|P M A  C A P I T A L
|--------------------

Selected Financial Data

|(dollar amounts in thousands, except per share data) | 2001(1) |  | 2000(1) |            | 1999 |   | 1998       |  | 1997(1) |           
|---------------------------------------------------- | ------- |  | ------- | ---------- | ---- | - | ---------- |  | ------- | ----------
|                                                    
|                                                    
|                                                     |         |  |         |            |      |   |            |  |         |           
|Net premiums written                                 |         |  | $       | 769,058    |      | $ | 545,555    |  | $       | 563,510   
|                                                     |        
|Consolidated Results of Operations:                  |         | 
|Net premiums earned                                  |         |  | $       | 732,440    |      | $ | 531,424    |  | $       | 540,087   
|Net investment income                                |         |  |         | 86,945     |      |   | 102,591    |  |         | 110,057   
|Net realized investment gains (losses)               |         |  |         | 7,988      |      |   | 11,975     |  |         | (7,745    
|Other revenues                                       |         |  |         | 22,599     |      |   | 14,000     |  |         | 12,718    
|                                                     |        
|Total consolidated revenues                          |         |  | $       | 849,972    |      | $ | 659,990    |  | $       | 655,117   
|                                                     |        
|Income before extraordinary loss and                 |         | 
|cumulative effect of accounting change               |         |  | $       | 7,103      |      | $ | 1,325      |  | $       | 28,353    
|Extraordinary loss from early extinguishment         |         | 
|of debt, net of related tax effect(2)                |         |  |         | --         |      |   | --         |  |         | --        
|Cumulative effect of accounting change,              |         | 
|net of related tax effect(3)                         |         |  |         | --         |      |   | --         |  |         | (2,759    
|                                                     |        
|Net income                                           |         |  | $       | 7,103      |      | $ | 1,325      |  | $       | 25,594    
|                                                     |        
|                                                     |        
|Per Share Data:                                      |         | 
|Weighted average shares:                             |         | 
|Basic                                                |         |  |         | 21,831,725 |      |   | 21,898,967 |  |         | 22,976,326
|Diluted                                              |         |  |         | 22,216,695 |      |   | 22,353,622 |  |         | 23,785,916
|Income before extraordinary loss and                 |         | 
|cumulative effect of accounting change:              |         | 
|Basic                                                |         |  | $       | 0.33       |      | $ | 0.06       |  | $       | 1.23      
|Diluted                                              |         |  |         | 0.32       |      |   | 0.06       |  |         | 1.19      
|Net income per share:                                |         | 
|Basic                                                |         |  |         | 0.33       |      |   | 0.06       |  |         | 1.11      
|Diluted                                              |         |  |         | 0.32       |      |   | 0.06       |  |         | 1.08      
|Dividends paid per Common share(4)                   |         |  |         | --         |      |   | 0.16       |  |         | 0.32      
|Dividends paid per Class A Common share(4)           |         |  |         | 0.42       |      |   | 0.375      |  |         | 0.36      
|Shareholders' equity per share                       |         |  |         | 19.64      |      |   | 20.40      |  |         | 19.21     
|                                                     |        
|Consolidated Financial Position:                     |         | 
|Total investments                                    |         |  | $       | 1,775,335  |      | $ | 1,826,949  |  | $       | 1,918,035 
|Total assets                                         |         |  |         | 3,802,979  |      |   | 3,469,406  |  |         | 3,245,087 
|Reserves for unpaid losses and LAE                   |         |  |         | 2,324,439  |      |   | 2,053,138  |  |         | 1,932,601 
|Debt                                                 |         |  |         | 62,500     |      |   | 163,000    |  |         | 163,000   
|Shareholders' equity                                 |         |  |         | 612,006    |      |   | 440,046    |  |         | 429,143   

|(1) |  | Operating
results in 2001, 2000 and 1997 were impacted by approximately $22 million, $60 million
and $12 million, respectively, of reserve strengthening, restructuring and other special
charges.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In
1997, the Company refinanced substantially all of its long-term debt resulting in a $4.7
million extraordinary loss, net of tax effect.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | In
1999, the Company adopted SOP 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." As a result of adopting SOP 97-3, the Company recorded a
liability of $4.3 million pre-tax and a resulting charge to earnings of $2.8 million, net
of tax effect.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Effective
at the close of business April 24, 2000, all shares of Common stock were reclassified as
Class A Common stock. Accordingly, all dividends subsequent to April 24, 2000 are for the
Class A Common stock.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

---

|P M A  C A P I T A L
|--------------------

|(dollar amounts in thousands, except per share data) | 2001(1) |  | 2000(1) |         | 1999 |   | 1998    |   | 1997(1) |        
|---------------------------------------------------- | ------- |  | ------- | ------- | ---- | - | ------- | - | ------- | -------
|                                                    
|                                                    
|Pre-tax operating income (loss)(5):                  |         |  |         |         |      |   |         |   |         |        
|PMA Re                                               |         |  | $       | (3,062  | )    | $ | (7,297  | ) | $       | 50,319 
|The PMA Insurance Group                              |         |  |         | 23,148  |      |   | 21,601  |   |         | 18,200 
|Caliber One                                          |         |  |         | (26,168 | )    |   | (7,014  | ) |         | 83     
|Corporate and Other                                  |         |  |         | (6,322  | )    |   | (19,142 | ) |         | (20,765
|                                                     |        
|Pre-tax operating income (loss)                      |         |  |         | (12,404 | )    |   | (11,852 | ) |         | 47,837 
|Net realized investment gains (losses)               |         |  |         | 7,988   |      |   | 11,975  |   |         | (7,745 
|                                                     |        
|Income (loss) before income taxes,                   |         | 
|extraordinary loss and cumulative                    |         | 
|effect of accounting change                          |         |  |         | (4,416  | )    |   | 123     |   |         | 40,092 
|Income tax expense (benefit)                         |         |  |         | (11,519 | )    |   | (1,202  | ) |         | 11,739 
|                                                     |        
|Income before extraordinary loss and                 |         | 
|cumulative effect of accounting change               |         |  |         | 7,103   |      |   | 1,325   |   |         | 28,353 
|Extraordinary loss from early extinguishment         |         | 
|of debt, net of related tax effect(2)                |         |  |         | --      |      |   | --      |   |         | --     
|Cumulative effect of accounting change,              |         | 
|net of related tax effect(3)                         |         |  |         | --      |      |   | --      |   |         | (2,759 
|                                                     |        
|Net income                                           |         |  | $       | 7,103   |      | $ | 1,325   |   | $       | 25,594 
|                                                     |        
|                                                     |        
|GAAP Ratios for Insurance Segments:                  |         | 
|PMA Re:                                              |         | 
|Loss and LAE ratio                                   |         |  |         | 87.4%   |      |   | 91.6%   |   |         | 70.4%  
|Expense ratio                                        |         |  |         | 26.8%   |      |   | 31.7%   |   |         | 32.1%  
|                                                     |        
|Combined ratio(6)                                    |         |  |         | 114.2%  |      |   | 123.3%  |   |         | 102.5% 
|                                                     |        
|Operating ratio(7)                                   |         |  |         | 100.9%  |      |   | 102.9%  |   |         | 82.9%  
|                                                     |        
|The PMA Insurance Group:                             |         | 
|Loss and LAE ratio                                   |         |  |         | 74.7%   |      |   | 74.9%   |   |         | 75.1%  
|Expense ratio(8)                                     |         |  |         | 26.7%   |      |   | 29.3%   |   |         | 31.7%  
|Policyholders' dividend ratio                        |         |  |         | 4.1%    |      |   | 7.5%    |   |         | 8.6%   
|                                                     |        
|Combined ratio(6)                                    |         |  |         | 105.5%  |      |   | 111.7%  |   |         | 115.4% 
|                                                     |        
|Operating ratio(7)                                   |         |  |         | 94.1%   |      |   | 92.7%   |   |         | 92.7%  
|                                                     |        
|Caliber One(9):                                      |         | 
|Loss and LAE ratio                                   |         |  |         | 130.2%  |      |   | 105.8%  |   |         | 76.5%  
|Expense ratio                                        |         |  |         | 33.1%   |      |   | 33.9%   |   |         | 33.1%  
|                                                     |        
|Combined ratio(6)                                    |         |  |         | 163.3%  |      |   | 139.7%  |   |         | 109.6% 
|                                                     |        
|Operating ratio(7)                                   |         |  |         | 156.5%  |      |   | 124.3%  |   |         | 99.7%  
|                                                     |        

|(5) |  | Pre-tax operating income (loss) excludes net realized investment gains
(losses). Pre-tax operating income by business segment for all periods
is unaudited and has been presented in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, which the Company adopted on January 1, 1998. See
Managements Discussion and Analysis of Financial Condition and
Results of Operations and Note 14 to the Companys
Consolidated Financial Statements. The Company excludes net realized
investment gains (losses) from the profit and loss measure it utilizes
to assess the performance of its operating segments because (i) net
realized investment gains (losses) are unpredictable and not necessarily
indicative of current operating fundamentals or future performance 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
(losses) that do not relate to the operations of the individual
segments.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | The combined ratio computed on a GAAP basis is equal to losses and loss
          adjustment expenses plus acquisition expenses, operating expenses and
          policyholders dividends (where applicable), all divided by net premiums
          earned.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | 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
          earned premiums.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | The GAAP operating expense ratios exclude $8.8 million, $7.0 million, $7.9
million, $9.0 million and $9.3 million for the years ended December 31,
2001, 2000, 1999, 1998 and 1997, respectively, of PMA Management Corp.
direct expenses related to service revenues, which are not included in
premiums earned. See Managements Discussion and Analysis of
Financial Condition and Results of Operations.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Caliber One was formed in 1997 and its results prior to 1999 were not
          material to the underwriting ratios of the Company; accordingly, the
          ratios for Caliber One have not been presented for these years.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|27
|--

---

|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following is a discussion of the financial condition of PMA
Capital Corporation and its consolidated subsidiaries (PMA Capital
or the Company which also may be referred to as we or
us) as of December 31, 2001, compared with December 31, 2000, and
the results of operations of PMA Capital for 2001 and 2000, compared with the
immediately preceding year. The balance sheet information presented below is as
of December 31 for each respective year. The statement of operations information
is for the year ended December 31 for each respective year.

This discussion
and analysis should be read in conjunction with our audited Consolidated
Financial Statements and Notes thereto presented on pages 49 to 72 in this
Annual Report. You should also read our Critical Accounting Policies beginning
on page 46 for an explanation of those accounting policies that we believe are
most important to the portrayal of our financial condition and results of
operations and that require our most difficult, subjective and complex
judgements.

This
Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, including those made in the
Business Outlook section, 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 48 for a list of factors that could cause actual results to
differ materially from those contained in any forward-looking statement. Also,
see the Risk Factors in our Form 10-K for the year ended December 31, 2001
(2001 Form 10-K) for a further discussion of risks that could
materially affect our business.

Consolidated Results

The major components of operating revenues, pre-tax operating
income (loss) and net income are as follows:

|(dollar amounts in thousands)                                     | 2001 |  | 2000 |         | 1999 |  
|----------------------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                                 
|                                                                 
|                                                                  |      |  |      |         |      |  
|Operating revenues:                                               |      |  |      |         |      |  
|Net premiums written                                              |      |  | $    | 769,058 |      | $
|                                                                  |     
|Net premiums earned                                               |      |  | $    | 732,440 |      | $
|Net investment income                                             |      |  |      | 86,945  |      |  
|Other revenues                                                    |      |  |      | 22,599  |      |  
|                                                                  |     
|Total operating revenues                                          |      |  | $    | 841,984 |      | $
|                                                                  |     
|Components of pre-tax operating income (loss)(1)  and net income: |      | 
|PMA Re                                                            |      |  | $    | (3,062  | )    | $
|The PMA Insurance Group                                           |      |  |      | 23,148  |      |  
|Caliber One                                                       |      |  |      | (26,168 | )    |  
|Corporate and Other                                               |      |  |      | (6,322  | )    |  
|                                                                  |     
|Pre-tax operating income (loss)                                   |      |  |      | (12,404 | )    |  
|Net realized investment gains (losses)                            |      |  |      | 7,988   |      |  
|                                                                  |     
|Income (loss) before income taxes and                             |      | 
|cumulative effect of accounting change                            |      |  |      | (4,416  | )    |  
|Income tax expense (benefit)                                      |      |  |      | (11,519 | )    |  
|                                                                  |     
|Income before cumulative effect of accounting change              |      |  |      | 7,103   |      |  
|Cumulative effect of accounting change, net of tax                |      |  |      | --      |      |  
|                                                                  |     
|Net income                                                        |      |  | $    | 7,103   |      | $
|                                                                  |     

|(1) |  | Operating income (loss) differs from net income under GAAP because operating
income excludes net realized investment gains and losses. Pre-tax
operating income (loss) is defined as income (loss) from continuing operations
before income taxes, excluding net realized investment gains and losses.
We exclude net realized investment gains (losses) from the profit and
loss measure we utilize to assess the performance of our operating segments
because (i) net realized investment gains (losses) are unpredictable and
not necessarily indicative of current operating fundamentals or future
performance 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 (losses) that do not relate to the operations of the
individual segments.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

---

|P M A  C A P I T A L
|--------------------

Consolidated
operating revenues were $842.0 million, $648.0 million and $662.9 million in
2001, 2000 and 1999, respectively. The increase in operating revenues in 2001,
compared to 2000, primarily reflects higher net premiums earned for all three
business segments, partially offset by lower net investment income. The decrease
in operating revenues in 2000, compared to 1999, primarily reflects lower net
premiums earned at PMA Re and lower net investment income, partially offset by
higher net premiums earned at The PMA Insurance Group and Caliber One.

Operating income
(loss) is one of the primary performance measures we use to monitor and assess
the performance of our insurance operations. Operating income (loss) differs
from net income under GAAP because operating income excludes net realized
investment gains and losses. In 2001, we recorded a pre-tax operating loss of
$12.4 million (operating income of $1.9 million after-tax), compared to a
pre-tax operating loss of $11.9 million ($6.5 million after-tax) in 2000 and
pre-tax operating income of $47.8 million ($33.4 million after-tax) in 1999. The
2001 results include a charge of approximately $30 million pre-tax
(approximately $20 million after-tax) relating to losses resulting from the
attack on the World Trade Center and losses of $22.2 million pre-tax ($14.4
million after-tax) due to higher than expected losses and loss adjustment
expenses (LAE) at Caliber One. These losses were partially offset by
a pre-tax gain of $9.8 million ($6.4 million after-tax) on the sale of certain
real estate properties recorded in Corporate and Other. In addition, after-tax
operating income for 2001 includes a tax benefit of $10.1 million resulting from
the completion of an IRS examination of our 1996 federal income tax return.

The 2000
operating loss includes a charge of approximately $60 million pre-tax
(approximately $40 million after-tax) for higher than expected losses and LAE in
certain lines of business written by PMA Re. To a lesser extent, the 2000
results also reflect higher losses from certain lines of business written by
Caliber One. Improved earnings at The PMA Insurance Group and a lower effective
tax rate in 2000, compared to 1999, partially offset the decline in earnings at
PMA Re and Caliber One.

Net income was
$7.1 million, $1.3 million and $25.6 million in 2001, 2000 and 1999,
respectively. Net income for 1999 includes an after-tax charge of $2.8 million
for the effect of adopting Statement of Position (SOP) 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments. See Recent Accounting Pronouncements on page 45 for
additional information.

Net income also
includes after-tax gains and losses on the sale of investments. The timing and
recognition of such gains and losses are unpredictable and are not indicative of
current operating fundamentals or future performance of our operating segments.
Accordingly, such gains and losses are not included as a component of operating
income (loss). After-tax net realized investment gains were $5.2 million and
$7.8 million for 2001 and 2000, respectively, and after-tax net realized
investment losses were $5.0 million in 1999. Throughout 2000 and into the first
half of 2001, we shifted the mix of our invested asset portfolio from U.S.
Treasury and agency securities to corporate bonds and structured securities as a
means to enhance the portfolios yield. As a result of investment sales
pursuant to this strategy and given the declining interest rates in 2001, we
recorded after-tax net realized investment gains in 2001.The realized investment
gains in 2000 reflect the sale of equity securities, which had reached our
targeted price level. The realized investment losses for 1999 reflect sales of
securities in a rising interest rate environment in order to invest in yield
enhancing investment opportunities.

Impact on 2001 Results from the September 11th Terrorist Attack on the
World Trade Center

PMA Res pre-tax results for 2001 were adversely impacted
by approximately $30 million as a result of losses from the September 11th
terrorist attack on the World Trade Center. The pre-tax charge of approximately
$30 million consists of total assumed losses of approximately $135 million,
which is before (1) reinsurance recoveries, (2) additional premiums due to PMA
Res retrocessionaires, and (3) additional premiums due to PMA Re on its
assumed business. Of these losses, approximately 80% were property losses,
primarily from property excess of loss and property catastrophe coverages. The
remaining 20% were casualty losses, primarily from umbrella coverages and, to a
lesser extent, workers compensation coverages. PMA Re

|29
|--

---

|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

expects to recover approximately $80 million of its total loss from its
retrocessionaires under existing retrocessional contracts after deducting additional
ceded premiums of approximately $30 million due to its retrocessionaires. In addition,
PMA Re expects to collect approximately $25 million of additional premiums from its
ceding companies under contractual provisions of their assumed reinsurance contracts.
Caliber Ones net losses and LAE for 2001 include approximately $1 million of net
property losses related to the September 11th terrorist attack on the World Trade Center,
net of $9 million of ceded losses. Approximately 30% of our reinsurance receivables are
secured by collateral, such as letters of credit or funds held. Substantially all of the
remainder is from reinsurers and retrocessionaires rated A-or better by
nationally recognized insurance rating agencies. Accordingly, we expect all receivables
to be fully collectible. Our estimate of losses from the terrorist attack on the World
Trade Center and amounts due to us for reinsurance recoveries and additional premiums are
based on our analysis to date of known exposures. However, it is difficult to fully
estimate our losses from the attack given the uncertain nature of damage theories and
loss amounts, and the development of additional facts related to the attack. As more
information becomes available, we may need to increase our estimate of these losses.

As a result of
the losses from the attack on the World Trade Center, the insurance rating
agencies placed the financial strength rating of many insurance and reinsurance
companies under review. Specifically, A.M. Best, Standard & Poors and
Moodys placed the financial strength rating of PMA Capital Insurance
Company (PMACIC) under review. In addition, because Standard &
Poors rating of PMACIC also covers the insurance subsidiaries through
which The PMA Insurance Group underwrites its business (the Pooled
Companies), the financial strength rating of those subsidiaries was also
placed under review. In late December 2001 and early January 2002, all three
rating agencies removed these insurance subsidiaries from their watchlists and
affirmed their financial strength ratings.

Business Outlook

Based on managements current expectations, the estimated
range of consolidated after-tax operating earnings for 2002 is between $1.40
and $1.55 per diluted share. In 2002, we expect price increases across all of
our businesses to contribute to strong growth in premiums with the most
significant growth coming from PMA Re, our reinsurance business. Based on
current market trends, we expect rate increases, as measured by the increase in
premiums on PMA Res renewal business, to average between 30-50% in 2002 in
its property and casualty lines. At The PMA Insurance Group, we expect price
increases for workers compensation business to average 15%, with higher
rate increases for the other commercial lines. At Caliber One, we expect premium
rates to rise significantly for excess and surplus lines coverages. As the
favorable effects of both price increases and improved terms and conditions are
earned into our results over the next 12 to 18 months, we expect to achieve our
combined ratio goal of 100% or better for PMA Re and Caliber One, and 104% or
better for The PMA Insurance Group.

These statements
are forward-looking. Actual results may differ materially from managements
current expectations as a result of the factors described in the cautionary
statements accompanying the forward-looking statements and other factors
described in the Cautionary Statements on page 48. Also, see the Risk Factors
described in our 2001 Form 10-K.

30

---

|P M A  C A P I T A L
|--------------------

PMA Re

Summarized financial results of PMA Re are as follows:

|(dollar amounts in thousands)     | 2001 |  | 2000 |         | 1999 |  
|--------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                 
|                                 
|                                  |      |  |      |         |      |  
|Net premiums written              |      |  | $    | 360,604 |      | $
|                                  |     
|Net premiums earned               |      |  | $    | 340,401 |      | $
|Net investment income             |      |  |      | 45,361  |      |  
|                                  |     
|Operating revenues                |      |  |      | 385,762 |      |  
|                                  |     
|Losses and LAE                    |      |  |      | 297,623 |      |  
|Acquisition and                   |      | 
|operating expenses                |      |  |      | 91,201  |      |  
|                                  |     
|Total losses and expenses         |      |  |      | 388,824 |      |  
|                                  |     
|Pre-tax operating income (loss)   |      |  | $    | (3,062  | )    | $
|                                  |     
|Combined ratio                    |      |  |      | 114.2%  |      |  
|Less: net investment income ratio |      |  |      | 13.3%   |      |  
|                                  |     
|Operating ratio                   |      |  |      | 100.9%  |      |  
|                                  |     

PMA Re recorded pre-tax operating losses of $3.1 million in 2001
and $7.3 million in 2000, and pre-tax operating income of $50.3 million in 1999.
The operating loss in 2001 includes a pre-tax charge of approximately $30
million relating to the effects of the losses caused by the attack on the World
Trade Center. The operating loss in 2000 includes a pre-tax charge of
approximately $60 million relating to the effects of higher than expected losses
and LAE. For additional information, see the discussion in Losses and Expenses
on page 32.

