Selected Financial Data

|(dollar amounts in thousands, except per share data)                                                | 2000 (1) |  | 1999 |            | 1998 |   | 1997 (1)   |   | 1996 (1) |           
|--------------------------------------------------------------------------------------------------- | -------- |  | ---- | ---------- | ---- | - | ---------- | - | -------- | ----------
|                                                                                                   
|                                                                                                   
|Net premiums written                                                                                |          |  | $    | 545,555    |      | $ | 563,510    |   | $        | 474,761   
|                                                                                                    |         
|Consolidated Results of Operations:                                                                 |          | 
|Net premiums earned                                                                                 |          |  | $    | 531,424    |      | $ | 540,087    |   | $        | 466,715   
|Net investment income                                                                               |          |  |      | 102,591    |      |   | 110,057    |   |          | 120,125   
|Net realized investment gains (losses)                                                              |          |  |      | 11,975     |      |   | (7,745     | ) |          | 21,745    
|Other revenues                                                                                      |          |  |      | 14,000     |      |   | 12,718     |   |          | 14,896    
|                                                                                                    |         
|Total consolidated revenues                                                                         |          |  | $    | 659,990    |      | $ | 655,117    |   | $        | 623,481   
|                                                                                                    |         
|                                                                                                   
|Income (loss) before extraordinary loss and                                                         |          | 
|cumulative effect of accounting change                                                              |          |  | $    | 1,325      |      | $ | 28,353     |   | $        | 44,734    
|Extraordinary loss from early extinguishment                                                        |          | 
|of debt, net of related tax effect(2)                                                               |          |  |      |           |      |   |           |   |          |          
|Cumulative effect of accounting change,                                                             |          | 
|net of related tax effect(3)                                                                        |          |  |      |           |      |   | (2,759     | ) |          |          
|                                                                                                    |         
|Net income (loss)                                                                                   |          |  | $    | 1,325      |      | $ | 25,594     |   | $        | 44,734    
|                                                                                                    |         
|                                                                                                   
|Per Share Data:                                                                                     |          | 
|Weighted average shares:                                                                            |          | 
|Basic(4)                                                                                            |          |  |      | 21,898,967 |      |   | 22,976,326 |   |          | 23,608,618
|Diluted(4) (5)                                                                                      |          |  |      | 22,353,622 |      |   | 23,785,916 |   |          | 24,524,888
|Income (loss) before extraordinary loss and   cumulative effect of accounting change
      Basic(4) |          |  | $    | 0.06       |      | $ | 1.23       |   | $        | 1.89      
|Diluted(4) (5)                                                                                      |          |  |      | 0.06       |      |   | 1.19       |   |          | 1.82      
|Net income (loss) per share:      Basic(4)                                                          |          |  |      | 0.06       |      |   | 1.11       |   |          | 1.89      
|Diluted(4) (5)                                                                                      |          |  |      | 0.06       |      |   | 1.08       |   |          | 1.82      
|Dividends paid per Common share(6)                                                                  |          |  |      | 0.16       |      |   | 0.32       |   |          | 0.32      
|Dividends paid per Class A Common share(6)                                                          |          |  |      | 0.375      |      |   | 0.36       |   |          | 0.36      
|Shareholders' equity per share                                                                      |          |  |      | 20.40      |      |   | 19.21      |   |          | 21.90     
|                                                                                                   
|Consolidated Financial Position:                                                                    |          | 
|Total investments                                                                                   |          |  | $    | 1,826,949  |      | $ | 1,918,035  |   | $        | 2,325,409 
|Total assets                                                                                        |          |  |      | 3,469,406  |      |   | 3,245,087  |   |          | 3,460,718 
|Reserves for unpaid losses and LAE                                                                  |          |  |      | 2,053,138  |      |   | 1,932,601  |   |          | 1,940,895 
|Long-term debt                                                                                      |          |  |      | 163,000    |      |   | 163,000    |   |          | 163,000   
|Shareholders' equity                                                                                |          |  |      | 440,046    |      |   | 429,143    |   |          | 511,480   

|(1) |  | Operating results in 2000, 1997 and 1996 were impacted by approximately $60
million, $12 million and $223 million, respectively, of reserve
strengthening, restructuring and other special charges.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(4) |  | In 1997, the Company adopted SFAS No. 128, Earnings Per
Share, which requires the presentation of basic and diluted earnings
per share. See Note 15 to the Companys Consolidated Financial Statements
for additional information. All prior periods presentation of
earnings per share data has been restated to conform to SFAS No. 128.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | For the year ended December 31, 1996 common stock equivalents were not taken
into consideration in the computation of weighted-average diluted shares
as these common stock equivalents would have an anti-dilutive effect on
the net loss per share.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Pre-tax operating income (loss) excludes net realized investment gains
(losses). Pre-tax operating income by business segment for all periods
is unaudited and has been presented in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, which the Company adopted on January 1, 1998. See
Managements Discussion and Analysis of Financial Condition and
Results of Operations and Note 16 to the Companys Consolidated
Financial Statements. The Company excludes net realized investment gains
(losses) from the profit and loss measure it utilizes to assess the
performance of its operating segments because (i) net realized investment
gains (losses) are unpredictable and not necessarily indicative of current
operating fundamentals or future performance and (ii) in many instances,
decisions to buy and sell securities are made at the holding company level,
and such decisions result in net realized gains (losses) that do not relate
to the operations of the individual segments.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Run-off Operations of The PMA Insurance Group were established in December
1996 to reinsure certain obligations primarily associated with
workers compensation claims written by the Pooled Companies for accident
years 1991 and prior. The Run-off Operations are separate legal entities
and substantially all of the assets of the Run-off Operations are held
in trust for the benefit of the Pooled Companies. See
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

---

|(dollar amounts in thousands, except per share data) | 2000 (1) |  | 1999 |         | 1998 |   | 1997 (1) |   | 1996 (1) |        
|---------------------------------------------------- | -------- |  | ---- | ------- | ---- | - | -------- | - | -------- | -------
|                                                    
|                                                    
|Pre-tax operating income (loss)(7):                  |          |  |      |         |      |   |          |   |          |        
|PMA Re                                               |          |  | $    | (7,297  | )    | $ | 50,319   |   | $        | 46,408 
|                                                     |         
|The PMA Insurance Group(7):                          |          | 
|Excluding Run-off Operations                         |          |  |      | 21,646  |      |   | 18,389   |   |          | 10,018 
|Run-off Operations(8)                                |          |  |      | (45     | )    |   | (189     | ) |          | 452    
|                                                     |         
|Total PMA Insurance Group                            |          |  |      | 21,601  |      |   | 18,200   |   |          | 10,470 
|Caliber One                                          |          |  |      | (7,014  | )    |   | 83       |   |          | (1,606 
|Corporate and Other                                  |          |  |      | (19,142 | )    |   | (20,765  | ) |          | (21,948
|                                                     |         
|Pre-tax operating income (loss)                      |          |  |      | (11,852 | )    |   | 47,837   |   |          | 33,324 
|Net realized investment gains (losses)               |          |  |      | 11,975  |      |   | (7,745   | ) |          | 21,745 
|                                                     |         
|Income (loss) before income taxes,                   |          | 
|extraordinary loss and cumulative                    |          | 
|effect of accounting change                          |          |  |      | 123     |      |   | 40,092   |   |          | 55,069 
|Income tax expense (benefit)                         |          |  |      | (1,202  | )    |   | 11,739   |   |          | 10,335 
|                                                     |         
|Income (loss) before extraordinary loss and          |          | 
|cumulative effect of accounting change               |          |  |      | 1,325   |      |   | 28,353   |   |          | 44,734 
|Extraordinary loss from early extinguishment         |          | 
|of debt, net of related tax effect(2)                |          |  |      |        |      |   |         |   |          |       
|Cumulative effect of accounting change,              |          | 
|net of related tax effect(3)                         |          |  |      |        |      |   | (2,759   | ) |          |       
|                                                     |         
|Net income (loss)                                    |          |  | $    | 1,325   |      | $ | 25,594   |   | $        | 44,734 
|                                                     |         

|GAAP Ratios for Insurance Subsidiaries: |  |  |  |        |  |  |        |  |  |        |  |  |        |  |  |        | 
|--------------------------------------- |  |  |  | ------ |  |  | ------ |  |  | ------ |  |  | ------ |  |  | ------ | 
|PMA Re:                                 |  | 
|Loss and LAE ratio                      |  |  |  | 91.6%  |  |  | 70.4%  |  |  | 68.9%  |  |  | 69.6%  |  |  | 73.7%  | 
|Expense ratio                           |  |  |  | 31.7%  |  |  | 32.1%  |  |  | 34.8%  |  |  | 34.2%  |  |  | 28.9%  | 
|                                        | 
|Combined ratio(9)                       |  |  |  | 123.3% |  |  | 102.5% |  |  | 103.7% |  |  | 103.8% |  |  | 102.6% | 
|                                        | 
|The PMA Insurance Group, including      |  | 
|Run-off Operations(8):                  |  | 
|Loss and LAE ratio                      |  |  |  | 74.9%  |  |  | 75.1%  |  |  | 81.6%  |  |  | 91.1%  |  |  | 158.2% | 
|Expense ratio(10)                       |  |  |  | 29.3%  |  |  | 31.7%  |  |  | 33.7%  |  |  | 42.8%  |  |  | 47.1%  | 
|Policyholders' dividend ratio           |  |  |  | 7.5%   |  |  | 8.6%   |  |  | 7.3%   |  |  | 6.9%   |  |  | 6.1%   | 
|                                        | 
|Combined ratio(9)                       |  |  |  | 111.7% |  |  | 115.4% |  |  | 122.6% |  |  | 140.8% |  |  | 211.4% | 
|                                        | 
|The PMA Insurance Group, excluding      |  | 
|Run-off Operations(8):                  |  | 
|Loss and LAE ratio                      |  |  |  | 73.8%  |  |  | 73.6%  |  |  | 78.0%  |  |  | 83.7%  |  |  |       | 
|Expense ratio(10)                       |  |  |  | 28.7%  |  |  | 31.1%  |  |  | 31.3%  |  |  | 32.9%  |  |  |       | 
|Policyholders' dividend ratio           |  |  |  | 7.5%   |  |  | 8.6%   |  |  | 7.1%   |  |  | 5.6%   |  |  |       | 
|                                        | 
|Combined ratio(9)                       |  |  |  | 110.0% |  |  | 113.3% |  |  | 116.4% |  |  | 122.2% |  |  |       | 
|                                        | 
|Caliber One(11):                        |  | 
|Loss and LAE ratio                      |  |  |  | 105.8% |  |  | 76.5%  |  |  |       |  |  |       |  |  |       | 
|Expense ratio                           |  |  |  | 33.9%  |  |  | 33.1%  |  |  |       |  |  |       |  |  |       | 
|                                        | 
|Combined ratio(9)                       |  |  |  | 139.7% |  |  | 109.6% |  |  |       |  |  |       |  |  |       | 
|                                        | 

|(9) |  | The combined ratio computed on a GAAP basis is equal to losses and loss
adjustment expenses plus acquisition expenses, operating expenses and
policyholders dividends (where applicable), all divided by net premiums
earned.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | The GAAP operating expense ratios exclude $7.0 million, $7.9 million, $9.0
million, $9.3 million and $8.2 million for the years ended December 31,
2000, 1999, 1998, 1997 and 1996, respectively, of PMA Management Corp. direct
expenses related to service revenues, which are not included in premiums
earned. See Managements Discussion and Analysis of Financial
Condition and Results of Operations.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Caliber One was formed in 1997 and its results prior to 1999 were not
material to the underwriting ratios of the Company; accordingly, the
ratios for Caliber One have not been presented for these years.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

---

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) as of December 31, 2000, compared with December 31,
1999, and the results of operations of PMA Capital for 2000 and 1999, 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
Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, including those made in the
Business Outlook discussion, which involve inherent risks and uncertainties.
Statements that are not historical facts, including statements about PMA
Capitals beliefs and expectations, are forward-looking statements. These
statements are based upon current estimates, assumptions and projections. Actual
results may differ materially from those projected in such forward-looking
statements, and therefore, investors should not place undue reliance on them.
See Cautionary Statements on page 44 for a list of factors that could cause
actual results to differ materially from those contained in any forward-looking
statement.

This discussion
and analysis should be read in conjunction with the audited Consolidated
Financial Statements and Notes thereto presented on pages 45 to 67 in this
Annual Report.

Consolidated Results

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

|(dollar amounts in thousands)                                    | 2000 |  | 1999 |         | 1998 |  
|---------------------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                                
|                                                                
|Operating revenues:                                              |      |  |      |         |      |  
|Net premiums written                                             |      |  | $    | 545,555 |      | $
|                                                                 |     
|Net premiums earned                                              |      |  | $    | 531,424 |      | $
|Net investment income                                            |      |  |      | 102,591 |      |  
|Other revenues                                                   |      |  |      | 14,000  |      |  
|                                                                 |     
|Total operating revenues                                         |      |  | $    | 648,015 |      | $
|                                                                 |     
|Components of pre-tax operating income (loss)(1) and net income: |      | 
|PMA Re                                                           |      |  | $    | (7,297  | )    | $
|The PMA Insurance Group:                                         |      | 
|Excluding Run-off operations                                     |      |  |      | 21,646  |      |  
|Run-off operations                                               |      |  |      | (45     | )    |  
|                                                                 |     
|Total                                                            |      |  |      | 21,601  |      |  
|Caliber One                                                      |      |  |      | (7,014  | )    |  
|Corporate and Other                                              |      |  |      | (19,142 | )    |  
|                                                                 |     
|Pre-tax operating income (loss)                                  |      |  |      | (11,852 | )    |  
|Net realized investment gains (losses)                           |      |  |      | 11,975  |      |  
|                                                                 |     
|Income before income taxes and                                   |      | 
|cumulative effect of accounting change                           |      |  |      | 123     |      |  
|Income tax expense (benefit)                                     |      |  |      | (1,202  | )    |  
|                                                                 |     
|Income before cumulative effect of accounting change             |      |  |      | 1,325   |      |  
|Cumulative effect of accounting change, net of tax               |      |  |      |        |      |  
|                                                                 |     
|Net income                                                       |      |  | $    | 1,325   |      | $
|                                                                 |     

|(1) |  | Operating income differs from net income under generally accepted accounting
principles (GAAP) because operating income excludes net
realized investment gains and losses. Pre-tax operating income (loss) represents
income (loss) from continuing operations before income taxes, excluding
net realized investment gains and losses. The Company excludes net
realized investment gains (losses) from the profit and loss measure it utilizes
to assess the performance of its operating segments because (i) net
realized investment gains (losses) are unpredictable and not necessarily
indicative of current operating fundamentals or future performance and (ii) in
many instances, decisions to buy and sell securities are made at the
holding company level, and such decisions result in net realized gains
(losses) that do not relate to the operations of the individual segments.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

---

Consolidated operating
revenues were $648.0 million, $662.9 million and $601.7 million in 2000, 1999 and 1998,
respectively. The decrease in operating revenues in 2000, compared to 1999, primarily
reflects lower net premiums earned at PMA Re and lower net investment income, partially
offset by higher net premiums earned at The PMA Insurance Group and Caliber One. The
increase in operating revenues in 1999, compared to 1998, primarily reflects higher net
premiums earned at PMA Re and Caliber One, partially offset by lower net premiums earned
and net investment income at The PMA Insurance Group.

Operating income
is one of the primary performance measures used by the Company to monitor and
assess the performance of its insurance operations. In 2000, the Company
recorded a pre-tax operating loss of $11.9 million and an after-tax operating
loss of $6.5 million, compared to pre-tax operating income of $47.8 million and
after-tax operating income of $33.4 million in 1999. The 2000 operating loss
includes a charge of $40 million after-tax ($60 million pre-tax) for higher than
expected losses and loss adjustment expenses (LAE) in certain lines
of business written by PMA Re. To a lesser extent, the 2000 results also reflect
higher losses from certain lines of business written by Caliber One. Improved
earnings at The PMA Insurance Group and a lower effective tax rate in 2000
partially offset the decline in earnings caused by PMA Re and Caliber One.

In 1999, pre-tax
operating income and after-tax operating income were $47.8 million and $33.4
million, respectively, compared to $33.3 million and $30.6 million in 1998. The
increase in pre-tax and after-tax operating income was primarily due to higher
pre-tax operating income for The PMA Insurance Group and PMA Re, and lower
interest expense. The increase in after-tax operating income in 1999 was
partially offset by a higher effective tax rate in 1999.

Net income was
$1.3 million, $25.6 million and $44.7 million in 2000, 1999 and 1998,
respectively. Net income for 1999 includes an after-tax charge of $2.8 million
for the effect of adopting Statement of Position (SOP) 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments. See Recent Accounting Pronouncements on page 43 for
additional information.

