UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C.
20549

FORM 10-K

|(MARK ONE)                                             
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|/X/                                                    
|FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003            
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|/  /                                                   
|FOR THE TRANSITION PERIOD FROM __________ TO __________
|                                                       

Commission File Number 000-22761

|PMA Capital Corporation (Exact name of registrant as specified in its charter)
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|Pennsylvania                                                                  
|(State or other jurisdiction of                                               
|incorporation or organization)                                                
|                                                                              
|1735 Market Street, Suite 2800Philadelphia, Pennsylvania                      
|(Address of principal executive offices)                                      
|                                                                              
|Registrants telephone number, including area code: (215) 665-5046            
|                                                                              
|Securities registered pursuant to Section 12(b) of the Act:                   
|                                                                              
|Title of each class:                                                          
|                                                                              
|8.50% Monthly Income SeniorNotes due 2018                                     
|Securities registered pursuant to Section 12(g) of the Act:                   
|                                                                              
|Class A Common Stock, par value $5.00 per share                               
|(Title of Class)                                                              
|                                                                              
|Rights to Purchase Preferred Stock                                            
|(Title of Class)                                                              

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /

Indicate by check mark whether the  registrant is an  accelerated  filer
(as defined in Rule 12b-2 of the Act). YES /X/ NO /  /

The aggregate market value of the Class A
Common Stock held by non-affiliates of the registrant on June 30, 2003, based on the last
price at which the Class A Common Stock was sold, was $270,904,652.

There were 31,334,403 shares outstanding
of the registrants Class A Common stock, $5 par value per share, as of the close of
business on March 1, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:

|(1) | Part
III of this Form 10-K incorporates by reference portions of the           registrants
proxy statement for its 2004 Annual Meeting of Shareholders.
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|INDEX                                                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------
|PART I                                                                                                                                             
|                                                                                                                                                   
|Item 1.    Business                                                                                                                                
|Company Overview                                                                                                                                   
|The PMA Insurance Group                                                                                                                            
|PMA Re                                                                                                                                             
|Run-off Operations                                                                                                                                 
|Reinsurance and Retrocessional Protection                                                                                                          
|Loss Reserves                                                                                                                                      
|Investments                                                                                                                                        
|Ratings                                                                                                                                            
|Regulatory Matters                                                                                                                                 
|Employees                                                                                                                                          
|Available Information                                                                                                                              
|Glossary of Selected Insurance Terms                                                                                                               
|Risk Factors                                                                                                                                       
|Item 2.    Properties                                                                                                                              
|Item 3.    Legal Proceedings                                                                                                                       
|Item 4.    Submission of Matters to a Vote of Security Holders                                                                                     
|Executive Officers of the Registrant                                                                                                               
|                                                                                                                                                   
|PART II                                                                                                                                            
|                                                                                                                                                   
|Item 5.    Market for the Registrant's Common Equity, Related Shareholder Matters and
                        Issuer Purchases of Equity Securities
|Item 6.    Selected Financial Data                                                                                                                 
|Item 7.    Management's Discussion and Analysis of Financial Condition                                                                             
|and Results of Operations                                                                                                                          
|Item 7A. Quantitative and Qualitative Disclosure About Market Risk                                                                                 
|Item 8.    Financial Statements and Supplementary Data                                                                                             
|Item 9.    Changes in and Disagreements with Accountants on                                                                                        
|Accounting and Financial Disclosure                                                                                                                
|Item 9A.    Controls and Procedures                                                                                                                
|                                                                                                                                                   
|PART III                                                                                                                                           
|                                                                                                                                                   
|Item 10.   Directors and Executive Officers of the Registrant                                                                                      
|Item 11.   Executive Compensation                                                                                                                  
|Item 12.   Security Ownership of Certain Beneficial Owners and Management and                                                                      
|Related Shareholder Matters                                                                                                                        
|Item 13.   Certain Relationships and Related Transactions                                                                                          
|Item 14.   Principal Accountant Fees and Services                                                                                                  
|                                                                                                                                                   
|PART IV                                                                                                                                            
|                                                                                                                                                   
|Item 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K                                                                         
|                                                                                                                                                   
|Signatures                                                                                                                                         
|Index to Financial Statement Schedules                                                                                                             
|Index to Exhibits                                                                                                                                  

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PART I

The Business Section and other parts of
this Form 10-K contain forward-looking statements that involve inherent risks and
uncertainties. Statements that are not historical facts, including statements about our
beliefs and expectations, and containing words such as believes,
estimates, anticipates, expects or similar words are
forward-looking statements. Our actual results may differ materially from the projected
results discussed in the forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed in Risk Factors beginning
on page 25 and in the Cautionary Statements in Item 7 
Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A).

Item 1. Business

COMPANY OVERVIEW

We are an insurance holding company,
whose operating subsidiaries provide workers compensation, integrated disability and
other commercial property and casualty lines of insurance, primarily in the eastern part
of the United States, underwritten and marketed under the trade name The PMA Insurance
Group. Our primary insurance business has been in operation since 1915. At December 31,
2003, we had total assets of $4.2 billion and shareholders equity of $463.7 million.

Our property and casualty insurance
segment, 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. Currently, approximately 90% of The PMA Insurance
Groups business is produced through independent agents and brokers.

Prior to November 6, 2003, our
reinsurance operations, PMA Re, offered excess of loss and pro rata property and casualty
reinsurance protection mainly through reinsurance brokers. On November 6, 2003, we
announced our decision to withdraw from the reinsurance business previously served by PMA
Re, and we are no longer writing new reinsurance business. Beginning in 2004, PMA
Res results will be included in our Run-off Operations segment. Under our current
corporate structure, PMA Capital Insurance Company, which is the insurance company
subsidiary through which PMA Res business was underwritten, owns the capital stock
of the insurance subsidiaries through which The PMA Insurance Group writes its property
and casualty business. On December 22, 2003, PMA Capital Insurance Company entered into a
voluntary agreement with the Pennsylvania Insurance Department. Pursuant to this
agreement, PMA Capital Insurance Company will not, without the prior approval of the
Pennsylvania Insurance Department, pay dividends to us subsequent to November 6, 2003;
enter into any new reinsurance contracts, treaties or agreements, except as may be
required by law; or alter its or its Pennsylvania-domiciled insurance company
subsidiaries ownership structure. See "Regulatory Matters  General" beginning on
page 17 for additional information regarding our agreement with the
Pennsylvania Insurance Department.

Prior to May 1, 2002, we operated a third
specialty risk management business, Caliber One, which wrote excess and surplus lines of
business throughout the United States, generally through surplus lines brokers. Effective
May 1, 2002, we announced our decision to withdraw from the excess and surplus lines
marketplace. In January 2003, we sold the capital stock of Caliber One Indemnity Company,
which resulted in a pre-tax gain of $2.5 million. Pursuant to the agreement of sale, we
have retained all assets and liabilities related to the in-force policies and outstanding
claim obligations relating to Caliber Ones business written prior to closing. As a
result of the decision to exit this business, the results of this segment are reported as
Run-off Operations.

In addition, we have a Corporate and
Other segment, which includes unallocated investment income and expenses, including debt
service.

Financial information in the tables that
follow is presented in conformity with accounting principles generally accepted in the
United States of America (GAAP), unless otherwise indicated. Certain
reclassifications have been made to prior periods financial information to conform
to the 2003 presentation. Revenues, pre-tax operating income (loss) and assets
attributable to each of our operating segments and our Corporate and Other segment for the
last three years are set forth in Note 15 in Item 8 of this Form 10-K.

1

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Our gross and net premiums written by
segment were as follows:

|                              | 2003  |  | 2002 |           | 2001  |   | 2003 as % of Total |  
|----------------------------- | ----- |  | ---- | --------- | ----- | - | ------------------ | -
|(dollar amounts in thousands) | Gross |  | Net  |           | Gross |   | Net                |  
|                             
|                             
|The PMA Insurance Group       |       |  | $    | 678,434   |       | $ | 603,593            |  
|PMA Re                        |       |  |      | 750,873   |       |   | 595,074            |  
|Run-off Operations            |       |  |      | 1,125     |       |   | (5,625             | )
|Corporate and Other           |       |  |      | (788      | )     |   | (788               | )
|                              |       |  |      |           |       |   |                    |  
|Total                         |       |  | $    | 1,429,644 |       | $ | 1,192,254          |  
|                              |       |  |      |           |       |   |                    |  
|                             
|                             

Property and casualty insurance and
reinsurance companies provide loss protection to insureds in exchange for premiums. If
earned premiums exceed the sum of losses and loss adjustment expenses (which we refer to
as LAE), acquisition expenses, operating expenses and policyholders dividends, then
underwriting profits are realized. When earned premiums do not exceed the sum of these
items, the result is an underwriting loss.

The combined ratio is a
frequently used measure of property and casualty underwriting performance. The combined
ratio computed on a GAAP basis is equal to losses and LAE, plus acquisition expenses,
operating expenses and policyholders dividends, where applicable, all divided by net
premiums earned. Thus, a combined ratio of under 100% reflects an underwriting profit. The
combined ratios of The PMA Insurance Group and PMA Re were as follows:

|                        |  |  |  | 2003  |   |  | 2002  |   |  | 2001  |  
|----------------------- |  |  |  | ----- | - |  | ----- | - |  | ----- | -
|                       
|The PMA Insurance Group |  |  |  | 102.8 | % |  | 103.2 | % |  | 105.5 | %
|PMA Re                  |  |  |  | 117.9 | % |  | 106.4 | % |  | 114.2 | %
|                       

Because time normally elapses between the
receipt of premiums and the payment of claims and certain related expenses, we invest the
available premiums. Underwriting results do not include investment income from these
funds. Given the long-tail nature of our liabilities, we believe that the operating ratios
are also important in evaluating our business. The operating ratio is the combined ratio
less the net investment income ratio, which is net investment income divided by premiums
earned. The operating ratios of The PMA Insurance Group and PMA Re were as follows:

|                        |  |  |  | 2003  |   |  | 2002 |   |  | 2001  |  
|----------------------- |  |  |  | ----- | - |  | ---- | - |  | ----- | -
|                       
|The PMA Insurance Group |  |  |  | 97.0  | % |  | 94.5 | % |  | 94.1  | %
|PMA Re                  |  |  |  | 112.7 | % |  | 97.6 | % |  | 100.9 | %
|                       

Because of our decision to withdraw from the
reinsurance business, the financial results and related financial matters of PMA Re
presented above will not be indicative of future results and ratios.

A glossary of selected insurance terms
used in this Form 10-K is included on pages 22 to 24.

2

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THE PMA INSURANCE GROUP

Background

The PMA Insurance Group emphasizes its traditional
core business, workers compensation insurance and integrated disability. We also
provide a range of other commercial insurance products but generally only if they
complement our workers compensation products, including commercial automobile and
multi-peril coverages, general liability and related services. The PMA Insurance Group
focuses primarily on middle-market and large accounts operating in our principal marketing
territory concentrated in the eastern part of the United States. Currently, approximately
90% of this business is produced through independent agents and brokers.

The PMA Insurance Group competes on the
basis of its ability to offer tailored workplace disability management solutions to its
clients, its long-term relationships with its agents and brokers, its localized service
and its reputation as a high-quality claims and risk control service provider.

The PMA Insurance Group has the ability
to handle multi-state clients based in its operating territory but which have operations
in other parts of the U.S. by being authorized to do business in 52 jurisdictions
(including Puerto Rico and the District of Columbia) for workers compensation,
general liability and commercial automobile. The PMA Insurance Group intends to continue
writing other lines of property and casualty insurance, but generally only if such
writings are supported by its core workers compensation business. The PMA Insurance
Group is one of the leading providers of integrated disability products with 123 accounts
as of December 31, 2003 that generated approximately $46 million in combined workers
compensation and integrated disability premium in 2003. The PMA Insurance Groups
primary insurance subsidiaries (Pennsylvania Manufacturers Association Insurance
Company, Manufacturers Alliance Insurance Company and Pennsylvania Manufacturers Indemnity
Company) will sometimes be referred to as the Pooled Companies because they share results
under an intercompany pooling agreement.

Although we cannot currently predict the
ultimate effect of the recent A.M. Best financial strength rating downgrade on The PMA
Insurance Groups business, such downgrade will likely result in lower premiums
written. Further, the recent ratings downgrades may make it more difficult to write
business at the same rates and favorable terms and conditions as our current businesses.
See Ratings beginning on page 16 for additional information.

Products

The PMA Insurance Groups premiums
written were as follows:

|(dollar amounts in thousands)                         | 2003 |  | 2002 |         | 2001 | 
|----------------------------------------------------- | ---- |  | ---- | ------- | ---- | 
|                                                     
|                                                      |      |  |      |         |      | 
|Gross premiums written:                               |      | 
|Workers' compensation and integrated       disability |      |  | $    | 570,858 |      | 
|Commercial automobile                                 |      |  |      | 55,899  |      | 
|Commercial multi-peril                                |      |  |      | 34,166  |      | 
|Other                                                 |      |  |      | 17,511  |      | 
|                                                      |      |  |      |         |      | 
|Total                                                 |      |  | $    | 678,434 |      | 
|                                                      |      |  |      |         |      | 
|Net premiums written:                                 |      | 
|                                                     
|Workers' compensation and integrated       disability |      |  | $    | 512,151 |      | 
|Commercial automobile                                 |      |  |      | 52,125  |      | 
|Commercial multi-peril                                |      |  |      | 28,374  |      | 
|Other                                                 |      |  |      | 10,943  |      | 
|                                                      |      |  |      |         |      | 
|Total                                                 |      |  | $    | 603,593 |      | 
|                                                      |      |  |      |         |      | 
|                                                     
|                                                     

3

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WorkersCompensation Insurance

All states require employers to provide
workers compensation benefits to their employees for injuries and occupational
diseases arising out of employment, regardless of whether such injuries result from the
employers or the employees negligence. Employers may insure their
workers compensation obligations subject to state regulation or, subject to regulatory approval, self-insure
their liabilities. Workers compensation statutes require that a policy cover three
types of benefits: medical expenses, disability (indemnity) benefits and death benefits.
The amounts of disability and death benefits payable for various types of claims are set
and limited by statute, but no maximum dollar limitation exists for medical benefits.
Workers compensation benefits vary among states, and the insurance rates we charge
to our customers are subject to differing forms of state regulation.

Statutory direct workers
compensation business written by jurisdiction was as follows:

|(dollar amounts in thousands) | 2003 |  | 2002 |         | 2001 | 
|----------------------------- | ---- |  | ---- | ------- | ---- | 
|                             
|                              |      |  |      |         |      | 
|Pennsylvania                  |      |  | $    | 193,129 |      | 
|New Jersey                    |      |  |      | 44,314  |      | 
|New York                      |      |  |      | 43,978  |      | 
|Virginia                      |      |  |      | 22,400  |      | 
|Florida                       |      |  |      | 21,723  |      | 
|North Carolina                |      |  |      | 21,407  |      | 
|Maryland                      |      |  |      | 21,133  |      | 
|Georgia                       |      |  |      | 18,244  |      | 
|Other                         |      |  |      | 101,437 |      | 
|                              |      |  |      |         |      | 
|Total                         |      |  | $    | 487,765 |      | 
|                              |      |  |      |         |      | 
|                             
|                             

Based upon direct written premium
information published by the A.M. Best Company for the most recently available year
(2002), The PMA Insurance Group is the second largest writer of workers compensation
insurance in Pennsylvania and ranks among the fifteen largest writers of workers
compensation insurance in Delaware, District of Columbia, New Jersey, Maryland, Virginia,
South Carolina and New York. The PMA Insurance Group has focused primarily on the
jurisdictions in the table above based upon its knowledge of their workers
compensation systems and its assessment of each states respective business,
economic, legal and regulatory climates. We closely monitor and take into consideration
rate adequacy, regulatory climate and economic conditions in each state in the
underwriting process. The PMA Insurance Group employs similar analyses in determining
whether and to what extent it will offer products in additional jurisdictions.

The PMA Insurance Group is focused on
expanding its premium base in territories that meet its underwriting and actuarial
criteria. In recent years, The PMA Insurance Group increased its writings of workers
compensation premiums through focused marketing efforts in its principal marketing
territories. In addition, The PMA Insurance Group continues to benefit from writing
business for insureds mainly operating in The PMA Insurance Groups principal
marketing territory but with some operations in other states.

Workers compensation insurers doing
business in certain states are required to provide insurance for risks that are not
otherwise written on a voluntary basis by the private market (residual market
business). This system exists in all of The PMA Insurance Groups marketing
jurisdictions, except Pennsylvania, New York and Maryland. In these three states, separate
governmental entities write all of the workers compensation residual market
business. In 2003, The PMA Insurance Group wrote $24.9 million in premiums of residual
market business, which constituted less than 5% of its gross workers compensation
premiums written. Based upon data for policy year 2002 reported by the National Council on
Compensation Insurance, the percentage of residual market business for the industry as a
whole, in all states, was 11.0% of direct workers compensation premiums written.

The PMA Insurance Group offers a variety
of workers compensation products to its customers. Rate-sensitive products are
essentially based on manual rates filed and approved by state insurance departments, while
loss-sensitive products are priced to a certain extent on the basis of the insureds
own loss experience. The PMA Insurance Group has also developed and sold alternative
market products, such as large deductible products and other programs and services to
customers who agree to assume even greater exposure to loss than under more traditional
loss-sensitive products. The PMA Insurance Group decides which type of product to offer a
customer based upon the customers needs, an underwriting review and financial
qualification.

4

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The PMA Insurance Groups voluntary
workers compensation direct premiums written by product type were as follows:

|                            |  |  |  | 2003 |   |  | 2002 |   |  | 2001 |  
|--------------------------- |  |  |  | ---- | - |  | ---- | - |  | ---- | -
|                            | 
|Rate-sensitive products     |  |  |  | 59   | % |  | 58   | % |  | 59   | %
|Loss-sensitive products     |  |  |  | 31   | % |  | 33   | % |  | 34   | %
|Alternative market products |  |  |  | 10   | % |  | 9    | % |  | 7    | %
|                            |  |  |  |      |   | 
|Total                       |  |  |  | 100  | % |  | 100  | % |  | 100  | %
|                            |  |  |  |      |   | 
|                            | 
|                            | 

| |  | Rate-sensitive
products include fixed-cost policies and dividend paying policies. The premium charged on
a          fixed-cost policy is essentially based upon the manual rates filed with and
approved by the state insurance          department and does not increase or decrease
based upon the losses incurred during the policy period. Under          policies that are
subject to dividend plans, the customer may receive a dividend based upon loss experience
         during the policy period.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
PMA Insurance Group's loss-sensitive products adjust the amount of the insured's premiums
after the policy          period expires based, to a certain extent, upon the insured's
actual losses incurred during the policy period.          These loss-sensitive products
are generally subject to less price regulation than rate-sensitive products and
         reduce, but do not eliminate, risk to the insurer. Under these types of
policies, claims professionals          periodically evaluate the reserves on losses
after the policy period expires to determine whether additional          premium
adjustments are required under the policy. These policies are typically subject to
adjustment for an          average of five years after policy expiration. The PMA
Insurance Group generally restricts loss-sensitive          products to accounts with
minimum annual premiums in excess of $100,000.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
PMA Insurance Group offers a variety of alternative market products for larger accounts,
including large          deductible policies and off-shore captive programs. Typically,
The PMA Insurance Group receives a lower          up-front premium for these types of
alternative market product plans. However, under this type of business, the
         insured retains a greater share of the underwriting risk than under
rate-sensitive or loss-sensitive products,          which reduces the potential for
unfavorable claim activity on the accounts and encourages loss control on the
         part of the insured. For example, under a large deductible policy, the customer
is contractually obligated to          pay its own losses up to the amount of the
deductible for each occurrence. The deductibles under these policies          generally
range from $250,000 to $1.0 million. In addition to these products, The PMA Insurance
Group offers          its clients certain workers' compensation services such as claims,
risk management and other services.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The PMA Insurance Group developed a
product for group integrated occupational and non-occupational disability coverages, named
PMA One®, which it began marketing in 1998. PMA One leverages what we
consider to be one of The PMA Insurance Groups most important core competencies:
managing employee disabilities. PMA One offers employers the benefits of coordinated
workers compensation and disability administration, reduced costs, programs designed
to encourage faster return to work and heightened employee productivity. In 2003, we had
123 PMA One clients, which generated approximately $46 million of combined workers
compensation and integrated disability written premiums. PMA One clients include health
care systems, educational institutions, manufacturers and financial institutions.

Through The PMA Insurance Groups
workers compensation product offerings, we provide a comprehensive array of managed
care services to control loss costs. These include:

| |  | Case
review and intervention by disability management coordinators, all of who are registered
nurses. This service is also provided for our integrated disability product.
These disability management coordinators employ an early intervention model to
proactively manage medical treatment and length of disability in concert with
The PMA Insurance Group's claims professionals and the insured employer. There are also
case management nurses who manage more serious claims via on-site visits with
injured workers and medical providers.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Access
to the First Health® Network, a workers' compensation preferred provider network, which
includes doctors, hospitals, physical therapists, outpatient clinics and imaging
centers. Utilization of the network generally results in reduced medical costs,
in comparison to medical costs incurred when a claim is handled outside this
network.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5

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| |  | Utilization
of an automated medical bill review system to detect duplicate billings, unrelated
charges and coding discrepancies. Complex bills are forwarded to The PMA
Insurance Group's cost containment unit, which is staffed by registered nurses
and other medical professionals, to resolve questions regarding causal
relationship and appropriate utilization levels.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Use
of Paradigm Corporation for the medical management of certain catastrophic injuries.
Paradigm adds a team of catastrophic case management experts to assist in achieving
enhanced clinical and financial outcomes on these catastrophic injuries.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | TMESYS® pharmacy
benefit management program. TMESYS® is the only "Cardless" pharmacy program designed
specifically for the workers' compensation industry. It includes access to a nationwide
network of pharmacies, increased savings through higher utilization, on-line drug
utilization review and the ability to capture the first prescription within the program.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Support
of a full time Medical Director, who assists in implementing programs to monitor the
quality and medical necessity of recommended treatment and identifying peer experts for
complex claims.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commercial Lines

The PMA Insurance Group writes property
and liability coverages for larger and middle market accounts that satisfy its
underwriting standards. See Underwriting on page 7. These coverages feature
commercial automobile, commercial multi-peril, general liability and umbrella business.
The PMA Insurance Group offers these products, but generally only if they complement the
core workers compensation business.

Other Products and Services

The PMA Insurance Group offers
rent-a-captive products for certain insureds and associations. The purpose of
a rent-a-captive program is to offer a customer an alternative method of managing its loss
exposures by obtaining many of the benefits of a captive insurer without establishing and
capitalizing its own captive; in effect, the insured is renting a captive
facility that we have already established.

Under this arrangement, the client
purchases an insurance policy from us and chooses a participation level. We then cede this
portion of the premium and loss exposures to either a Bermuda- or Cayman-based subsidiary.
The client participates in the loss and investment experience of the portion ceded to the
Bermuda- or Cayman-based subsidiary through a dividend mechanism. The client is
responsible for any loss that may arise within its participation level, and this potential
obligation is typically secured through a letter of credit or similar arrangement. Our
principal sources of income from this rent-a-captive program are the premium income on the
risk retained by us and captive management fees earned.

Through PMA Management Corp., The PMA
Insurance Group provides claims, risk management and related services primarily to
self-insureds on an unbundled basis.

Distribution

The PMA Insurance Group distributes its
products through multiple channels, including national, regional and local brokers and
agents, employee benefits brokers, and direct sales representatives.

As of December 31, 2003, The PMA
Insurance Group employed 12 direct sales representatives and had contracts with
approximately 335 independent brokers and agents. The direct sales representatives are
generally responsible for certain business located in Pennsylvania and Delaware. For the
year ended December 31, 2003, these employees produced approximately $52 million in direct
premiums written.

The independent brokers and agents
solicit business throughout the marketing territory. The current distribution network
generally consists of large regional agents and brokers, local agents, and national
brokers that specialize in larger to middle market accounts that require the variety of
workers compensation, commercial lines and alternative market products offered by
The PMA Insurance Group. In 2003, independent brokers and agents accounted for
approximately 90% of The PMA Insurance Groups direct written premiums. The top
ten independent brokers and agents accounted for approximately 16% of The PMA Insurance
Groups direct written premiums, the largest of which accounted for approximately 3%
of its direct written premiums.

6

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The PMA Insurance Groups
underwriters review all business submissions before it is accepted. The PMA Insurance
Group monitors several statistics with respect to its independent brokers and agents,
including a complete profile of the broker/agent, the number of years the broker/agent has
been associated with The PMA Insurance Group, the percentage of the broker/agents
business that is underwritten by The PMA Insurance Group, the ranking of The PMA Insurance
Group within the broker/agents business and the profitability of the
broker/agents business.

As of December 31, 2003, the field
organization consisted of 17 offices throughout The PMA Insurance Groups principal
marketing territory. Branch offices deliver a full range of services directly to customers
located in their service territory, while satellite offices primarily offer risk control
and claim adjustment services.

Underwriting

The PMA Insurance Groups
underwriters, in consultation with actuaries, determine the general type of business to be
written using a number of criteria, including past performance, relative exposure to
hazard, premium size, type of business and other indicators of potential loss. Specific
types of business are referred to underwriting specialists and actuaries for individual
pricing. The underwriting team also establishes classes of business that The PMA Insurance
Group generally will not write, such as certain property exposures, certain hazardous
products and activities, and certain environmental coverages. Because terrorism exclusions
have never been permitted for workers compensation business, we refined our
workers compensation underwriting guidelines to reduce the underwriting exposure
from terrorism risks, including the review of aggregation of risks by geographic location,
evacuation and security of buildings in which insured employees work, and the type of
entities located in the vicinity of the prospective insured. These refined procedures have
not materially affected The PMA Insurance Groups mix of business.

Underwriters and risk-control
professionals in the field report functionally to the Chief Underwriting Officer and
locally to branch vice presidents who are accountable for territorial operating results.
Underwriters also work with the field marketing force to identify business that meets
prescribed underwriting standards and to develop specific strategies to write the desired
business. In performing this assessment, the field office professionals also consult with
actuaries who have been assigned to the specific field office regarding loss trends and
pricing and utilize actuarial loss rating models to assess the projected underwriting
results of accounts. A formal underwriting quality assurance program is also employed to
ensure consistent adherence to underwriting standards and controls.

The PMA Insurance Group also employs
credit analysts. These employees review the financial strength and stability of customers
who utilize loss-sensitive and alternative market products and specify the type and amount
of collateral that customers must provide under these arrangements. Premium auditors
perform audits to determine that premiums charged accurately reflect actual exposures.

Claims Administration

Claims services are delivered to
customers primarily through employees located in the field offices. Claim handling
professionals are assigned to each reported loss based on coverage and jurisdictional
expertise. Claims meeting certain criteria are referred to line of business claim
specialists. A formal quality assurance program is carried out to ensure the consistency
and effectiveness of claims adjustment activities. Claim handlers are also supported by a
network of in-house legal counsel and an anti-fraud investigative unit. A special claims
unit has also been established in the home office to focus on more complex specialized
matters such as asbestos and environmental claims.

The PMA Insurance Group maintains a
centralized claim processing center in order to minimize the volume of clerical and
repetitive administrative demands on our claims specialists. The centers ability to
handle loss reports, claim set-up, payments and statutory reporting allows the specialists
to focus immediate contact and a timely and effective resolution process. A centralized
call center is also located in the claim processing center to provide 24 hour coverage for
customer requests and inquiries.

In 2002, The PMA Insurance Group expanded
its internet-based functionality to include claim reporting capability. Currently, 20% of
new losses are reported through PMA Cinch®, our internet risk management information
technology.

7

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Competition

The domestic property and casualty
insurance industry is very competitive and consists of many companies, with no one company
dominating the market for all products. In addition, the degree and nature of competition
varies from state to state for a variety of reasons, including the regulatory climate and
other market participants in each state. In addition to competition from other insurance
companies, The PMA Insurance Group competes with certain alternative market arrangements,
such as captive insurers, risk-sharing pools and associations, risk retention groups, and
self-insurance programs. Many of our competitors are larger and have greater financial
resources than us.

The main factors upon which entities in
our markets compete are price, service, product capabilities and financial security. The
PMA Insurance Group attempts to price its products in such a way that the prices charged
to their clients are commensurate with the overall marketplace while still meeting our
rate of return targets. The PMA Insurance Group has rejected and/or non-renewed certain
accounts where we believed the market rates, terms and conditions for such risks did not
provide the opportunity to achieve an acceptable rate of return.

We maintain service standards concerning
turn-around time for underwriting submissions, information flow, claims handling and the
quality of other services. These standards help ensure that clients are satisfied with our
products and services. We periodically participate in surveys of intermediaries and
clients to gain an understanding of the perceptions of our service as compared to our
competitors.

We attempt to design products that meet
the needs of clients in our markets. In recent years, The PMA Insurance Group has
developed products that reflect the evolving nature of the workers compensation
market. Specifically, it has developed PMA One, a product that provides for group
integrated occupational and non-occupational disability coverages. The PMA Insurance Group
has also increased its focus on rehabilitation and managed care to control workers
compensation costs for the employers. In addition, it also continues to benefit from
writing business for insureds mainly operating in The PMA Insurance Groups principal
marketing territory but with some operations in other states. See The PMA Insurance
GroupProducts for additional discussion. We continually evaluate new product
opportunities for The PMA Insurance Group.

Industry Trends

During the 1990s and into 2000, the
property and casualty insurance industry was characterized by excess
capacity, which resulted in highly competitive market conditions evidenced by declining
premium rates and, in many cases, policy terms less favorable to the insurers. As a result
of this prolonged soft market, beginning in 2000, capacity in the property and casualty
market began to contract as companies withdrew from the business or ceased operations. In
response to market conditions, many insurance and reinsurance companies, including our
companies, independently sought and achieved significant price increases and improved
policy terms commencing in the second half of 2000. In 2002 and 2001, we realized price
increases at The PMA Insurance Group in excess of 15%. These increases continued in 2003,
with The PMA Insurance Group obtaining price increases of 10% for its workers
compensation business and 17% for its Commercial Lines business.

In addition to these increases, we have
achieved generally improved terms in certain of our insurance  policies.
For example, we have implemented broader coverage exclusions, lower occurrence limits,
lower ceding commissions, accelerated payment terms and higher retentions or deductibles
for insureds. These improvements in terms and conditions should further enhance the
profitability of our business.

Despite current market conditions, there
can be no assurance that prices and premiums will increase at a level consistent with
these expectations. Even if the industry in general experiences those types of increases,
we cannot assure you that we will see similar increases or that we will achieve price
increases consistent with 2003. Further, any benefit that we derive from such price
increases may be partially or completely offset by increases in ceded reinsurance premiums
and unexpected increases in our loss reserves.

8

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PMA RE

On November 6, 2003, we announced our
decision to withdraw from the reinsurance business. We are no longer writing new
reinsurance business. The results of this business, which had been offered though our PMA
Re business segment, will be included in Run-off Operations effective in 2004. Prior to
November 6, 2003, the Companys reinsurance operations offered excess of loss and pro
rata property and casualty reinsurance protection mainly through reinsurance brokers. PMA
Re provided treaty reinsurance on both a traditional and finite risk basis as well as
facultative reinsurance. PMA Re focused on providing reinsurance to small- to medium-sized
insurers, which we define as insurers with less than $500 million of statutory surplus.

Reinsurance is an arrangement in which an
insurance company, the reinsurer, agrees to indemnify another insurance company, the
ceding company, against all or a portion of the insurance risks underwritten by the ceding
company under one or more insurance contracts. Reinsurance provides ceding companies with
several benefits: reducing exposure on individual risks, protecting against catastrophic
losses, stabilizing underwriting results and maintaining acceptable capital ratios.

PMA Re provided reinsurance coverage
primarily under two arrangements: treaty and facultative. Typically, in treaty
reinsurance, the primary insurer or ceding company is obligated to cede and the reinsurer
is obligated to accept a specified portion of all agreed upon types or categories of risks
originally written by the primary insurer or ceding company. Facultative reinsurance is a
form of reinsurance coverage that is placed on a risk-by-risk basis, and the reinsurer
retains the right to accept or reject each individual risk submitted by the ceding
company. Of PMA Res total net premiums written during 2003, 95% were treaty and 5%
were facultative.

Late in 2000, PMA Re invested in a
Lloyds of London managing general agency, Cathedral Capital PLC, and commencing in
2001, we began participating in the results of Syndicate 2010, which primarily writes
property and aviation reinsurance. In the fourth quarter of 2002, we increased our
ownership in Cathedral Capital to 29.9% of their outstanding capital stock. In connection
with that transaction, we ceased our direct participation in Syndicate 2010 effective
December 31, 2002. At December 31, 2003, our interest in Cathedral Capital was
approximately $34 million. Cathedral Capital has agreed to indemnify us for losses
exceeding £300,000 arising from Syndicate 2010 related to the 2001 and 2002
underwriting years of account in which we participated. In consideration for the
indemnification, we have agreed to pay Cathedral Capital 30% of any underwriting profit
related to the 2001 and 2002 years of account. Cathedral Capital primarily provides
underwriting and management services for various Lloyds syndicates providing
primarily property and casualty coverages.

PMA Re had five distinct underwriting
units, organized by class of business. The Traditional-Treaty, Finite Risk and Financial
Products, Specialty-Treaty, and Accident-Treaty units provided treaty reinsurance
coverage. The fifth unit, Facultative, provided reinsurance on a facultative basis. The
Traditional-Treaty underwriting unit wrote general property and casualty business. The
Traditional casualty portfolio included general liability, umbrella, commercial automobile
and workers compensation.

The Finite Risk and Financial Products
underwriting unit provided PMA Res clients with creative risk management solutions
that complemented their traditional reinsurance program. Under its finite risk covers, PMA
Re assumed a measured amount of insurance risk in exchange for a specified margin. Our
finite risk reinsurance covers typically included a combination of sub-limits and caps on
the maximum gain or loss to PMA Re as the reinsurer. In December 2003, we executed a
definitive agreement with Imagine Insurance Company Limited (Imagine) selling
the renewal rights to PMA Res finite business and giving Imagine the exclusive
option to assume certain of PMA Res finite business currently in force. The amount
of business transferred to Imagine will be subject to their underwriting practices and
standards. Under the terms of the agreement, Imagine will compensate PMA Re based upon the
amount of in-force business either renewed or assumed by Imagine.

The Specialty-Treaty underwriting unit
wrote business that fell outside the confines of our traditional property and casualty
risks. The Facultative underwriting unit wrote property and casualty reinsurance on an
individual risk basis and on a program/semi-automatic basis, in which we agreed to accept
risks that fell within certain predetermined parameters. In 2002, the Accident-Treaty unit
was created to take advantage of market opportunities and to expand the portfolio of
products offered by PMA Re. The Accident-Treaty unit offered a wide variety of accident
products to life insurance companies, writers of workers compensation insurance and
writers of Special Risk insurance. In 2004, we entered into a 100% quota share reinsurance
agreement with a third-party reinsurer in which the reinsurer agreed to reinsure all of
the liabilities of the Accident-Treaty unit occurring after December 31, 2003, in return
for 100% of the Units unearned premium reserve.

9

---

PMA Res gross and net premiums
written by business unit and major category of business were as follows:

|                                   | 2003  |  | 2002 |         | 2001  |  
|---------------------------------- | ----- |  | ---- | ------- | ----- | -
|(dollar amounts in thousands)      | Gross |  | Net  |         | Gross |  
|                                  
|                                  
|Traditional - Treaty               |       |  |      |         |       |  
|Casualty                           |       |  | $    | 187,758 |       | $
|Property                           |       |  |      | 78,050  |       |  
|Other                              |       |  |      | 1,108   |       |  
|                                   |       |  |      |         |       |  
|Total                              |       |  |      | 266,916 |       |  
|                                   |       |  |      |         |       |  
|Finite Risk and Financial Products |       | 
|Casualty                           |       |  |      | 168,971 |       |  
|Property                           |       |  |      | 132,940 |       |  
|Other                              |       |  |      | 13,587  |       |  
|                                   |       |  |      |         |       |  
|Total                              |       |  |      | 315,498 |       |  
|                                   |       |  |      |         |       |  
|Specialty - Treaty                 |       | 
|Casualty                           |       |  |      | 89,203  |       |  
|Property                           |       |  |      | 1,267   |       |  
|Other                              |       |  |      | 614     |       |  
|                                   |       |  |      |         |       |  
|Total                              |       |  |      | 91,084  |       |  
|                                   |       |  |      |         |       |  
|Facultative                        |       | 
|Casualty                           |       |  |      | 46,392  |       |  
|Property                           |       |  |      | 11,985  |       |  
|Other                              |       |  |      | --      |       |  
|                                   |       |  |      |         |       |  
|Total                              |       |  |      | 58,377  |       |  
|                                   |       |  |      |         |       |  
|Accident                           |       | 
|Casualty                           |       |  |      | 256     |       |  
|Property                           |       |  |      | --      |       |  
|Other                              |       |  |      | 18,742  |       |  
|                                   |       |  |      |         |       |  
|Total                              |       |  |      | 18,998  |       |  
|                                   |       |  |      |         |       |  
|Total Casualty                     |       |  |      | 492,580 |       |  
|Total Property                     |       |  |      | 224,242 |       |  
|Total Other                        |       |  |      | 34,051  |       |  
|                                   |       |  |      |         |       |  
|Total Premiums Written             |       |  | $    | 750,873 |       | $
|                                   |       |  |      |         |       |  
|                                  
|                                  

As of December 31, 2003, traditional catastrophe
covers accounted for approximately 2% of PMA Res gross property premiums written.
The per risk property programs written by PMA Re generally contain per occurrence limits
and in some instances there is less catastrophe exposure either because of the locations
of the insured values or the nature of the underlying exposures. In addition, PMA
Res gross premiums written include approximately $21 million of funded catastrophe
coverages written by the Finite Risk and Financial Products unit. These funded covers
contain per occurrence and aggregate limits, as well as loss sensitive additional premium
provisions in the event of a loss to mitigate the severity of the catastrophic loss to us.
However, as is common in property reinsurance, PMA Re is exposed to the possibility of
loss from catastrophes due to the aggregation of losses. PMA Re actively manages this
exposure through zonal management, minimizing writings of catastrophe business, and the
purchase of retrocessional protection. See Item 7 - MD&A - Reinsurance
 and Reinsurance and Retrocessional Protection on page 11
 for additional information regarding PMA Res catastrophe retrocessional
program.

PMA Res claims department analyzes
reported claims, establishes individual claim reserves, pays claims, provides
claims-related services to clients and audits the claims activities of selected clients.
The claims departments evaluation of claims activity includes reviewing loss reports
received from ceding companies to confirm that claims are covered under the terms of the
relevant reinsurance contract, establishing reserves on an individual case basis and
monitoring the adequacy of those reserves. The claims department monitors the progress and
ultimate outcome of the claims to determine that subrogation, salvage and other cost
recovery opportunities have been adequately explored. The claims department performs these
functions in coordination with the actuarial department.

In addition to evaluating and adjusting
claims, the claims department conducts claims audits at the offices of selected ceding
companies. The claims department also conducts annual claims audits for many current and
former client ceding companies.

10

---

PMA Res claims department uses
electronic data exchange where trading partner capabilities exist to maintain the
timeliness of claims remittances and processing efficiency.

RUN-OFF OPERATIONS

Run-off Operations, formerly known as
Caliber One, comprise the assets and liabilities relating to the inforce policies of our
former excess and surplus lines business written prior to January 2, 2003. Our excess and
surplus lines business focused on excess and surplus lines of insurance for low
frequency/high severity risks that were declined by the standard market. The Run-off
Operations wrote business throughout the United States, generally through surplus lines
brokers.

Our Run-off Operations analyze and
investigate reported claims, establish individual claim reserves, pay claims and
monitor the progress and ultimate outcome of the excess and surplus lines claims. In
addition, they determine that subrogation, salvage and other cost recovery opportunities
have been adequately explored.

