31,
(dollar amounts in thousands)	2008		2007

Assets:
Investments	$	160,240	$	219,678
Cash		692		5,665
Reinsurance receivables		134,133		150,097
Other assets (1)		14,542		216
Assets of discontinued operations	$	309,607	$	375,656

Liabilities:
Unpaid losses and loss adjustment expenses	$	281,386	$	339,077
Other liabilities		49,505		52,526
Liabilities of discontinued operations	$	330,891	$	391,603

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

6. INVESTMENTS

The Company reviews the securities in its fixed income portfolio on a periodic basis to specifically identify individual securities for any meaningful decline in fair value below amortized cost. As a result of this review, the Company recorded pre-tax impairment charges of $9.1 million, which related to other than temporary impairments, during the three and nine months ended September 30, 2008. These impairments were the result of writing down the Company’s investments in three corporate senior debt securities that were issued by Lehman Brothers Holdings, Inc. (“Lehman”) and perpetual preferred stock issued by the Federal National Mortgage Association (“Fannie Mae”). The Company’s write-down of the Lehman senior debt was for $8.2 million and the Company’s write-down of the Fannie Mae preferred stock was for $913,000. These write-downs were measured based on public market prices.

7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

At September 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 $1,247 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 September 30, 2008 whether or not these claims had been reported to the Company. At September 30, 2008, the estimate for such amounts recorded as liabilities of discontinued operations was $281 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 September 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 the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at September 30, 2008, then the related adjustments could have a material adverse impact on the Company’s financial condition, results of operations and liquidity.

8. 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				Nine Months Ended
		September 30,				September 30,
(dollar amounts in thousands)			2008		2007		2008		2007

Premiums written:
	Direct	$	148,193	$	146,547	$	387,716	$	418,280
	Assumed		3,305		2,889		8,982		10,978
	Ceded		(27,503)		(33,320)		(79,774)		(105,749)
	Net	$	123,995	$	116,116	$	316,924	$	323,509
Premiums earned:
	Direct	$	120,590	$	121,065	$	364,791	$	355,648
	Assumed		3,249		3,756		10,781		13,823
	Ceded		(25,865)		(31,048)		(89,082)		(84,845)
	Net	$	97,974	$	93,773	$	286,490	$	284,626
Losses and LAE:
	Direct	$	87,267	$	91,941	$	268,357	$	264,247
	Assumed		2,599		3,037		8,626		11,176
	Ceded		(21,206)		(31,815)		(76,829)		(78,376)
	Net	$	68,660	$	63,163	$	200,154	$	197,047

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 $473,000 and $9.3 million during the three and nine months ended September 30, 2008, compared to $13.7 million and $47.0 million in the third quarter and first nine months 2007, respectively. The Company’s agreement with Midwest was terminated in March 2008.

9. DEBT

In September 2008, the Company retired $410,000 principal amount of its 4.25% Senior Convertible Debt due 2022, $20,000 of which was put to the Company on September 30, 2008. The Company paid par for these bond purchases, exclusive of accrued interest.

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.

10. 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 September 30, 2008 and December 31, 2007, the Company had recorded liabilities of $7.5 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 7. 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.

11. STOCK-BASED COMPENSATION

The Company currently has stock-based compensation plans in place for directors, officers, and other key employees of the Company. Pursuant to the terms of these plans, 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 $695,000 and $399,000 for the third quarters of 2008 and 2007 and $1.9 million and $1.4 million for the nine month periods ended September 30, 2008 and 2007, respectively. The stock-based compensation expense for the first nine 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		(160,441	)		7.45
Options forfeited or expired		(150,000	)		18.42
Options outstanding, September 30, 2008		1,211,786		$	9.68		4.95	$	1,559,251
Options exercisable, September 30, 2008		1,211,786		$	9.68		4.95	$	1,559,251
Option price range at September 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		(61,557	)		9.94
Forfeited		(3,000	)		9.39
Restricted stock at September 30, 2008		62,917		$	9.56

The Company recognizes compensation expense for restricted stock awards over the vesting period of the award. Compensation expense recognized for restricted stock was $120,000 and $392,000 for the three and nine months ended September 30, 2008, compared to $149,000 and $619,000 for the same periods last year. At September 30, 2008, unrecognized compensation expense for non-vested restricted stock was $325,000.

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 nine months of 2008, employees remitted 1,241 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 equity in 2008, 2009 and 2010 is within a specified range. The Company recognized expenses related to these plans of $575,000 and $1.5 million for the three and nine month periods ended September 30, 2008, compared to $250,000 and $750,000 for the same periods last year.