Premiums

PMA Res gross premiums written by business unit and major
lines of business are as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                             
|                              |      |  |      |         |      |  
|Business Unit:                |      |  |      |         |      |  
|Finite Risk and               |      | 
|Financial Products            |      |  | $    | 244,527 |      | $
|Traditional - Treaty          |      |  |      | 171,318 |      |  
|Specialty - Treaty            |      |  |      | 34,180  |      |  
|Facultative                   |      |  |      | 26,566  |      |  
|                              |     
|Total                         |      |  | $    | 476,591 |      | $
|                              |     
|Major Lines of Business:      |      | 
|Casualty                      |      |  | $    | 266,672 |      | $
|Property                      |      |  |      | 206,940 |      |  
|Other                         |      |  |      | 2,979   |      |  
|                              |     
|Total                         |      |  | $    | 476,591 |      | $
|                              |     

PMA Re's net premiums written by business unit and major lines of
business are as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                             
|                              |      |  |      |         |      |  
|Business Unit:                |      |  |      |         |      |  
|Finite Risk and               |      | 
|Financial Products            |      |  | $    | 209,939 |      | $
|Traditional - Treaty          |      |  |      | 115,814 |      |  
|Specialty - Treaty            |      |  |      | 26,252  |      |  
|Facultative                   |      |  |      | 8,599   |      |  
|                              |     
|Total                         |      |  | $    | 360,604 |      | $
|                              |     
|Major Lines of Business:      |      | 
|Casualty                      |      |  | $    | 186,603 |      | $
|Property                      |      |  |      | 171,056 |      |  
|Other                         |      |  |      | 2,945   |      |  
|                              |     
|Total                         |      |  | $    | 360,604 |      | $
|                              |     

Gross premiums written were $476.6 million and $394.8 million
and net premiums written were $360.6 million and $261.5 million in 2001 and
2000, respectively. In 2001, gross and net premiums written were affected by the
attack on the World Trade Center. Contractual provisions under certain of PMA
Res assumed business in the Finite Risk and Financial Products unit
provide for approximately $25 million of additional premium due to PMA Re
because losses were ceded to PMA Re under the terms of these contracts. These
additional

|31
|--

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|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

premiums were more than offset by approximately $30 million of ceded
premiums payable by PMA Re to its retrocessionaires because PMA Re ceded a portion of its
gross losses incurred to these retrocessionaires. In 2000, net premiums written were
impacted by ceded premiums of $52.1 million on existing retrocessional contracts covering
higher than expected losses and LAE in 2000.

Excluding the
effects of these items, gross and net premiums written would have increased by
14% and 17%, respectively, for 2001, compared to 2000. In addition to rate
increases, the increase in gross and net written premiums in 2001, compared to
2000, reflects higher premium volume for both property and casualty coverages
written by the Finite Risk and Financial Products unit due primarily to
increased demand for these coverages. The Finite Risk and Financial Products
unit continued to achieve growth in both property and casualty lines by
providing non-traditional reinsurance coverages mostly to small- and
medium-sized insurers, which we define as insurers with less than $500 million
in policyholders surplus.

Partially
offsetting premium growth in the Finite Risk and Financial Products unit was
lower premium volume from PMA Res Specialty and Traditional treaty units,
which primarily write casualty lines of business. During 2001, approximately 35%
of the beginning in-force business for the Traditional and Specialty treaty
units was non-renewed, largely reflecting PMA Res decision to non-renew
accounts that did not meet its pricing guidelines. Despite the full year decline
in writings for PMA Res Traditional and Specialty treaty coverages, the
environment for writing these coverages on acceptable terms became increasingly
more favorable as 2001 progressed. This resulted in an increase in premiums
written for the Traditional and Specialty treaty coverages for the second half
of 2001, compared with the first half of the year.

For 2000, PMA
Res gross premiums written increased 15%, compared to 1999, primarily
reflecting increased premiums written by the Finite Risk and Financial Products
unit. Also contributing to the growth in gross premiums written were price
increases in all segments of PMA Res business. The improvement in gross
premiums written was partially offset by a decline of $37.5 million for the
Specialty treaty unit due to competitive rates and conditions in the
professional liability market, which caused PMA Re to non-renew business that
did not meet its price guidelines. In addition, gross premiums written in 2000
included $17.5 million of premiums recognized as a result of a change in the
estimate of ultimate premiums by underwriting year.

Net premiums
written decreased by 6% in 2000, compared to 1999, as increases in ceded
premiums of $68.7 million for 2000, compared to 1999, more than offset the
growth in gross premiums written. The increase in ceded premiums was primarily
due to additional ceded premiums of $52.1 million on existing retrocessional
contracts covering the higher than expected losses and LAE in 2000. Also
contributing to the increase in ceded premiums was $17 million from the effect
of one casualty reinsurance treaty, on which substantially all of the assumed
premiums were retroceded.

Net premiums
earned increased 36% in 2001 and decreased 15% in 2000, compared to the
immediately preceding year. After adjusting for the impact of the additional
assumed and ceded premiums discussed above, net premiums earned increased 14% in
2001, compared to 2000. Net premiums earned in 2000 included $12.4 million of
premiums recognized as a result of a change in the estimate of ultimate premiums
by underwriting year. PMA Res earned premiums for 1999 include
approximately $32 million related to a revision in the methodology used in
estimating premiums on in-force contracts. After adjusting for these revisions
and for the additional ceded premiums discussed above, net premiums earned
increased 11% in 2000, compared to 1999. Traditionally, trends in net premiums
earned follow patterns similar to net premiums written, with premiums being
earned principally on a pro rata basis over the coverage periods of the
underlying policies.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

|                     | 2001 |  | 2000 |        | 1999 | 
|-------------------- | ---- |  | ---- | ------ | ---- | 
|                    
|                    
|                     |      |  |      |        |      | 
|Loss and LAE ratio   |      |  |      | 87.4%  |      | 
|                     |     
|Expense ratio:       |      | 
|Acquisition expenses |      |  |      | 20.9%  |      | 
|Operating expenses   |      |  |      | 5.9%   |      | 
|                     |     
|Total expense ratio  |      |  |      | 26.8%  |      | 
|                     |     
|Combined ratio(1)    |      |  |      | 114.2% |      | 
|                     |     

|(1) |  | The combined ratio computed on a GAAP basis is equal to losses and LAE, plus
          acquisition expenses and operating expenses, all divided by net premiums
          earned.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

32

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|P M A  C A P I T A L
|--------------------

In 2001, PMA Res combined ratio and the individual
components of the combined ratio were impacted by the unfavorable loss activity
related to the attack on the World Trade Center. Excluding the impact of the
attack, PMA Res loss and LAE ratio was approximately 80% and the combined
ratio was approximately 105% for 2001. For additional information, see Impact on
2001 Results from the September 11th Terrorist Attack on the World Trade Center
on page 29.

PMA Res
loss and LAE ratio increased significantly in 2000, compared to 1999, reflecting
the recognition in the third quarter of 2000 of the effects of higher than
expected losses and LAE in certain lines of business, primarily coverages for
1998 and 1999 written on a pro rata basis, partially offset by lower than
expected losses and LAE for treaties covering losses occurring in accident years
1996 and prior. In the third quarter of 2000, PMA Res actuarial department
conducted its routine semi-annual reserve study to determine the impact of any
emerging data on anticipated loss development trends and recorded unpaid losses
and LAE reserves. Based on the actuarial work performed, which included
analyzing recent trends in the levels of the reported and paid claims, an
updated selection of actuarially determined loss reserve estimates was developed
by accident year for each major line of business written by PMA Re.
Managements selection of the ultimate losses indicated that gross loss
reserves needed to be increased by $83.2 million.

The increase in
the estimate of gross loss and LAE reserves primarily reflected higher than
anticipated losses mainly in our pro rata business, where PMA Re participates
with the insured by agreeing to pay a predetermined percentage of all losses
arising under a particular insurance contract of the insured in exchange for the
same predetermined percentage of all applicable premiums received under that
contract. The concentration of estimated adverse loss development was in PMA
Res pro rata reinsurance business related primarily to general liability
treaties written on a claims made basis covering losses in 1998 and 1999,
property treaties covering 1999 losses and, to a lesser extent, commercial
automobile liability treaties covering losses in 1998 and 1999. In addition, the
reserve increase reflects unfavorable prior year loss reserve development in the
excess of loss general liability line for accident years 1998 and 1999. Under
existing retrocessional contracts, $60.0 million of gross losses were ceded to
PMA Res retrocessionaires, reducing the impact on net incurred losses and
LAE to $23.2 million. The increase in net incurred losses and LAE, combined with
$35.0 million of ceded premiums and interest on funds held under existing
retrocessional contracts covering the ceded losses, resulted in a pre-tax charge
of approximately $60 million to PMA Res operating results in 2000.

For additional
information about PMA Res loss reserves, see pages 38
and 39 and Note 4 to our Consolidated Financial Statements.

Net premiums
earned, which are used in calculating the acquisition and expense ratios, were
adversely impacted by the attack on the World Trade Center in 2001 and the
higher than expected losses in 2000. Excluding the effect of these items, the
acquisition expense ratio decreased 1.0 point and the operating expense ratio
increased 1.1 points for 2001, compared to 2000. The lower acquisition expense
ratio is primarily due to the shift in business towards Finite Risk and
Financial Products business, which generates a lower acquisition expense ratio
than traditional treaty business. The increase in the operating expense ratio is
due to operating expenses growing at a faster rate than earned premiums in 2001,
which reflects net expenses related to our participation in a Lloyds of
London operation, beginning in 2001.

In 2000, the
acquisition expense ratio decreased by 5.9 points and the operating expense
ratio remained essentially flat, compared to 1999, excluding the impact of the
additional ceded premium on retrocessional contracts discussed above. The
decline in the acquisition expense ratio reflects the shift in business towards
Finite Risk and Financial Products business.

Net Investment Income

Net investment income was $45.4 million, $51.1 million and $57.7
million in 2001, 2000 and 1999, respectively. The decrease in 2001, compared to
2000, is primarily due to lower investment yields. The decrease in 2000,
compared to 1999, principally reflects an increase of $9.2 million in interest
credited on ceded retrocessional funds held treaties under which PMA Re ceded
premiums and losses during 2000, as discussed above. Excluding the impact of the
interest credited on funds held treaties, net investment income increased in
2000, compared to 1999, due to higher yields on invested assets resulting from a
portfolio shift towards higher yielding investments, which began in the second
quarter of 1999 and was substantially completed by the beginning of the fourth
quarter of 1999.

|33
|--

---

|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

The PMA Insurance Group

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

|(dollar amounts in thousands)    | 2001 |  | 2000 |         | 1999 |  
|-------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                
|                                
|                                 |      |  |      |         |      |  
|The PMA Insurance Group          |      |  |      |         |      |  
|Net premiums written             |      |  | $    | 355,547 |      | $
|                                 |     
|Net premiums earned              |      |  | $    | 346,574 |      | $
|Net investment income            |      |  |      | 39,444  |      |  
|Other revenues                   |      |  |      | 11,240  |      |  
|                                 |     
|Operating revenues               |      |  |      | 397,258 |      |  
|                                 |     
|Losses and LAE                   |      |  |      | 258,933 |      |  
|Acquisition and                  |      | 
|operating expenses               |      |  |      | 101,090 |      |  
|Dividends to policyholders       |      |  |      | 14,087  |      |  
|                                 |     
|Total losses and expenses        |      |  |      | 374,110 |      |  
|                                 |     
|Pre-tax operating income         |      |  | $    | 23,148  |      | $
|                                 |     
|Combined ratio                   |      |  |      | 105.5%  |      |  
|Less: net investment             |      | 
|income ratio                     |      |  |      | 11.4%   |      |  
|                                 |     
|Operating ratio                  |      |  |      | 94.1%   |      |  
|                                 |     
|The PMA Insurance Group          |      | 
|Excluding Run-off Operations (1) |      | 
|Net premiums written             |      |  | $    | 355,547 |      | $
|                                 |     
|Net premiums earned              |      |  | $    | 346,574 |      | $
|Net investment income            |      |  |      | 39,444  |      |  
|Other revenues                   |      |  |      | 11,240  |      |  
|                                 |     
|Operating revenues               |      |  |      | 397,258 |      |  
|                                 |     
|Losses and LAE                   |      |  |      | 258,933 |      |  
|Acquisition and                  |      | 
|operating expenses               |      |  |      | 101,090 |      |  
|Dividends to policyholders       |      |  |      | 14,087  |      |  
|                                 |     
|Total losses and expenses        |      |  |      | 374,110 |      |  
|                                 |     
|Pre-tax operating income         |      |  | $    | 23,148  |      | $
|                                 |     
|Combined ratio                   |      |  |      | 105.5%  |      |  
|Less: net investment             |      | 
|income ratio                     |      |  |      | 11.4%   |      |  
|                                 |     
|Operating ratio                  |      |  |      | 94.1%   |      |  
|                                 |     

|(1) |  | Run-off operations (Run-off operations) of The PMA Insurance
Group reinsured certain obligations primarily associated with
workers compensation claims written by The PMA Insurance Groups
Pooled Companies for the years 1991 and prior. For 2000 and 1999,
Run-off operations generated net investment income of $4.1 million and $4.4
million, losses and expenses of $4.1 million and $4.6 million, and pre-tax
operating losses of $45,000 and $189,000. Effective December 31, 2000,
substantially all of the remaining assets and liabilities of the Run-off
operations were transferred to a third party under an assumption
reinsurance agreement. As a result of this transaction, The PMA
Insurance Group no longer reports separate results for the Run-off operations.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pre-tax
operating income for The PMA Insurance Group increased in 2001 to $23.1 million,
compared to $21.6 million in 2000 and $18.2 million in 1999. Operating income
increased 7% and 19% for 2001 and 2000, respectively, compared to the
immediately preceding year, primarily due to improved underwriting results
reflecting premium growth that outpaced higher losses and expenses, and lower
dividends to policyholders, partially offset by lower net investment income.

The PMA Insurance Group Excluding Run-off Operations

Premiums

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                             
|                              |      |  |      |         |      |  
|Workers' compensation and     |      |  |      |         |      |  
|integrated disability:        |      | 
|Direct premiums written       |      |  | $    | 315,611 |      | $
|Premiums assumed              |      |  |      | 6,331   |      |  
|Premiums ceded                |      |  |      | (29,771 | )    |  
|                              |     
|Net premiums written          |      |  | $    | 292,171 |      | $
|                              |     
|Commercial Lines:             |      | 
|Direct premiums written       |      |  | $    | 92,107  |      | $
|Premiums assumed              |      |  |      | 2,646   |      |  
|Premiums ceded                |      |  |      | (31,377 | )    |  
|                              |     
|Net premiums written          |      |  | $    | 63,376  |      | $
|                              |     
|Total:                        |      | 
|Direct premiums written       |      |  | $    | 407,718 |      | $
|Premiums assumed              |      |  |      | 8,977   |      |  
|Premiums ceded                |      |  |      | (61,148 | )    |  
|                              |     
|Net premiums written          |      |  | $    | 355,547 |      | $
|                              |     

Direct workers compensation and integrated disability
premiums written increased 28% in 2001 and 17% in 2000, compared to the
immediately preceding year, primarily due to increased prices on workers
compensation business and an increase in the volume of risks underwritten for
the workers compensation and integrated disability lines of business. In
recent years, The PMA Insurance Group increased its writings of workers
compensation premiums through focused marketing efforts in its principal
marketing territory. It also benefited in 2001 and 2000 from writing business
for insureds mainly operating in The PMA Insurance Groups principal
marketing territory but with some operations in other states.

34

---

|P M A  C A P I T A L
|--------------------

The premium
charged on a fixed-cost policy is primarily based upon the manual rates filed
with the state insurance department. Manual rates in The PMA Insurance
Groups principal marketing territories for workers compensation
increased on average approximately 10% in 2001 and 8% in 2000, compared to a
decline of 3% in 1999. The increase in manual rates reflects the effects of
higher average medical and indemnity costs in recent years. Because manual rate
fluctuations directly affect the prices that The PMA Insurance Group can charge
for its rate sensitive workers compensation products, which include fixed
cost and dividend policies, such fluctuations in manual rate levels affect
workers compensation premium volume.

Direct writings
of commercial lines of business other than workers compensation, such as
commercial auto, general liability, umbrella, multi-peril and commercial
property lines (collectively, Commercial Lines), increased by $8.7
million in 2001, compared to 2000, primarily due to rate increases for
commercial auto and commercial multi-peril lines. During 2000, direct writings
of Commercial Lines increased $4.4 million, compared to 1999. This increase was
primarily due to rate increases for commercial auto and commercial package
lines, partially offset by non-renewals of certain accounts that did not meet
underwriting standards.

Premiums ceded
decreased $5.5 million in 2001, compared to 2000. The change in premiums ceded
reflects a decrease of $9.6 million in premiums ceded for workers
compensation, partially offset by an increase of $4.1 million in premiums ceded
for Commercial Lines in 2001, compared to 2000. Premiums ceded for workers
compensation decreased despite the growth in gross premiums written for
workers compensation because The PMA Insurance Group increased its net
retention by adding a deductible limit of approximately $10 million on its
workers compensation reinsurance program, effective January 1, 2001. The
increase in premiums ceded for Commercial Lines is primarily due to the increase
in direct premiums written for these products.

Premiums ceded
increased $4.9 million for 2000, compared to 1999, reflecting an increase of
$8.5 million in ceded workers compensation and integrated disability
premiums, partially offset by a decrease of $3.6 million in ceded premiums for
Commercial Lines. The increase in workers compensation premiums ceded is
primarily due to the increase in direct writings for these products. The
decrease in Commercial Lines premiums ceded is primarily due to an increase in
the reinsurance retention for the commercial casualty lines of business from
$175,000 to $250,000, effective January 1, 2000.

Net premiums
earned increased 37% in 2001, compared to 2000, and 14% in 2000, compared to
1999. 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. Direct premiums are earned principally on a pro rata
basis over the terms of the policies.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

|                              | 2001 |  | 2000 |        | 1999 | 
|----------------------------- | ---- |  | ---- | ------ | ---- | 
|                             
|                             
|                              |      |  |      |        |      | 
|Loss and LAE ratio            |      |  |      | 74.7%  |      | 
|                              |     
|Expense ratio:                |      | 
|Acquisition expenses          |      |  |      | 17.6%  |      | 
|Operating expenses(1) (2)     |      |  |      | 9.1%   |      | 
|                              |     
|Total expense ratio           |      |  |      | 26.7%  |      | 
|Policyholders' dividend ratio |      |  |      | 4.1%   |      | 
|                              |     
|Combined ratio(1) (2) (3) (4) |      |  |      | 105.5% |      | 
|                              |     

|(1) |  | The expense ratio and the combined ratio exclude $8.8 million, $7.0 million
and $7.9 million in 2001, 2000 and 1999, respectively, for direct
expenses related to loss adjusting services and risk control fees included in
other revenues, which are not included in premiums earned.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The expense ratio and the combined ratio for 1999 exclude the impact of the
          cumulative effect of accounting change of $4.3 million ($2.8 million
          after-tax) for insurance-related assessments.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The combined ratio computed on a GAAP basis is equal to losses and LAE, plus
          acquisition expenses, operating expenses and policyholders
          dividends, all divided by net premiums earned.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The GAAP combined ratios for The PMA Insurance Group including the
Run-off operations were 111.7% and 115.4% for 2000 and 1999,
respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

The loss and LAE ratio increased slightly in 2001 and 2000,
compared to the immediately preceding year, primarily due to the unfavorable
impact of changes in prior year development, partially offset by an improved
current accident year loss and LAE ratio, and a decline in net discount
accretion.

|35
|--

---

|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

The PMA
Insurance Group experienced $2.9 million of unfavorable prior year development
in 2001, compared to favorable prior year development of $6.1 million and $9.2
million in 2000 and 1999, respectively. The changes in prior year development
unfavorably impacted the loss and LAE ratio by 3.2 points and 1.8 points for
2001 and 2000, respectively, compared to the immediately preceding year. The
unfavorable prior year development in 2001 primarily reflects higher than
expected claims handling costs. The favorable prior year development in 2000 and
1999 primarily reflects better than expected loss experience from loss-sensitive
and rent-a-captive workers compensation business. Premium adjustments for
loss-sensitive business and policyholders dividends for rent-a-captive
business have substantially offset this favorable development. Rent-a-captives
are used by customers as an alternative method to manage their loss exposure
without establishing and capitalizing their own captive insurance company.

The current
accident year loss and LAE ratio improved by 1.7 points in 2001 and 1.2 points
in 2000, compared to the immediately preceding year, primarily reflecting
improved current accident year loss and LAE ratios for the workers
compensation and integrated disability lines of business. The reduction in the
loss and LAE ratios for workers compensation and integrated disability
primarily reflect price increases and a decline in claims frequency for the
workers compensation line of business. However, a slowdown in the United
States economy may change the trend of declining claims frequency. Also, in most
economic slowdowns, we have generally experienced increasing claims severity.
Further, medical cost inflation continues, which may contribute to increased
severity of losses, despite The PMAInsurance Groups attempt to mitigate
medical cost inflation through its affiliation with a national preferred
provider organization.

The loss and LAE
ratio is negatively impacted by accretion of discount on prior year reserves and
favorably impacted by the recording of discount for current year reserves. The
net of these amounts is referred to as net discount accretion. The recording of
discount essentially offset the accretion of discount on prior year reserves for
2001, whereas the accretion of discount on prior year reserves exceeded the
recording of discount for 2000 and 1999. The decline in net discount accretion
in 2001, compared to 2000, favorably impacted the loss and LAE ratio by 0.6
points, reflecting the increase in workers compensation writings during
2001. The decline in net discount accretion in 2000, compared to 1999, favorably
impacted the loss and LAE ratio by 0.4 points, reflecting a reduction in
discount accretion attributable to prior year loss reserves. For additional
information regarding The PMAInsurance Groups loss reserves, see pages 38
and 39.

The expense
ratio improved by 2.0 points in 2001 and by 2.4 points in 2000, compared to the
immediately preceding year, due to growth in net premiums earned that outpaced
the increase in expenses.

The
policyholders dividend ratio was 4.1%, 7.5% and 8.6% in 2001, 2000 and
1999, respectively. Under policies that are subject to dividend plans, the
customer may receive a dividend based upon loss experience during the policy
period. The improvements in the policyholders dividend ratio occurred
primarily because The PMA Insurance Group sold less business under dividend
plans and wrote business under lower paying dividend plans.

Net Investment Income

Net investment income was $4.4 million lower in 2001 and $2.0
million lower in 2000, compared to the immediately preceding year. The decrease
in net investment income over the three years is primarily due to a lower
invested asset base resulting from the paydown of loss reserves from prior
accident years. The decrease in 2000, compared to 1999, was partially offset by
higher investment yields associated with a shift in invested assets towards
higher yielding invested assets.