All notices of claims are reported to the
Run-off Operations centralized claims department. Claims services are delivered to
customers through employees and independent adjusters under the direction of internal
claims staff. The claims staff actively directs and manages the activities of all outside
attorneys utilized in the claims process.

See Note 15 in Item 8 of this Form 10-K for additional information regarding the Run-off Operations.

REINSURANCE AND RETROCESSIONAL PROTECTION

We follow the customary insurance practice
of reinsuring with other insurance companies a portion of the risks under the policies
written by our insurance subsidiaries. This reinsurance is maintained to protect the
insurance subsidiaries against the severity of losses on individual claims and unusually
serious occurrences in which a number of claims produce an aggregate extraordinary loss.
Although reinsurance does not discharge the insurance subsidiaries from their primary
liabilities to their policyholders for losses insured under the insurance policies, it
does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured
portion of the risk.

The ceded reinsurance agreements of our
insurance subsidiaries generally may be terminated at their annual anniversary by either
party upon 30 to 90 days notice. In general, the reinsurance agreements are treaty
agreements, which cover all underwritten risks of the types specified in the treaties. Our
reinsurance is on a per risk and per occurrence basis. Per risk reinsurance offers
reinsurance protection for each risk involved in each occurrence. Per occurrence
reinsurance is a form of reinsurance under which the date of the loss event is deemed to
be the date of the occurrence regardless of when reported and permits all losses arising
out of one event to be aggregated.

See "Item 7 - MD&A - Reinsurance"  and Note 6 in Item 8 of this 10-K  for additional
information.

11

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LOSS RESERVES

Insurers establish reserves representing
estimates of future amounts needed to pay claims with respect to insured events that have
occurred, including events that have not been reported to the insurer. Reserves are also
established for LAE representing the estimated expenses of settling claims, including
legal and other fees, and general expenses of administering the claims adjustment process.

After a claim is reported, claims
personnel establish a case reserve for the estimated amount of the ultimate
payment. The estimate reflects the informed judgment of management based on reserving
practices and managements experience and knowledge regarding the nature and value of
the specific type of claim. Claims personnel review and update their estimates as
additional information becomes available and claims proceed towards resolution. In
addition, reserves are also established on an aggregate basis:

| |  | to
provide for losses incurred but not yet reported to the insurer;
| | - | -------------------------------------------------------------------

| |  | to
provide for the estimated expenses of settling claims, including legal and other fees and
general expenses          of administering the claims adjustment process; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | to
adjust for the fact that, in the aggregate, case reserves may not accurately estimate the
ultimate liability          for reported claims.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

Reserves are estimated using various
generally accepted actuarial methodologies. As part of the reserving process, historical
and industry data is reviewed and consideration is given to the anticipated impact of
various factors such as legal developments, changes in social attitudes and economic
conditions, including the effects of inflation. This process relies on the basic
assumption that past experience, adjusted for the effect of current developments and
probable trends, provides a reasonable basis for predicting future events. The reserving
process provides implicit recognition of the impact of inflation and other factors
affecting claims payments by taking into account changes in historic payment patterns and
perceived probable trends. There is generally no precise method, however, for subsequently
evaluating the adequacy of the consideration given to inflation or to any other specific
factor, since the eventual deficiency or redundancy of reserves is affected by many
factors, some of which are interdependent.

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 insurer and the insurers payment of that
loss. In addition, because reinsurers rely on their ceding companies to provide them with
information regarding incurred losses, reported claims for reinsurers become known more
slowly than for primary insurers and are generally subject to more unforeseen development
and uncertainty. 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. As additional experience and data
become available regarding claims payment and reporting patterns, legal and legislative
developments, judicial theories of liability, regulatory trends on benefit levels for both
medical and indemnity payments, changes in social attitudes and economic conditions, the
estimates are revised accordingly. If our ultimate losses, net of reinsurance, prove to
differ substantially from the amounts recorded at December 31, 2003, the related
adjustments could have a material adverse effect on our financial condition, results of
operations and liquidity.

The table on the next page presents the
subsequent development of the estimated year-end property and casualty reserves, net of
reinsurance (net reserves), for the ten years prior to 2003. The first section
of the table shows the estimated net reserves that were recorded at the end of each
respective year for all current and prior year unpaid losses and LAE. The second section
shows the cumulative amounts of such previously recorded net reserves paid in succeeding
years. The third section shows the re-estimates of the net reserves made in each
succeeding year.

The cumulative deficiency (redundancy) as
shown in the table represents the aggregate change in the reserve estimates from the
original balance sheet dates through December 31, 2003; an increase in a loss estimate
that related to a prior year occurrence generates a deficiency in each intervening year.
For example, a deficiency first recognized in 2000 relating to losses incurred in 1993
would be included in the cumulative deficiency amount for each of the years 1993 through
1999. However, the deficiency would be reflected in operating results in 2000 only.

Conditions and trends that have affected
the reserve development reflected in the table may change, and care should be exercised in
extrapolating future reserve redundancies or deficiencies from such development.

12

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Consolidated Loss and Loss Adjustment Expense Development

December 31, (dollar amounts in millions)

|                                      | 1993 | 1994       | 1995 | 1996       | 1997 | 1998       | 1999 | 2000       | 2001 | 2002       | 2003
|------------------------------------- | ---- | ---------- | ---- | ---------- | ---- | ---------- | ---- | ---------- | ---- | ---------- | ----
|                                     
|                                      |      |            |      |            |      |            |      |            |      |            |     
|I. Initial estimated liability for    |      |            |      |            |      |            |      |            |      |            |     
|unpaid losses and LAE,                |     
|net of reinsurance                    |      | $ 1,932.0  |      | $ 1,855.9  |      | $ 1,808.5  |      | $ 1,834.5  |      | $ 1,670.9  |     
|                                     
|                                     
|II. Amount of reserve paid,           |     
|net of reinsurance through:           |     
|                                     
|- one year later                      |      | $    407.8 |      | $    398.9 |      | $    437.6 |      | $    398.8 |      | $    360.7 |     
|- two years later                     |      | 746.1      |      | 763.7      |      | 780.0      |      | 669.6      |      | 646.0      |     
|- three years later                   |      | 1,055.9    |      | 1,072.9    |      | 999.0      |      | 894.8      |      | 924.6      |     
|- four years later                    |      | 1,330.6    |      | 1,252.2    |      | 1,183.5    |      | 1,118.2    |      | 1,013.0    |     
|- five years later                    |      | 1,472.7    |      | 1,405.9    |      | 1,369.7    |      | 1,172.3    |      | 1,196.9    |     
|- six years later                     |      | 1,605.4    |      | 1,573.2    |      | 1,407.9    |      | 1,325.2    |      | 1,289.7    |     
|- seven years later                   |      | 1,761.7    |      | 1,595.8    |      | 1,542.2    |      | 1,394.5    |     
|- eight years later                   |      | 1,779.3    |      | 1,722.5    |      | 1,609.8    |     
|- nine years later                    |      | 1,897.7    |      | 1,783.3    |     
|- ten years later                     |      | 1,943.6    |     
|                                     
|III. Reestimated liability,           |     
|net of reinsurance, as of             |     
|                                     
|- one year later                      |      | $ 1,932.3  |      | $ 1,907.4  |      | $ 1,964.6  |      | $ 1,748.5  |      | $ 1,624.3  |     
|- two years later                     |      | 1,982.5    |      | 2,073.4    |      | 1,866.8    |      | 1,700.5    |      | 1,557.6    |     
|- three years later                   |      | 2,163.9    |      | 1,986.7    |      | 1,819.2    |      | 1,611.1    |      | 1,495.3    |     
|- four years later                    |      | 2,078.3    |      | 1,942.0    |      | 1,742.1    |      | 1,542.3    |      | 1,480.8    |     
|- five years later                    |      | 2,030.5    |      | 1,880.3    |      | 1,672.6    |      | 1,524.3    |      | 1,482.9    |     
|- six years later                     |      | 1,973.2    |      | 1,822.1    |      | 1,658.0    |      | 1,519.0    |      | 1,487.5    |     
|- seven years later                   |      | 1,922.1    |      | 1,807.6    |      | 1,655.3    |      | 1,514.0    |     
|- eight years later                   |      | 1,910.9    |      | 1,807.3    |      | 1,650.0    |     
|- nine years later                    |      | 1,912.7    |      | 1,804.9    |     
|- ten years later                     |      | 1,907.4    |     
|                                     
|IV. Cumulative deficiency             |     
|(redundancy):                         |      | $   (24.6  | )    | $   (51.0  | )    | $  (158.5  | )    | $  (320.5  | )    | $  (183.4  | )   
|                                     
|                                     
|V. Net liability                      |      | $ 1,932.0  |      | $ 1,855.9  |      | $ 1,808.5  |      | $ 1,834.5  |      | $ 1,670.9  |     
|Reinsurance recoverables              |      | 218.7      |      | 247.9      |      | 261.5      |      | 256.6      |      | 332.3      |     
|                                     
|Gross liability                       |      | $ 2,150.7  |      | $ 2,103.8  |      | $ 2,070.0  |      | $ 2,091.1  |      | $ 2,003.2  |     
|                                     
|                                     
|VI. Re-estimated net liability        |      | $ 1,907.4  |      | $ 1,804.9  |      | $ 1,650.0  |      | $ 1,514.0  |      | $ 1,487.5  |     
|Re-estimated reinsurance recoverables |      | 223.8      |      | 264.5      |      | 299.3      |      | 278.9      |      | 338.9      |     
|                                     
|Re-estimated gross liability          |      | $ 2,131.2  |      | $ 2,069.4  |      | $ 1,949.3  |      | $ 1,792.9  |      | $ 1,826.4  |     
|                                     

13

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Unpaid losses and LAE on a GAAP basis
were $2,541.3 million and $2,449.9 million at December 31, 2003 and 2002, respectively.
Unpaid losses and LAE on a statutory basis were $1,080.1 million and $970.9 million at
December 31, 2003 and 2002, respectively. The difference between GAAP and statutory loss
reserves reflects: 1) reinsurance receivables on unpaid losses and LAE, which are recorded
as assets for GAAP but netted against statutory loss reserves, and 2) non-U.S. domiciled
insurance companies, whose unpaid losses and LAE are included for GAAP purposes, but not
for statutory purposes.

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)     | 2003 |  | 2002 |         | 2001 |  
|--------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                 
|                                 
|                                  |      |  |      |         |      |  
|The PMA Insurance Group           |      |  | $    | 49,685  |      | $
|PMA Re                            |      |  |      | 169,089 |      |  
|Run-off Operations                |      |  |      | --      |      |  
|                                  |      |  |      |         |      |  
|Total net unfavorable development |      |  | $    | 218,774 |      | $
|                                  |      |  |      |         |      |  
|                                 
|                                 

The PMA Insurance Group recorded
unfavorable prior year loss development of $49.7 million, $1.1 million and $2.9 million in
2003, 2002 and 2001, respectively. In the fourth quarter of 2003, our internal actuaries
completed a comprehensive year-end actuarial analysis of loss reserves. Based on the
actuarial work performed, we noticed higher than expected claims severity in our
workers compensation business written for accident years 2001 and 2002, primarily
from loss-sensitive and participating workers compensation business. As a result, The PMA Insurance Group
increased loss reserves for prior years by $50 million. An independent actuarial firm also
conducted a comprehensive review of The PMA Insurance Group's loss reserves as of December 31, 2003 and
concluded that such carried loss reserves were reasonable as of December 31, 2003. Under
The PMA Insurance Groups loss-sensitive rating plans we adjust the amount of the
insureds premiums after the policy period expires based, to a large extent, upon the
insureds actual losses incurred during the policy period. Under policies that are
subject to dividend plans, the ultimate amount of the dividend that the insured may
receive is also based, to a large extent, upon loss experience during the policy period.
Accordingly, offsetting the effects of this unfavorable prior year loss development were
premium adjustments of $35 million under loss-sensitive plans and reduced policyholder
dividends of $8 million, resulting in a net fourth quarter pre-tax charge of $7 million.

During 2003, PMA Re increased net loss
reserves for prior accident years by $169.1 million, including $150 million during the
third quarter. PMA Res third quarter 2003 reserve charge related to higher than
expected underwriting losses, primarily from casualty business written in accident years
1997 through 2000. Approximately 75% of the charge was related to general liability business
written from 1997 to 2000 with substantially all of the remainder from the commercial
automobile line written during those same years. During the third quarter, the Company's
actuaries conducted their periodic comprehensive reserve review. 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. The
information derived during this review indicated that a large portion of the change in
expected loss development was due to increasing loss trends emerging in calendar year 2003
for prior accident years. This increase in 2003 loss trends caused us to determine that
the reserve levels, primarily for accident years 1997 to 2000, needed to be increased by
$150 million. An independent actuarial firm also conducted a comprehensive review of PMA
Res Traditional-Treaty, Specialty-Treaty and Facultative loss reserves, and
concluded that those carried loss reserves were reasonable at September 30, 2003.

PMA Res analysis was enhanced by an
extensive review of specific accounts, comprising about 40% of carried reserves for
accident years 1997 to 2000. The Company's actuaries visited a number of former ceding company
clients, which collectively comprised about 25% of PMA Res total gross loss and LAE
reserves from accident years 1997 to 2000, to discuss reserving and reporting experience
with these ceding companies. The Company's actuaries separately evaluated an additional number
of other ceding companies, representing approximately 15% of PMA Res total gross
loss and LAE reserves from accident years 1997 to 2000, to understand and examine data
trends.

During 2002, PMA Re recorded unfavorable
prior year development of $106.9 million. In the fourth quarter, PMA Res actuarial
department conducted its routine year-end reserve study to determine the impact of any
emerging data on anticipated loss development trends and recorded unpaid losses and LAE
reserves. During the fourth quarter, the Companys actuaries observed a higher than
expected increase in the frequency and, to a lesser extent, severity of reported claims by
PMA Res ceding companies. 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 net loss and LAE reserves for prior accident years needed to be increased by
approximately

14

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$64 million in the fourth quarter of 2002, primarily for excess of loss and pro
rata general liability occurrence contracts and, to a lesser extent, excess of loss
general liability claims-made contracts, from accident years 1998, 1999 and 2000.

The remaining $43 million of unfavorable
prior year development at PMA Re in 2002 primarily reflects the recording of losses and
LAE on additional earned premiums recorded during 2002 as a result of a change in our
estimate of ultimate premiums written from prior years. Because premiums from ceding
companies are typically reported on a delayed basis, we monitor and update as appropriate
the estimated ultimate premiums written. PMA Res periodic reviews of estimated
ultimate premiums written, which compared actual reported premiums and originally
estimated premiums based on ceding company estimates, indicated that premiums written in
recent years, primarily in the Traditional- and Specialty-Treaty units for 2001 and 2000,
were higher than originally estimated. As a result, PMA Re recorded additional net
premiums earned during 2002, including $39.9 million in the second quarter, which were
completely offset by losses and LAE and acquisition expenses.

During 2002, the Run-off Operations
recorded unfavorable prior year development of $51.8 million. During 2002, company
actuaries conducted reserve reviews 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
this segment. Managements selection of the ultimate losses resulting from their
reviews indicated that net loss reserves for prior accident years, mainly 1999 and 2000,
needed to be increased by $51.8 million. This unfavorable prior year development reflects
the impact of higher than expected claim severity and, to a lesser extent, frequency, that
emerged in 2002 on casualty lines of business, primarily professional liability policies
for the nursing homes class of business; general liability, including policies covering
contractors liability for construction defects; and commercial automobile, mainly
for accident years 1999 and 2000.

As a result of its reserve reviews
conducted in 2001, the Run-off Operations 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, the Run-off Operations recorded
unfavorable prior year loss development of $22.2 million. 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.

At December 31, 2003 and 2002, our GAAP
loss reserves were recorded net of discount of $67.0 million and $97.8 million,
respectively, primarily related to workers compensation business. Pre-tax income
(loss) is negatively impacted by accretion of discount on prior year reserves and
favorably impacted by recording of discount for current year reserves. The net of these
amounts is referred to as net discount accretion. Net discount accretion benefited pre-tax
results by $6.3 million and $6.8 million in 2003 and 2002, respectively.

At December 31, 2003, our loss reserves
were stated net of $33.2 million of salvage and subrogation. Our policy with respect to
estimating the amounts and realizability of salvage and subrogation is to develop accident
year schedules of historic paid salvage and subrogation by line of business, which are
then projected to an ultimate basis using actuarial projection techniques. The anticipated
salvage and subrogation is the estimated ultimate salvage and subrogation less any amounts
received by us. The realizability of anticipated salvage and subrogation is reflected in
the historical data that is used to complete the projection, as historical paid data
implicitly considers realization and collectibility.

Asbestos and Environmental Reserves

At December 31, 2003, 2002 and 2001,
gross reserves for asbestos-related losses were $37.8 million, $42.1 million and $59.9
million, respectively ($17.8 million, $25.8 million and $28.6 million, net of reinsurance,
respectively). Of the net asbestos reserves, approximately $14.9 million, $22.9 million,
and $26.6 million related to IBNR losses at December 31, 2003, 2002 and 2001,
respectively. At December 31, 2003, 2002 and 2001 gross reserves for environmental-related
losses were $14.2 million, $18.2 million and $29.6 million, respectively ($8.8 million,
$14.3 million and $16.0 million, net of reinsurance, respectively). Of the net
environmental reserves, approximately $3.7 million, $7.9 million and $9.2 million related
to IBNR losses at December 31, 2003, 2002 and 2001, 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 and regulations. We believe that our reserves for

15

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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 and damages 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.

INVESTMENTS

An important component of our financial
results is the return on invested assets. 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.

The executive committee of our board of
directors is responsible for reviewing our investment objectives. We retain outside investment
advisers to provide investment advice and guidance, supervise our portfolio and arrange
securities transactions through brokers and dealers. Investments by the Pooled Companies
and PMA Capital Insurance Company must comply with the insurance laws and regulations of
the Commonwealth of Pennsylvania.

We do not currently own any derivative
financial instruments. We do not use derivatives for speculative purposes. Our investment
portfolio 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 investments in any single industry segment other than finance companies,
which comprise 14% of invested assets at December 31, 2003. Included in this industry
segment are diverse financial institutions, including financing subsidiaries of automotive
manufacturers.

For additional information on our
investments, including carrying values by category, quality ratings and net investment
income, see "Item 7 - MD&A - Investments"  as well as Notes 2-B and 4 in Item 8 of this Form 10-K.

RATINGS

Nationally recognized ratings agencies
rate the financial strength of our principal insurance subsidiaries and of the debt of PMA
Capital Corporation. Ratings are not recommendations to buy our securities.

Rating agencies rate insurance companies
based on financial strength and the ability to pay claims, factors more relevant to
policyholders than investors. We believe that the ratings assigned by nationally
recognized, independent rating agencies, particularly A.M. Best, are material to our
operations. We currently participate in the ratings process of A.M. Best and Moodys
Investor Services. Other rating agencies also rate our securities, which we do not
disclose in our reports.

The rating scales of A.M. Best and
Moodys are characterized as follows:

| |  | A.M.
Best--A++ to S ("Superior" to "Suspended")
| | - | -----------------------------------------------

| |  | Moody's--Aaa
to C ("Exceptional" to "Lowest")
| | - | ---------------------------------------------

16

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As of February 29, 2004, the financial
strength ratings of our principal insurance subsidiaries and the debt ratings of PMA
Capital Corporation, as published by the principal rating agencies, are as follows:

|                             
|-----------------------------
|Financial Strength Ratings:  
|                             
|Pooled Companies(3)          
|PMA Capital Insurance Company
|                             
|Senior Debt Ratings:         
|                             
|PMA Capital Corporation      
|                             
|                             

|(1) |  | Under
review with negative implications.
|--- |  | ----------------------------------------

|(2) |  | Negative
outlook.
|--- |  | -----------------

|(3) |  | The
Pooled Companies (Pennsylvania Manufacturers Association Insurance Company,
Pennsylvania Manufacturers Indemnity Company and Manufacturers Alliance Insurance
Company) represent the domestic subsidiary insurance companies through which The PMA
Insurance Group writes its insurance business, which share results through an
intercompany pooling agreement. The Pooled Companies are rated as one entity.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Direction
uncertain.
|--- |  | --------------------

A downgrade in the A.M. Best financial
strength rating of the Pooled Companies would result in a material loss of business as
policyholders move to other companies with higher financial strength ratings. Accordingly,
such a downgrade to our A.M. Best insurer financial strength rating would have a material
adverse effect on our results of operations, liquidity and capital resources.

A downgrade in our debt ratings will
affect our ability to raise additional debt with terms and conditions similar to our
current debt, and, accordingly, will increase our cost of capital. In addition, a
downgrade of our debt ratings will make it more difficult to raise capital to refinance
any maturing debt obligations and to maintain or improve the current financial strength
ratings of our principal insurance subsidiaries.

These ratings are subject to revision or
withdrawal at any time by the rating agencies, and therefore, no assurance can be given
that we or our principal insurance subsidiaries can maintain these ratings. Each rating
should be evaluated independently of any other rating.

See "Risk Factors" beginning on page 25 and "Item 7 - MD&A - Recent Developments" for
additional information regarding our ratings.

REGULATORY MATTERS

General

One or more of The PMA Insurance
Groups Pooled Companies are licensed to transact insurance business in, and are
subject to regulation and supervision by, 52 jurisdictions (including Puerto Rico and the
District of Columbia). PMA Capital Insurance Company is licensed or accredited to transact
business in, and is subject to regulation and supervision by, 50 states and the District
of Columbia. Our insurance subsidiaries are authorized and regulated in all jurisdictions
where they conduct insurance business.

In supervising and regulating insurance
and reinsurance companies, state insurance departments, charged primarily with protecting
policyholders and the public rather than investors, enjoy broad authority and discretion
in applying applicable insurance laws and regulations for that purpose. The Pooled
Companies and PMA Capital Insurance Company are domiciled in Pennsylvania, and the
Pennsylvania Insurance Department exercises principal regulatory jurisdiction over them.
The extent of regulation by the states varies, but in general, most jurisdictions have
laws and regulations governing standards of solvency, adequacy of reserves, reinsurance,
capital adequacy and standards of business conduct.

In addition, statutes and regulations
usually require the licensing of insurers and their agents, the approval of policy forms
and related material and, for certain lines of insurance, including rate-sensitive
workers compensation, the approval of rates. Property and casualty reinsurers are
generally not subject to filing or other regulatory requirements applicable to primary
standard lines insurers with respect to rates, underwriting rules and policy forms. The
form and content of statutory financial statements are regulated.

17

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The U.S. federal government does not
directly regulate the insurance industry; however, federal initiatives from time to time
can impact the insurance industry. In November 2002, the Terrorism Risk Insurance Act of
2002 (TRIA) became effective. TRIA provides federal reinsurance protection for
property and casualty losses in the United States or to United States aircraft or vessels
arising from certified terrorist acts through the end of 2005. For terrorist acts to be
covered under TRIA, they must be certified as such by the United States Government and
must be committed by individuals acting on behalf of a foreign person or interest. TRIA
contains a make available provision, which requires insurers subject to the
Act, to offer coverage for acts of terrorism that does not differ materially from the
terms (other than price), amounts and other coverage limitations offered to the
policyholder for losses from events other than acts of terrorism. The make
available provision permits exclusions for certain types of losses, if a state
permits exclusions for such losses. TRIA requires insurers to retain losses based on a
percentage of their commercial lines direct earned premiums for the prior year equal to a
7% deductible for 2003, 10% for 2004 and 15% for 2005. The federal government covers 90%
of the losses above the deductible, while a company retains 10% of the losses. TRIA
contains an annual limit of $100 billion of covered industry-wide losses. TRIA applies to
commercial lines of property and casualty insurance, including workers compensation
insurance, offered by The PMA Insurance Group, but does not apply to reinsurance. The PMA
Insurance Group would have a deductible of approximately $43 million in 2004 if a covered
terrorist act were to occur.

Workers compensation insurers were
not permitted to exclude terrorism from coverage prior to the enactment of TRIA, and
continue to be subject to this prohibition. When underwriting existing and new commercial
insurance business, The PMA Insurance Group considers the added potential risk of loss due
to terrorist activity, and this may lead it to decline to write or non-renew certain
business. Appropriate rates may be charged for terrorism coverage, and as of January 1,
2004, The PMA Insurance Group had adopted premium charges for workers compensation
insurance in all states. The PMA Insurance Group has refined its underwriting procedures
to take into account terrorism risks.

As discussed above, we have refined our
underwriting processes to account for terrorism risks and TRIA may mitigate the potential
impact of terrorism losses on our results. However, because of TRIAs uncertain
application, the amount of terrorism losses that The PMA Insurance Group must retain under
TRIA and the fact that TRIA does not apply to, and we do not have terrorism exclusions in
all of, our reinsurance business, future terrorist attacks may result in losses that could
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 Business  The PMA Insurance Group, Underwriting on page 7 of this Form
10-K.

Further, although we do not write health
insurance, federal and state rules and regulations affecting health care services can
affect the workers compensation and integrated disability services we provide.
Pending initiatives to increase health care regulation at the federal and state level
include managed care reform and a patients bill of rights. We cannot predict what
health care reform legislation will be adopted by Congress or by state legislatures where
we do business or the effect, if any, that the adoption of health care legislation or
regulations at the federal or state level will have on our results of operations.

State insurance departments in
jurisdictions in which our insurance subsidiaries do business also conduct periodic
examinations of their respective operations and accounts and require the filing of annual
and other reports relating to their financial condition. The Pennsylvania Department of
Insurance is currently conducting examinations of PMA Capital Insurance Company and the
Pooled Companies as of December 31, 2002. Although we have not received the final report
of the Department, we do not expect any material adjustments to previously filed statutory
financial statements as a result of such examinations. In addition, we do not expect any
material qualitative matters to be raised as a result of the examination.

Insurance Holding Company Regulation

The Company and its insurance
subsidiaries are subject to regulation pursuant to the insurance holding company laws of the Commonwealth of
Pennsylvania. Pennsylvanias state insurance holding company laws generally require
an insurance holding company and insurers and reinsurers that are members of such
insurance holding companys system to register with the insurance department
authorities, to file with it certain reports disclosing information including their
capital structure, ownership, management, financial condition, certain intercompany
transactions, including material transfers of assets and intercompany business agreements,
and to report material changes in that information. These laws also require that
intercompany transactions be fair and reasonable and, under certain circumstances, prior
approval of the Pennsylvania insurance department must be received before entering into an
intercompany transaction. Further, these laws require that an insurers
policyholders surplus following any dividends or distributions to shareholder
affiliates be reasonable in relation to the insurers outstanding liabilities and
adequate for its financial needs.

18

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As a result of discussions with the
Pennsylvania Insurance Department, PMA Capital Insurance Company entered into a letter
agreement with the Department, dated December 22, 2003. Pursuant to the agreement, PMA
Capital Insurance Company has agreed to request the Departments prior approval of
certain additional actions, including: entering into any new reinsurance contracts,
treaties or agreements, except as may be required by law; making any payments, dividends
or other distributions to, or engaging in any transactions with, any of PMA Capital
Insurance Companys affiliates; making any withdrawal of monies from PMA Capital
Insurance Companys bank accounts or making any disbursements, payments or transfers
of assets in an amount exceeding five percent (which equaled $57.1 million as of December
31, 2003) of the fair market value of PMA Capital Insurance Companys then aggregate
cash and investments; incurring any debt, obligation or liability for borrowed money,
pledging its assets or loaning monies to any person or entity (whether or not affiliated);
appointing any new director or executive officer; or altering its or its
Pennsylvania-domiciled insurance company subsidiaries ownership structure.
The letter agreement shall remain in effect until the Commissioner, or PMA
Capital Insurance Company and the Commissioner, determine it is no longer necessary,
or until and unless it is superseded by a regulatory order.

In addition, PMA Capital Insurance
Company has agreed to engage an independent actuary, approved by the Department, to
conduct actuarial assessments of it and its Pennsylvania-domiciled insurance
subsidiaries (The PMA Insurance Group companies) loss reserves for 2003 and, as the
Department deems necessary, each year thereafter. PMA Capital Insurance Company has also
agreed to provide the Department with certain financial and operating information,
including: a monthly summary statutory financial report of its results of operations and
the financial position; a plan for the satisfaction of its reinsurance liabilities that
will contain projections for funding each years liabilities and that will be
regularly reviewed and revised as necessary; a list of commutations of existing
reinsurance contracts or treaties and their financial impact. This is a summary of certain
terms of the letter agreement and is qualified in its entirety by the full text of the
letter agreement, which is filed as Exhibit 99.1 hereto and incorporated herein by
reference.

Under Pennsylvania law, no person may
acquire, directly or indirectly, a controlling interest in our capital stock unless such
person, corporation or other entity has obtained prior approval from the Commissioner for
such acquisition of control. Pursuant to the Pennsylvania law, any person acquiring,
controlling or holding the power to vote, directly or indirectly, ten percent or more of
the voting securities of an insurance company, is presumed to have control of
such company. This presumption may be rebutted by a showing that control does not exist in
fact. The Commissioner, however, may find that control exists in circumstances
in which a person owns or controls a smaller amount of voting securities. To obtain
approval from the Commissioner of any acquisition of control of an insurance company, the
proposed acquirer must file with the Commissioner an application containing information
regarding: the identity and background of the acquirer and its affiliates; the nature,
source and amount of funds to be used to carry out the acquisition; the financial
statements of the acquirer and its affiliates; any potential plans for disposition of the
securities or business of the insurer; the number and type of securities to be acquired;
any contracts with respect to the securities to be acquired; any agreements with
broker-dealers; and other matters.

Other jurisdictions in which our
insurance subsidiaries are licensed to transact business may have requirements for prior
approval of any acquisition of control of an insurance or reinsurance company licensed or
authorized to transact business in those jurisdictions. Additional requirements in those
jurisdictions may include re-licensing or subsequent approval for renewal of existing
licenses upon an acquisition of control. As further described below, laws that govern the
holding company structure also govern payment of dividends to us by our insurance
subsidiaries.

Restrictions on Subsidiaries' Dividends and Other Payments

We are a holding company that transacts
substantially all of our business directly and indirectly through subsidiaries. Our
primary assets are the stock of our operating subsidiaries. Our ability to meet our
obligations on our outstanding debt and to pay dividends and our general and
administrative expenses depends on the surplus and earnings of our subsidiaries and the
ability of our subsidiaries to pay dividends or to advance or repay funds to us.

Under Pennsylvania laws and regulations,
our insurance subsidiaries may pay dividends only from unassigned surplus and future
earnings arising from their businesses and must receive prior approval of the Pennsylvania
Insurance Commissioner to pay a dividend if such dividend would exceed the statutory
limitation. The current statutory limitation is the greater of (i) 10% of the
insurers policyholders surplus, as shown on its last annual statement on file
with the Pennsylvania Insurance Commissioner or (ii) the insurers statutory net
income for the previous calendar year, but in no event to exceed statutory unassigned
surplus. Pennsylvania law gives the Pennsylvania Insurance Commissioner broad discretion
to disapprove requests for dividends in excess of these limits. Pennsylvania law also
provides that following the payment of any dividend, the insurers
policyholders surplus must be reasonable in relation to its outstanding liabilities
and adequate for its financial needs, and permits the Pennsylvania Insurance Commissioner
to bring an action to rescind a dividend which violates these standards. In the event that
the Pennsylvania Insurance Commissioner determines that the policyholders surplus of
one subsidiary

19

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is inadequate, the Commissioner could use his or her broad discretionary
authority to seek to require us to apply payments received from another subsidiary for
the benefit of that insurance subsidiary.

All of our domestic insurance entities
are owned by PMA Capital Insurance Company. Only PMA Capital Insurance Company, a
Pennsylvania domiciled company, may pay dividends directly to us. During 2003, we received
$24 million in dividends from PMA Capital Insurance Company. Under Pennsylvania law,
approximately $17 million of dividends would have been available to be paid by PMA Capital
Insurance Company to us in 2004 without the prior approval of the Pennsylvania Insurance
Department as of December 31, 2003. However, under the letter agreement dated December 22, 2003,
 PMA Capital Insurance Company has agreed with
the Pennsylvania Insurance Department that PMA Capital Insurance Company will not pay
dividends to us without the prior approval of the Pennsylvania Insurance Department. As of
December 31, 2003, The PMA Insurance Groups Pooled Companies can pay up to $23.2
million in dividends to PMA Capital Insurance Company during 2004.

In addition to the regulatory
restrictions, we may not declare or pay cash dividends or distributions on our Class A
Common stock if we elect to exercise our right to defer interest payments on our $43.8
million of trust preferred debt outstanding.

Risk-Based Capital

The National Association of Insurance
Commissioners has adopted risk-based capital requirements for property/casualty insurance
companies to evaluate the adequacy of statutory capital and surplus in relation to
investment and insurance risks such as asset quality, asset and liability matching, loss
reserve adequacy and other business factors. Under risk-based capital ("RBC") requirements, regulatory compliance
is determined by the ratio of a companys total adjusted capital, as defined by the
NAIC, to its authorized control level of RBC (known as the RBC ratio), also as defined by
the NAIC.

Four levels of regulatory attention may
be triggered if the RBC ratio is insufficient:

| |  | "Company
action level"If the RBC ratio is between 150% and 200%, then the insurer must submit a
plan to the regulator detailing corrective action it proposes to undertake.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | "Regulatory
action level"If the RBC ratio is between 100% and 150%, then the insurer must
submit a plan, but a regulator may also issue a corrective order requiring the insurer to
comply within a specified period.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | "Authorized
control level"If the RBC ratio is between 70% and 100%, then the regulatory
response is the same as at the "Regulatory action level," but in addition, the regulator
may take action to rehabilitate or liquidate the insurer.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | "Mandatory
control level"If the RBC ratio is less than 70%, then the regulator must
rehabilitate or liquidate the insurer.
| | - | ---------------------------------------------------------------------------------------------------------------------------

At December 31, 2003, the RBC ratios of the
Pooled Companies ranged from 398% to 705% and PMA Capital Insurance Companys RBC
ratio was 262%.

We believe that we will be able to
maintain the RBC ratios of our insurance subsidiaries in excess of Company action
level through prudent underwriting, claims handling, investing and capital
management. However, no assurances can be given that developments affecting the insurance
subsidiaries, many of which could be outside of our control, including but not limited to
changes in the regulatory environment, economic conditions and competitive conditions in
the jurisdictions in which we write business, will not cause the RBC ratios to fall below
required levels resulting in a corresponding regulatory response.

The NAIC has also developed a series of
twelve ratios (known as the IRIS ratios) designed to further assist regulators in
assessing the financial condition of insurers. These ratio results are computed annually
and reported to the NAIC and the insurers state of domicile. In 2003, each of the
Pooled Companies reported an unusual value in one ratio, relating to reserve development
due to the paydown of loss reserves. In addition, one of the Pooled Companies reported an
unusual value in a second ratio, due to low investment yield.

20

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In 2003, PMA Capital Insurance Company
reported six unusual values, relating to: (1) liabilities to liquid assets ratio, (2)
investment yield, (3) change in policyholders surplus, (4) the two-year overall
operating ratio, (5) two-year  development to policyholders surplus ratio and (6) estimated
current reserve deficiency to policyholder surplus. The unusual value relating to the
liabilities to liquid assets ratio is due largely to investments in PMA Capital Insurance
Companys insurance subsidiaries. These investments are not considered liquid
assets, and therefore caused the ratio to increase. The unusual value related to
investment yield relates primarily to a decrease in yield on our bond portfolio. The
unusual values relating to the remaining ratios are due primarily to the unfavorable
prior year loss development recorded in 2003 and 2002.

EMPLOYEES

As of February 29, 2004, we had
approximately 1,250 full-time employees. None of our employees are represented by a labor
union and we are not a party to any collective bargaining agreements. We consider our
employee relations to be good.

AVAILABLE INFORMATION

The address for our internet website is
www.pmacapital.com. We make available, free of charge, through our internet website, our
annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.