12. EARNINGS PER SHARE

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007

Denominator:
Basic shares		31,888,038		32,001,649		31,792,400		32,304,383
Dilutive effect of:
Stock options		249,045		305,278		215,278		301,073
Restricted stock		63,471		77,345		68,124		103,086
Convertible debt		-		27,798		26,663		27,798
Total diluted shares		32,200,554		32,412,070		32,102,465		32,736,340

The effects of 230,000 and 328,000 stock options were excluded from the computations of diluted earnings per share for the three and nine months ended September 30, 2008, respectively, and the effects of 388,000 stock options were excluded from the computations of diluted earnings per share for both the three and nine months ended September 30, 2007, respectively, because they were anti-dilutive.

Diluted shares used in the computation of diluted earnings per share for the three and nine months ended September 30, 2008 also do not assume the effects of the potential conversion of the Company’s convertible debt into 24,000 and 3,000 shares of Class A Common Stock, respectively, because they were anti-dilutive. The effects of the potential conversion of the Company’s convertible debt into 348,000 and 879,000 shares of Class A Common Stock were also excluded from the computations of diluted earnings per share for the three and nine months ended September 30, 2007, respectively, because they were anti-dilutive.

13.	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 September 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	9/30/2008		(Level 1)		(Level 2)		(Level 3)

Assets
Fixed maturities available for sale	$	701,738	$	36,723	$	662,515	$	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 nine months ended September 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	$	1,000
Purchases		1,500
Ending balance as of September 30, 2008	$	2,500

14.	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 (loss) 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 (loss) as the GAAP measure of the Company’s consolidated results of operations.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007

Revenues:
The PMA Insurance Group	$	106,872		$	103,325		$	315,799		$	313,627
Fee-based Business		18,822			7,788			51,531			23,332
Corporate and Other		(392	)		202			(876	)		253
Net realized investment gains (losses)		(7,929	)		153			(4,983	)		(3	)
Total revenues	$	117,373		$	111,468		$	361,471		$	337,209

Components of net income (loss):
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 and 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, net of tax (1)		(2,310	)		(13,981	)		(4,937	)		(16,531	)
Net income (loss)	$	(1,059	)	$	(8,803	)	$	9,795		$	(4,966	)

(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						Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007

The PMA Insurance Group:
Workers' compensation	$	89,840		$	85,531		$	261,638		$	261,633
Commercial automobile		5,614			5,529			16,201			15,520
Commercial multi-peril		1,015			1,811			5,411			4,643
Other		1,627			1,057			3,611			3,301
Total net premiums earned		98,096			93,928			286,861			285,097
Corporate and Other		(122	)		(155	)		(371	)		(471	)
Consolidated net premiums earned	$	97,974		$	93,773		$	286,490		$	284,626

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

	As of		As of
	September 30,		December 31,
(dollar amounts in thousands)	2008		2007

The PMA Insurance Group	$	2,112,931	$	2,032,848
Fee-based Business		97,170		67,313
Corporate and Other (1)		79,459		105,824
Assets of discontinued operations		309,607		375,656
Total assets	$	2,599,167	$	2,581,641

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

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 September 30, 2008, compared with December 31, 2007, and our results of operations for the three and nine months ended September 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 33 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., Midlands Management Corporation (“Midlands”), and PMA Management Corp. of New England, Inc. 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 PMA Management Corp. of New England, Inc. (formerly Webster Risk Services), 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 Re”), a Bermuda-based corporation. On May 22, 2008, Armour Re filed the Form A application with the Pennsylvania Insurance Department (the “Department”), which formally started the regulatory review process. The closing of the sale and transfer of ownership are subject to regulatory approval by the Department. As of October 2008, the Department’s public comment period related to the sale remained open. The Department’s financial examination of PMA Capital Insurance Company, which includes its review of the loss reserves, was also still in process. Under the original terms of the Agreement, the Agreement could have been terminated by either us or Armour Re if the closing of the sale had not occurred within six months of signing the Agreement. We have amended the Agreement with Armour Re to extend the termination date to December 15, 2008 or such later date as mutually agreed.

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

·	losses we pay under insurance policies that we write;

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

·	acquisition and operating expenses, which are direct and indirect costs of acquiring both new and renewal business, including commissions paid to agents, brokers and sub-producers and the internal expenses to operate the business; 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 had a net loss of $1.1 million for the third quarter of 2008, compared to a net loss of $8.8 million for the third quarter of 2007. Operating income, which we define as net income (loss) excluding realized gains and losses and results from discontinued operations, was $6.4 million for the three months ended September 30, 2008, compared to $5.1 million for the same period last year. For the first nine months of 2008, we had net income of $9.8 million, compared to a net loss of $5.0 million for the first nine months of 2007. Operating income for the first nine months of 2008 was $18.0 million, compared to $11.6 million for the same period last year.