Net income also
includes after-tax gains and losses on the sale of investments. The timing and
recognition of such gains and losses are unpredictable and are not indicative of
current operating fundamentals or future operating performance. Accordingly,
such gains and losses are not included as a component of operating income
(loss). After-tax net realized investment gains were $7.8 million for 2000,
compared to after-tax net realized investment losses of $5.0 million in 1999 and
after-tax net realized investment gains of $14.1 million for 1998. Realized
investment gains in 2000 reflect the sale of equity securities, which had
reached the Companys targeted price level. The realized losses for 1999
reflect sales of investments in a rising interest rate environment in order to
invest in yield enhancing investment opportunities. The realized gains in 1998
reflect sales of investments in a declining interest rate environment.

Business Outlook

Based on managements current expectations, the estimated
range of consolidated pre-tax operating earnings for 2001 is between $1.35 and
$1.55 per diluted share. Management currently expects improved earnings in 2001
resulting in part from the rate increases achieved during 2000, which are
expected to continue into 2001 in all three of PMA Capitals specialty
insurance businesses. The unexpected emergence of losses may cause actual
results to differ materially from current earnings expectations.

Management
currently believes that the outlook for the reinsurance business in 2001 is
positive primarily as a result of improving rate adequacy that is reflected in
the price increases obtained in recent quarters. In 2001, PMA Re expects to
experience generally favorable marketplace acceptance of its rate increases on
both renewal business and new business opportunities. In instances where the
marketplaces pricing is inconsistent with PMA Res underwriting and
profitability guidelines, PMA Re expects to decline and non-renew the business.
As a result, management currently believes that the price increases it has
obtained are sufficient to meet its evaluation of the underwriting exposure,
which is expected to result in an improvement in the 2001 loss and LAE ratio.
Actual results may differ from managements current expectations due to
higher than expected losses.

Since 1996, The
PMA Insurance Group has reported improving earnings. Management believes it is
regarded as a highly professional, regional commercial lines writer with
broadening product capabilities and a focus on quality service. These attributes
are expected to provide continued profitable growth for The PMA Insurance Group
especially if, as management currently believes, rates continue to firm in the
workers compensation and other commercial lines of business. Management
currently expects the consistent pricing improvements realized in 2000 to
continue into 2001. The favorable effect of price increases may be tempered by a
rise in claim costs due to increased medical inflation and claim frequency.

29

---

Management's Discussion and Analysis (continued)

Management believes that
Caliber One has established a meaningful presence in the excess and surplus lines
marketplace. In 2000, Caliber One saw the beginning of increased rate adequacy,
particularly in property lines, and such rate firming is expected to continue into 2001.
In addition, Caliber One has made certain enhancements in its underwriting and risk
selection process and expects these improvements, along with improving rate adequacy and
reduced property catastrophe reinsurance costs, to have a favorable effect on its
underwriting results in 2001. Actual results may differ from managements current
expectations due to higher than expected losses.

These statements
are forward-looking, and actual results may differ materially from
managements current expectations, as a result of the Cautionary Statements
accompanying the forward-looking statements, and the additional Cautionary
Statements on page 44, which describe other factors.

PMA Re

Summarized financial results of PMA Re are as follows:

|(dollar amounts in thousands)      | 2000 |  | 1999 |         | 1998 |  
|---------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                  
|                                  
|Net premiums written               |      |  | $    | 261,505 |      | $
|                                   |     
|Net premiums earned                |      |  | $    | 251,109 |      | $
|Net investment income              |      |  |      | 51,125  |      |  
|                                   |     
|Operating revenues                 |      |  |      | 302,234 |      |  
|                                   |     
|Losses and LAE                     |      |  |      | 229,925 |      |  
|Acquisition and operating expenses |      |  |      | 79,606  |      |  
|                                   |     
|Total losses and expenses          |      |  |      | 309,531 |      |  
|                                   |     
|Pre-tax operating income (loss)    |      |  | $    | (7,297  | )    | $
|                                   |     
|GAAP loss and LAE ratio            |      |  |      | 91.6%   |      |  
|GAAP combined ratio                |      |  |      | 123.3%  |      |  
|                                   |     

PMA Res pre-tax operating loss was $7.3 million in 2000,
compared to pre-tax operating income of $50.3 million in 1999 and $46.4 million
in 1998. The operating loss in 2000 includes a pre-tax charge of $60 million
relating to the effects of higher than expected losses and LAE (see discussion
below in Losses and Expenses). The increase in PMA Res pre-tax operating
income in 1999, compared to 1998, was primarily due to an increase in net
investment income, and to a lesser extent, slower growth in operating expenses
relative to premium growth, partially offset by increased losses and LAE.

Premiums

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

|(dollar amounts in thousands) | 2000 |  | 1999 |         | 1998 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                              |      |  |      |         |      |  
|Business Unit:                |      |  |      |         |      |  
|Traditional - Treaty          |      |  | $    | 224,226 |      | $
|Finite Risk and               |      | 
|Financial Products            |      |  |      | 109,062 |      |  
|Specialty - Treaty            |      |  |      | 50,971  |      |  
|Facultative                   |      |  |      | 10,564  |      |  
|                              |     
|Total                         |      |  | $    | 394,823 |      | $
|                              |     
|Major Lines of Business:      |      | 
|Casualty                      |      |  | $    | 268,877 |      | $
|Property                      |      |  |      | 123,393 |      |  
|Other                         |      |  |      | 2,553   |      |  
|                              |     
|Total                         |      |  | $    | 394,823 |      | $
|                              |     

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

|(dollar amounts in thousands) | 2000 |  | 1999 |         | 1998 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                              |      |  |      |         |      |  
|Business Unit:                |      |  |      |         |      |  
|Traditional - Treaty          |      |  | $    | 134,724 |      | $
|Finite Risk and               |      | 
|Financial Products            |      |  |      | 89,254  |      |  
|Specialty - Treaty            |      |  |      | 34,062  |      |  
|Facultative                   |      |  |      | 3,465   |      |  
|                              |     
|Total                         |      |  | $    | 261,505 |      | $
|                              |     
|Major Lines of Business:      |      | 
|Casualty                      |      |  | $    | 157,887 |      | $
|Property                      |      |  |      | 101,086 |      |  
|Other                         |      |  |      | 2,532   |      |  
|                              |     
|Total                         |      |  | $    | 261,505 |      | $
|                              |     

30

---

The increase in PMA Res
gross premiums written of $51.2 million in 2000, compared to 1999, primarily reflects the
success of the Finite Risk and Financial Products unit in achieving targeted growth by
providing non-traditional reinsurance coverages mostly to small- and medium-sized
insurers. Also contributing to the growth in gross premiums written were price increases
in all segments of PMA Res business. The improvement in gross premiums written was
partially offset by a decline of $37.5 million for the Specialty Treaty unit due to
competitive rates and conditions in the professional liability market, which caused PMA
Re to non-renew business that did not meet its price guidelines. In addition, gross
premiums written included $17.5 million of premiums recognized in 2000 as a result of a
change in the estimate of ultimate premiums by underwriting year.

Net premiums
written decreased by $17.5 million in 2000, compared to 1999, as increases in
ceded premiums of $68.7 million for 2000, compared to 1999, more than offset the
growth in gross premiums written. The increase in ceded premiums was primarily
due to additional ceded premiums of $52.1 million on existing retrocessional
contracts covering the higher than expected losses and LAE. Also contributing to
the increase in ceded premiums was $17 million from the effect of one casualty
reinsurance treaty, on which substantially all of the assumed premiums were
retroceded.

In 1999, gross
premiums written increased 21% and net premiums written increased 19%, primarily
reflecting the expansion of the Finite Risk and Financial Products unit, which
resulted in $49.2 million in net casualty writings and $20.1 million in net
property writings.

Net premiums
earned decreased 15% in 2000, compared to 1999, and increased 31% in 1999,
compared to 1998. Generally, trends in net premiums earned follow patterns
similar to net premiums written, with premiums being earned principally on a pro
rata basis over the terms of the contracts. However, in 2000, net premiums
earned declined at a higher rate than net premiums written due largely to the
additional ceded premiums mentioned above, which were all earned when recorded.
Additionally, PMA Res earned premiums for 1999 include approximately $32
million related to a revision in the methodology used in estimating unearned
premiums on in-force contracts. PMAs Res earned premiums for 1999
increased at a greater rate than net written premiums primarily due to this
revision.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

|                       | 2000 |  | 1999 |        | 1998 | 
|---------------------- | ---- |  | ---- | ------ | ---- | 
|                      
|                       |      |  |      |        |      | 
|Loss and LAE ratio     |      |  |      | 91.6%  |      | 
|                       |     
|Expense ratio:         |      | 
|Acquisition expenses   |      |  |      | 26.1%  |      | 
|Operating expenses     |      |  |      | 5.6%   |      | 
|                       |     
|Total expense ratio    |      |  |      | 31.7%  |      | 
|                       |     
|GAAP combined ratio(1) |      |  |      | 123.3% |      | 
|                       |     

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

PMA Re's loss and LAE ratio increased significantly in 2000, reflecting
the recognition in the third quarter of 2000 of the effects of higher than expected
losses and LAE in certain lines of business, primarily coverages for 1998 and 1999
written on a pro rata basis, partially offset by lower than expected losses and LAE for
treaties covering losses occurring in accident years 1996 and prior. In the third quarter
of 2000, PMA Re's actuarial department conducted its routine semi-annual reserve study to
determine the impact of any emerging data on anticipated loss development trends and
recorded unpaid losses and LAE reserves. Based on the actuarial work performed, which
included analyzing recent trends in the levels of the reported and paid claims, an
updated selection of actuarially determined loss reserve estimates was developed by
accident year for each major line of business written by PMA Re. Management's selection
of the ultimate losses indicated that gross loss reserves at September 30, 2000 needed to
be increased by $83.2 million. Under existing retrocessional contracts, $60.0 million of
gross losses were ceded to PMA Re's retrocessionaires, resulting in an impact on net
incurred losses and LAE of $23.2 million. The increase in incurred losses and LAE,
combined with $35.0 million of ceded premiums and interest on funds held under existing
retrocessional contracts covering the ceded losses, resulted in a pre-tax charge of
approximately $60 million to PMA Re's operating results in 2000.

31

---

Management's Discussion and Analysis (continued)

The increase in the
estimate of gross loss and LAE reserves primarily reflects higher than anticipated losses
mainly in the Company's pro rata business, where PMA Re participates with the insured by
agreeing to pay a pre-determined percentage of all losses arising under a particular
insurance contract of the insured in exchange for the same pre-determined percentage of
all applicable premiums received under that contract. The concentration of estimated
adverse loss development was in PMA Re's pro rata reinsurance business related primarily
to general liability treaties covering losses in 1998 and 1999, property treaties
covering 1999 losses and, to a lesser extent, commercial automobile liability treaties
covering losses in 1998 and 1999. In addition, the reserve increase reflects unfavorable
prior year loss reserve development ("prior year development") in the excess of loss
general liability line for accident years 1998 and 1999.

A comprehensive review
performed by senior underwriting, claims and financial personnel concluded that PMA Re
has already non-renewed a significant portion of the accounts that contributed to the
higher than expected losses. In addition, PMA Re believes that it obtained adequate price
increases and/or improvements in contract terms and conditions on substantially all of
the accounts renewed in 2000 that contributed to the higher than expected losses for
prior accident years.

See the discussion of
Loss Reserves on pages 37 to 39 for additional information, and see the Cautionary
Statements on page 44 for a discussion of factors that may adversely impact PMA Re's loss
and LAE ratio.

In 2000, PMA Re's expense
ratio declined 0.4 points, compared to 1999, as a result of the acquisition expense ratio
decreasing by 1.4 points and the operating expense ratio increasing by 1.0 point. The
decline in the acquisition ratio was due largely to lower commission rates paid,
partially offset by the unfavorable impact of the additional ceded premium on
retrocessional contracts discussed above, with no associated ceding commissions. The
increase in the operating expense ratio was due to a $500,000, or 4%, increase in
operating expenses coupled with the decline in net earned premiums described above.

In 1999, PMA Re's
combined ratio decreased slightly to 102.5%, compared with 103.7% in 1998, primarily as a
result of a decline in the expense ratio. The expense ratio decreased 2.7 points in 1999,
compared to 1998, primarily due to growth in premiums earned that outpaced the increase
in expenses.

Net Investment Income

Net investment income was
$51.1 million, $57.7 million and $54.7 million in 2000, 1999 and 1998, respectively. The
decrease in 2000, compared to 1999, principally reflects an increase of $9.2 million in
interest credited on ceded retrocessional funds held treaties under which PMA Re ceded
premiums and losses during 2000 as discussed above. Excluding the impact of the interest
credited on funds held treaties, net investment income increased in 2000 due to higher
yields on invested assets resulting from a portfolio shift towards higher yielding
invested assets, which began in the second quarter of 1999 and was substantially
completed by the beginning of the fourth quarter of 1999. The improvement in net
investment income in 1999, compared to 1998, also resulted from this portfolio shift.

The PMA Insurance Group

The PMA Insurance Group is principally comprised of three insurance
companies, collectively, the "Pooled Companies" and Run-off operations. Run-off
operations of The PMA Insurance Group were classified by management and segregated from
ongoing operations effective December 31, 1996. The Run-off operations have been
established to reinsure certain obligations primarily associated with workers'
compensation claims written by the Pooled Companies for the years 1991 and prior. The
Run-off operations have been segregated into separate legal entities and substantially
all of the assets of the Run-off operations are held in trust for the benefit of the
Pooled Companies.

32

---

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

|(dollar amounts in thousands)   | 2000 |  | 1999 |         | 1998 |  
|------------------------------- | ---- |  | ---- | ------- | ---- | -
|                               
|                                |      |  |      |         |      |  
|The PMA Insurance Group         |      |  |      |         |      |  
|Net premiums written            |      |  | $    | 268,839 |      | $
|                                |     
|Net premiums earned             |      |  | $    | 252,348 |      | $
|Net investment income           |      |  |      | 47,969  |      |  
|Other revenues                  |      |  |      | 10,099  |      |  
|                                |     
|Operating revenues              |      |  |      | 310,416 |      |  
|                                |     
|Losses and LAE                  |      |  |      | 189,001 |      |  
|Acquisition and                 |      | 
|operating expenses              |      |  |      | 80,959  |      |  
|Dividends to policyholders      |      |  |      | 18,855  |      |  
|                                |     
|Total losses and expenses       |      |  |      | 288,815 |      |  
|                                |     
|Pre-tax operating income        |      |  | $    | 21,601  |      | $
|                                |     
|The PMA Insurance Group         |      | 
|Excluding Run-off Operations    |      | 
|Net premiums written            |      |  | $    | 268,839 |      | $
|                                |     
|Net premiums earned             |      |  | $    | 252,348 |      | $
|Net investment income           |      |  |      | 43,886  |      |  
|Other revenues                  |      |  |      | 10,099  |      |  
|                                |     
|Operating revenues              |      |  |      | 306,333 |      |  
|                                |     
|Losses and LAE                  |      |  |      | 186,317 |      |  
|Acquisition and                 |      | 
|operating expenses              |      |  |      | 79,515  |      |  
|Dividends to policyholders      |      |  |      | 18,855  |      |  
|                                |     
|Total losses and expenses       |      |  |      | 284,687 |      |  
|                                |     
|Pre-tax operating income        |      |  | $    | 21,646  |      | $
|                                |     
|Run-off Operations              |      | 
|Net premiums written            |      |  | $    |        |      | $
|                                |     
|Net premiums earned             |      |  | $    |        |      | $
|Net investment income           |      |  |      | 4,083   |      |  
|                                |     
|Operating revenues              |      |  |      | 4,083   |      |  
|                                |     
|Losses and LAE                  |      |  |      | 2,684   |      |  
|Acquisition and                 |      | 
|operating expenses              |      |  |      | 1,444   |      |  
|                                |     
|Total losses and expenses       |      |  |      | 4,128   |      |  
|                                |     
|Pre-tax operating income (loss) |      |  | $    | (45     | )    | $
|                                |     

Pre-tax operating income
for The PMA Insurance Group increased in 2000 to $21.6 million, compared to pre-tax
operating income of $18.2 million and $10.5 million in 1999 and 1998, respectively. The
19% increase in operating income in 2000, compared to 1999, is primarily due to improved
underwriting results reflecting improving prices on both new and renewal business,
partially offset by lower net investment income. The significant increase in operating
income in 1999, compared to 1998, was primarily due to improved underwriting results,
reflecting better loss experience and lower operating expenses resulting from ongoing
cost reduction initiatives. In addition, the improvement in operating income in 1999
reflected a reduction in the level of net exposures underwritten due to disciplined and
focused underwriting as well as an increase in the use of reinsurance.