Caliber One

Summarized financial results of Caliber One are as follows:

|(dollar amounts in thousands)   | 2001 |  | 2000 |         | 1999 |  
|------------------------------- | ---- |  | ---- | ------- | ---- | -
|                               
|                               
|                                |      |  |      |         |      |  
|Net premiums written            |      |  | $    | 53,674  |      | $
|                                |     
|Net premiums earned             |      |  | $    | 46,232  |      | $
|Net investment income           |      |  |      | 3,124   |      |  
|                                |     
|Operating revenues              |      |  |      | 49,356  |      |  
|                                |     
|Losses and LAE                  |      |  |      | 60,207  |      |  
|Acquisition and                 |      | 
|operating expenses              |      |  |      | 15,317  |      |  
|                                |     
|Total losses and expenses       |      |  |      | 75,524  |      |  
|                                |     
|Pre-tax operating income (loss) |      |  | $    | (26,168 | )    | $
|                                |     
|Combined ratio                  |      |  |      | 163.3%  |      |  
|Less: net investment            |      | 
|income ratio                    |      |  |      | 6.8%    |      |  
|                                |     
|Operating ratio                 |      |  |      | 156.5%  |      |  
|                                |     

36

---

|P M A  C A P I T A L
|--------------------

Caliber One recorded pre-tax operating losses of $26.2 million
in 2001 and $7.0 million in 2000, and pre-tax operating income of $83,000 in
1999. The increase in the pre-tax operating loss for 2001, compared to 2000,
reflects higher underwriting losses, which included $22.2 million of net
unfavorable prior year loss development, substantially all of which was from the
1999 and 2000 accident years. The pre-tax operating loss for 2000, compared to
pre-tax operating income in 1999, reflects higher underwriting losses, partially
offset by higher net investment income.

Premiums

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                             
|                              |      |  |      |         |      |  
|Gross premiums written:       |      |  |      |         |      |  
|Property                      |      |  | $    | 69,107  |      | $
|Products liability            |      |  |      | 26,143  |      |  
|General liability             |      |  |      | 17,807  |      |  
|Professional liability        |      |  |      | 6,637   |      |  
|Other liability               |      |  |      | 4,641   |      |  
|                              |     
|Total                         |      |  | $    | 124,335 |      | $
|                              |     
|Net premiums written:         |      | 
|Property                      |      |  | $    | 31,679  |      | $
|Products liability            |      |  |      | 9,409   |      |  
|General liability             |      |  |      | 7,117   |      |  
|Professional liability        |      |  |      | 3,534   |      |  
|Other liability               |      |  |      | 1,935   |      |  
|                              |     
|Total                         |      |  | $    | 53,674  |      | $
|                              |     

Gross premiums written increased $30.9 million for 2001,
compared to 2000, and were essentially flat in 2000, compared to 1999. Gross
premiums written in 2001 reflect growth in property and certain classes of
liability lines of business due to rate increases as well as growth in policy
volume, partially offset by our decision in 2000 to exit from certain segments
of the professional liability line of business, primarily the nursing homes
class, and from certain commercial automobile lines of business (included in
Other liability in the table above). Mid-term policy cancellations
in the nursing homes class of business also impacted premiums written for the
professional liability line of business in 2000.

Net premiums
written increased $37.6 million in 2001, compared to 2000. Net property premiums
written increased $24.2 million for 2001, compared to 2000, reflecting rate
increases and growth in policy volume. Net liability premiums written increased
$13.4 million in 2001, compared to 2000, reflecting rate increases in most
liability lines of business. Additionally, net premiums written in 2000 included
higher levels of ceded premiums related primarily to professional liability and
commercial automobile exposures. Net premiums written declined in 2000, compared
to 1999, primarily due to higher levels of ceded premiums related to
professional liability, commercial automobile, general liability and property
catastrophe exposures.

Net premiums
earned increased $17.4 million in 2001, compared to 2000. 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. Net
premiums earned in 2000 increased $4.1 million, compared to 1999, primarily
reflecting the increase in premiums written in the latter part of 1999 and early
2000, partially offset by increased ceded premiums in 2000, as discussed above.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

|                     | 2001 |  | 2000 |        | 1999 | 
|-------------------- | ---- |  | ---- | ------ | ---- | 
|                    
|                    
|                     |      |  |      |        |      | 
|Loss and LAE ratio   |      |  |      | 130.2% |      | 
|                     |     
|Expense ratio:       |      | 
|Acquisition expenses |      |  |      | 15.3%  |      | 
|Operating expenses   |      |  |      | 17.8%  |      | 
|                     |     
|Total expense ratio  |      |  |      | 33.1%  |      | 
|                     |     
|Combined ratio(1)    |      |  |      | 163.3% |      | 
|                     |     

|(1) |  | Combined ratio computed on a GAAP basis is equal to losses and LAE, plus
          acquisition expenses and operating expenses, all divided by net premiums
          earned.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Caliber Ones loss and LAE ratio increased significantly in
2001, compared to 2000, primarily due to net unfavorable prior year development
of $22.2 million, which is net of losses of approximately $26 million ceded to
third party reinsurers under existing reinsurance contracts covering the prior
year loss development. These losses primarily reflect higher than expected claim
frequency and severity that emerged in 2001 on certain casualty lines of
business, primarily professional liability policies for

|37
|--

---

|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

the nursing homes class of business, and, to a lesser extent, property
lines of business. As a result of its reserve reviews conducted in 2001, Caliber One
revised its estimate of ultimate expected claims activity and, accordingly, increased its
estimate of ultimate losses, substantially all for accident years 1999 and 2000.

Caliber
Ones loss and LAE ratio increased significantly for 2000, compared to
1999, primarily due to higher than expected losses and LAE in certain segments
of the professional liability, commercial automobile, general liability and
property lines of business for coverage of 2000 and 1999 exposures. The loss and
LAE ratio for 2000 reflects the ceding of a substantial amount of losses and LAE
from the professional liability and commercial automobile lines of business to
reinsurers. For additional information regarding Caliber Ones loss
reserves, see pages 38 and 39.

The acquisition
expense ratio increased significantly for 2001, compared to 2000, primarily as a
result of lower ceding commissions. The acquisition expense ratio decreased
significantly for 2000, compared to 1999, primarily due to the benefit of higher
ceding commissions on Caliber Ones 2000 reinsurance coverage for the
professional liability and commercial automobile lines of business. Ceding
commissions are offset against acquisition expenses.

The operating
expense ratio decreased substantially in 2001, compared to 2000, primarily due
to the effect on net premiums earned of the increased use of reinsurance and
policy cancellations in 2000. Operating expenses were $8.3 million in 2001,
which is a decrease of $850,000 compared to 2000, reflecting the substantial
completion in 2000 of Caliber Ones infrastructure development. The
operating expense ratio increased substantially for 2000, compared to 1999,
primarily reflecting increases in operating expenses associated with Caliber
Ones continued growth in net premiums earned and infrastructure
development, as well as the negative effect on net premiums earned of the
increased use of reinsurance and policy cancellations in 2000.

Net Investment Income

Net investment income was $3.1 million, $4.4 million and $2.5
million for 2001, 2000 and 1999, respectively. The decrease in net investment
income for 2001, compared to 2000, is due to an increase in interest on funds
held reinsurance contracts and lower yields on invested assets, partially offset
by an increase in Caliber Ones invested asset base.

The increase in
2000, compared to 1999, primarily reflects a larger average invested asset base,
due primarily to premium collections in excess of paid losses and expenses and,
to a lesser extent, capital contributions received, partially offset in 2000 by
an increase in interest credited on funds held reinsurance contracts.

Loss Reserves and Reinsurance

Loss Reserves

Our consolidated unpaid losses and LAE, net of reinsurance, at
December 31, 2001 and 2000 were $1,143.1 million and $1,128.7 million, net of
discount of $113.7 million and $104.0 million, respectively. Included in the
consolidated unpaid losses and LAE are amounts related to our workers
compensation claims of $363.5 million and $341.8 million, net of discount of
$91.0 million and $88.4 million at December 31, 2001 and 2000, respectively. The
approximate discount rate used was 5% at December 31, 2001 and 2000.

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. 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. In general, liabilities for reinsurers become known
more slowly than for primary insurers and are subject to more unforeseen
development and uncertainty. As part of the process for determining our unpaid
losses and LAE, actuarial models are used that analyze historical data and
consider the impact of current developments and trends, such as trends in claims
severity and frequency. Also considered are legal developments, regulatory
trends, legislative developments, changes in social attitudes and economic
conditions. See the discussion under Losses and Expenses on pages 32 and 37 for
additional information regarding higher than expected losses and LAE during 2001
and 2000 at PMA Re and Caliber One.

38

---

|P M A  C A P I T A L
|--------------------

Management
believes that its unpaid losses and LAE are fairly stated at December 31, 2001.
However, estimating the ultimate claims liability is necessarily a complex and
judgmental process inasmuch as the amounts are based on managements
informed estimates and judgments using data currently available. As additional
experience and data become available regarding claims payment and reporting
patterns, legislative developments, judicial theories of liability, regulatory
trends on benefit levels for both medical and indemnity payments, social
attitudes, and economic conditions, the estimates are revised accordingly. If
our ultimate losses, net of reinsurance, prove to differ substantially from the
amounts recorded at December 31, 2001, the related adjustments could have a
material adverse effect on our financial condition, results of operations and
liquidity. See the Cautionary Statements on page 48 and Risk Factors in our 2001
Form 10-K for a discussion of factors that may adversely impact our losses and
LAE in the future.

At December 31,
2001, 2000 and 1999, our gross reserves for asbestos-related losses were $59.9
million, $49.2 million and $61.3 million, respectively ($28.6 million, $32.0
million and $38.9 million, net of reinsurance, respectively). At December 31,
2001, 2000 and 1999, our gross reserves for environmental-related losses were
$29.6 million, $29.5 million and $41.4 million, respectively ($16.0 million,
$18.0 million and $24.5 million, net of reinsurance, respectively).

Estimating
reserves for asbestos and environmental exposures continues to be difficult
because of several factors, including: (i) evolving methodologies for the
estimation of the liabilities; (ii) lack of reliable historical claim data;
(iii) uncertainties with respect to insurance and reinsurance coverage related
to these obligations; (iv) changing judicial interpretations; and (v) changing
government standards. Management believes that its reserves for asbestos and
environmental claims are appropriately established based upon known facts,
existing case law and generally accepted actuarial methodologies. However, due
to changing interpretations by courts involving coverage issues, the potential
for changes in federal and state standards for clean-up and liability, as well
as issues involving policy provisions, allocation of liability among
participating insurers, and proof of coverage, our ultimate exposure for these
claims may vary significantly from the amounts currently recorded, resulting in
a potential future adjustment that could be material to our financial condition
and results of operations. See Loss Reserves in our 2001 Form 10-K and Note 4 to
our Consolidated Financial Statements for additional discussion.

Reinsurance

At December 31, 2001, our reinsurance and retrocessional
protection was as follows:

|                             |  | Retention |   | Limits (1)   |    
|---------------------------- |  | --------- | - | ------------ | ---
|                            
|                            
|                             |  |           |   |              |    
|PMA Re                       |  |           |   |              |    
|Per Occurrence:              |  |          
|Casualty lines(2)            |  |           | $ | 2.8 million  |    
|Workers' compensation(2)     |  |           | $ | 2.0 million  |    
|Property lines               |  |           | $ | 10.0 million |    
|Per Risk:                    |  |          
|Property lines               |  |           | $ | 750,000      |    
|Casualty lines               |  |           | $ | 1.5 million  |    
|                            
|The PMA Insurance Group      |  |          
|Per Occurrence:              |  |          
|Workers' compensation        |  |           | $ | 150,000      | (3)
|Per Risk:                    |  |          
|Property lines(4)            |  |           | $ | 500,000      |    
|Auto physical damage         |  |           | $ | 500,000      |    
|Other casualty lines(5)      |  |           | $ | 250,000      |    
|                            
|Caliber One                  |  |          
|Per Occurrence and Per Risk: |  |          
|Property lines               |  |           | $ | 500,000      |    
|Casualty lines               |  |           | $ | 250,000      |    

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

|(2) |  | Effective
January 1, 2002, the retention and limits were changed to $5.0 million and $15.0 million,
respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------

|(3) |  | The
PMA Insurance Group retains the first $10 million of losses. Effective January 1, 2002,
the retention increased to $250,000, with The PMAInsurance Group retaining the first $3
million of losses.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | This
coverage also provides protection of $47.5 million per occurrence over the combined net
retention of $500,000.
|--- |  | -------------------------------------------------------------------------------------------------------------------

|(5) |  | Effective
January 1, 2002, the retention and limits were changed to $500,000 and $4.5 million,
respectively. This coverage also provides protection of $59.5 million per occurrence over
the combined net retention of $500,000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to the reinsurance and retrocessional protections shown in
the table above, for 2001 we had excess of loss retrocessional protection that allowed us
to cede losses up to a limit of $73 million once our loss and LAE ratio exceeded a
predetermined level. Cession of losses under this contract required us to cede additional
premium in 2001. Effective January 1, 2002, the limit was increased to $150 million,
which includes protection for losses caused by terrorist activities.

We actively manage our
exposure to catastrophes through our underwriting process, where we generally monitor the
accumulation of insurable values in catastrophe-prone regions. Also, in writing property
reinsurance coverages, PMA Re typically requires per occurrence loss limitations for
contracts that could have catastrophe

|39
|--

---

|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

exposure. Through per risk reinsurance, we manage our net retention in
each exposure. PMA Re's property per occurrence reinsurance provides catastrophe
protection of $50.0 million in excess of $10.0 million on its traditional property book.
Under certain conditions, PMA Re may recover $6.0 million of the $10.0 million retention
for multiple net catastrophe losses. PMA Re also maintains catastrophe protection of
$12.5 million in excess of $5.0 million for property exposures underwritten by its Finite
Risk and Financial Products unit. PMA Re can also recover an additional $40.0 million of
Finite Risk and Financial Products occurrence losses under certain industry loss
scenarios. The PMA Insurance Group maintains catastrophe reinsurance protection of 95% of
$18.0 million excess of $2.0 million and Caliber One maintains catastrophe reinsurance
protection of $14.7 million excess of $1.3 million. Any cession of losses under certain
of these contracts requires that we cede additional premiums.

In 2001, our loss and LAE
ratios were impacted by the attack on the World Trade Center as discussed on page 29. In
2000 and 1999, our loss and LAE ratios were not significantly impacted by catastrophes.
Although we believe that we have adequate reinsurance to protect against the estimated
probable maximum gross loss from a catastrophe, an especially severe catastrophe or
series of catastrophes could exceed our reinsurance and/or retrocessional protection and
may have a material adverse impact on our financial condition, results of operations and
liquidity.

With respect to the
reinsurance and retrocessional protection shown in the table on page 39, our treaties
that renewed effective January 1, 2002 do not cover us for losses sustained from
terrorist activities, except for PMA Re's property per occurrence treaty. Further, for
treaties that renew later in 2002 it is possible that losses due to terrorist attacks may
be excluded. Therefore, future terrorist attacks may result in losses that have a
material adverse effect on our financial condition, results of operations and liquidity.
See discussion under Terrorism on page 41 for steps we are taking to mitigate this
exposure.

Under our reinsurance and
retrocessional coverages in place during 2001, 2000 and 1999, we ceded premiums totaling
$243.4 million, $278.6 million and $154.5 million, and ceded losses and LAE of $359.6
million, $308.8 million and $113.1 million to reinsurers and retrocessionaires. The
increase in ceded losses in 2001, compared to 2000, is primarily related to the attack on
the World Trade Center. The significant increase in ceded premiums and ceded losses in
2000, compared to prior years is due to PMA Re's and Caliber One's use of reinsurance
protection to cover a substantial portion of their higher than expected gross losses and
LAE recognized in 2000. See the discussions under Impact on 2001 Results from the
September 11th Terrorist Attack on the World Trade Center on page 29 and Losses and
Expenses on pages 32 and 37 for additional information.

At December 31, 2001 and
2000, we had amounts receivable from our reinsurers and retrocessionaires totaling
$1,210.8 million and $933.9 million, respectively. Approximately $36 million and $15
million of these amounts are due to us on losses we have already paid at December 31,
2001 and 2000, respectively. The remainder of the reinsurance receivables relate to
unpaid claims.

At December 31, 2001, we
had reinsurance receivables due from the following unaffiliated reinsurers in excess of
5% of shareholders' equity:

|(dollar amounts in thousands)       |  | ReinsuranceReceivables |   | Collateral |  | Rating(1) |        
|----------------------------------- |  | ---------------------- | - | ---------- |  | --------- | -------
|                                   
|The London Reinsurance Group        |  |                        | $ | 343,270    |  | $         | 343,270
|United States Fidelity and Guaranty |  |                        |   | 143,635    |  |           | 104,154
|Underwriters Re                     |  |                        |   | 86,549     |  |           | 86,549 
|Houston Casualty                    |  |                        |   | 74,566     |  |           | --     
|Mountain Ridge Insurance Company    |  |                        |   | 49,829     |  |           | 49,829 
|PXRE                                |  |                        |   | 36,495     |  |           | 13,688 
|Folksamerica Re                     |  |                        |   | 31,732     |  |           | 1,243  

|(1) |  | Ratings
are as of February 28, 2002. A.M. Best ratings are as follows: A++, Superior, 1st of 16;
A+, Superior, 2nd of 16; A, Excellent, 3rd of 16; and A-, Excellent, 4th of 16; NR, Not
Rated.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Underwriters
Re is a subsidiary of Swiss Re, which is rated A++.
|--- |  | ----------------------------------------------------------------

|(3) |  | Mountain
Ridge is a subsidiary of St. Paul, which is rated A+.
|--- |  | --------------------------------------------------------------

40

---

|P M A  C A P I T A L
|--------------------

We perform credit reviews
of our reinsurers focusing on, among other things, financial capacity, stability, trends
and commitment to the reinsurance business. Prospective and existing reinsurers failing
to meet our standards are excluded from our reinsurance programs. In addition, we require
collateral, typically assets in trust, letters of credit or funds withheld, to support
balances due from certain reinsurers, consisting generally of those not authorized to
transact business in the applicable jurisdictions. At December 31, 2001 and 2000, our
reinsurance receivables were supported by $626.9 million and $553.6 million of
collateral. Of the uncollateralized reinsurance receivables at December 31, 2001,
approximately 95%, were due from reinsurers rated A-or better by A.M. Best.
We believe that the amounts receivable from reinsurers are fully collectible and that the
allowance for uncollectible items is adequate to cover any disputes about amounts owed by
reinsurers to us. In the last three years combined, we have written off less than $1
million of reinsurance receivables. The timing and collectibility of reinsurance
receivables have not had, and are not expected to have, a material adverse effect on our
liquidity. See Note 5 to our Consolidated Financial Statements for additional discussion.

Terrorism

We are currently attempting to exclude coverage of losses due to
terrorist activity in our assumed reinsurance contracts and in our surplus lines
insurance agreements where underwriters determine that there is a significant
risk of loss from terrorist activities. For the commercial insurance business
offered by The PMA Insurance Group, excluding our workers compensation
business, state insurance departments must approve the terms of our insurance
forms and new exclusions included in those forms. As of January 31, 2002, all
states except for California, Georgia, Florida and New York have approved
terrorism exclusions for policies on commercial insurance business, other than
workers compensation insurance. Accordingly, we are attempting to include
terrorism exclusions when permitted. With respect to workers compensation
insurance, terrorism exclusions are not permitted under workers
compensation laws of any state or jurisdiction in which we operate. When
underwriting existing and new workers compensation business, we are
considering the added potential risk of loss due to terrorist activity, and this
may lead us to decline to write or non-renew certain business. However, even
when terrorism exclusions are permitted, because our clients may not accept a
full terrorism exclusion in connection with business that we may still desire to
write without an exclusion, some or many of our insurance policies or
reinsurance contracts may not include a terrorism exclusion or only include a
limited exclusion. Therefore, future terrorist attacks may result in losses that
have a material adverse effect on our financial condition, results of operations
and liquidity. For additional information regarding the underwriting criteria of
our operating segments, see our 2001 Form 10-K.

Corporate and Other

The Corporate and Other segment includes unallocated investment
income, expenses, including debt service, as well as the results of certain of
our real estate properties. This segment had pre-tax operating losses of $6.3
million, $19.1 million and $20.8 million in 2001, 2000 and 1999, respectively.
During 2001, we sold certain real estate properties for net proceeds totaling
$14.4 million, resulting in a pre-tax gain of $9.8 million, which is recorded in
other revenues. We recorded interest expense of $6.5 million, $11.9 million and
$12.2 million in 2001, 2000 and 1999, respectively. The decrease in interest
expense for 2001, compared to 2000, is due to the $38.0 million paydown of
outstanding debt early in the first quarter of 2001 and lower interest rates
throughout 2001.

Net Realized Investment Gains/Losses

We recorded net pre-tax realized investment gains of $8.0
million in 2001, compared to net pre-tax realized investment gains of $12.0
million in 2000 and net pre-tax realized investment losses of $7.7 million in
1999. Throughout 2000 and into the first half of 2001, we shifted the mix of our
invested asset portfolio from U.S. Treasury and agency securities to corporate
bonds and structured securities as a means to enhance the portfolios
yield. As a result of investment sales pursuant to this strategy and given the
declining interest rates in 2001, we recorded net realized investment gains in
2001. During 2000, realized investment gains reflect the sale of equity
securities, which had reached our targeted price level. The realized investment
losses for 1999 reflect sales of securities in a rising interest rate
environment in order to invest in yield enhancing investment opportunities.

|41
|--

---

|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

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. At the
holding company level, our primary sources of liquidity are dividends from
subsidiaries, net tax payments received from subsidiaries and capital raising
activities (both debt and equity). We utilize cash to pay debt obligations,
including interest costs; dividends to shareholders; taxes to the Federal
government; and corporate expenses. In addition, we utilize cash resources to
repurchase shares of our common stock and to capitalize subsidiaries from time
to time.

In December
2001, we issued 9,775,000 shares of Class A Common stock, for net proceeds of
approximately $158 million. We used the net proceeds from this issuance to
contribute additional capital to our reinsurance subsidiary and to repay a
portion of our outstanding debt under our Revolving Credit Facility.

