THIRD AMENDMENT TO CREDIT AGREEMENT

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

RECITALS

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

STATEMENT OF AGREEMENT

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

ARTICLE I

AMENDMENTS TO CREDIT AGREEMENT

        1.1 Amendment to Section 1.1.

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

 

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

 

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

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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

ARTICLE II

CONDITIONS TO EFFECTIVENESS

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

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

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

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

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

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

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

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ARTICLE III

REPRESENTATIONS AND WARRANTIES

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

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

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

ARTICLE IV

GENERAL

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

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

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

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

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

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

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

      PMA CAPITAL CORPORATION   By: /s/ Albert D. Ciavardelli

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Name: Albert D. Ciavardelli

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Title:  Vice President - Finance

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  THE BANK OF NEW YORK, as Administrative Agent and a Lender   By: /s/ David
Trick

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Name: David Trick

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Title: Vice President

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  FIRST UNION NATIONAL BANK, as Documentation Agent and as a Lender   By: /s/
Kimberly Shaffer

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Name: Kimberly Shaffer

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Title: Director

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      CREDIT LYONNAIS NEW YORK BRANCH   By: /s/ Sebastian Rocco

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Name: Sebastian Rocco

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Title: Senior Vice President

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  FLEET NATIONAL BANK   By: /s/ Lawrence Davis

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Name: Lawrence Davis

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Title: Portfolio Manager

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  PNC BANK, NATIONAL ASSOCIATION   By: /s/ Robert J. Giannone

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Name: Robert J. Giannone

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Title: Vice President

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    MELLON BANK N.A.   By: /s/ Gary A. Best

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Name: Gary A. Best

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Title: Vice President

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      DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH   By: /s/ Erika
P. Walters-Engemann

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Name: Erika P. Walters-Engemann

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Title: Director

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    By: /s/ Jonathan Wallin

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Name: Jonathan Wallin

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Title: Vice President

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  UNION BANK OF CALIFORNIA, N.A.   By: /s/ Christine Davis

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Name: Christine Davis

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Title: Vice President

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