The PMA Insurance Group Excluding Run-off Operations

Premiums

|(dollar amounts in thousands) | 2000 |  | 1999 |         | 1998 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                              |      |  |      |         |      |  
|Workers' compensation and     |      |  |      |         |      |  
|integrated disability:        |      | 
|Direct premiums written       |      |  | $    | 246,617 |      | $
|Premiums assumed              |      |  |      | 3,620   |      |  
|Premiums ceded                |      |  |      | 39,367  |      |  
|                              |     
|Net premiums written          |      |  | $    | 210,870 |      | $
|                              |     
|Commercial Lines:             |      | 
|Direct premiums written       |      |  | $    | 83,381  |      | $
|Premiums assumed              |      |  |      | 1,848   |      |  
|Premiums ceded                |      |  |      | 27,260  |      |  
|                              |     
|Net premiums written          |      |  | $    | 57,969  |      | $
|                              |     
|Total:                        |      | 
|Direct premiums written       |      |  | $    | 329,998 |      | $
|Premiums assumed              |      |  |      | 5,468   |      |  
|Premiums ceded                |      |  |      | 66,627  |      |  
|                              |     
|Net premiums written          |      |  | $    | 268,839 |      | $
|                              |     

Direct workers compensation and integrated disability
premiums written increased in 2000, compared to 1999, primarily due to increased
prices on workers compensation and an increase in the volume of risks
underwritten for the workers compensation and integrated disability lines
of business.

Direct
workers compensation and integrated disability premiums written increased
in 1999, compared to 1998, due to an increase in the volume of risks
underwritten. Continued intense price competition and selected non-renewal of
unprofitable accounts tempered increases in direct premiums written in 1999.

33

---

Management's Discussion and Analysis (continued)

In recent years,
The PMA Insurance Group increased its writings of workers compensation
premiums through focused marketing efforts in its principal marketing territory.
It also benefited in 2000 and, to a lesser extent, in 1999, from writing
business for insureds mainly operating in The PMA Insurance Groups
principal marketing territory but with some operations in other states. In
addition, The PMA Insurance Group continues to balance the risk profile of its
workers compensation portfolio by increasing its percentage of writings in
relatively lower hazard classes of business and reducing its percentage of
writings in higher hazard classes of business. For example, lower hazard classes
of business such as health care, schools/colleges and retail represented 30%,
33% and 26% of total direct workers compensation premiums written in 2000,
1999 and 1998, respectively, compared to higher hazard classes of business such
as construction, which represented 13%, 15% and 21% of total direct
workers compensation premiums written in 2000, 1999 and 1998,
respectively.

Because manual
rate fluctuations directly affect the prices that The PMA Insurance Group can
charge for its rate sensitive workers compensation products, which include
fixed cost and dividend policies, such fluctuations in manual rate levels have
had an effect on workers compensation premium volume. The premium charged
on a fixed-cost policy is primarily based upon the manual rates filed with the
state insurance department. Manual rates in The PMA Insurance Groups
principal marketing territories for workers compensation increased on
average approximately 8% in 2000, compared to a decline of 3% in 1999 and 13% in
1998. The increase in 2000 manual rates reflects the effects of higher average
medical and indemnity costs in recent years. In comparison, manual rates
declined in 1999 and 1998 as a result of a lower frequency of workers
compensation claims.

During 2000,
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 $4.4 million, compared to 1999. This increase was primarily due to
rate increases for commercial auto and commercial package lines, partially
offset by non-renewals of certain accounts that did not meet underwriting
standards. During 1999, direct writings of Commercial Lines decreased $11.9
million, compared to 1998, primarily due to planned reductions in such lines and
competitive conditions, which caused The PMA Insurance Group to non-renew some
of its Commercial Lines business.

Premiums ceded
increased $4.9 million for 2000, compared to 1999, reflecting an increase of
$8.5 million in ceded workers compensation and integrated disability
premiums, partially offset by a decrease of $3.6 million in ceded premiums for
Commercial Lines. The increase in workers compensation premiums ceded is
primarily due to the increase in direct writings for these products. The
decrease in Commercial Lines premiums ceded is primarily due to an increase in
the reinsurance retention for the commercial casualty lines of business from
$175,000 to $250,000, effective January 1, 2000. The $21.2 million increase in
premiums ceded for 1999, compared to 1998, primarily reflects a reinsurance
treaty that reduced the net retention level on workers compensation
exposures from $1.5 million to $150,000 per occurrence, beginning in 1999,
causing a $28.5 million increase in ceded premiums. Partially offsetting this
increase was a decrease of $7.3 million in ceded premiums for Commercial Lines,
which was primarily due to the reduction in direct Commercial Lines business
written and negotiated rate reductions for various treaties reinsuring certain
Commercial Lines business.

Net premiums
earned increased 14% in 2000, compared to 1999, and decreased 12% in 1999,
compared to 1998. Generally, trends in net premiums earned follow patterns
similar to net premiums written adjusted for the customary lag related to the
timing of premium writings within the year. Direct premiums are earned
principally on a pro rata basis over the terms of the policies.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

|                                   | 2000 |  | 1999 |        | 1998 | 
|---------------------------------- | ---- |  | ---- | ------ | ---- | 
|                                  
|                                   |      |  |      |        |      | 
|Loss and LAE ratio                 |      |  |      | 73.8%  |      | 
|                                   |     
|Expense ratio:                     |      | 
|Acquisition expenses               |      |  |      | 18.4%  |      | 
|Operating expenses(1) (2)          |      |  |      | 10.3%  |      | 
|                                   |     
|Total expense ratio                |      |  |      | 28.7%  |      | 
|Policyholders' dividend ratio      |      |  |      | 7.5%   |      | 
|                                   |     
|GAAP combined ratio(1) (2) (3) (4) |      |  |      | 110.0% |      | 
|                                   |     

|(1) |  | The
expense ratio and the combined ratio exclude $7.0 million, $7.9 million and $9.0 million
in 2000, 1999 and 1998, respectively, for direct expenses related to service revenues,
which are not included in premiums earned.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(4) |  | The
GAAP combined ratios for The PMA Insurance Group including the Run-off operations were
111.7%, 115.4% and 122.6% for 2000, 1999 and 1998, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

34

---

The components of the loss and LAE ratio are as follows:

|                          | 2000 |  | 1999 |        | 1998 | 
|------------------------- | ---- |  | ---- | ------ | ---- | 
|                         
|                          |      |  |      |        |      | 
|Current accident year -   |      |  |      |        |      | 
|undiscounted(1)           |      |  |      | 75.6 % |      | 
|Prior year development(2) |      |  |      | (2.4)% |      | 
|Net discount accretion    |      |  |      | 0.6 %  |      | 
|                          |     
|Loss and LAE ratio        |      |  |      | 73.8 % |      | 
|                          |     

|(1) |  | Returned premiums of $4.7 million, $5.7 million and $3.0 million
associated with older years reduced reported premiums in 2000, 1999 and
1998, respectively. The current accident year undiscounted loss and LAE ratios
excluding such adjustments were 74.2%, 74.8% and 79.0% in 2000, 1999 and
1998, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Excluding the aforementioned premium adjustments and amounts returned to the
policyholders for rent-a-captive business, prior year development had no
impact on the loss and LAE ratio in 2000 and 1998. In 1999, the impact was
0.4%.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The loss and LAE ratio increased slightly in 2000, compared to
1999, primarily due to a decline in the level of favorable prior year
development, partially offset by an improved current accident year loss and LAE
ratio and a decline in net discount accretion. The loss and LAE ratio improved
4.4 points in 1999, compared to 1998, primarily due to an improved current
accident year loss and LAE ratio and more favorable prior year development,
partially offset by a decline in the level of reserve discount.

The current
accident year loss and LAE ratio improved by 1.2 points in 2000 and by 3.2
points in 1999, compared to the immediately preceding year. For 2000, the
reduction in the ratio primarily reflects an improvement in the current accident
year loss and LAE ratio for the workers compensation and integrated
disability lines of business. The improvement in the 1999 ratio primarily
reflects a reduction in the current accident year loss and LAE ratio for
Commercial Lines.

The current
accident year loss and LAE ratio for workers compensation and integrated
disability improved in 2000, compared to 1999, primarily due to improved
pricing. Additionally, measures to control medical costs and LAE on
workers compensation claims have continued to improve the overall loss and
LAE ratio since 1997. Medical costs have improved primarily due to The PMA
Insurance Groups affiliation with a national preferred provider
organization (PPO) that became effective late in 1997. This
affiliation has enabled The PMA Insurance Group to better control its cost of
providing medical benefits to injured workers as The PMA Insurance Group has
increased its utilization of medical services provided through the PPO.

The current
accident year loss and LAE ratio for Commercial Lines improved in 1999, compared
to 1998, due to stricter underwriting standards and measures to control LAE. The
PMA Insurance Group chose not to renew some of its Commercial Lines business
rather than lower prices to what it believes are unacceptable levels.

The PMA
Insurance Group experienced $6.1 million, $9.2 million and $4.6 million of
favorable prior year development in 2000, 1999 and 1998, respectively. The
favorable prior year development in 2000 and 1999 primarily reflects better than
expected loss experience from loss-sensitive and rent-a-captive workers
compensation business. Premium adjustments for loss-sensitive business and
policyholders dividends for rent-a-captive business have substantially
offset this favorable development. Rent-a-captives are used by customers as an
alternative method to manage their loss exposure without establishing and
capitalizing their own captive insurance company. In 1998, favorable prior year
development was $4.6 million, comprised of $6.9 million of favorable prior year
development for workers compensation, partially offset by $2.3 million of
adverse prior year development in Commercial Lines. See Note 4 to the
Companys Consolidated Financial Statements for additional information.

The loss and LAE
ratio is negatively impacted by accretion of discount on prior year reserves and
favorably impacted by setting up discount for current year reserves. The net of
these amounts is referred to as net discount accretion. Accretion of discount on
prior year reserves exceeded the setting up of discount for 2000 and 1999,
whereas the setting up of discount exceeded the accretion of discount on prior
year reserves in 1998. The decline in net discount accretion in 2000, compared
to 1999, reflects a reduction in discount accretion attributable to prior year
loss reserves. Net discount accretion in 1999 reflects a reduction in the amount
of discount recorded on current year reserves as a result of higher ceded loss
reserves due to the reduction in the retention level on workers
compensation exposures.

In 2000, the
expense ratio improved by 2.4 points, compared to 1999, due to growth in net
premiums earned that outpaced the increase in expenses. In 1999, the expense
ratio improved by 0.2 points, compared to 1998, due to a decrease in the
acquisition expense ratio of 0.3 points, partially offset by an increase in the
operating expense ratio of 0.1 points. The decrease in the acquisition expense
ratio for 1999 is a result of higher ceded commissions received as a result of
the new reinsurance treaty in 1999 and a reduction in certain state assessments,
compared to 1998.

The
policyholders dividend ratio was 7.5%, 8.6% and 7.1% in 2000, 1999 and
1998, respectively. Under policies that are subject to dividend plans, the
customer may receive a dividend based upon loss experience during the policy
period. The improvement in the

35

---

Management's Discussion and Analysis (continued)

policyholdersdividend ratio in 2000, compared to 1999, occurred
primarily because The PMA Insurance Group sold less business under dividend plans and
wrote business under lower paying dividend plans in 2000. The increase in the
policyholdersdividend ratio in 1999, compared to 1998, was primarily due to
improved loss experience related to rent-a-captive business and selling more business
under dividend plans, which resulted in higher dividend payouts to policyholders.

Net Investment Income

Net investment income was $2.0 million lower in 2000, compared
to 1999, and $4.5 million lower in 1999, compared to 1998. The decrease in net
investment income over the three years is primarily due to a lower asset base
resulting from the paydown of loss reserves from prior accident years. The
decrease was partially offset by higher investment yields associated with a
shift in invested assets towards higher yielding invested assets.

Run-off Operations

Net investment income for the Run-off operations decreased by
$300,000 in 2000, compared to 1999, and by $9.7 million in 1999, compared to
1998. The decrease in 1999 was primarily due to the sale of PMA Insurance,
Cayman Ltd. (PMA Cayman) in mid-1998, which lowered the invested
assets of the Run-off operations. To a lesser extent, the paydown of losses by
the remaining run-off entities also contributed to the decline in net investment
income.

Losses and LAE
of the Run-off operations consist of discount accretion on established loss
reserves within the Run-off operations. In 1998, favorable prior year
development was $10.3 million, and a premium adjustment of $9.4 million
partially offset this favorable development.

Effective July
1, 1998, the Company sold PMA Cayman for a purchase price of $1.8 million and
recorded an after-tax loss of $1.6 million. This transaction included the
transfer of $231.5 million in cash and invested assets to the buyer. At December
31, 2000, the Company had recorded $221.3 million in reinsurance receivables
from the buyer related to this transaction, all of which are secured by assets
in a trust and by letters of credit. See Note 18 to the Companys
Consolidated Financial Statements for additional information. Effective December
31, 2000, all of the remaining loss reserves of the Run-off operations were
ceded to a third party under an assumption reinsurance agreement. As a result of
this transaction, The PMA Insurance Group will no longer report separate results
for the Run-off operations.

Caliber One

Summarized financial results of Caliber One are as follows:

|(dollar amounts in thousands)      | 2000 |  | 1999 |        | 1998 |  
|---------------------------------- | ---- |  | ---- | ------ | ---- | -
|                                  
|                                   |      |  |      |        |      |  
|Net premiums written               |      |  | $    | 16,043 |      | $
|                                   |     
|Net premiums earned                |      |  | $    | 28,799 |      | $
|Net investment income              |      |  |      | 4,424  |      |  
|                                   |     
|Operating revenues                 |      |  |      | 33,223 |      |  
|                                   |     
|Losses and LAE                     |      |  |      | 30,462 |      |  
|Acquisition and operating expenses |      |  |      | 9,775  |      |  
|                                   |     
|Total losses and expenses          |      |  |      | 40,237 |      |  
|                                   |     
|Pre-tax operating income (loss)    |      |  | $    | (7,014 | )    | $
|                                   |     

Caliber One recorded a pre-tax operating loss of $7.0 million in 2000,
compared to pre-tax operating income of $83,000 in 1999 and a pre-tax operating loss of
$1.6 million in 1998. The pre-tax operating loss for 2000 reflects higher underwriting
losses, partially offset by higher net investment income. Operating results in 1999
reflect significant growth in premiums compared to 1998, stabilization of Caliber One's
expenses relative to its premium base and an increase in net investment income.

Premiums

|(dollar amounts in thousands) | 2000 |  | 1999 |        | 1998 |  
|----------------------------- | ---- |  | ---- | ------ | ---- | -
|                             
|                              |      |  |      |        |      |  
|Gross premiums written:       |      |  |      |        |      |  
|Products liability            |      |  | $    | 21,190 |      | $
|Professional liability        |      |  |      | 7,049  |      |  
|Other liability               |      |  |      | 23,530 |      |  
|Property                      |      |  |      | 41,636 |      |  
|                              |     
|Total                         |      |  | $    | 93,405 |      | $
|                              |     
|Net premiums written:         |      | 
|Products liability            |      |  | $    | 10,020 |      | $
|Professional liability        |      |  |      | (5,813 | )    |  
|Other liability               |      |  |      | 4,389  |      |  
|Property                      |      |  |      | 7,447  |      |  
|                              |     
|Total                         |      |  | $    | 16,043 |      | $
|                              |     

Gross premiums written were essentially flat in 2000, compared to 1999.
Gross premiums written in 2000 reflect Caliber One's growing market acceptance and
penetration as well as expanded product offerings, primarily in the property and products
liability lines of business. Caliber One's premium growth in 2000 was tempered by its
de-emphasis of certain segments of the commercial automobile (included in "other
liability" in the table above) and professional liability lines, including the
intermediate and long-term care (nursing homes) class of business. Mid-term policy
cancellations for the nursing homes class

36

---

of business impacted premiums written for the professional liability line
of business. Net premiums written declined in 2000, compared to 1999, primarily due to
higher levels of ceded premiums related to professional liability, commercial automobile
and property catastrophe exposures.

In 1999, Caliber One's
first full year of operation, gross and net premiums written increased significantly,
compared to 1998, primarily due to Caliber One's growing market acceptance and
penetration, as well as expanded product offerings and distribution network.