Our domestic
insurance subsidiaries ability to pay dividends to us is limited by the
insurance laws and regulations of Pennsylvania. All of our domestic insurance
entities are owned by PMA Capital Insurance Company (PMACIC). As a
result, dividends from The PMAInsurance Groups Pooled Companies and
Caliber One Indemnity Company may not be paid directly to PMA Capital. Instead,
only PMACIC, a Pennsylvania domiciled company, may pay dividends directly to PMA
Capital. Approximately $56 million of dividends are available to be paid by
PMACIC to PMA Capital in 2002 without the prior approval of the Pennsylvania
Insurance Commissioner during 2002. As of December 31, 2001, The PMA Insurance
Groups Pooled Companies can pay up to $27.4 million in dividends to PMACIC
during 2002. Under Delaware law, Caliber One can not pay dividends to PMACIC in
2002. Dividends received from subsidiaries were $29.6 million, $36.0 million and
$43.2 million in 2001, 2000 and 1999, respectively.

Net tax payments
received from subsidiaries were $2.4 million, $6.4 million and $21.8 million in
2001, 2000 and 1999, respectively.

We had $62.5
million and $163.0 million outstanding under our existing Revolving Credit
Facility (Credit Facility) at December 31, 2001 and 2000,
respectively. Under the terms of the Credit Facility, we repaid $62.5 million in
December 2001 and $38.0 million in January 2001 thereby reducing the outstanding
debt to $62.5 million, which is the maximum amount PMA Capital can borrow under
the Credit Facility as of December 31, 2001. The outstanding balance at December
31, 2001 of $62.5 million matures on December 31, 2002. In 2002, we will be
evaluating alternatives to replace our existing Credit Facility.

During 2001,
2000 and 1999, we incurred $6.5 million, $11.9 million and $12.2 million of
interest expense related to the Credit Facility, substantially all of which was
paid in each respective year.

In addition to
the Credit Facility, we maintain a committed facility of $50.0 million for
letters of credit (the Letter of Credit Facility). The Letter of
Credit Facility is utilized primarily for securing reinsurance obligations of
our insurance subsidiaries. As of December 31, 2001, we had $27.9 million
outstanding in letters of credit under the Letter of Credit Facility.

In addition to
the $62.5 million of debt maturing in 2002, we currently have contractual
obligations to pay $4.5 million in operating lease payments in 2002. Our future
commitment for operating lease payments are $4.9 million in 2003, $4.5 million
in 2004, $3.2 million in 2005 and $16.9 million thereafter.

During 2001,
2000 and 1999, we paid dividends to shareholders of $9.0 million, $8.0 million
and $7.8 million, respectively. In 2001 and 2000, dividends paid were higher due
to an increase in the annual dividend rate to $0.42 from $0.36 commencing with
the fourth quarter 2000 dividend payment. Our dividends to shareholders are
restricted by our debt agreements. Based upon the terms of our debt agreements,
under the most restrictive debt covenant, PMA Capital would be able to pay
dividends of approximately $15 million in 2002.

In 1998, our
Board of Directors authorized a plan to repurchase shares of Class A Common
stock in an amount not to exceed $25.0 million. Our Board of Directors
authorized an additional $15.0 million and $50.0 million of share repurchase
authority in 2000 and 1999, respectively. Since the inception of our share
repurchase program, we have repurchased a total of approximately 3.8 million
shares at a cost of $72.8 million. We repurchased 299,000 shares at a cost of
$5.3 million in 2001, 1.0 million shares at a cost of $18.4 million in 2000 and
1.5 million shares at a cost of $30.2 million in 1999. Our remaining share
repurchase authorization at December 31, 2001 is $17.2 million. Decisions
regarding share repurchases are subject to prevailing market conditions and an
evaluation of the costs and benefits associated with alternative uses of
capital.

42

---

|P M A  C A P I T A L
|--------------------

We made capital
contributions in the form of cash to our subsidiaries totaling $103.9 million,
$9.0 million and $7.1 million in 2001, 2000 and 1999, respectively.

Management
believes that our available sources of funds will provide sufficient liquidity
to meet our short-term and long-term obligations. However, because we depend
primarily upon dividends from our operating subsidiaries to meet our short-term
and long-term obligations, any event that has a material adverse effect on the
results of operations of our insurance subsidiaries could affect our liquidity
and ability to meet our contractual obligations and operating needs. Management
currently believes that the existing capital structure is appropriate. However,
management continually monitors the capital structure in light of developments
in its businesses, and the present assessment could change as management becomes
aware of new opportunities and challenges in our business.

Our total assets
increased to $3,803.0 million at December 31, 2001 from $3,469.4 million at
December 31, 2000. The increase in total assets in 2001, compared to 2000, is
primarily attributable to an increase of $276.9 million in reinsurance
receivables.

Investments

Our investment objectives are to (i) seek competitive after-tax
income and total return as appropriate, (ii) maintain medium to high investment
grade asset quality and high marketability, (iii) maintain maturity distribution
commensurate with our business objectives, (iv) provide portfolio flexibility
for changing business and investment climates and (v) provide liquidity to meet
operating objectives. Our investment strategy includes 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, both current income and investment maturities, are structured after
considering projected liability cash flows of loss reserve payouts using
actuarial models. Property and casualty claim demands are somewhat unpredictable
in nature and require liquidity from the underlying invested assets, which are
structured to emphasize current investment income to the extent consistent with
maintaining appropriate portfolio quality and diversity. The liquidity
requirements are met primarily through publicly traded fixed maturities as well
as operating cash flows and short-term investments.

Our investment
portfolio is diversified and does not contain any significant concentrations in
single issuers other than U.S. Treasury and agency obligations. In addition, we
do not have a significant concentration of our investments in any single
industry segment other than finance companies, which comprise 8% of invested
assets at December 31, 2001. Included in this industry segment are financial
institutions, including the financing subsidiaries of automotive manufacturers.
All of our investments are dollar denominated as of December 31, 2001.

Our investments
at December 31 were as follows:

|                                                  |  | 2001       | 2000
|------------------------------------------------- |  | ---------- | ----
|                                                  | 
|(dollar amounts in millions)                      |  | Fair Value |     
|                                                 
|                                                 
|                                                  |  |            |     
|U.S. Treasury securities and obligations          |  |            |     
|of U.S. Government agencies                       |  |            | $   
|States, political subdivisions and foreign        |  |           
|government securities                             |  |            |     
|Corporate debt securities                         |  |            |     
|Mortgage-backed and other asset-backed securities |  |            |     
|                                                  | 
|Total fixed maturities available for sale         |  |            |     
|Short-term investments                            |  |            |     
|                                                  | 
|Total                                             |  |            | $   
|                                                  | 

Mortgage-backed and other asset-backed securities in the table
above include collateralized mortgage obligations (CMOs) of $125.6
million and $167.7 million carried at fair value as of December 31, 2001 and
2000, respectively. CMO holdings are concentrated in securities with limited
prepayment, extension and default risk, such as planned amortization class
bonds.

|43
|--

---

|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

At December 31,
the ratings of our fixed maturities were as follows:

|                                 |  | 2001       | 2000
|-------------------------------- |  | ---------- | ----
|                                 | 
|(dollar amounts in millions)     |  | Fair Value |     
|                                
|                                
|                                 |  |            |     
|U.S. Treasury securities and AAA |  |            | $   
|AA                               |  |            |     
|A                                |  |            |     
|BBB                              |  |            |     
|BB                               |  |            |     
|B                                |  |            |     
|                                 | 
|Total                            |  |            | $   
|                                 | 

Ratings as assigned by Standard and Poors. Such ratings are
generally assigned at the time of the issuance of the securities, subject to revision on
the basis of ongoing evaluations.

Our investment results were as follows:

|(dollar amounts in millions) | 2001 |  | 2000 |         | 1999 |  
|---------------------------- | ---- |  | ---- | ------- | ---- | -
|                            
|                            
|                             |      |  |      |         |      |  
|Average invested assets(1)   |      |  | $    | 1,648.2 |      | $
|Investment income(2)         |      |  | $    | 98.6    |      | $
|Net effective yield(3)       |      |  |      | 5.98%   |      |  
|                             |     

|(1) |  | Average invested assets throughout the year, at amortized cost, excluding
          amounts related to securities lending activities.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Gross investment income less investment expenses and before interest credited
          on funds held treaties of $12.0 million and $10.6 million in 2001 and
          2000, respectively. Excludes net realized investment gains and losses and
          amounts related to securities lending activities.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Investment
income for the period divided by average invested assets for the same period.
|--- |  | ----------------------------------------------------------------------------------------

As of December 31, 2001, the duration of our investments that
support the insurance reserves was 3.2 years and the duration of our insurance
reserves was 3.3 years.

See Business
 Investments in our 2001 Form 10-K and Notes 2B and 3 to our Consolidated
Financial Statements for additional discussion about our investment portfolio.

Market Risk of Financial Instruments

A significant portion of our assets and liabilities are
financial instruments that are subject to the market risk of potential losses
from adverse changes in market rates and prices. Our primary market risk
exposures relate to interest rate risk on fixed rate domestic medium-term
instruments and, to a lesser extent, domestic short- and long-term instruments.
To manage our exposure to market risk, we have established strategies, asset
quality standards, asset allocations and other relevant criteria for our
investment portfolio. In addition, invested asset cash flows are structured
after considering projected liability cash flows with actuarial models. All of
our financial instruments are held for purposes other than trading. As stated
above, our portfolio does not contain a significant concentration in single
issuers other than U.S. Treasury and agency obligations. In addition, we do not
have a significant concentration of our investments in any single industry
segment other than finance companies, which comprise 8% of invested assets at
December 31, 2001. Included in this industry segment are financial institutions,
including the financing subsidiaries of automotive manufacturers. See Notes 2B,
3, 6 and 11 to our Consolidated Financial Statements for additional information
about financial instruments.

Caution should
be used in evaluating our overall market risk from the information below, since
actual results could differ materially because the information was developed
using estimates and assumptions as described below, and because insurance
liabilities and reinsurance receivables are excluded in the hypothetical effects
(insurance liabilities represent 73% of our total liabilities and reinsurance
receivables on unpaid losses represent 32% of our total assets).

The hypothetical
effects of changes in market rates or prices on the fair values of financial
instruments as of December 31, 2001, excluding insurance liabilities

44

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|P M A  C A P I T A L
|--------------------

and reinsurance receivables on unpaid losses because such insurance
related assets and liabilities are not carried at fair value, would have been as follows:

| |  | If interest rates had increased by 100 basis points, there would have been no
          significant change in the fair value of our debt. The change in fair values was
          determined by estimating the present value of future cash flows using models
          that measure the change in net present values arising from selected hypothetical
          changes in market interest rates.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If interest rates had increased by 100 basis points, there would have been a net
          decrease of approximately $65 million in the fair value of our investment
          portfolio. The change in fair values was determined by estimating the present
          value of future cash flows using various models, primarily duration modeling.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Matters

Environmental Factors

Our businesses are subject to a changing social, economic,
legal, legislative and regulatory environment that could 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. See Notes 4, 7 and 12
to our Consolidated Financial Statements for additional discussion.

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 and
the Delaware 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
(NAIC) publications. Permitted SAP encompasses all accounting
practices that are not prescribed. Effective December 31, 2000, our insurance
subsidiaries implemented the Codification guidelines, resulting in an increase
of $20.5 million in its statutory surplus. See Note 16 to our Consolidated
Financial Statements for additional discussion.

Recent Accounting Pronouncements

Effective January 1, 2001, we adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. We do not have any derivative instruments that are impacted by the
accounting requirements of SFAS No. 133 and we do not currently participate in
any hedging activities. Accordingly, the adoption of SFAS No. 133 did not have a
material impact on our financial condition, results of operations or liquidity.

In 2001, we adopted SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities-- a Replacement of SFAS No. 125." SFAS No. 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. SFAS No. 140 revises the standards for securitizations and other
transfers of financial assets and collateral and requires certain disclosures, but
carries over most of the provisions of SFAS No. 125 without reconsideration. Our existing
policies and practices for our securities lending program are in conformity with SFAS No.
140. Accordingly, the adoption of SFAS No. 140 did not have a material impact on our
financial condition, results of operations or liquidity.

As of December
31, 2001, we adopted Statement of Position (SOP) 01-05,
Amendments to Specific AICPA Pronouncements for Changes Related to the
NAIC Codification. SOP 01-05 requires insurance enterprises to disclose
any prescribed or permitted statutory accounting practice that it uses and the
related monetary effect on statutory surplus if such accounting practice differs
from either state prescribed statutory accounting practices or NAIC statutory
accounting practices. See Note 16 to our Consolidated Financial Statements for
additional information.

|45
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|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

Effective
January 1, 2000, we adopted SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.
This statement identifies several methods of deposit accounting and provides
guidance on the application of each method. This statement classifies insurance
and reinsurance contracts for which the deposit method is appropriate as
contracts that (i) transfer only significant timing risk, (ii) transfer only
significant underwriting risk, (iii) transfer neither significant timing nor
underwriting risk and (iv) have an indeterminate risk. The adoption of SOP 98-7
did not have a material impact on our financial condition, results of operations
or liquidity.

Effective
January 1, 1999, we adopted SOP 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments. SOP 97-3 provides guidance
for determining when an insurance company should recognize a liability for
guaranty fund and other insurance-related assessments and how to measure that
liability. As a result of adopting SOP 97-3, we recorded a liability of $4.3
million pre-tax and a resulting charge to earnings of $2.8 million, net of
income tax benefit of $1.5 million, which has been reported as a cumulative
effect of accounting change. This accounting change impacted The PMA Insurance
Group segment.

In July 2001,
the Financial Accounting Standards Board (FASB) issued SFAS No. 142,
Goodwill and Other Intangible Assets. This statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. We will adopt the provisions of this statement effective January 1,
2002. This statement is required to be applied to all goodwill and other
intangible assets recognized in our financial statements at the date of
adoption. At that time, goodwill will no longer be amortized, but will be tested
periodically for impairment. As of December 31, 2001, we had approximately $4.3
million of goodwill, which is included in other assets on our balance sheet, and
goodwill amortization was $960,000, $220,000 and $220,000 in 2001, 2000 and
1999, respectively. We do not expect adoption of this statement to have a
material impact on our financial condition, results of operations or liquidity.

Critical Accounting Policies

Our Consolidated Financial Statements have been prepared in
accordance with GAAP. Some of the accounting policies permitted by GAAP require
us to make estimates of the amounts of assets and liabilities to be reported in
our Consolidated Financial Statements. We have provided a summary of all of our
significant accounting policies on pages 54 to 56 of our Consolidated Financial
Statements. We recommend that you read all of these policies.

The following
discussion is intended to provide you with an understanding of our critical
accounting policies, which are those accounting policies that we believe are
most important to the portrayal of our financial condition and results of
operations, and that require our most difficult, subjective and complex
judgements.

Unpaid losses and loss adjustment expenses

At December 31, 2001, we estimated that under all insurance
policies and reinsurance contracts issued by our insurance businesses the
ultimate amount that we would have to pay for all events that occurred as of
December 31, 2001 is $2,324.4 million. This amount includes estimated losses
from claims plus estimated expenses to settle claims. Our estimate also includes
amounts for losses occurring prior to December 31, 2001 whether or not these
claims have been reported to us.

In arriving at
the estimate of unpaid claims, our actuaries performed detailed studies of
historical data for incurred claims, reported claims and paid claims for each
major line of business and by accident year. The review of this data results in
patterns and trends that are analyzed using actuarial models that assume that
historical development patterns will be predictive of future patterns. Along
with this historical data, our actuaries consider the impact of legal and
legislative developments, regulatory trends, changes in social attitudes and
economic conditions. From this assessment, we develop various sets of
assumptions that we believe are valid and can be relied upon to help us predict
future claim trends. These assumptions are then applied to various actuarially
accepted methods and techniques, which provide us with a range of possible
outcomes of the ultimate claims to be paid by us in the future. Management uses
its judgment to select the best estimate of the amounts needed to pay all future
claims and related expenses from this range of possible outcomes. Under GAAP, we
record a liability on our balance sheet equal to that amount.

46

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|P M A  C A P I T A L
|--------------------

It is important
that you realize and understand that the process of estimating our ultimate
claims liability is necessarily a complex and judgmental process inasmuch as the
amounts are based on managements informed estimates and judgments using
data currently available to us. As additional experience and data become
available regarding claim payment and reporting patterns, legal and legislative
developments, regulatory trends on benefit levels for both medical and indemnity
payments, and economic conditions, we revise our estimates accordingly. We
believe that our liability for unpaid losses and loss adjustment expenses are
fairly stated at December 31, 2001. However, if our future estimate of ultimate
unpaid losses is larger than the recorded amounts, we would have to increase our
reserves. The increase in reserves would result in a charge to earnings in the
period recorded. Accordingly, any related reserve adjustment could have a
material adverse effect on our financial condition, results of operations and
liquidity.

For additional
information about our liability for unpaid losses and loss adjustment expenses,
see Notes 2D and 4 to our Consolidated Financial Statements as well as the
discussion on pages 38 and 39 of this Managements Discussion and Analysis.

Investments

All investments in our portfolio are carried at market value.
For 99% of our investments, we determine the market value using prices obtained
in the public markets, both primary and secondary markets. These market prices
reflect publicly reported values of recent purchase and sale transactions for
each specific, individual security. Therefore, we believe that the reported fair
values for our investments at December 31, 2001 reflect the value that we could
realize if we sold these investments in the open market at that time.

As part of
determining the market value for each specific investment that we hold, we
evaluate each issuers ability to fully meet their obligation to pay all
amounts, both interest and principal, due in the future. Because we have
invested in fixed income obligations with an average credit quality of AA-, and
99% of our investments are currently meeting their obligations with respect to
scheduled interest income and principal payments, we believe that we will fully
realize the value of our investments. However, future general economic
conditions and/or specific company performance issues may cause a particular
issuer, or group of issuers in the same industry segment, to become unable to
meet their obligation to pay principal and interest as it comes due. If such
events were to occur, then we would evaluate our ability to fully recover the
recorded value of our investment. Ultimately, we may have to write down an
investment to its then determined net realizable value and reflect that
write-down in earnings in the period such determination is made.

For additional
information about our investments, see Notes 2B, 3 and 11 as well as the
discussion on pages 43 to 45 of this Managements Discussion and Analysis.

Reinsurance Receivables

We follow the customary insurance industry practice of
reinsuring with other insurance and reinsurance companies a portion of the risks
under the policies written by our insurance and reinsurance subsidiaries. Our
reinsurance receivables total $1,210.8 million at December 31, 2001. We have
also estimated that $4.6 million of reinsurance receivables will be
uncollectible, and we have provided a valuation allowance for that amount.

Although the
contractual obligation of individual reinsurers to pay their reinsurance
obligations is determinable from specific contract provisions, the
collectibility of such amounts requires significant estimation by management.
Many years may pass between the occurrence of a claim, when it is reported to us
and when we ultimately settle and pay the claim. As a result, it can be several
years before a reinsurer has to actually pay amounts to us. Over this period of
time, economic conditions and operational performance of a particular reinsurer
may impact their ability to meet these obligations and while they may still
acknowledge their contractual obligation to do so, they may not have the
financial resources to fully meet their obligation to us. If this occurs, we may
have to write down a reinsurance receivable to its then determined net
realizable value and reflect that write-down in earnings in the period such
determination is made. We attempt to limit any such exposure to uncollectible
reinsurance receivables by performing credit reviews of our reinsurers. In
addition, we require collateral, such as assets held in trust or letters of
credit, for certain reinsurance receivables. However, if our future estimate of
uncollectible receivables exceeds our current expectations, we may need to
increase our allowance for uncollectible reinsurance receivables. The increase
in this allowance would result in a charge to earnings in the period recorded.
Accordingly, any related charge could have a material adverse effect on our
financial condition, results of operations and liquidity.

|47
|--

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|P M A  C A P I T A L
|--------------------

Management's Discussion and Analysis (continued)

For additional
information about reinsurance receivables, see Note 5 to the Consolidated
Financial Statements as well as the discussion on pages 39 to 41 of this
Managements Discussion and Analysis.