21

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GLOSSARY OF SELECTED INSURANCE TERMS

|                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Acquisition expense                                   | The cost of acquiring both new and renewal insurance business, including
commissions to agents or brokers and premium taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                     
|Broker                                                | One who negotiates contracts of insurance or reinsurance between parties.
An insurance broker negotiates on behalf of an insured and a primary insurer. A
reinsurance broker negotiates on behalf of a primary insurer or other reinsured and a
reinsurer. The broker receives a commission for placement and other services rendered.                                                                                                                                                                                                                                                                        
|                                                     
|Case reserves                                         | Loss reserves established with respect to individual reported claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                     
|Casualty insurance and/or
   reinsurance              | Insurance and/or reinsurance that is concerned primarily with the losses caused
by injuries to third persons (in other words, persons other than the
policyholder) and the legal liability imposed on the insured resulting
therefrom.                                                                                                                                                                                                                                                                                                                                                                        
|                                                     
|Catastrophe reinsurance                               | A form of excess of loss property reinsurance that, subject to a specified
limit, indemnifies the ceding company for the amount of loss in excess of a
specified retention with respect to an accumulation of losses resulting from a
catastrophic event. Cede; ceding company; cedent When a company reinsures its
risk with another, it "cedes" business and is referred to as the "ceding
company" or the "cedent."                                                                                                                                                                                        
|                                                     
|Claims-made policy                                    | A term describing an insurance policy that covers claims made (reported or
filed) during the year the policy is in force for any incidents that occur that
year or during any previous period during which the insured was covered under a
"claims-made" contract.                                                                                                                                                                                                                                                                                                                                            
|                                                     
|Combined ratio                                        | The sum of losses and LAE, acquisition expenses, operating expenses and
policyholders' dividends, where applicable, all divided by net premiums earned.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                     
|Direct reinsurer, direct   underwriter, direct writer | A reinsurer that markets and sells reinsurance directly to its reinsureds
without the assistance of brokers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                     
|Excess and surplus lines                              | Surplus lines risks are those risks not fitting normal underwriting patterns,
involving a degree of risk that is not commensurate with standard rates and/or
policy forms, or that will not be written by standard carriers because of
general market conditions. Excess insurance refers to coverage that attaches for
an insured over the limits of a primary policy or a stipulated self-insured
retention. Policies are bound or accepted by carriers not licensed in the
jurisdiction where the risk is located, and generally are not subject to
regulations governing premium rates or policy language.
|                                                     
|Excess of loss reinsurance                            | The generic term describing reinsurance that indemnifies the reinsured against
all or a specified portion of losses on underlying insurance policies in excess
of a specified dollar amount, called a "layer" or "retention." Also known as
nonproportional reinsurance.                                                                                                                                                                                                                                                                                                                                      
|                                                     
|Facultative reinsurance                               | The reinsurance of all or a portion of the insurance provided by a single
policy. Each policy reinsured is separately negotiated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                     
|Financial quota share   reinsurance                   | A form of finite risk reinsurance wherein the cedent transfers some of its
premiums to a finite risk provider and achieves, by virtue of an individual
arrangement for reinsurance commission, the required financial effects, such as
a stabilization of net claims costs.                                                                                                                                                                                                                                                                                                                                   

22

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|                                              |                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                             
|Finite risk reinsurance                       | A form of reinsurance combining common features of traditional reinsurance with
additional features that recognize the reinsured's needs regarding cash flows,
investment yields and capital management. This type of reinsurance usually
includes caps on the maximum gain or loss to the reinsurer.                              
|                                             
|Funded catastrophe coverages                  | Reinsurance contracts under which the ceding company pays a higher than normal
premium intended to build a fund from which to pay expected losses. All of the
premium less the reinsurance charge will be returned to the ceding company at
some time in the future as loss payments, returned premiums, or contingent
commissions.
|                                             
|Funds held                                    | The holding by a ceding company of funds representing the unearned premium
reserve or the outstanding loss reserve applied to the business it cedes to a
reinsurer.                                                                                                                                                                
|                                             
|Gross premiums written                        | Total premiums for direct insurance and reinsurance assumed during a given period.                                                                                                                                                                                                                                                 
|                                             
|Incurred but not reported   ("IBNR") reserves | Loss reserves for estimated losses that have been incurred but not yet reported
to the insurer or reinsurer.                                                                                                                                                                                                                       
|                                             
|Incurred losses                               | The total losses sustained by an insurance company under a policy or policies,
whether paid or unpaid. Incurred losses include a provision for claims that have
occurred but have not yet been reported to the insurer ("IBNR").                                                                                                   
|                                             
|Loss adjustment expenses   ("LAE")            | The expenses of settling claims, including legal and other fees and the portion
of general expenses allocated to claim settlement costs.                                                                                                                                                                                           
|                                             
|Loss and LAE ratio                            | Loss and LAE ratio is equal to losses and LAE divided by earned premiums.                                                                                                                                                                                                                                                          
|                                             
|Loss reserves                                 | Liabilities established by insurers and reinsurers to reflect the estimated cost
of claims payments that the insurer or reinsurer ultimately will be required to
pay in respect of insurance or reinsurance it has written. Reserves are
established for losses and for LAE and consist of case reserves and bulk
reserves.        
|                                             
|Manual rates                                  | Insurance rates for lines and classes of business that are approved and
published by state insurance departments.                                                                                                                                                                                                                  
|                                             
|Net premiums earned                           | The portion of net premiums written that is earned during a period and
recognized for accounting purposes as revenue.                                                                                                                                                                                                              
|                                             
|Net premiums written                          | Gross premiums written for a given period less premiums ceded to reinsurers
during such period.                                                                                                                                                                                                                                    
|                                             
|Occurrence policy                             | A term describing an insurance policy that covers an incident occurring while
the policy is in force regardless of when the claim arising out of that incident
is asserted.                                                                                                                                                        
|                                             
|Per occurrence                                | A form of insurance or reinsurance under which the date of the loss event is
deemed to be the date of the occurrence, regardless of when reported and permits
all losses arising out of one event to be aggregated instead of being handled on
a risk-by-risk basis.                                                               
|                                             
|Policyholders' dividend ratio                 | The ratio of policyholders' dividends to earned premiums.                                                                                                                                                                                                                                                                          
|                                             
|Primary insurer                               | An insurance company that issues insurance policies to consumers or businesses
on a first dollar basis, sometimes subject to a deductible.                                                                                                                                                                                         

23

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|                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                    
|Pro rata reinsurance                                                 | A form of reinsurance in which the reinsurer shares a proportional part of the
ceded insurance liability, premiums and losses of the ceding company. Pro rata
reinsurance also is known as proportional reinsurance or participating
reinsurance.                                                                                                                                                                                   
|                                                                    
|Property insurance   and/or reinsurance                              | Insurance and/or reinsurance that indemnifies a person with an insurable
interest in tangible property for his property loss, damage or loss of use.                                                                                                                                                                                                                                                                                
|                                                                    
|Reinsurance                                                          | A transaction whereby the reinsurer, for consideration, agrees to indemnify the
reinsured company against all or part of the loss the company may sustain under
the policy or policies it has issued. The reinsured may be referred to as the
original or primary insurer, the direct writing company or the ceding company.                                                                                                        
|                                                                    
|Retention, retention layer                                           | The amount or portion of risk that an insurer or reinsurer retains for its own
account. Losses in excess of the retention layer are paid by the reinsurer or
retrocessionaire. In proportional treaties, the retention may be a percentage of
the original policy's limit. In excess of loss business, the retention is a
dollar amount of loss, a loss ratio or a percentage.                                                      
|                                                                    
|Retrocession;   retrocessionaire                                     | A transaction whereby a reinsurer cedes to another reinsurer (the
"retrocessionaire") all or part of the reinsurance it has assumed. Retrocession
does not legally discharge the ceding reinsurer from its liability with respect
to its obligations to the reinsured.                                                                                                                                                              
|                                                                    
|Semi-automatic facultative   arrangements                            | Facultative reinsurance contracts where the ceding company has the right, but
not the obligation to cede risks to a reinsurer and the reinsurer is obligated
to accept such risks as they are within stated criteria. If a risk falls outside
such criteria, the reinsurer has the option of either accepting the risk,
declining the risk, or repricing the risk.                                                                  
|                                                                    
|Statutory accounting   principles ("SAP")                            | Recording transactions and preparing financial statements in accordance with the
rules and procedures prescribed or permitted by state insurance regulatory
authorities and the NAIC.                                                                                                                                                                                                                                               
|                                                                    
|Statutory or policyholders'   surplus; statutory capital   & surplus | The excess of admitted assets over total liabilities (including loss reserves),
determined in accordance with SAP.                                                                                                                                                                                                                                                                                                                  
|                                                                    
|Treaty reinsurance                                                   | The reinsurance of a specified type or category of risks defined in a
reinsurance agreement (a "treaty") between a primary insurer or other reinsured
and a reinsurer. Typically, in treaty reinsurance, the primary insurer or
reinsured is obligated to offer and the reinsurer is obligated to accept a
specified portion of all agreed upon types or categories of risks originally
written by the primary insurer or reinsured.
|                                                                    
|Underwriting                                                         | The insurer's/reinsurer's process of reviewing applications submitted for
insurance coverage, deciding whether to accept all or part of the coverage
requested and determining the applicable premiums.                                                                                                                                                                                                                             
|                                                                    
|Unearned premiums                                                    | The portion of a premium representing the unexpired portion of the exposure
period as of a certain date.                                                                                                                                                                                                                                                                                                                            
|                                                                    
|Unearned premium reserve                                             | Liabilities established by insurers and reinsurers to reflect unearned premiums
which are refundable to policyholders if an insurance or reinsurance contract is
canceled prior to expiration of the contract term.                                                                                                                                                                                                                 

24

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RISK FACTORS

Our business faces significant risks. The
risks described below may not be the only risks we face. Additional risks that we do not
yet know of or that we currently think are immaterial may also impair our business
operations. If any of the following risks actually occur, our business, financial
condition, results of operations or prospects could be affected materially.

Because insurance and credit ratings are important to our policyholders
and creditors, downgrades in our ratings may adversely affect us.

Nationally recognized ratings agencies
rate the financial strength of our principal insurance subsidiaries and the debt of PMA
Capital Corporation. Ratings are not recommendations to buy our securities. Please see
Ratings beginning on page 16 for a complete description of our ratings.

Although we cannot currently predict the
ultimate effect of our B++ (5th of 16) A.M. Best Rating on The PMA Insurance
Groups business, certain large account clients  and clients in certain industries
will not purchase property and
casualty insurance from insurers with less than an A- (4th of 16) A.M. Best
rating. Therefore, we believe that a continuation of our B++ A.M. Best rating will likely
result in lower premiums written. A further downgrade in our A.M. Best ratings would
result in a material loss of business as policyholders move to other companies with higher
financial strength ratings. Accordingly, such a downgrade to our insurer financial
strength ratings would have a material adverse effect on our results of operations,
liquidity and capital resources.

A downgrade in our debt ratings will
affect our ability to raise additional debt with terms and conditions similar to our
current debt, and, accordingly, will increase our cost of capital. In addition, a
downgrade of our debt ratings will make it more difficult to raise capital to refinance
any maturing debt obligations and to maintain or improve the current financial strength
ratings of our principal insurance subsidiaries.

These ratings are subject to revision or
withdrawal at any time by the rating agencies, and therefore, no assurance can be given
that we or our principal insurance subsidiaries can maintain these ratings. Each rating
should be evaluated independently of any other rating.

If our actual losses from insureds exceed our loss reserves, our
financial results would be adversely affected.

Like all insurers and reinsurers, we
establish reserves representing estimates of future amounts needed to pay claims with
respect to insured events that have occurred, including events that have not been reported
to us. We also establish reserves for loss adjustment expenses, which represent the
estimated expenses of settling claims, including legal and other fees, and general
expenses of administering the claims adjustment process. Reserves are merely estimates and
do not and cannot represent an exact measure of liability. The reserving process involves
actuarial models, which rely on the basic assumption that past experience, adjusted for
the effect of current developments and likely trends in claims severity, frequency,
judicial theories of liability and other factors, is an appropriate basis for predicting
future events. However, 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 insurer and the insurers payment of that loss. Further, because
reinsurers rely on their ceding companies to provide them with information regarding
incurred losses, reported claims for reinsurers generally become known more slowly than
for primary insurers and are generally subject to more unforeseen development.

If, during that time, actual losses and
loss adjustment expenses develop faster or are larger than our loss reserve estimates,
which may be due to a wide range of factors, including inflation, changes in claims and
litigation trends and legislative or regulatory changes, we would have to increase
reserves. As a result, we would incur a charge to earnings in the period the reserves are
increased. For example, in the third quarter of 2003, we recorded a charge of $150 million
pre-tax related to higher than expected underwriting losses, primarily from casualty
business written in accident years 1997 through 2000.

Reserve estimates are continually refined
through an ongoing process as further claims are reported and settled and additional
information concerning loss experience becomes known. Because setting reserves is
inherently uncertain, our current reserves may prove inadequate in light of subsequent
developments. As stated in the preceding paragraph, if we increase our reserves, our
earnings for the period will generally decrease by a corresponding amount. Therefore,
future reserve increases could have a material adverse effect on our results of operations
and financial condition.

25

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We face a risk of non-collectibility of reinsurance, which could
materially affect our results of operations.

We follow the customary insurance
practice of reinsuring with other insurance and reinsurance companies a portion of the
risks under the policies written by our insurance and reinsurance subsidiaries. During
2003, we had approximately $1.4 billion of gross written premiums of which we ceded $237.4
million, or 17% of gross written premiums, to reinsurers for reinsurance protection. This
reinsurance is maintained to protect our insurance and reinsurance subsidiaries against
the severity of losses on individual claims and unusually serious occurrences in which a
number of claims produce an aggregate extraordinary loss. Although reinsurance does not
discharge our subsidiaries from their primary obligation to pay policyholders for losses
insured under the policies we issue, reinsurance does make the assuming reinsurer liable
to the insurance subsidiaries for the reinsured portion of the risk. As of December 31,
2003, we had $1.2 billion of reinsurance receivables from reinsurers for paid and unpaid
losses, for which they are obligated to reimburse us under our reinsurance contracts. The
collectibility of reinsurance is largely a function of the solvency of reinsurers. We
perform annual credit reviews on our reinsurers, focusing on, among other things,
financial capacity, stability, trends and commitment to the reinsurance business. We also
require assets in trust, letters of credit or other acceptable collateral to support
balances due from reinsurers not authorized to transact business in the applicable
jurisdictions. Despite these measures, a reinsurers insolvency or inability to make
payments under the terms of a reinsurance contract could have a material adverse effect on
our results of operations and financial condition.

Because we are heavily regulated by the states in which we do business,
we may be limited in the way we operate.

We are subject to extensive supervision
and regulation in the states in which we do business. The supervision and regulation
relate to numerous aspects of our business and financial condition. The primary purpose of
the supervision and regulation is the protection of our insurance policyholders, and not
our investors. The extent of regulation varies, but generally is governed by state
statutes. These statutes delegate regulatory, supervisory and administrative authority to
state insurance departments. This system of supervision and regulation covers, among other
things:

| |  | standards
of solvency, including risk-based capital measurements;
| | - | -----------------------------------------------------------------

| |  | restrictions
of certain transactions between our insurance subsidiaries and their affiliates;
| | - | ---------------------------------------------------------------------------------------------

| |  | restrictions
on the nature, quality and concentration of investments;
| | - | ---------------------------------------------------------------------

| |  | limitations
on the rates that we may charge on our primary insurance business;
| | - | ------------------------------------------------------------------------------

| |  | restrictions
on the types of terms and conditions that we can include in the insurance policies
offered by our          primary insurance operations;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | limitations
on the amount of dividends that insurance subsidiaries can pay;
| | - | ---------------------------------------------------------------------------

| |  | certain
required methods of accounting;
| | - | ---------------------------------------

| |  | reserves
for unearned premiums, losses and other purposes; and
| | - | --------------------------------------------------------------

| |  | assignment
of residual market business and potential assessments for the provision of funds
necessary for the          settlement of covered claims under certain policies provided
by impaired, insolvent or failed insurance          companies.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Further, as described above in
Item 1Regulatory MattersInsurance Holding Company Regulation, on
December 22, 2003, PMA Capital Insurance Company entered into a voluntary agreement with
the Pennsylvania Insurance Department. Pursuant to the agreement, PMA Capital Insurance
Company has agreed to request the Departments prior approval of certain
actions, including: entering into any new reinsurance contracts, treaties or agreements,
except as may be required by law; making any payments, dividends or other distributions
to, or engaging in any transactions with, any of PMA Capital Insurance Companys
affiliates; making any withdrawal of monies from PMA Capital Insurance Companys bank
accounts or making any disbursements, payments or transfers of assets in an amount
exceeding five percent of the fair market value of PMA Capital Insurance Companys
then aggregate cash and investments; incurring any debt, obligation or liability for
borrowed money, pledging its assets or loaning monies to any person or entity (whether or
not affiliated); appointing any new director or executive officer; or altering its or its
Pennsylvania-domiciled insurance company subsidiaries ownership structure. Finally,
the Department may impose additional operational or administrative restrictions deemed
necessary by the Pennsylvania

26

---

Insurance Commissioner for implementation of the agreement. These
restrictions as well as any further restrictions on the conduct of PMA Capital Insurance
Companys business may adversely affect its ability to efficiently conduct the
run-off of its insurance liabilities.

The regulations of the state insurance
departments may affect the cost or demand for our products and may impede us from
obtaining rate increases on insurance policies offered by our primary insurance operations
or taking other actions we might wish to take to increase our profitability. Further, we
may be unable to maintain all required licenses and approvals and our business may not
fully comply with the wide variety of applicable laws and regulations or the relevant
authoritys interpretation of the laws and regulations, which may change from time to
time. Also, regulatory authorities have relatively broad discretion to grant, renew or
revoke licenses and approvals. If we do not have the requisite licenses and approvals or
do not comply with applicable regulatory requirements, the insurance regulatory
authorities could preclude or temporarily suspend us from carrying on some or all of our
activities or impose substantial fines. Further, insurance regulatory authorities have
relatively broad discretion to issue orders of supervision, which permit such authorities
to supervise the business and operations of an insurance company. As of December 31, 2003,
no state insurance regulatory authority had imposed on us any substantial fines or revoked
or suspended any of our licenses to conduct insurance business in any state or issued an
order of supervision with respect to our insurance subsidiaries, which would have a
material adverse effect on our results of operations or financial condition. In light of
recent insolvencies of large property and casualty insurers, it is possible that the
regulations governing the level of the guaranty fund or association assessments against us
may change, requiring us to increase our level of payments.

Our status as an insurance holding company with no direct operations and
our agreement with the Pennsylvania Department of Insurance to restrict dividends from
our insurance subsidiaries could adversely affect our ability to meet our obligations and
pay dividends.

We are a holding company that transacts
substantially all of our business directly and indirectly through subsidiaries. Our
primary assets are the stock of our operating subsidiaries. Our ability to meet our
obligations on our outstanding debt and to pay dividends and our general and
administrative expenses depends on the surplus and earnings of our subsidiaries and the
ability of our subsidiaries to pay dividends or to advance or repay funds to us. Payments
of dividends and advances and repayments by our insurance operating subsidiaries are
restricted by state insurance laws, including laws establishing minimum solvency and
liquidity thresholds. Further, we have agreed with the Pennsylvania Insurance Department
that PMA Capital Insurance Company, our only direct insurance subsidiary, will not pay
dividends to us, without the prior approval of the Pennsylvania Insurance Department. As a
result, we may not be able to receive dividends from PMA Capital Insurance Company at
times and in amounts necessary to meet our debt obligations and corporate expenses.

We have exposure to unpredictable catastrophes, which can materially
affect our financial results.

We are subject to claims arising out of
catastrophes that may have a significant effect on our results of operations, liquidity
and financial condition. Catastrophes can be caused by various events, including
hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and
fires. The incidence and severity of catastrophes are inherently unpredictable. The extent
of losses from a catastrophe is a function of both the total amount of insured exposure in
the area affected by the event and the severity of the event. Insurance companies are not
permitted to reserve for catastrophes until such event takes place. Therefore, although we
actively manage our exposure to catastrophes through our underwriting process and the
purchase of reinsurance protection, an especially severe catastrophe or series of
catastrophes could exceed our reinsurance protection and may have a material adverse
impact on our financial condition, results of operations and liquidity.

Man-made events, such as terrorism, can
also cause catastrophes. For example, the attack on the World Trade Center resulted in
approximately $30 million in pre-tax losses to us, after deduction of all reinsurance and
retrocessional protection, for 2001. This estimate is based on our analysis of the
available facts known by us to date and our examination 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 possible development of additional facts related
to the attack. As more information becomes available, we may need to increase our estimate
of these losses.

Although the Terrorism Risk Insurance Act
of 2002 may mitigate the impact of future terrorism losses in connection with the
commercial insurance business offered by The PMA Insurance Group, because of its uncertain
application, the amount of losses a company must retain and the fact that it does not
apply to reinsurance business, future terrorist attacks may result in losses that have a
material adverse effect on our financial condition, results of operations and liquidity.

27

---

We face a risk of non-availability of reinsurance, which could
materially affect our ability to write business and our results of operations.

Market conditions beyond our control,
such as the amount of surplus in the reinsurance market and natural and man-made
catastrophes, determine the availability and cost of the reinsurance protection we
purchase. We cannot assure you that reinsurance will remain continuously available to us
to the same extent and on the same terms and rates as are currently available. If we are
unable to maintain our current level of reinsurance or purchase new reinsurance protection
in amounts that we consider sufficient, we would either have to be willing to accept an
increase in our net exposures or reduce our insurance writings.

Our results may fluctuate as a result of many factors, including
cyclical changes in the insurance industry.

The results of companies in the property and
casualty insurance industry historically have been subject to significant fluctuations and
uncertainties. The industrys profitability can be affected significantly by:

| |  | rising
levels of actual costs that are not known by companies at the time they price their
products;
| | - | ----------------------------------------------------------------------------------------------------

| |  | volatile
and unpredictable developments, including man-made, weather-related and other natural
catastrophes;
| | - | ------------------------------------------------------------------------------------------------------------

| |  | changes
in reserves resulting from the general claims and legal environments as different types
of claims arise          and judicial interpretations relating to the scope of insurers'
liability develop;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | fluctuations
in interest rates, inflationary pressures and other changes in the investment
environment, which          affect returns on invested capital and may impact the
ultimate payout of losses; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | volatility
associated with the long-tail nature of the reinsurance business, which may impact our
operating          results.
| | - | -----------------------------------------------------------------------------------------------------------------------------

The property and casualty insurance
industry historically is cyclical in nature. The demand for property and casualty
insurance can vary significantly, rising as the overall level of economic activity
increases and falling as such activity decreases. The property and casualty insurance
industry have been very competitive, although our insurance subsidiaries have experienced
more favorable terms and pricing beginning in the second half of 2000 and continuing into
early 2004. These fluctuations in demand and competition and the impact on us of other
factors identified above could have a negative impact on our results of operations and
financial condition.

Because we operate in a highly competitive industry, oversupply may
negatively influence the sustainability of adequate rate charges.

The property and casualty insurance and
reinsurance industry is highly competitive. The PMA Insurance Group has six major
competitors. Its primary competitors are Liberty Mutual Insurance Company, American
International Group, Inc., Zurich/Farmers Group, CNA Insurance Companies, Travelers
Property & Casualty and The Hartford Insurance Group. Many of our competitors have
greater financial, marketing and management resources than we do.

A number of new, proposed or potential
legislative or industry developments could further increase competition in our industry.
These developments include:

| |  | an
influx of new capital in the marketplace as existing companies attempt to expand their
business and new          companies attempt to enter the insurance and reinsurance
business as a result of favorable pricing and/or terms;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
enactment of the Gramm-Leach-Bliley Act of 1999 (which permits financial services
companies, such as banks          and brokerage firms, to engage in certain insurance
activities), which could result in increased competition          from financial services
companies;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | programs
in which state-sponsored entities provide property insurance in catastrophe-prone areas
or other          alternative markets types of coverage; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changing
practices caused by the Internet, which have led to greater competition in the insurance
business.
| | - | -----------------------------------------------------------------------------------------------------------

28

---

These developments could make the
property and casualty insurance marketplace more competitive by increasing the supply of
insurance available. The significant amount of capital in the property and casualty
marketplace has, until 2001, resulted in the supply of insurance outpacing demand.
This oversupply has made it difficult to achieve a level of rate adequacy related to the
amount of risk undertaken. Since 2003 prices have increased at a lower rate or have declined in
certain lines of business, continued oversupply may
negatively influence the adequacy of rate charges, and accordingly, have an
adverse effect on our earnings.

Because our investment portfolio is made up primarily of fixed-income
securities, the fair value of our investment portfolio and our investment income could
suffer as a result of fluctuations in interest rates.

We currently maintain and intend to
continue to maintain an investment portfolio made up primarily of fixed-income securities.
The fair value of these securities can fluctuate depending on changes in interest rates.
Generally, the fair market value of these investments increases or decreases in an inverse
relationship with changes in interest rates, while net investment income earned by us from
future investments in fixed-income securities will generally increase or decrease with
interest rates. Our overall investment strategy is to invest in high quality securities
while maintaining diversification to avoid significant concentrations in individual
issuers, industry segments and geographic regions. All of our fixed-income securities are
classified as available for sale; as a result, changes in the market value of our
fixed-income securities are reflected in our balance sheet. Accordingly, changes in
interest rates may result in fluctuations in the income from, and the valuation of, our
fixed-income investments, which could have an adverse effect on our results of operations
and financial condition.

The purported class action lawsuits may result in financial losses and
may divert management resources.

We and certain of our directors and key
executive officers are defendants in several purported class actions that were filed in
2003 in the United States District Court for the Eastern District of Pennsylvania by
alleged purchasers of our Class A Common stock, 4.25% Convertible Debentures and 8.50%
Monthly Income Senior Notes. The lawsuits seek damages in an unspecified amount for losses
allegedly incurred as a result of materially false and misleading statements and material
omissions regarding our loss reserves allegedly contained in our reports filed with the
SEC, certain of our press releases, certain prospectuses and prospectus supplements and in
other statements made by us. For more information on the lawsuits, see Item
3Legal Proceedings. This litigation may require the dedication of significant
management resources. The lawsuits are in their earliest stages. The lawsuits may have a
material adverse effect on our financial condition, results of operations and liquidity.
We intend to vigorously defend against the claims asserted in these actions.

Our directors and executive officers collectively have significant
shareholdings and may influence action requiring stockholder approval and may have
interests different than, or adverse to, those of our other security holders.

Our directors and executive officers
beneficially owned approximately 13.8% of our Class A common stock at March 1, 2004. As a
result, these stockholders, acting alone or together, may be able to influence matters
requiring approval by our stockholders and may have interests different than, or adverse
to, those of our other security holders, including preventing changes in our board of
directors or management that stockholders may desire.

Provisions in our charter documents and the ownership of our shares of
Class A common stock by management may impede attempts to replace or remove our board or
management with management favored by stockholders.

Our Restated Articles of Incorporation
and Amended and Restated Bylaws contain provisions that could delay or prevent changes in
our board of directors or management that stockholders may desire. These provisions
include:

| |  | requiring
advance notice requirements for nominations for election to the board of directors or for
proposing          business that can be acted on by stockholders at meetings;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | establishing
a classified board of directors and permitting our board to increase its size and appoint
         directors to fill newly created board vacancies;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | requiring
stockholders to show cause to remove one or more directors; and
| | - | -------------------------------------------------------------------------

| |  | prohibiting
stockholders from acting by written consent.
| | - | --------------------------------------------------------

29

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Item 2. Properties

PMA Capital Corporations and PMA
Res headquarters are located in approximately 88,000 square feet of leased space in
center city Philadelphia, Pennsylvania. The PMA Insurance Groups headquarters are
located in a four story, 110,000 square foot building that we own in Blue Bell,
Pennsylvania. We also lease approximately 63,000 square feet of office space in Yardley,
Pennsylvania, which previously housed our excess and surplus lines business and now is
subleased to an unaffiliated third party. We also own an approximately 16,585 square foot
building in Harrisburg, Pennsylvania that we lease to PMA Foundation, which is currently
under agreement of sale to PMA Foundation for $1.6 million.

Through various wholly owned
subsidiaries, we also own and occupy additional office facilities in three other locations
and rent additional office space for our insurance operations in 16 other locations. We
believe that such owned and leased properties are suitable and adequate for our current
business operations.

Item 3. Legal Proceedings

We are 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 our insureds, or as an
insurer defending coverage claims brought against it by our policyholders or other
insurers. While the outcome of all litigation involving us, 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 our 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 our financial condition, results of operations or liquidity.

On November 6, 2003, several purported
class action lawsuits were filed against PMA Capital Corporation and certain other
defendants. A purported class action lawsuit captionedPitt v. PMA Capital Corporation,
John W. Smithson and William E. Hitselberger (initiated November 6, 2003) has been
filed in the Eastern District of Pennsylvania by alleged shareholders of PMA Capital who
seek to represent a class of purchasers of PMA Capital securities from May 7, 2003 to
November 3, 2003. The complaints allege, among other things, that the defendants violated
Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by making materially false and
misleading public statements and material omissions during the class period regarding the
Companys loss reserves.

Several other purported class action
lawsuits, captionedAugenbaum v. PMA Capital Corporation, et. al. (initiated
November 6, 2003), Klinghoffer v. PMA Capital Corporation, et. al. (initiated
November 10, 2003), and Pollin v. PMA Capital Corporation, John W. Smithson and
Frederick W. Anton III (initiated November 11, 2003) were filed in the Eastern
District of Pennsylvania by alleged purchasers of the Companys 4.25% Convertible
Debentures and 8.50% Monthly Income Senior Notes. The Klinghoffer and Pollin complaints name PMA Capital
Corporation, PMA Capital Trust I, PMA Capital Trust II, certain of the Companys
officers and directors and investment banking firms as defendants. The complaints allege,
among other things, that the defendants violated Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933, as amended, by making materially false and misleading statements about its
reserves in the registration statement, prospectuses and prospectus supplements in
connection with the debt.

Several purported class action lawsuits
captioned Newman v. PMA Capital Corporation, John W. Smithson, William E. Hitselberger
and Francis W. McDonnell, (initiated November 7, 2003), Appel v. PMA Capital
Corporation, John W. Smithson, William E. Hitselberger and Francis W. McDonnell
(initiated November 10, 2003), Boyd v. PMA Capital Corporation, John W. Smithson,
William E. Hitselberger and Francis W. McDonnell (initiated November 20, 2003),
Waller v. PMA Capital Corporation, John W. Smithson, Francis W. McDonnell and William
E. Hitselberger (initiated November 12, 2003), Bauer v. PMA Capital Corporation,
John W. Smithson, William E. Hitselberger and Francis W. McDonnell (initiated November
21, 2003), and Frey v. PMA Capital Corporation, John W. Smithson, William E.
Hitselberger and Francis W. McDonnell(initiated December 11, 2003) were filed in the
Eastern District of Pennsylvania by alleged shareholders of PMA Capital who seek to
represent a class of purchasers of PMA Capital securities from November 13, 1998 to
November 3, 2003. The complaints allege, among other things, that the defendants violated
Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by making materially false and
misleading public statements and material omissions during the class period regarding the
Companys loss reserves.

The lawsuits seek unspecified compensatory damages and
reasonable costs and expenses. We intend to vigorously defend against
the claims asserted in these actions. The lawsuits are in their earliest stages. The
lawsuits may have a material adverse effect on the Companys financial condition,
results of operations and liquidity.

30

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Item 4.  Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote
of security holders during the fourth quarter of 2003.

Executive Officers of the
Registrant

Our executive officers are as follows:

|Name                    | Age | Position                                                    
|----------------------- | --- | ------------------------------------------------------------
|Vincent T. Donnelly     | 51  | President and Chief Executive Officer                       
|William E. Hitselberger | 46  | Senior Vice President, Chief Financial Officer and Treasurer
|Robert L. Pratter       | 59  | Senior Vice President, General Counsel and Secretary        

Vincent T. Donnelly was elected as
President and Chief Executive Officer in February 2004 and served as head of the
interim-Office of the President from November 2003 to February 2004. Prior to that, he
served as President and Chief Operating Officer of The PMA Insurance Group since February
1997, and has served as Executive Vice President of PMA Capital Insurance Company since
November 2000. Mr. Donnelly served as Senior Vice President  Finance and Chief
Actuary of The PMA Insurance Group from 1995 to 1997.

William E. Hitselberger has served as our
Senior Vice President, Chief Financial Officer and Treasurer since June 2002. He has also
served as Vice President and Chief Financial Officer of The PMA Insurance Group from 1998
to June 2002 and Vice President of The PMA Insurance Group from 1996 to 1998.

Robert L. Pratter has served as our
Senior Vice President, General Counsel and Secretary since June 1999, and has served as
Vice President and General Counsel of PMA Capital Insurance Company since November 2000.
From 1969 to 1999, Mr. Pratter was an attorney and partner in the law firm of Duane Morris
LLP.

31

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PART II

Item 5. Market for the Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities

|(a) | Our
Class A Common stock is listed on The Nasdaq Stock Market®. It trades under
the stock symbol: PMACA.
|--- | --------------------------------------------------------------------------------------------------------

Following is information regarding prices for our Class A Common Stock:

|                                                 |  |  |   |             
|------------------------------------------------ |  |  | - | ------------
|(dollar amounts in thousands, except share data) |  |  |   | FirstQuarter
|                                                
|                                                
|2003                                             |  |  |   |             
|Class A Common Stock Prices:                     |  | 
|High                                             |  |  | $ | 15.00       
|Low                                              |  |  |   | 6.67        
|Close                                            |  |  |   | 6.77        
|                                                
|2002                                             |  |  |   |             
|Class A Common Stock Prices:                     |  | 
|High                                             |  |  | $ | 23.10       
|Low                                              |  |  |   | 18.71       
|Close                                            |  |  |   | 22.94       

There were approximately 9,000
holders of our Class A Common stock at January 31, 2004 based on recordholders and other
beneficial owners. We declared quarterly dividends of $0.105 per share for our Class A
Common stock in each quarter of 2002 and the first three quarters of 2003. On November 4,
2003, our Board of Directors resolved to suspend the dividends on our Class A Common
stock. Our domestic insurance subsidiaries ability to pay dividends to us is limited
by the insurance laws and regulations of Pennsylvania. Furthermore, our directly owned
insurance subsidiary, PMA Capital Insurance Company, has voluntarily agreed not to pay
dividends or other distributions to us or other affiliates without the prior approval of
the Pennsylvania Insurance Department. For additional information on these restrictions,
see "Item 7 - MD&A -  Liquidity and Capital Resources."

|(b) | Not applicable
|--- | --------------

|(c) | Not applicable
|--- | --------------

32

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Item 6. Selected Financial Data

|                                                             |  |  |   |            |    
|------------------------------------------------------------ |  |  | - | ---------- | ---
|(dollar amounts in thousands, except per share data)         |  |  |   | 2003       | (1)
|                                                            
|Net Premiums Written                                         |  |  | $ | 1,192,254  |    
|                                                             |  |  |   |            |    
|                                                             |  |  |   |            |    
|Consolidated Results of Operations:                          |  | 
|Net premiums earned                                          |  |  | $ | 1,198,165  |    
|Net investment income                                        |  |  |   | 68,923     |    
|Net realized investment gains (losses)                       |  |  |   | 13,780     |    
|Other revenues                                               |  |  |   | 20,379     |    
|                                                             |  |  |   |            |    
|Total consolidated revenues                                  |  |  | $ | 1,301,247  |    
|                                                             |  |  |   |            |    
|Income (loss) before cumulative effect of accounting change  |  |  | $ | (93,569    | )  
|Cumulative effect of accounting change, net of related       |  | 
|tax effect(2)                                                |  |  |   | -          |    
|                                                             |  |  |   |            |    
|Net income (loss)                                            |  |  | $ | (93,569    | )  
|                                                             |  |  |   |            |    
|                                                             |  |  |   |            |    
|Per Share Data:                                              |  | 
|Weighted average shares:                                     |  | 
|Basic                                                        |  |  |   | 31,330,183 |    
|Diluted                                                      |  |  |   | 31,330,183 |    
|Income (loss) before cumulative effect of accounting change: |  | 
|Basic                                                        |  |  | $ | (2.99      | )  
|Diluted                                                      |  |  |   | (2.99      | )  
|Net income (loss) per share(3)                               |  | 
|Basic                                                        |  |  |   | (2.99      | )  
|Diluted                                                      |  |  |   | (2.99      | )  
|Dividends declared per Common share(3)                       |  |  |   | -          |    
|Dividends declared per Class A Common share(3)               |  |  |   | 0.315      |    
|Shareholders' equity per share                               |  |  |   | 14.80      |    
|                                                             |  |  |   |            |    
|Consolidated Financial Position:                             |  | 
|Total investments                                            |  |  | $ | 2,012,187  |    
|Total assets                                                 |  |  |   | 4,187,958  |    
|Reserves for unpaid losses and LAE                           |  |  |   | 2,541,318  |    
|Debt                                                         |  |  |   | 187,566    |    
|Shareholders' equity                                         |  |  |   | 463,667    |    

|(1) |  | Results
for 2003 were impacted by $49 million resulting from the recording of a valuation
allowance on the Company's deferred tax asset. Results for 2002 were impacted by $43
million pre-tax ($28 million after-tax) for costs associated with the exit from and run
off of Caliber One, our former excess and surplus lines business. Results for 2001 were
impacted by $30 million pre-tax ($20 million after-tax) for World Trade Center losses.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

33

---

|                                                     |  |  |   |         |    
|---------------------------------------------------- |  |  | - | ------- | ---
|(dollar amounts in thousands, except per share data) |  |  |   | 2003    | (1)
|                                                    
|Components of net income (loss)(4):                  |  | 
|The PMA Insurance Group                              |  |  | $ | 21,541  |    
|PMA Re(5)                                            |  |  |   | (79,433 | )  
|Corporate and Other                                  |  |  |   | (22,816 | )  
|Run-off Operations(6)                                |  |  |   | (818    | )  
|Net realized investment gains (losses)               |  |  |   | 13,780  |    
|                                                     |  |  |   |         |    
|Income (loss) before income taxes                    |  | 
|and cumulative effect                                |  | 
|of accounting change                                 |  |  |   | (67,746 | )  
|Income tax expense (benefit)                         |  |  |   | 25,823  |    
|                                                     |  |  |   |         |    
|Income (loss) before cumulative                      |  | 
|effect of accounting change                          |  |  |   | (93,569 | )  
|Cumulative effect of accounting                      |  | 
|change, net of related                               |  | 
|tax effect(2)                                        |  |  |   | -       |    
|                                                     |  |  |   |         |    
|Net income (loss)                                    |  |  | $ | (93,569 | )  
|                                                     |  |  |   |         |    
|GAAP Insurance Ratios:                               |  | 
|The PMA Insurance Group:                             |  | 
|Loss and LAE ratio                                   |  |  |   | 77.6    | %  
|Expense Ratio(7)                                     |  |  |   | 25.1    | %  
|Policyholders dividend ratio                        |  |  |   | 0.1     | %  
|                                                     |  |  |   |         |    
|Combined ratio(8)                                    |  |  |   | 102.8   | %  
|                                                     |  |  |   |         |    
|Operating ratio(9)                                   |  |  |   | 97.0    | %  
|                                                     |  |  |   |         |    
|PMA Re                                               |  | 
|Loss and LAE ratio                                   |  |  |   | 88.0    | %  
|Expense Ratio(7)                                     |  |  |   | 29.9    | %  
|                                                     |  |  |   |         |    
|Combined ratio(8)                                    |  |  |   | 117.9   | %  
|                                                     |  |  |   |         |    
|Operating ratio(9)                                   |  |  |   | 112.7   | %  
|                                                     |  |  |   |         |    

|(4) |  | In
addition to providing consolidated net income (loss), we also provide segment operating
income (loss) because we believe that it is a meaningful measure of the profit or loss
generated by our operating segments. Operating income (loss), which is GAAP net income
(loss) excluding net realized investment gains and losses, is the financial performance
measure used by our management and Board of Directors to evaluate and assess the results
of our insurance businesses. Accordingly, we report operating income by segment in Note
16 to our Consolidated Financial Statements as required by SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." Our management and Board of
Directors use operating income as the measure of financial performance because (i) net
realized investment gains and losses are unpredictable and not necessarily indicative of
current operating fundamentals or future performance of the business segments and (ii) in
many instances, decisions to buy and sell securities are made at the holding company
level, and such decisions result in net realized gains and losses that do not relate to
the operations of the individual segments. Operating income (loss) does not replace net
income (loss) as the GAAP measure of our consolidated results of operations.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | On
November 6, 2003, we announced our decision to withdraw from the reinsurance business
previously served by PMA Re. This segment is currently in run-off. Therefore, PMA Re's
results for 2003 will not be indicative of results for future periods.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | In
May 2002, we exited the excess and surplus lines business and placed this business,
formerly known as Caliber One, into run-off.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------

|(7) |  | The
expense ratio equals the sum of acquisition and insurance-related operating expenses
divided by net premiums earned. Acquisition and insurance-related expenses  for The PMA Insurance Group were $142.7
million, $108.6 million, $92.3 million, $72.5 million and $69.1 million for 2003, 2002, 2001, 2000 and 1999.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | The
combined ratio computed on a GAAP basis is equal to losses and loss adjustment expenses
plus acquisition expenses and policyholders' dividends (where applicable), all divided by
net premiums earned.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | The
operating ratio is equal to the combined ratio less the net investment income ratio,
which is computed by dividing net investment income by net premiums earned.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

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Item 7.  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, 2003, compared with December 31,
2002, and the results of operations of PMA Capital for 2003 and 2002, 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 in Item 8 of this Form 10-K ("Consolidated Financial Statements"). You should also read our discussion of Critical
Accounting Estimates beginning on page 59 for an explanation of those accounting estimates
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 judgments.

This Managements Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) contains
forward-looking statements, which involve inherent risks and uncertainties. Statements
that are not historical facts, including statements about our beliefs and expectations,
and containing words such as believes, estimates,
anticipates, expects or similar words, 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 "Cautionary Statements" beginning on page 62 for a list of factors that could cause
our actual results to differ materially from those contained in any forward-looking
statement. Also, see "Item 1 - Business - Risk Factors" for a further
discussion of risks that could materially affect our business.

OVERVIEW

We are a property and casualty insurance
holding company, which during the three year period ended December 31, 2003 offered
through our subsidiaries standard commercial lines of insurance, excess of loss and pro
rata property and casualty reinsurance and excess and surplus lines insurance. In May
2002, we announced our intention to cease writing excess and surplus lines insurance, and
since that time, the results of this business have been classified as Run-off Operations.
On November 6, 2003, we announced our intention to cease writing excess of loss and pro
rata property and casualty reinsurance. The results of this business, which had been
offered though our PMA Re business segment, will be included in Run-off Operations
effective in 2004. Since November 6, 2003, our subsidiaries offer workers
compensation, integrated disability and, to a lesser extent, other standard lines of
commercial insurance, primarily in the eastern part of the United States. These products
are written through The PMA Insurance Group business segment.

The PMA
Insurance Group earns revenue and generates cash primarily by writing insurance policies
and collecting insurance premiums. The PMA Insurance Group also earns other revenues by
providing risk control and claims adjusting services to customers. Because time normally
 elapses between the receipt of
premiums and the payment of claims and certain related expenses, we invest the available
premiums and earn investment income at The PMA Insurance Group and PMA Re. From our revenues are
deducted:

| |  | losses
we pay under insurance policies that we write;
| | - | -----------------------------------------------------

| |  | loss
adjustment expenses ("LAE"), which are the expenses of settling claims;
| | - | ----------------------------------------------------------------------------

| |  | acquisition
and operating expenses, which are direct and indirect costs of acquiring both new and
renewal           business, including commissions paid to agents and brokers, and the
internal expenses to operate the business           segment; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | dividends
that are paid to policyholders of certain of our insurance products.
| | - | ------------------------------------------------------------------------------

These items are further described in the
MD&A and in Item 1Business.