Net premiums earned in
2000 increased $4.1 million, compared to 1999, primarily reflecting the increase in
premiums written in the latter part of 1999 and early 2000, partially offset by increased
ceded premiums in 2000, as discussed above. Net premiums earned increased significantly
in 1999, compared to 1998, primarily reflecting the increase in premiums written.

Losses and Expenses

The components of the GAAP combined ratios are as follows:

|                       | 2000 |  | 1999 |        | 1998 | 
|---------------------- | ---- |  | ---- | ------ | ---- | 
|                      
|                       |      |  |      |        |      | 
|Loss and LAE ratio     |      |  |      | 105.8% |      | 
|                       |     
|Expense ratio:         |      | 
|Acquisition expenses   |      |  |      | 2.3%   |      | 
|Operating expenses     |      |  |      | 31.6%  |      | 
|                       |     
|Total expense ratio    |      |  |      | 33.9%  |      | 
|                       |     
|GAAP combined ratio(1) |      |  |      | 139.7% |      | 
|                       |     

|(1)                 |  | Combined
ratio computed on a GAAP basis is equal to losses and LAE, plus acquisition expenses and
operating expenses, all divided by net premiums earned.
|------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|NM - Not Meaningful

Caliber One's loss and LAE ratio increased significantly for 2000,
compared to 1999, primarily due to the emergence of higher than expected losses and LAE
in certain segments of the professional liability, commercial automobile, general
liability and property lines of business for coverage of 1999 and 2000 exposures. The
loss and LAE ratio for 2000 reflects the benefit of ceding a substantial amount of losses
and LAE from the professional liability and commercial automobile lines of business to
reinsurers. Additionally, other steps were taken in 2000 to minimize the impact of these
segments, which included de-emphasizing certain classes of the commercial automobile and
professional liability lines, including the nursing homes class of business.

The acquisition expense
ratio decreased significantly for 2000, compared to 1999, primarily due to ceding
commissions on the reinsurance coverage for the professional liability and commercial
automobile lines of business, which are offset against acquisition expenses.

The operating expense
ratio increased substantially for 2000, compared to 1999, primarily reflecting increases
in operating expenses associated with Caliber One's continued growth in net premiums
earned and infrastructure development, as well as the effect on net premiums earned of
the increased use of reinsurance and policy cancellations in 2000.

The increases in losses
and LAE, and acquisition expenses in 1999, compared to 1998, result from the increase in
business written from year to year. Operating expenses increased in 1999, compared to
1998, primarily due to the increasing employee base and the continued investment in the
infrastructure of Caliber One.

Net Investment Income

Net investment income increased $2.0 million in 2000, compared to 1999,
and $1.0 million in 1999, compared to 1998. The increases primarily reflect a larger
average invested asset base, due primarily to premium collections in excess of paid
losses and expenses and, to a lesser extent, capital contributions received, partially
offset in 2000 by $1.4 million of interest credited on funds held reinsurance contracts.

Loss Reserves and Reinsurance

The Company's consolidated unpaid losses and LAE, net of reinsurance, at
December 31, 2000 and 1999 were $1,128.7 million and $1,284.4 million, net of discount of
$104.0 million and $180.4 million, respectively. Included in the consolidated unpaid
losses and LAE are amounts related to the Company's workers' compensation claims of
$341.8 million and $527.9 million, net of discount of $88.4 million and $173.1 million at
December 31, 2000 and 1999, respectively. The approximate discount rate used was 5% at
December 31, 2000 and 1999.

Unpaid losses and LAE
reflect management's best estimate of future amounts needed to pay claims and related
settlement costs with respect to insured events which have occurred, including events
that have not been reported to the Company. In many cases, significant periods of time,
ranging up to several years or more, may elapse between the occurrence of an insured
loss, the reporting of the loss to the Company and the Company's payment of that loss. In
general, liabilities for reinsurers become known more slowly than for primary insurers
and are subject to more unforeseen development and uncertainty. As part of the process
for determining the Company's unpaid losses and LAE, historical data is reviewed and
consideration is given to the impact of various factors, such as legal developments,
changes in social attitudes and economic conditions. See the discussion under Losses and
Expenses on pages 31 and 37 for additional information regarding loss reserve increases
during 2000 at PMA Re and Caliber One.

37

---

Management's Discussion and Analysis (continued)

Management believes that
its unpaid losses and LAE are fairly stated at December 31, 2000. However, estimating the
ultimate claims liability is necessarily a complex and judgmental process inasmuch as the
amounts are based on management's informed estimates and judgments using data currently
available. As additional experience and data become available regarding claims payment
and reporting patterns, legislative developments, regulatory trends on benefit levels for
both medical and indemnity payments, 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, 2000, the related adjustments
could have a material adverse effect on the Company's financial condition, results of
operations and liquidity.

At December 31, 2000,
1999 and 1998, the Company's gross reserves for asbestos-related losses were $49.2
million, $61.3 million and $67.9 million, respectively ($32.0 million, $38.9 million and
$43.6 million, net of reinsurance, respectively). At December 31, 2000, 1999 and 1998,
the Company's gross reserves for environmental-related losses were $29.5 million, $41.4
million and $47.0 million, respectively ($18.0 million, $24.5 million and $29.4 million,
net of reinsurance, respectively).

Estimating reserves for
asbestos and environmental exposures continues to be difficult because of several
factors, including: (i) evolving methodologies for the estimation of the liabilities;
(ii) lack of reliable historical claim data; (iii) uncertainties with respect to
insurance and reinsurance coverage related to these obligations; (iv) changing judicial
interpretations; and (v) changing government standards. Management believes that its
reserves for asbestos and environmental claims are appropriately established based upon
known facts, existing case law and generally accepted actuarial methodologies. However,
due to changing interpretations by courts involving coverage issues, the potential for
changes in federal and state standards for clean-up and liability, as well as issues
involving policy provisions, allocation of liability among participating insurers and
proof of coverage, the Company's ultimate exposure for these claims may vary
significantly from the amounts currently recorded, resulting in a potential future
adjustment that could be material to the Company's financial condition and results of
operations. See Loss Reserves in the Company's 2000 Form 10-K and Note 4 to the Company's
Consolidated Financial Statements for additional discussion.

At December 31, 2000, the
Company's reinsurance and retrocessional protection was as follows:

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

|(1) |  | Represents
the amount of loss protection above the Company's level of loss retention.
|--- |  | -------------------------------------------------------------------------------------

|(2) |  | This
coverage also provides protection of $48.5 million per occurrence over its combined net
retention of $500,000.
|--- |  | -------------------------------------------------------------------------------------------------------------------

|(3) |  | This
coverage also provides protection of $49.8 million per occurrence over its combined net
retention of $250,000.
|--- |  | -------------------------------------------------------------------------------------------------------------------

|(4) |  | Caliber
One has additional reinsurance with aggregate limits of approximately $50 million on the
professional liability and commercial automobile lines of business.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Effective
January 1, 2001, Caliber One's net retention on casualty lines has been reduced to
$100,000.
|--- |  | ------------------------------------------------------------------------------------------------------

The Company actively manages its exposure to catastrophes through its
underwriting process, where the Company generally monitors the accumulation of insurable
values in catastrophe prone regions. Also, in writing property reinsurance coverages, PMA
Re typically requires per occurrence loss limitations for contracts that could have
catastrophe exposure. Through per risk reinsurance, the Company manages its net retention
in each exposure. PMA Re's property per occurrence reinsurance provides catastrophe
protection of $50.0 million in excess of $10.0 million on its traditional property book.
Under certain conditions, PMA Re may recover $6.0 million of the $10.0 million retention
for multiple net catastrophe losses. PMA Re also maintains catastrophe protection of
$12.5 million in excess of $5.0 million for property exposures underwritten by its Finite
Risk and Financial Products unit. PMA Re can also recover an additional $40.0 million of
Finite Risk and Financial Products occurrence losses under certain industry loss
scenarios. The PMA Insurance Group maintains catastrophe

38

---

reinsurance protection of $27.7 million excess of $850,000 and Caliber
One maintains catastrophe reinsurance protection of $17.5 million excess of $2.5 million.
The Company's loss and LAE ratios have not been significantly impacted by catastrophes in
2000, 1999 or 1998. 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.

Under the Company's
reinsurance and retrocessional coverages in place during 2000, 1999 and 1998, the Company
ceded $278.6 million, $154.5 million and $97.0 million of premiums, and ceded $308.8
million, $113.1 million and $82.3 million of losses and LAE to reinsurers and
retrocessionaires. The significant increase in ceded premiums and ceded losses in 2000,
compared to prior years is due to PMA Re's and Caliber One's use of reinsurance
protection to cover a substantial portion of their higher than expected gross losses and
LAE recognized in 2000. See the discussions under Losses and Expenses on pages 31 and 37
for additional information.

At December 31, 2000 and
1999, the Company had amounts receivable from its reinsurers and retrocessionaires
totaling $934 million and $658 million, respectively. At both December 31, 2000 and 1999,
approximately $15 million of these amounts are due to the Company on losses it has
already paid. The remainder of the reinsurance receivables relate to unpaid claims.

The Company performs
credit reviews of its reinsurers focusing on, among other things, financial capacity,
stability, trends and commitment to the reinsurance business. Prospective and existing
reinsurers failing to meet the Company's standards are excluded from the Company's
reinsurance programs. In addition, the Company requires collateral, typically assets in
trust, letters of credit or funds withheld, to support balances due from certain
reinsurers, consisting generally of those not authorized to transact business in the
applicable jurisdictions. At December 31, 2000 and 1999, the Company's reinsurance
receivables were supported by $553.6 million and $357.2 million of collateral. In
addition, nearly 90% of the uncollateralized reinsurance receivables were due from
reinsurers rated A or better by A.M. Best Company. The Company believes that the amounts
receivable from reinsurers are fully collectible and that the allowance for uncollectible
items is adequate to cover any disputes about amounts owed by reinsurers to the Company.
In the last three years combined, the Company has written off less than $1 million of
reinsurance receivables. The timing and collectibility of reinsurance receivables have
not had, and are not expected to have, a material adverse effect on the Company's
liquidity. See Note 5 to the Company's Consolidated Financial Statements for additional
discussion.

Corporate and Other

The Corporate and Other segment includes unallocated investment income,
expenses, including debt service, as well as the results of certain of the Company's real
estate properties. This segment had pre-tax operating losses of $19.1 million, $20.8
million and $21.9 million in 2000, 1999 and 1998, respectively. Interest expense of $11.9
million, $12.2 million and $15.0 million in 2000, 1999 and 1998, respectively, is the
largest component of the pre-tax operating losses for Corporate and Other. The decrease
in interest expense in 1999, compared to 1998, reflected a $40.0 million paydown in
outstanding debt in the fourth quarter of 1998. See Liquidity and Capital Resources below
for further discussion.

Net Realized Investment Gains/Losses

The Company recorded net pre-tax realized investment gains of $12.0
million in 2000, compared with net pre-tax realized investment losses of $7.7 million in
1999 and net pre-tax realized investment gains of $21.7 million in 1998. Gains and losses
on the sale of investments are recognized as a component of net income, but the timing
and recognition of such gains and losses are unpredictable and are not indicative of
current operating fundamentals or future operating performance of the Company's insurance
operations. Accordingly, such gains and losses are not included as a component of
operating income (loss).

During 2000, realized
investment gains reflect the sale of equity securities, which had reached the Company's
targeted price level. The realized losses for 1999 reflect sales of investments in a
rising interest rate environment in order to invest in yield enhancing investment
opportunities. This is in contrast to the realized gains in 1998, which primarily reflect
sales of investments in a declining interest rate environment. In 1999 and 1998, the
Company diversified its investment portfolio by increasing its holdings of corporate
bonds, mortgage-backed and other asset-backed securities, while reducing holdings in
government securities.

Liquidity and Capital Resources

Liquidity is a measure of an entity's ability to secure sufficient cash
to meet its contractual obligations and operating needs. At the holding company level,
PMA Capital's primary sources of liquidity are dividends from subsidiaries, net tax
payments received from subsidiaries and borrowings. The Company utilizes cash to pay debt
obligations, including interest costs; dividends to

39

---

Management's Discussion and Analysis (continued)

shareholders; taxes to the Federal government; and corporate expenses. In
addition, the Company utilizes cash resources to repurchase shares of its common stock
and to capitalize subsidiaries from time to time.

The Company's domestic
insurance subsidiaries' ability to pay dividends to the holding company is limited by the
insurance laws and regulations of Pennsylvania. Under Pennsylvania laws and regulations,
dividends may not be paid without prior approval of the Pennsylvania Insurance
Commissioner in excess of the greater of (i) 10% of policyholders' surplus as of the end
of the preceding year or (ii) statutory net income for the preceding year, but in no
event to exceed statutory unassigned surplus. Effective September 30, 2000, PMA Capital
realigned the ownership structure of its domestic statutory insurance companies, with the
result that all of PMA Capital's domestic insurance entities are now owned by PMA Capital
Insurance Company (formerly known as PMA Reinsurance Corporation).

As a result of this
statutory realignment, dividends from the Pooled Companies and Caliber One Indemnity
Company 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. As
of December 31, 2000, approximately $53 million of dividends are available to be paid to
PMA Capital without the prior approval of the Pennsylvania Insurance Commissioner during
2001. As of December 31, 2000, The PMA Insurance Group can pay up to $20.1 million in
dividends to PMA Capital Insurance Company during 2001. Under Delaware law (which is
substantially similar to Pennsylvania law with respect to dividends), Caliber One can pay
up to $5.5 million in dividends to PMA Capital Insurance Company in 2001. Dividends
received from subsidiaries were $36.0 million, $43.2 million and $35.5 million in 2000,
1999 and 1998, respectively.

Net tax payments received
from subsidiaries were $6.4 million, $21.8 million and $29.7 million in 2000, 1999 and
1998, respectively. In December 1998, the Company received a refund from the Internal
Revenue Service of approximately $15 million relating to Federal income taxes paid by the
Company. The refund relates to a claim for refund filed by the Company with regard to its
1992 U.S. Federal income tax return. See Note 8 to the Company's Consolidated Financial
Statements for additional discussion of income taxes.

At December 31, 2000 and
1999, the Company had $163.0 million outstanding under its existing Revolving Credit
Facility ("Credit Facility"). Under the terms of the Credit Facility, the Company repaid
$38.0 million on January 2, 2001 thereby reducing the outstanding debt to $125.0 million,
which is the maximum amount PMA Capital can borrow under the Credit Facility. The $125.0
million matures as follows: $62.5 million on December 31, 2001 and $62.5 million on
December 31, 2002.

During 2000, 1999 and
1998, the Company incurred $11.9 million, $12.2 million and $15.0 million of interest
expense related to the Credit Facility, substantially all of which was paid in each
respective year. In addition, at the end of 1998, the Company repaid $40.0 million of
outstanding debt under the Credit Facility.

In addition to the Credit
Facility, the Company maintains a committed facility of $67.5 million for letters of
credit (the "Letter of Credit Facility"). The Letter of Credit Facility is utilized
primarily for securing reinsurance obligations of the Company's insurance subsidiaries.
As of December 31, 2000, the Company had $40.1 million outstanding in letters of credit
under the Letter of Credit Facility.

During 2000, 1999 and
1998, the Company paid dividends to shareholders of $8.0 million, $7.8 million and $7.9
million, respectively. Since 1997, the amount of dividends paid to shareholders has
declined due to share repurchase activities. However, in 2000, dividends paid were higher
due to an increase in the annual dividend rate to $0.42 from $0.36 commencing with the
fourth quarter 2000 dividend payment. PMA Capital's dividends to shareholders are
restricted by its debt agreements. Based upon the terms of the Credit Facility, under the
most restrictive debt covenant, PMA Capital would be able to pay dividends of
approximately $9.5 million in 2001.

In 1998, the Company's
Board of Directors authorized a plan to repurchase shares of Common stock and Class A
Common stock in an amount not to exceed $25.0 million. The Company's Board of Directors
authorized an additional $15.0 million and $50.0 million of share repurchase authority in
2000 and 1999, respectively. Since the inception of its share repurchase program, PMA
Capital has repurchased a total of approximately 3.5 million shares at a cost of $67.5
million, which represents approximately 15% of the outstanding shares (1.0 million shares
at a cost of $18.4 million in 2000; 1.5 million shares at a cost of $30.2 million in
1999; and 1.0 million shares at a cost of $18.9 million in 1998). PMA Capital's remaining
share repurchase authorization at December 31, 2000 is $22.5 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.

Management believes that
the Company's available sources of funds will provide sufficient liquidity to meet its
short-term and long-term obligations. In addition, management currently believes that the
existing capital

40

---

structure is appropriate. However, management continually monitors the
capital structure in light of developments in its businesses, and the present assessment
could change as management becomes aware of new opportunities and challenges in the
Company's business.