Cautionary Statements

Except for historical information provided in Managements
Discussion and Analysis and otherwise in this report, statements made
throughout, including in the Business Outlook section, are forward-looking and
contain information about financial results, economic conditions, trends and
known uncertainties. Words such as believes, estimates,
anticipates, expects, or similar words, are intended to
identify forward-looking statements. These forward-looking statements are based
on currently available financial, competitive and economic data and our current
operating plans based on assumptions regarding future events. Our actual results
could differ materially from those expected by our management. The factors that
could cause actual results to vary materially, some of which are described with
the forward-looking statements, include, but are not limited to:

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

| |  | regulatory or tax changes, including changes in risk-based capital or other
          regulatory standards that affect the cost of, or demand for, our products or
          otherwise affect our ability to conduct our business;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ability
to implement and maintain rate increases;
|- |  | -------------------------------------------------

| |  | the effect of changes in workers compensation statutes and their
          administration, which may affect the rates that we can charge and the manner in
          which we administer claims;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
ability to predict and effectively manage claims related to insurance and reinsurance
policies;
|- |  | ---------------------------------------------------------------------------------------------------

| |  | the
lowering or loss of one or more of the financial strength or claims paying ratings of our
insurance subsidiaries;
|- |  | ---------------------------------------------------------------------------------------------------------------------

| |  | adequacy
of reserves for claim liabilities;
|- |  | -------------------------------------------

| |  | adverse
property and casualty loss development for events that we insured in prior years;
|- |  | -----------------------------------------------------------------------------------------

| |  | the uncertain nature of damage theories and loss amounts and the development of
          additional facts related to the attack on the World Trade Center;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | adequacy
and collectibility of reinsurance that we purchase;
|- |  | ------------------------------------------------------------

| |  | severity
of natural disasters and other catastrophes;
|- |  | -----------------------------------------------------

| |  | reliance
on key management; and
|- |  | -------------------------------

| |  | other factors disclosed from time to time in our most recent Forms 10-K, 10-Q
          and 8-K filed with the Securities and Exchange Commission.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

You should not place undue reliance on any such forward-looking
statements. Unless otherwise stated, we disclaim any current intention to update
forward-looking infor-mation and to release publicly the results of any future
revisions we may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

48

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|P M A  C A P I T A L
|--------------------

Consolidated Balance Sheets

|(in thousands, except share data)                                                     |  | 2001 |   | 2000      |  
|------------------------------------------------------------------------------------- |  | ---- | - | --------- | -
|                                                                                     
|                                                                                     
|                                                                                      |  |      |   |           |  
|Assets:                                                                               |  |      |   |           |  
|Investments:                                                                          |  |     
|Fixed maturities available for sale, at fair value (amortized cost:                   |  |     
|2001 - $1,416,901; 2000 - $1,507,667)                                                 |  |      | $ | 1,425,281 |  
|Short-term investments, at cost which approximates fair value                         |  |      |   | 350,054   |  
|Cash                                                                                  |  |      |   | 20,656    |  
|                                                                                      | 
|Total investments and cash                                                            |  |      |   | 1,795,991 |  
|Accrued investment income                                                             |  |      |   | 19,121    |  
|Premiums receivable (net of valuation allowance: 2001 - $12,583; 2000 - $16,630)      |  |      |   | 301,104   |  
|Reinsurance receivables (net of valuation allowance: 2001 - $4,562;    2000 - $4,328) |  |      |   | 1,210,764 |  
|Deferred income taxes, net                                                            |  |      |   | 82,120    |  
|Deferred acquisition costs                                                            |  |      |   | 64,350    |  
|Funds held by reinsureds                                                              |  |      |   | 145,239   |  
|Other assets                                                                          |  |      |   | 184,290   |  
|                                                                                      | 
|Total assets                                                                          |  |      | $ | 3,802,979 |  
|                                                                                      | 
|                                                                                     
|Liabilities:                                                                          |  |     
|Unpaid losses and loss adjustment expenses                                            |  |      | $ | 2,324,439 |  
|Unearned premiums                                                                     |  |      |   | 308,292   |  
|Short-term debt                                                                       |  |      |   | 62,500    |  
|Long-term debt                                                                        |  |      |   | --        |  
|Accounts payable, accrued expenses and other liabilities                              |  |      |   | 217,490   |  
|Funds held under reinsurance treaties                                                 |  |      |   | 227,892   |  
|Dividends to policyholders                                                            |  |      |   | 17,132    |  
|Payable under securities loan agreements                                              |  |      |   | 33,228    |  
|                                                                                      | 
|Total liabilities                                                                     |  |      |   | 3,190,973 |  
|                                                                                      | 
|Commitments and contingencies (Note 7)                                                |  |     
|                                                                                     
|Shareholders' Equity:                                                                 |  |     
|Class A Common stock, $5 par value (40,000,000 shares authorized;                     |  |     
|2001 - 34,217,945 shares issued and 31,167,006 outstanding;                           |  |     
|2000 - 24,442,945 shares issued and 21,573,316 outstanding)                           |  |      |   | 171,090   |  
|Additional paid-in capital                                                            |  |      |   | 109,331   |  
|Retained earnings                                                                     |  |      |   | 382,165   |  
|Accumulated other comprehensive income (loss)                                         |  |      |   | 5,375     |  
|Notes receivable from officers                                                        |  |      |   | (158      | )
|Treasury stock, at cost (2001 - 3,050,939 shares; 2000 - 2,869,629 shares)            |  |      |   | (55,797   | )
|                                                                                      | 
|Total shareholders' equity                                                            |  |      |   | 612,006   |  
|                                                                                      | 
|Total liabilities and shareholders' equity                                            |  |      | $ | 3,802,979 |  
|                                                                                      | 

See accompanying notes to the consolidated financial
statements.

|49
|--

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|P M A  C A P I T A L
|--------------------

Consolidated Statements of Operations

|(in thousands, except per share data)                | 2001 |  | 2000 |         | 1999 |  
|---------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                    
|                                                    
|                                                     |      |  |      |         |      |  
|Revenues:                                            |      |  |      |         |      |  
|Net premiums written                                 |      |  | $    | 769,058 |      | $
|Change in net unearned premiums                      |      |  |      | (36,618 | )    |  
|                                                     |     
|Net premiums earned                                  |      |  |      | 732,440 |      |  
|Net investment income                                |      |  |      | 86,945  |      |  
|Net realized investment gains (losses)               |      |  |      | 7,988   |      |  
|Other revenues                                       |      |  |      | 22,599  |      |  
|                                                     |     
|Total revenues                                       |      |  |      | 849,972 |      |  
|                                                     |     
|                                                     |     
|Losses and Expenses:                                 |      | 
|Losses and loss adjustment expenses                  |      |  |      | 616,763 |      |  
|Acquisition expenses                                 |      |  |      | 138,982 |      |  
|Operating expenses                                   |      |  |      | 78,015  |      |  
|Dividends to policyholders                           |      |  |      | 14,087  |      |  
|Interest expense                                     |      |  |      | 6,541   |      |  
|                                                     |     
|Total losses and expenses                            |      |  |      | 854,388 |      |  
|                                                     |     
|Income (loss) before income taxes and cumulative     |      | 
|effect of accounting change                          |      |  |      | (4,416  | )    |  
|Income tax expense (benefit)                         |      |  |      | (11,519 | )    |  
|                                                     |     
|Income before cumulative effect of accounting change |      |  |      | 7,103   |      |  
|Cumulative effect of accounting change               |      | 
|(net of income tax benefit of $1,485)                |      |  |      | --      |      |  
|                                                     |     
|Net income                                           |      |  | $    | 7,103   |      | $
|                                                     |     
|                                                     |     
|Income per share:                                    |      | 
|Basic:                                               |      | 
|Income before cumulative effect of accounting change |      |  | $    | 0.33    |      | $
|Cumulative effect of accounting change               |      |  |      | --      |      |  
|                                                     |     
|Net income                                           |      |  | $    | 0.33    |      | $
|                                                     |     
|Diluted:                                             |      | 
|Income before cumulative effect of accounting change |      |  | $    | 0.32    |      | $
|Cumulative effect of accounting change               |      |  |      | --      |      |  
|                                                     |     
|Net income                                           |      |  | $    | 0.32    |      | $
|                                                     |     

See accompanying notes to the consolidated financial statements.

50

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|P M A  C A P I T A L
|--------------------

Consolidated Statements of Cash Flows

|(in thousands)                                              | 2001 |  | 2000 |            | 1999 |  
|----------------------------------------------------------- | ---- |  | ---- | ---------- | ---- | -
|                                                           
|                                                           
|                                                            |      |  |      |            |      |  
|Cash flows from operating activities:                       |      |  |      |            |      |  
|Net income                                                  |      |  | $    | 7,103      |      | $
|Adjustments to reconcile net income to net cash flows       |      | 
|provided by (used in) operating activities:                 |      | 
|Deferred income tax expense (benefit)                       |      |  |      | (3,147     | )    |  
|Cumulative effect of accounting change                      |      |  |      | --         |      |  
|Net realized investment (gains) losses                      |      |  |      | (7,988     | )    |  
|Gain on sale of real estate                                 |      |  |      | (9,763     | )    |  
|Change in:                                                  |      | 
|Premiums receivable and unearned premiums, net              |      |  |      | 20,236     |      |  
|Dividends to policyholders                                  |      |  |      | (114       | )    |  
|Reinsurance receivables                                     |      |  |      | (276,875   | )    |  
|Unpaid losses and loss adjustment expenses                  |      |  |      | 257,520    |      |  
|Funds held by reinsureds                                    |      |  |      | (72,588    | )    |  
|Funds held under reinsurance treaties                       |      |  |      | 54,130     |      |  
|Accrued investment income                                   |      |  |      | 1,746      |      |  
|Deferred acquisition costs                                  |      |  |      | (15,828    | )    |  
|Accounts payable, accrued expenses and other liabilities    |      |  |      | 45,122     |      |  
|Other, net                                                  |      |  |      | (9,129     | )    |  
|                                                            |     
|Net cash flows provided by (used in) operating activities   |      |  |      | (9,575     | )    |  
|                                                            |     
|                                                           
|Cash flows from investing activities:                       |      | 
|Fixed maturities available for sale:                        |      | 
|Purchases                                                   |      |  |      | (1,054,794 | )    |  
|Maturities or calls                                         |      |  |      | 297,549    |      |  
|Sales                                                       |      |  |      | 833,884    |      |  
|Equity securities:                                          |      | 
|Purchases                                                   |      |  |      | --         |      |  
|Sales                                                       |      |  |      | --         |      |  
|Net (purchases) sales of short-term investments             |      |  |      | (102,637   | )    |  
|Proceeds from sale of real estate                           |      |  |      | 14,401     |      |  
|Other, net                                                  |      |  |      | (8,071     | )    |  
|                                                            |     
|Net cash flows provided by (used in) investing activities   |      |  |      | (19,668    | )    |  
|                                                            |     
|                                                           
|Cash flows from financing activities:                       |      | 
|Proceeds from issuance of stock                             |      |  |      | 157,868    |      |  
|Dividends paid to shareholders                              |      |  |      | (9,035     | )    |  
|Proceeds from exercise of stock options                     |      |  |      | 1,387      |      |  
|Purchase of treasury stock                                  |      |  |      | (5,323     | )    |  
|Repayments of debt                                          |      |  |      | (100,500   | )    |  
|Net repayments (issuance) of notes receivable from officers |      |  |      | (102       | )    |  
|                                                            |     
|Net cash flows provided by (used in) financing activities   |      |  |      | 44,295     |      |  
|                                                            |     
|Net increase (decrease) in cash                             |      |  |      | 15,052     |      |  
|Cash - beginning of year                                    |      |  |      | 5,604      |      |  
|                                                            |     
|Cash - end of year                                          |      |  | $    | 20,656     |      | $
|                                                            |     
|                                                           
|Supplementary cash flow information:                        |      | 
|Income tax paid (refunded)                                  |      |  | $    | (8,991     | )    | $
|Interest paid                                               |      |  | $    | 7,074      |      | $

See accompanying notes to the consolidated financial statements.

|51
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|P M A  C A P I T A L
|--------------------

Consolidated Statements of Shareholders Equity

|(in thousands)                                             | 2001 |  | 2000 |         | 1999 |  
|---------------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                          
|                                                          
|                                                           |      |  |      |         |      |  
|Class A Common stock:                                      |      | 
|Balance at beginning of year                               |      |  | $    | 122,214 |      | $
|Issuance of Class A Common stock                           |      |  |      | 48,876  |      |  
|Conversion of Common stock into Class A Common stock       |      |  |      | --      |      |  
|                                                           |     
|Balance at end of year                                     |      |  |      | 171,090 |      |  
|                                                           |     
|                                                          
|Common stock:                                              |      | 
|Balance at beginning of year                               |      |  |      | --      |      |  
|Conversion of Common stock into Class A Common stock       |      |  |      | --      |      |  
|                                                           |     
|Balance at end of year                                     |      |  |      | --      |      |  
|                                                           |     
|                                                          
|Additional paid-in capital - Class A Common stock:         |      | 
|Balance at beginning of year                               |      |  |      | 339     |      |  
|Issuance of Class A Common stock                           |      |  |      | 108,992 |      |  
|                                                           |     
|Balance at end of year                                     |      |  |      | 109,331 |      |  
|                                                           |     
|                                                          
|Retained earnings:                                         |      | 
|Balance at beginning of year                               |      |  |      | 384,694 |      |  
|Net income                                                 |      |  |      | 7,103   |      |  
|Class A Common stock dividends declared                    |      |  |      | (9,018  | )    |  
|Common stock dividends declared                            |      |  |      | --      |      |  
|Reissuance of treasury shares under employee benefit plans |      |  |      | (614    | )    |  
|                                                           |     
|Balance at end of year                                     |      |  |      | 382,165 |      |  
|                                                           |     
|                                                          
|Accumulated other comprehensive income (loss):             |      | 
|Balance at beginning of year                               |      |  |      | (14,373 | )    |  
|Other comprehensive income (loss), net of tax              |      | 
|(expense) benefit:                                         |      | 
|2001 - ($10,634); 2000 - ($17,484); 1999 - $41,386         |      |  |      | 19,748  |      |  
|                                                           |     
|Balance at end of year                                     |      |  |      | 5,375   |      |  
|                                                           |     
|                                                          
|Notes receivable from officers:                            |      | 
|Balance at beginning of year                               |      |  |      | (56     | )    |  
|Repayment (issuance) of notes receivable from officers     |      |  |      | (102    | )    |  
|                                                           |     
|Balance at end of year                                     |      |  |      | (158    | )    |  
|                                                           |     
|                                                          
|Treasury stock - Class A Common:                           |      | 
|Balance at beginning of year                               |      |  |      | (52,772 | )    |  
|Purchase of treasury shares                                |      |  |      | (5,323  | )    |  
|Conversion of Common stock into Class A Common stock       |      |  |      | --      |      |  
|Reissuance of treasury shares under employee benefit plans |      |  |      | 2,298   |      |  
|                                                           |     
|Balance at end of year                                     |      |  |      | (55,797 | )    |  
|                                                           |     
|                                                          
|Treasury stock - Common:                                   |      | 
|Balance at beginning of year                               |      |  |      | --      |      |  
|Conversion of Common stock into Class A Common stock       |      |  |      | --      |      |  
|                                                           |     
|Balance at end of year                                     |      |  |      | --      |      |  
|                                                           |     
|                                                          
|Total shareholders' equity:                                |      | 
|Balance at beginning of year                               |      |  |      | 440,046 |      |  
|Net income                                                 |      |  |      | 7,103   |      |  
|Issuance of Class A Common stock                           |      |  |      | 157,868 |      |  
|Class A Common stock dividends declared                    |      |  |      | (9,018  | )    |  
|Common stock dividends declared                            |      |  |      | --      |      |  
|Purchase of treasury shares                                |      |  |      | (5,323  | )    |  
|Reissuance of treasury shares under employee benefit plans |      |  |      | 1,684   |      |  
|Other comprehensive income (loss)                          |      |  |      | 19,748  |      |  
|Repayment (issuance) of notes receivable from officers     |      |  |      | (102    | )    |  
|                                                           |     
|Balance at end of year                                     |      |  | $    | 612,006 |      | $
|                                                           |     

See accompanying notes to the consolidated financial statements.

52

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|P M A  C A P I T A L
|--------------------

Consolidated Statements of Comprehensive Income (Loss)

|(in thousands)                                                | 2001 |  | 2000 |        | 1999 |  
|------------------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|                                                             
|                                                             
|                                                              |      |  |      |        |      |  
|Net income                                                    |      |  | $    | 7,103  |      | $
|                                                              |     
|                                                             
|Other comprehensive income (loss), net of tax:                |      | 
|Unrealized gain (loss) on securities:                         |      | 
|Holding gain (loss) arising during the period                 |      |  |      | 25,175 |      |  
|Less: reclassification adjustment for (gains) losses included |      | 
|in net income, net of tax expense (benefit): 2001 - $2,796;   |      | 
|2000 - $4,191; 1999 - ($2,711)                                |      |  |      | (5,192 | )    |  
|                                                              |     
|                                                             
|Total unrealized gain (loss) on securities                    |      |  |      | 19,983 |      |  
|Foreign currency translation (gain) loss, net of tax          |      | 
|expense (benefit):                                            |      | 
|2001 - ($127); 2000 - $87                                     |      |  |      | (235   | )    |  
|                                                              |     
|                                                             
|Other comprehensive income (loss), net of tax                 |      |  |      | 19,748 |      |  
|                                                              |     
|                                                             
|Comprehensive income (loss)                                   |      |  | $    | 26,851 |      | $
|                                                              |     

See accompanying notes to the consolidated financial statements.

|53
|--

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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements

|1. | Business Description
|-- | --------------------



The accompanying consolidated financial statements include the
accounts of PMA Capital Corporation and its subsidiaries (collectively referred
to as PMA Capital or the Company). PMA Capital is an
insurance holding company that operates three specialty risk management
businesses:

PMA Re PMA Capitals reinsurance operations
offer excess of loss and pro rata property and casualty reinsurance protection
mainly through reinsurance brokers.

The PMA Insurance Group The PMA Insurance Group
writes workers compensation, integrated disability and, to a lesser
extent, other standard lines of commercial insurance, 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.

Caliber One PMA Capitals specialty property
and casualty operations write excess and surplus lines of business throughout
the United States, generally through surplus lines brokers.

|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

A. Basis of Presentation  The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles (GAAP). All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of
consolidated financial statements in conformity with GAAP requires management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates. In
addition, certain prior year amounts have been restated to conform to the
current year classification. The balance sheet information presented in these
financial statements and notes thereto is as of December 31 for each respective
year. The statement of operations information is for the year ended December 31
for each respective year.

B. Investments  All fixed maturities are classified as
available-for-sale and, accordingly, are carried at fair value. Changes in fair
value of fixed maturities, net of income tax effects, are reflected in
accumulated other comprehensive income (loss). Short-term investments, which
have original maturities of one year or less, are carried at amortized cost,
which approximates fair value. All short-term, highly liquid investments, which
are part of the Companys investing activities, are treated as short-term
investments.

Realized gains
and losses, determined by specific identification where possible and the
first-in, first-out method in other instances, are reflected in income in the
period in which the sale transaction occurs. In the event that the carrying
value of an investment exceeds its fair value and the decline in value is
determined to be other-than-temporary, an impairment charge is recorded in net
realized investment losses.

The Company
participates in a securities lending program through which securities are lent
from the Companys portfolio for short periods of time to qualifying third
parties via a lending agent. Borrowers of these securities must provide
collateral equal to a minimum of 102% of the market value including accrued
interest of the lent securities. Acceptable collateral may be in the form of
either cash or securities. Cash received as collateral is invested in short-term
investments, and is recorded as such on the balance sheet, along with a
corresponding liability included in payable under securities loan agreements.
All securities received as collateral are of similar quality to those securities
lent by the Company. The Company is not permitted by contract to sell or
repledge the securities received as collateral. Additionally, the Company limits
securities lending to 40% of statutory admitted assets of its insurance
subsidiaries, with a 2% limit on statutory admitted assets to any individual
borrower. The Company either receives a fee from the borrower or retains a
portion of the income earned on the collateral. Under the terms of the
securities lending program, the Company is indemnified against borrower
default, with the lending agent responsible to the Company for any deficiency
between the cost of replacing a security that was not returned and the amount of
collateral held by the Company.

54

---

|P M A  C A P I T A L
|--------------------

C. Premiums  Premiums, including estimates of additional
premiums resulting from audits of insureds records, and premiums from
ceding companies which are typically reported on a delayed basis, are earned
principally on a pro rata basis over the terms of the policies. Premiums
applicable to the unexpired terms of policies in force are reported as unearned
premiums. The estimated premiums receivable on retrospectively rated policies
are reported as a component of premiums receivable.

D. Unpaid Losses and Loss Adjustment Expenses  Unpaid
losses and loss adjustment expenses (LAE), which are stated net of
estimated salvage and subrogation, are estimates of losses and loss adjustment
expenses on known claims, and estimates of losses and loss adjustment expenses
incurred but not reported (IBNR). IBNR reserves are calculated
utilizing various actuarial methods. Unpaid losses on certain workers
compensation claims are discounted to present value using the Companys
payment experience and mortality and interest assumptions in accordance with
statutory accounting practices prescribed by the Pennsylvania Insurance
Department (collectively SAP). The Company also discounts unpaid
losses and LAE for certain other claims at rates permitted by domiciliary
regulators. The methods of making such estimates and establishing the resulting
reserves are continually reviewed and updated and any adjustments resulting
therefrom are reflected in earnings in the period identified. See Note 4 for
additional information.

E. Deferred Acquisition Costs  Costs that directly relate
to and vary with acquisition of new and renewal business are deferred and
amortized over the period during which the related premiums are earned. Such
direct costs include commissions, brokerage and premium taxes, as well as other
policy issuance costs and underwriting expenses. The Company determines whether
deferred acquisition costs are recoverable considering future losses and loss
adjustment expenses, maintenance costs and anticipated investment income. To the
extent that deferred acquisition costs are not recoverable, the deficiency is
charged to income in the period identified.

F. Dividends to Policyholders  The PMA Insurance Group
issues certain workers compensation insurance policies with dividend
payment features. These policyholders share in the operating results of their
respective policies in the form of dividends declared at the discretion of the
Board of Directors of The PMA Insurance Groups operating companies.
Dividends to policyholders are accrued during the period in which the related
premiums are earned and are determined based on the terms of the individual
policies.

G. Income Taxes  The Company records deferred tax assets
and liabilities to the extent of the tax effect of differences between the
financial statement carrying values and tax bases of assets and liabilities. A
valuation allowance is recorded for deferred tax assets where it appears more
likely than not that the Company will not be able to recover the deferred tax
asset.

H. Stock-Based Compensation  The Company accounts for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Companys Class A Common stock at grant date or other measurement date
over the amount an employee must pay to acquire the Class A Common stock.

I. Other Revenues  Other revenues include service revenues
related to unbundled claims, risk management and related services provided by
The PMA Insurance Group, which are earned over the term of the related contracts
in proportion to the actual services rendered, and other miscellaneous revenues.

J. Recent Accounting Pronouncements  Effective January 1,
2001, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS No. 133 requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in the fair
value of a derivative (that is, gains and losses) depends on the intended use of
the derivative and the resulting designation. The Company does not have any
derivative instruments that are impacted by the accounting requirements of SFAS
No. 133 and the Company does not currently participate in any hedging
activities. Accordingly, the adoption of SFAS No. 133 did not have a material
impact on the Companys financial condition, results of operations or
liquidity.

|55
|--

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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements (continued)

In 2001, the Company
adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities-- a Replacement of SFAS No. 125." SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. SFAS No. 140 revises the standards for
securitizations and other transfers of financial assets and collateral and requires
certain disclosures, but carries over most of the provisions of SFAS No. 125 without
reconsideration. The Company's existing policies and practices for its securities lending
program are in conformity with SFAS No. 140. Accordingly, the adoption of SFAS No. 140
did not have a material impact on the Company's financial condition, results of
operations or liquidity.