Losses and LAE are the most significant
expense items affecting our insurance business. Like all insurers, we establish reserves
representing estimates of future amounts needed to pay claims with respect to insured
events that have occurred, including events that have not been reported to us. We also
establish reserves for LAE, which represent the estimated expenses of settling claims,
including legal and other fees, and general expenses of administering the claims
adjustment process. Reserves are merely estimates and do not and cannot represent an exact
measure of liability. If actual losses and LAE are larger than our loss reserve estimates,
or if our actual claims reported to us exceed our estimate of the number of claims to be
reported to us, we have to increase reserves for prior years. Changes in reserve estimates
may be due to a wide range of factors, including inflation, changes in claims and
litigation trends and legislative or regulatory changes. We incur a charge to earnings in
the period the

35

---

reserves are increased. In 2003, we recorded a total of $169 million in
charges to increase loss reserves for prior years in our PMA Re segment. See "Item
1 - Business - Risk Factors"  for additional information.

These charges to increase loss reserves
led to the downgrade of the insurer financial strength ratings of PMA Capital Insurance
Company, our reinsurance subsidiary, and The PMA Insurance Group (Pennsylvania
Manufacturers Association Insurance Company, Pennsylvania Manufacturers Indemnity
Company and Manufacturers Alliance Insurance Company), or the Pooled Companies, our
primary insurance subsidiaries, by the rating agencies that rate the financial strength of
our insurance subsidiaries, particularly A.M. Best. The downgrade by A.M. Best of the
financial strength rating of PMA Capital Insurance Company from A- (4th of 16) to B++ (5th
of 16) was a substantial factor in our decision to withdraw from the reinsurance business.
In addition, A.M. Bests lowering of the financial strength rating of The PMA
Insurance Group companies from A- (4th of 16) to B++ (5th of 16) has constrained The PMA
Insurance Groups ability to attract and retain business. Further, the recent ratings
downgrades may make it more difficult to write business at the same rates and favorable
terms and conditions as our current businesses. We currently believe that one of the most
significant challenges that we have in 2004 is restoring the A- A.M. Best rating of The
PMA Insurance Group. We believe the restoration of the A- rating is necessary for the
growth of our primary insurance operations. We are currently evaluating various
alternatives which we believe would allow the rating to be upgraded.

Another significant challenge for 2004 is
ensuring that we maintain sufficient cash at the holding company level to pay corporate
overhead, including debt service and operating expenses. See "Liquidity and Capital Resources" beginning on
page 51 for additional information. In December 2003, we entered into
a voluntary agreement with our lead regulator, the Pennsylvania Insurance Department,
whereby, among other things, we would seek the Departments prior approval for any
dividends paid from our insurance subsidiaries. See "Item 1 - BusinessRegulatory
Matters"  for additional information about this voluntary agreement. As
these dividends are a significant source of cash to the holding company, we will continue
to work cooperatively with the Department to demonstrate to them our belief that our
insurance subsidiaries have adequate statutory capital to support their expected level of
business production, the satisfaction of their existing liabilities and the servicing of
the holding company debt and overhead obligations.

36

---

RESULTS OF OPERATIONS

Consolidated Results

We recorded a net loss of $93.6 million
in 2003, compared to a net loss of $48.0 million in 2002 and net income of $7.1 million in
2001.

The net loss for 2003 reflects a third
quarter after-tax charge of $97.5 million ($150 million pre-tax), to increase loss
reserves at PMA Re. On November 6, 2003, we announced our decision to exit from the
reinsurance business and we are no longer writing new reinsurance business. See "Recent
Developments" beginning on page 38 for additional information. Additionally, we established
a valuation allowance of $49 million on our deferred tax asset in 2003.

Results for 2002 were impacted by
approximately $42 million after-tax ($64 million pre-tax) due to unfavorable prior year
loss development at PMA Re and by approximately $34 million after-tax ($52 million
pre-tax) due to unfavorable prior year loss development at the Run-off Operations.
Additionally, results for 2002 include a charge of $28 million after-tax ($43 million
pre-tax) associated with our decision to exit from and run off our excess and surplus
lines business.

Results for 2001 were adversely impacted
by approximately $20 million after-tax ($30 million pre-tax) as a result of losses
incurred at PMA Re from the September 11th terrorist attack on the World Trade Center and
by unfavorable prior year development of $14 million after-tax ($22 million pre-tax) at
the Run-off Operations.

Included in net income (loss) are
after-tax net realized investment gains of $9.0 million in 2003, compared to after-tax net
realized investment losses of $10.5 million for 2002 and gains of $5.2 million for 2001.
Net realized investment gains in 2003 were primarily attributable to sales intended to
change the duration of our investment portfolio in order to better match our cash flows
with our liability payouts. Net realized investment losses for 2002 primarily reflect
impairment losses of $15.4 million after-tax ($23.8 million pre-tax) on fixed income
securities, primarily corporate bonds issued by telecommunications and energy companies.
Net realized investment gains for 2001 reflect the sale of securities because of our
decision to shift 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 our
portfolios yield. As a result of investment sales pursuant to this strategy and the
declining interest rates in 2001, we recorded net realized investment gains in 2001.

Also included in net income for 2001 is a
$6.3 million after-tax gain ($9.8 million pre-tax included in other revenues) on the sale
of certain real estate properties and a tax benefit of $10.1 million resulting from the
completion of an IRS examination of our 1996 tax return.

Consolidated revenues were $1,301.2
million, $1,075.1 million and $850.0 million in 2003, 2002 and 2001. The increases in
revenues primarily reflect higher net premiums earned. Since PMA Re is no longer writing
new reinsurance business, we do not expect this increasing trend in consolidated revenues
to continue.

In this MD&A, in addition to
providing consolidated net income (loss), we also provide segment operating income (loss)
because we believe that it is a meaningful measure of the profit or loss generated by our
operating segments. Operating income (loss), which is GAAP net income (loss) excluding net
realized investment gains and losses, is the financial performance measure used by our
management and Board of Directors to evaluate and assess the results of our insurance
businesses. Accordingly, we report operating income by segment in Note 16 to the
Consolidated Financial Statements as required by SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. Our management and Board of
Directors use operating income as the measure of financial performance because (i) net
realized investment gains and losses are unpredictable and not necessarily indicative of
current operating fundamentals or future performance of the business segments and (ii) in
many instances, decisions to buy and sell securities are made at the holding company
level, and such decisions result in net realized gains and losses that do not relate to
the operations of the individual segments. Operating income (loss) does not replace net
income (loss) as the GAAP measure of our consolidated results of operations.

37

---

Following is a reconciliation of our
segment operating results to GAAP net income (loss). See Note 16 to our Consolidated
Financial Statements for additional information.

|(dollar amounts in thousands)          | 2003 |  | 2002 |         | 2001 |  
|-------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                      
|                                      
|                                       |      |  |      |         |      |  
|Components of net income (loss):       |      | 
|Pre-tax operating income (loss):       |      | 
|The PMA Insurance Group                |      |  | $    | 21,541  |      | $
|PMA Re(1)                              |      |  |      | (79,433 | )    |  
|Run-off Operations                     |      |  |      | (818    | )    |  
|Corporate and Other                    |      |  |      | (22,816 | )    |  
|Net realized investment gains (losses) |      |  |      | 13,780  |      |  
|                                       |      |  |      |         |      |  
|Loss before income taxes               |      |  |      | (67,746 | )    |  
|Income tax expense (benefit)           |      |  |      | 25,823  |      |  
|                                       |      |  |      |         |      |  
|Net income (loss)                      |      |  | $    | (93,569 | )    | $
|                                       |      |  |      |         |      |  
|                                      
|                                      

|(1) |  | On
November 6, 2003, we announced our decision to withdraw from the reinsurance business
previously served by      PMA Re.  This segment is currently in run-off.  Therefore, PMA
Re's results for 2003 will not be indicative of      results for future periods.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In
May 2002, we announced our decision to withdraw from the excess and surplus lines
marketplace. As a result of      this decision, the results of this segment, formerly
known as Caliber One, are reported as Run-off Operations.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also provide combined ratios and
operating ratios for our insurance segments on pages 39 and 43. The combined
ratio is a measure of property and casualty underwriting performance. The combined
ratio computed using GAAP-basis numbers is equal to losses and LAE, plus acquisition
expenses, insurance-related operating expenses and policyholders dividends, where
applicable, all divided by net premiums earned. A combined ratio of less than 100%
reflects an underwriting profit. Because time normally elapses between the receipt of
premiums and the payment of claims and certain related expenses, we invest the available
premiums. Underwriting results do not include investment income from these funds. Given
the long-tail nature of our liabilities, we believe that the operating ratios are also
important in evaluating our business. The operating ratio is the combined ratio less the
net investment income ratio, which is net investment income divided by premiums earned.

Recent Developments

On November 4, 2003, we announced that we
had recorded a pre-tax charge of $150 million at September 30, 2003 to strengthen loss
reserves at PMA Re. Since that time, the principal nationally recognized ratings agencies
that rate the financial strength of our principal insurance subsidiaries and the debt of
PMA Capital Corporation have taken the following actions on our ratings:

| |  | A.M.
Best announced that it lowered the insurer financial strength ratings of PMA Capital
Insurance Company, our reinsurance subsidiary, from A- (4th of 16) to
B++ (5th of 16), and The PMA Insurance Group (Pennsylvania
Manufacturers' Association Insurance Company, Pennsylvania Manufacturers Indemnity
Company and Manufacturers Alliance Insurance Company), or the Pooled
Companies, our primary insurance subsidiaries, from A- (4th of 16) to
B++ (5th of 16). All of these ratings are under review with negative
implications.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Moody's
Investors Service announced that it has lowered the insurer financial strength ratings of
PMA Capital Insurance Company from Baa1 (8th of 21) to B1 (14th of 21),
and the Pooled Companies from Baa1 (8th of 21) to Ba1 (11th of 21),
each with negative outlook. Moody's also lowered the senior debt ratings on
PMA Capital Corporation from Ba1 (11th of 21) to B3 (16th of 21).
These debt ratings remain under review with direction uncertain.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On November 24, 2003, we announced that
we had voluntarily withdrawn from the Standard & Poors rating process.

See "Item 1BusinessRatings" for additional information regarding our ratings.

On November 4, 2003, our Board of
Directors resolved to suspend the dividends on our Class A Common stock.

On November 6, 2003, we announced our
decision to withdraw from the reinsurance business previously served by PMA Re, and we are
no longer writing new reinsurance business. On December 22, 2003, PMA Capital
Insurance Company entered into a voluntary agreement with the
Pennsylvania Insurance Department. Pursuant to this agreement, PMA Capital

38

---

Insurance
Company agreed, among other things, not to pay dividends to us without the prior approval
of the Pennsylvania Insurance Department; enter into any new reinsurance contracts,
treaties or agreements, except as may be required by law; alter it or its
Pennsylvania-domiciled insurance company subsidiaries ownership structure; and
agreed to provide the Department with certain financial and operating information. See
"Item 1Business  Regulatory" for additional information regarding our agreement
with the Pennsylvania Insurance Department.

Several purported class action lawsuits
have been filed against us and certain other defendants. We intend to vigorously defend
against the claims asserted in these actions. The lawsuits are in their earliest stages.
The lawsuits may have a material adverse effect on our financial condition, results of
operations and liquidity. For additional information, see "Item 1  Legal Proceedings."

Segment Results

The PMA Insurance Group

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

|(dollar amounts in thousands)      | 2003 |  | 2002 |         | 2001 |  
|---------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                  
|                                  
|                                   |      |  |      |         |      |  
|Net premiums written               |      |  | $    | 603,593 |      | $
|                                   |      |  |      |         |      |  
|Net premiums earned                |      |  |      | 570,032 |      |  
|Net investment income              |      |  |      | 32,907  |      |  
|Other revenues                     |      |  |      | 17,493  |      |  
|                                   |      |  |      |         |      |  
|Operating revenues                 |      |  |      | 620,432 |      |  
|                                   |      |  |      |         |      |  
|Losses and LAE                     |      |  |      | 442,502 |      |  
|Acquisition and operating expenses |      |  |      | 155,748 |      |  
|Dividends to policyholders         |      |  |      | 641     |      |  
|                                   |      |  |      |         |      |  
|Total losses and expenses          |      |  |      | 598,891 |      |  
|                                   |      |  |      |         |      |  
|Pre-tax operating income           |      |  |      | 21,541  |      |  
|                                   |      |  |      |         |      |  
|Combined ratio                     |      |  |      | 102.8   | %    |  
|Less:  net investment income ratio |      |  |      | 5.8     | %    |  
|                                   |      |  |      |         |      |  
|Operating ratio                    |      |  |      | 97.0    | %    |  
|                                   |      |  |      |         |      |  
|                                  
|                                  

Pre-tax operating income for The PMA
Insurance Group was $21.5 million in 2003, compared to $25.3 million in 2002 and $23.1
million in 2001. The lower pre-tax operating income in 2003, compared to 2002, primarily
reflects lower underwriting results from accident years 2001 and 2002 in the workers
compensation lines of business and lower net investment income, partially offset by
improved current accident year underwriting results. The increase in operating income for
2002, compared to 2001, was primarily due to improved underwriting results, partially
offset by lower net investment income.

39

---

Premiums

The PMA Insurance Groups premiums
written are as follows:

|(dollar amounts in thousands)                    | 2003 |  | 2002 |         | 2001 |  
|------------------------------------------------ | ---- |  | ---- | ------- | ---- | -
|                                                
|                                                
|                                                 |      |  |      |         |      |  
|Workers' compensation and integrated disability: |      | 
|Direct premiums written                          |      |  | $    | 546,059 |      | $
|Premiums assumed                                 |      |  |      | 24,799  |      |  
|Premiums ceded                                   |      |  |      | (58,707 | )    |  
|                                                 |      |  |      |         |      |  
|Net premiums written                             |      |  | $    | 512,151 |      | $
|                                                 |      |  |      |         |      |  
|Commercial Lines:                                |      | 
|Direct premiums written                          |      |  |      | 106,399 |      | $
|Premiums assumed                                 |      |  |      | 1,177   |      |  
|Premiums ceded                                   |      |  |      | (16,134 | )    |  
|                                                 |      |  |      |         |      |  
|Net premiums written                             |      |  | $    | 91,442  |      | $
|                                                 |      |  |      |         |      |  
|Total:                                           |      | 
|Direct premiums written                          |      |  |      | 652,458 |      | $
|Premiums assumed                                 |      |  |      | 25,976  |      |  
|Premiums ceded                                   |      |  |      | (74,841 | )    |  
|                                                 |      |  |      |         |      |  
|Net premiums written                             |      |  | $    | 603,593 |      | $
|                                                 |      |  |      |         |      |  
|                                                
|                                                

Direct workers compensation and
integrated disability premiums written increased 37% in 2003 and 26% in 2002, compared to
the immediately preceding year, primarily due to an increase in the volume of risks
underwritten, and to a lesser extent, pricing increases. In addition, the increase in
direct workers compensation premiums written for 2003 includes $35 million of
retrospectively rated premiums recorded in the fourth quarter under loss-sensitive
policies that are attributable to the higher than expected losses from accident years 2001
and 2002. See "Losses and Expenses" beginning on page 41 for additional information. Pricing
increased approximately 10% in 2003 and 17% in 2002 on workers compensation
business. In recent years, The PMA Insurance Group increased its writings of workers
compensation premiums through focused marketing efforts in its principal marketing
territories covering the eastern part of the United States.

For workers compensation coverages,
the premium charged on fixed-cost policies is primarily based upon the manual rates filed
with state insurance departments. Manual rates in The PMA Insurance Groups principal
marketing territories for workers compensation increased on average approximately 8%
in 2003 and 13% in 2002. These increases in manual rates generally reflect the effects of
higher average medical and indemnity costs in recent years. Manual rate changes 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 that
comprise approximately 58% of workers compensation premiums for 2003.

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 $3.5 million and $10.8 million in 2003 and
2002, compared to the immediately preceding year, primarily due to weighted average price
increases of approximately 17% in 2003 and 28% in 2002.

Although we cannot currently predict the
ultimate effect of the recent A.M. Best financial strength rating downgrade on The PMA
Insurance Groups business, such downgrade will likely result in lower premiums
written. Further, the recent ratings downgrades may make it more difficult to write
business at the same rates and favorable terms and conditions as our current businesses.

Premiums assumed increased $11.2 million
and $5.8 million in 2003 and 2002, respectively, compared to the immediately preceding year, primarily
due to an increase in the amount of residual market business in The PMA Insurance
Groups principal marketing territories. Companies which write premiums in certain
states generally must share in the risk of insuring entities that cannot obtain insurance
in the voluntary market. Typically, an insurers share of this residual market
business is dependent upon its market share in terms of direct premiums in the voluntary
market, and the assignments are accomplished either by direct assignment or by assumption
from pools of residual market business.

40

---

Premiums ceded increased $11.8 million in
2003, compared to 2002 and increased $1.9 million in 2002, compared to 2001. Premiums
ceded for workers compensation and integrated disability increased by $21.1 million
in 2003 and $7.9 million in 2002, compared to the immediately preceding year, as a result
of the increase in direct premiums written as well as higher rates being charged by
reinsurers. Premiums ceded for Commercial Lines were lower by $9.3 million and $5.9
million in 2003 and 2002, respectively, primarily because we have increased our net
retentions in Commercial Lines from $250,000 in 2001 to $500,000 in 2002 and $1.5 million
in 2003.

Net premiums written increased 33% in
2003 and 27% in 2002, compared to the immediately preceding year, mainly reflecting the
trends discussed above for gross premiums written. Net premiums earned increased 39% in
2003 and 18% in 2002. 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. However, with respect to policies that provide for premium
adjustments, such as experience-rated or exposure-based adjustments, such premium
adjustment may be made subsequent to the end of the policys coverage period and will
be recorded as earned premium in the period in which the adjustment is made. We made such
an adjustment in the fourth quarter of 2003 as described above.

Losses and Expenses

The components of the GAAP combined
ratios are as follows:

|                              | 2003 |  | 2002 |        | 2001 | 
|----------------------------- | ---- |  | ---- | ------ | ---- | 
|                             
|                             
|                              |      |  |      |        |      | 
|Loss and LAE ratio            |      |  |      | 77.6%  |      | 
|Expense ratio:                |      | 
|Acquisition expenses          |      |  |      | 15.9%  |      | 
|Operating expenses(1)         |      |  |      | 9.2%   |      | 
|                              |      |  |      |        |      | 
|Total expense ratio           |      |  |      | 25.1%  |      | 
|Policyholders' dividend ratio |      |  |      | 0.1%   |      | 
|                              |      |  |      |        |      | 
|Combined ratio                |      |  |      | 102.8% |      | 
|                              |      |  |      |        |      | 
|                             
|                             

|(1) |  | The
operating expense ratio equals insurance-related operating expenses divided by net
premiums earned.      Insurance-related operating expenses were $52.2 million, $36.7
million and $31.4 million for 2003, 2002 and 2001,      respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the fourth quarter of 2003, our
internal actuaries completed a comprehensive year-end actuarial analysis of loss reserves.
Based on the actuarial work performed, we noticed higher than expected claims severity in
our workers compensation business written for accident years 2001 and 2002,
primarily from loss-sensitive and participating workers compensation business. As a
result, The PMA Insurance Group increased loss reserves for prior years by $50 million. An independent
actuarial firm also conducted a comprehensive review of The PMA Insurance Group's loss reserves as of December
31, 2003 and concluded that such carried loss reserves were reasonable as of December 31,
2003. Under The PMA Insurance Groups loss-sensitive rating plans we adjust the
amount of the insureds premiums after the policy period expires based, to a large
extent, upon the insureds actual losses incurred during the policy period. Under
policies that are subject to dividend plans, the ultimate amount of the dividend that the
insured may receive is also based, to a large extent, upon loss experience during the
policy period. Accordingly, offsetting the effects of this unfavorable prior year loss
development were premium adjustments of $35 million under loss-sensitive plans and reduced
policyholder dividends of $8 million, resulting in a net fourth quarter pre-tax charge of $7
million.

This unfavorable prior year loss
development and resulting premium and policyholders dividend adjustments in 2003
increased the loss and LAE ratio by approximately 4 points and decreased the total expense
ratio and policyholders dividend ratio each by approximately 1.5 points. The total
impact to the combined ratio was approximately 1 point. Overall, the loss and LAE ratio
increased by 2.6 points in 2003 compared to 2002, reflecting the effects of prior year
loss development described above, partially offset by an improved current accident year
loss and LAE ratio. Our current accident year loss and LAE ratio improved 5.3 points in
2003, compared to 2002, including 4.5 points due to the premium adjustment of $35 million
recorded in the fourth quarter for policies of loss-sensitive plans. The remainder of the
improvement is primarily due to price increases that have outpaced increasing loss costs.
Medical cost inflation, which has contributed to increased severity of workers
compensation losses, was the primary reason for the increasing loss costs in 2003. We
estimate our medical cost inflation for 2003 to be approximately 11%. We expect medical
cost inflation to remain a significant component of loss costs in 2004.

41

---

The loss and LAE ratio increased slightly
in 2002, compared to 2001, primarily due to a higher current accident year loss and LAE
ratio, partially offset by lower unfavorable prior year development. The current accident
year loss and LAE ratio increased by 1.0 point in 2002, compared to 2001, primarily due to
increased reinsurance costs and higher workers compensation loss trends, partially
offset by price increases. The PMA Insurance Group experienced $1.1 million and $2.9
million of unfavorable prior year development in 2002 and 2001, respectively. The lower
unfavorable prior year development reduced the loss and LAE ratio by 0.5 points in 2002,
compared to 2001. The unfavorable prior year development in 2002 and 2001 primarily
reflects higher than expected claims handling costs. For additional information regarding
The PMA Insurance Groups loss reserves, see "Loss Reserves" beginning on page 47.

The expense ratio improved by 0.3 points
in 2002, compared to 2001, as premium growth outpaced the increase in expenses. The
policyholders dividend ratio improved by 2.3 points in 2002, compared to 2001,
primarily because we sold less business under dividend plans and wrote business under
lower paying dividend plans. Lower dividend payments are effectively another form of price
increase that contributes to the overall profitability of our workers compensation
business.

Net Investment Income

Net investment income was $2.7 million
lower in 2003 and $3.8 million lower in 2002, compared to the immediately preceding year.
The lower net investment income in 2003, compared to 2002, primarily reflects a reduction
in invested asset yields of approximately 90 basis points, partially offset by a higher
invested asset base that increased approximately 12%. The decline in 2002, compared to
2001, primarily reflects a reduction in invested asset yields of approximately 50 basis
points.

42

---

PMA Re

On November 6, 2003, we announced our
decision to withdraw from the reinsurance business. We are no longer writing new
reinsurance business. See "Recent Developments" beginning on page 38 for additional
information. Because of our decision to withdraw from the reinsurance business, we expect
that PMA Res premiums written and earned, losses and LAE, and operating expenses
will decline materially in 2004. Therefore, PMA Res results for 2003 will not be
indicative of results for future periods. PMA Res results will be included in
Run-off Operations beginning in the first quarter of 2004.

Summarized financial results of PMA Re
are as follows:

|(dollar amounts in thousands)      | 2003 |  | 2002 |         | 2001 |  
|---------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                  
|                                  
|                                   |      |  |      |         |      |  
|Net premiums written               |      |  | $    | 595,074 |      | $
|                                   |      |  |      |         |      |  
|Net premiums earned                |      |  |      | 624,249 |      |  
|Net investment income              |      |  |      | 32,513  |      |  
|                                   |      |  |      |         |      |  
|Total revenues                     |      |  |      | 656,762 |      |  
|                                   |      |  |      |         |      |  
|Losses and LAE                     |      |  |      | 549,379 |      |  
|Acquisition and operating expenses |      |  |      | 186,816 |      |  
|                                   |      |  |      |         |      |  
|Total losses and expenses          |      |  |      | 736,195 |      |  
|                                   |      |  |      |         |      |  
|Pre-tax operating income (loss)    |      |  | $    | (79,433 | )    | $
|                                   |      |  |      |         |      |  
|                                  
|Combined ratio                     |      |  |      | 117.9   | %    |  
|Less:  net investment income ratio |      |  |      | 5.2     | %    |  
|                                   |      |  |      |         |      |  
|Operating ratio                    |      |  |      | 112.7   | %    |  
|                                   |      |  |      |         |      |  
|                                  
|                                  

PMA Re recorded a pre-tax operating loss
of $79.4 million in 2003, compared to pre-tax operating income of $13.4 million in 2002
and a pre-tax operating loss of $3.1 million in 2001. PMA Res results for 2003
reflect the third quarter reserve charge of $150 million associated mainly with accident
years 1997 to 2000. Additionally, as a result of the decision to exit from and run off
this business, PMA Res results for 2003 include exit costs of $2.6 million, mainly
related to severance benefits for terminated employees. PMA Res 2002 results were
impacted by approximately $64 million due to unfavorable prior year loss development. PMA
Res results for 2001 include a pre-tax charge of approximately $30 million relating
to the effects of the losses caused by the terrorist attack on the World Trade Center. See
"Losses and Expenses" beginning on page 45 for additional information.

Premiums

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

|(dollar amounts in thousands)      | 2003 |  | 2002 |         | 2001 |  
|---------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                  
|                                  
|                                   |      |  |      |         |      |  
|Business Unit:                     |      | 
|Finite Risk and Financial Products |      |  | $    | 315,498 |      | $
|Traditional - Treaty               |      |  |      | 266,916 |      |  
|Specialty - Treaty                 |      |  |      | 91,084  |      |  
|Facultative                        |      |  |      | 58,377  |      |  
|Accident                           |      |  |      | 18,998  |      |  
|                                   |      |  |      |         |      |  
|Total                              |      |  | $    | 750,873 |      | $
|                                   |      |  |      |         |      |  
|Major Lines of Business:           |      | 
|Casualty                           |      |  |      | 492,580 |      | $
|Property                           |      |  |      | 224,242 |      |  
|Other(1)                           |      |  |      | 34,051  |      |  
|                                   |      |  |      |         |      |  
|Total                              |      |  | $    | 750,873 |      | $
|                                   |      |  |      |         |      |  
|                                  
|                                  

|(1) |  | Primarily
aviation, ocean marine and accident.
|--- |  | ----------------------------------------------

43

---

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

|(dollar amounts in thousands)      | 2003 |  | 2002 |         | 2001 |  
|---------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                  
|                                  
|                                   |      |  |      |         |      |  
|Business Unit:                     |      | 
|Finite Risk and Financial Products |      |  | $    | 207,424 |      | $
|Traditional - Treaty               |      |  |      | 256,320 |      |  
|Specialty - Treaty                 |      |  |      | 89,574  |      |  
|Facultative                        |      |  |      | 27,053  |      |  
|Accident                           |      |  |      | 14,703  |      |  
|                                   |      |  |      |         |      |  
|Total                              |      |  | $    | 595,074 |      | $
|                                   |      |  |      |         |      |  
|Major Lines of Business:           |      | 
|Casualty                           |      |  | $    | 399,832 |      | $
|Property                           |      |  |      | 169,365 |      |  
|Other(1)                           |      |  |      | 25,877  |      |  
|                                   |      |  |      |         |      |  
|Total                              |      |  | $    | 595,074 |      | $
|                                   |      |  |      |         |      |  
|                                  
|                                  

|(1) |  | Primarily
aviation, ocean marine and accident.
|--- |  | ----------------------------------------------

Gross premiums written were $750.9
million for 2003, compared to $776.8 million for 2002, primarily reflecting lower premiums
from our Traditional-Treaty unit, partially offset by higher premiums from our Finite Risk
and Financial Products unit. In addition, gross premiums written for 2002 included an
additional $58.1 million of gross premiums written ($44.2 million of net premiums written)
recorded in the second quarter of 2002 as a result of a change in our estimate of ultimate
premiums written. Because premiums from ceding companies are typically reported on a
delayed basis, we monitor and update, as appropriate, the estimated ultimate premiums
written. Our periodic review of estimated ultimate premiums written, comparing actual
reported premiums to originally estimated premiums based on ceding company estimates,
indicated that premiums written in recent years, primarily for 2001 and 2000 in the
Traditional- and Specialty-Treaty units, were higher than originally estimated. The
increase in net premiums earned of $39.9 million in 2002 caused by this adjustment was
offset by corresponding losses and LAE and acquisition expenses.

Gross premiums written increased $300.2
million for 2002, compared to 2001, reflecting higher premiums in all of our business
units. Additionally, gross premiums written increased in 2002, compared to 2001, due to
PMA Res increased participation in aviation, ocean marine and accident reinsurance
business (included in Other in the tables on pages 43 and 44) due to significantly
improved market conditions in these lines.

In 2001, gross and net premiums written
included approximately $25 million of premiums (mainly property premiums in the Finite
Risk and Financial Products unit) due under contractual provisions of certain of PMA
Res assumed business where additional premiums were due to us because of the cession
of World Trade Center losses to us by our reinsureds. These additional 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 World Trade Center gross losses to
these retrocessionaires.

Ceded premiums were $155.8 million,
$137.7 million and $116.0 million in 2003, 2002 and 2001, respectively. Ceded premiums for
2003 include approximately $103.6 million from our Finite Risk and Financial Products unit
that were due under a quota share retrocessional cover that ceded one-third of this
units 2003 premiums and losses. Ceded premiums increased by $21.7 million in 2002,
compared to 2001, reflecting the increase in gross premiums written and an increase in
premiums charged by retrocessionaires, partially offset by the additional ceded premiums
in 2001 resulting from the terrorist attack on the World Trade Center.

Net premiums written decreased
approximately 7% and net premiums earned increased by approximately 13% in 2003. In 2002,
net premiums written and earned increased approximately 77% and 62%, respectively,
compared to the immediately preceding year. Traditionally, trends in net premiums earned
follow patterns similar to net premiums written. Generally, in periods of decreasing
premium writings, the decrease in net premiums written will be greater than the decrease
in net premiums earned, as was the case in 2003. Generally, in periods of premium growth,
the increase in net premiums written will be greater than the increase in net premiums
earned, as was the case in 2002. Premiums are earned principally on a pro rata basis over
the coverage periods of the underlying policies. However, with respect to

44

---

policies that provide for premium adjustments, such as experience-rated
or exposure-based adjustments, such premium adjustments may be made subsequent to the end
of the policys coverage period and will be recorded as earned premium in the period
in which the adjustment is made.

We expect PMA Re to continue to have
gross and net premiums written in 2004 as certain contracts written in 2003 and prior
years will continue to generate premiums in 2004. Similarly, because premiums are earned
principally on a pro rata basis over the coverage periods of the underlying policies, PMA
Re will earn premiums in 2004.

Losses and Expenses

The components of the GAAP combined
ratios are as follows:

|                     | 2003 |  | 2002 |       | 2001 | 
|-------------------- | ---- |  | ---- | ----- | ---- | 
|                    
|                    
|                     |      |  |      |       |      | 
|Loss and LAE ratio   |      |  |      | 88.0  | %    | 
|Expense ratio:       |      | 
|Acquisition expenses |      |  |      | 26.4  | %    | 
|Operating expenses   |      |  |      | 3.5   | %    | 
|                     |      |  |      |       |      | 
|Total expense ratio  |      |  |      | 29.9  | %    | 
|                     |      |  |      |       |      | 
|Combined ratio       |      |  |      | 117.9 | %    | 
|                     |      |  |      |       |      | 
|                    
|                    

The loss and LAE ratio was 88.0% for
2003, compared to 79.6% in 2002 and 87.4% in 2001. During 2003, PMA Re increased its net
loss reserves for prior accident years by $169.1 million, including $150 million during
the third quarter. PMA Res third quarter 2003 reserve charge related to higher than
expected underwriting losses, primarily from casualty business written in accident years
1997 through 2000. Approximately 75% of the charge was related to general liability
business written from 1997 to 2000 with substantially all of the remainder from the
commercial automobile line written during those same years. During the third quarter, our
actuaries conducted their periodic comprehensive reserve review. 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. The
information derived during this review indicated that a large portion of the change in
expected loss development was due to increasing loss trends emerging in calendar year 2003
for prior accident years. This increase in 2003 loss trends caused us to determine that
the reserve levels, primarily for accident years 1997 to 2000, needed to be increased by
$150 million. An independent actuarial firm also conducted a comprehensive review of PMA
Res Traditional-Treaty, Specialty-Treaty and Facultative loss reserves, and
concluded that those carried loss reserves were reasonable at September 30, 2003.

PMA Res analysis was enhanced by an
extensive review of specific accounts, comprising about 40% of carried reserves for
accident years 1997 to 2000. Our actuaries visited a number of former ceding company
clients, which collectively comprised about 25% of PMA Res total gross loss and LAE
reserves from accident years 1997 to 2000, to discuss reserving and reporting experience
with these ceding companies. Our actuaries separately evaluated an additional number of
other ceding companies, representing approximately 15% of PMA Res total gross loss
and LAE reserves from accident years 1997 to 2000, to understand and examine data trends.

PMA Res loss and LAE ratio for 2002
reflects a $64 million increase in net loss reserves for prior accident years in the
fourth quarter of 2002. In the fourth quarter, PMA Res actuarial department
conducted its routine year-end reserve study to determine the impact of any emerging data
on anticipated loss development trends and recorded unpaid losses and LAE reserves. During
the fourth quarter, our actuaries observed a higher than expected increase in the frequency
and, to a lesser extent, severity of reported claims by our ceding companies. 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 net loss and LAE
reserves for prior accident years needed to be increased by approximately $64 million in
the fourth quarter of 2002, primarily for excess of loss and pro rata general liability occurrence
contracts and, to a lesser extent, excess of loss general liability claims-made contracts,
from accident years 1998, 1999 and 2000.

For 2001, PMA Res loss and LAE
ratio reflects the impact on losses and LAE and earned premium of the terrorist attack on
the World Trade Center, which increased net losses and LAE by $25 million and decreased
net premiums earned by $5 million.

45

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As a result of the decision to exit from
and run off this business, PMA Res operating expenses for 2003 include exit costs of
$2.6 million, mainly employee termination benefits, the majority of which were paid during
the first quarter of 2004.

Approximately 75 employees at PMA Re were
terminated in accordance with our exit plan. Approximately 90 positions, primarily claims
and financial, remain at PMA Re after the terminations. We have established an employee
retention arrangement for these remaining employees. Under this arrangement, PMA Re
expects to record expenses of approximately $2 million in 2004, which includes retention
bonuses and severance. We expect to pay the majority of these costs in 2004 and 2005.

Net Investment Income

Net investment income was $32.5 million,
$48.7 million and $45.4 million in 2003, 2002 and 2001, respectively. The decline in 2003,
compared to 2002, reflects lower yields on the invested asset portfolio of approximately
110 basis points on an average invested asset base that increased approximately 10%, and
lower interest earned of $9.0 million on funds held arrangements. For 2003, the reduction
in interest earned on funds held arrangements was substantially offset by lower losses on
the associated assumed Finite Risk and Financial Products contracts. In a funds held
arrangement, the ceding company retains the premiums, and losses are offset against these
funds in an experience account. Because the reinsurer is not in receipt of the funds, the
reinsurer earns interest on the experience fund balance at a predetermined credited
interest rate. The increase in net investment income in 2002, compared to 2001, reflects
higher interest earned of $9.7 million on funds held arrangements, partially offset by
lower investment earnings of $6.4 million on the invested asset portfolio. The lower
investment earnings resulted from a drop in yields of approximately 100 basis points on an
average invested asset base that increased approximately 5% during 2002.

Run-off Operations

Summarized financial results of the
Run-off Operations, formerly known as Caliber One, are as follows:

|(dollar amounts in thousands)      | 2003 |  | 2002 |        | 2001 |  
|---------------------------------- | ---- |  | ---- | ------ | ---- | -
|                                  
|                                  
|                                   |      |  |      |        |      |  
|Net premiums written               |      |  | $    | (5,625 | )    | $
|                                   |      |  |      |        |      |  
|Net premiums earned                |      |  |      | 4,672  |      |  
|Net investment income              |      |  |      | 1,974  |      |  
|Other revenues                     |      |  |      | 2,500  |      |  
|                                   |      |  |      |        |      |  
|Total revenues                     |      |  |      | 9,146  |      |  
|                                   |      |  |      |        |      |  
|Losses and LAE                     |      |  |      | 6,466  |      |  
|Acquisition and operating expenses |      |  |      | 3,498  |      |  
|                                   |      |  |      |        |      |  
|Total losses and expenses          |      |  |      | 9,964  |      |  
|                                   |      |  |      |        |      |  
|Pre-tax operating loss             |      |  | $    | (818   | )    | $
|                                   |      |  |      |        |      |  
|                                  
|                                  

In May 2002, we announced our decision to
withdraw from the excess and surplus lines marketplace previously served by the Caliber
One operating segment. In January 2003, we closed on the sale of the capital stock of
Caliber One Indemnity Company. Pursuant to the agreement of sale, we retained all assets
and liabilities related to the in-force policies and outstanding claim obligations
relating to Caliber Ones business written prior to closing on the sale. As a result
of our decision to exit this business, the results of this segment are reported as Run-off
Operations.

The Run-off Operations recorded a pre-tax
operating loss of $818,000 for 2003. The sale of the capital stock of Caliber One
Indemnity Company generated gross proceeds of approximately $31 million and resulted in a
pre-tax gain of $2.5 million, which is included in other revenues in the Statement of
Operations for 2003. During 2003, the Run-off Operations recognized an additional $2.5
million writedown of assets, made up of approximately $2 million for reinsurance
receivables and $500,000 for premiums receivable, reflecting an assessment of their
estimated net realizable value. The writedown is included in operating expenses in the
Statement of Operations for 2003.

In 2002, the Run-off Operations recorded
a pre-tax operating loss of $87.5 million. As a result of our decision to exit from and
run off this business, the Run-off Operations recorded a charge of $43 million pre-tax.
Components of the pre-tax charge include approximately $16 million to write-down assets to
their estimated net realizable value, including non-cash charges of approximately $6
million for leasehold improvements and other fixed assets and $1.3 million for goodwill.
In addition, the $43 million pre-tax charge includes expenses associated with the
recognition of liabilities of approximately $27

46

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million, including reinsurance costs of approximately $19 million,
long-term lease costs of approximately $4 million and involuntary employee termination
benefits of approximately $3 million. At December 31, 2003, the Company has a remaining
obligation of approximately $859,000 for net lease costs and approximately $152,000 for
severance.

Pre-tax operating results for 2002 also
include net unfavorable prior year loss development of $51.8 million. During 2002, company
actuaries conducted reserve reviews 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 this
segment. Managements selection of the ultimate losses resulting from their reviews
indicated that net loss reserves for prior accident years, mainly 1999 and 2000, needed to
be increased by $51.8 million. This unfavorable prior year development
reflects the impact of higher than expected claim severity and, to a lesser extent,
frequency, that emerged in 2002 on casualty lines of business, primarily professional
liability policies for the nursing homes class of business; general liability, including
policies covering contractors liability for construction defects; and commercial
automobile, mainly for accident years 1999 and 2000.

The Run-off Operations recorded a pre-tax
operating loss of $26.2 million for 2001. The results for 2001 include net unfavorable
prior year loss development of $22.2 million, reflecting 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.

Corporate and Other

The Corporate and Other segment includes
unallocated investment income and expenses, including debt service. This segment recorded
pre-tax operating losses of $22.8 million, $14.3 million and $6.3 million in 2003, 2002
and 2001, respectively. Included in results for 2003 are approximately $3 million of
accrued costs associated primarily with the remaining salary obligations under employment
contracts with our former executive officers. Interest expense increased by $6.6 million
in 2003, compared to 2002, primarily due to a higher average amount of debt outstanding.
Interest expense declined $3.3 million during 2002, compared to 2001, reflecting a lower
average amount of debt outstanding and lower interest rates throughout the year. 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.