The Company's total
assets increased to $3,469.4 million at December 31, 2000 from $3,245.1 million at
December 31, 1999. The increase in total assets in 2000, compared to 1999, is primarily
attributable to an increase of $275.7 million in reinsurance receivables.

Investments

The Company's 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 the Company's business objectives, (iv) provide portfolio flexibility for changing
business and investment climates and (v) provide liquidity to meet operating objectives.
The Company's investment strategy includes guidelines for asset quality standards, asset
allocations among investment types and issuers, and other relevant criteria for its
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. The Company's investment portfolio does not
contain any significant concentrations in single issuers (other than U.S. Treasury and
agency obligations), industry segments or geographic regions. All of the Company's
investments are dollar denominated as of December 31, 2000.

The Company's investments
at December 31 were as follows:

|                                                                 |  | 2000       | 1999
|---------------------------------------------------------------- |  | ---------- | ----
|                                                                 | 
|(dollar amounts in millions)                                     |  | Fair Value |     
|                                                                
|                                                                
|U.S. Treasury securities and obligations                         |  |            |     
|of U.S. Government agencies                                      |  |            | $   
|States, political subdivisions and foreign government securities |  |            |     
|Corporate debt securities                                        |  |            |     
|Mortgage-backed and other asset-backed securities                |  |            |     
|                                                                 | 
|Total fixed maturities available for sale                        |  |            |     
|Equity securities                                                |  |            |     
|Short-term investments                                           |  |            |     
|                                                                 | 
|Total                                                            |  |            | $   
|                                                                 | 

Mortgage-backed and other asset-backed securities in the table above
include collateralized mortgage obligations ("CMOs") of $167.7 million and $168.2 million
carried at fair value as of December 31, 2000 and 1999, respectively. CMO holdings are
concentrated in securities with limited prepayment, extension and default risk, such as
planned amortization class bonds.

The composition of the
Company's fixed maturities, by rating was as follows at December 31:

|                                 |  | 2000       | 1999
|-------------------------------- |  | ---------- | ----
|                                 | 
|(dollar amounts in millions)     |  | Fair Value |     
|                                
|                                
|U.S. Treasury securities and AAA |  |            | $   
|AA                               |  |            |     
|A                                |  |            |     
|BBB                              |  |            |     
|BB                               |  |            |     
|B                                |  |            |     
|                                 | 
|Total                            |  |            | $   
|                                 | 

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

41

---

Management's Discussion and Analysis (continued)

The Company's investment results were as follows:

|(dollar amounts in millions) | 2000 |  | 1999 |         | 1998 |  
|---------------------------- | ---- |  | ---- | ------- | ---- | -
|                            
|                             |      |  |      |         |      |  
|Average invested assets(1)   |      |  | $    | 1,742.8 |      | $
|Investment income(2)         |      |  | $    | 112.7   |      | $
|Net effective yield(3)       |      |  |      | 6.47%   |      |  
|                             |     

|(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. Excludes net realized investment gains and amounts related to securities
lending activities.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

As of December 31, 2000, the duration of the Company's investments that
support the insurance reserves was 3.3 years and the duration of its insurance reserves
was 2.8 years.

See Business -
Investments in the Company's 2000 Form 10-K and Notes 2-B and 3 to the Company's
Consolidated Financial Statements for additional discussion about the Company's
investment portfolio.

Market Risk of Financial Instruments

A significant portion of PMA Capital's assets and liabilities are
financial instruments, which are subject to the market risk of potential losses from
adverse changes in market rates and prices. The Company's 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 its exposure to
market risk, the Company has established strategies, asset quality standards, asset
allocations and other relevant criteria for its investment portfolio. In addition,
invested asset cash flows are structured after considering projected liability cash flows
with actuarial models. All of the Company's financial instruments are held for purposes
other than trading. The Company's portfolio does not contain any significant
concentrations in single issuers (other than U.S. Treasury and agency obligations),
industry segments or geographic regions. See Notes 3, 6 and 10 to the Company's
Consolidated Financial Statements for additional information about financial instruments.

Caution should be used in
evaluating PMA Capital's 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 total liabilities and reinsurance receivables on unpaid losses represent 27% of total
assets).

The hypothetical effects
of changes in market rates or prices on the fair values of financial instruments as of
December 31, 2000, 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 the Company's long-term 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 $74.2 million in the fair value of the Company's investment portfolio. The
change in fair values was determined by estimating the present value of future cash flows
using various models, primarily duration modeling.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Matters

The Company's 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 the Company. The eventual
effect on the Company of the changing environment in which it operates remains uncertain.
See Notes 4, 8 and 12 to the Company's Consolidated Financial Statements for additional
discussion.

42

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Comparison of SAP and GAAP Results

Results presented in accordance with GAAP vary in certain respects from
statutory accounting practices prescribed or permitted by the Pennsylvania Insurance
Department and the Delaware Insurance Department, (collectively "SAP"). Prescribed SAP
includes state laws, regulations and general administrative rules, as well as a variety
of National Association of Insurance Commissioners ("NAIC") publications. Permitted SAP
encompasses all accounting practices that are not prescribed. In 1998, the NAIC adopted
the Codification of Statutory Accounting Principles ("Codification") guidance, which
replaced the current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in some
areas, such as deferred income taxes. Effective December 31, 2000, the Company's
insurance subsidiaries implemented the Codification guidelines, resulting in an increase
of $20.5 million in its statutory surplus.

Recent Accounting Pronouncements

Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes
certain interpretations of the staff of the Securities and Exchange Commission regarding
the application of GAAP to revenue recognition in financial statements. The adoption of
SAB No. 101 did not have a material impact on the Company's financial condition, results
of operations or liquidity.

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

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

In September 2000, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125." SFAS No.
140 is effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. SFAS No. 140 revises the standards for
securitizations and other transfers of financial assets and collateral and requires
certain disclosures, but carries over most of the provisions of SFAS No. 125 without
reconsideration. The Company's existing policies and practices for its securities lending
program are in conformity with SFAS No. 140, accordingly, the adoption of SFAS No. 140 is
not expected to have a material impact on the Company's financial condition, results of
operations or liquidity.

In June 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts (collectively
referred to as "derivatives") and for hedging activities. SFAS No. 133 requires an entity
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. In June 1999, the FASB
issued SFAS No.

43

---

Management's Discussion and Analysis (continued)

137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," which defers the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company
does not have any derivative instruments that are impacted by the accounting requirements
of SFAS No. 133 and the Company does not currently participate in any hedging activities.
Accordingly, the adoption of SFAS No. 133 is not expected to have a material impact on
the Company's financial condition, results of operations or liquidity.

Cautionary Statements

Except for historical information provided in Management's Discussion and
Analysis and otherwise in this report, statements made throughout, including in the
Business Outlook section, in the letter to shareholders by John W. Smithson and in the
description of insurance operations, are forward-looking and contain information about
financial results, economic conditions, trends and known uncertainties. These
forward-looking statements are based on currently available financial, competitive and
economic data and the Company's current operating plans based on assumptions regarding
future events. The Company's actual results could differ materially from those expected
by the Company's management. The factors that could cause actual results to vary
materially, some of which are described with the forward-looking statements, include, but
are not limited to:

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

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

| |  | competitive
conditions resulting from the significant amount of capital in the property and casualty
insurance marketplace 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;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
effect of changes in workers' compensation statutes and their administration;
|- |  | ---------------------------------------------------------------------------------

| |  | the
Company's ability to predict and effectively manage claims related to insurance and
reinsurance policies;
|- |  | -------------------------------------------------------------------------------------------------------------

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

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

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

| |  | adequacy
and collectibility of reinsurance purchased by the Company;
|- |  | --------------------------------------------------------------------

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

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

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

Investors should not place undue reliance on any such forward-looking
statements. The Company disclaims any obligation 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.

44

---

Consolidated Balance Sheets

|(in thousands, except share data)                                                  |  | 2000 |   | 1999      |  
|---------------------------------------------------------------------------------- |  | ---- | - | --------- | -
|                                                                                  
|                                                                                  
|Assets:                                                                            |  |      |   |           |  
|Investments:                                                                       |  |     
|Fixed maturities available for sale, at fair value (amortized cost:                |  |     
|2000 - $1,507,667; 1999 - $1,648,894)                                              |  |      | $ | 1,485,308 |  
|Equity securities, at fair value (cost: 2000 - $0; 1999 - $37,779)                 |  |      |   |          |  
|Short-term investments, at cost which approximates fair value                      |  |      |   | 341,641   |  
|                                                                                   | 
|Total investments                                                                  |  |      |   | 1,826,949 |  
|Cash                                                                               |  |      |   | 5,604     |  
|Accrued investment income                                                          |  |      |   | 18,614    |  
|Premiums receivable (net of valuation allowance: 2000 - $16,630; 1999 - $18,088)   |  |      |   | 299,342   |  
|Reinsurance receivables (net of valuation allowance: 2000 - $4,328; 1999 - $5,528) |  |      |   | 933,889   |  
|Deferred income taxes, net                                                         |  |      |   | 89,011    |  
|Deferred acquisition costs                                                         |  |      |   | 48,522    |  
|Funds held by reinsureds                                                           |  |      |   | 73,999    |  
|Other assets                                                                       |  |      |   | 173,476   |  
|                                                                                   | 
|Total assets                                                                       |  |      | $ | 3,469,406 |  
|                                                                                   | 
|                                                                                  
|Liabilities:                                                                       |  |     
|Unpaid losses and loss adjustment expenses                                         |  |      | $ | 2,053,138 |  
|Unearned premiums                                                                  |  |      |   | 269,734   |  
|Long-term debt                                                                     |  |      |   | 163,000   |  
|Accounts payable, accrued expenses and other liabilities                           |  |      |   | 207,211   |  
|Funds held under reinsurance treaties                                              |  |      |   | 173,762   |  
|Dividends to policyholders                                                         |  |      |   | 17,246    |  
|Payable under securities loan agreements                                           |  |      |   | 145,269   |  
|                                                                                   | 
|Total liabilities                                                                  |  |      |   | 3,029,360 |  
|                                                                                   | 
|Commitments and contingencies (Note 12)                                            |  |     
|                                                                                  
|Shareholders' Equity:                                                              |  |     
|Class A Common stock, $5 par value (40,000,000 shares authorized;                  |  |     
|2000 - 24,442,945 shares issued and 21,573,316 outstanding;                        |  |     
|1999 - 11,358,280 shares issued and 9,692,854 outstanding)                         |  |      |   | 122,214   |  
|Common stock, $5 par value (2000 - 0 shares authorized, issued and outstanding;    |  |     
|1999 - 13,084,665 shares issued and 12,648,658 outstanding)                        |  |      |   |          |  
|Additional paid-in capital - Class A Common stock                                  |  |      |   | 339       |  
|Retained earnings                                                                  |  |      |   | 384,694   |  
|Accumulated other comprehensive loss                                               |  |      |   | (14,373   | )
|Notes receivable from officers                                                     |  |      |   | (56       | )
|Treasury stock, at cost:                                                           |  |     
|Class A Common stock (2000 - 2,869,629 shares; 1999 - 1,665,426 shares)            |  |      |   | (52,772   | )
|Common stock (2000 - 0 shares; 1999 - 436,007 shares)                              |  |      |   |          |  
|                                                                                   | 
|Total shareholders' equity                                                         |  |      |   | 440,046   |  
|                                                                                   | 
|Total liabilities and shareholders' equity                                         |  |      | $ | 3,469,406 |  
|                                                                                   | 

See accompanying notes to the consolidated financial statements.

45

---

Consolidated Statements of Operations

|(in thousands, except per share data)                | 2000 |  | 1999 |         | 1998 |  
|---------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                    
|                                                     |      |  |      |         |      |  
|Revenues:                                            |      |  |      |         |      |  
|Net premiums written                                 |      |  | $    | 545,555 |      | $
|Change in net unearned premiums                      |      |  |      | (14,131 | )    |  
|                                                     |     
|Net premiums earned                                  |      |  |      | 531,424 |      |  
|Net investment income                                |      |  |      | 102,591 |      |  
|Net realized investment gains (losses)               |      |  |      | 11,975  |      |  
|Other revenues                                       |      |  |      | 14,000  |      |  
|                                                     |     
|Total revenues                                       |      |  |      | 659,990 |      |  
|                                                     |     
|                                                    
|Losses and Expenses:                                 |      | 
|Losses and loss adjustment expenses                  |      |  |      | 449,388 |      |  
|Acquisition expenses                                 |      |  |      | 112,654 |      |  
|Operating expenses                                   |      |  |      | 67,081  |      |  
|Dividends to policyholders                           |      |  |      | 18,855  |      |  
|Interest expense                                     |      |  |      | 11,889  |      |  
|                                                     |     
|Total losses and expenses                            |      |  |      | 659,867 |      |  
|                                                     |     
|Income before income taxes and cumulative            |      | 
|effect of accounting change                          |      |  |      | 123     |      |  
|Income tax expense (benefit)                         |      |  |      | (1,202  | )    |  
|                                                     |     
|Income before cumulative effect of accounting change |      |  |      | 1,325   |      |  
|Cumulative effect of accounting change               |      | 
|(net of income tax benefit of $1,485)                |      |  |      |        |      |  
|                                                     |     
|Net income                                           |      |  | $    | 1,325   |      | $
|                                                     |     
|                                                    
|Income per share:                                    |      | 
|Basic:                                               |      | 
|Income before cumulative effect of accounting change |      |  | $    | 0.06    |      | $
|Cumulative effect of accounting change               |      |  |      |        |      |  
|                                                     |     
|Net income                                           |      |  | $    | 0.06    |      | $
|                                                     |     
|Diluted:                                             |      | 
|Income before cumulative effect of accounting change |      |  | $    | 0.06    |      | $
|Cumulative effect of accounting change               |      |  |      |        |      |  
|                                                     |     
|Net income                                           |      |  | $    | 0.06    |      | $
|                                                     |     

See accompanying notes to the consolidated financial statements.

46

---

Consolidated Statements of Cash Flows

|(in thousands)                                                    | 2000 |  | 1999 |          | 1998 |  
|----------------------------------------------------------------- | ---- |  | ---- | -------- | ---- | -
|                                                                 
|                                                                  |      |  |      |          |      |  
|Cash flows from operating activities:                             |      |  |      |          |      |  
|Net income                                                        |      |  | $    | 1,325    |      | $
|Adjustments to reconcile net income to net cash flows             |      | 
|provided by (used in) operating activities:                       |      | 
|Deferred income tax expense (benefit)                             |      |  |      | (82      | )    |  
|Cumulative effect of accounting change                            |      |  |      |         |      |  
|Net realized investment (gains) losses                            |      |  |      | (11,975  | )    |  
|Change in:                                                        |      | 
|Premiums receivable and unearned premiums, net                    |      |  |      | (18,127  | )    |  
|Dividends to policyholders                                        |      |  |      | 3,464    |      |  
|Reinsurance receivables                                           |      |  |      | (275,725 | )    |  
|Unpaid losses and loss adjustment expenses                        |      |  |      | 120,537  |      |  
|Funds held, net                                                   |      |  |      | 24,596   |      |  
|Accrued investment income                                         |      |  |      | 1,866    |      |  
|Deferred acquisition costs                                        |      |  |      | 427      |      |  
|Accounts payable, accrued expenses and other         liabilities  |      |  |      | 96,667   |      |  
|Other, net                                                        |      |  |      | 1,988    |      |  
|                                                                  |     
|Net cash flows provided by (used in) operating activities         |      |  |      | (55,039  | )    |  
|                                                                  |     
|                                                                 
|Cash flows from investing activities:                             |      | 
|Fixed maturities available for sale:                              |      | 
|Purchases                                                         |      |  |      | (422,350 | )    |  
|Maturities or calls                                               |      |  |      | 121,814  |      |  
|Sales                                                             |      |  |      | 408,233  |      |  
|Equity securities:                                                |      | 
|Purchases                                                         |      |  |      | (24,706  | )    |  
|Sales                                                             |      |  |      | 78,182   |      |  
|Net (purchases) sales of short-term investments                   |      |  |      | (131,688 | )    |  
|Proceeds from sale of PMA Insurance, Cayman Ltd.                  |      |  |      |         |      |  
|Other, net                                                        |      |  |      | (29,522  | )    |  
|                                                                  |     
|Net cash flows provided by (used in) investing activities         |      |  |      | (37      | )    |  
|                                                                  |     
|                                                                 
|Cash flows from financing activities:                             |      | 
|Dividends paid to shareholders                                    |      |  |      | (8,020   | )    |  
|Proceeds from exercise of stock options                           |      |  |      | 2,866    |      |  
|Purchase of treasury stock                                        |      |  |      | (18,427  | )    |  
|Repayments of long-term debt                                      |      |  |      |         |      |  
|Net repayments (issuance) of notes receivable from       officers |      |  |      |         |      |  
|                                                                  |     
|Net cash flows used in financing activities                       |      |  |      | (23,581  | )    |  
|                                                                  |     
|                                                                 
|Net increase (decrease) in cash                                   |      |  |      | (78,657  | )    |  
|Cash - beginning of year                                          |      |  |      | 84,261   |      |  
|                                                                  |     
|Cash - end of year                                                |      |  | $    | 5,604    |      | $
|                                                                  |     
|                                                                 
|Supplementary cash flow information:                              |      | 
|Income tax paid (refunded)                                        |      |  | $    | 7,300    |      | $
|Interest paid                                                     |      |  | $    | 11,795   |      | $

See accompanying notes to the consolidated financial statements.