Net income for the first nine months of 2008 included an after-tax reserve charge of $4.9 million for adverse loss development at the discontinued operations, including $2.3 million recorded in the third quarter. Also, included in net income and operating income for the nine months ended September 30, 2008 was an after-tax gain of $1.4 million, which resulted from the sale of a property at The PMA Insurance Group.

The net losses for the three and nine months ended September 30, 2007 included an after-tax reserve charge of $14.3 million for adverse loss development at the discontinued operations. The reserve charge was primarily related to increased loss development from a limited number of ceding companies on our claims-made general liability business, primarily related to professional liability claims from accident years 2001 to 2003.

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

	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	)

Consolidated revenues for the third quarter of 2008 were $117.4 million, compared to $111.5 million for the same period last year. Consolidated revenues for the first nine months of 2008 were $361.5 million, compared to $337.2 million for the same period in 2007. Net premiums earned for the third quarter increased 4% to $98.0 million, compared to $93.8 million for the same period a year ago. Net premiums earned were $286.5 million for the first nine months of 2008, compared to $284.6 million for the same period last year. Claims service revenues for the third quarter and first nine months of 2008 were $15.7 million and $40.6 million, compared to $7.6 million and $22.8 million for the same periods in 2007. Commission income during the third quarter and first nine months of 2008 was $2.6 million and $9.5 million.

In this MD&A, in addition to providing consolidated net income (loss), we also provide segment operating income (loss) because we believe that it is a meaningful measure of the profit or loss generated by our operating segments. Operating income, which is GAAP net income (loss) 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 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.

The following is a reconciliation of our segment operating results and operating income to GAAP net income (loss):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007

Components of net income (loss):
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 and 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, net of tax (1)		(2,310	)		(13,981	)		(4,937	)		(16,531	)
Net income (loss)	$	(1,059	)	$	(8,803	)	$	9,795		$	(4,966	)

(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.

Segment Results

The PMA Insurance Group

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007

Net premiums written	$	124,117		$	116,271		$	317,295		$	323,980

Net premiums earned	$	98,096		$	93,928		$	286,861		$	285,097
Net investment income		8,776			9,397			26,818			28,530
Other revenues		-			-			2,120			-
Total revenues		106,872			103,325			315,799			313,627

Losses and LAE		68,660			63,163			200,154			197,047
Acquisition and operating expenses		23,527			26,001			73,223			79,521
Dividends to policyholders		1,169			2,205			3,544			5,874
Total losses and expenses		93,356			91,369			276,921			282,442

Operating income before income
taxes and interest expense		13,516			11,956			38,878			31,185

Interest expense		191			254			593			754

Pre-tax operating income	$	13,325		$	11,702		$	38,285		$	30,431

Combined ratio		95.2	%		97.3	%		96.5	%		99.0	%
Less: net investment income ratio		8.9	%		10.0	%		9.3	%		10.0	%
Operating ratio		86.3	%		87.3	%		87.2	%		89.0	%

The PMA Insurance Group recorded 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 increases for both the third quarter and first nine months of 2008 were due primarily to improved underwriting results, as reflected in our lower combined ratios. The third quarter increase was also impacted by an increase in net premiums earned. The increase for the first nine months of 2008 was also impacted by a pre-tax gain of $2.1 million on the sale of a property that housed one of our branch offices.

Premiums

Direct premium production was up 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 PMA Insurance Group’s premiums written were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007

Workers' compensation:
Direct premiums written	$	131,491		$	132,888		$	339,917		$	375,365
Premiums assumed		3,265			2,816			8,872			10,804
Premiums ceded		(19,843	)		(29,334	)		(60,874	)		(90,048	)
Net premiums written	$	114,913		$	106,370		$	287,915		$	296,121
Commercial lines:
Direct premiums written	$	16,824		$	13,814		$	48,170		$	43,386
Premiums assumed		40			73			110			174
Premiums ceded		(7,660	)		(3,986	)		(18,900	)		(15,701	)
Net premiums written	$	9,204		$	9,901		$	29,380		$	27,859
Total:
Direct premiums written	$	148,315		$	146,702		$	388,087		$	418,751
Premiums assumed		3,305			2,889			8,982			10,978
Premiums ceded		(27,503	)		(33,320	)		(79,774	)		(105,749	)
Net premiums written	$	124,117		$	116,271		$	317,295		$	323,980