Loss Reserves and Reinsurance

Loss Reserves

Our consolidated unpaid losses and LAE,
net of reinsurance, at December 31, 2003 and 2002 were $1,346.3 million and $1,184.3
million, net of discount of $67.0 million and $97.8 million, respectively. Included in the
consolidated unpaid losses and LAE are amounts related to our workers compensation
claims of $433.8 million and $326.7 million, net of discount of $54.6 million and $76.7
million at December 31, 2003 and 2002, respectively. The discount rate used was
approximately 5% at December 31, 2003 and 2002.

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 addition, because reinsurers rely on
their ceding companies to provide them with information regarding incurred losses,
reported claims 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, various 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 and claims settlement trends. Also considered are legal
developments, regulatory trends, legislative developments, changes in social attitudes and
economic conditions.

Management believes that its unpaid
losses and LAE are fairly stated at December 31, 2003. 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, legal and legislative developments, judicial theories
of liability, the impact of regulatory trends on benefit levels for both
medical and indemnity payments, changes in social attitudes and economic conditions, the
estimates are revised accordingly. If our ultimate losses, net of reinsurance, prove

47

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to
differ substantially from the amounts recorded at December 31, 2003, the related
adjustments could have a material adverse effect on our financial condition, results of
operations and liquidity. See the discussion under Losses and Expenses beginning on pages
41 and 45, and Run-off Operations beginning on page 46 for additional information
regarding increases in loss reserves for prior years.

At December 31, 2003, 2002 and 2001, our
gross reserves for asbestos-related losses were $37.8 million, $42.1 million and $59.9
million, respectively ($17.8 million, $25.8 million and $28.6 million, net of reinsurance,
respectively). At December 31, 2003, 2002 and 2001, our gross reserves for
environmental-related losses were $14.2 million, $18.2 million and $29.6 million,
respectively ($8.8 million, $14.3 million and $16.0 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 and damages 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 "Critical Accounting Estimates 
Unpaid Losses and Loss Adjustment Expenses" beginning on page 59 for additional
information. In addition, see "Cautionary Statements" beginning on page 62 and "Item
1 - Business - Risk Factors"  for a discussion of factors that may adversely
impact our losses and LAE in the future.

Reinsurance

Under our reinsurance and retrocessional
coverages in place during 2003, 2002 and 2001, we ceded premiums totaling $228.6 million,
$300.6 million and $243.4 million, and we ceded losses and LAE of $243.1 million, $223.2
million and $359.6 million to reinsurers and retrocessionaires. Ceded losses for 2001
include approximately $110 million resulting from the September 11th terrorist attack on
the World Trade Center.

At December 31, 2003 and 2002, we had
amounts receivable from our reinsurers and retrocessionaires totaling $1,220.3 million and
$1,295.1 million, respectively. Approximately $39 million and $37 million, or 3%, of these
amounts are due to us on losses we have already paid at December 31, 2003 and 2002. The
remainder of the reinsurance receivables relate to unpaid claims.

At December 31, 2003, we had reinsurance
receivables due from the following unaffiliated reinsurers in excess of 5% of our
shareholders equity:

|                                               |  | 
|---------------------------------------------- |  | 
|                                               |  | 
|(dollar amounts in thousands)                  |  | 
|                                              
|The London Reinsurance Group and Affiliates(1) |  | 
|PXRE                                           |  | 
|St. Paul and Affiliates(2)                     |  | 
|Swiss Reinsurance                              |  | 
|Houston Casualty                               |  | 
|Arch Reinsurance                               |  | 
|Partner Re                                     |  | 
|Hannover Ruckversicherungs AG                  |  | 
|                                              

|(1) |  | Includes
Trabaja Reinsurance Company ($288.7 million), London Life & General Reinsurance Company
($44.3 million) and London Life & Casualty Reinsurance Corporation ($1.0 million).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes
United States Fidelity & Guaranty Insurance Company ($89.7 million) and Mountain Ridge
Insurance Company ($44.3 million).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

We perform credit reviews of our  reinsurers focusing on, among other
things, financial capacity, stability, trends and  commitment to the reinsurance
business. 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

48

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from certain
reinsurers, generally those not authorized to transact business in the applicable
jurisdictions. At December 31, 2003 and 2002, our reinsurance receivables were supported
by $644.1 million and $666.9 million of collateral. Of the uncollateralized reinsurance
receivables at December 31, 2003, approximately 91% were due from reinsurers rated
A- or better by A.M. Best and is broken down as follows: A++
 11%; A+  33%; A  40% and A-
 7%. 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
$6.5 million of reinsurance receivables, substantially all from the Run-off Operations.
The timing and collectibility of reinsurance receivables have not had, and are not
expected to have, a material adverse effect on our liquidity. See "Critical Accounting
Estimates  Reinsurance Receivables" beginning on page 60 and Note 6 to our
Consolidated Financial Statements for additional information.

At December 31, 2003, our reinsurance and
retrocessional protection for major lines of business that we write was as follows:

|                        |  | Per risk: |   | Per occurrence: |    
|----------------------- |  | --------- | - | --------------- | ---
|                        |  | Retention |   | Limits(1)       |    
|                       
|The PMA Insurance Group |  |           |   |                 |    
|Workers' compensation   |  |           | $ | 250,000         | (2)
|Property lines          |  |           | $ | 500,000         |    
|Auto physical damage    |  |           | $ | 500,000         |    
|Other casualty lines    |  |           | $ | 1.5 million     |    
|                       
|PMA Re                  |  |          
|Casualty lines          |  |           | $ | 3.0 million     |    
|Property lines          |  |           | $ | 1.0 million     |    
|                       

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

|(2) |  | The
PMA Insurance Group retains the first $5 million of losses.
|--- |  | ---------------------------------------------------------------

The PMA Insurance Group does not write a
significant amount of natural catastrophe exposed business. We actively manage our
exposure to catastrophes through our underwriting process, where we generally monitor the
accumulation of insurable values in catastrophe-prone regions. The PMA Insurance Group
maintains catastrophe reinsurance protection of 95% of $18.0 million excess of $2.0
million. PMA Re did not write a significant amount of catastrophe exposed business in its
traditional underwriting units. Excluding PMA Res Finite Risk and Financial Products
writings, less than 1% of gross written premiums was for property catastrophe coverage in
2003. The Finite Risk and Financial Products unit wrote $36.5 million in premiums for
property catastrophe coverage in 2003. However, these contracts generally provided for
additional premiums payable to PMA Re to mitigate the severity of the catastrophic loss.
Also, in writing property reinsurance coverages, PMA Re typically required per occurrence
loss limitations for contracts that could have had catastrophe exposure. Through per risk
reinsurance, we manage our net retention in each exposure. PMA Res property per
occurrence reinsurance provides catastrophe protection of $40.0 million in excess of $10.0
million on its traditional property book. PMA Re can also recover an additional $20.0
million of Traditional and/or Finite Risk and Financial Products occurrence losses under
certain industry loss scenarios. Certain of these contracts require that we cede
additional premiums of up to 20% of ceded losses depending on the level of such losses.

In 2003 and 2002, our loss and LAE ratios
were not significantly impacted by catastrophes. In 2001, our loss and LAE ratios were
impacted by the attack on the World Trade Center as discussed under "Losses and Expenses"
beginning on page 45. 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 above, our treaties that renewed effective
January 1, 2004 do not cover us for losses sustained from terrorist activities. Further,
for treaties that renew later in 2004 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 Note 6 to our Consolidated Financial
Statements for additional discussion.

49

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Terrorism

In November 2002, the Terrorism Risk
Insurance Act of 2002 (TRIA) became effective. TRIA provides federal
reinsurance protection for property and casualty losses in the United States or to United
States aircraft or vessels arising from certified terrorist acts through the end of 2005.
For terrorist acts to be covered under TRIA, they must be certified as such by the United
States Government and must be committed by individuals acting on behalf of a foreign
person or interest. TRIA contains a make available provision, which requires
insurers subject to the Act, to offer coverage for acts of terrorism that does not differ
materially from the terms (other than price), amounts and other coverage limitations
offered to the policyholder for losses from events other than acts of terrorism. The
make available provision permits exclusions for certain types of losses, if a
state permits exclusions for such losses. TRIA requires insurers to retain losses based on
a percentage of their commercial lines direct earned premiums for the prior year equal to
a 7% deductible for 2003, 10% for 2004 and 15% for 2005. The federal government covers 90%
of the losses above the deductible, while a company retains 10% of the losses. TRIA
contains an annual limit of $100 billion of covered industry-wide losses. TRIA applies to
commercial lines of property and casualty insurance, including workers compensation
insurance, offered by The PMA Insurance Group, but does not apply to reinsurance. The PMA
Insurance Group would have a deductible of approximately $43 million in 2004 if a covered
terrorist act were to occur.

Workers compensation insurers were
not permitted to exclude terrorism from coverage prior to the enactment of TRIA, and
continue to be subject to this prohibition. When underwriting existing and new commercial
insurance business, The PMA Insurance Group considers the added potential risk of loss due
to terrorist activity, and this may lead it to decline to write or non-renew certain
business. Appropriate rates may be charged for terrorism coverage, and as of January 1,
2004, The PMA Insurance Group had adopted premium charges for workers compensation
insurance in all states. The PMA Insurance Group has refined its underwriting procedures
to take into account terrorism risks.

As discussed above, we have refined our
underwriting processes to account for terrorism risks and TRIA may mitigate the potential
impact of terrorism losses on our results. However, because of TRIAs uncertain
application, the amount of terrorism losses that The PMA Insurance Group must retain under
TRIA and the fact that TRIA does not apply to, and we do not have terrorism exclusions in
all of, our reinsurance business, future terrorist attacks may result in losses that could
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 "Item 1 - Business  The PMA Insurance Group, Underwriting."

50

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of an
entitys ability to secure sufficient cash to meet its contractual obligations and
operating needs. Our insurance operations generate cash by writing insurance policies and
collecting premiums. The cash generated is used to pay losses and LAE and operating
expenses. Any excess cash is invested and earns investment income. Operating cash flows
increased significantly in 2003 and 2002, compared to the immediately preceding year,
reflecting higher revenues due to price increases across all of our lines of business.

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

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. As a result, dividends from The PMA Insurance Groups Pooled Companies may
not be paid directly to PMA Capital. Instead, only PMA Capital Insurance Company, a
Pennsylvania domiciled company, may pay dividends directly to PMA Capital. Under
Pennsylvania law, approximately $17 million of dividends would be available to be paid by
PMA Capital Insurance Company to us in 2004 without the prior approval of the Pennsylvania
Insurance Department as of December 31, 2003. However, PMA Capital Insurance Company has
agreed with the Pennsylvania Insurance Department that PMA Capital Insurance Company will
not pay dividends to us without the prior approval of the Pennsylvania Insurance
Department. As of December 31, 2003, The PMA Insurance Groups Pooled Companies can
pay up to $23.2 million in dividends to PMA Capital Insurance Company during 2004. PMA
Capital received dividends from subsidiaries of $24.0 million, $28.0 million and $29.6
million in 2003, 2002 and 2001, respectively.

Net tax payments received from
subsidiaries were $5.6 million, $12.0 million and $2.4 million in 2003, 2002 and 2001,
respectively.

As of December 31, 2003, we had $15.0
million in cash and short-term investments at the holding company. Management currently
believes that our available sources of funds will provide sufficient liquidity to meet our
short-term obligations without receiving dividends from our insurance subsidiaries. Our
ability to meet our long-term obligations will depend on our ability to receive dividends
from our insurance subsidiaries. As a result, unless the Pennsylvania Insurance Department
permits such dividends, we may not be able to receive dividends from our operating
subsidiaries in sufficient amounts to pay these long-term obligations. Further, any event
that would have a material adverse effect on the $15.0 million of holding company cash and
short-term investments or the results of operations of our insurance subsidiaries could
affect our liquidity and ability to meet our contractual obligations and operating needs.

51

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Our contractual obligations by payment
due period are as follows:

|(dollar amounts in thousands)            |  | 2004 |   | 2005-2006 |  | 2007-2009 |        | Thereafter |   | Total  | 
|---------------------------------------- |  | ---- | - | --------- |  | --------- | ------ | ---------- | - | ------ | 
|                                        
|                                        
|Long-Term Debt (Principal and Interest): |  |      |   |           |  |           |        |            |   |        | 
|4.25% Convertible Debt(1)                |  |      | $ | 3,666     |  | $         | 7,331  |            | $ | 10,997 | 
|8.50% Senior Notes                       |  |      |   | 4,888     |  |           | 9,775  |            |   | 14,663 | 
|Trust Preferred Debt(2)                  |  |      |   | 2,321     |  |           | 4,641  |            |   | 6,962  | 
|                                         |  |      |   |           |  |           |        |            |   |       
|                                         |  |      |   | 10,875    |  |           | 21,747 |            |   | 32,622 | 
|Operating Leases(3)                      |  |      |   | 7,031     |  |           | 11,775 |            |   | 10,788 | 
|                                         |  |      |   |           |  |           |        |            |   |       
|Total                                    |  |      | $ | 17,906    |  | $         | 33,522 |            | $ | 43,410 | 
|                                         |  |      |   |           |  |           |        |            |   |       
|                                        
|                                        

|(1) |  | Holders
of the Convertible Debt, at their option, may require the Company to repurchase all or a
portion of their debentures on September 30, 2006, 2008, 2010, 2012 and 2017. This debt
may be converted at any time, at the holder's option, at a current price of $16.368 per
share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | See
discussion below for the variable interest rates on the Trust Preferred Debt. The
obligations related to the Trust Preferred Debt have been calculated using the interest
rates in effect at December 31, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The
operating lease obligations referred to in the table above are primarily obligations of
our insurance subsidiaries and are net of sublease payments of $1.4 million in 2004, $3.0
million in 2005-2006, $4.8 million in 2007-2009 and $7.7 million thereafter.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In June 2003, we issued $57.5 million of
8.50% monthly income senior notes (Senior Notes) due June 15, 2018, from which
we realized net proceeds of $55.1 million. We used the proceeds from the offering to repay
the remaining balance outstanding under our prior bank credit facility, to increase the
statutory capital and surplus of our insurance subsidiaries, and for general corporate
purposes. We have the right to call these securities beginning in June 2008.

In May 2003, we issued $18.0 million
(Trust Preferred 1) and $15.5 million (Trust Preferred 2) of
30-year floating rate subordinated debentures to two wholly owned statutory trust
subsidiaries. We used all of the $31.5 million of net proceeds to pay down a portion of
our then outstanding bank credit facility. During September 2003, we issued $10.3 million
(Trust Preferred 3) of 30-year floating rate subordinated debentures to a
third wholly owned statutory trust subsidiary. We realized net proceeds of $9.7 million,
which we used for general corporate purposes. Each of Trust Preferred 1, 2 and 3 has a
30-year maturity and is redeemable, in whole or in part, after five years from issuance at
their stated liquidation amount plus accrued and unpaid interest. The interest rates on
Trust Preferred 1, 2 and 3 equal the three-month London InterBank Offered Rate
(LIBOR) plus 4.10%, 4.20% and 4.05%, respectively, and are payable on a
quarterly basis. At December 31, 2003, the interest rates on Trust Preferred 1, 2 and 3
were 5.28%, 5.37% and 5.21%, respectively.

We have the right to defer interest
payments on Trust Preferred 1, 2 and 3 for up to twenty consecutive quarters but, if so
deferred, we may not declare or pay cash dividends or distributions on our Class A common
stock. The obligations of the statutory trust subsidiaries are guaranteed by PMA Capital
with respect to distributions and payments of Trust Preferred 1, 2 and 3.

In October 2002, we issued $86.25 million
of 4.25% convertible senior debentures (Convertible Debt) due September 30,
2022 from which we received net proceeds of $83.7 million. We used the proceeds from this
offering primarily to increase the capital and surplus of our reinsurance and insurance
subsidiaries. See Note 7 to our Consolidated Financial Statements for additional
information. In December 2001, we issued 9,775,000 shares of Class A Common stock for net
proceeds of $157.9 million. We used the net proceeds from this issuance to contribute
additional capital to our reinsurance subsidiary and to repay $62.5 million of our
outstanding debt maturing at year-end 2001 under our bank credit facility. Because of the
debt rating assigned to the Companys 4.25% Senior Convertible Debentures
(Convertible Debt), holders of the Convertible Debt may currently convert
their debentures at a conversion price of $16.368 per share, subject to adjustment upon certain events.

At December 31, 2002, we had $65 million
of short-term debt under our bank credit facility (Credit Facility) and $86.25
million aggregate principal amount of 4.25% Convertible Debt. We repaid and retired the
Credit Facility in the first half of 2003 as discussed above.

During 2003, 2002 and 2001, we incurred
$9.9 million, $3.3 million and $6.5 million of interest expense, and paid interest of $8.4 million,
$2.1 million and $7.1 million in each respective year. As of December 31, 2003, we had
$12.0 million outstanding in letters of credit, which we utilize primarily for securing
reinsurance obligations of our insurance subsidiaries. The letters of credit were issued
under our letter of credit facility, which was terminated during 2003. The lender agreed
to waive certain defaults under the letter of credit facility and renewed the letters of
credit for one year.

52

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Our ability to refinance our existing
debt obligations or raise additional capital is dependent upon several factors, including
conditions with respect to both the equity and debt markets and the ratings of any
securities that we may issue as established by the principal rating agencies. Because of
our current debt ratings downgrades, it is unlikely that we would be able to refinance our
outstanding debt obligations with the same terms and conditions as presently exist. See
Recent Developments beginning on page 38 for additional discussion regarding ratings
downgrades.

During 2003, 2002 and 2001 we paid
dividends to shareholders of $9.9 million, $12.1 million and $9.0 million, respectively.
We did not declare a dividend in the fourth quarter of 2003 and we have suspended common
stock dividends at the current time. The increase in dividends paid in 2002, compared to
2001, was due to the additional shares outstanding resulting from our December 2001
issuance of 9,775,000 shares of Class A Common stock.

We did not repurchase any shares during
2003. We repurchased 90,000 shares and 299,000 shares of our Class A Common stock at a
cost of $1.7 million and $5.3 million in 2002 and 2001, respectively. Our remaining share
repurchase authorization at December 31, 2003 is $15.4 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.

In 2002 and 2001, we contributed $16.5
million and $9.0 million, respectively, to our qualified pension plan in order to ensure
that the plan assets were at least equal to our accumulated benefit obligation at the end
of each year. We did not make a contribution to our qualified pension plan in 2003. Our
accumulated benefit obligation was greater than the fair value of plan assets by
approximately $3 million at December 31, 2003, largely due to a reduction in the discount
rate used to measure the benefit obligation. As a result, we recorded a minimum pension
liability of $25.3 million, and reduced accumulated other comprehensive income by $15.6
million after-tax. In 2003, the Company was not required to make any contribution to the
pension plan under the minimum funding requirements of the Employee Retirement Income
Security Act (ERISA) of 1974, and we are not required to make such a
contribution in 2004. We made the contributions in 2002 and 2001 due to a significant
decline in the market value of our plan assets, stemming from the broad market declines in
the bond and equity markets over the past three years. Our plan assets are composed of 35%
fixed maturities and 65% equities at December 31, 2003. We currently estimate that the
pension plans assets will generate a long-term rate of return of 9%, which we
believe is a reasonable long-term rate of return, in part, because of the historical
performance of the broad financial markets. Pension expense in 2003, 2002 and 2001 was
$4.4 million, $3.0 million and $1.9 million, respectively.

Contingent Obligations

We have an interest in a real estate
partnership that leases office space for which we have provided a guaranty of $7.0 million
related to loans on properties of the partnership. This guaranty shall continue to be in
force until the related loan has been satisfied. The loan is scheduled to be repaid on
November 1, 2004.

Until December 31, 2003, we had an
executive loan program, through which a financial institution provided personal demand
loans to our officers. We had provided collateral and agreed to purchase any loan in
default. In November 2003, the financial institution sold the collateral partially
securing the loans of two of our former officers in satisfaction of their loans in the
aggregate amount of $2.0 million. We are seeking repayment of the loans from the former
officers and are accruing interest on these loans at a rate of 3.3% as of December 31,
2003. These loans are included in other assets on the Balance Sheet at December 31, 2003.

Under the terms of the sale of one of our
insurance subsidiaries, PMA Insurance Cayman, Ltd. (renamed Trabaja Reinsurance Company),
to London Life and Casualty Reinsurance Corporation in 1998, we have 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, we will participate in such
favorable loss reserve development. Trabaja Reinsurance Company is our largest reinsurer.
See Note 6 to the Consolidated Financial Statements for additional information.

53

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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 investments at
December 31 were as follows:

|                                                                        | 2003       |  | 2002    |        
|----------------------------------------------------------------------- | ---------- |  | ------- | -------
|(dollar amounts in millions)                                            | Fair Value |  | Percent |        
|                                                                       
|                                                                       
|U.S. Treasury securities and obligations of U.S. Government    agencies |            |  | $       | 351.3  
|States, political subdivisions and foreign government securities        |            |  |         | 20.8   
|Corporate debt securities                                               |            |  |         | 795.2  
|Mortgage-backed and other asset-backed securities                       |            |  |         | 687.3  
|                                                                        |            |  |         |        
|Total fixed maturities available for sale                               |            |  | $       | 1,854.6
|Short-term investments                                                  |            |  |         | 157.6  
|                                                                        |            |  |         |        
|Total                                                                   |            |  | $       | 2,012.2
|                                                                        |            |  |         |        
|                                                                       
|                                                                       

Our investment portfolio includes only
fixed maturities, short-term investments and cash. The portfolio is diversified and does
not contain any significant concentrations in single issuers other than U.S. Treasury and
agency obligations. Our largest exposure to a single corporate issuer is $26.2 million, or
1.3% of total invested assets. In addition, we do not have a significant concentration of
our investments in any single industry segment other than finance companies, which
comprise 14% of invested assets at December 31, 2003. Included in this industry segment
are diverse financial institutions, including the financing subsidiaries of automotive
manufacturers. Substantially all of our investments are dollar denominated as of December
31, 2003.

Mortgage-backed and other asset-backed
securities in the table above include collateralized mortgage obligations
(CMOs) of $209.2 million and $181.2 million carried at fair value as of
December 31, 2003 and 2002. CMO holdings are concentrated in securities with limited
prepayment, extension and default risk, such as planned amortization class bonds.

As of December 31, 2003, the duration of
our investments that support the insurance reserves was 3.4 years and the duration of our
insurance reserves was 2.8 years. The difference in the duration of our investments and
our insurance reserves reflects our decision to maintain a longer asset duration in order
to enhance overall yield.

The net unrealized gain on our investment
assets at December 31, 2003 was $48.5 million, or 2.4% of the amortized cost basis. The
net unrealized gain included gross unrealized gains of $60.5 million and gross unrealized
losses of $12.0 million.

For all but one security, which was
carried at its fair value of $14.9 million at December 31, 2003, we determine the market
value of each fixed income security using prices obtained in the public markets. For this
security, whose fair value is not reliably determined from these public market sources, we
utilize the services of our outside professional investment asset manager to determine the
fair value. The asset manager determines the fair value of the security by using a
discounted present value of the estimated future cash flows (interest and principal
repayment).

54

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At December 31, our fixed maturities had
an overall average credit quality of AA, broken down as follows:

|                                 | 2003       |  | 2002    |        
|-------------------------------- | ---------- |  | ------- | -------
|(dollar amounts in millions)     | Fair Value |  | Percent |        
|                                
|                                
|                                 |            |  |         |        
|U.S. Treasury securities and AAA |            |  | $       | 1,040.7
|AA                               |            |  |         | 63.1   
|A                                |            |  |         | 435.9  
|BBB                              |            |  |         | 299.3  
|Below investment grade           |            |  |         | 15.6   
|                                 |            |  |         |        
|Total                            |            |  | $       | 1,854.6
|                                 |            |  |         |        
|                                
|                                

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 income and net effective
yield were as follows:

|(dollar amounts in millions) | 2003 |  | 2002 |         | 2001 |  
|---------------------------- | ---- |  | ---- | ------- | ---- | -
|                            
|                            
|                             |      |  |      |         |      |  
|Average invested assets(1)   |      |  | $    | 1,886.2 |      | $
|Investment income(2)         |      |  | $    | 79.1    |      | $
|Net effective yield(3)       |      |  |      | 4.19%   |      |  
|                            
|                            

|(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 $10.4 million, $2.9 million and $12.0 million in 2003, 2002 and 2001,
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.
|--- |  | ----------------------------------------------------------------------------------------

We review the securities in our fixed
income portfolio on a periodic basis to specifically review individual securities for any
meaningful decline in market value below amortized cost. Our analysis addresses all
securities whose fair value is significantly below amortized cost at the time of the
analysis, with additional emphasis placed on securities whose fair value has been below
amortized cost for an extended period of time. As part of our periodic review process, we
utilize the expertise of our outside professional asset managers who provide us with an
updated assessment of each issuers current credit situation based on recent issuer
activities, such as quarterly earnings announcements or other pertinent financial news for
the company, recent developments in a particular industry, economic outlook for a
particular industry and rating agency actions.

In addition to company-specific financial
information and general economic data, we also consider our ability and intent to hold a
particular security to maturity or until the market value of the bond recovers to a level
in excess of the carrying value. Our ability and intent to hold securities to such time is
evidenced by our strategy and process to match the cash flow characteristics of the
invested asset portfolio, both interest income and principal repayment, to the actuarially
determined estimated liability pay-out patterns of each insurance companys claims
liabilities. As a result of this periodic review process, we have determined that there
currently is no need to sell any of the fixed maturity investments prior to their
scheduled/expected maturity to fund anticipated claim payments.

55

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As of December 31, 2003, our investment
asset portfolio had gross unrealized losses of $12.0 million. For securities that were in
an unrealized loss position at December 31, 2003, the length of time that such securities
have been in an unrealized loss position, as measured by their month-end fair values, is
as follows:

|(dollar amounts in millions)        |  | Number ofSecurities |  | FairValue |  | AmortizedCost |       | UnrealizedLoss |   | PercentageFair Value toAmortized Cost | 
|----------------------------------- |  | ------------------- |  | --------- |  | ------------- | ----- | -------------- | - | ------------------------------------- | 
|                                   
|                                   
|Less than 6 months                  |  |                     |  | 134       |  | $             | 192.1 |                | $ | 193.5                                 | 
|6 to 9 months                       |  |                     |  | 45        |  |               | 37.3  |                |   | 38.9                                  | 
|9 to 12 months                      |  |                     |  | --        |  |               | --    |                |   | --                                    | 
|More than 12 months                 |  |                     |  | 5         |  |               | 30.3  |                |   | 36.4                                  | 
|                                    |  |                     |  |           |  |               |       |                |   |                                      
|Subtotal                            |  |                     |  | 184       |  |               | 259.7 |                |   | 268.8                                 | 
|U.S. Treasury and Agency securities |  |                     |  | 75        |  |               | 186.7 |                |   | 189.6                                 | 
|                                    |  |                     |  |           |  |               |       |                |   |                                      
|Total                               |  |                     |  | 259       |  | $             | 446.4 |                | $ | 458.4                                 | 
|                                    |  |                     |  |           |  |               |       |                |   |                                      
|                                   
|                                   

Of the 5 securities that have been in an
unrealized loss position for more than 12 months, 4 securities have an unrealized loss of
less than $1 million each and/or less than 20% of each securitys amortized cost.
These 4 securities have fair values at December 31, 2003 that are 90% or more of the
amortized cost basis, and the average unrealized loss per security is approximately
$276,000. There is only one security out of the 5 with an unrealized loss in excess of $1
million at December 31, 2003, and it has a market value of $14.9 million and a cost of
$20.0 million. The security is a structured security backed by a U.S. Treasury Strip, and
is rated AAA. This security matures in 2011 at a value of $20.0 million, and we have both
the ability and intent to hold this security until it matures.

The contractual maturity of securities in an unrealized loss position at
December 31, 2003 was as follows:

|(dollar amounts in millions)                      |  | FairValue |   | AmortizedCost |  | UnrealizedLoss |       | PercentageFair Value toAmortized Cost |  
|------------------------------------------------- |  | --------- | - | ------------- |  | -------------- | ----- | ------------------------------------- | -
|                                                 
|                                                 
|2004                                              |  |           | $ | 0.9           |  | $              | 0.9   |                                       |  
|2005-2008                                         |  |           |   | 60.7          |  |                | 61.1  |                                       |  
|2009-2013                                         |  |           |   | 73.2          |  |                | 74.6  |                                       |  
|2014 and later                                    |  |           |   | 19.9          |  |                | 20.4  |                                       |  
|Mortgage-backed and other asset-backed securities |  |           |   | 105.0         |  |                | 111.8 |                                       |  
|                                                  |  |           |   |               |  |                |       |                                      
|Subtotal                                          |  |           |   | 259.7         |  |                | 268.8 |                                       |  
|U.S. Treasury and Agency securities               |  |           |   | 186.7         |  |                | 189.6 |                                       |  
|                                                  |  |           |   |               |  |                |       |                                      
|Total                                             |  |           | $ | 446.4         |  | $              | 458.4 |                                       | $
|                                                  |  |           |   |               |  |                |       |                                      
|                                                 
|                                                 

For all securities that are in an
unrealized loss position for an extended period of time, we perform an evaluation of the
specific events attributable to the market decline of the security. We consider the length
of time and extent to which the securitys market value has been below cost as well
as the general market conditions, industry characteristics and the fundamental operating
results of the issuer to determine if the decline is due to changes in interest rates,
changes relating to a decline in credit quality of the issuer, or general market
conditions. We also consider as part of the evaluation our intent and ability to hold the
security until its market value has recovered to a level at least equal to the amortized
cost. Where we determine that a securitys unrealized loss is other than temporary, a
realized loss is recognized in the period in which the decline in value is determined to
be other than temporary.

At December 31, 2003, 99% of our fixed
income investments were publicly traded and all were rated by at least one nationally
recognized credit rating agency. In addition, at December 31, 2003, $15.6 million, or
0.8%, of our total investments were below investment grade. Of these
below investment grade investments, $2.2 million were in an unrealized loss position, which totaled
$13,000.

During 2003, we determined there were
other than temporary declines in market value of securities issued by 4 companies,
resulting in impairment charges of $2.6 million pre-tax in 2003. The impairment losses for
2003 primarily related to securities issued by airline companies and one asset-backed
security. The write-downs were measured based on public market prices and our expectation
of the future realizable value for the security at the time we determined the decline in
value was other than temporary.

56

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During 2002, we impaired securities
issued by 11 companies, resulting in impairment charges of $23.8 million pre-tax during
2002, including $14.2 million for WorldCom. In 2001, we recognized an impairment loss of
$1.6 million pre-tax resulting from the issuer filing for bankruptcy. See Critical
Accounting Estimates  Investments on page 60 for additional information.

Net Realized Investment Gains and Losses

We recorded pre-tax net realized
investment gains of $13.8 million in 2003, compared to pre-tax net realized investment
losses of $16.1 million in 2002 and net realized gains of $8.0 million in 2001. During
2003, there were gross realized gains and losses of $18.7 million and $4.9 million,
respectively. Included in the gross losses of $4.9 million were $2.6 million of impairment
losses on fixed income securities, primarily securities issued by airline companies and
one asset-backed security and $800,000 of realized losses on sales of securities where we
reduced and/or eliminated our positions in certain issuers due to credit concerns.
Realized losses also include sales reducing our per issuer exposure and general duration
management trades.

The net realized investment losses for
2002 primarily reflect impairment charges of $23.8 million on fixed income securities,
primarily corporate bonds issued by telecommunications and energy companies. Net realized
investment gains for 2001 reflect the sale of securities pursuant to a shift in 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 our 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.

See "Item 1 - Business - Investments"
 and Notes 2B and 4 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 approximately 14% of invested assets at December 31, 2003. Included in this
industry segment are diverse financial institutions, including the financing subsidiaries
of automotive manufacturers. See Notes 2B, 4, 7 and 12 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 68% of our total
liabilities and reinsurance receivables represent 29% 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,
2003, excluding insurance liabilities 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 $77 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.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

57

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OTHER MATTERS

Other Factors Affecting Our Business

In general, our businesses are subject to
a changing social, economic, legal, legislative and regulatory environment that could
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.
The Pennsylvania Insurance Department is currently conducting its triennial examination of
our insurance subsidiaries, including a review of the future business plans of those
subsidiaries. Although we have not received the final report of the Department, we do not
expect any material adverse effect on our statutory financial statements as a result of
the examination.

Comparison of SAP and GAAP Results

Results presented in accordance with GAAP
vary in certain respects from results presented in accordance with statutory accounting
practices prescribed or permitted by the Pennsylvania Insurance Department, (collectively
SAP). Prescribed SAP includes state laws, regulations and general
administrative rules, as well as a variety of National Association of Insurance
Commissioners publications. Permitted SAP encompasses all accounting practices that are
not prescribed. Our domestic insurance subsidiaries use SAP to prepare various financial
reports for use by insurance regulators.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46), which requires a company to
assess if consolidation of an entity is appropriate based upon its variable economic
interests in a variable interest entity (VIE). The initial determination of
whether an entity is a VIE is required to be made on the date at which we become involved
with the entity. A VIE is an entity in which the equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated financial
support from other parties. A company must consolidate a VIE if the company has a variable
interest that will absorb a majority of the VIEs expected losses if they occur, receive a
majority of the entitys expected residual returns if they occur or both. FIN 46 also
requires the disclosure of certain information related to VIEs in which a company holds a
significant variable interest.

Adoption of FIN 46 and its current
interpretations did not have a material impact on our financial condition, results of
operations or liquidity. At December 31, 2003, we applied the provisions of FIN 46 and its
current interpretations to our reporting for three wholly owned statutory trusts, which
issued $42.5 million of trust preferred securities in 2003. As a result of application of
the provisions of FIN 46, we deconsolidated these wholly owned statutory trusts, resulting
in an increase of $1.3 million in other assets and debt on the Balance Sheet.

In December 2003, the FASB revised
Statement of Financial Accounting Standards (SFAS) No. 132,
Employers Disclosures About Pensions and Other Postretirement Benefits,
to require additional disclosures regarding defined benefit pension plans and other
defined benefit postretirement plans. We have applied the disclosure provisions of SFAS
No. 132 to our Consolidated Financial Statements for 2003.

Effective December 31, 2002, we adopted
the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure. SFAS No. 148 amended SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on reported
results. We account for stock-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, we have applied the
disclosure provisions of SFAS No. 148.

Effective January 1, 2003, we adopted the
recognition provisions of FASB Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others (FIN 45). We had previously applied the disclosure provisions
of FIN 45 to our year end 2002 financial statements. FIN 45 requires certain guarantees to
be recorded at fair value and also requires a guarantor to make certain disclosures, even
when the likelihood of making payments under the guarantee is remote. Generally, FIN 45
applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed
party. Adoption of FIN 45 did not have an impact on our financial condition, results of
operations or liquidity.

58

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Effective July 1, 2003, we adopted SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.
Adoption of this statement did not have an impact on our financial condition, results of
operations or liquidity.

In May 2003, the FASB issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This statement is
effective for instruments entered into or modified after May 31, 2003 and the disclosure
requirements were effective beginning with the third quarter of 2003. Adoption of this
statement did not have an impact on our financial statements.

In July 2002, the FASB issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS
No. 146 requires companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. Accordingly, this standard does not apply to our exit from the
excess and surplus lines business, which we announced in May 2002. We applied the
provisions of SFAS No. 146 to our exit from the reinsurance business, which we announced
in November 2003.

Critical Accounting Estimates

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 in Note 2 to 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 estimates, which are those
accounting estimates 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 judgments.

Unpaid losses and loss adjustment expenses

At December 31, 2003, we estimated that
under all insurance policies and reinsurance contracts issued by our insurance businesses
our liability for all events that occurred as of December 31, 2003 is $2,541.3 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, 2003
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 various
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 reasonable, 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 our
best estimate of the ultimate claims liability.

It is important to 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. As additional experience and data
become available regarding claim payment and reporting patterns, legal and legislative
developments, the impact of regulatory trends on benefit levels for both medical and
indemnity payments, and changes in social attitudes and economic conditions, we revise our
estimates accordingly. In addition, because reinsurers rely on their ceding companies to
provide them with information regarding incurred losses, reported claims for reinsurers
become known more slowly than for primary insurers and are subject to  more unforeseen development and uncertainty. We believe that our
liability for unpaid losses and loss adjustment expenses is fairly stated at December 31,
2003. However, if our future estimate of ultimate unpaid losses is larger than the

59

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recorded amounts, we would have to increase our reserves. Any increase in reserves would
result in a charge to earnings in the period recorded. For example, in 2003 we increased
PMA Res net reserves by $169 million and took earnings charges as a result.
Accordingly, any reserve adjustment could have a material adverse effect on our financial
condition, results of operations and liquidity.

As outlined above, our loss and LAE
reserves at December 31, 2003 have been established using generally accepted actuarial
techniques and are based on numerous critical assumptions and informed judgments about
reported and paid claim trends and their implication on our estimate of the ultimate loss
for reported and incurred but unreported claims at the balance sheet date. We have
established a loss and LAE reserve for unpaid claims at December 31, 2003 that we believe
is a reasonable and adequate provision based on the information available to us. If we
revised our assessment of loss reporting and claims payment patterns because of changes in
those patterns, such that it resulted in a 1% change in our net loss and LAE reserves,
then our pre-tax operating income would change by approximately $13 million.

For additional information about our
liability for unpaid losses and loss adjustment expenses, see Notes 2-D and 5 to the
Consolidated Financial Statements as well as "Item 1 - Business - Loss Reserves."

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, 2003 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 overall average credit quality of AA,
and all 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.

Based on our evaluation of securities
with an unrealized loss at December 31, 2003, we do not believe that any additional
other-than-temporary impairment losses, other than those already reflected in the financial
statements, is necessary at the balance sheet date. However, if we were to have determined
that all securities that were in an unrealized loss position at December 31, 2003 should
have been written down to their fair value, we would have recorded an additional
other-than-temporary impairment loss of $12.0 million pre-tax.

For additional information about our
investments, see Notes 2-B, 4 and 12 of the Consolidated Financial Statements as well as "Investments" beginning on page 54.

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 $1,220.3 million at December 31, 2003. We have also
estimated that $6.8 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 remit 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

60

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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.

Based on our evaluation of reinsurance
receivables at December 31, 2003, we have established an allowance for amounts that we
have concluded are uncollectible at the balance sheet date. In evaluating collectibility,
we considered historical payment performance of our reinsurers, the fact that our
reinsurers are current on their obligations to our insurance subsidiaries, and any known
disputes or collection issues as of the balance sheet date. To these factors, we applied
our informed judgment in ascertaining the appropriate level of allowance for uncollectible
amounts. At December 31, 2003, approximately $36 million of uncollateralized reinsurance
receivables, including $14 million due for ceded IBNR, are due from reinsurers who have
ratings that declined to below Adequate,  defined as B++ or below by A.M.
Best, in 2003 or who were under regulatory supervision or in liquidation in 2003.

For additional information about
reinsurance receivables, see Note 5 to the Consolidated Financial Statements as well as
"Reinsurance" beginning on page 48.

Deferred Tax Assets

We record 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. The recoverability of deferred
tax assets is evaluated based upon managements estimates of the future profitability
of our taxable entities based on current forecasts. We establish a valuation allowance for
deferred tax assets where it appears more likely than not that we will not be able to
recover the deferred tax asset. At December 31, 2003, PMA Capital has a net deferred tax
asset of $77.0 million, resulting from $191.4 million of gross deferred tax assets reduced
by a deferred tax asset valuation allowance of $49.0 million and by $65.4 million of
deferred tax liabilities. In establishing the appropriate value of this asset, management
must make judgments about our ability to utilize the net tax benefit from the reversal of
temporary differences and the utilization of operating loss carryforwards that expire
mainly from 2018 through 2023.