47

---

Consolidated Statements of Shareholders' Equity

|(in thousands)                                                        | 2000 |  | 1999 |         | 1998 |  
|--------------------------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                                     
|                                                                      |      |  |      |         |      |  
|Class A Common stock:                                                 |      |  |      |         |      |  
|Balance at beginning of year                                          |      |  | $    | 56,791  |      | $
|Conversion of Common stock into Class A Common stock                  |      |  |      | 65,423  |      |  
|                                                                      |     
|Balance at end of year                                                |      |  |      | 122,214 |      |  
|                                                                      |     
|                                                                     
|Common stock:                                                         |      | 
|Balance at beginning of year                                          |      |  |      | 65,423  |      |  
|Conversion of Common stock into Class A Common stock                  |      |  |      | (65,423 | )    |  
|                                                                      |     
|Balance at end of year                                                |      |  |      |        |      |  
|                                                                      |     
|                                                                     
|Additional paid-in capital - Class A Common stock:                    |      |  |      | 339     |      |  
|                                                                      |     
|                                                                     
|Retained earnings:                                                    |      | 
|Balance at beginning of year                                          |      |  |      | 391,981 |      |  
|Net income                                                            |      |  |      | 1,325   |      |  
|Class A Common stock dividends declared                               |      |  |      | (7,458  | )    |  
|Common stock dividends declared                                       |      |  |      | (922    | )    |  
|Reissuance of treasury shares under employee benefit plans            |      |  |      | (232    | )    |  
|                                                                      |     
|Balance at end of year                                                |      |  |      | 384,694 |      |  
|                                                                      |     
|                                                                     
|Accumulated other comprehensive income (loss):                        |      | 
|Balance at beginning of year                                          |      |  |      | (46,844 | )    |  
|Other comprehensive income (loss), net of tax (expense)      benefit: |      | 
|2000 - ($17,484); 1999 - $41,386; 1998 - ($6,036)                     |      |  |      | 32,471  |      |  
|                                                                      |     
|Balance at end of year                                                |      |  |      | (14,373 | )    |  
|                                                                      |     
|                                                                     
|Notes receivable from officers:                                       |      | 
|Balance at beginning of year                                          |      |  |      | (56     | )    |  
|Repayment (issuance) of notes receivable from officers                |      |  |      |        |      |  
|                                                                      |     
|Balance at end of year                                                |      |  |      | (56     | )    |  
|                                                                      |     
|                                                                     
|Treasury stock - Class A Common:                                      |      | 
|Balance at beginning of year                                          |      |  |      | (32,909 | )    |  
|Purchase of treasury shares                                           |      |  |      | (18,427 | )    |  
|Conversion of Common stock into Class A Common stock                  |      |  |      | (5,582  | )    |  
|Reissuance of treasury shares under employee benefit plans            |      |  |      | 4,146   |      |  
|                                                                      |     
|Balance at end of year                                                |      |  |      | (52,772 | )    |  
|                                                                      |     
|                                                                     
|Treasury stock - Common:                                              |      | 
|Balance at beginning of year                                          |      |  |      | (5,582  | )    |  
|Conversion of Common stock into Class A Common stock                  |      |  |      | 5,582   |      |  
|                                                                      |     
|Balance at end of year                                                |      |  |      |        |      |  
|                                                                      |     
|                                                                     
|Total shareholders' equity:                                           |      | 
|Balance at beginning of year                                          |      |  |      | 429,143 |      |  
|Net income                                                            |      |  |      | 1,325   |      |  
|Class A Common stock dividends declared                               |      |  |      | (7,458  | )    |  
|Common stock dividends declared                                       |      |  |      | (922    | )    |  
|Purchase of treasury shares                                           |      |  |      | (18,427 | )    |  
|Reissuance of treasury shares under employee benefit plans            |      |  |      | 3,914   |      |  
|Other comprehensive income (loss)                                     |      |  |      | 32,471  |      |  
|Repayment (issuance) of notes receivable from officers                |      |  |      |        |      |  
|                                                                      |     
|Balance at end of year                                                |      |  | $    | 440,046 |      | $
|                                                                      |     

See accompanying notes to the consolidated financial statements.

48

---

Consolidated Statements of Comprehensive Income (Loss)

|(in thousands)                                                       | 2000 |  | 1999 |        | 1998 |  
|-------------------------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|                                                                    
|                                                                     |      |  |      |        |      |  
|Net income                                                           |      |  | $    | 1,325  |      | $
|                                                                     |     
|Other comprehensive income (loss), net of tax:                       |      | 
|Unrealized gain (loss) on securities:                                |      | 
|Holding gain (loss) arising during the period                        |      |  |      | 40,095 |      |  
|Less: reclassification adjustment for (gains) losses included        |      | 
|in net income, net of tax expense (benefit): 2000 - $4,191;          |      | 
|1999 - ($2,711); 1998 - $7,611                                       |      |  |      | (7,784 | )    |  
|                                                                     |     
|                                                                    
|Total unrealized gain (loss) on securities                           |      |  |      | 32,311 |      |  
|Foreign currency translation gain, net of tax expense:    2000 - $87 |      |  |      | 160    |      |  
|                                                                     |     
|                                                                    
|Other comprehensive income (loss), net of tax                        |      |  |      | 32,471 |      |  
|                                                                     |     
|                                                                    
|Comprehensive income (loss)                                          |      |  | $    | 33,796 |      | $
|                                                                     |     

See accompanying notes to the consolidated financial statements.

49

---

Notes to Consolidated Financial Statements

|1. | BusinessDescription
|-- | -------------------

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

PMA Re -- PMA Capital's reinsurance operations conduct business mainly in
the brokered market offering excess of loss and pro rata property and casualty
reinsurance protection, with an emphasis on risk-exposed, excess of loss coverages. PMA
Re provides reinsurance coverages on either a traditional treaty or finite risk basis as
well as on a facultative basis.

The PMA Insurance Group -- PMA Capital's property and casualty insurance
subsidiaries include Pennsylvania domiciled insurance companies as well as certain
foreign subsidiaries. The PMA Insurance Group primarily writes workers' compensation,
integrated disability, and to a lesser extent, other standard lines of commercial
insurance, primarily in the Mid-Atlantic and Southern regions of the U.S. The majority of
The PMA Insurance Group's business is produced by independent agents and brokers.

Caliber One -- PMA Capital's specialty property and casualty operations
write excess and surplus lines of business nationally on a non-admitted basis through
surplus lines brokers and, to a lesser extent, managing general agents.

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

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

B. Investments -- Fixed maturities include U.S. Treasury securities and
obligations of U.S. Government agencies; obligations of states, political subdivisions
and foreign governments; corporate debt securities; and mortgage-backed and other
asset-backed securities. All fixed maturities are classified as available-for-sale and,
accordingly, are carried at fair value with changes in fair value, net of income tax
effects, reflected in accumulated other comprehensive income (loss). Equity securities
for all periods are stated at fair value with changes in fair value, net of income tax
effects, reflected in accumulated other comprehensive income (loss). Short-term
investments, which have original maturities of one year or less, are carried at cost,
which approximates fair value.

Realized gains and
losses, determined by specific identification where possible and the first-in, first-out
method in other instances, are reflected in income in the period in which the sale
transaction occurs.

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 and 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 all securities received as collateral are of similar quality
to those securities lent by the Company. The Company is not permitted by contract to sell
or repledge the securities received as collateral. Additionally, the Company limits
securities lending to 40% of statutory admitted assets of its insurance subsidiaries,
with a 2% limit on statutory admitted assets to any individual borrower. The Company
receives either 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. 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 (see
Note 2-K).

50

---

D. Unpaid Losses and Loss Adjustment Expenses -- Unpaid losses and loss
adjustment expenses, which are stated net of estimated salvage and subrogation, are
estimates of losses and loss adjustment expenses on known claims, and estimates of losses
and loss adjustment expenses incurred but not reported ("IBNR"). IBNR reserves are
calculated utilizing various actuarial methods. Unpaid losses on certain workers'
compensation claims are discounted to present value using the Company's payment
experience and mortality and interest assumptions in accordance with statutory accounting
practices prescribed or permitted by the Pennsylvania Insurance Department (collectively
"SAP"). The methods of making such estimates and establishing the resulting reserves are
continually reviewed and updated and any adjustments resulting therefrom are reflected in
earnings in the period identified (see Note 4).

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

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

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

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

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

J. Recent Accounting Pronouncements -- Effective January 1, 2000, the
Company adopted Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes certain interpretations of the staff of the
Securities and Exchange Commission regarding the application of GAAP to revenue
recognition in financial statements. The adoption of SAB No. 101 did not have a material
impact on the Company's financial condition, results of operations or liquidity.

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

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

51

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Notes to Consolidated Financial Statements (continued)

In September 2000, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities-a Replacement of FASB Statement No. 125." SFAS No. 140
is effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. SFAS No. 140 revises the standards for
securitizations and other transfers of financial assets and collateral and requires
certain disclosures, but carries over most of the provisions of SFAS No. 125 without
reconsideration. The Company's existing policies and practices for its securities lending
program are in conformity with SFAS No. 140, accordingly, the adoption of SFAS No. 140 is
not expected to have a material impact on the Company's financial condition, results of
operations or liquidity.

In June 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts (collectively
referred to as "derivatives") and for hedging activities. SFAS No. 133 requires an entity
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," which defers the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company
does not have any derivative instruments that are impacted by the accounting requirements
of SFAS No. 133 and the Company does not currently participate in any hedging activities.
Accordingly, the adoption of SFAS No. 133 is not expected to have a material impact on
the Company's financial condition, results of operations or liquidity.

K. Accrued Retrospective Premiums -- Accrued retrospective premiums are
based upon actuarial estimates of expected ultimate losses and resulting estimated
premium adjustments relating to retrospectively rated policies. The estimated ultimate
premium adjustments under retrospectively rated policies are recorded in the initial
accident year based upon estimated loss experience on the underlying policies and
adjusted in subsequent periods in conjunction with revisions of the underlying estimated
losses on such policies. The change in accrued retrospective premiums is a component of
net premiums written and net premiums earned.

The components of the
change in accrued retrospective premiums are as follows:

|(dollar amounts in thousands) | 2000 |  | 1999 |         | 1998 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                              |      |  |      |         |      |  
|Estimated retrospective       |      |  |      |         |      |  
|policy adjustments related    |      | 
|to current accident year      |      |  | $    | (26,771 | )    | $
|Revision of estimate of       |      | 
|retrospective policy          |      | 
|adjustments related to        |      | 
|prior accident years          |      |  |      | (9,138  | )    |  
|Retrospective policy          |      | 
|adjustments paid              |      |  |      | 17,409  |      |  
|Write-off of uncollectible    |      | 
|amounts                       |      |  |      |        |      |  
|                              |     
|Net decrease in accrued       |      | 
|retrospective premiums        |      |  | $    | (18,500 | )    | $
|                              |     

For 2000, 1999 and 1998, the net decrease in accrued retrospective
premiums of $18.5 million, $21.0 million and $3.0 million, respectively, primarily
reflects favorable development of claims liabilities at The PMA Insurance Group.
Management believes that it has made a reasonable estimate of the Company's accrued
retrospective premiums. While the ultimate amount receivable may differ from the current
estimates, management does not believe that the difference will have a material effect on
the Company's financial condition, results of operations or liquidity.

52

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

The Company's investment portfolio is diversified and contains no
significant concentrations in any specific industry, business segment or individual
issuer (other than U.S. Treasury and agency obligations). The amortized cost and fair
value of the Company's investment portfolio are as follows:

|(dollar amounts in thousands)                                         |  | AmortizedCost |   | GrossUnrealizedGains |  | GrossUnrealizedLosses |        | FairValue |  
|--------------------------------------------------------------------- |  | ------------- | - | -------------------- |  | --------------------- | ------ | --------- | -
|                                                                     
|                                                                     
|December 31, 2000                                                     |  |               |   |                      |  |                       |        |           |  
|Fixed maturities available for sale:                                  |  |              
|U.S. Treasury securities and obligations                              |  |              
|of U.S. Government agencies                                           |  |               | $ | 349,112              |  | $                     | 7,433  |           | $
|States, political subdivisions and foreign government      securities |  |               |   | 28,784               |  |                       | 103    |           |  
|Corporate debt securities                                             |  |               |   | 528,753              |  |                       | 3,612  |           |  
|Mortgage-backed and other asset-backed securities                     |  |               |   | 601,018              |  |                       | 6,324  |           |  
|                                                                      | 
|Total fixed maturities available for sale                             |  |               |   | 1,507,667            |  |                       | 17,472 |           |  
|Short-term investments                                                |  |               |   | 341,641              |  |                       |       |           |  
|                                                                      | 
|Total investments                                                     |  |               | $ | 1,849,308            |  | $                     | 17,472 |           | $
|                                                                      | 
|                                                                     
|December 31, 1999                                                     |  |              
|Fixed maturities available for sale:                                  |  |              
|U.S. Treasury securities and obligations                              |  |              
|of U.S. Government agencies                                           |  |               | $ | 438,412              |  | $                     | 841    |           | $
|States, political subdivisions and foreign government      securities |  |               |   | 32,164               |  |                       | 18     |           |  
|Corporate debt securities                                             |  |               |   | 580,710              |  |                       | 380    |           |  
|Mortgage-backed and other asset-backed securities                     |  |               |   | 597,608              |  |                       | 204    |           |  
|                                                                      | 
|Total fixed maturities available for sale                             |  |               |   | 1,648,894            |  |                       | 1,443  |           |  
|Equity securities                                                     |  |               |   | 37,779               |  |                       | 614    |           |  
|Short-term investments                                                |  |               |   | 303,429              |  |                       |       |           |  
|                                                                      | 
|Total investments                                                     |  |               | $ | 1,990,102            |  | $                     | 2,057  |           | $
|                                                                      | 

53

---

Notes to Consolidated Financial Statements (continued)

The amortized cost and fair value of fixed maturities at December 31,
2000, by contractual maturity, are as follows:

|(dollar amounts in thousands) |  | AmortizedCost |   | FairValue | 
|----------------------------- |  | ------------- | - | --------- | 
|                             
|                             
|2001                          |  |               | $ | 131,965   | 
|2002-2005                     |  |               |   | 287,969   | 
|2006-2010                     |  |               |   | 174,890   | 
|2011 and thereafter           |  |               |   | 311,825   | 
|Mortgage-backed and other     |  |              
|asset-backed securities       |  |               |   | 601,018   | 
|                              | 
|                              |  |               | $ | 1,507,667 | 
|                              | 

Net investment income consists of the following:

|(dollar amounts in thousands) | 2000 |  | 1999 |         | 1998 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                              |      |  |      |         |      |  
|Fixed maturities              |      |  | $    | 103,490 |      | $
|Equity securities             |      |  |      | 716     |      |  
|Short-term investments        |      |  |      | 8,513   |      |  
|Other                         |      |  |      | 3,002   |      |  
|                              |     
|Total investment income       |      |  |      | 115,721 |      |  
|Investment expenses(1)        |      |  |      | 13,130  |      |  
|                              |     
|Net investment income         |      |  | $    | 102,591 |      | $
|                              |     

(1) Includes $10.6 million of interest credited on funds held treaties in
2000.

The Company recognized income from securities lending transactions of
$600,000, $1.3 million and $1.0 million in 2000, 1999 and 1998, respectively, net of
lending fees, which was included in net investment income. At December 31, 2000, the
Company had approximately $148.1 million of collateral related to securities on loan of
which $145.3 million was cash received and subsequently reinvested in short-term
investments.