Direct workers’ compensation premiums written were $131.5 million in the third quarter of 2008, compared to $132.9 million during the same period last year. These premium writings during the first nine months of 2008 were $339.9 million, compared to $375.4 million during the first nine months of last year. Our renewal retention rate on existing workers’ compensation accounts was 88% for 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. Direct workers’ compensation premiums written for the first nine months of 2008 were down due to a reduction in fronting premiums and 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 $2.8 million and $13.0 million in the third quarter and first nine months of 2008, compared to $13.7 million and $47.0 million for the same periods a year ago. The decreases in fronting premiums were primarily 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, during the third quarter, we entered into two fronting arrangements which produced $2.0 million of workers’ compensation business in the current period. Excluding fronting business, we wrote $35.3 million of new workers’ compensation business in the third quarter of 2008 and $86.8 million for the first nine months of 2008, compared to $24.5 million and $81.9 million during the same periods last year.

We entered into a fronting agreement considerably smaller than Midwest in February 2008, and we also entered into two fronting arrangements in the third quarter of 2008. Under these arrangements, Appalachian Underwriters (“Appalachian”) and Arrowhead General Insurance Agency (“Arrowhead”) underwrite and service workers’ compensation policies using our approved forms and guidelines. The workers’ compensation 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. 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 it to secure amounts owed by holding cash in trust. We expect that direct premiums written under these arrangements will be between $70 million and $100 million on an annualized basis, and we expect that the fees from these arrangements will fully replace the fees from our expiring agreement with Midwest.

Pricing on our rate-sensitive workers’ compensation business, which represents approximately 60% of our total workers’ compensation business, declined 7% during the first nine months of 2008, compared to a 4% decrease during the first nine months of 2007. Our pricing on this business during the first nine months of 2008 decreased 23% in New York and 18% in Florida. The pricing reductions in both New York and Florida were mainly driven by manual 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 18% of our overall rate-sensitive workers’ compensation business written during the first nine months of 2008. Exclusive of business written in New York and Florida, our pricing on rate-sensitive workers’ compensation business decreased 4% for the nine months ended September 30, 2008.

Pricing on our rate-sensitive workers’ compensation business in Pennsylvania declined 6% during the first nine months of 2008. In Pennsylvania, we were 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 the nature of our loss-sensitive book of business, which represents about 45% of our Pennsylvania workers’ compensation business, mitigates the impact of reductions in filed loss costs.

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 $16.8 million in the third quarter of 2008, compared to $13.8 million for the same period last year. For the first nine months of the year, direct premiums written for Commercial Lines were $48.2 million in 2008, compared to $43.4 million in 2007. New business increased to $4.1 million in the third quarter of 2008, up from $2.4 million in the third quarter of 2007, and new business for the first nine months increased to $13.0 million in 2008, compared to $9.6 million for the same period last year. Our renewal retention rate on existing Commercial Lines accounts was 92% and 88% for the three and nine months ended September 30, 2008, compared to 89% and 90% for the three and nine months ended September 30, 2007.

Total premiums assumed decreased by $2.0 million during the first nine months of 2008, compared to the same period last year. The decline 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 $9.5 million and $29.2 million during the three and nine months ended September 30, 2008, compared to the same periods a year ago. The declines were primarily due to lower premiums ceded under the Midwest agreement, 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. Premiums ceded for other commercial lines increased by $3.7 million and $3.2 million during the three and nine months ended September 30, 2008, compared to the same periods in 2007, mainly resulting from increased direct premium writings.

In total, net premiums written increased by 7% during the third quarter of 2008, compared to the same period last year, while year-to-date net premiums written decreased by 2%, compared to the same period in 2007. The increase in net premiums written for the quarter primarily reflected the increase in direct production. Net premiums written for the first nine months of 2008 were down due primarily to the first quarter return premium adjustments and, to a lesser extent, the increase in the amount of workers’ compensation business sold to captive accounts. The year-to-date impact of these items was partially offset by increased production in direct writings.

Net premiums earned increased by 4% and 1% during the third quarter and first nine 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.