As of December
31, 2001, the Company adopted Statement of Position (SOP) 01-05,
Amendments to Specific AICPA Pronouncements for Changes Related to the
NAIC Codification. SOP 01-05 requires insurance enterprises to disclose
any prescribed or permitted statutory accounting practice that it uses and the
related monetary effect on statutory surplus if such accounting practice differs
from either state prescribed statutory accounting practices or National
Association of Insurance Commissioners (NAIC) statutory accounting
practices. See Note 16 for additional information.

Effective
January 1, 2000, the Company adopted SOP 98-7, Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk. This statement identifies several methods of deposit
accounting and provides guidance on the application of each method. This
statement classifies insurance and reinsurance contracts for which the deposit
method is appropriate as contracts that (i) transfer only significant timing
risk, (ii) transfer only significant underwriting risk, (iii) transfer neither
significant timing nor underwriting risk and (iv) have an indeterminate risk.
The adoption of SOP 98-7 did not have a material impact on the Companys
financial condition, results of operations or liquidity.

Effective
January 1, 1999, the Company adopted SOP 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments. SOP 97-3 provides
guidance for determining when an insurance company should recognize a liability
for guaranty fund and other insurance-related assessments and how to measure
that liability. As a result of adopting SOP 97-3, the Company recorded a
liability of $4.3 million pre-tax and a resulting charge to earnings of $2.8
million, net of income tax benefit of $1.5 million, which has been reported as a
cumulative effect of accounting change. This accounting change impacted The PMA
Insurance Group segment.

In July 2001,
the Financial Accounting Standards Board (FASB) issued SFAS No. 142,
Goodwill and Other Intangible Assets. This statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. The Company is required to adopt the provisions of this statement
effective January 1, 2002. This statement is required to be applied to all
goodwill and other intangible assets recognized in the Companys financial
statements at the date of adoption. At that time, goodwill will no longer be
amortized, but will be tested periodically for impairment. As of December 31,
2001, the Company had approximately $4.3 million of goodwill, which is included
in other assets on the Companys balance sheet, and goodwill amortization
was $960,000, $220,000 and $220,000 in 2001, 2000 and 1999, respectively. The
Company does not expect adoption of this statement to have a material impact on
the Companys financial condition, results of operations or liquidity when
it is adopted.

56

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|P M A  C A P I T A L
|--------------------

|3. | Investments
|-- | -----------

The Companys investment portfolio is diversified and does
not contain any significant concentrations in single issuers other than U.S.
Treasury and agency obligations. In addition, the Company does not have a
significant concentration of investments in any single industry segment other
than finance companies, which comprise 8% of invested assets at December
31, 2001. Included in this industry segment are financial institutions,
including the financing subsidiaries of automotive manufacturers.

The amortized
cost and fair value of the Companys investment portfolio are as follows:

|(dollar amounts in thousands)                                    |  | AmortizedCost |   | GrossUnrealizedGains |  | GrossUnrealizedLosses |        | FairValue |  
|---------------------------------------------------------------- |  | ------------- | - | -------------------- |  | --------------------- | ------ | --------- | -
|                                                                
|                                                                
|December 31, 2001                                                |  |               |   |                      |  |                       |        |           |  
|Fixed maturities available for sale:                             |  |              
|U.S. Treasury securities and obligations                         |  |              
|of U.S. Government agencies                                      |  |               | $ | 263,633              |  | $                     | 4,563  |           | $
|States, political subdivisions and foreign government securities |  |               |   | 16,857               |  |                       | 272    |           |  
|Corporate debt securities                                        |  |               |   | 594,477              |  |                       | 13,354 |           |  
|Mortgage-backed and other asset-backed securities                |  |               |   | 541,934              |  |                       | 10,215 |           |  
|                                                                 | 
|Total fixed maturities available for sale                        |  |               |   | 1,416,901            |  |                       | 28,404 |           |  
|Short-term investments                                           |  |               |   | 350,054              |  |                       | --     |           |  
|                                                                 | 
|Total investments                                                |  |               | $ | 1,766,955            |  | $                     | 28,404 |           | $
|                                                                 | 
|                                                                 | 
|December 31, 2000                                                |  |              
|Fixed maturities available for sale:                             |  |              
|U.S. Treasury securities and obligations                         |  |              
|of U.S. Government agencies                                      |  |               | $ | 349,112              |  | $                     | 7,433  |           | $
|States, political subdivisions and foreign government securities |  |               |   | 28,784               |  |                       | 103    |           |  
|Corporate debt securities                                        |  |               |   | 528,753              |  |                       | 3,612  |           |  
|Mortgage-backed and other asset-backed securities                |  |               |   | 601,018              |  |                       | 6,324  |           |  
|                                                                 | 
|Total fixed maturities available for sale                        |  |               |   | 1,507,667            |  |                       | 17,472 |           |  
|Short-term investments                                           |  |               |   | 341,641              |  |                       | --     |           |  
|                                                                 | 
|Total investments                                                |  |               | $ | 1,849,308            |  | $                     | 17,472 |           | $
|                                                                 | 

The amortized cost and fair value of fixed maturities at
December 31, 2001, by contractual maturity, are as follows:

|(dollar amounts in thousands)                     |  | AmortizedCost |   | FairValue | 
|------------------------------------------------- |  | ------------- | - | --------- | 
|                                                 
|                                                 
|                                                  |  |               |   |           | 
|2002                                              |  |               | $ | 96,254    | 
|2003-2006                                         |  |               |   | 283,169   | 
|2007-2011                                         |  |               |   | 216,428   | 
|2012 and thereafter                               |  |               |   | 279,116   | 
|Mortgage-backed and other asset-backed securities |  |               |   | 541,934   | 
|                                                  | 
|                                                  |  |               | $ | 1,416,901 | 
|                                                  | 

|57
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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements (continued)

Net investment income consists of the following:

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                             
|                              |      |  |      |         |      |  
|Fixed maturities              |      |  | $    | 91,530  |      | $
|Equity securities             |      |  |      | --      |      |  
|Short-term investments        |      |  |      | 7,048   |      |  
|Other                         |      |  |      | 2,911   |      |  
|                              |     
|Total investment income       |      |  |      | 101,489 |      |  
|Investment expenses(1)        |      |  |      | 14,544  |      |  
|                              |     
|Net investment income         |      |  | $    | 86,945  |      | $
|                              |     

|(1) |  | Includes
$12.0 million and $10.6 million of interest credited on funds held treaties in 2001 and
2000, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------

The Company recognized income, net of lending fees, from securities
lending transactions of $383,000, $600,000 and $1.3 million in 2001, 2000 and 1999,
respectively, which was included in net investment income. At December 31, 2001, the
Company had approximately $33.2 million of collateral related to securities on loan,
substantially all of which was cash received and subsequently reinvested in short-term
investments.

Net realized investment
gains (losses) consist of the following:

|(dollar amounts in thousands) | 2001 |  | 2000 |        | 1999 |  
|----------------------------- | ---- |  | ---- | ------ | ---- | -
|                             
|                             
|                              |      |  |      |        |      |  
|Realized gains:               |      | 
|Fixed maturities              |      |  | $    | 15,768 |      | $
|Equity securities             |      |  |      | --     |      |  
|                              |     
|                              |      |  |      | 15,768 |      |  
|Realized losses:              |      | 
|Fixed maturities              |      |  |      | (7,780 | )    |  
|Equity securities             |      |  |      | --     |      |  
|                              |     
|                              |      |  |      | (7,780 | )    |  
|                              |     
|Total net realized            |      | 
|investment gains (losses)     |      |  | $    | 7,988  |      | $
|                              |     

The change in unrealized gains (losses) on investments for 2001,
2000 and 1999 was $30.7 million, $49.7 million and ($118.2) million,
respectively, attributable to fixed maturities.

On December 31,
2001, the Company had securities with a total amortized cost of $37.6 million
and fair value of $39.0 million on deposit with various governmental
authorities, as required by law. In addition, at December 31, 2001, securities
with a total amortized cost of $46.8 million and fair value of $47.3 million
were pledged as collateral for letters of credit issued on behalf of the
Company, and securities with a total amortized cost of $18.3 million and fair
value of $18.7 million were held in trust to support the Companys
investment in a Lloyds of London operation.

|4. | Unpaid Losses and Loss Adjustment Expenses
|-- | ------------------------------------------

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

|(dollar amounts in thousands) | 2001 |  | 2000 |           | 1999 |  
|----------------------------- | ---- |  | ---- | --------- | ---- | -
|                             
|                             
|                              |      |  |      |           |      |  
|Balance at January 1          |      |  | $    | 2,053,138 |      | $
|Less: reinsurance             |      | 
|recoverable on unpaid         |      | 
|losses and LAE                |      |  |      | 924,429   |      |  
|                              |     
|Net balance at January 1      |      |  |      | 1,128,709 |      |  
|                              |     
|Losses and LAE                |      | 
|incurred, net:                |      | 
|Current year, net             |      | 
|of discount                   |      |  |      | 586,392   |      |  
|Prior years                   |      |  |      | 23,512    |      |  
|Accretion of prior            |      | 
|years' discount               |      |  |      | 6,859     |      |  
|                              |     
|Total losses and LAE          |      | 
|incurred, net                 |      |  |      | 616,763   |      |  
|                              |     
|Losses and LAE paid, net:     |      | 
|Current year                  |      |  |      | (145,352  | )    |  
|Prior years                   |      |  |      | (457,003  | )    |  
|                              |     
|Total losses and LAE          |      | 
|paid, net                     |      |  |      | (602,355  | )    |  
|                              |     
|Reserves transferred          |      |  |      | --        |      |  
|                              |     
|Net balance at December 31    |      |  |      | 1,143,117 |      |  
|Reinsurance recoverable       |      | 
|on unpaid losses and LAE      |      |  |      | 1,181,322 |      |  
|                              |     
|Balance at December 31        |      |  | $    | 2,324,439 |      | $
|                              |     

58

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|P M A  C A P I T A L
|--------------------

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. 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. In general, liabilities for reinsurers become known more slowly than for
primary insurers and are subject to more unforeseen development and uncertainty.
As part of the process for determining the Companys unpaid losses and LAE,
actuarial models are used that analyze historical data and consider the impact
of current developments and trends, such as trends in claims severity and
frequency. Also considered are legal developments, regulatory trends,
legislative developments, changes in social attitudes and economic conditions.

Losses and LAE
incurred in 2001 were impacted by the September 11th terrorist attack on the
World Trade Center. Gross losses of approximately $145 million resulted from
this catastrophe, which is before (1) reinsurance recoveries, (2) additional
premiums due to PMA Res retrocessionaires and (3) additional premiums due
to PMA Re on its assumed business. Of these losses, approximately 80% were
property losses, primarily from property excess of loss and property catastrophe
coverages. The remaining 20% were casualty losses, primarily from umbrella
coverages and, to a lesser extent, workers compensation coverages. The
Company expects to recover approximately $120 million of its total losses from
its reinsurers and retrocessionaires under existing reinsurance and
retrocessional contracts. As a result of ceding these losses, the Company is
required to pay additional premiums of approximately $30 million to its
reinsurers and retrocessionaires. The Company expects to collect approximately
$25 million of additional premiums from its ceding companies under contractual
provisions of its assumed reinsurance contracts. These estimates are based on
the Companys analysis to date of known exposures. However, it is difficult
to fully estimate the Companys losses from the attack given the uncertain
nature of damage theories and loss amounts, and the development of additional
facts related to the attack. As more information becomes available, the
Companys estimate of these losses may need to be increased.

The components
of our (favorable) unfavorable development of reserves for losses and LAE for
prior accident years, excluding accretion of discount, are as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |        | 1999 |  
|----------------------------- | ---- |  | ---- | ------ | ---- | -
|                             
|                             
|                              |      |  |      |        |      |  
|PMA Re                        |      |  | $    | (1,568 | )    | $
|The PMA Insurance Group       |      |  |      | 2,889  |      |  
|Caliber One                   |      |  |      | 22,191 |      |  
|                              |     
|Total                         |      |  | $    | 23,512 |      | $
|                              |     

During 2001, PMA Re recorded favorable prior year development of
$1.6 million, reflecting development on prior accident years due to re-estimated
loss trends for such years that were lower than previous expectations. This is
largely due to favorable development on casualty business.

In 2000, PMA Re
recorded unfavorable prior year development of $9.7 million, reflecting higher
than expected losses and LAE primarily from more recent accident years,
partially offset by lower than expected losses and LAE for accident years 1996
and prior. PMA Res actuarial department conducted its routine semi-annual
reserve study to determine the impact of any emerging data on anticipated loss
development trends and recorded unpaid losses and LAE reserves. Based on the
actuarial work performed, which included analyzing recent trends in the levels
of the reported and paid claims, an updated selection of actuarially determined
loss reserve estimates was developed by accident year for each major line of
business written by PMA Re. Managements selection of the ultimate losses
indicated that gross loss reserves needed to be increased by $83.2 million.

The increase in
the estimate of gross loss and LAE reserves primarily reflects higher than
anticipated losses mainly in the Companys pro rata business, where PMA Re
participates with the insured by agreeing to pay a predetermined percentage of
all losses arising under a particular insurance contract of the insured in
exchange for the same predetermined percentage of all applicable premiums
received under that contract. The concentration of estimated adverse loss
development was in PMA Res pro rata reinsurance business related primarily
to general liability treaties written on a claims made basis covering losses in
1998 and 1999, property treaties covering 1999 losses and, to a lesser extent,
commercial automobile liability treaties covering losses in 1998 and 1999. In
addition, the reserve increase reflects unfavorable prior year development in
the excess of loss general liability line for accident years 1998 and 1999.
Under existing retrocessional contracts, $60.0 million of gross

|59
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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements (continued)

losses were ceded to PMA Res retrocessionaires, reducing the impact
on net incurred losses and LAE to $23.2 million. The increase in incurred losses and LAE,
combined with $35.0 million of ceded premiums and interest on funds held under existing
retrocessional contracts covering the ceded losses, resulted in a pre-tax charge of
approximately $60 million to PMA Res operating results in 2000.

During 1999, PMA
Re recorded favorable prior year development of $23.5 million, reflecting
development on prior accident years due to re-estimated loss trends for such
years that were lower than previous expectations. This is largely due to
favorable development on casualty excess of loss business.

The PMA
Insurance Group experienced unfavorable prior year development of $2.9 million
in 2001, and favorable prior year development of $6.1 million and $9.0 million
in 2000 and 1999, respectively. The unfavorable prior year development in 2001
reflects higher than expected claims handling costs. The favorable prior year
development in 2000 and 1999 primarily reflects better than expected loss
experience from loss-sensitive and rent-a-captive workers compensation
business. Premium adjustments for loss-sensitive business and
policyholders dividends for rent-a-captive business have substantially
offset this favorable development. Rent-a-captives are used by customers as an
alternative method to manage their loss exposure without establishing and
capitalizing their own captive insurance company. Adjustments to premiums for
retrospectively rated business and dividends on captive workers
compensation business of $6.1 million and $8.4 million partially offset
favorable prior year development in 2000 and 1999, respectively.

As a result of
its reserve reviews conducted during 2001, Caliber One revised its estimate of
ultimate expected claims activity and, accordingly, increased its estimate of
ultimate losses, substantially all for accident years 1999 and 2000. During
2001, Caliber One recorded unfavorable prior year development of $22.2 million,
which is net of losses of approximately $26 million ceded to third party
reinsurers under existing reinsurance contracts covering the prior year loss
development. These losses primarily reflect higher than expected claim frequency
and severity that emerged in 2001 on certain casualty lines of business,
primarily professional liability policies for the nursing homes class of
business, and, to a lesser extent, property lines of business.

During 2000,
Caliber One recorded unfavorable prior year development of $2.9 million,
primarily related to the emergence of higher than expected losses and LAE in
certain segments of the professional liability, commercial automobile, general
liability and property lines of business for coverage of 1999 exposures. During
2000, Caliber One discontinued writing or cancelled policies in the professional
liability (nursing homes) and commercial automobile classes of business that
produced the emergence of higher than expected losses.

Reserves
transferred in 2000 reflect the assumption of liability by an unaffiliated third
party of The PMA Insurance Groups Run-off operations, which reinsured
certain obligations primarily associated with workers compensation claims
written by The PMA Insurance Groups Pooled Companies for the years 1991
and prior.

Unpaid losses
for the Companys workers compensation claims, net of reinsurance, at
December 31, 2001 and 2000 were $363.5 million and $341.8 million, net of
discount of $91.0 million and $88.4 million, respectively. The approximate
discount rate used was 5% at December 31, 2001 and 2000.

The
Companys loss reserves were stated net of salvage and subrogation of $40.8
million and $41.8 million at December 31, 2001 and 2000, respectively.

Management
believes that its unpaid losses and LAE are fairly stated at December 31, 2001.
However, estimating the ultimate claims liability is necessarily a complex and
judgmental process inasmuch as the amounts are based on managements
informed estimates and judgments using data currently available. As additional
experience and data become available regarding claims payment and reporting
patterns, legislative developments, judicial theories of liability, regulatory
trends on benefit levels for both medical and indemnity payments, social
attitudes and economic conditions, the estimates are revised accordingly. If the
Companys ultimate losses, net of reinsurance, prove to differ
substantially from the amounts recorded at December 31, 2001, the related
adjustments could have a material adverse effect on the Companys financial
condition, results of operations and liquidity.

Asbestos-related
liabilities included in unpaid losses and LAE were as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                             
|                              |      |  |      |         |      |  
|Gross of reinsurance:         |      |  |      |         |      |  
|Beginning reserves            |      |  | $    | 49,193  |      | $
|Incurred losses and LAE       |      |  |      | 23,295  |      |  
|Paid losses and LAE           |      |  |      | (12,629 | )    |  
|                              |     
|Ending reserves               |      |  | $    | 59,859  |      | $
|                              |     
|Net of reinsurance:           |      | 
|Beginning reserves            |      |  | $    | 32,043  |      | $
|Incurred losses and LAE       |      |  |      | 131     |      |  
|Paid losses and LAE           |      |  |      | (3,604  | )    |  
|                              |     
|Ending reserves               |      |  | $    | 28,570  |      | $
|                              |     

60

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|P M A  C A P I T A L
|--------------------

Environmental-related liabilities included in unpaid losses and
LAE were as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |        | 1999 |  
|----------------------------- | ---- |  | ---- | ------ | ---- | -
|                             
|                             
|                              |      |  |      |        |      |  
|Gross of reinsurance:         |      |  |      |        |      |  
|Beginning reserves            |      |  | $    | 29,483 |      | $
|Incurred losses and LAE       |      |  |      | 2,846  |      |  
|Paid losses and LAE           |      |  |      | (2,745 | )    |  
|                              |     
|Ending reserves               |      |  | $    | 29,584 |      | $
|                              |     
|Net of reinsurance:           |      | 
|Beginning reserves            |      |  | $    | 18,020 |      | $
|Incurred losses and LAE       |      |  |      | 15     |      |  
|Paid losses and LAE           |      |  |      | (2,058 | )    |  
|                              |     
|Ending reserves               |      |  | $    | 15,977 |      | $
|                              |     

Of the total net asbestos reserves, approximately $26.6 million,
$27.2 million and $32.0 million related to IBNR losses at December 31, 2001,
2000 and 1999, respectively. Of the total net environmental reserves,
approximately $9.2 million, $9.2 million and $18.0 million related to IBNR
losses at December 31, 2001, 2000 and 1999, respectively. All incurred asbestos
and environmental losses were for accident years 1986 and prior.

Estimating
reserves for asbestos and environmental exposures continues to be difficult
because of several factors, including: (i) evolving methodologies for the
estimation of the liabilities; (ii) lack of reliable historical claim data;
(iii) uncertainties with respect to insurance and reinsurance coverage related
to these obligations; (iv) changing judicial interpretations; and (v) changing
government standards. Management believes that its reserves for asbestos and
environmental claims are appropriately established based upon known facts,
existing case law and generally accepted actuarial methodologies. However, due
to changing interpretations by courts involving coverage issues, the potential
for changes in federal and state standards for clean-up and liability, as well
as issues involving policy provisions, allocation of liability among
participating insurers, and proof of coverage, the Companys ultimate
exposure for these claims may vary significantly from the amounts currently
recorded, resulting in a potential future adjustment that could be material to
the Companys financial condition and results of operations.

|5. | Reinsurance
|-- | -----------

In the ordinary course of business, PMA Capitals
reinsurance and insurance subsidiaries assume and cede premiums with other
insurance companies and are members of various insurance pools and associations.
The reinsurance and insurance subsidiaries cede business in order to limit the
maximum net loss from large risks and limit the accumulation of many smaller
losses from a catastrophic event. The reinsurance and insurance subsidiaries
remain primarily liable to their clients in the event their reinsurers are
unable to meet their financial obligations.