In evaluating the recoverability of our
net deferred tax asset, management has considered the recent performance of its business,
which generated pre-tax losses of $67.7 million and $79.2 million in 2003 and 2002 due
primarily to losses from PMA Re and the Run-off Operations. As a result of these losses,
we have reduced our deferred tax asset at December 31, 2003 by $49.0 million to establish
a valuation allowance. We believe that our future results will improve due to the
profitability of more recent accident year business and due to our exit from the business
segments that generated the substantial portion of our net losses in 2002 and 2003.
Accordingly, despite our recent earnings history, we have estimated at December 31, 2003
that our insurance operations will generate sufficient future taxable income to utilize
the net deferred tax asset, net of the $49.0 million valuation allowance, over a period of
time not exceeding the expiration of our operating loss carryforwards. As a result, we
determined that it is more likely than not that we will be able to realize the future tax
benefit of our net deferred tax asset. In making this determination, we have made
reasonable estimates of our future taxable income. If our estimates of future income were
to be revised downward and we determined that it was then more likely than not that we
would not be able to realize the value of our net deferred tax asset, then this could have
a material adverse effect on our results of operations. For additional information see
Note 13 to our Consolidated Financial Statements.

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. As discussed in "PMA Re - Premiums"
beginning on page 43, in the second quarter of 2002, PMA Re recognized $44 million of net
written premiums for prior underwriting years due to a difference between the originally
estimated and actual premiums. Due to the customary lag in reporting premium data by some
of PMA Res clients, PMA Re must estimate the ultimate written premiums to be
received from a ceding company based upon data received when we initially receive the
submission including broker and ceding company data and projections. Actual premiums
written for PMA Re reported in the Statement of Operations are based upon reports received
from ceding companies, supplemented by our own estimates of premiums written for which
ceding company reports have not been received. Differences between such estimates and
actual amounts are recorded in the period in which the actual amounts are determined.

The premiums on reinsurance business  ceded are recorded as incurred on a
pro rata basis over the contract period. Certain ceded  reinsurance contracts contain
provisions requiring us to pay additional premiums ranging  from 20% to

61

---

50% of ceded losses or reinstatement premiums in the event that losses of a
significant magnitude are ceded under such contracts. Under accounting rules, we are not
permitted to establish reserves for potential additional premiums or record such amounts
until a loss occurs that would obligate us to pay such additional or reinstatement
premiums. As a result, the net benefit to our results from ceding losses to our
retrocessionaires in the event of a loss may be reduced by the payment of additional
premiums and reinstatement premiums to our retrocessionaires. For example, in 2001, PMA Re
assumed losses of $135 million due to the September 11th terrorist attack on the World
Trade Center and ceded $110 million of these losses to our retrocessionaires. Under the
terms of the retrocessional coverage to which we ceded these losses, we were required to
pay $30 million of additional ceded premiums to our retrocessionaires, which reduced the
net benefit of the loss cessions from $110 million to $80 million. For additional
information, see Notes 5 and 6 to our Consolidated Financial Statements.

CAUTIONARY STATEMENTS

Except for historical information
provided in Managements Discussion and Analysis and otherwise in this report,
statements made throughout 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:

| |  | our
ability to effect an efficient withdrawal from the reinsurance business, including the
commutation of          reinsurance business with certain large ceding companies;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | regulatory
or tax 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
business, including any future action with          respect to our business taken by the
Pennsylvania Insurance Department or any other state insurance department;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
effect on The PMA Insurance Group's premium writings and profitability due to the
downgrade of its          financial strength rating by A.M. Best to B++;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
effect on The PMA Insurance Group's premium writings, profitability and ratings due to
its status as a          subsidiary of PMA Capital Insurance Company;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
ability of the Company to have sufficient cash at the holding company to meet its debt
service and other          obligations, including any restrictions such as in our letter
agreement with the Pennsylvania Insurance Department on  receiving
dividends from its insurance subsidiaries in an amount          sufficient to meet such
obligations;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
lowering or loss of one or more of the Company's debt ratings, and the adverse impact
that any such          downgrade may have on our ability to raise capital and our
liquidity and financial condition;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |  | the
impact of future results on the recoverability of our deferred tax asset;
| | - | -----------------------------------------------------------------------------

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

| |  | the
outcome of any litigation against the Company, including the outcome of the purported
class action lawsuits;
| | - | ----------------------------------------------------------------------------------------------------------------

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

| |  | severity
of natural disasters and other catastrophes, including the impact of future acts of
terrorism, in          connection with insurance and reinsurance policies;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

62

---

| |  | uncertainties
related to possible terrorist activities or international hostilities; and
| | - | ----------------------------------------------------------------------------------------

| |  | other
factors disclosed from time to time in  this Form 10-K and our most recent 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 information 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.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

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 approximately 14% of invested assets at December 31, 2003. Included in this
industry segment are diverse financial institutions, including the financing subsidiaries
of automotive manufacturers. See Notes 2B, 4, 7 and 12 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 68% of our total
liabilities and reinsurance receivables represent 29% 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,
2003, excluding insurance liabilities 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 $77 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.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

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Item 8. Financial Statements and Supplementary Data

|                                                                                                                     |    
|-------------------------------------------------------------------------------------------------------------------- | ---
|Index to Consolidated Financial Statements                                                                           |    
|                                                                                                                    
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                            | 65 
|                                                                                                                    
|Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001                           | 66 
|                                                                                                                    
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                           | 67 
|                                                                                                                    
|Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001                 | 68 
|                                                                                                                    
|Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2003, 2002
         and 2001 | 69 
|                                                                                                                    
|Notes to Consolidated Financial Statements                                                                           | 70 
|                                                                                                                    
|Reports of Independent Accountants                                                                                   | 98 
|                                                                                                                    
|Quarterly Financial Information                                                                                      | 100

64

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CONSOLIDATED BALANCE SHEETS

|                                                                           |  | 
|-------------------------------------------------------------------------- |  | 
|(in thousands, except share data)                                          |  | 
|                                                                          
|Assets:                                                                    |  | 
|Investments:                                                               |  | 
|Fixed maturities available for sale,                                       |  | 
|at fair value (amortized cost:                                             |  | 
|2003 - $1,806,090; 2002 - $1,477,921)                                      |  | 
|Short-term investments                                                     |  | 
|Short-term investments, loaned securities collateral                       |  | 
|Cash                                                                       |  | 
|                                                                           |  | 
|Total investments and cash                                                 |  | 
|Accrued investment income                                                  |  | 
|Premiums receivable (net of valuation allowance:                           |  | 
|2003 - $7,972; 2002 - $9,528)                                              |  | 
|Reinsurance receivables (net of valuation allowance:                       |  | 
|2003 - $6,769; 2002 - $5,483)                                              |  | 
|Deferred income taxes, net                                                 |  | 
|Deferred acquisition costs                                                 |  | 
|Funds held by reinsureds                                                   |  | 
|Other assets                                                               |  | 
|                                                                           |  | 
|Total assets                                                               |  | 
|                                                                           |  | 
|Liabilities:                                                               |  | 
|Unpaid losses and loss adjustment expenses                                 |  | 
|Unearned premiums                                                          |  | 
|Short-term debt                                                            |  | 
|Long-term debt                                                             |  | 
|Accounts payable, accrued expenses and other liabilities                   |  | 
|Funds held under reinsurance treaties                                      |  | 
|Dividends to policyholders                                                 |  | 
|Payable under securities loan agreements                                   |  | 
|                                                                           |  | 
|Total liabilities                                                          |  | 
|                                                                           |  | 
|Commitments and contingencies (Note 8)                                     |  | 
|                                                                          
|Shareholders' Equity:                                                      |  | 
|Class A Common stock, $5 par value                                         |  | 
|(2003 - 60,000,000 shares authorized; 34,217,945 shares                    |  | 
|issued and 31,334,403 outstanding; 2002 - 40,000,000 shares                |  | 
|authorized; 34,217,945 shares issued and 31,328,922 outstanding)           |  | 
|Additional paid-in capital                                                 |  | 
|Retained earnings                                                          |  | 
|Accumulated other comprehensive income                                     |  | 
|Notes receivable from officers                                             |  | 
|Treasury stock, at cost (2003 - 2,883,542 shares; 2002 - 2,889,023 shares) |  | 
|                                                                           |  | 
|Total shareholders' equity                                                 |  | 
|                                                                           |  | 
|Total liabilities and shareholders' equity                                 |  | 
|                                                                           |  | 
|                                                                          

See accompanying notes to the consolidated financial statements.

65

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CONSOLIDATED STATEMENTS OF OPERATIONS

|                                       |  |  |  
|-------------------------------------- |  |  | -
|(in thousands, except share data)      |  |  |  
|                                      
|Revenues:                              |  | 
|Net premiums written                   |  |  | $
|Change in net unearned premiums        |  |  |  
|                                       |  |  |  
|Net premiums earned                    |  |  |  
|Net investment income                  |  |  |  
|Net realized investment gains (losses) |  |  |  
|Other revenues                         |  |  |  
|                                       |  |  |  
|Total revenues                         |  |  |  
|                                       |  |  |  
|                                       |  |  |  
|Losses and Expenses:                   |  | 
|Losses and loss adjustment expenses    |  |  |  
|Acquisition expenses                   |  |  |  
|Operating expenses                     |  |  |  
|Dividends to policyholders             |  |  |  
|Interest expense                       |  |  |  
|                                       |  |  |  
|Total losses and expenses              |  |  |  
|                                       |  |  |  
|Loss before income taxes               |  |  |  
|Income tax expense (benefit)           |  |  |  
|                                       |  |  |  
|Net income (loss)                      |  |  | $
|                                       |  |  |  
|Income (loss) per share:               |  | 
|Basic                                  |  |  | $
|                                       |  |  |  
|Diluted                                |  |  | $
|                                       |  |  |  
|                                      

See accompanying notes to the consolidated financial statements.

66

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CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                             |  |  |  
|------------------------------------------------------------ |  |  | -
|(in thousands)                                               |  |  |  
|                                                            
|Cash flows from operating activities:                        |  | 
|Net income (loss)                                            |  |  | $
|Adjustments to reconcile net income (loss) to net cash flows |  | 
|provided by (used in) operating activities:                  |  | 
|Deferred income tax expense (benefit)                        |  |  |  
|Net realized investment (gains) losses                       |  |  |  
|Gain on sale of real estate                                  |  |  |  
|Change in:                                                   |  | 
|Premiums receivable and unearned premiums, net               |  |  |  
|Reinsurance receivables                                      |  |  |  
|Unpaid losses and loss adjustment expenses                   |  |  |  
|Funds held by reinsureds                                     |  |  |  
|Funds held under reinsurance treaties                        |  |  |  
|Deferred acquisition costs                                   |  |  |  
|Accounts payable, accrued expenses and other liabilities     |  |  |  
|Dividends to policyholders                                   |  |  |  
|Accrued investment income                                    |  |  |  
|Other, net                                                   |  |  |  
|                                                             |  |  |  
|Net cash flows provided by (used in) operating activities    |  |  |  
|                                                             |  |  |  
|Cash flows from investing activities:                        |  | 
|Fixed maturities available for sale:                         |  | 
|Purchases                                                    |  |  |  
|Maturities and calls                                         |  |  |  
|Sales                                                        |  |  |  
|Net (purchases) sales of short-term investments              |  |  |  
|Proceeds from sale of real estate                            |  |  |  
|Proceeds from sale of subsidiary, net of cash sold           |  |  |  
|Other, net                                                   |  |  |  
|                                                             |  |  |  
|Net cash flows used in investing activities                  |  |  |  
|                                                             |  |  |  
|Cash flows from financing activities:                        |  | 
|Dividends paid to shareholders                               |  |  |  
|Proceeds from issuance of stock                              |  |  |  
|Issuance of long-term debt                                   |  |  |  
|Debt issue costs                                             |  |  |  
|Repayment of debt                                            |  |  |  
|Proceeds from exercise of stock options                      |  |  |  
|Purchase of treasury stock                                   |  |  |  
|Net repayments (issuance) of notes receivable from officers  |  |  |  
|                                                             |  |  |  
|Net cash flows provided by financing activities              |  |  |  
|                                                             |  |  |  
|Net increase (decrease) in cash                              |  |  |  
|Cash - beginning of year                                     |  |  |  
|                                                             |  |  |  
|Cash - end of year                                           |  |  | $
|                                                             |  |  |  
|                                                             |  |  |  
|Supplementary cash flow information:                         |  | 
|Income tax paid (refunded)                                   |  |  | $
|Interest paid                                                |  |  | $

See accompanying notes to the consolidated financial statements.

67

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|                                                                                  |  |  |  
|--------------------------------------------------------------------------------- |  |  | -
|(in thousands)                                                                    |  |  |  
|                                                                                 
|Class A Common Stock:                                                             |  | 
|Balance at beginning of year                                                      |  |  | $
|Issuance of Class A Common stock                                                  |  |  |  
|                                                                                  |  |  |  
|Balance at end of year                                                            |  |  |  
|                                                                                  |  |  |  
|Additional paid-in capital - Class A Common stock:                                |  | 
|Balance at beginning of year                                                      |  |  |  
|Issuance of Class A Common stock                                                  |  |  |  
|                                                                                  |  |  |  
|Balance at end of year                                                            |  |  |  
|                                                                                  |  |  |  
|Retained earnings:                                                                |  | 
|Balance at beginning of year                                                      |  |  |  
|Net income (loss)                                                                 |  |  |  
|Class A Common stock dividends declared                                           |  |  |  
|Reissuance of treasury shares under employee benefit plans                        |  |  |  
|                                                                                  |  |  |  
|Balance at end of year                                                            |  |  |  
|                                                                                  |  |  |  
|Accumulated other comprehensive income (loss):                                    |  | 
|Balance at beginning of year                                                      |  |  |  
|Other comprehensive income (loss),           net of tax expense (benefit):        |  | 
|2003 - $(8,039); 2002 - $15,710; 2001 - $10,634                                   |  |  |  
|                                                                                  |  |  |  
|Balance at end of year                                                            |  |  |  
|                                                                                  |  |  |  
|Notes receivable from officers:                                                   |  | 
|Balance at beginning of year                                                      |  |  |  
|Repayment (issuance/interest accrued)           of notes receivable from officers |  |  |  
|                                                                                  |  |  |  
|Balance at end of year                                                            |  |  |  
|                                                                                  |  |  |  
|Treasury stock - Class A Common:                                                  |  | 
|Balance at beginning of year                                                      |  |  |  
|Purchase of treasury shares                                                       |  |  |  
|Reissuance of treasury shares under employee benefit plans                        |  |  |  
|                                                                                  |  |  |  
|Balance at end of year                                                            |  |  |  
|                                                                                  |  |  |  
|Total shareholders' equity:                                                       |  | 
|Balance at beginning of year                                                      |  |  |  
|Net income (loss)                                                                 |  |  |  
|Issuance of Class A Common stock                                                  |  |  |  
|Class A Common stock dividends declared                                           |  |  |  
|Purchase of treasury shares                                                       |  |  |  
|Reissuance of treasury shares under employee benefit plans                        |  |  |  
|Other comprehensive income (loss)                                                 |  |  |  
|Repayment (issuance/interest accrued) of notes           receivable from officers |  |  |  
|                                                                                  |  |  |  
|Balance at end of year                                                            |  |  | $
|                                                                                  |  |  |  

See accompanying notes to the consolidated financial statements.

68

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

|                                                      |  |  |  
|----------------------------------------------------- |  |  | -
|(in thousands)                                        |  |  |  
|                                                     
|Net income (loss)                                     |  |  | $
|                                                      |  |  |  
|                                                      |  |  |  
|Other comprehensive income (loss), net of tax:        |  | 
|Unrealized gains (losses) on securities               |  | 
|Holding gains arising during the period               |  |  |  
|Less: reclassification adjustment for (gains)         |  | 
|losses included in net income (loss), net             |  | 
|of tax expenses (benefit): 2003 - 4,823;              |  | 
|2002 - ($5,630); 2001 - $2,796                        |  |  |  
|                                                      |  |  |  
|Total unrealized gains (losses) on securites          |  |  |  
|Pension plan liability adjustment, net of tax benefit |  | 
|2003 - $8,406                                         |  |  |  
|Foreign currency translation gains (losses),          |  | 
|net of tax expense (benefit):                         |  | 
|2003 - $1,378; 2002 - $736; 2001 - ($127)             |  |  |  
|                                                      |  |  |  
|Other comprehensive income (loss), net of tax         |  |  |  
|                                                      |  |  |  
|Comprehensive income (loss)                           |  |  |  
|                                                      |  |  |  
|                                                     

See accompanying notes to the consolidated financial statements.

69

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Notes to Consolidated Financial Statements

Note 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 the following businesses:

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.

PMA Re  Prior to November 6, 2003, the
Companys reinsurance operations offered excess of loss and pro rata
property and casualty reinsurance protection mainly through reinsurance brokers.
Effective November 6, 2003, the Company decided to withdraw from the reinsurance
business. See Note 3 for additional information. The results of this business,
which had been offered though our PMA Re business segment, will be included in
Run-off Operations effective in 2004.

Run-off Operations  Prior to May 1, 2002, the
Company operated a third specialty risk management business, Caliber One, which
wrote excess and surplus lines of business throughout the United States,
generally through surplus lines brokers. Effective May 1, 2002, the Company
announced its decision to withdraw from the excess and surplus lines
marketplace. As a result of this decision, the results of this segment are
reported as Run-off Operations. See Note 15 for additional information.

Note 2. Summary of Significant Accounting Policies

A. Basis of Presentation  The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (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). All short-term, highly liquid
investments, which have original maturities of one year or less from acquisition
date, are treated as short-term investments and are carried at amortized cost,
which approximates fair value.

Realized gains and losses, determined by the first-in, first-out
method, are reflected in income in the period in which the sale transaction
occurs. For all securities that are in an unrealized loss position for an
extended period of time and for all securities whose fair value is significantly
below amortized cost, the Company performs an evaluation of the specific events
attributable to the market decline of the security. The Company considers the
length of time and extent to which the securitys market value has been
below cost as well as the general market conditions, industry characteristics
and the fundamental operating results of the issuer to determine if the decline
is due to changes in interest rates or general market conditions, or changes
relating to a decline in credit quality of the issuer. The Company also
considers as part of the evaluation its intent and ability to hold the security
until its market value has recovered to a level at least equal to the amortized
cost. Where the Company determines that a securitys unrealized loss is
other than temporary, a realized loss is recognized in the period in which the
decline in value is determined to be other than temporary. The write-downs are
measured based on public market prices and the Companys expectation of the
future realizable value for the security at the time the Company determines the
decline in value was other than temporary.

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

70

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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.

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. For
reinsurance premiums assumed, management must estimate the subject premiums
associated with the treaties in order to determine the level of written and
earned premiums for a reporting period. Such estimates are based on information
from brokers and ceding companies, which can be subject to change as new
information becomes available. Any changes occurring or reported to the Company
after the policy term are recorded as earned premiums in the period in which the
adjustment is made. See Note 5 for additional information. With respect to
policies that provide for premium adjustments, such as experience-rated or
exposure-based adjustments, such premium adjustments may be made subsequent to
the end of the policys coverage period and will be recorded as earned
premiums in the period in which the adjustment is made. 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 LAE on
known claims and estimates of losses and LAE 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. The Company also discounts unpaid losses and LAE for certain
other claims at rates permitted by domiciliary regulators or if the timing and
amount of such claims are fixed and determinable. 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 5 for additional information.

E. 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 Companys insurance and reinsurance
subsidiaries cede business in order to limit the maximum net loss
 and limit the accumulation of many smaller losses from a catastrophic
event. The insurance and reinsurance subsidiaries remain primarily liable to
their clients in the event their reinsurers are unable to meet their financial
obligations. Reinsurance receivables include claims paid by the Company and
estimates of unpaid losses and LAE that are subject to reimbursement under
reinsurance and retrocessional contracts. The method for determining the
reinsurance receivable for unpaid losses and LAE involves reviewing actuarial
estimates of unpaid losses and LAE to determine the Companys ability to
cede unpaid losses and LAE under its existing reinsurance contracts. This method
is continually reviewed and updated and any adjustments resulting therefrom are
reflected in earnings in the period identified. Under certain of the
Companys reinsurance and retrocessional contracts, additional premium and
interest may be required if predetermined loss and LAE thresholds are exceeded.

Certain of the Companys assumed and ceded reinsurance
contracts are funds held arrangements. In a funds held arrangement, the ceding
company retains the premiums instead of paying them to the reinsurer and losses
are offset against these funds in an experience account. Because the reinsurer
is not in receipt of the funds, the reinsurer will generally earn interest on
the experience fund balance at a predetermined credited rate of interest. The
Company generally earns an interest rate of between 6% and 8% on its assumed
funds held arrangements and generally pays interest at a rate of between 6% and
8% on its ceded funds held arrangements. The interest earned or credited on
funds held arrangements is included in net investment income in the Statement of
Operations. In addition, interest on funds held arrangements will continue to be
earned or credited until the experience account is fully depleted, which can
extend many years beyond the expiration of the coverage period.

Certain of the Companys reinsurance contracts are
retroactive in nature. Any benefit derived from retroactive reinsurance
contracts is deferred and amortized into income over the payout pattern of the
underlying claim liabilities unless the contracts call for immediate recovery by
the Company from reinsurers as ceded losses are incurred.

F. Deferred Acquisition Costs  Costs that directly
relate to and vary with the acquisition of new and renewal business are deferred and
amortized over the period during which the related premiums are earned. Such
direct costs include

71

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commissions, brokerage and premium taxes, as well as other  policy
issuance costs and underwriting expenses. The Company determines whether  acquisition
costs are recoverable considering future losses and LAE, maintenance  costs and
anticipated investment income. To the extent that acquisition costs  are not recoverable,
the deficiency is charged to income in the period  identified.

G. Dividends to Policyholders  The PMA Insurance
Group sells certain workers compensation insurance policies with dividend
payment features. These policyholders share in the underwriting 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.

H. 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. See Note 13 for additional information.

I. 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. The following table illustrates the effect on net income (loss) if
the fair value based method had been applied:

|                                                   |      |  |     
|-------------------------------------------------- | ---- |  | ----
|                                                   |      |  |     
|(in thousands, except per share)                   | 2003 |  | 2002
|                                                  
|Net income (loss)                                  |      |  | $   
|Stock-based compensation expense already           |      | 
|included in reported net income (loss), net of tax |      |  |     
|Total stock-based compensation expense             |      | 
|determined under fair value based method,          |      | 
|net of tax                                         |      |  |     
|                                                   |      |  |     
|Pro forma net income (loss)                        |      |  |     
|                                                   |      |  |     
|Net income (loss) per share:                       |      | 
|Basic - as reported                                |      |  | $   
|                                                   |      |  |     
|Basic - pro forma                                  |      |  | $   
|                                                   |      |  |     
|Diluted - as reported                              |      |  | $   
|                                                   |      |  |     
|Diluted - pro forma                                |      |  | $   
|                                                   |      |  |     
|                                                  

---

J. 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. During 2001, other revenues included a $9.8 million gain
on the sale of certain real estate properties.

K. Recent Accounting Pronouncements  In January
2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46), which requires a company to assess if consolidation of an
entity is appropriate based upon its variable economic interests in a variable
interest entity (VIE). The initial determination of whether an
entity is a VIE is required to be made on the date at which a company becomes
involved with the entity. A VIE is an entity in which the equity investors do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. A company must
consolidate a VIE if the company has a variable interest that will absorb a
majority of the VIEs expected losses if they occur, receive a majority of the
entitys expected residual returns if they occur or both. FIN 46 also
requires the disclosure of certain information related to VIEs in which a
company holds a significant variable interest.

72

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Adoption of FIN 46 and its current interpretations did not have
a material impact on the Companys financial condition, results of
operations or liquidity. At December 31, 2003, the Company applied the
provisions of FIN 46 and its current interpretations to its reporting for three
wholly owned statutory trusts, which issued $42.5 million of trust preferred
securities in 2003. As a result of application of the provisions of FIN 46, the
Company deconsolidated these wholly owned statutory trusts, resulting in an
increase of $1.3 million in other assets and debt on the Balance Sheet. See Note
7 for additional information about the trust preferred debt.

In December 2003, the FASB revised Statement of Financial
Accounting Standards (SFAS) No. 132, Employers
Disclosures About Pensions and Other Postretirement Benefits, to require
additional disclosures regarding defined benefit pension plans and other defined
benefit postretirement plans. The Company has applied the disclosure provisions
of SFAS No. 132 to its Consolidated Financial Statements for 2003.

Effective December 31, 2002, the Company adopted the disclosure
provisions of SFAS No.
148, Accounting for Stock-Based Compensation  Transition and
Disclosure. SFAS No. 148 amended SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company accounts for
stock-based employee compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, the Company has applied the
disclosure provisions of SFAS No. 148.

Effective January 1, 2003, the Company adopted the recognition
provisions of FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). The Company had previously
applied the disclosure provisions of FIN 45 to its year end 2002 financial
statements. FIN 45 requires certain guarantees to be recorded at fair value and
also requires a guarantor to make certain disclosures, even when the likelihood
of making payments under the guarantee is remote. Generally, FIN 45 applies to
contracts or indemnification agreements that contingently require the guarantor
to make payments to the guaranteed party. Adoption of FIN 45 did not have an
impact on the Companys financial condition, results of operations or
liquidity.

Effective July 1, 2003, the Company adopted SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Adoption of this statement did not
have an impact on the Companys financial condition, results of operations
or liquidity.

In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This statement is effective for instruments entered into or
modified after May 31, 2003 and the disclosure requirements were effective
beginning with the third quarter of 2003. Adoption of this statement did not
have an impact on the Companys financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Accordingly, this standard does not apply to
the Companys exit from the excess and surplus lines business, which the
Company announced in May 2002. The Company applied the provisions of SFAS No.
146 to its exit from the reinsurance business, which the Company announced in
November 2003.

Note 3. Withdrawal From Reinsurance Business

On November 6, 2003, the Company announced its decision to
withdraw from the reinsurance business previously served by PMA Re, which is no
longer writing new reinsurance business. As a result of the decision to exit
from and run off this business, the Companys results for 2003 include a
charge of $5.7 million pre-tax ($2.6 million in PMA Re, mainly for employee
termination benefits, and $3.1 million in Corporate and Other associated
primarily with salary obligations under employment contracts with our former
executive officers). Approximately 75 employees at PMA Re were terminated in
accordance with the Companys exit plan. The majority of these employee
termination costs were paid during the first quarter of 2004. Approximately 90
positions, primarily claims and financial, remain at PMA Re after the
terminations. The Company has established an employee retention arrangement for
the remaining employees. Under this arrangement, PMA

73

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Re expects to record  expenses of approximately $2 million in 2004, which
includes retention bonuses  and severance. The Company expects to pay the majority of
these costs in 2004  and 2005.

Note 4. 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 14% of invested assets at December 31,
2003. Included in this industry segment are diverse 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
|                                                                    
|December 31, 2003                                                    |  | 
|Fixed maturities available for sale:                                 |  | 
|U.S. Treasury securities and obligations of U.S. Government agencies |  |  | $ | 340,483      
|States, political subdivisions and foreign government securities     |  |  |   | 20,200       
|Corporate debt securities                                            |  |  |   | 764,710      
|Mortgage-backed and other asset-backed securities                    |  |  |   | 680,697      
|                                                                     |  |  |   |              
|Total fixed maturities available for sale                            |  |  |   | 1,806,090    
|Short-term investments                                               |  |  |   | 157,632      
|                                                                     |  |  |   |              
|Total investments                                                    |  |  | $ | 1,963,722    
|                                                                     |  |  |   |              
|December 31, 2002                                                    |  | 
|Fixed maturities available for sale:                                 |  | 
|U.S. Treasury securities and obligations of U.S. Government agencies |  |  | $ | 315,911      
|States, political subdivisions and foreign government securities     |  |  |   | 10,217       
|Corporate debt securities                                            |  |  |   | 608,407      
|Mortgage-backed and other asset-backed securities                    |  |  |   | 543,386      
|                                                                     |  |  |   |              
|Total fixed maturities available for sale                            |  |  |   | 1,477,921    
|Short-term investments                                               |  |  |   | 298,686      
|                                                                     |  |  |   |              
|Total investments                                                    |  |  | $ | 1,776,607    
|                                                                     |  |  |   |              
|                                                                    

74

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As of December 31, 2003, the Companys investment asset
portfolio had gross unrealized losses of $12.0 million. For securities that were
in an unrealized loss position at December 31, 2003, the length of time that
such securities have been in an unrealized loss position, as measured by their
month-end fair values, is as follows:

|(dollar amounts in millions)        |  | Number ofSecurities |  | FairValue |  | AmortizedCost |       | UnrealizedLoss |   | PercentageFair Value toAmortized Cost | 
|----------------------------------- |  | ------------------- |  | --------- |  | ------------- | ----- | -------------- | - | ------------------------------------- | 
|                                   
|                                   
|Less than 6 months                  |  |                     |  | 134       |  | $             | 192.1 |                | $ | 193.5                                 | 
|6 to 9 months                       |  |                     |  | 45        |  |               | 37.3  |                |   | 38.9                                  | 
|9 to 12 months                      |  |                     |  | --        |  |               | --    |                |   | --                                    | 
|More than 12 months                 |  |                     |  | 5         |  |               | 30.3  |                |   | 36.4                                  | 
|                                    |  |                     |  |           |  |               |       |                |   |                                      
|Subtotal                            |  |                     |  | 184       |  |               | 259.7 |                |   | 268.8                                 | 
|U.S. Treasury and Agency securities |  |                     |  | 75        |  |               | 186.7 |                |   | 189.6                                 | 
|                                    |  |                     |  |           |  |               |       |                |   |                                      
|Total                               |  |                     |  | 259       |  | $             | 446.4 |                | $ | 458.4                                 | 
|                                    |  |                     |  |           |  |               |       |                |   |                                      
|                                   
|                                   

The amortized cost and fair value of fixed maturities at
December 31, 2003, by contractual maturity, are as follows:

|                                                  |  | 
|------------------------------------------------- |  | 
|                                                  |  | 
|(dollar amounts in thousands)                     |  | 
|                                                 
|2004                                              |  | 
|2005-2008                                         |  | 
|2009-2013                                         |  | 
|2014 and thereafter                               |  | 
|Mortgage-backed and other asset-backed securities |  | 
|                                                  |  | 
|                                                  |  | 
|                                                  |  | 
|                                                 

Actual maturities may differ from contractual maturities because
certain securities may be called or prepaid with or without call or prepayment
penalties.

Net investment income consists of the following:

|                               |  |  |  
|------------------------------ |  |  | -
|(dollars amounts in thousands) |  |  |  
|                              
|Fixed maturities               |  |  | $
|Short-term investments         |  |  |  
|Other                          |  |  |  
|                               |  |  |  
|Total investment income        |  |  |  
|Investment expenses            |  |  |  
|Interest on funds held, net    |  |  |  
|                               |  |  |  
|Net investment income          |  |  | $
|                               |  |  |  
|                              

75

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

|                                             |  |  |  
|-------------------------------------------- |  |  | -
|(dollar amounts in thousands)                |  |  |  
|                                            
|Realized gains                               |  |  | $
|Realized losses                              |  |  |  
|                                             |  |  |  
|Total net realized investment gains (losses) |  |  | $
|                                             |  |  |  
|                                            

Included in realized losses for 2003, 2002 and 2001 were
impairment losses of $2.6 million, $23.8 million and $1.6 million, respectively.
The impairment losses for 2003 primarily related to securities issued by airline
companies and an asset-backed security. The impairment losses for 2002 primarily
related to corporate bonds issued by telecommunications and energy companies,
including $14.2 million for WorldCom. The write-downs were measured based on
public market prices and the Companys expectation of the future realizable
value for the security at the time when the Company determined the decline in
value was other than temporary.

The increase (decrease) in net unrealized gains on investments
for 2003, 2002 and 2001 was $(3.5) million, $43.6 million and $30.7 million,
respectively, attributable to fixed maturities.

At December 31, 2003, the Company had $6.3 million of collateral
related to securities on loan, substantially all of which was cash received and
subsequently reinvested in short-term investments.

On December 31, 2003, the Company had securities with a total
amortized cost of $44.1 million and fair value of $45.9 million held in trust
for the benefit of certain ceding companies on reinsurance balances assumed by
PMA Re and securities with a total amortized cost of $18.0 million and fair
value of $18.2 million pledged as collateral for letters of credit issued on
behalf of the Company. In addition, the Company had securities with a total
amortized cost of $34.7 million and fair value of $37.5 million on deposit with
various governmental authorities, as required by law. Securities with a total
amortized cost of $5.5 million and fair value of $6.2 million were held in trust
to support the Companys participation in the underwriting capacity of a
Lloyds of London syndicate. The securities held in trust, on deposit or
pledged as collateral are included in fixed maturities on the Balance Sheet.

76

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Note 5. Unpaid Losses and Loss Adjustment Expenses

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

|                                                       |  |  |  
|------------------------------------------------------ |  |  | -
|(dollar amounts in thousands)                          |  |  |  
|                                                      
|Balance at January 1                                   |  |  | $
|Less: reinsurance recoverable on unpaid losses and LAE |  |  |  
|                                                       |  |  |  
|Net balance at January 1                               |  |  |  
|                                                       |  |  |  
|Losses and LAE incurred, net:                          |  | 
|Current year, net of discount                          |  |  |  
|Prior years                                            |  |  |  
|Accretion of prior years' discount                     |  |  |  
|                                                       |  |  |  
|Total losses and LAE incurred, net                     |  |  |  
|                                                       |  |  |  
|Losses and LAE paid, net:                              |  | 
|Current year                                           |  |  |  
|Prior years                                            |  |  |  
|                                                       |  |  |  
|Total losses and LAE paid, net                         |  |  |  
|                                                       |  |  |  
|Reserves transferred                                   |  |  |  
|                                                       |  |  |  
|Net balance at December 31                             |  |  |  
|Reinsurance recoverable on unpaid losses and LAE       |  |  |  
|                                                       |  |  |  
|Balance at December 31                                 |  |  | $
|                                                       |  |  |  
|                                                      

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 addition, because reinsurers rely on their ceding companies to provide
them with information regarding incurred losses, reported claims 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, various 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 and claims settlement
trends. Also considered are legal developments, regulatory trends, legislative
developments, changes in social attitudes and economic conditions.

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

|                                  |  |  |  
|--------------------------------- |  |  | -
|(dollar amounts in thousands)     |  |  |  
|                                 
|The PMA Insurance Group           |  |  | $
|PMA Re                            |  |  |  
|Run-off Operations                |  |  |  
|                                  |  |  |  
|Total net unfavorable development |  |  | $
|                                  |  |  |  
|                                 

During 2003, The PMA Insurance Group recorded unfavorable prior
year loss development of $49.7 million. In the fourth quarter of 2003, the
Companys actuaries completed a comprehensive year-end actuarial analysis
of loss reserves. Based on the actuarial work performed, the Companys
actuaries noticed higher than expected claims severity in workers
compensation business written for accident years 2001 and 2002, primarily from
loss-sensitive and participating workers compensation business. As a
result, The PMA Insurance Group increased loss reserves for prior years by $50
million. An independent actuarial firm also conducted a comprehensive review of
The PMA Insurance Groups loss reserves as of December 31, 2003 and
concluded that such carried loss reserves were reasonable as of December 31,
2003. Under The PMA Insurance Groups loss-sensitive rating plans, the
amount of the insureds premiums is adjusted after the policy period
expires based, to a large extent, upon the insureds actual losses incurred
during the policy period. Under policies that are subject to dividend plans, the
ultimate amount of the dividend that the insured may receive is also based, to a

77

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large extent, upon loss experience during the policy period. Accordingly,
offsetting the effects of this unfavorable prior year loss development were  premium
adjustments of $35 million under loss-sensitive plans and reduced  policyholder dividends
of $8 million, resulting in a net fourth quarter pre-tax charge  of $7 million.

During 2003, PMA Re increased its net loss reserves for prior
accident years by $169.1 million, including $150 million during the third
quarter. PMA Res third quarter 2003 reserve charge related to higher than
expected underwriting losses, primarily from casualty business written in
accident years 1997 through 2000. Approximately 75% of the charge was related to
general liability business written from 1997 to 2000 with substantially all of
the remainder from the commercial automobile line written during those same
years. During the third quarter, the Companys actuaries conducted their
periodic comprehensive reserve review. 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. The information derived during this review indicated that a large portion of
the change in expected loss development was due to increasing loss trends
emerging in calendar year 2003 for prior accident years. This increase in 2003
loss trends caused management to determine that the reserve levels, primarily
for accident years 1997 to 2000, needed to be increased by $150 million. An
independent actuarial firm also conducted a comprehensive review of PMA
Res Traditional-Treaty, Specialty-Treaty and Facultative loss reserves,
and concluded that those carried loss reserves were reasonable at September
30, 2003.

PMA Res analysis was enhanced by an extensive review of
specific accounts, comprising about 40% of carried reserves for accident years
1997 to 2000. The Companys actuaries visited a number of former ceding
company clients, which collectively comprised about 25% of PMA Res total
gross loss and LAE reserves from accident years 1997 to 2000, to discuss
reserving and reporting experience with these ceding companies. The
Companys actuaries separately evaluated an additional number of other
ceding companies, representing approximately 15% of PMA Res total gross
loss and LAE reserves from accident years 1997 to 2000, to understand and
examine data trends.

During 2002, PMA Re recorded unfavorable prior year development
of $106.9 million. In the fourth quarter, PMA Res actuarial department
conducted its routine year-end reserve study to determine the impact of any
emerging data on anticipated loss development trends and recorded unpaid losses
and LAE reserves. During the fourth quarter, the Companys actuaries
observed a higher than expected increase in the frequency and, to a lesser
extent, severity of reported claims by PMA Res ceding companies. Based on
the actuarial work performed,  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 net loss and LAE reserves for prior accident years needed to be increased by
approximately $64 million in the fourth quarter of 2002, primarily for excess of loss
and pro rata general liability occurrence contracts and, to a lesser extent,
excess of loss general liability claims-made contracts, from accident years
1998, 1999 and 2000.

The remaining $43 million of unfavorable prior year development
at PMA Re in 2002 primarily reflects the recording of losses and LAE on
additional earned premiums recorded during 2002 as a result of a change in our
estimate of ultimate premiums written from prior years. Because premiums from
ceding companies are typically reported on a delayed basis, we monitor and
update as appropriate the estimated ultimate premiums written. PMA Res
periodic reviews of estimated ultimate premiums written, which compared actual
reported premiums and originally estimated premiums based on ceding company
estimates, indicated that premiums written in recent years, primarily in the
Traditional- and Specialty-Treaty units for 2001 and 2000, were higher than
originally estimated. As a result, PMA Re recorded additional net premiums
earned during 2002, including $39.9 million in the second quarter, which were
completely offset by losses and LAE and acquisition expenses.

During 2002, the Run-off Operations recorded unfavorable prior
year development of $51.8 million. During 2002, company actuaries conducted
reserve reviews 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 this segment. Managements selection of the ultimate losses
resulting from their reviews indicated that net loss reserves for prior accident
years, mainly 1999 and 2000, needed to be increased by $51.8 million. This
unfavorable prior year development reflects the impact of higher than expected
claim severity and, to a lesser extent, frequency, that emerged in 2002 on
casualty lines of business, primarily professional liability policies for the
nursing homes class of business; general liability, including policies covering
contractors liability for construction defects; and commercial automobile,
mainly for accident years 1999 and 2000.

As a result of its reserve reviews conducted in 2001, the
Run-off Operations 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, the Run-off Operations recorded
unfavorable prior year loss development of $22.2 million. These losses primarily

78

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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.