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

|(dollar amounts in thousands) | 2000 |  | 1999 |        | 1998 |  
|----------------------------- | ---- |  | ---- | ------ | ---- | -
|                             
|                              |      |  |      |        |      |  
|Realized gains:               |      |  |      |        |      |  
|Fixed maturities              |      |  | $    | 3,423  |      | $
|Equity securities             |      |  |      | 15,698 |      |  
|                              |     
|                              |      |  |      | 19,121 |      |  
|Realized losses:              |      | 
|Fixed maturities              |      |  |      | (7,146 | )    |  
|Equity securities             |      |  |      |       |      |  
|                              |     
|                              |      |  |      | (7,146 | )    |  
|Other net realized losses     |      |  |      |       |      |  
|                              |     
|Total net realized            |      | 
|investment gains (losses)     |      |  | $    | 11,975 |      | $
|                              |     

The change in unrealized appreciation (depreciation) of investments for
2000, 1999 and 1998 was $49.7 million, ($118.2) million and $17.2 million, respectively,
primarily attributable to fixed maturities.

On December 31, 2000, the
Company had securities with a total amortized cost of $34.1 million and fair value of
$34.5 million on deposit with various governmental authorities, as required by law. In
addition, at December 31, 2000, securities with a total amortized cost of $73.2 million
and fair value of $73.5 million, were pledged as collateral for letters of credit issued
on behalf of the Company.

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

Activity in the liability for unpaid losses and loss adjustment expenses
("LAE") is summarized as follows:

|(dollar amounts in thousands) | 2000 |  | 1999 |           | 1998 |  
|----------------------------- | ---- |  | ---- | --------- | ---- | -
|                             
|                              |      |  |      |           |      |  
|Balance at January 1          |      |  | $    | 1,932,601 |      | $
|Less: reinsurance             |      | 
|recoverable on unpaid         |      | 
|losses and LAE                |      |  |      | 648,227   |      |  
|                              |     
|Net balance at January 1      |      |  |      | 1,284,374 |      |  
|                              |     
|Losses and LAE                |      | 
|incurred, net:                |      | 
|Current year, net             |      | 
|of discount                   |      |  |      | 432,767   |      |  
|Prior years                   |      |  |      | 6,491     |      |  
|Accretion of prior            |      | 
|years' discount               |      |  |      | 10,130    |      |  
|                              |     
|Total losses and LAE          |      | 
|incurred, net                 |      |  |      | 449,388   |      |  
|                              |     
|Losses and LAE paid, net:     |      | 
|Current year                  |      |  |      | (110,188  | )    |  
|Prior years                   |      |  |      | (445,865  | )    |  
|                              |     
|Total losses and LAE          |      | 
|paid, net                     |      |  |      | (556,053  | )    |  
|                              |     
|Reserves transferred          |      |  |      | (49,000   | )    |  
|                              |     
|Net balance at                |      | 
|December 31                   |      |  |      | 1,128,709 |      |  
|Reinsurance recoverable       |      | 
|on unpaid losses              |      | 
|and LAE                       |      |  |      | 924,429   |      |  
|                              |     
|Balance at December 31        |      |  | $    | 2,053,138 |      | $
|                              |     

54

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Unpaid losses and LAE reflect management's best estimate of future
amounts needed to pay claims and related settlement costs with respect to insured events
which have occurred, including events that have not been reported to the Company. In many
cases, significant periods of time, ranging up to several years or more, may elapse
between the occurrence of an insured loss, the reporting of the loss to the Company and
the Company's payment of that loss. In general, liabilities for reinsurers become known
more slowly than for primary insurers and are subject to more unforeseen development and
uncertainty. As part of the process in determining these amounts, historical data is
reviewed and consideration is given to the impact of various factors, such as legal
developments, changes in social attitudes and economic conditions.

The Company's results of
operations included an increase in estimated incurred losses and LAE related to prior
accident years ("unfavorable prior year development") of $6.5 million in 2000 and a
decrease in estimated incurred losses and LAE related to prior accident years ("favorable
prior year development") of $32.5 million and $46.5 million in 1999 and 1998,
respectively.

In the third quarter of
2000, PMA Re's actuarial department conducted its routine semi-annual reserve study to
determine the impact of any emerging data on anticipated loss development trends and
recorded unpaid losses and LAE reserves. Based on the actuarial work performed, which
included analyzing recent trends in the levels of the reported and paid claims, an
updated selection of actuarially determined loss reserve estimates was developed by
accident year for each major line of business written by PMA Re. Management's selection
of the ultimate losses indicated that gross loss reserves at September 30, 2000 needed to
be increased by $83.2 million. Under existing retrocessional contracts, $60.0 million of
gross losses were ceded to PMA Re's retrocessionaires, resulting in an impact on net
incurred losses and LAE of $23.2 million. The increase in incurred losses and LAE,
combined with $35.0 million of ceded premiums and interest on funds held under existing
retrocessional contracts covering the ceded losses, resulted in a pre-tax charge of
approximately $60 million to PMA Re's operating results in 2000.

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

During 1999 and 1998, PMA
Re recorded favorable prior year development of $23.5 million and $31.5 million,
respectively. The favorable reserve development reflects development on prior accident
years due to re-estimated loss trends for such years that were lower than previous
expectations. This is largely due to favorable development on casualty excess of loss
business.

The PMA Insurance Group
experienced $6.1 million, $9.0 million and $15.0 million of favorable prior year
development in 2000, 1999 and 1998, respectively. The favorable prior year development in
2000 and 1999 primarily reflects better than expected loss experience from loss-sensitive
and rent-a-captive workers' compensation business. Premium adjustments for loss-sensitive
business and policyholders' dividends for rent-a-captive business have substantially
offset this favorable development. Rent-a-captives are used by customers as an
alternative method to manage their loss exposure without establishing and capitalizing
their own captive insurance company. The favorable prior year development during 1998
primarily relates to formal commutation programs, which resulted in early liability
settlements made during 1998 to reduce future claim payments. Adjustments to premiums for
retrospectively rated business and dividends on captive workers' compensation business of
$6.1 million, $8.4 million and $4.5 million partially offset favorable prior year
development in 2000, 1999 and 1998, respectively.

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

Reserves transferred in
2000 reflect the assumption of liability of The PMA Insurance Group's Run-off operations
by an unaffiliated third party. Reserves transferred in 1998 reflect reserves transferred
upon the sale of a subsidiary (see Note 18).

55

---

Notes to Consolidated Financial Statements (continued)

Unpaid losses for the
Company's workers' compensation claims, net of reinsurance, at December 31, 2000 and 1999
were $341.8 million and $527.9 million, net of discount of $88.4 million and $173.1
million, respectively. The approximate discount rate used was 5% at December 31, 2000 and
1999.

The Company's loss
reserves were stated net of salvage and subrogation of approximately $41.8 million and
$43.8 million at December 31, 2000 and 1999, respectively.

Management believes that
its unpaid losses and LAE are fairly stated at December 31, 2000. However, estimating the
ultimate claims liability is necessarily a complex and judgmental process inasmuch as the
amounts are based on management's informed estimates and judgments using data currently
available. As additional experience and data become available regarding claims payment
and reporting patterns, legislative developments, regulatory trends on benefit levels for
both medical and indemnity payments, 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, 2000, the related adjustments
could have a material adverse effect on the Company's financial condition, results of
operations and liquidity.

The Company's
asbestos-related liabilities included in unpaid losses and LAE were as follows:

|(dollar amounts in thousands) | 2000 |  | 1999 |         | 1998 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                              |      |  |      |         |      |  
|Gross of reinsurance:         |      |  |      |         |      |  
|Beginning reserves            |      |  | $    | 61,277  |      | $
|Incurred losses and LAE       |      |  |      | 1,640   |      |  
|Paid losses and LAE           |      |  |      | (13,724 | )    |  
|                              |     
|Ending reserves               |      |  | $    | 49,193  |      | $
|                              |     
|Net of reinsurance:           |      | 
|Beginning reserves            |      |  | $    | 38,851  |      | $
|Incurred losses and LAE       |      |  |      | (341    | )    |  
|Paid losses and LAE           |      |  |      | (6,467  | )    |  
|                              |     
|Ending reserves               |      |  | $    | 32,043  |      | $
|                              |     

The Company's environmental-related liabilities included in unpaid losses
and LAE were as follows:

|(dollar amounts in thousands) | 2000 |  | 1999 |        | 1998 |  
|----------------------------- | ---- |  | ---- | ------ | ---- | -
|                             
|                              |      |  |      |        |      |  
|Gross of reinsurance:         |      |  |      |        |      |  
|Beginning reserves            |      |  | $    | 41,359 |      | $
|Incurred losses and LAE       |      |  |      | (7,848 | )    |  
|Paid losses and LAE           |      |  |      | (4,028 | )    |  
|                              |     
|Ending reserves               |      |  | $    | 29,483 |      | $
|                              |     
|Net of reinsurance:           |      | 
|Beginning reserves            |      |  | $    | 24,522 |      | $
|Incurred losses and LAE       |      |  |      | (3,212 | )    |  
|Paid losses and LAE           |      |  |      | (3,290 | )    |  
|                              |     
|Ending reserves               |      |  | $    | 18,020 |      | $
|                              |     

Of the total net asbestos reserves, approximately $27.2 million, $32.0
million and $34.2 million related to IBNR losses at December 31, 2000, 1999 and 1998,
respectively. Of the total net environmental reserves, approximately $9.2 million, $18.0
million and $20.3 million related to IBNR losses at December 31, 2000, 1999 and 1998,
respectively. All incurred asbestos and environmental losses were for accident years 1986
and prior.

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

56

---

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

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

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

|(dollar amounts in thousands) | 2000 |  | 1999 |          | 1998 |  
|----------------------------- | ---- |  | ---- | -------- | ---- | -
|                             
|                              |      |  |      |          |      |  
|Earned premiums:              |      |  |      |          |      |  
|Direct                        |      |  | $    | 416,152  |      | $
|Assumed                       |      |  |      | 393,828  |      |  
|Ceded                         |      |  |      | (278,556 | )    |  
|                              |     
|Net                           |      |  | $    | 531,424  |      | $
|                              |     
|Losses and LAE incurred:      |      | 
|Direct                        |      |  | $    | 368,424  |      | $
|Assumed                       |      |  |      | 389,724  |      |  
|Ceded                         |      |  |      | (308,760 | )    |  
|                              |     
|Net                           |      |  | $    | 449,388  |      | $
|                              |     

At December 31, 2000, 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                | $334,297
|United States Fidelity and Guaranty Company | 116,216 
|Houston Casualty Company                    | 65,058  
|Underwriters Reinsurance Company            | 52,832  
|Mountain Ridge Insurance Company            | 35,036  
|American Reinsurance Corporation            | 31,034  
|GE Reinsurance Corporation                  | 24,286  
|SCOR Reinsurance Company                    | 23,253  

The Company performs credit reviews of its reinsurers focusing on, among
other things, financial capacity, stability, trends and commitment to the reinsurance
business. Prospective and existing reinsurers failing to meet the Company's standards are
excluded from the Company's reinsurance programs. In addition, the Company requires
collateral, typically assets in trust, letters of credit or funds withheld, to support
balances due from certain reinsurers, consisting generally of those not authorized to
transact business in the applicable jurisdictions. At December 31, 2000 and 1999, the
Company's reinsurance receivables were supported by $553.6 million and $357.2 million of
collateral. The Company believes that the amounts receivable from reinsurers are fully
collectible and that the allowance for uncollectible items is adequate to cover any
disputes about amounts owed by reinsurers to the Company.

|6. | Long-Term Debt
|-- | --------------

At December 31, 2000 and 1999, the Company had $163.0 million outstanding
under its existing Revolving Credit Facility ("Credit Facility"). Under the terms of the
Credit Facility, the Company repaid $38.0 million on January 2, 2001 thereby reducing the
outstanding debt to $125.0 million, which is the maximum amount PMA Capital can borrow
under the Credit Facility. The $125.0 million matures as follows: $62.5 million on
December 31, 2001 and $62.5 million on December 31, 2002.

The Credit Facility bears
interest at the London InterBank Offered Rate ("LIBOR") plus 0.375% on the utilized
portion and carries a 0.225% facility fee. The spread over LIBOR and the facility fee are
adjustable downward in the future based upon the Company's debt-to-capitalization ratios.
As of December 31, 2000, the interest rate on the utilized portion of the Credit Facility
was 7.73%.

The Company has a letter
of credit agreement with a group of banks (the "Letter of Credit Agreement"). At December
31, 2000 and 1999, the aggregate outstanding face amount of letters of credit issued was
$40.1 million and $45.9 million, respectively. The Letter of Credit Agreement primarily
secures reinsurance liabilities of the insurance subsidiaries of the Company. At December
31, 2000, the commitment fee was 0.15% per annum.

The debt covenants
supporting the Credit Facility and the Letter of Credit Agreement contain provisions
that, among other matters, limit the Company's ability to incur additional indebtedness,
merge, consolidate and acquire or sell assets. The debt covenants also require the
Company to satisfy certain ratios related to net worth, debt-to-capitalization and
interest coverage. Additionally, the debt covenants place restrictions on dividends to
shareholders (see Note 14).

57

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Notes to Consolidated Financial Statements (continued)

|7. | Stock Options
|-- | -------------

The Company currently has stock option plans in place for stock options
granted to officers and other key employees for the purchase of the Company's Class A
Common stock, under which 3,565,992 Class A Common shares were reserved for issuance at
December 31, 2000. The stock options are granted under terms and conditions determined by
the Stock Option Committee of the Board of Directors. Stock options granted have a
maximum term of ten years, generally vest over periods ranging between zero and five
years, and are typically granted with an exercise price at least equal to the fair market
value of the Class A Common stock on the date the options are granted. Information
regarding these option plans is as follows:

|                                           |  | 2000   |  | 1999                 |   | 1998   |                
|------------------------------------------ |  | ------ |  | -------------------- | - | ------ | ---------------
|                                           | 
|                                           |  | Shares |  | WeightedAveragePrice |   | Shares |                
|                                          
|                                          
|Options outstanding, beginning of year     |  |        |  | 3,320,556            |   | $      | 15.40          
|Options granted                            |  |        |  | 411,000              |   |        | 21.50          
|Options exercised                          |  |        |  | (221,905             | ) |        | 13.02          
|Options forfeited or expired               |  |        |  | (65,625              | ) |        | 18.84          
|                                           | 
|Options outstanding, end of year(1)        |  |        |  | 3,444,026            |   | $      | 16.22          
|                                           | 
|Options exercisable, end of year           |  |        |  | 2,102,509            |   | $      | 14.38          
|                                           | 
|Option price range at end of year          |  |        |  | $8.00 to $21.50      |   |        | $8.00 to $20.44
|Option price range for exercised shares    |  |        |  | $8.00 to $17.00      |   |        | $8.00 to $17.00
|Options available for grant at end of year |  |        |  | 121,966              |   |        | 467,341        

|(1) |  | Included
in the options outstanding at the end of 2000, 1999 and 1998 are 420,000 options ("Target
Price Options") with an exercise price of $17.00, which become exercisable based on the
Company's Class A Common stock achieving certain target prices, with one-half of those
options becoming exercisable at $28.00 and the remaining one-half becoming exercisable at
$32.00. In 1998, the Company recorded approximately $1 million in compensation expense
related to such options. In 2000, the Company reduced the accrual for such options by
approximately $1 million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2000, all options were granted with an exercise price that exceeded
the market value on the grant date ("out-of-the-money"), and such options had a weighted
average exercise price of $21.50 and a fair value of $7.16 per share. In 1999, all
options were granted out-of-the-money, and such options had a weighted average exercise
price of $19.53 per share and a fair value of $9.61 per share. Of the total options
granted in 1998, 96% were granted out-of-the-money at an exercise price of $17.03 per
share and a weighted average fair value of $3.65 per share. The remaining 4% were granted
with an exercise price that was lower than the market value on the grant date, and such
options had a weighted average exercise price of $19.00 per share and a weighted average
fair value of $7.59 per share.