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

|(dollar amounts in thousands) | 2001 |  | 2000 |          | 1999 |  
|----------------------------- | ---- |  | ---- | -------- | ---- | -
|                             
|                             
|                              |      |  |      |          |      |  
|Written premiums:             |      |  |      |          |      |  
|Direct                        |      |  | $    | 531,286  |      | $
|Assumed                       |      |  |      | 485,568  |      |  
|Ceded                         |      |  |      | (247,796 | )    |  
|                              |     
|Net                           |      |  | $    | 769,058  |      | $
|                              |     
|Earned premiums:              |      | 
|Direct                        |      |  | $    | 508,821  |      | $
|Assumed                       |      |  |      | 466,975  |      |  
|Ceded                         |      |  |      | (243,356 | )    |  
|                              |     
|Net                           |      |  | $    | 732,440  |      | $
|                              |     
|Losses and LAE:               |      | 
|Direct                        |      |  | $    | 478,013  |      | $
|Assumed                       |      |  |      | 498,366  |      |  
|Ceded                         |      |  |      | (359,616 | )    |  
|                              |     
|Net                           |      |  | $    | 616,763  |      | $
|                              |     

In 2001, losses and LAE ceded included approximately $120
million related to the September 11th attack on the World Trade Center.
Approximately 30% of the ceded loss recoverables are secured by collateral, such
as letters of credit or funds held. Substantially all of the remainder are from
reinsurers and retrocessionaires rated A- or better by nationally
recognized insurance rating agencies. Accordingly, the Company expects all
recoverables to be fully collectible.

|61
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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements (continued)

At December 31,
2001, the Company had reinsurance receivables due from the following
unaffiliated reinsurers in excess of 5% of shareholders equity:

|(dollar amounts in thousands)       |  | ReinsuranceReceivables |   | Collateral |  | Rating(1) |        
|----------------------------------- |  | ---------------------- | - | ---------- |  | --------- | -------
|                                   
|The London Reinsurance Group        |  |                        | $ | 343,270    |  | $         | 343,270
|United States Fidelity and Guaranty |  |                        |   | 143,635    |  |           | 104,154
|Underwriters Re                     |  |                        |   | 86,549     |  |           | 86,549 
|Houston Casualty                    |  |                        |   | 74,566     |  |           | --     
|Mountain Ridge Insurance Company    |  |                        |   | 49,829     |  |           | 49,829 
|PXRE                                |  |                        |   | 36,495     |  |           | 13,688 
|Folksamerica Re                     |  |                        |   | 31,732     |  |           | 1,243  

|(1) |  | Ratings
are as of February 28, 2002. A.M. Best ratings are as follows: A++, Superior, 1st of 16;
A+, Superior, 2nd of 16; A, Excellent, 3rd of 16; and A-, Excellent, 4th of 16; NR, Not
Rated.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Underwriters
Re is a subsidiary of Swiss Re, which is rated A++.
|--- |  | ----------------------------------------------------------------

|(3) |  | Mountain
Ridge is a subsidiary of St. Paul, which is rated A+.
|--- |  | --------------------------------------------------------------

The Company performs credit reviews of its reinsurers focusing
on, among other things, financial capacity, stability, trends and commitment to
the reinsurance business. Prospective and existing reinsurers failing to meet
the Companys standards are excluded from the Companys reinsurance
programs. In addition, the Company requires collateral, typically assets in
trust, letters of credit or funds withheld, to support balances due from certain
reinsurers, consisting generally of those not authorized to transact business in
the applicable jurisdictions. At December 31, 2001 and 2000, the Companys
reinsurance receivables of $1,210.8 million and $933.9 million were supported by
$626.9 million and $553.6 million of collateral. Of the uncollateralized
reinsurance receivables as of December 31, 2001, approximately 95% were
recoverable from reinsurers rated A- or better by A.M. Best. The
Company believes that the amounts receivable from reinsurers are fully
collectible and that the allowance for uncollectible items is adequate to cover
any disputes about amounts owed by reinsurers to the Company.

|6. | Debt
|-- | ----

At December 31, 2001 and 2000, the Company had $62.5 million and
$163.0 million outstanding under its existing Revolving Credit Facility
(Credit Facility). Under the terms of the Credit Facility, the
Company repaid $38.0 million in January 2001 and $62.5 million at year-end 2001,
thereby reducing the outstanding debt to $62.5 million, which is the maximum
amount PMA Capital can borrow under the Credit Facility as of December 31, 2001.
The balance outstanding at December 31, 2001 of $62.5 million matures on
December 31, 2002.

The Credit
Facility bears interest at the London InterBank Offered Rate (LIBOR)
plus 1.375% on the utilized portion and carries a 0.375% facility fee. As of
December 31, 2001, the interest rate on the utilized portion of the Credit
Facility was approximately 3.3%.

The Company has
a letter of credit facility (the Letter of Credit Facility) which
provides for up to $50.0 million in letter of credit capacity. At December 31,
2001 and 2000, the aggregate outstanding face amount of letters of credit issued
was $27.9 million and $40.1 million, respectively. The Letter of Credit Facility
primarily secures reinsurance liabilities of the insurance subsidiaries of the
Company. At December 31, 2001, the Letter of Credit Facility carried fees of
0.45% per annum on the utilized portion and 0.15% on the unutilized portion.

The debt
covenants supporting the Credit Facility and the Letter of Credit Facility
contain provisions that, among other matters, limit the Companys ability
to incur additional indebtedness, merge, consolidate and acquire or sell assets.
The debt covenants also require the Company to satisfy certain ratios related to
net worth, debt-to-capitalization and interest coverage. Additionally, the debt
covenants place restrictions on dividends to shareholders. See Note 8 for
additional information.

62

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|P M A  C A P I T A L
|--------------------

|7. | Commitments and Contingencies
|-- | -----------------------------

For the years ended December 31, 2001, 2000 and 1999, total rent
expense was $3.9 million, $3.4 million and $2.7 million, respectively. At
December 31, 2001, the Company was obligated under noncancelable operating
leases for office space with aggregate minimum annual rentals of $4.5 million in
2002, $4.9 million in 2003, $4.5 million in 2004, $3.2 million in 2005 and $16.9
million thereafter.

In the event a
property and casualty insurer operating in a jurisdiction where the
Companys insurance subsidiaries also operate becomes or is declared
insolvent, state insurance regulations provide for the assessment of other
insurers to fund any capital deficiency of the insolvent insurer. Generally,
this assessment is based upon the ratio of an insurers voluntary premiums
written to the total premiums written for all insurers in that particular
jurisdiction. As of December 31, 2001, the Company has recorded a liability of
$3.8 million for these assessments, which is included in accounts payable,
accrued expenses and other liabilities on the balance sheet. See Note 2J for
additional information regarding SOP 97-3.

The Company has
provided guarantees of $9.7 million, primarily related to loans on properties in
which the Company has an interest.

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 $15.0 million if
the actual claim payments in the aggregate exceed the estimated payments upon
which the loss reserves of the former subsidiary were established. If the actual
claim payments in the aggregate are less than the estimated payments upon which
the loss reserves have been established, the Company will participate in such
favorable loss reserve development.

The Company is
continuously 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, 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. 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.

|8. | Shareholders Equity
|-- | --------------------

In December 2001, the Company issued 9,775,000 shares of its
Class A Common stock, realizing net proceeds of $157.9 million. The Company used
the net proceeds from this issuance to contribute additional capital to its
reinsurance subsidiary and to repay a portion of its outstanding debt under its
Credit Facility.

Effective on the
close of business April 24, 2000, the Company eliminated its class of Common
stock from the Companys authorized capital and reclassified each issued
share of Common stock into one share of Class A Common stock. In addition, in
early 2000 the Company authorized 2,000,000 shares of undesignated Preferred
stock, $0.01 par value per share. There are no shares of Preferred stock issued
or outstanding.

In 2000, the
Companys Board of Directors adopted a shareholder rights plan that will
expire on May 22, 2010. The rights automatically attached to each share of Class
A Common stock. Generally, the rights become exercisable after the acquisition
of 15% or more of the Companys Class A Common stock and permit
rights-holders to purchase the Companys Class A Common stock or that of an
acquirer at a substantial discount. The Company may redeem the rights for $0.001
per right at any time prior to an acquisition.

The Company
declared dividends on its Class A Common stock of $0.42, $0.39 and $0.36 per
share in 2001, 2000 and 1999, respectively. The Company declared dividends on
its Common stock of $0.08 per share and $0.32 per share in 2000 and 1999,
respectively.

|63
|--

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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements (continued)

Changes in Class A Common stock and Common stock shares were as
follows:

|                                                           | 2001 |  | 2000 |            | 1999 | 
|---------------------------------------------------------- | ---- |  | ---- | ---------- | ---- | 
|                                                          
|                                                          
|                                                           |      |  |      |            |      | 
|Class A Common stock:                                      |      |  |      |            |      | 
|Balance at beginning of year                               |      |  |      | 24,442,945 |      | 
|Issuance of Class A Common stock                           |      |  |      | 9,775,000  |      | 
|Conversion of Common stock into Class A Common stock       |      |  |      | --         |      | 
|                                                           |     
|Balance at end of year                                     |      |  |      | 34,217,945 |      | 
|                                                           |     
|                                                          
|Common stock:                                              |      | 
|Balance at beginning of year                               |      |  |      | --         |      | 
|Conversion of Common stock into Class A Common stock       |      |  |      | --         |      | 
|                                                           |     
|Balance at end of year                                     |      |  |      | --         |      | 
|                                                           |     
|                                                          
|Treasury stock - Class A Common stock:                     |      | 
|Balance at beginning of year                               |      |  |      | 2,869,629  |      | 
|Purchase of treasury shares                                |      |  |      | 299,300    |      | 
|Reissuance of treasury shares under employee benefit plans |      |  |      | (117,990   | )    | 
|Conversion of Common stock into Class A Common stock       |      |  |      | --         |      | 
|                                                           |     
|Balance at end of year                                     |      |  |      | 3,050,939  |      | 
|                                                           |     
|                                                          
|Treasury stock - Common stock:                             |      | 
|Balance at beginning of year                               |      |  |      | --         |      | 
|Conversion of Common stock into Class A Common stock       |      |  |      | --         |      | 
|Purchase of treasury shares                                |      |  |      | --         |      | 
|                                                           |     
|Balance at end of year                                     |      |  |      | --         |      | 
|                                                           |     

In 1998, the Companys Board of Directors authorized a plan
to repurchase shares of Class A Common stock in an amount not to exceed $25.0
million. The Companys Board of Directors authorized an additional $15.0
million and $50.0 million of share repurchase authority in 2000 and 1999,
respectively. Since the inception of its share repurchase program, the Company
has repurchased a total of 3.8 million shares at a cost of $72.8 million. The
Company repurchased 299,000 shares at a cost of $5.3 million in 2001, 1.0
million shares at a cost of $18.4 million in 2000 and 1.5 million shares at a
cost of $30.2 million in 1999. The Companys remaining share repurchase
authorization at December 31, 2001 is $17.2 million. Decisions regarding share
repurchases are subject to prevailing market conditions and an evaluation of the
costs and benefits associated with alternative uses of capital.

The
Companys domestic insurance subsidiaries ability to pay dividends to
the holding company is limited by the insurance laws and regulations of
Pennsylvania. All of PMA Capitals domestic insurance entities are owned by
PMA Capital Insurance Company (PMACIC).

As a result,
dividends from The PMA Insurance Groups Pooled Companies and Caliber One
Indemnity Company may not be paid directly to PMA Capital. Instead, only PMACIC,
a Pennsylvania domiciled company, may pay dividends directly to PMA Capital.
Approximately $56 million of dividends are available to be paid by PMACIC to PMA
Capital in 2002 without the prior approval of the Pennsylvania Insurance
Commissioner. As of December 31, 2001, The PMA Insurance Groups Pooled
Companies can pay up to approximately $27 million in dividends to PMACIC during
2002. Under Delaware law (which is substantially similar to Pennsylvania law
with respect to dividends), Caliber One cannot pay dividends to PMACIC in 2002.
Dividends received from subsidiaries were $29.6 million, $36.0 million and $43.2
million in 2001, 2000 and 1999, respectively.

PMA
Capitals dividends to shareholders are restricted by its debt agreements.
Under the most restrictive debt covenant of the Credit Facility and the Letter
of Credit Facility, the Company would be able to pay dividends of approximately
$15 million in 2002.

64

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|P M A  C A P I T A L
|--------------------

|9. | Stock Options
|-- | -------------

The Company currently has stock option plans in place for stock
options granted to officers and other key employees for the purchase of the
Companys Class A Common stock, under which 3,435,620 Class A Common shares
were reserved for issuance at December 31, 2001. The stock options are granted
under terms and conditions determined by the Stock Option Committee of the Board
of Directors. Stock options granted have a maximum term of ten years, generally
vest over periods ranging between zero and five years, and are typically granted
with an exercise price at least equal to the fair market value of the Class A
Common stock on the date the options are granted. Information regarding these
option plans is as follows:

|                                           |  | 2001   |  | 2000                 |   | 1999   |                
|------------------------------------------ |  | ------ |  | -------------------- | - | ------ | ---------------
|                                           | 
|                                           |  | Shares |  | WeightedAveragePrice |   | Shares |                
|                                          
|                                          
|                                           |  |        |  |                      |   |        |                
|Options outstanding, beginning of year     |  |        |  | 3,444,026            |   | $      | 16.22          
|Options granted                            |  |        |  | 115,000              |   |        | 20.00          
|Options exercised                          |  |        |  | (128,372             | ) |        | 12.20          
|Options forfeited or expired               |  |        |  | (43,500              | ) |        | 20.26          
|                                           | 
|Options outstanding, end of year(1)        |  |        |  | 3,387,154            |   | $      | 16.45          
|                                           | 
|Options exercisable, end of year           |  |        |  | 2,190,357            |   | $      | 14.91          
|                                           | 
|Option price range at end of year          |  |        |  | $10.00 to $21.50     |   |        | $8.00 to $21.50
|Option price range for exercised shares    |  |        |  | $8.00 to $17.00      |   |        | $8.00 to $17.00
|Options available for grant at end of year |  |        |  | 48,466               |   |        | 121,966        

|(1) |  | Included in the options outstanding at the end of 2001, 2000 and 1999 are
420,000 options (Target Price Options) with an exercise
price of $17.00, which become exercisable based on the Companys Class A
Common stock achieving certain target prices, with one-half of those
options becoming exercisable if the share price reaches $28.00 by
February 2003 and the remaining one-half becoming exercisable if the share price
reaches $32.00 by February 2003. In 2000, the Company reduced the
accrual for these Target Price Options by approximately $1 million.
There was no accrued liability for the Target Price Options as of December
31, 2001 and 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2001, 2000 and 1999, all options were granted with an
exercise price that exceeded the market value on the grant date.

The weighted
average exercise price and fair value of options granted were as follows:

|                                | 2001 |  | 2000 |       | 1999 |  
|------------------------------- | ---- |  | ---- | ----- | ---- | -
|                               
|                               
|                                |      |  |      |       |      |  
|Weighted average exercise price |      |  | $    | 20.00 |      | $
|Fair value                      |      |  | $    | 6.39  |      | $

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

|                        | 2001 |  | 2000 |      | 1999 | 
|----------------------- | ---- |  | ---- | ---- | ---- | 
|                       
|                       
|                        |      |  |      |      |      | 
|Expected life (years)   |      |  |      | 10   |      | 
|Risk-free interest rate |      |  |      | 5.2% |      | 
|Expected volatility     |      |  |      | 16%  |      | 
|Expected dividend yield |      |  |      | 2.4% |      | 

Information regarding stock options outstanding and options
exercisable at December 31, 2001 is as follows:

|                 |  | Options Outstanding |  | Options Exercisable          | 
|---------------- |  | ------------------- |  | ---------------------------- | 
|                 |  |                     |  |                             
|Exercise Prices  |  | Numberof Shares     |  | WeightedAverageRemainingLife | 
|                
|                
|$10.00 to $13.00 |  | 768,989             |  | 1.54                         | 
|$13.01 to $16.00 |  | 462,915             |  | 3.43                         | 
|$16.01 to $19.00 |  | 1,282,250           |  | 4.11                         | 
|$19.01 to $21.50 |  | 873,000             |  | 7.82                         | 

The Company has adopted the disclosure-only provision of SFAS
No. 123, Accounting for Stock-Based Compensation. Accordingly,
compensation cost that was recognized in 2001, 2000 and 1999 for stock options,
other than Target Price Options, was not significant.

|65
|--

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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements (continued)

Had compensation costs for the Companys stock option plans been
determined based on the fair value at the grant date for awards granted during the year,
the Companys pre-tax income would have been reduced by $735,000, $2.9 million and
$4.1 million in 2001, 2000 and 1999, respectively. After-tax income would have been
reduced by $478,000, $1.9 million and $2.7 million or $0.02, $0.09 and $0.12 per basic
share and $0.02, $0.09 and $0.11 per diluted share in 2001, 2000 and 1999, respectively.

|10. | Earnings Per Share
|--- | ------------------

A reconciliation of the shares used as the denominator of the
basic and diluted earnings per share computations is presented below:

|                        | 2001 |  | 2000 |            | 1999 | 
|----------------------- | ---- |  | ---- | ---------- | ---- | 
|                       
|                       
|                        |      |  |      |            |      | 
|Basic shares - weighted |      |  |      |            |      | 
|average shares          |      | 
|outstanding             |      |  |      | 21,831,725 |      | 
|Effect of dilutive      |      | 
|stock options           |      |  |      | 384,970    |      | 
|                        |     
|Total diluted shares    |      |  |      | 22,216,695 |      | 
|                        |     

For all years presented, there were no differences in the
numerator (income before cumulative effect of accounting change) for the basic
and diluted earnings per share calculation.

The effect of
873,000, 840,500 and 12,500 stock options were excluded from the computation of
diluted earnings per share because they would have been anti-dilutive for 2001,
2000 and 1999, respectively.

|11. | Fair Value of Financial Instruments
|--- | -----------------------------------

As of December 31, 2001 and 2000, the carrying amounts for the
Companys financial instruments approximated their estimated fair value.
The Company measures the fair value of fixed maturities based upon quoted market
prices or by obtaining quotes from dealers. The fair value of debt is estimated
using discounted cash flow calculations based upon the Companys current
incremental borrowing rate for similar types of borrowing facilities or the rate
utilized to prepay obligations, where applicable. For other financial
instruments, the carrying values approximate their fair values. Certain
financial instruments, specifically amounts relating to insurance and
reinsurance contracts, are excluded from this disclosure.

|12. | Income Taxes
|--- | ------------

The components of the Federal income tax expense (benefit) from
income before cumulative effect of accounting change are:

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                             
|                              |      |  |      |         |      |  
|Current                       |      |  | $    | (8,372  | )    | $
|Deferred                      |      |  |      | (3,147  | )    |  
|                              |     
|Income tax expense (benefit)  |      |  | $    | (11,519 | )    | $
|                              |     

In addition, in 1999, the Company recognized a deferred Federal income
tax benefit of $1.5 million related to the cumulative effect of accounting
change.

A reconciliation
between the total income tax expense (benefit) and the amounts computed at the
statutory Federal income tax rate of 35% is as follows:

|(dollar amounts in thousands)            | 2001 |  | 2000 |         | 1999 |  
|---------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                        
|                                        
|                                         |      |  |      |         |      |  
|Federal income tax at the statutory rate |      |  | $    | (1,546  | )    | $
|Reversal of income                       |      | 
|tax accruals                             |      |  |      | (10,076 | )    |  
|Other                                    |      |  |      | 103     |      |  
|                                         |     
|Income tax expense (benefit)             |      |  | $    | (11,519 | )    | $
|                                         |     

66

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|P M A  C A P I T A L
|--------------------

The tax effects of significant temporary differences between the
financial statement carrying amounts and tax bases of assets and liabilities
that represent the net deferred tax asset are as follows:

|(dollar amounts in thousands)           |  | 2001 |   | 2000    |  
|--------------------------------------- |  | ---- | - | ------- | -
|                                       
|                                       
|                                        |  |      |   |         |  
|Discounting of unpaid losses and LAE    |  |      | $ | 54,647  |  
|Unrealized depreciation of investments  |  |      |   | --      |  
|Tax credit carryforwards                |  |      |   | 29,189  |  
|Unearned premiums                       |  |      |   | 18,508  |  
|Allowance for uncollectible accounts    |  |      |   | 6,402   |  
|Postretirement benefit obligation       |  |      |   | 4,878   |  
|Deferred compensation                   |  |      |   | 3,001   |  
|Depreciation                            |  |      |   | 1,909   |  
|Guaranty funds and other assessments    |  |      |   | 1,335   |  
|Other                                   |  |      |   | 9,469   |  
|                                        | 
|Gross deferred tax assets               |  |      |   | 129,338 |  
|Valuation allowance                     |  |      |   | (572    | )
|                                        | 
|Deferred tax assets, net of             |  |     
|valuation allowance                     |  |      |   | 128,766 |  
|                                        | 
|                                        | 
|Deferred acquisition costs              |  |      |   | (22,521 | )
|Losses of foreign reinsurance affiliate |  |      |   | (11,120 | )
|Unrealized appreciation of investments  |  |      |   | (2,886  | )
|Prepaid pension                         |  |      |   | (2,945  | )
|Capitalized software                    |  |      |   | (4,100  | )
|Other                                   |  |      |   | (3,074  | )
|                                        | 
|Gross deferred tax liabilities          |  |      |   | (46,646 | )
|                                        | 
|Net deferred tax assets                 |  |      | $ | 82,120  |  
|                                        | 

At December 31, 2001, the Company had $46.7 million of net
operating loss carryforwards, which will expire in 2018 through 2021, and $12.1
million of alternative minimum tax credit carryforwards, which do not expire.

Management
believes that it is more likely than not that the benefit of its deferred tax
asset will be fully realized, except for $572,000 of deferred tax assets
relating to certain foreign insurance operations. Accordingly, the Company has
recorded a valuation allowance for this portion of the deferred tax asset.

The
Companys Federal income tax returns are subject to audit by the Internal
Revenue Service (IRS), and provisions are made in the financial
statements in anticipation of the results of these audits. The IRS completed
their examination of the Companys 1996 U.S. Federal tax return in 2001
with no material changes to the Companys filed tax return. No other tax
years are currently under audit by the IRS. In managements opinion,
adequate liabilities have been established for all years.

|13. | Employee Retirement, Postretirement andPostemployment Benefits
|--- | --------------------------------------------------------------

A. Pension and Other Postretirement Benefits:

Pension Benefits The Company sponsors a qualified
non-contributory defined benefit pension plan (the Qualified Pension
Plan) covering substantially all employees. After meeting certain
qualifications, an employee acquires a vested right to future benefits. The
benefits payable under the plan are generally determined on the basis of an
employees length of employment and salary during employment. The
Companys policy is to fund pension costs in accordance with the Employee
Retirement Income Security Act of 1974.

The Company also
maintains non-qualified unfunded supplemental defined benefit pension plans (the
Non-qualified Pension Plans) for the benefit of certain key
employees. The projected benefit obligation and accumulated benefit obligation
for the Non-qualified Pension Plans were $5.1 million and $4.6 million,
respectively, as of December 31, 2001.