Losses and Expenses

The components of the GAAP combined ratios were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007

Loss and LAE ratio		70.0	%		67.2	%		69.8	%		69.1	%
Expense ratio:
Acquisition expense		16.2	%		19.4	%		17.5	%		19.5	%
Operating expense		7.8	%		8.4	%		8.0	%		8.3	%
Total expense ratio		24.0	%		27.8	%		25.5	%		27.8	%
Policyholders' dividend ratio		1.2	%		2.3	%		1.2	%		2.1	%
Combined ratio		95.2	%		97.3	%		96.5	%		99.0	%

The loss and LAE ratios increased by 2.8 points during the third quarter of 2008 and by 0.7 points during the first nine months of 2008, compared to the same periods last year. 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 estimated 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. However, we expect that medical cost inflation will continue to be a significant component of our overall loss experience. 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.

The acquisition expense ratios improved by 3.2 points and 2.0 points in the third quarter and first nine months of 2008, compared to the same periods last year. Commissions earned under our fronting agreements reduced the current year ratio 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, as the ceding commissions earned on this business reduce our commission expense. 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 by 1.1 points and 0.9 points in the third quarter and first nine months of 2008, compared to the same periods last year. The current year periods reflected slightly higher loss experience on captive

accounts, which resulted in lower dividends on captive products where the policyholders may receive a dividend based, to a large extent, on their loss experience.

Net Investment Income

Net investment income was $8.8 million for the third quarter of 2008, compared to $9.4 million for the same period a year ago. For the first nine months of 2008, net investment income decreased $1.7 million to $26.8 million, compared to the first nine months 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. The declines for both periods were partially offset by an increased invested asset base.

Other Revenues

Other revenues for the first nine 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.

Fee-based Business

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollar amounts in thousands)	2008		2007		2008		2007

Claims service revenues	$	15,951	$	7,595	$	41,272	$	22,795
Commission income		2,662		-		9,587		-
Net investment income		118		193		397		537
Other revenues		91		-		275		-
Total revenues		18,822		7,788		51,531		23,332

Operating expenses		16,893		7,127		46,215		21,277

Pre-tax operating income	$	1,929	$	661	$	5,316	$	2,055

Pre-tax operating income for the Fee-based Business was $1.9 million for the third quarter of 2008, compared to $661,000 for the same period in 2007. Year-to-date pre-tax operating income was $5.3 million, compared to $2.1 million for the first nine months of 2007. The increases for both the third quarter and first nine months of 2008 related primarily to the inclusion of Midlands’ results in 2008, which we acquired on October 1, 2007. The segment’s operating results for the third quarter of 2008 also reflect those of PMA Management Corp. of New England, Inc., which we acquired on June 30, 2008.

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 PMA Management Corp. of New England, Inc. (formerly Webster Risk Services). We paid $7.3 million for the stock of PMA Management Corp. of New England, Inc. on June 30, 2008 and expect to continue to grow the business, which generated $6 million in annual revenues at the time of our acquisition.

Fee-based Revenues

Fee-based revenues, excluding net investment income, were $18.7 million and $51.1 million for the third quarter and first nine months of 2008, compared to $7.6 million and $22.8 million for the same periods in 2007. The increases were primarily due to the inclusion of Midlands’ revenues, which contributed $6.7 million and $20.7 million of revenue growth for the third quarter and first nine months of 2008. The increases also reflected higher fees for managed care services of $1.4 million and $3.1 million for the third quarter and year-to-date periods in 2008, compared to 2007. The increases in the third quarter and first nine months of 2008, compared to the same periods last year, also included increases in fees of $2.5 million and $3.6 million, respectively, 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 $16.9 million in the third quarter of 2008, up from $7.1 million in the third quarter of 2007. Year-to-date operating expenses increased to $46.2 million, compared to $21.3 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 $1.3 million and $4.5 million in commission expenses and $167,000 and $502,000 related to the amortization of intangible assets for the three and nine months ended September 30, 2008, respectively. The increases also reflected higher direct costs of $2.7 million and $4.7 million associated with the claims and managed care services provided to self-insured clients for the third quarter and first nine months of 2008, compared to the same periods for 2007.

Corporate and Other

The Corporate and Other segment primarily includes corporate expenses and debt service. Corporate and Other recorded net expenses of $5.3 million during the third quarter of 2008, compared to $4.6 million during the same period last year. Net expenses were $15.8 million during the first nine months of 2008, compared to $14.6 million during the first nine months of 2007. In the first nine months of 2008, 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

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 Re 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 Re 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 Department.

Under the original terms of the Agreement, the Agreement could have been terminated by either us or Armour Re if the closing of the sale had not occurred within six months of signing the Agreement. We have amended the Agreement with Armour Re to extend the termination date to December 15, 2008 or such later date as mutually agreed.