Losses and LAE incurred in 2001 were impacted by the September
11th terrorist attack on the World Trade Center. The Company incurred $30
million of pre-tax net losses from this catastrophe. Gross losses of
approximately $145 million resulted from this catastrophe, which is before (1)
reinsurance recoveries ($120 million), (2) additional premiums due to PMA
Res retrocessionaires ($30 million) and (3) additional premiums due to PMA
Re on its assumed business ($25 million). The Companys estimate of net
loss from the September 11th terrorist attack on the World Trade Center
continues to be approximately $30 million pre-tax and is based on its analysis
to date of known exposures. However, it is difficult to fully estimate the
Companys loss 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.

Reserves transferred in 2002 reflect the assumption of PMA
Res and The PMA Insurance Groups losses by an unaffiliated third
party. Cash and short-term investments of $50 million were transferred to
support the payment of the transferred reserves.

Unpaid losses for the Companys workers compensation
claims, net of reinsurance, at December 31, 2003 and 2002 were $433.8 million
and $326.7 million, net of discount of $54.6 million and $76.7 million,
respectively. The discount rate used was approximately 5% at December 31, 2003
and 2002.

The Companys loss reserves were stated net of salvage and
subrogation of $33.2 million and $41.1 million at December 31, 2003 and 2002,
respectively.

Management believes that its unpaid losses and LAE are fairly
stated at December 31, 2003. 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, legal and legislative developments, judicial
theories of liability, the impact of regulatory trends on benefit levels for
both medical and indemnity payments, changes in social attitudes and economic
conditions, the estimates are revised accordingly. If the Companys
ultimate losses, net of reinsurance, prove to differ substantially from the
amounts recorded at December 31, 2003, the related adjustments could have a
material adverse effect on the Companys financial condition, results of
operations and liquidity.

At December 31, 2003, 2002 and 2001, gross reserves for
asbestos-related losses were $37.8 million, $42.1 million and $59.9 million,
respectively ($17.8 million, $25.8 million and $28.6 million, net of
reinsurance, respectively). Of the net asbestos reserves, approximately $14.9
million, $22.9 million and $26.6 million related to IBNR losses at December 31,
2003, 2002 and 2001, respectively.

At December 31, 2003, 2002 and 2001, gross reserves for
environmental-related losses were $14.2 million, $18.2 million and $29.6
million, respectively ($8.8 million, $14.3 million and $16.0 million, net of
reinsurance, respectively). Of the net environmental reserves, approximately
$3.7 million, $7.9 million and $9.2 million related to IBNR losses at December
31, 2003, 2002 and 2001, 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 and damages 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, results of operations and liquidity.

79

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Note 6. Reinsurance

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

|                              |  |  |  
|----------------------------- |  |  | -
|(dollar amounts in thousands) |  |  |  
|                             
|Written premiums:             |  | 
|Direct                        |  |  | $
|Assumed                       |  |  |  
|Ceded                         |  |  |  
|                              |  |  |  
|Net                           |  |  | $
|                              |  |  |  
|Earned premiums:              |  | 
|Direct                        |  |  | $
|Assumed                       |  |  |  
|Ceded                         |  |  |  
|                              |  |  |  
|Net                           |  |  | $
|                              |  |  |  
|Losses and LAE:               |  | 
|Direct                        |  |  | $
|Assumed                       |  |  |  
|Ceded                         |  |  |  
|                              |  |  |  
|Net                           |  |  | $
|                              |  |  |  
|                             

Losses and LAE ceded for 2001 included approximately $120
million related to the September 11th terrorist attack on the World Trade
Center.

At December 31, 2003, the Company had reinsurance receivables
due from the following unaffiliated reinsurers in excess of 5% of
shareholders equity:

|                                               |  | 
|---------------------------------------------- |  | 
|                                               |  | 
|(dollar amounts in thousands)                  |  | 
|                                              
|The London Reinsurance Group and Affiliates(1) |  | 
|PXRE                                           |  | 
|St. Paul and Affiliates(2)                     |  | 
|Swiss Reinsurance                              |  | 
|Houston Casualty                               |  | 
|Arch Reinsurance                               |  | 
|Partner Re                                     |  | 
|Hannover Ruckversicherungs AG                  |  | 
|                                              

|(1) |  | Includes Trabaja Reinsurance Company ($288.7 million), London Life &
General Reinsurance Company ($44.3 million) and London Life &
Casualty Reinsurance Corporation ($1.0 million).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes United States Fidelity & Guaranty Insurance Company ($89.7
million) and Mountain Ridge Insurance Company ($44.3 million).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

The Company performs credit reviews of its reinsurers focusing
on, among other things, financial capacity, stability, trends and commitment to
the reinsurance business. 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,
generally those not authorized to transact business in the applicable
jurisdictions. At December 31, 2003 and 2002, the Companys reinsurance
receivables of $1,220.3 million and $1,295.1 million were supported by $644.1
million and $666.9 million of collateral. Of the uncollateralized reinsurance
receivables as of December 31, 2003, approximately 91% 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
valuation allowance is adequate to cover any disputes about amounts owed by
reinsurers to the Company.

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Our largest reinsurer is Trabaja Reinsurance Company
(Trabaja). Reinsurance receivables from Trabaja were $288.7 million
at December 31, 2003, of which 94% were collateralized.

Trabaja, formerly PMA Insurance Cayman, Ltd. (PMA
Cayman), is a wholly owned subsidiary of London Life and Casualty
Reinsurance Corporation (London Reinsurance Group). The Company sold
PMA Cayman to London Reinsurance Group for $1.8 million, and transferred
approximately $230 million of cash and invested assets as well as loss reserves
to the buyer in 1998. Under the terms of the sale of PMA Cayman to London
Reinsurance Group in 1998, the Company has agreed to indemnify London
Reinsurance Group, up to a maximum of $15 million if the actual claim payments
in the aggregate exceed the estimated payments upon which the loss reserves of
PMA Cayman were established. If the actual claim payments in the aggregate are
less than the estimated payments upon which the loss reserves have been
established, then the Company will participate in such favorable loss reserve
development.

In January 2002, the Company supplemented its in-force
reinsurance programs for PMA Re and The PMA Insurance Group with retroactive
reinsurance contracts with Trabaja that provide coverage for adverse loss
development on certain lines of business for accident years prior to 2002. These
contracts provide coverage of up to $125 million in losses in return for $55
million of funding, which included $50 million of assets and $5 million in ceded
premiums. Under the terms of the contracts, PMA Res losses and LAE ceded
to Trabaja for accident years 1996 through 2001 are recoverable as they are
incurred by the Company. In 2002, PMA Re recognized a benefit of $25 million for
losses ceded to these reinsurance contracts. Any future cession of losses under
these contracts may require the Company to cede additional premiums ranging from
40% to 50% of ceded losses depending on the level of such losses.

Note 7. Debt

The Companys outstanding debt is as follows:

|                              |  | 
|----------------------------- |  | 
|(dollar amounts in thousands) |  | 
|                             
|Short-term debt:              |  | 
|Bank credit facility          |  | 
|Long-term debt:               |  | 
|4.25% Convertible debt        |  | 
|Trust preferred debt          |  | 
|8.50% Senior notes            |  | 
|                              |  | 
|Total long-term debt          |  | 
|                              |  | 
|Total debt                    |  | 
|                              |  | 
|                             

In May 2003, we issued $18.0 million (Trust Preferred
1) and $15.5 million (Trust Preferred 2) of 30-year floating
rate subordinated debentures to two wholly owned statutory trust subsidiaries.
The Company used all of the $31.5 million of net proceeds to pay down a portion
of its then outstanding bank credit facility. During September 2003, the Company
issued $10.3 million (Trust Preferred 3) of 30-year floating rate
subordinated debentures to a third wholly owned statutory trust subsidiary. The
Company realized net proceeds of $9.7 million, which it used for general
corporate purposes. Each of Trust Preferred 1, 2 and 3 has a 30-year maturity
and is redeemable, in whole or in part, after five years from issuance at its
stated liquidation amount plus accrued and unpaid interest. The interest rates
on Trust Preferred 1, 2 and 3 equal the three-month London InterBank Offered
Rate (LIBOR) plus 4.10%, 4.20% and 4.05%, respectively, and are
payable on a quarterly basis. At December 31, 2003, the interest rates on Trust
Preferred 1, 2 and 3 were 5.28%, 5.37% and 5.21%, respectively.

The Company has the right to defer interest payments on Trust
Preferred 1, 2 and 3 for up to twenty consecutive quarters but, if so deferred,
it may not declare or pay cash dividends or distributions on its Class A common
stock. The Company has guaranteed the obligations of these statutory trust
subsidiaries with respect to distributions and payments on the trust preferred
securities issued by these subsidiaries.

In June 2003, the Company issued $57.5 million of 8.50% monthly
income senior notes (Senior Notes) due June 15, 2018, from which it
realized net proceeds of $55.1 million. The Company used the proceeds from the
offering to repay the remaining balance outstanding under its prior bank credit
facility, to increase the statutory capital and surplus of its insurance
subsidiaries, and for general corporate purposes. The Company has the right to
call these securities beginning in June 2008.

81

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In October 2002, the Company issued $86.25 million aggregate
principal amount of 4.25% convertible senior debentures (Convertible
Debt) due September 30, 2022 from which the Company received net proceeds
of $83.7 million. The Convertible Debt bears interest at a rate of 4.25% per
annum, payable semi-annually on March 30 and September 30. In addition,
contingent interest may be payable by the Company to the holders of the
Convertible Debt commencing September 30, 2006, under certain circumstances.
Because of the debt ratings assigned to the Convertible Debt, holders of the
Convertible Debt may currently convert their debentures at a conversion price of
$16.368 per share, subject to adjustment upon certain events. Further, holders of the Convertible Debt, at their option,
may require the Company to repurchase all or a portion of their debentures on
September 30, 2006, 2008, 2010, 2012 and 2017, or subject to specified
exceptions, upon a change in control. The Company may choose to pay the
repurchase price in cash or shares of Class A common stock. The Convertible Debt
is redeemable in cash, in whole or in part, at the Companys option at any
time on or after September 30, 2006.

At December 31, 2003 and 2002, the aggregate outstanding face
amount of letters of credit issued on behalf of the Company was $12.0 million
and $15.7 million, respectively. The Company utilizes letters of credit
primarily for collateralizing reinsurance obligations of its insurance
subsidiaries. At December 31, 2003, fees for the letters of credit were 2.0% per
annum.

The debt covenants supporting the letters of credit contain
provisions that, among other matters, limit the Companys ability to incur
additional indebtedness, merge, consolidate and acquire or sell assets.

Note 8. Commitments and Contingencies

Total rent expense was $4.0 million, $4.1 million and $3.9
million for 2003, 2002 and 2001, respectively. At December 31, 2003, the Company
was obligated under noncancelable operating leases for office space with
aggregate minimum annual net rentals of $4.0 million in 2004 and 2005, $3.9
million in 2006 and 2007, $3.4 million in 2008 and $22.0 million thereafter, net
of sublease rentals of $1.4 million in 2004, $1.5 million in 2005 and 2006, $1.6
million in 2007 and 2008 and $9.3 million thereafter. In addition, the Company
was obligated under noncancelable operating leases for office computers,
equipment and other items of $3.1 million in 2004, $2.3 million in 2005, $1.5
million in 2006, $425,000 in 2007 and $32,000 in 2008.

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, 2003 and 2002, the Company had
recorded liabilities of $7.5 million and $5.4 million for these assessments,
which are included in accounts payable, accrued expenses and other liabilities
on the Balance Sheet.

The Company has an interest in a partnership for which it has
provided a guaranty of $7.0 million related to loans on properties of the
partnership. This guaranty shall continue to be in force until the related loan
has been satisfied. The loan is scheduled to be repaid on November 1, 2004.

Until December 31, 2003, the Company had an executive loan
program, through which a financial institution provided personal demand loans to
the Companys officers. The Company had provided collateral and agreed to
purchase any loan in default. In November 2003, the financial institution sold
the Company's collateral partially securing the loans of two former officers of the
Company in satisfaction of their loans in the aggregate amount of $2.0 million.
The Company is seeking repayment of the loans from the former officers and is
accruing interest on these loans at a rate of 3.3% as of December 31, 2003.
These loans are included in other assets on the Balance Sheet at December 31,
2003.

Under the terms of the sale of PMA Cayman 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

82

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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.

On November 6, 2003, several purported class action lawsuits
were filed against PMA Capital Corporation and certain other defendants. A
purported class action lawsuit captioned Pitt v. PMA Capital Corporation,
John W. Smithson, and William E. Hitselberger (initiated November 6, 2003) has been
filed in the Eastern District of Pennsylvania by alleged shareholders of PMA
Capital who seek to represent a class of purchasers of PMA Capital securities
from May 7, 2003 to November 3, 2003. The complaints allege, among other things,
that the defendants violated Rule 10b-5 of the Securities Exchange Act of 1934, as amended,
by making materially false and misleading public statements and material
omissions during the class period regarding the Companys loss reserves.

Several other purported class action lawsuits, captioned
Augenbaum v. PMA Capital Corporation, et. al.(initiated November 6,
2003), Klinghoffer v. PMA Capital Corporation, et. al. (initiated
November 10, 2003), and Pollin v. PMA Capital Corporation, John W. Smithson
and Frederick W. Anton III (initiated November 11, 2003) were filed in the
Eastern District of Pennsylvania by alleged purchasers of the Companys
4.25% Convertible Debentures and 8.50% Monthly Income Senior Notes. The
Klinghoffer and Pollin complaints name PMA Capital Corporation,
PMA Capital Trust I, PMA Capital Trust II, certain of the Companys
officers and directors and investment banking firms as defendants. The
complaints allege, among other things, that the defendants violated Sections 11,
12(a)(2) and 15 of the Securities Act of 1933, as amended, by making materially false and
misleading statements about its reserves in the registration statement,
prospectuses and prospectus supplements in connection with the debt.

Several purported class action lawsuits captioned Newman v. PMA Capital
Corporation, John W. Smithson, William E. Hitselberger and Francis W. McDonnell,
(initiated November 7, 2003), Appel v. PMA Capital Corporation, John W. Smithson,
 William E. Hitselberger and Francis W. McDonnell (initiated November 10, 2003), Boyd v.
PMA Capital Corporation, John W. Smithson, William E. Hitselberger and Francis W.
McDonnell (initiated November 20, 2003), Waller v. PMA Capital Corporation, John W.
Smithson, Francis W. McDonnell and William E. Hitselberger (initiated November 12,
2003), Bauer v. PMA Capital Corporation, John W. Smithson, William E. Hitselberger and Francis W. McDonnell
(initiated November 21, 2003), and Frey v. PMA Capital Corporation, John W. Smithson,
William E. Hitselberger and Francis W. McDonnell (initiated December 11, 2003) were
filed in the Eastern District of Pennsylvania by alleged shareholders of PMA Capital who
seek to represent a class of purchasers of PMA Capital securities from November 13, 1998
to November 3, 2003. The complaints allege, among other things, that the defendants
violated Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by making materially false
and misleading public statements and material omissions during the class period
regarding the Company's loss reserves.

The lawsuits seek unspecified compensatory damages and
reasonable costs and expenses. The Company intends to vigorously defend against the claims
asserted in these actions. The lawsuits are in their earliest stages. The lawsuits may have a material adverse effect on the Companys financial
condition, results of operations and liquidity.

Note 9. Shareholders Equity

Changes in Class A Common stock shares were as follows:

|                                                           |  |  | 
|---------------------------------------------------------- |  |  | 
|                                                           |  |  | 
|                                                          
|Class A Common stock:                                      |  | 
|Balance at beginning of year                               |  |  | 
|Issuance of Class A Common stock                           |  |  | 
|                                                           |  |  | 
|Balance at end of year                                     |  |  | 
|                                                           |  |  | 
|Treasury stock - Class A Common stock:                     |  | 
|Balance at beginning of year                               |  |  | 
|Purchase of treasury shares                                |  |  | 
|Reissuance of treasury shares under employee benefit plans |  |  | 
|                                                           |  |  | 
|Balance at end of year                                     |  |  | 
|                                                           |  |  | 
|                                                          

83

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In 2003, shareholders approved an increase in the authorized shares of the
Company's Class A Common stock, which has a $5 par value, from 40 million shares to 60 million shares.

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 $62.5 million of its then outstanding bank
credit facility.

The Company repurchased 90,185 shares of its Class A Common
stock at a cost of $1.7 million in 2002 and 299,300 shares at a cost of $5.3
million in 2001. No shares were repurchased in 2003. The Companys
remaining share repurchase authorization at December 31, 2003 is $15.4 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 declared dividends on its Class A Common stock of
$0.315, $0.42 and $0.42 per share in 2003, 2002 and 2001, respectively. On
November 4, 2003, the Companys Board of Directors resolved to suspend
dividends on the Companys Class A Common stock.

The Company has 2,000,000 shares of undesignated Preferred
stock, $0.01 par value per share authorized. 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s domestic insurance subsidiaries ability
to pay dividends to the holding company is limited by the insurance laws and
regulations of the Commonwealth of Pennsylvania. All of PMA Capitals domestic insurance
entities are owned by PMA Capital Insurance Company. As a result, dividends from
The PMA Insurance Groups Pooled Companies may not be paid directly to PMA
Capital. Instead, only PMA Capital Insurance Company, a Pennsylvania domiciled
company, may pay dividends directly to PMA Capital. Under Pennsylvania law,
approximately $17 million of dividends would have been available to be paid by
PMA Capital Insurance Company to the holding company in 2004 without the prior
approval of the Pennsylvania Insurance Department as of December 31, 2003.
However, PMA Capital Insurance Company has agreed with the Pennsylvania
Insurance Department that PMA Capital Insurance Company will not pay dividends
to the holding company without the prior approval of the Pennsylvania Insurance
Department. As of December 31, 2003, The PMA Insurance Groups Pooled
Companies can pay up to $23.2 million in dividends to PMA Capital Insurance
Company during 2004. Dividends received from subsidiaries were $24.0 million,
$28.0 million and $29.6 million in 2003, 2002 and 2001, respectively.

84

---

Note 10. 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 4,928,673 Class A Common shares
were reserved for issuance at December 31, 2003. The stock options were 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 two and four 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:

|                                           |  |  |                 |           |                  |   |                      |  |  |           |   |   |                      |  |  |           |   |   |                      | 
|------------------------------------------ |  |  | --------------- | --------- | ---------------- | - | -------------------- |  |  | --------- | - | - | -------------------- |  |  | --------- | - | - | -------------------- | 
|                                           |  |  | 2003            | 2002      | 2001            
|                                           | 
|                                           |  |  |                 | Shares    |                  |   | WeightedAveragePrice |  |  | Shares    |   |   | WeightedAveragePrice |  |  | Shares    |   |   | WeightedAveragePrice | 
|                                          
|Options outstanding, beginning of year     |  |  |                 | 3,096,494 |                  | $ | 16.93                |  |  | 3,387,154 |   | $ | 16.45                |  |  | 3,444,026 |   | $ | 16.22                | 
|Options granted                            |  |  |                 | 511,960   |                  |   | 9.21                 |  |  | 440,500   |   |   | 19.50                |  |  | 115,000   |   |   | 20.00                | 
|Options exercised                          |  |  |                 | (50,141   | )                |   | 11.50                |  |  | (302,465  | ) |   | 12.66                |  |  | (128,372  | ) |   | 12.20                | 
|Options forfeited or expired               |  |  |                 | (686,694  | )                |   | 15.17                |  |  | (428,695  | ) |   | 18.78                |  |  | (43,500   | ) |   | 20.26                | 
|                                           |  |  |                 |           |                  |   |                      | 
|Options outstanding, end of year(1)        |  |  |                 | 2,871,619 |                  | $ | 16.07                |  |  | 3,096,494 |   | $ | 16.93                |  |  | 3,387,154 |   | $ | 16.45                | 
|                                           |  |  |                 |           |                  |   |                      | 
|Options exercisable, end of year           |  |  |                 | 1,861,489 |                  | $ | 16.85                |  |  | 2,059,729 |   | $ | 15.74                |  |  | 2,190,357 |   | $ | 14.91                | 
|                                           |  |  |                 |           |                  |   |                      | 
|Option price range at end of year          |  |  | $9.14 to $21.50 |           | $11.50 to $21.50 |   | $10.00 to $21.50     | 
|Option price range for exercised shares    |  |  | $11.50          |           | $10.00 to $17.00 |   | $8.00 to $17.00      | 
|Options available for grant at end of year |  |  | 2,057,054       |           | 305,158          |   | 48,466               | 
|                                          

|(1) |  | Included in the options outstanding at December 31, 2002 and 2001 are 260,000
and 420,000 options (Target Price Options), respectively,
with an exercise price of $17.00. Because the stock did not reach the
necessary price, the Target Price Options expired as unvested options in
February 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All options granted in 2003 were granted with an exercise price
that exceeded the market value of the Class A Common stock on the grant date
(out-of-the-money), and such options had a weighted average exercise
price of $9.21 per share and a weighted average fair value of $4.91 per share.
Of the total options granted in 2002, 225,000 were granted with an exercise
price that was lower than the market value of the Class A Common stock on the
grant date, and such options had a weighted average exercise price of $19.50 per
share and a weighted average fair value of $14.61 per share. The remaining
215,500 options were granted out-of-the-money, and such options had an exercise price of
$19.50 per share and a weighted average fair value of $7.66 per share. In 2001,
all options were granted out-of-the-money at an exercise price of $20.00 per
share and a fair value of $6.39 per share.

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. Included in the Companys net loss for 2003 and 2002 were
pre-tax compensation costs of $239,000 and $215,000, respectively. No
compensation cost was recognized in 2001.

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

|                        |  |  | 
|----------------------- |  |  | 
|                        |  |  | 
|                       
|Expected life (years)   |  |  | 
|Risk-free interest rate |  |  | 
|Expected volatility     |  |  | 
|Expected dividend yield |  |  | 
|                       

85

---

Stock options outstanding and options exercisable at December
31, 2003 were as follows:

|                 |  |  |                     |           |                             
|---------------- |  |  | ------------------- | --------- | ----------------------------
|                 |  |  |                     |           |                             
|                 |  |  | Options Outstanding |           | Options Exercisable         
|                 | 
|                 |  |  | Numberof Shares     |           | WeightedAverageRemainingLife
|                
|$9.14 to $13.00  |  |  |                     | 753,819   |                             
|$13.01 to $16.00 |  |  |                     | 428,800   |                             
|$16.01 to $19.00 |  |  |                     | 684,750   |                             
|$19.01 to $21.50 |  |  |                     | 1,004,250 |                             
|                

See Note 2-I for additional information.

Note 11. Earnings Per Share

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

|                                                   |  |  | 
|-------------------------------------------------- |  |  | 
|                                                   |  |  | 
|                                                  
|Basic shares - weighted average shares outstanding |  |  | 
|Effect of dilutive stock options                   |  |  | 
|                                                   |  |  | 
|Total diluted shares                               |  |  | 
|                                                   |  |  | 
|                                                  

For all years presented, there were no differences in the
numerator (net income (loss)) for the basic and diluted earnings per share
calculation.

The effect of 2.9 million, 3.1 million and 873,000 stock options
were excluded from the computation of diluted earnings per share for 2003, 2002
and 2001, respectively, because they would have been anti-dilutive.

The 2003 diluted shares do not assume the conversion of the
Companys 4.25% convertible debentures into 5.3 million shares of Class A
Common stock because they would have been anti-dilutive. The 2002 diluted shares
do not assume the conversion of the Companys 4.25% convertible debentures
into 5.3 million shares of Class A Common stock because, under the terms of the
Convertible Debt agreement, the debentures did not meet the conditions for
convertibility. See Note 7 for additional information.

86

---

Note 12. Fair Value of Financial Instruments

As of December 31, 2003 and 2002, the carrying amounts for
the Companys financial instruments approximated their estimated fair
value, other than the Convertible Debt, which had a fair value of approximately
$65 million, compared to a carrying value of $86.25 million, and the Senior
Notes, which had a fair value of approximately $50 million, compared to a
carrying value of $57.5 million. The Company measures the fair value of fixed
maturities, the Convertible Debt and the Senior Notes based upon quoted market
prices or by obtaining quotes from dealers. The fair value of bank debt was
estimated using discounted cash flow calculations based upon the Companys
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.

Note 13. Income Taxes

The components of the Federal income tax expense (benefit) are:

|                              |  |  |  
|----------------------------- |  |  | -
|(dollar amounts in thousands) |  |  |  
|                             
|Current                       |  |  | $
|Deferred                      |  |  |  
|                              |  |  |  
|Income tax expense (benefit)  |  |  | $
|                              |  |  |  
|                             

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)            |  |  |  
|                                        
|Federal income tax at the statutory rate |  |  | $
|Change in valuation allowance            |  |  |  
|Reversal of income tax accruals          |  |  |  
|Other                                    |  |  |  
|                                         |  |  |  
|Income tax expense (benefit)             |  |  | $
|                                         |  |  |  
|                                        

87

---

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)                   |  | 
|                                               
|Net operating loss and tax credit carryforwards |  | 
|Discounting of unpaid losses and LAE            |  | 
|Unearned premiums                               |  | 
|Postretirement benefit obligation               |  | 
|Allowance for uncollectible accounts            |  | 
|Depreciation                                    |  | 
|Other                                           |  | 
|                                                |  | 
|Gross deferred tax assets                       |  | 
|Valuation allowance                             |  | 
|                                                |  | 
|Deferred tax assets, net of valuation allowance |  | 
|                                                |  | 
|Deferred acquisition costs                      |  | 
|Unrealized appreciation of investments          |  | 
|Losses of foreign reinsurance affiliates        |  | 
|Capitalized software                            |  | 
|Foreign exchange translation adjustment         |  | 
|Prepaid pension                                 |  | 
|Other                                           |  | 
|                                                |  | 
|Gross deferred tax liabilities                  |  | 
|                                                |  | 
|Net deferred tax assets                         |  | 
|                                                |  | 
|                                               

At December 31, 2003, the Company had a net operating loss
(NOL) carryforward of $193.2 million, which will expire in 2018
through 2023, and an $8.5 million alternative minimum tax (AMT)
credit carryforward, which does not expire. The NOL carryforward, which produces
a gross deferred tax asset of $67.6 million, will be applied to reduce future
taxable income of the Company. During 2003, the Company updated its evaluation
of the realizability of its net deferred tax asset, considering a number of
factors including recent earnings history, expectations for future earnings,
timing of reversal of temporary differences and the expiration dates associated
with the NOL carryforwards. Based upon managements consideration of these
factors, the Company established a valuation allowance in the amount of $49
million. The valuation allowance reserves against $40.5 million of gross
deferred tax assets related to the NOL carryforward and all of the deferred tax
asset related to the AMT credit carryforward because it is
more likely than not that this portion of the benefit will not be realized. The
Company will continue to periodically assess the realizability of its net
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. In
2001, the IRS completed its examination of the Companys 1996 U.S.
Federal tax return 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.

In 2002, the Company received refunds from the IRS of $10.6
million, resulting primarily from an AMT net operating loss, which was generated
in 2001 and carried back to 1998 and 1999.

88

---

Note 14. Employee Retirement, Postretirement and
Postemployment 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
requirements under the Qualified Pension Plan, 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 $7.0
million and $6.6 million, respectively, as of December 31, 2003.

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.

89

---

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 PostretirementBenefits
|                                                              |                 
|(dollar amounts in thousands)                                 |                  |                              |   | 2003   
|                                                             
|Change in benefit obligation:                                 |                  |                             
|Benefit obligation at beginning of year                       |                  |                              | $ | 66,924 
|Service cost                                                  |                  |                              |   | 3,202  
|Interest cost                                                 |                  |                              |   | 4,629  
|Actuarial loss                                                |                  |                              |   | 4,927  
|Benefits paid                                                 |                  |                              |   | (2,212 
|                                                              |                  |                              |   |        
|Benefit obligation at end of year                             |                  |                              | $ | 77,470 
|                                                              |                  |                              |   |        
|                                                              |                  |                              |   |        
|Change in plan assets:                                        |                  |                             
|Fair value of plan assets at beginning of year                |                  |                              | $ | 57,118 
|Actual return on plan assets                                  |                  |                              |   | 7,495  
|Employer contributions                                        |                  |                              |   | -      
|Benefits paid                                                 |                  |                              |   | (2,212 
|                                                              |                  |                              |   |        
|Fair value of plan assets at end of year                      |                  |                              | $ | 62,401 
|                                                              |                  |                              |   |        
|                                                              |                  |                              |   |        
|Benefit obligation greater than the fair value of plan assets |                  |                              | $ | (15,069
|                                                              |                  |                              |   |        
|Unrecognized actuarial (gain) loss                            |                  |                              |   | 29,982 
|Unrecognized prior service (cost) benefit                     |                  |                              |   | 487    
|Unrecognized net transition obligation                        |                  |                              |   | 338    
|                                                              |                  |                              |   |        
|Net amount recognized at end of year                          |                  |                              | $ | 15,738 
|                                                              |                  |                              |   |        
|Amounts recognized in the balance sheet consist of:           |                  |                             
|Prepaid benefit cost                                          |                  |                              | $ | 21,075 
|Accrued benefit cost                                          |                  |                              |   | (5,337 
|Additional minimum liability                                  |                  |                              |   | (25,288
|Intangible asset                                              |                  |                              |   | 1,273  
|Accumulated other comprehensive income, pre-tax               |                  |                              |   | 24,015 
|                                                              |                  |                              |   |        
|Net amount recognized at end of year                          |                  |                              | $ | 15,738 
|                                                              |                  |                              |   |        
|                                                             

|                                         |                  |                             |   |        |   |  
|---------------------------------------- | ---------------- | --------------------------- | - | ------ | - | -
|                                         |                  |                             |   |        |   |  
|                                         | Pension Benefits | OtherPostretirementBenefits
|                                         |                 
|(dollar amounts in thousands)            |                  |                             |   | 2003   |   |  
|                                        
|Components of net periodic benefit cost: |                  |                            
|Service cost                             |                  |                             | $ | 3,202  |   | $
|Interest cost                            |                  |                             |   | 4,629  |   |  
|Expected return on plan assets           |                  |                             |   | (5,032 | ) |  
|Amortization of transition obligation    |                  |                             |   | (5     | ) |  
|Amortization of prior service cost       |                  |                             |   | 5      |   |  
|Recognized actuarial (gain) loss         |                  |                             |   | 1,643  |   |  
|                                         |                  |                             |   |        |   |  
|Net periodic pension cost                |                  |                             | $ | 4,442  |   | $
|                                         |                  |                             |   |        |   |  
|                                         |                  |                             |   |        |   |  
|Weighted average assumptions:            |                  |                            
|Discount rate                            |                  |                             |   | 6.25   | % |  
|Expected return on plan assets           |                  |                             |   | 9.00   | % |  
|Rate of compensation increase            |                  |                             |   | 4.00   | % |  
|                                        

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 2004. The rate was assumed to decrease gradually to 5% by 2009
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.

90

---

Employer contributions and benefits paid in the table above
include only those amounts contributed directly to, or paid directly from, plan
assets.

The decline in Qualified Pension Plan asset performance in
recent years, coupled with historically low interest rates (which are the key
assumption in estimating plan liabilities) caused the Company to record a $24.0
million increase in our accrued Qualified Pension Plan liability and to take a
$15.6 million non-cash charge to equity in the fourth quarter of 2003. This
charge did not impact earnings or cash flow, and could reverse in future periods
if either interest rates increase or market performance and plan asset returns
improve.

The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for the Qualified Pension Plan were $70.5 million,
$65.3 million and $62.4 million, respectively, at December 31, 2003 and $60.7
million, $56.4 million and $57.1 million, respectively, at December 31, 2002.

The asset allocation for the Companys Qualified Pension
Plan at the end of 2003 and 2002, and the target allocation for 2004, by asset
category, are as follows:

|                  |  |  | 
|----------------- |  |  | 
|Asset Category    |  |  | 
|                 
|Equity Securities |  |  | 
|Debt Securities   |  |  | 
|                 
|Total             |  |  | 
|                 

The Companys Qualified Pension Plan assets are managed by
outside investment managers and are rebalanced periodically. The Companys
investment strategy with respect to Qualified Pension Plan assets includes
guidelines for asset quality standards, asset allocations among investment types
and issuers, and other relevant criteria for the portfolio.

91

---

Following are expected cash flows for the Companys pension
plans:

|                                 |                          |                             
|-------------------------------- | ------------------------ | ----------------------------
|                                 |                          |                             
|(dollar amounts in thousands)    | QualifiedPensionBenefits | Non-QualifiedPensionBenefits
|                                
|Expected Employer Contributions:
|2004                             |                          |                             
|Expected Benefit Payments:      
|2004                             |                          |                             
|2005                             |                          |                             
|2006                             |                          |                             
|2007                             |                          |                             
|2008                             |                          |                             
|2009-2013                        |                          |                             
|                                

Qualified Pension Plan benefits will be paid from the pension
trust assets which have a fair value of $62.4 million at December 31, 2003.
Non-qualified Pension Plan benefits will be paid from the general assets of the
Company.

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 2003, 2002 and 2001
were $3.3 million, $3.4 million and $2.9 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. See Notes 3 and 15 for additional information
regarding severance.

Note 15. Run-Off Operations

In May 2002, the Company announced its decision to withdraw from
the excess and surplus lines marketplace previously served by the Caliber One
operating segment. In January 2003, the Company closed on the sale of the
capital stock of Caliber One Indemnity Company. The sale generated gross
proceeds of approximately $31 million and resulted in a pre-tax gain of $2.5
million, which is included in other revenues in the Statement of Operations for
2003. Pursuant to the agreement of sale, the Company has retained all assets and
liabilities related to the in-force policies and outstanding claim obligations
relating to Caliber Ones business written prior to closing. As a result of
the Companys decision to exit this business, the results of this segment
are reported as Run-off Operations. During 2003, the Company recognized an
additional $2.5 million writedown of assets, made up of approximately $2 million
for reinsurance receivables and $500,000 for premiums receivable, reflecting an
assessment of their estimated net realizable value. The writedown is included in
operating expenses in the Statement of Operations for 2003.

As a result of the decision to exit from and run off this
business, 2002 results for the Run-off Operations include a charge of $43
million pre-tax ($28 million after-tax). Components of the pre-tax charge
include approximately $16 million to write-down assets to their estimated net
realizable value, including non-cash charges of approximately $6 million for
leasehold improvements and other fixed assets and $1.3 million for goodwill.

In addition, the $43 million pre-tax charge includes expenses
associated with the recognition of liabilities of approximately $27 million,
including reinsurance costs of approximately $19 million, long-term lease costs
of approximately $4 million and involuntary employee termination benefits of
approximately $3 million. See Note 16 for additional information regarding the
reinsurance component of the charge. The charge was included in operating
expenses (approximately $24 million) and net premiums earned (approximately $19
million) in the Statement of Operations in 2002. At December 31, 2003, the
Company has a remaining balance of approximately $859,000 for net lease costs
and approximately $152,000 for severance.

During 2002, approximately 80 Caliber One employees, primarily
in the underwriting area, were terminated in accordance with the Companys
exit plan. Approximately 14 positions, primarily claims and accounting staff,
remain as of December

92

---

31, 2003. Involuntary employee termination benefits of  $730,000 and $1.9
million were paid during 2003 and 2002, respectively.

Note 16. Business Segments

The Companys total revenues, substantially all of which
are generated within the U.S., and pre-tax operating income (loss) by principal
business segment are presented in the table below.

Operating income (loss), which is GAAP net income (loss)
excluding net realized investment gains and losses, is the financial performance
measure used by the Companys management and Board of Directors to evaluate
and assess the results of the Companys insurance businesses. Accordingly,
the Company reports operating income by segment in this footnote as required by
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. The Companys management and Board of Directors use
operating income as the measure of financial performance for the Companys
business segments because (i) net realized investment gains and losses are
unpredictable and not necessarily indicative of current operating fundamentals
or future performance of the business segments and (ii) in many instances,
decisions to buy and sell securities are made at the holding company level, and
such decisions result in net realized gains and losses that do not relate to the
operations of the individual segments. Operating income (loss) does not replace
net income (loss) as the GAAP measure of our consolidated results of operations.

|                                       |  |  |  
|-------------------------------------- |  |  | -
|(dollar amounts in thousands)          |  |  |  
|                                      
|Revenues:                              |  | 
|The PMA Insurance Group                |  |  | $
|PMA Re(1)                              |  |  |  
|Run-off Operations                     |  |  |  
|Corporate and Other                    |  |  |  
|Net realized investment gains (losses) |  |  |  
|                                       |  |  |  
|Total revenues                         |  |  | $
|                                       |  |  |  
|Components of net income (loss):       |  | 
|Pre-tax operating income (loss):       |  | 
|The PMA Insurance Group                |  |  | $
|PMA Re(1)                              |  |  |  
|Run-off Operations                     |  |  |  
|Corporate and Other                    |  |  |  
|Net realized investment gains (losses) |  |  |  
|                                       |  |  |  
|Loss before income taxes               |  |  |  
|Income tax expense (benefit)           |  |  |  
|                                       |  |  |  
|Net income (loss)                      |  |  | $
|                                       |  |  |  
|                                      

|(1) |  | On November 6, 2003, the Company announced its decision to withdraw from the
reinsurance business previously served by PMA Re. This segment is
currently in run-off and will be included in the Run-off Operations
segment beginning in 2004.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

93

---

Net premiums earned by principal business segment are as
follows:

|                                                |  |  |  
|----------------------------------------------- |  |  | -
|(dollar amounts in thousands)                   |  |  |  
|                                               
|The PMA Insurance Group:                        |  | 
|Workers' compensation and integrated disability |  |  | $
|Commercial automobile                           |  |  |  
|Commercial multi-peril                          |  |  |  
|Other                                           |  |  |  
|                                                |  |  |  
|Total premiums earned                           |  |  |  
|                                                |  |  |  
|PMA Re:(1)                                      |  | 
|Finite Risk and Financial Products              |  | 
|Casualty                                        |  |  |  
|Property                                        |  |  |  
|Other                                           |  |  |  
|                                                |  |  |  
|Total                                           |  |  |  
|                                                |  |  |  
|Traditional - Treaty                            |  | 
|Casualty                                        |  |  |  
|Property                                        |  |  |  
|Other                                           |  |  |  
|                                                |  |  |  
|Total                                           |  |  |  
|                                                |  |  |  
|Specialty - Treaty                              |  | 
|Casualty                                        |  |  |  
|Property                                        |  |  |  
|Other                                           |  |  |  
|                                                |  |  |  
|Total                                           |  |  |  
|                                                |  |  |  
|Facultative                                     |  | 
|Casualty                                        |  |  |  
|Property                                        |  |  |  
|                                                |  |  |  
|Total                                           |  |  |  
|                                                |  |  |  
|Accident                                        |  | 
|Casualty                                        |  |  |  
|Property                                        |  |  |  
|Other                                           |  |  |  
|                                                |  |  |  
|Total                                           |  |  |  
|                                                |  |  |  
|Total casualty                                  |  |  |  
|Total property                                  |  |  |  
|Total other(2)                                  |  |  |  
|                                                |  |  |  
|Total premiums earned                           |  |  |  
|                                                |  |  |  
|Run-off Operations                              |  |  |  
|Corporate and Other                             |  |  |  
|                                                |  |  |  
|Net premiums earned                             |  |  | $
|                                                |  |  |  
|                                               

|(1) |  | On November 6, 2003, the Company announced its decision to withdraw from the
reinsurance business previously served by PMA Re. This segment is
currently in run-off and will be included in the Run-off Operations
segment beginning in 2004.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Primarily aviation, ocean marine and accident.
|--- |  | ----------------------------------------------

94

---

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

|                                            |  |  |  
|------------------------------------------- |  |  | -
|(dollar amounts in thousands)               |  |  |  
|                                           
|The PMA Insurance Group                     |  |  | $
|PMA Re                                      |  |  |  
|Run-off Operations                          |  |  |  
|Corporate and Other                         |  |  |  
|                                            |  |  |  
|Total depreciation and amortization expense |  |  | $
|                                            |  |  |  
|                                           

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

|                              |  |  |  
|----------------------------- |  |  | -
|(dollar amounts in thousands) |  |  |  
|                             
|The PMA Insurance Group       |  |  | $
|PMA Re                        |  |  |  
|Run-off Operations            |  |  |  
|Corporate and Other(2)        |  |  |  
|                              |  |  |  
|Total assets                  |  |  | $
|                              |  |  |  
|                             

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

|(2) |  | Corporate and Other includes the effects of eliminating transactions between
the various insurance segments.
|--- |  | ------------------------------------------------------------------------------------------------------------

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 2003, 2002 and 2001, workers compensation net premiums
written by The PMA Insurance Group represented 41%, 32% and 36%, respectively,
of the Companys net premiums written.