Other Postretirement Benefits In addition to
providing pension benefits, the Company provides certain health care benefits
for retired employees and their spouses. Substantially all of the Companys
employees may become eligible for those benefits if they meet the requirements
for early retirement under the Qualified Pension Plan and have a minimum of 10
years employment with the Company. For employees who retired on or subsequent to
January 1, 1993, the Company will pay a fixed portion of medical insurance
premiums, including Medicare Part B. Retirees will absorb future increases in
medical premiums.The Company also provides retiree life insurance for certain
retirees.

|67
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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements (continued)

The following tables set forth the amounts recognized in the
Companys financial statements with respect to Pension Benefits and Other
Postretirement Benefits:

|                                               |  | Pension Benefits |   | Other Postretirement Benefits |  
|---------------------------------------------- |  | ---------------- | - | ----------------------------- | -
|                                               |  |                  |   |                              
|(dollar amounts in thousands)                  |  | 2001             |   | 2000                          |  
|                                              
|                                              
|                                               |  |                  |   |                               |  
|Change in benefit obligation:                  |  |                  |   |                               |  
|Benefit obligation at beginning of year        |  |                  | $ | 51,698                        |  
|Service cost                                   |  |                  |   | 1,917                         |  
|Interest cost                                  |  |                  |   | 3,911                         |  
|Actuarial (gain) loss                          |  |                  |   | 1,868                         |  
|Benefits paid                                  |  |                  |   | (2,251                        | )
|Plan amendments and other                      |  |                  |   | --                            |  
|                                               | 
|Benefit obligation at end of year              |  |                  | $ | 57,143                        |  
|                                               | 
|Change in plan assets:                         |  |                 
|Fair value of plan assets at beginning of year |  |                  | $ | 45,440                        |  
|Actual return on plan assets                   |  |                  |   | (2,862                        | )
|Employer contributions                         |  |                  |   | 9,000                         |  
|Benefits paid                                  |  |                  |   | (2,251                        | )
|Other                                          |  |                  |   | --                            |  
|                                               | 
|Fair value of plan assets at end of year       |  |                  | $ | 49,327                        |  
|                                               | 
|Benefit obligation greater than the            |  |                 
|fair value of plan assets                      |  |                  | $ | (7,816                        | )
|Unrecognized actuarial (gain) loss             |  |                  |   | 13,603                        |  
|Unrecognized prior service (cost) benefit      |  |                  |   | 497                           |  
|Unrecognized net transition obligation         |  |                  |   | 329                           |  
|                                               | 
|Prepaid (accrued) benefit at end of year       |  |                  | $ | 6,613                         |  
|                                               | 

|                                         |  | Pension Benefits |   | Other Postretirement Benefits |  
|---------------------------------------- |  | ---------------- | - | ----------------------------- | -
|                                         |  |                  |   |                              
|(dollar amounts in thousands)            |  | 2001             |   | 2000                          |  
|                                        
|                                        
|                                         |  |                  |   |                               |  
|Components of net periodic benefit cost: |  |                  |   |                               |  
|Service cost                             |  |                  | $ | 1,917                         |  
|Interest cost                            |  |                  |   | 3,911                         |  
|Expected return on plan assets           |  |                  |   | (3,983                        | )
|Amortization of transition obligation    |  |                  |   | (4                            | )
|Amortization of prior service cost       |  |                  |   | 5                             |  
|Recognized actuarial (gain) loss         |  |                  |   | 26                            |  
|                                         | 
|Net periodic benefit cost                |  |                  | $ | 1,872                         |  
|                                         | 
|Weighted average assumptions:            |  |                 
|Discount rate                            |  |                  |   | 7.25%                         |  
|Expected return on plan assets           |  |                  |   | 9.00%                         |  
|Rate of compensation increase            |  |                  |   | 4.75%                         |  

For the measurement of Other Postretirement Benefits, a 10%
annual rate of increase in the per capita cost of covered health care benefits
was assumed for 2002. The rate was assumed to decrease gradually to 5.50% by
2007 and remain at that level thereafter. A one percentage point change in
assumed health care cost trend rates would have an immaterial impact on the
total service and interest cost components of the net periodic benefit cost and
the postretirement benefit obligation.

Qualified
Pension Plan assets consist of approximately 55% equity securities and
approximately 45% fixed maturity securities at December 31, 2001.

68

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|P M A  C A P I T A L
|--------------------

B. Defined Contribution Savings Plan  The Company also
maintains a voluntary defined contribution savings plan covering substantially
all employees. The Company matches employee contributions up to 5% of
compensation. Contributions under such plans expensed in 2001, 2000 and 1999
were $2.9 million, $2.6 million and $2.3 million, respectively.

C. Postemployment Benefits  The Company may provide
certain benefits to employees subsequent to their employment, but prior to
retirement including severance, long-term and short-term disability payments,
and other related benefits. Postemployment benefits attributable to prior
service and/or that relate to benefits that vest or accumulate are accrued
presently if the payments are probable and reasonably estimable. Postemployment
benefits that do not meet such criteria are accrued when payments are probable
and reasonably estimable.

|14. | Business Segments
|--- | -----------------

The Companys pre-tax operating income (loss) by principal
business segment, and net income were as follows:

|(dollar amounts in thousands)       | 2001 |  | 2000 |         | 1999 |  
|----------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                   
|                                   
|                                    |      |  |      |         |      |  
|Pre-tax operating income (loss)(1): |      |  |      |         |      |  
|PMA Re                              |      |  | $    | (3,062  | )    | $
|The PMA Insurance Group             |      |  |      | 23,148  |      |  
|Caliber One                         |      |  |      | (26,168 | )    |  
|Corporate and Other                 |      |  |      | (6,322  | )    |  
|                                    |     
|Pre-tax operating income (loss)     |      |  |      | (12,404 | )    |  
|Net realized investment             |      | 
|gains (losses)                      |      |  |      | 7,988   |      |  
|                                    |     
|Income (loss) before income         |      | 
|taxes and cumulative effect         |      | 
|of accounting change                |      |  |      | (4,416  | )    |  
|Income tax expense (benefit)        |      |  |      | (11,519 | )    |  
|                                    |     
|Income before cumulative            |      | 
|effect of accounting change         |      |  |      | 7,103   |      |  
|Cumulative effect of accounting     |      | 
|change, net of tax                  |      |  |      | --      |      |  
|                                    |     
|Net income                          |      |  | $    | 7,103   |      | $
|                                    |     

|(1) |  | Operating income (loss) differs from net income under GAAP because operating
income (loss) excludes net realized investment gains and losses. Pre-tax
operating income (loss) is defined as income (loss) from continuing operations
before income taxes, excluding net realized investment gains and losses.
The Company excludes net realized investment gains (losses) from the
profit and loss measure it utilizes to assess the performance of its operating
segments because (i) net realized investment gains (losses) are
unpredictable and not necessarily indicative of current operating
fundamentals or future performance 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 (losses) that do not relate to
the operations of the individual segments.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company's revenues,
substantially all of which are generated within the U.S., by principal business segment
were as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                             
|                              |      |  |      |         |      |  
|PMA Re                        |      |  | $    | 385,762 |      | $
|The PMA Insurance Group       |      |  |      | 397,258 |      |  
|Caliber One                   |      |  |      | 49,356  |      |  
|Corporate and Other           |      |  |      | 9,608   |      |  
|Net realized investment       |      | 
|gains (losses)                |      |  |      | 7,988   |      |  
|                              |     
|Total revenues                |      |  | $    | 849,972 |      | $
|                              |     

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

|(dollar amounts in thousands) | 2001 |  | 2000 |       | 1999 |  
|----------------------------- | ---- |  | ---- | ----- | ---- | -
|                             
|                             
|                              |      |  |      |       |      |  
|PMA Re                        |      |  | $    | 3,520 |      | $
|The PMA Insurance Group       |      |  |      | 1,933 |      |  
|Caliber One                   |      |  |      | 1,295 |      |  
|Corporate and Other           |      |  |      | 328   |      |  
|                              |     
|Total depreciation and        |      | 
|amortization expense          |      |  | $    | 7,076 |      | $
|                              |     

The Companys total assets(1) by principal business segment
were as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |           | 1999 |  
|----------------------------- | ---- |  | ---- | --------- | ---- | -
|                             
|                             
|                              |      |  |      |           |      |  
|PMA Re                        |      |  | $    | 1,868,818 |      | $
|The PMA Insurance Group       |      |  |      | 1,678,206 |      |  
|Caliber One                   |      |  |      | 299,756   |      |  
|Corporate and Other           |      |  |      | (43,801   | )    |  
|                              |     
|Total assets                  |      |  | $    | 3,802,979 |      | $
|                              |     

|(1) |  | Equity investments in subsidiaries, which eliminate in consolidation, are
          excluded from total assets for each segment.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

PMA Re distributes its products through reinsurance brokers, and
PMA Res top four such brokers accounted for approximately 80% of PMA
Res gross premiums written in 2001. During 2001, 2000 and 1999, total
revenues of approximately $110 million, $76 million and $159 million,
respectively, were placed through brokers which individually exceeded 10% of the
Companys total revenue.

|69
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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements (continued)

The PMA
Insurance Groups operations are concentrated in nine contiguous states in
the eastern part of the U.S. As such, economic trends in individual states may
not be independent of one another. Also, The PMA Insurance Groups products
are highly regulated by each of these states. For many of The PMA Insurance
Groups products, the insurance departments of the states in which it
conducts business must approve rates and policy forms. In addition,
workers compensation benefits are determined by statutes and regulations
in each of these states. While The PMA Insurance Group considers factors such as
rate adequacy, regulatory climate and economic factors in its underwriting
process, unfavorable developments in these factors could have an adverse impact
on the Companys financial condition and results of operations. In 2001,
2000 and 1999, workers compensation net premiums written at The PMA
Insurance Group represented 36.2%, 36.9% and 31.8%, respectively, of the
Companys total net premiums written.

The Company
actively manages its exposure to catastrophes through its underwriting process,
where the Company generally monitors the accumulation of insurable values in
catastrophe-prone regions. Also, in writing property reinsurance coverages, PMA
Re typically requires per occurrence loss limitations for contracts that could
have catastrophe exposure. Through per risk reinsurance, the Company manages its
net retention in each exposure. PMA Res property per occurrence
reinsurance provides catastrophe protection of $50.0 million in excess of $10.0
million on its traditional property book. Under certain conditions, PMA Re may
recover $6.0 million of the $10.0 million retention for multiple net catastrophe
losses. PMA Re also maintains catastrophe protection of $12.5 million in excess
of $5.0 million for property exposures underwritten by its Finite Risk and
Financial Products unit. PMA Re can also recover an additional $40 million of
Finite Risk and Financial Products occurrence losses under certain industry loss
scenarios. The PMA Insurance Group maintains catastrophe reinsurance protection
of 95% of $18.0 million excess of $2.0 million and Caliber One maintains
catastrophe reinsurance protection of $14.7 million excess of $1.3 million. Any
cession of losses under certain of these contracts requires that we cede
additional premiums.

Although the
Company believes that it has adequate reinsurance to protect against the
estimated probable maximum gross loss from a catastrophe, an especially severe
catastrophe or series of catastrophes could exceed the Companys
reinsurance and/or retrocessional protection and may have a material adverse
impact on the Companys financial condition, results of operations and
liquidity. In 2001, the Companys results reflect approximately $30 million
pre-tax ($20 million after-tax) of losses due to the attack on the World Trade
Center. See Note 4 for additional information. In 2000 and 1999, the
Companys loss and LAE ratios were not significantly impacted by
catastrophes.

|15. | Transactions with Related Parties
|--- | ---------------------------------

The Companys largest shareholder is PMA Foundation (the
Foundation), a not-for-profit corporation qualified under Section
501(c)(6) of the Internal Revenue Code, whose purposes include the promotion of
the common business interests of its members and the economic prosperity of the
Commonwealth of Pennsylvania. As of December 31, 2001, the Foundation owned
5,558,050 shares, or 17.8%, of the Companys Class A Common stock. All but
one member of the Companys Board of Directors currently serve as members
of the Foundations Board of Trustees. Also, Frederick W. Anton III,
Chairman of the Company, serves as President and Chief Executive Officer of the
Foundation. The Company and certain of its subsidiaries provide certain
administrative services to the Foundation for which the Company and its
subsidiaries receive reimbursement. Total reimbursements amounted to $13,000 for
each of the years ended December 31, 2001, 2000 and 1999, respectively. The
Foundation also leases its Harrisburg, Pennsylvania headquarters facility from a
subsidiary of the Company under an operating lease presently requiring rent
payments of $25,000 per month, and reimburses a subsidiary of the Company for
its use of office space. Rent and related reimbursements paid to the
Companys affiliates by the Foundation was $304,000 for each of the years
ended December 31, 2001, 2000 and 1999.

70

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|P M A  C A P I T A L
|--------------------

The Company
incurred legal and consulting expenses aggregating approximately $4.8 million,
$5.3 million and $5.3 million in 2001, 2000 and 1999, respectively, from firms
in which directors of the Company are partners or principals.

At December 31,
2001, 2000 and 1999, the Company had notes receivable from officers totalling
$158,000, $56,000 and $56,000, respectively, that are accounted for as a
reduction of shareholders equity. At December 31, 2001, the interest rate
on these notes was 5.5%.

The Company has
arranged an executive loan program with a financial institution. The institution
provides personal demand loans to officers of the Company at a floating interest
rate equal to the financial institutions prime rate minus 1/2%. Such loans
are collateralized by Class A Common stock beneficially owned by the officer and
a Company treasury security. The Company has agreed to purchase any loan made to
an officer (including accrued interest and related expenses) from the financial
institution in the event that the borrower defaults on the loan. The amount of
loans outstanding as of December 31, 2001 under this program was $2.7 million.

|16. | Statutory Financial Information
|--- | -------------------------------

These consolidated financial statements vary in certain respects
from financial statements prepared using statutory accounting practices that are
prescribed or permitted by the Pennsylvania Insurance Department and the
Delaware 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 (NAIC)
publications. Permitted SAP encompasses all accounting practices that are not
prescribed. In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles (Codification) guidance, which replaced the Accounting
Practices and Procedures manual as the NAICs primary guidance on statutory
accounting. Codification provides guidance for areas where statutory accounting
has been silent and changes current statutory accounting in some areas, such as
deferred income taxes. Effective December 31, 2000, the Companys insurance
subsidiaries implemented the Codification guidelines, resulting in an increase
of $20.5 million in its statutory surplus.

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

|(dollar amounts in thousands) | 2001 |  | 2000 |          | 1999 |  
|----------------------------- | ---- |  | ---- | -------- | ---- | -
|                             
|                             
|                              |      |  |      |          |      |  
|SAP net income (loss):        |      |  |      |          |      |  
|PMA Capital Insurance Co.     |      |  | $    | (18,708  | )    | $
|The PMA Insurance Group       |      |  |      | 25,341   |      |  
|Caliber One Indemnity Co.     |      |  |      | (3,658   | )    |  
|                              |     
|Total                         |      |  | $    | 2,975    |      | $
|                              |     
|SAP capital and surplus:      |      | 
|PMA Capital Insurance Co.     |      |  | $    | 559,578  |      | $
|The PMA Insurance Group       |      |  |      | 264,476  |      |  
|Caliber One Indemnity Co.     |      |  |      | 37,060   |      |  
|Eliminations(1)               |      |  |      | (301,536 | )    |  
|                              |     
|Total                         |      |  | $    | 559,578  |      | $
|                              |     

|(1) |  | Caliber One Indemnity Companys surplus is eliminated as it is included
in the statutory surplus of PMA Capital Insurance Company. At December
31, 2001 and 2000, the surplus of The PMA Insurance Groups domestic
insurance subsidiaries is eliminated as it is included in the statutory
surplus of PMA Capital Insurance Company.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|71
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|P M A  C A P I T A L
|--------------------

Notes to Consolidated Financial Statements (continued)

A reconciliation of PMA Capitals domestic insurance
subsidiaries SAP net income to the Companys GAAP net income is as
follows:

|(dollar amounts in thousands)                     | 2001 |  | 2000 |         | 1999 |  
|------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                 
|                                                 
|                                                  |      |  |      |         |      |  
|SAP net income - domestic insurance subsidiaries  |      |  | $    | 2,975   |      | $
|GAAP adjustments:                                 |      | 
|Dividends received from subsidiaries              |      |  |      | (16,797 | )    |  
|Change in deferred acquisition costs              |      |  |      | 15,828  |      |  
|Benefit (provision) for deferred income taxes     |      |  |      | (7,100  | )    |  
|Cumulative effect of accounting change            |      |  |      | --      |      |  
|Allowance for doubtful accounts                   |      |  |      | 4,874   |      |  
|Guaranty fund and loss based assessments          |      |  |      | 328     |      |  
|Other                                             |      |  |      | 1,497   |      |  
|                                                  |     
|GAAP net income - domestic insurance subsidiaries |      |  |      | 1,605   |      |  
|Other entities and eliminations                   |      |  |      | 5,498   |      |  
|                                                  |     
|GAAP net income                                   |      |  | $    | 7,103   |      | $
|                                                  |     

A reconciliation of PMA Capitals domestic insurance
subsidiaries SAP capital and surplus to the Companys GAAP
shareholders equity is as follows:

|(dollar amounts in thousands)                                 |  | 2001 |   | 2000     |  
|------------------------------------------------------------- |  | ---- | - | -------- | -
|                                                             
|SAP capital and surplus - domestic insurance subsidiaries     |  |      | $ | 559,578  |  
|GAAP adjustments:                                             |  |     
|Deferred acquisition costs                                    |  |      |   | 64,350   |  
|Deferred income taxes                                         |  |      |   | 36,226   |  
|Allowance for doubtful accounts                               |  |      |   | (13,954  | )
|Retirement accruals                                           |  |      |   | (8,943   | )
|Reversal of non-admitted assets                               |  |      |   | 88,150   |  
|Unrealized gain (loss) on fixed maturities available for sale |  |      |   | 5,584    |  
|Other                                                         |  |      |   | 12,030   |  
|                                                              | 
|GAAP shareholders' equity - domestic insurance subsidiaries   |  |      |   | 743,021  |  
|Other entities and eliminations                               |  |      |   | (131,015 | )
|                                                              | 
|GAAP shareholders' equity                                     |  |      | $ | 612,006  |  
|                                                              | 

The Companys statutory financial statements are presented
on the basis of accounting practices prescribed or permitted by the Pennsylvania
Insurance Department (for PMA Capital Insurance Company and The PMA Insurance
Group) and the Delaware Insurance Department (for Caliber One Indemnity
Company). Pennsylvania and Delaware have adopted Codification as the basis of
their statutory accounting practices. However, Pennsylvania has retained the
prescribed practice of non-tabular discounting of unpaid losses and LAE for
workers compensation, which was not permitted under Codification. This
prescribed accounting practice increased statutory capital and surplus by $22.2
million and $20.4 million at December 31, 2001 and 2000, respectively, over what
it would have been had the prescribed practice not been allowed.

72

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|P M A  C A P I T A L
|--------------------

Report of Independent Accountants

PRICEWATERHOUSECOOPERS LLP (LOGO)

To the Board of Directors and Shareholders of PMA Capital Corporation

In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, cash flows,
shareholders equity and comprehensive income (loss) present fairly, in all
material respects, the financial position of PMA Capital Corporation and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Companys management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP 
Two Commerce Square
2001 Market Street
Philadelphia, PA
February 6, 2002

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|P M A  C A P I T A L
|--------------------

Quarterly Financial Information(Unaudited)

The following unaudited quarterly financial data are presented on a
consolidated basis for each of the years ended December 31, 2001 and 2000. Quarterly
financial results necessarily rely on estimates and caution is required in drawing
specific conclusions from quarterly consolidated results.

|                                  |  | FirstQuarter |   | SecondQuarter |   | ThirdQuarter |         | FourthQuarter |  
|--------------------------------- |  | ------------ | - | ------------- | - | ------------ | ------- | ------------- | -
|                                 
|                                  |  |              |   |               |   |              |         |               |  
|2001                              |  |              |   |               |   |              |         |               |  
|Income Statement Data:            |  |             
|Total revenues                    |  |              | $ | 193,599       |   | $            | 217,075 |               | $
|Income (loss) before income taxes |  |              |   | (2,549        | ) |              | 9,726   |               |  
|Net income (loss)                 |  |              |   | 8,091         |   |              | 6,040   |               |  
|                                 
|Per Share Data:                   |  |             
|Net income (loss) (Basic)         |  |              | $ | 0.38          |   | $            | 0.28    |               | $
|Net income (loss) (Diluted)       |  |              | $ | 0.37          |   | $            | 0.28    |               | $
|                                 
|Class A Common Stock Prices:      |  |              |   |               |   |              |         |               |  
|High                              |  |              | $ | 18.94         |   | $            | 18.05   |               | $
|Low                               |  |              |   | 16.50         |   |              | 16.59   |               |  
|Close                             |  |              |   | 17.38         |   |              | 18.05   |               |  
|                                 
|2000                              |  |              |   |               |  
|Income Statement Data:            |  |             
|Total revenues                    |  |              | $ | 151,555       |   | $            | 177,894 |               | $
|Income (loss) before income taxes |  |              |   | 6,739         |   |              | 15,807  |               |  
|Net income (loss)                 |  |              |   | 4,378         |   |              | 10,140  |               |  
|                                 
|Per Share Data:                   |  |             
|Net income (loss) (Basic)         |  |              | $ | 0.20          |   | $            | 0.46    |               | $
|Net income (loss) (Diluted)       |  |              | $ | 0.19          |   | $            | 0.45    |               | $
|                                 
|Class A Common Stock Prices:      |  |              |   |               |   |              |         |               |  
|High                              |  |              | $ | 20.00         |   | $            | 19.00   |               | $
|Low                               |  |              |   | 16.06         |   |              | 15.88   |               |  
|Close                             |  |              |   | 17.50         |   |              | 19.00   |               |  

The Company had approximately 300 recordholders at January 31,
2002. In each quarter of 2001, the Company declared quarterly dividends of
$0.105 per share for its Class A Common stock. In the first quarter of 2000, the
Company declared a quarterly dividend of $0.08 and $0.09 per share for its
Common stock and Class A Common stock, respectively. In the second quarter of
2000, the Company declared a quarterly dividend of $0.09 per share for its Class
A Common stock. In the third and fourth quarters of 2000, the Company declared a
quarterly dividend of $0.105 per share for its Class A Common stock. See Note 8
for a discussion of a change in the Companys capital structure in 2000,
which effectively converted all shares of Common stock to Class A Common stock.

74

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Investor Information

Securities Listing

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

Dividends

PMA Capital Corporations quarterly dividends on Class A Common stock are paid on or about
the first day of January, April, July and October.

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