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 adverse loss development during the first nine months of 2008, the cash to be received and the value of the promissory note at closing will each be reduced by $7.5 million, which includes $3.5 million for adverse loss development recorded in the third quarter. 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 condensed consolidated statements of operations, were as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007

Net premiums earned	$	517		$	1,105		$	1,554		$	2,815
Net investment income		(663	)		777			(986	)		2,784
Net realized investment gains (losses)		107			783			138			(1,245	)
		(39	)		2,665			706			4,354

Losses and loss adjustment expenses		10,201			22,447			20,031			23,739
Acquisition and operating expenses		1,908			1,728			6,895			6,048
Valuation adjustment		(8,594	)		-			(18,624	)		-
		3,515			24,175			8,302			29,787

Income tax benefit		(1,244	)		(7,529	)		(2,659	)		(8,902	)
Loss from discontinued operations, net of tax	$	(2,310	)	$	(13,981	)	$	(4,937	)	$	(16,531	)

The loss from discontinued operations for the nine months ended September 30, 2008 was due to an after-tax charge of $4.9 million for adverse loss development at the discontinued operations, 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 valuation adjustment reflects operating activity at the discontinued operations which is not expected to reduce the sale proceeds at closing.

The loss from discontinued operations for the third quarter and first nine months of 2007 included an after-tax charge of $14.3 million for adverse loss development. During the third quarter of 2007, our actuaries conducted their periodic comprehensive reserve review. Based on the actuarial work performed, our actuaries observed increased loss development from a limited number of ceding companies on our claims-made general liability business, primarily related to professional liability claims. This increase in 2007 loss trends caused management to determine that reserve levels, primarily for accident years 2001 to 2003, needed to be increased.

Loss Reserves

At September 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 September 30, 2008 was $1,247 million. This amount included estimated losses from claims plus estimated expenses to settle claims. Our estimate also included estimated amounts for losses occurring on or prior to September 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.

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

Discontinued Operations

At September 30, 2008, our estimate for unpaid losses and LAE for such amounts recorded as liabilities of discontinued operations was $281 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 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 September 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 $46.8 million, which included $67.8 million used at our discontinued operations, in the first nine months of 2008, compared to $74.6 million, which included $76.0 million used at our discontinued operations, for the same period last year. The decrease in operating cash flows used was primarily due to an increase in cash flows at The PMA Insurance Group and, to a lesser extent, less cash flows used by our discontinued operations. During the third quarter of 2007, The PMA Insurance Group’s cash flows were reduced by $22.7 million for retroactive reinsurance purchased to cover substantially all of the unpaid losses and LAE related to its integrated disability business.

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 Re 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 adverse loss development during the first nine months of 2008, the cash to be received and the value of the promissory note at closing will each be reduced by $7.5 million, which includes $3.5 million for adverse loss development recorded in the third quarter. 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 September 30, 2008, we had $29.5 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. 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 $336.4 million as of September 30, 2008, including $10.0 million relating to surplus notes. Given the anticipated sale of PMA Capital Insurance Company, we do not expect to receive any dividends from this operation in 2008. As of September 30, 2008, the statutory surplus of PMACIC was $26.1 million.

Net tax payments received from subsidiaries were $3.1 million during the third quarter of 2008, compared to $3.4 million during the same period last year. Net tax payments received from subsidiaries during the first nine months of 2008 were $10.9 million, compared to $19.6 million for the same period in 2007.

Pursuant to a Stock Purchase Agreement with Webster Financial Corporation, we acquired all the stock of PMA Management Corp. of New England, Inc. (formerly Webster Risk Services) for $7.3 million 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 September 30, 2008, our total outstanding debt was $129.4 million, compared to $131.3 million at December 31, 2007. In September 2008, we retired $410,000 principal amount of our 4.25% Senior Convertible Debt due 2022, $20,000 of which was put to us on September 30, 2008. We paid par for these bond purchases, exclusive of accrued interest. 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 third quarter of 2008, compared to $3.1 million during the same period last year. Interest expense for the first nine months of 2008 totaled $8.2 million, compared to $8.7 million during the first nine months of 2007. We paid interest of $2.7 million during the third quarter of 2008, compared to $2.9 million during the same period last year. We have paid $8.3 million in interest through the first nine months of 2008, compared to $8.4 million during the first nine months of 2007. We expect to pay interest of $3 million in the fourth quarter 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 fair 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 September 30, 2008, the duration of our investments that support the insurance reserves was 3.6 years, which approximates the duration of our reserves of 3.7 years.