PMA Re has agreed to assume the claims obligations of the
Run-off Operations if the actual claim payments in the aggregate exceed the
estimated payments upon which the loss reserves of the Run-off Operations were
established. As a result of this transaction, PMA Re recorded assumed premiums
of $10 million in 2002. No losses were recorded by PMA Re in connection with
this transaction. Also during 2002, PMA Re recorded assumed premiums of $8.5
million in connection with the assumption of losses from the Run-off Operations,
which PMA Re retroceded under its existing retrocessional contracts. As a result
of these two transactions, the Run-off Operations recorded a ceded premium
charge of $18.5 million in 2002 as part of the charge to exit from and run off
the excess and surplus lines business. These amounts are reflected in the
individual business segments pre-tax operating income (loss) and revenues.

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. The PMA Insurance
Group maintains catastrophe reinsurance protection of 95% of $18.0 million
excess of $2.0 million. In writing property reinsurance coverages, PMA Re
typically required per occurrence loss limitations for contracts that could have
had 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 $40.0 million in excess of $10.0
million on its traditional property book. PMA Re can also recover an additional $20.0 million of
Traditional and/or Finite Risk and Financial Products occurrence losses under
certain industry loss scenarios. Certain of these contracts require that the
Company cede additional premiums of up to 20% of ceded losses depending on the
level of such losses.

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 5 for additional information. In 2003
and 2002, the Companys loss and LAE ratios were not significantly impacted
by catastrophes.

95

---

Note 17. Transactions with Related Parties

As of December 31, 2003, the Companys largest shareholder
was 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,
2003, the Foundation owned 5,242,150 shares, or 16.7%, of the Companys
Class A Common stock. 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 2003, 2002 and 2001. The Foundation also leased its Harrisburg,
Pennsylvania headquarters facility from a subsidiary of the Company under an
operating lease which required rent payments of $25,000 per month, and
reimbursed 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 2003, 2002 and 2001. In February 2004, the Company agreed to sell this building to the Foundation for gross proceeds of
$1.6 million. As of March 8, 2004, the Foundation owned 2,165,471 shares, or
6.9 %, of the Companys Class A Common stock.

The Company incurred legal and consulting expenses aggregating
approximately $3.7 million, $3.9 million and $4.8 million in 2003, 2002 and
2001, respectively, from firms in which directors of the Company are partners or
principals.

Until December 31, 2003, the Company had an executive loan
program, through which a financial institution provided personal demand loans to
the Companys officers. The Company had provided collateral and agreed to
purchase any loan in default. In November 2003, the financial institution sold
the Company's collateral partially securing the loans of two former officers of the
Company in satisfaction of their loans in the aggregate amount of $2.0 million.
The Company is seeking repayment of the loans from the former officers and is
accruing interest on these loans at a rate of 3.3% as of December 31, 2003.
These loans are included in other assets on the Balance Sheet at December 31,
2003.

At December 31, 2003, 2002 and 2001, the Company had notes
receivable from officers totaling $65,000, $62,000 and $158,000, respectively,
that are accounted for as a reduction of shareholders equity. At December
31, 2003, the interest rate on these notes was 4.0%.

96

---

Note 18. 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. The Codification of Statutory Accounting
Principles (Codification) guidance is the NAICs primary
guidance on statutory accounting. The principal differences between GAAP and SAP
are in the treatment of reinsurance, acquisition expenses, deferred income
taxes, fixed assets and investments.

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

|                                 |  |  |  
|-------------------------------- |  |  | -
|(dollar amounts in thousands)    |  |  |  
|                                
|SAP net income (loss):           |  | 
|PMA Capital Insurance Company    |  |  | $
|The PMA Insurance Group          |  |  |  
|Caliber One Indemnity Company(1) |  |  |  
|                                 |  |  |  
|Total                            |  |  | $
|                                 |  |  |  
|SAP capital and surplus:         |  | 
|PMA Capital Insurance Company    |  |  | $
|The PMA Insurance Group          |  |  |  
|Caliber One Indemnity Company(1) |  |  |  
|Eliminations(2)                  |  |  |  
|                                 |  |  |  
|Total                            |  |  | $
|                                 |  |  |  
|                                

|(1) |  | In
January 2003, the Company sold the capital stock of Caliber One Indemnity  Company.
|--- |  | --------------------------------------------------------------------------------------

|(2) |  | The
surplus of The PMA Insurance Groups domestic  insurance subsidiaries and Caliber
One Indemnity Company are eliminated as  they are included in the statutory surplus
of PMA Capital Insurance Company, the  parent company of these insurance
companies.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
$435,000, $13.0 million and $22.2 million at December 31, 2003, 2002 and 2001,
respectively, over what it would have been had the prescribed practice not been
allowed.

97

---

INDEPENDENT AUDITORS REPORT

Board of Directors and Shareholders  PMA Capital
Corporation

We have audited the accompanying consolidated balance sheet of
PMA Capital Corporation and subsidiaries (the Company) as of
December 31, 2003, and the related consolidated statements of operations, cash
flows, shareholders equity, and comprehensive income (loss) for the year
then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on the
financial statements based on our audit. The consolidated financial statements
of the Company for the years ended December 31, 2002 and 2001 were audited by
other auditors whose report, dated February 5, 2003, expressed an unqualified opinion on those
statements.

We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of PMA Capital
Corporation and subsidiaries at December 31, 2003, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP
Philadelphia, PA
March 10, 2004

98

---

REPORT OF INDEPENDENT AUDITORS

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, shareholder's
equity and comprehensive income (loss) present fairly, in all material respects, the financial position of PMA Capital Corporation and its subsidiaries at December
31, 2002 and 2001, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002 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 audit 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, assesing 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/ Pricewaterhouse Coopers LLP 
Two Commerce Square
2001 Market Street
Philadelphia, PA
February 5, 2003

99

---

QUARTERLY FINANCIAL INFORMATION (unaudited)

|                                                 |  |  |   |             
|------------------------------------------------ |  |  | - | ------------
|(dollar amounts in thousands, except share data) |  |  |   | FirstQuarter
|                                                
|2003                                             |  |  |   |             
|Income Statement Data:                           |  | 
|Total revenues                                   |  |  | $ | 303,070     
|Income (loss) before income taxes                |  |  |   | 16,599      
|Net income (loss)                                |  |  |   | 10,702      
|                                                
|Per Share Data:                                  |  | 
|Net income (loss) (Basic)                        |  |  | $ | 0.34        
|Net income (loss) (Diluted)                      |  |  |   | 0.34        
|                                                
|2002                                             |  |  |   |             
|Income Statement Data:                           |  | 
|Total revenues                                   |  |  | $ | 227,375     
|Income (loss) before income taxes                |  |  |   | (26,585     
|Net income (loss)                                |  |  |   | (17,247     
|                                                
|Per Share Data:                                  |  | 
|Net income (loss) (Basic)                        |  |  | $ | (0.55       
|Net income (loss) (Diluted)                      |  |  |   | (0.55       
|                                                

|(1) |  | Includes $24 million, or $0.76 per basic and diluted share, for the third
quarter, and $25 million, or $0.80 per basic and diluted share, for the fourth quarter, to
record a valuation allowance on our deferred tax asset.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes approximately $43 million pre-tax ($28 million after-tax or $0.90
per basic and diluted share) for costs associated with the exit from and run
off of Caliber One, our former excess and surplus lines business.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

On April 2, 2003, our Audit Committee appointed Deloitte &
Touche LLP as our independent auditors for the year ended December 31, 2003 and
dismissed our independent auditors for the year ended December 31, 2002,
Pricewaterhouse Coopers LLP. The information required by Item 304 (a) of
Regulation S-K regarding our change in and disagreement with our prior
independent auditors has been previously reported in a Form 8-K dated April 2,
2003.

Item 9A. Controls and Procedures

As of the end of the period covered by this report on Form 10-K,
we, under the supervision and with the participation
of our management, including Vincent T. Donnelly, President and Chief Executive Officer and William E.
Hitselberger, Senior Vice President and Chief Financial Officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be disclosed in our periodic filings with the Securities and
Exchange Commission. During the period covered by this report, there were no
 changes in our internal controls
over financial reporting that have materially  affected, or are reasonably likely to
materially affect, our internal controls  over financial reporting.

100

---

PART III

Item 10. Directors and Executive Officers of the Registrant

See Executive Officers of the Registrant under Item
4 above. The information under the captions The Board of Directors and
Corporate Governance, Nominees For Election, Directors
Continuing in Office and Committees of the Board  Audit
Committee and Committees of the Board  Nominating and
Corporate Governance Committee in our Proxy Statement for the 2004 Annual
Meeting of Shareholders (Proxy Statement) is incorporated herein by
reference, as is the information under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy Statement.

We have had a Business Ethics and Practices Policy in place,
which covers all officers and employees, for some time. This policy expresses
our commitment to maintaining the highest legal and ethical standards in the
conduct of our business. In 2003, we enhanced our Business Ethics and Practices
Policy by adopting a Code of Ethics for the Chief Financial Officer and Senior
Financial Officers. In addition, in early 2004, our Board of Directors adopted a
separate Code of Ethics for Directors. Copies of our ethics policies can be
found on our website www.pmacapital.com. Any amendment to or waiver from the
provisions of the Code of Ethics for the Chief Financial Officer and Senior
Financial Officers will be disclosed on our website www.pmacapital.com.

Item 11. Executive Compensation

The information under the caption Compensation of
Executive Officers and under the caption Director Compensation
in the Proxy Statement is incorporated herein by reference.

101

---

Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters

The information under the caption Beneficial Ownership of Class
A Common Stock in the Proxy Statement is incorporated herein by reference.

Securities Authorized for Issuance Under Equity Compensation
Plans

The following table provides information with respect to
compensation plans under which our equity securities are authorized for issuance
as of December 31, 2003:

|                                                        
|--------------------------------------------------------
|Plan Category                                           
|                                                        
|                                                        
|Equity compensationplans approved bysecurity holders    
|                                                        
|Equity compensationplans not approvedby security holders
|                                                        
|Total                                                   
|                                                        

|(1) |  | These
securities are issuable under our 2002 Equity Incentive Plan, which was  approved by
shareholders at the 2002 Annual Meeting of Shareholders. The Plan  authorizes the grant
of stock options, stock appreciation rights, restricted  stock, bonus stock or stock in
lieu of other obligations, dividend equivalent  rights or other stock-based awards and
performance awards.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 13. Certain Relationships and Related Transactions

The information under the caption Certain
Transactions in the Proxy Statement is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information under the capital Ratification of the
Appointment of the Independent Auditors in the Proxy Statement is
incorporated herein by reference.

102

---

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

FINANCIAL STATEMENTS AND SCHEDULES

|                                                                                                                  |   
|----------------------------------------------------------------------------------------------------------------- | --
|(a) (1)  Index to Consolidated Financial Statements                                                               |   
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                         | 65
|Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001                        | 66
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                        | 67
|Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001              | 68
|Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2003, 2002               
|and 2001                                                                                                          | 69
|Notes to Consolidated Financial Statements                                                                        | 70
|Independent Auditors Reports                                                                                     | 98
|(a) (2)  The Financial Statement Schedules are listed in the Index to Financial Statement Schedules on page FS-1.

All other schedules specified by Article 7 of Regulation S-X are  not
required pursuant to the related instructions or are inapplicable and,  therefore, have
been omitted.

EXHIBITS AND REPORTS ON FORM 8-K

|(a) | (3) | The Exhibits are listed in the Index to Exhibits beginning on  page E-1.
|--- | --- | ------------------------------------------------------------------------

|(b) |  | Reports
on Form 8-K filed during the quarter ended December 31, 2003
|--- |  | --------------------------------------------------------------------

| |  | During the
quarterly period ended December 31, 2003, the Company filed the following  reports on
Form 8-K:
| |  | ----------------------------------------------------------------------------------------------------------

| |  | dated
November 4, 2003, Items 5 and 12  containing a news release  announcing a reserve
charge and suspension of Class A Common stock dividends.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | dated
November 6, 2003, Item 12  containing an earnings release and our  third quarter
2003 statistical supplement.
| | - | --------------------------------------------------------------------------------------------------------------------

| |  | dated
November 7, 2003, Items 5 and 9  announcing several purported class  action
lawsuits filed against PMA Capital Corporation and certain other  defendants
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | dated
November 24, 2003, Item 5  updating the risk factors included in our  Form 10-K for
the year ended December 31, 2002 and Form 10-Q for the quarterly  period ended September
30, 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | dated
December 2, 2003, Item 5  containing a news release announcing the  sale of PMA Res
renewal rights to its finite reinsurance business.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

103

---

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf,  by the undersigned,
thereunto duly authorized.

|                     |  |                                      
|-------------------- |  | -------------------------------------
|                     |  | PMA CAPITAL CORPORATION              
|                     |  |                                      
|                     |  |                                      
|Date: March 12, 2004 |  | By: /s/ William E. Hitselberger      
|                     |  | William E. Hitselberger              
|                     |  | Senior Vice President,               
|                     |  | Chief Financial Officer and Treasurer
|                     |  |                                      

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 12, 2004.

|                                                                                                 |                                                                                                          
|------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------
|Signature                                                                                        | Title                                                                                                    
|By: /s/  William E. Hitselberger
         William E. Hitselberger                                | Senior Vice President, 
Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
|                                                                                                
|Vincent T. Donnelly*                                                                             | President and Chief Executive Officer and a Director                                                     
|                                                                                                 | (Principal Executive Officer)                                                                            
|Peter S. Burgess*                                                                                | Director                                                                                                 
|Joseph H. Foster*                                                                                | Director                                                                                                 
|Thomas J. Gallen*                                                                                | Director                                                                                                 
|Anne S. Genter*                                                                                  | Director                                                                                                 
|Richard Lutenski*                                                                                | Director                                                                                                 
|James F. Malone III*                                                                             | Director                                                                                                 
|John W. Miller, Jr*                                                                              | Director                                                                                                 
|Edward H. Owlett*                                                                                | Director                                                                                                 
|Roderic H. Ross*                                                                                 | Director                                                                                                 
|L. J. Rowell, Jr*                                                                                | Director                                                                                                 
|Neal C. Schneider*                                                                               | Director                                                                                                 
|Mark M. Wilcox*                                                                                  | Director                                                                                                 
|                                                                                                
|*  By: /s/  Charles A. Brawley, III
         Charles A. Brawley, III
           Attorney-in-Fact |                                                                                                          

104

---

|PMA Capital CorporationIndex to Financial Statement Schedules
|-------------------------------------------------------------
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             
|                                                             

Certain financial statement schedules
have been omitted because they are either not applicable or the required financial
information is contained in the Companys 2003 Consolidated Financial Statements and
notes thereto.

FS-1

---

PMA Capital Corporation Schedule II Registrant Only Financial
Statements Balance Sheets (Parent Company Only)

|                                                                           |  | December 31, |  
|-------------------------------------------------------------------------- |  | ------------ | -
|(dollar amounts in thousands)                                              |  | 2003         |  
|                                                                          
|                                                                           |  |              |  
|Assets                                                                     |  |              |  
|Cash                                                                       |  |              | $
|Short-term investments                                                     |  |              |  
|Investment in subsidiaries                                                 |  |              |  
|Related party receivables                                                  |  |              |  
|Deferred income taxes, net                                                 |  |              |  
|Other assets                                                               |  |              |  
|                                                                           |  |             
|Total assets                                                               |  |              | $
|                                                                           |  |             
|                                                                           |  |             
|Liabilities                                                                |  |             
|Short-term debt                                                            |  |              | $
|Long-term debt                                                             |  |              |  
|Other liabilities                                                          |  |              |  
|                                                                           |  |             
|Total liabilities                                                          |  |              |  
|                                                                           |  |             
|                                                                           |  |             
|Shareholders' Equity                                                       |  |             
|Class A Common stock, $5 par value                                         |  |             
|(2003 - 60,000,000 shares authorized; 34,217,945 shares                    |  |             
|issued and 31,334,403 outstanding; 2002 - 40,000,000                       |  |             
|shares authorized; 34,217,945 shares issued and                            |  |             
|31,328,922 outstanding)                                                    |  |              |  
|Additional paid-in capital                                                 |  |              |  
|Retained earnings                                                          |  |              |  
|Accumulated other comprehensive income                                     |  |              |  
|Notes receivable from officers                                             |  |              |  
|Treasury stock, at cost (2003 - 2,883,542 shares; 2002 - 2,889,023 shares) |  |              |  
|                                                                           |  |             
|Total shareholders' equity                                                 |  |              |  
|                                                                           |  |             
|Total liabilities and shareholders' equity                                 |  |              | $
|                                                                           |  |             

These financial statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto.

FS-2

---

PMA Capital Corporation Schedule II Registrant Only Financial
Statements Statements of Operations (Parent Company Only)

|                                                | Year Ended December 31,
|----------------------------------------------- | -----------------------
|(dollar amounts in thousands)                   | 2003                   
|                                               
|                                                |                        
|Revenues:                                       |                        
|Net investment income (expense)                 |                        
|Other revenues                                  |                        
|                                                |                        
|Total revenues                                  |                        
|                                                |                        
|                                                |                        
|Expenses:                                       |                        
|General expenses                                |                        
|Interest expense                                |                        
|                                                |                        
|Total expenses                                  |                        
|                                                |                        
|Loss before income taxes and equity in earnings |                        
|(loss) of subsidiaries                          |                        
|Income tax expense (benefit)                    |                        
|                                                |                        
|Income (loss) before equity in earnings (loss)  |                        
|of subsidiaries                                 |                        
|Equity in earnings (loss) of subsidiaries       |                        
|                                                |                        
|Net income (loss)                               |                        
|                                                |                        

These financial statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto.

FS-3

---

PMA Capital Corporation Schedule II  Registrant Only Financial
Statements Statements of Cash Flows (Parent Company Only)

|                                                                      | Year ended December 31,
|--------------------------------------------------------------------- | -----------------------
|(dollar amounts in thousands)                                         | 2003                   
|                                                                     
|                                                                      |                        
|Cash Flows From Operating Activities:                                 |                        
|Net income (loss)                                                     |                        
|Adjustments to reconcile net income (loss) to net cash flows provided |                        
|by operating activities:                                              |                        
|Equity in earnings (loss) of subsidiaries                             |                        
|Dividends received from subsidiaries                                  |                        
|Net tax sharing payments received from subsidiaries                   |                        
|Deferred income tax expense (benefit)                                 |                        
|Other, net                                                            |                        
|                                                                      |                        
|Net cash flows provided by operating activities                       |                        
|                                                                      |                        
|                                                                      |                        
|Cash Flows From Investing Activities:                                 |                        
|Net purchases of short-term investments                               |                        
|Cash contributions to subsidiaries                                    |                        
|                                                                      |                        
|Net cash flows used in investing activities                           |                        
|                                                                      |                        
|                                                                      |                        
|Cash Flows From Financing Activities:                                 |                        
|Dividends paid to shareholders                                        |                        
|Proceeds from issuance of stock                                       |                        
|Issuance of long-term debt                                            |                        
|Debt issue costs                                                      |                        
|Repayments of debt                                                    |                        
|Proceeds from exercise of stock options                               |                        
|Purchase of treasury stock                                            |                        
|Net repayments (issuance) of notes receivable from officers           |                        
|Change in related party receivables and payables                      |                        
|                                                                      |                        
|Net cash flows provided by (used in) financing activities             |                        
|                                                                      |                        
|                                                                      |                        
|Net increase (decrease) in cash                                       |                        
|Cash - beginning of year                                              |                        
|                                                                      |                        
|Cash - end of year                                                    |                        
|                                                                      |                        
|                                                                      |                        
|Supplementary cash flow information:                                  |                        
|Income taxes paid (refunded)                                          |                        
|Interest paid                                                         |                        

These financial statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto.

FS-4

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PMA Capital Corporation Schedule III Supplementary Insurance
Information

|(dollar amounts in thousands) |  | Deferred acquisitioncosts |   | Unpaid losses and lossadjustment expenses |  | Unearnedpremiums |           | Net premiumsearned |   | Net investmentincome(1) |  | Losses and lossadjustmentexpenses |           | Acquisitionexpenses |   | Operatingexpenses |   | Net premiumswritten |        
|----------------------------- |  | ------------------------- | - | ----------------------------------------- |  | ---------------- | --------- | ------------------ | - | ----------------------- |  | --------------------------------- | --------- | ------------------- | - | ----------------- | - | ------------------- | -------
|                             
|                              |  |                           |   |                                           |  |                  |           |                    |   |                         |  |                                   |           |                     |   |                   |   |                     |        
|December 31, 2003:            |  |                           |   |                                           |  |                  |           |                    |   |                         |  |                                   |           |                     |   |                   |   |                     |        
|The PMA Insurance Group       |  |                           | $ | 38,635                                    |  | $                | 1,259,737 |                    | $ | 227,262                 |  | $                                 | 570,032   |                     | $ | 32,907            |   | $                   | 442,502
|PMA Re                        |  |                           |   | 45,340                                    |  |                  | 1,197,101 |                    |   | 176,364                 |  |                                   | 624,249   |                     |   | 32,513            |   |                     | 549,379
|Run-off Operarions            |  |                           |   | --                                        |  |                  | 117,970   |                    |   | 82                      |  |                                   | 4,672     |                     |   | 1,974             |   |                     | 6,466  
|Corporate and Other (2)       |  |                           |   | --                                        |  |                  | (33,490   | )                  |   | --                      |  |                                   | (788      | )                   |   | 1,529             |   |                     | --     
|                             
|Total                         |  |                           | $ | 83,975                                    |  | $                | 2,541,318 |                    | $ | 403,708                 |  | $                                 | 1,198,165 |                     | $ | 68,923            |   | $                   | 998,347
|                             
|December 31, 2002:            |  |                          
|The PMA Insurance Group       |  |                           | $ | 32,266                                    |  | $                | 1,192,069 |                    | $ | 189,799                 |  | $                                 | 410,266   |                     | $ | 35,613            |   | $                   | 307,734
|PMA Re                        |  |                           |   | 56,029                                    |  |                  | 1,089,079 |                    |   | 195,400                 |  |                                   | 551,513   |                     |   | 48,736            |   |                     | 439,228
|Run-off Operarions            |  |                           |   | 927                                       |  |                  | 215,667   |                    |   | 20,180                  |  |                                   | 30,113    |                     |   | 1,140             |   |                     | 76,696 
|Corporate and Other (2)       |  |                           |   | --                                        |  |                  | (46,925   | )                  |   | --                      |  |                                   | (881      | )                   |   | (608              | ) |                     | --     
|                             
|Total                         |  |                           | $ | 89,222                                    |  | $                | 2,449,890 |                    | $ | 405,379                 |  | $                                 | 991,011   |                     | $ | 84,881            |   | $                   | 823,658
|                             
|December 31, 2001:            |  |                          
|The PMA Insurance Group       |  |                           | $ | 24,932                                    |  | $                | 1,107,141 |                    | $ | 146,658                 |  | $                                 | 346,574   |                     | $ | 39,444            |   | $                   | 258,933
|PMA Re                        |  |                           |   | 34,286                                    |  |                  | 1,047,503 |                    |   | 105,085                 |  |                                   | 340,401   |                     |   | 45,361            |   |                     | 297,623
|Run-off Operarions            |  |                           |   | 5,132                                     |  |                  | 189,534   |                    |   | 56,549                  |  |                                   | 46,232    |                     |   | 3,124             |   |                     | 60,207 
|Corporate and Other (2)       |  |                           |   | --                                        |  |                  | (19,739   | )                  |   | --                      |  |                                   | (767      | )                   |   | (984              | ) |                     | --     
|                             
|Total                         |  |                           | $ | 64,350                                    |  | $                | 2,324,439 |                    | $ | 308,292                 |  | $                                 | 732,440   |                     | $ | 86,945            |   | $                   | 616,763
|                             

|(1) |  | Net
investment income is based on each segment's invested assets.
|--- |  | -----------------------------------------------------------------

|(2) |  | Corporate
and Other includes unallocated investment income and expenses, including debt service.
Corporate and Other also includes the effect of eliminating
intercompany transactions.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

FS-5

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PMA Capital Corporation Schedule IV Reinsurance

|(dollar amounts in thousands)             |  | Direct amount |   | Ceded toothercompanies |  | Assumed from othercompanies |         | Net amount |   | Percentageof amount assumedto net | 
|----------------------------------------- |  | ------------- | - | ---------------------- |  | --------------------------- | ------- | ---------- | - | --------------------------------- | 
|                                         
|                                         
|                                          |  |               |   |                        |  |                             |         |            |   |                                   | 
|Year Ended December 31, 2003:             |  |               |   |                        |  |                             |         |            |   |                                   | 
|Property and liability insurance premiums |  |               | $ | 638,716                |  | $                           | 228,576 |            | $ | 788,025                           | 
|                                          |  |               |   |                        |  |                             |         |            |   |                                  
|Year Ended December 31, 2002:             |  |              
|Property and liability insurance premiums |  |               | $ | 599,827                |  | $                           | 300,556 |            | $ | 691,740                           | 
|                                          |  |               |   |                        |  |                             |         |            |   |                                  
|Year Ended December 31, 2001:             |  |              
|Property and liability insurance premiums |  |               | $ | 508,821                |  | $                           | 243,356 |            | $ | 466,975                           | 
|                                          |  |               |   |                        |  |                             |         |            |   |                                  

FS-6

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PMA Capital Corporation Schedule V Valuation and Qualifying Accounts

|(dollar amounts in thousands)
|-----------------------------
|                             
|Description                  
|                             
|                             
|Year ended December 31, 2003:
|Valuation allowance:         
|Premiums receivable          
|Reinsurance receivable       
|Deferred income taxes, net   
|                             
|                             
|Year ended December 31, 2002:
|Valuation allowance:         
|Premiums receivable          
|Reinsurance receivable       
|Deferred income taxes, net   
|                             
|                             
|Year ended December 31, 2001:
|Valuation allowance:         
|Premiums receivable          
|Reinsurance receivable       
|Deferred income taxes, net   
|                             

FS-7

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PMA Capital Corporation Schedule VI Supplemental Information
Concerning Property and Casualty Insurance Operations

|(dollar amounts in thousands)               | 
|------------------------------------------- | 
|                                           
|Affiliation with registrant                 | 
|                                           
|                                           
|                                            | 
|Consolidated property-casualtysubsidiaries:
|                                           
|December 31, 2003                           | 
|                                           
|December 31, 2002                           | 
|                                           
|December 31, 2001                           | 
|                                           
|                                           

|(1) |  | -
Reserves discounted at approximately 5%.
|--- |  | ------------------------------------------

|(2) |  | -
Excludes accretion of loss reserve discount of $11,459, $8,515 and $6,859  in 2003, 2002
and 2001, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------

FS-8

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INDEPENDENT AUDITORS REPORT

Board of Directors and Shareholders PMA Capital
Corporation

We have audited the consolidated financial statements of PMA
Capital Corporation and subsidiaries as of December 31, 2003, and for the year
then ended, and have issued our report thereon dated March 10, 2004; such report
is included elsewhere in this Form 10-K. Our audit also included the 2003
financial statement schedules of PMA Capital Corporation and subsidiaries listed
in Item 15. These financial statement schedules are the responsibility of the
Corporations management. Our responsibility is to express an opinion based
on our audit. In our opinion, the 2003 financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein. The
financial statement schedules for the years ended December 31, 2002 and 2001
were audited by other auditors. Those auditors expressed an opinion, in their
report dated February 5, 2003, that such 2002 and 2001 consolidated financial
statement schedules, when considered in relation to the 2002 and 2001 basic
consolidated financial statements taken as a whole, presented fairly, in all
material respects, the information set forth therein.

/s/Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
  Philadelphia, PA  
March 10, 2004

FS-9

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REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Shareholders of  PMA Capital Corporation

Our audits of the 2002 and 2001 consolidated financial statements referred to  in our
report dated February 5, 2003 appearing in the 2003 Annual Report to  Shareholders of PMA
Capital Corporation (which report and consolidated financial  statements are included
in this Annual Report on Form 10-K)  also included an audit of the 2002 and 2003 financial
statement schedules listed in Item  15(a)(2) of this Form 10-K. In our opinion, these
2002 and 2001 financial statement schedules  present fairly, in all material respects, the information
set forth therein when  read in conjunction with the related consolidated financial
statements.

/s/ PricewaterhouseCoopers LLP

Philadelphia, PA  February 5, 2003

FS-10

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INDEX TO EXHIBITS

|Exhibit No. | Description of Exhibit | Method of Filing                                                                                                                                                                    
|----------- | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3)         |                        | Articles of Incorporation and Bylaws:                                                                                                                                               
|            | 3.1                    | Restated Articles of Incorporation of the Company.                                                                                                                                  
|            | 3.2                    | Amended and Restated Bylaws of the Company.                                                                                                                                         
|(4)         |                        | Instruments defining the rights of security holders, including indentures:*                                                                                                         
|            | 4.1                    | Rights Agreement, dated as of May 3, 2000, between the Company and The Bank of
New York, as Rights Agent.                                                                           
|            | 4.2                    | Senior Indenture, dated as of October 21, 2002, between the Company and State
Street Bank and Trust Company, as Trustee.                                                            
|            | 4.3                    | First Supplemental Indenture, dated as of October 21, 2002, between the Company
and State Street Bank and Trust Company (predecessor of U.S. Bank National
Association), as Trustee.
|            | 4.4                    | Form of 4.25% Convertible Senior Debenture due September 30, 2022.                                                                                                                  
|            | 4.5                    | Second Supplemental Indenture, dated as of June 5, 2003, between the Company and
U.S. Bank National Association (successor to State Street Bank and Trust
Company), as Trustee.     
|            | 4.6                    | Form of 8.50% Monthly Income Senior Note due June 15, 2018.                                                                                                                         

E-1

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|     |      |                                                                                                                                                                                            |                                                                                                                                                        
|---- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) |      | Material Contracts:                                                                                                                                                                        |                                                                                                                                                        
|     |      | Exhibits 10.1 through 10.26 are management contracts or compensatory plans:                                                                                                               
|     | 10.1 | Description of 2001 stock appreciation rights.                                                                                                                                             | Filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 and incorporated herein by reference.           
|     | 10.2 | PMA Capital Corporation 401(k) Excess Plan (as Amended and Restated effective
January 1, 2000).                                                                                            | Filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.           
|     | 10.3 | PMA Capital Corporation Executive Deferred Compensation Plan (as Amended and
Restated effective January 1, 2000).                                                                          | Filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.           
|     | 10.4 | PMA Capital Corporation Supplemental Executive Retirement Plan (as Amended and
Restated effective January 1, 2000).                                                                        | Filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.           
|     | 10.5 | PMA Capital Corporation Executive Management Pension Plan (as Amended and
Restated effective January 1, 2000).                                                                             | Filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.           
|     | 10.6 | Amended and Restated Employment Agreement, dated May 1, 1999, between PMA
Capital Corporation and Frederick W. Anton III.                                                                  | Filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q/A, No. 1
for the quarter ended June 30, 1999 and incorporated herein by reference.
|     | 10.7 | Amended and Restated Split-Dollar Insurance Agreement, dated May 12, 1999, among
PMA Capital Corporation, Frederick W. Anton III and Irrevocable Deed and Trust
of Frederick W. Anton III. | Filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q/A, No. 1
for the quarter ended June 30, 1999 and incorporated herein by reference.
|     | 10.8 | Split-Dollar Insurance Agreement, dated May 12, 1999, among PMA Capital
Corporation, Frederick W. Anton III and Irrevocable Deed of Trust of Frederick
W. Anton III.                       | Filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q/A, No. 1
for the quarter ended June 30, 1999 and incorporated herein by reference.

E-2

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| |       |                                                                                                                                                                      |                                                                                                                                                        
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.9  | Split-Dollar Insurance Agreement, dated May 12, 1999, among PMA Capital
Corporation, Frederick W. Anton III and Irrevocable Deed of Trust of Frederick
W. Anton III. | Filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q/A, No. 1
for the quarter ended June 30, 1999 and incorporated herein by reference.
| | 10.10 | Employment Agreement dated May 1, 1995 between the Company and John W. Smithson.                                                                                     | Filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.          
| | 10.11 | Amended and Restated Deferred Compensation Plan for Non-Employee Directors of
the Company.                                                                           | Filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 and incorporated herein by reference.           
| | 10.12 | Company's Annual Incentive Plan.                                                                                                                                     | Filed as Annex C to the Company's Definitive Proxy Statement on Schedule 14A
dated March 23, 2000 and incorporated herein by reference.                
| | 10.13 | Company's Amended and Restated 1991 Equity Incentive Plan.                                                                                                           | Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.          
| | 10.14 | Amendment No. 1 to the Amended and Restated 1991 Equity Incentive Plan dated May
5, 1999.                                                                            | Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.         
| | 10.15 | Company's Amended and Restated 1993 Equity Incentive Plan.                                                                                                           | Filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.          
| | 10.16 | Amendment No. 1 to the Amended and Restated 1993 Equity Incentive Plan dated May
5, 1999.                                                                            | Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.         
| | 10.17 | Company's Amended and Restated 1994 Equity Incentive Plan.                                                                                                           | Filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.          

E-3

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| |       |                                                                                           |                                                                                                                                               
| | ----- | ----------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------
| | 10.18 | Amendment No. 1 to the Amended and Restated 1994 Equity Incentive Plan dated May
5, 1999. | Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.
| | 10.19 | Company's 1995 Equity Incentive Plan.                                                     | Filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference. 
| | 10.20 | Amendment No. 1 to the 1995 Equity Incentive Plan dated May 5, 1999.                      | Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.
| | 10.21 | Company's 1996 Equity Incentive Plan.                                                     | Filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference. 
| | 10.22 | Amendment No. 1 to the 1996 Equity Incentive Plan dated May 5, 1999.                      | Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.
| | 10.23 | Company's 1999 Equity Incentive Plan.                                                     | Filed as Annex A to the Company's Definitive Proxy Statement on Schedule 14A
dated March 26, 1999 and incorporated herein by reference.       
| | 10.24 | Company's 2002 Equity Incentive Plan.                                                     | Filed as Appendix A to the Company's Proxy Statement on Schedule 14A dated March
22, 2002 and incorporated herein by reference.               
| | 10.25 | Amendment No. 1 to Company's 2002 Equity Incentive Plan.                                  | Filed herewith.                                                                                                                               

E-4

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| |       |                                                                                                                                                                                                                                                                                       |                                                                                                                                                    
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.26 | Agreement and Release by and among Steven G. Tirney
and PMA Capital Insurance Company and PMA Re Management Company                                                                                                                                                                   | Filed herewith.                                                                                                                                    
| | 10.27 | Credit Agreement, dated as of September 20, 2002 by and among the Company, Bank of America N.A.,
as Administrative Agent, Fleet National Bank, as Syndication Agent, Credit Lyonnais New York Branch,
as Document Agent, and other lenders party thereto, including Pledge Agreement. | Filed as Exhibit 99.1 to the Companys Current Report on Form 8-K dated
September 20, 2002 and incorporated herein by reference.                   
| | 10.28 | First Amendment, dated October 11, 2002, amending the Credit Agreement, dated as of September 20, 2002.                                                                                                                                                                               | Filed as Exhibit 99 to the Companys Current Report on Form 8-K dated October 11, 2002 and incorporated
herein by reference.                       
| | 10.29 | Letter of Credit Agreement dated as of December 4, 2001, by and among the
Company and Certain Co-Applicants and Fleet National Bank and Other Banks Party
Thereto.                                                                                                                    | Filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 and incorporated herein by reference.      
| | 10.30 | First Amendment, dated June 17, 2002, to Letter of Credit Agreement dated
December 4, 2001.                                                                                                                                                                                           | Filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.      
| | 10.31 | Second Amendment, dated December 4, 2002, to Letter of Credit Agreement dated
December 4, 2001.                                                                                                                                                                                       | Filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.      
| | 10.32 | Transfer and Purchase Agreement dated December 2, 2003, between PMACIC and
Imagine Insurance Company Limited, a wholly-owned subsidiary of Imagine Group
Holdings Limited.                                                                                                            | Filed herewith.                                                                                                                                    
| | 10.33 | Office Lease by and between Nine Penn Center Associates LP, as Landlord, and
Lorjo Corp, as Tenant, covering the premises located at Mellon Bank, 1735 Market
St, Philadelphia, dated May 26, 1994.                                                                                   | Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 and incorporated herein by reference.
| | 10.34 | First Amendment, dated October 30, 1996 to the Office Lease dated May 26, 1994.                                                                                                                                                                                                       | Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 and incorporated herein by reference.
| | 10.35 | Second Amendment, dated December 11, 1998 to the Office Lease dated May 26,
1994.                                                                                                                                                                                                     | Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 and incorporated herein by reference.

E-5

---

|     |       |                                                                                                            |                                                                                                                                                    
|---- | ----- | ---------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|     | 10.36 | Third Amendment, dated retroactively as of May 16, 2001 to the Office Lease
dated May 26, 1994.            | Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 and incorporated herein by reference.
|     | 10.37 | Fourth Amendment, dated July 2, 2003 to the Office Lease dated May 26, 1994.                               | Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 and incorporated herein by reference.
|(12) |       | Computation of Ratio of Earnings to Fixed Charges.                                                         | Filed herewith.                                                                                                                                    
|(21) |       | Subsidiaries of the Company.                                                                               | Filed herewith.                                                                                                                                    
|(23) |       | Consent of Independent Accountants.                                                                        | Filed herewith.                                                                                                                                    
|     | 23.1  | Consent of PriceWaterhouse Coopers LLP                                                                     | Filed herewith.                                                                                                                                    
|     | 23.2  | Consent of Deloitte & Touche LLP                                                                           | Filed herewith.                                                                                                                                    
|(24) |       | Power of Attorney:                                                                                         |                                                                                                                                                    
|     | 24.1  | Powers of Attorney.                                                                                        | Filed herewith.                                                                                                                                    
|     | 24.2  | Certified Resolutions.                                                                                     | Filed herewith.                                                                                                                                    
|(31) |       | Rule 13a-14(a) Certifications:                                                                            
|     | 31.1  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934 | Filed herewith.                                                                                                                                    
|     | 31.2  | Certification of CFO pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934                     | Filed herewith.                                                                                                                                    

E-6

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|     |      |                                                                                                                         |                                                                                                                              
|---- | ---- | ----------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------
|(32) |      |                                                                                                                         |                                                                                                                              
|     | 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. | Filed herewith.                                                                                                              
|     | 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. | Filed herewith.                                                                                                              
|(99) |      | Additional Exhibits:                                                                                                    |                                                                                                                              
|     | 99.1 | Letter Agreement, dated 12/22/03, between PMA Capital Insurance Company and the
Pennsylvania Department of Insurance.   | Filed as Exhibit 99 to the Company's Current Report on Form 8-K dated December
22, 2003 and incorporated herein by reference.

* The registrant will furnish to the Commission, upon request, a copy of
any of the  registrants agreements with respect to its long-term debt not otherwise
filed with the Commission.

Shareholders may obtain copies of
exhibits by writing to the Company at PMA Capital Corporation, 1735 Market Street,
Suite 2800, Philadelphia, PA. 19103-7590, Attn: Secretary

E-7

---