INVESTMENTS

At September 30, 2008, our investments were carried at a fair value of $790.1 million and had an amortized cost of $823.2 million. The average credit quality of our portfolio was AA+. All but four of our fixed income securities were publicly traded and rated by at least one nationally recognized credit rating agency. At September 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 $3.3 million and an aggregate unrealized loss of $1.3 million.

At September 30, 2008, $416.2 million, or 53% of our investment portfolio, was allocated to mortgage-backed and other asset-backed securities and collateralized mortgage obligations (“structured securities”). Of this $416.2 million, $16.7 million, or 4%, were residential mortgage-backed securities whose underlying collateral was either a sub-prime or alternative A mortgage. The $16.7 million, which includes $14.9 million of alternative A collateral and $1.8 million of sub-prime collateral, had an estimated weighted average life of 2.1 years, with $4.8 million of that balance expected to pay off within one year, and an average credit quality of AAA.

Also included in the $416.2 million of structured securities were $181.6 million, or 44% of our total structured securities, of residential mortgage-backed pools and collateralized mortgage obligations (“CMO”) issued by either U.S. Government Agencies or U.S. Government Sponsored Enterprises (“GSE”). We do not believe there are credit related risks associated with structured securities issued by a GSE. We also held non-GSE issued CMO’s with a fair value of $167.2 million, or 40% of our total structured securities, that were either the super senior or senior tranches of their respective mortgage pools, had a weighted average life of 5.2 years and an average credit quality of AAA. As of September 30, 2008, the non-GSE issued CMO’s generated cash flows which totaled $12.4 million of principal paydowns from the underlying mortgages. Delinquencies of the underlying mortgages remained well below the credit support structure of the tranches we held.

The portfolio also held securities with a fair value of $30.1 million, or 4% of our investment portfolio, whose credit ratings were enhanced by various financial guaranty insurers. Of the credit enhanced securities, $13.0 million were asset-backed securities with a weighted average life of 3.9 years and whose underlying collateral had an imputed internal rating of “A”. None of these securities were wrapped asset-backed security collateralized debt obligation exposures.

The net unrealized loss on our investments at September 30, 2008 was $33.1 million, or 4.0% of the amortized cost basis. The net unrealized loss included gross unrealized gains of $4.6 million and gross unrealized losses of $37.7 million.

For all but three securities, which were carried at a fair value of $2.5 million at September 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.

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						Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2008			2007			2008			2007

Sales of investments:
Realized gains	$	1,411		$	188		$	5,577		$	1,009
Realized losses		(193	)		(3,109	)		(1,385	)		(3,564	)
Impairment charges		(9,147	)		-			(9,147	)		-
Change in fair value of trading securities		-			3,240			-			3,220
Other		-			(166	)		(28	)		(668	)
Total net realized investment gains (losses)	$	(7,929	)	$	153		$	(4,983	)	$	(3	)

The gross realized gains and losses on sales of investments for the three and nine months ended September 30, 2008 primarily related to general duration management trades. The gross realized gains and losses on sales of investments for the three and nine months ended September 30, 2007 primarily related to the repositioning of invested assets out of lower yielding sectors, such as 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.

We recorded other than temporary impairments of $9.1 million during the three and nine months ended September 30, 2008. These impairments were the result of writing down our investments in three corporate senior debt securities that were issued by Lehman Brothers Holdings, Inc. (“Lehman”) and perpetual preferred stock issued by the Federal National Mortgage Association (“Fannie Mae”). Our write-down of the Lehman senior debt was for $8.2 million and our write-down of the Fannie Mae preferred stock was for $913,000. These write-downs were measured based on public market prices.

As of September 30, 2008, our investment portfolio had gross unrealized losses of $37.7 million. For securities that were in an unrealized loss position at September 30, 2008, the length of time that such securities were in an unrealized loss position, as measured by their month end fair 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	$	274.1	$	289.6	$	(15.5	)		95	%
6 to 9 months		42		103.9		116.7		(12.8	)		89	%
9 to 12 months		3		12.8		14.0		(1.2	)		91	%
More than 12 months		31		48.0		55.0		(7.0	)		87	%
Subtotal		192		438.8		475.3		(36.5	)		92	%
U.S. Treasury and Agency securities		41		81.4		82.6		(1.2	)		99	%
Total		233	$	520.2	$	557.9	$	(37.7	)		93	%

Of the 31 securities that have been in an unrealized loss position for more than 12 months, 30 securities have a total fair value of 89% of their combined amortized cost basis at September 30, 2008, and an average unrealized loss per security of approximately $200,000. The other security that has been in an unrealized loss position for more than 12 months at September 30, 2008 has a fair value of $408,000 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. Of the remaining 30 securities, six were corporate debt securities issued by financial institutions that had a total fair value of 77% of their combined amortized cost basis at September 30, 2008.

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

								Percentage
	Fair		Amortized		Unrealized			Fair Value to
(dollar amounts in millions)	Value		Cost		Loss			Amortized Cost

2008	$	-	$	-	$	-			-
2009-2012		87.1		96.1		(9.0	)		91	%
2013-2017		76.0		81.6		(5.6	)		93	%
2018 and thereafter		30.6		32.9		(2.3	)		93	%
Non-agency mortgage and other asset-backed securities		245.1		264.7		(19.6	)		93	%
Subtotal		438.8		475.3		(36.5	)		92	%
U.S. Treasury and Agency securities		81.4		82.6		(1.2	)		99	%
Total	$	520.2	$	557.9	$	(37.7	)		93	%

Discontinued Operations

At September 30, 2008, the fair value of the investment portfolio at our discontinued operations was $160.2 million, which included accrued investment income of $351,000 related to trading securities in the portfolio, and had an amortized cost of $159.4 million. At September 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 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.

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). The purpose of FSP FAS 157-3 was to clarify the application of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), for a market that is not active. It also allows for the use of management’s internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. FSP FAS 157-3 did not change the objective of SFAS 157 which is the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. Our adoption of FSP FAS 157-3 for the period ended September 30, 2008 did not have a material effect on our financial position, results of operations, cash flows or disclosures.

Critical Accounting Estimates

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

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;

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

·	disruptions in the financial markets which may affect our ability to sell our investments;

·	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 adequate rates on our insurance products;

·	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;

·	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.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

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

Item 4. Controls and Procedures.

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

Item 1A. Risk Factors.

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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchase of Equity Securities

Period	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs
7/1/08-7/31/08		-		$	-		-		-
8/1/08-8/31/08		324	(1)		9.55		-		-
9/1/08-9/30/08		-			-		-		-
Total		324		$	9.55

(1)

Transactions represent shares of Class A Common Stock withheld by the Company, at the election of employees, pursuant to the Company’s 2007 Equity Incentive Plan (the “Plan”), to satisfy such employees’ tax obligations upon vesting of restricted stock awards. The price per share equals the fair value (as determined pursuant to the Plan) of the Company’s Class A Common Stock on the vesting date.

Item 6. Exhibits.

The Exhibits are listed in the Exhibit Index on page 36.

Signatures

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: November 4, 2008		By: /s/ William E. Hitselberger
		William E. Hitselberger
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

Exhibit Index

Exhibit No.	Description of Exhibit	Method of Filing

(10)	Material Contracts

	Amendment to Stock Purchase Agreement among PMA Capital Corporation and Armour Reinsurance Group Limited, dated as of September 11, 2008	Filed herewith.

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

(31)	Rule 13a - 14(a)/15d - 14 (a) Certificates

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a -14(a) of the Securities Exchange Act of 1934	Filed herewith.

31.2	Certification of Chief Financial Officer Pursuant to Rule 13a -14(a) of the Securities Exchange Act of 1934	Filed herewith.

(32)	Section 1350 Certificates

32.1	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.

32.2	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.


	ARMOUR REINSURANCE GROUP LIMITED


	By:	/s/ Pauline Richards
	Name:	Pauline Richards
	Title:	Chief Operating Officer

cc:	Senior Vice President and General Counsel
	PMA Capital Corporation
	380 Sentry Parkway
	Blue Bell, Pennsylvania 19422

	Sean Keyvan
	Sidley Austin LLP
	One South Dearborn Street
	Chicago, Illinois 60603

	For the Nine Months Ended
	September 30,
	2008			2007

EARNINGS
Pre-tax income from continuing operations	$	22,864		$	17,922
Fixed charges		9,370			9,625
Total	$	32,234		$	27,547

FIXED CHARGES
Interest expense and amortization of debt discount
and premium on all indebtedness	$	8,209		$	8,734
Interest portion of rental expenses		1,161			891
Total fixed charges	$	9,370		$	9,625


Ratio of earnings to fixed charges		3.4	x		2.9	x

Dated: November 4, 2008	/s/ Vincent T. Donnelly
	Vincent T. Donnelly
	President and Chief Executive Officer

By:	/s/ William E. Hitselberger
Name:	William E. Hitselberger
Title:	Executive Vice President and
	Chief Financial Officer