Information regarding stock options outstanding and options exercisable
at December 31, 2000 is as follows:

|                 |  | Options Outstanding |  | Options Exercisable          | 
|---------------- |  | ------------------- |  | ---------------------------- | 
|                 |  |                     |  |                             
|Exercise Prices  |  | Numberof Shares     |  | WeightedAverageRemainingLife | 
|                
|                
|$8.00 to $11.00  |  | 219,261             |  | 1.31                         | 
|$11.01 to $14.00 |  | 629,600             |  | 2.81                         | 
|$14.01 to $17.00 |  | 1,754,665           |  | 4.90                         | 
|$17.01 to $21.50 |  | 840,500             |  | 8.57                         | 

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

|                        | 2000 | 1999 | 1998
|----------------------- | ---- | ---- | ----
|                       
|                       
|Expected life (years)   | 10   | 10   | 7.5 
|Risk-free interest rate | 6.5% | 4.9% | 5.5%
|Expected volatility     | 17%  | 17%  | 26% 
|Expected dividend yield | 2.4% | 2.0% | 1.9%

58

---

The Company has adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, compensation cost that was
recognized in 2000, 1999 and 1998 for stock options, other than Target Price Options, was
not significant. Had compensation costs for the Company's stock option plans been
determined based on the fair value at the grant date for awards granted during the year,
the Company's pre-tax income would have been reduced by $2.9 million, $4.1 million and
$3.2 million in 2000, 1999 and 1998, respectively. After-tax income would have been
reduced by $1.9 million, $2.7 million and $2.1 million or $0.09, $0.12 and $0.09 per
basic share and $0.09, $0.11 and $0.08 per diluted share in 2000, 1999 and 1998,
respectively.

|8. | Income Taxes
|-- | ------------

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

|(dollar amounts in thousands) | 2000 |  | 1999 |        | 1998 |  
|----------------------------- | ---- |  | ---- | ------ | ---- | -
|                             
|                              |      |  |      |        |      |  
|Current                       |      |  | $    | (1,120 | )    | $
|Deferred                      |      |  |      | (82    | )    |  
|                              |     
|Income tax expense (benefit)  |      |  | $    | (1,202 | )    | $
|                              |     

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

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) | 2000 |  | 1999 |        | 1998 |  
|----------------------------- | ---- |  | ---- | ------ | ---- | -
|                             
|                              |      |  |      |        |      |  
|Computed at the statutory     |      |  |      |        |      |  
|Federal income tax rate       |      |  | $    | 43     |      | $
|Increase (decrease) in        |      | 
|taxes resulting from:         |      | 
|Reversal of income            |      | 
|tax accruals                  |      |  |      | (1,362 | )    |  
|Other                         |      |  |      | 117    |      |  
|                              |     
|Income tax expense (benefit)  |      |  | $    | (1,202 | )    | $
|                              |     

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)           |  | 2000 |   | 1999    |  
|--------------------------------------- |  | ---- | - | ------- | -
|                                       
|                                       
|Discounting of unpaid losses and LAE    |  |      | $ | 60,762  |  
|Unrealized depreciation of investments  |  |      |   | 7,741   |  
|Tax credit carryforwards                |  |      |   | 22,357  |  
|Unearned premiums                       |  |      |   | 16,060  |  
|Allowance for uncollectible accounts    |  |      |   | 6,297   |  
|Postretirement benefit obligation       |  |      |   | 5,031   |  
|Other                                   |  |      |   | 12,865  |  
|                                        | 
|Gross deferred tax asset                |  |      |   | 131,113 |  
|                                        | 
|Deferred acquisition costs              |  |      |   | (16,982 | )
|Losses of foreign reinsurance affiliate |  |      |   | (20,970 | )
|Other                                   |  |      |   | (4,150  | )
|                                        | 
|Gross deferred tax liability            |  |      |   | (42,102 | )
|                                        | 
|Net deferred tax asset                  |  |      | $ | 89,011  |  
|                                        | 

At December 31, 2000, the Company had $3.8 million of net operating loss
carryforwards, which will expire in 2012, and $20.5 million of alternative minimum tax
credit carryforwards, which do not expire.

Management believes that
it is more likely than not that the benefit of its deferred tax asset will be fully
realized, and therefore has not recorded a valuation allowance.

The Company's Federal
income tax returns are subject to audit by the Internal Revenue Service ("IRS"), and
provisions are made in the financial statements in anticipation of the results of these
audits. The Company's 1996 Federal income tax return is currently under examination by
the IRS. In 1998, the IRS completed their examination of the 1994 and 1995 U.S. Federal
tax returns. In management's opinion, adequate liabilities have been established for all
years.

In December 1998, the
Company received a refund from the IRS of approximately $15 million. The refund relates
to a claim for refund filed by the Company with regard to its 1992 income tax return.

59

---

Notes to Consolidated Financial Statements (continued)

|9. | Employee Retirement,Postretirement andPostemployment Benefits
|-- | -------------------------------------------------------------

A. Pension and Other Postretirement Benefits:

Pension Benefits -- The Company sponsors a qualified non-contributory
defined benefit pension plan (the "Qualified Pension Plan") covering substantially all
employees. After meeting certain qualifications, an employee acquires a vested right to
future benefits. The benefits payable under the plan are generally determined on the
basis of an employee's length of employment and modified career average salary. 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 $4.4 million and $4.0
million, respectively, as of December 31, 2000.

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 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. Retirees will absorb future increases in medical premiums. The Company also
provides Medicare Part B reimbursement for certain retirees as well as retiree life
insurance.

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

|                                               |  | Pension Benefits |   | Other Postretirement Benefits |  
|---------------------------------------------- |  | ---------------- | - | ----------------------------- | -
|                                               |  |                  |   |                              
|(dollar amounts in thousands)                  |  | 2000             |   | 1999                          |  
|                                              
|                                              
|Change in benefit obligation:                  |  |                  |   |                               |  
|Benefit obligation at beginning of year        |  |                  | $ | 46,882                        |  
|Service cost                                   |  |                  |   | 1,408                         |  
|Interest cost                                  |  |                  |   | 3,686                         |  
|Actuarial (gain) loss                          |  |                  |   | 2,026                         |  
|Benefits paid                                  |  |                  |   | (2,224                        | )
|Plan amendments and other                      |  |                  |   | (80                           | )
|                                               | 
|Benefit obligation at end of year              |  |                  | $ | 51,698                        |  
|                                               | 
|                                              
|Change in plan assets:                         |  |                 
|Fair value of plan assets at beginning of year |  |                  | $ | 49,227                        |  
|Actual return on plan assets                   |  |                  |   | (3,106                        | )
|Employer contributions                         |  |                  |   | 1,650                         |  
|Benefits paid                                  |  |                  |   | (2,224                        | )
|Other                                          |  |                  |   | (107                          | )
|                                               | 
|Fair value of plan assets at end of year       |  |                  | $ | 45,440                        |  
|                                               | 
|                                              
|Benefit obligation (greater) less than the     |  |                 
|fair value of plan assets                      |  |                  | $ | (6,258                        | )
|                                              
|Unrecognized actuarial (gain) loss             |  |                  |   | 4,879                         |  
|Unrecognized prior service (cost) benefit      |  |                  |   | 502                           |  
|Unrecognized net transition obligation         |  |                  |   | 325                           |  
|                                               | 
|Accrued benefit at end of year                 |  |                  | $ | (552                          | )
|                                               | 

60

---

|                                         |  | Pension Benefits |   | Other Postretirement Benefits |  
|---------------------------------------- |  | ---------------- | - | ----------------------------- | -
|                                         |  |                  |   |                              
|(dollar amounts in thousands)            |  | 2000             |   | 1999                          |  
|                                        
|                                        
|Components of net periodic benefit cost: |  |                  |   |                               |  
|Service cost                             |  |                  | $ | 1,408                         |  
|Interest cost                            |  |                  |   | 3,686                         |  
|Expected return on plan assets           |  |                  |   | (4,375                        | )
|Amortization of transition obligation    |  |                  |   | (4                            | )
|Amortization of prior service cost       |  |                  |   | 5                             |  
|Recognized actuarial (gain) loss         |  |                  |   | (34                           | )
|                                         | 
|Net periodic benefit cost                |  |                  | $ | 686                           |  
|                                         | 
|                                        
|Weighted average assumptions:            |  |                 
|Discount rate                            |  |                  |   | 7.50%                         |  
|Expected return on plan assets           |  |                  |   | 9.00%                         |  
|Rate of compensation increase            |  |                  |   | 4.75%                         |  

For the measurement of Other Postretirement Benefits, a 6.1% annual rate
of increase in the per capita cost of covered health care benefits was assumed for 2000.
The rate was assumed to decrease gradually to 5.50% for 2002 and remain at that level
thereafter. A one percentage point change in assumed health care cost trend rates would
have an immaterial impact on the total service and interest cost components of the net
periodic benefit cost and the postretirement benefit obligation.

Qualified Pension Plan
assets consist of equity securities and fixed maturity securities.

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 2000, 1999 and 1998 were $2.6 million, $2.3 million and $2.0 million,
respectively.

C. Postemployment Benefits -- The Company provides certain benefits to
employees subsequent to their employment, but prior to retirement including severance,
long-term and short-term disability payments, salary continuation, postemployment health
benefits, supplemental unemployment benefits and other related payments. 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.

|10. | Fair Value of FinancialInstruments
|--- | ----------------------------------

As of December 31, 2000, the carrying amounts for the Company's financial
instruments approximated their estimated fair value. As of December 31, 1999, the
carrying amounts for the Company's financial instruments approximated their estimated
fair value, except for interest rate swaps which had a carrying value of zero and a fair
value of $305,000. The Company measures the fair value of fixed maturities and interest
rate swaps based upon quoted market prices or by obtaining quotes from dealers. The fair
value of long-term debt is estimated using discounted cash flow calculations based upon
the Company's current incremental borrowing rate for similar types of borrowing
facilities or the rate utilized to prepay obligations, where applicable. For other
financial instruments, the carrying values approximate their fair values. Certain
financial instruments, specifically amounts relating to insurance contracts, are excluded
from this disclosure.

|11. | Transactions with Related Parties
|--- | ---------------------------------

The Company's largest shareholder is PMA Foundation (the "Foundation"), a
not-for-profit corporation qualified under Section 501(c)(6) of the Internal Revenue
Code, whose purposes include the promotion of the common business interests of its
members and the economic prosperity of the Commonwealth of Pennsylvania. As of December
31, 2000, the Foundation owned 5,473,450 shares, or 25.4%, of the Company's Class A
Common

61

---

Notes to Consolidated Financial Statements (continued)

stock. All but one member of the Company's Board of Directors currently
serve as members of the Foundation's Board of Trustees. Also, Frederick W. Anton III,
Chairman of the Company, serves as President and Chief Executive Officer of the
Foundation. The Company and certain of its subsidiaries provide certain administrative
services to the Foundation for which the Company and its subsidiaries receive
reimbursement. Total reimbursements amounted to $13,000, $13,000 and $14,000 for the
years ended December 31, 2000, 1999 and 1998, respectively. The Foundation also leases
its Harrisburg, Pennsylvania headquarters facility from a subsidiary of the Company under
an operating lease presently requiring rent payments of $25,000 per month, and reimburses
a subsidiary of the Company for its use of office space in the Blue Bell, Pennsylvania
facility. Rent and related reimbursements paid to the Company's affiliates by the
Foundation amounted to $304,000, $304,000 and $262,000 for the years ended December 31,
2000, 1999 and 1998, respectively.

The Company incurred
legal and consulting expenses aggregating approximately $5.3 million, $5.3 million and
$6.5 million in 2000, 1999 and 1998, respectively, from firms in which directors of the
Company are partners or principals.

At both December 31, 2000
and 1999, the Company had notes receivable from officers totalling $56,000 that are
accounted for as a reduction of shareholders' equity. The interest rates on the notes
range from 6% to 8%.

The Company has arranged
an executive loan program with a financial institution. The institution provides personal
demand loans to officers of the Company at a floating interest rate equal to the
financial institution's prime rate minus 1/2%. Such loans are collateralized by Class A
Common stock beneficially owned by the officer and a Company treasury security. The
Company has agreed to purchase any loan made to an officer (including accrued interest
and related expenses) from the financial institution in the event that the borrower
defaults on the loan. The amount of loans outstanding to current employees as of December
31, 2000 under this program was $2.7 million.

|12. | Commitments and Contingencies
|--- | -----------------------------

For the years ended December 31, 2000, 1999 and 1998, total rent expense
was $3.4 million, $2.7 million and $2.6 million, respectively. At December 31, 2000, the
Company was obligated under noncancelable operating leases for office space with
aggregate minimum annual rentals of $4.0 million in 2001, $4.9 million in 2002, $4.9
million in 2003, $4.5 million in 2004 and $15.6 million thereafter.

In the event a property
and casualty insurer operating in a jurisdiction where the Company's insurance
subsidiaries also operate becomes or is declared insolvent, state insurance regulations
provide for the assessment of other insurers to fund any capital deficiency of the
insolvent insurer. Generally, this assessment is based upon the ratio of an insurer's
voluntary premiums written to the total premiums written for all insurers in that
particular jurisdiction (see Note 2-J regarding SOP 97-3).

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

The Company is
continuously involved in numerous lawsuits arising, for the most part, in the ordinary
course of business, either as a liability insurer defending third party claims brought
against its insureds, or as an insurer defending coverage claims brought against it by
its policyholders or other insurers. While the outcome of all litigation involving the
Company, including insurance-related litigation, cannot be determined, litigation is not
expected to result in losses that differ from recorded reserves by amounts that would be
material to the Company's financial condition, results of operations or liquidity. In
addition, reinsurance recoveries related to claims in litigation, net of the allowance
for uncollectible reinsurance, are not expected to result in recoveries that differ from
recorded receivables by amounts that would be material to the Company's financial
condition, results of operations or liquidity.

|13. | Cost ReductionInitiatives
|--- | -------------------------

During 1997, the Company recorded a $7.0 million pre-tax charge ($4.6
million after-tax) in operating expenses for costs associated with nonvoluntary
terminations of approximately 60 employees in various operational and management
positions. As of December 31, 2000, approximately $2.6 million of such charges remained
in accounts payable, accrued expenses and other liabilities on the balance sheet.

62

---

|14. | Shareholders'Equity
|--- | -------------------

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

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

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

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

|                                                           | 2000 |  | 1999 |             | 1998 | 
|---------------------------------------------------------- | ---- |  | ---- | ----------- | ---- | 
|                                                          
|                                                           |      |  |      |             |      | 
|Class A Common stock:                                      |      |  |      |             |      | 
|Balance at beginning of year                               |      |  |      | 11,358,280  |      | 
|Conversion of Common stock into Class A Common stock       |      |  |      | 13,084,665  |      | 
|                                                           |     
|Balance at end of year                                     |      |  |      | 24,442,945  |      | 
|                                                           |     
|Common stock:                                              |      | 
|Balance at beginning of year                               |      |  |      | 13,084,665  |      | 
|Conversion of Common stock into Class A Common stock       |      |  |      | (13,084,665 | )    | 
|                                                           |     
|Balance at end of year                                     |      |  |      |            |      | 
|                                                           |     
|                                                          
|Treasury stock - Class A Common stock:                     |      | 
|Balance at beginning of year                               |      |  |      | 1,665,426   |      | 
|Purchase of treasury shares                                |      |  |      | 988,800     |      | 
|Reissuance of treasury shares under employee benefit plans |      |  |      | (220,604    | )    | 
|Conversion of Common stock into Class A Common stock       |      |  |      | 436,007     |      | 
|                                                           |     
|Balance at end of year                                     |      |  |      | 2,869,629   |      | 
|                                                           |     
|                                                          
|Treasury stock - Common stock:                             |      | 
|Balance at beginning of year                               |      |  |      | 436,007     |      | 
|Conversion of Common stock into Class A Common stock       |      |  |      | (436,007    | )    | 
|Purchase of treasury shares                                |      |  |      |            |      | 
|                                                           |     
|Balance at end of year                                     |      |  |      |            |      | 
|                                                           |     

63

---

Notes to Consolidated Financial Statements (continued)

In 1998, the Company's
Board of Directors authorized a plan to repurchase shares of Common stock and Class A
Common stock in an amount not to exceed $25.0 million. The Company's Board of Directors
authorized an additional $15.0 million and $50.0 million of share repurchase authority in
2000 and 1999, respectively. Since the inception of its share repurchase program, PMA
Capital has repurchased a total of approximately 3.5 million shares at a cost of $67.5
million, which represents approximately 15% of the outstanding shares (1.0 million shares
at a cost of $18.4 million in 2000; 1.5 million shares at a cost of $30.2 million in
1999; and 1.0 million shares at a cost of $18.8 million in 1998). PMA Capital's remaining
share repurchase authorization at December 31, 2000 is $22.5 million. Decisions regarding
share repurchases are subject to prevailing market conditions and an evaluation of the
costs and benefits associated with alternative uses of capital.

The Company's domestic
insurance subsidiaries' ability to pay dividends to the holding company is limited by the
insurance laws and regulations of Pennsylvania. Under Pennsylvania laws and regulations,
dividends may not be paid without prior approval of the Pennsylvania Insurance
Commissioner in excess of the greater of (i) 10% of policyholders' surplus as of the end
of the preceding year or (ii) statutory net income for the preceding year, but in no
event to exceed statutory unassigned surplus. Effective September 30, 2000, PMA Capital
realigned the ownership structure of its domestic statutory insurance companies, such
that all of PMA Capital's domestic insurance entities are now owned by PMA Capital
Insurance Company (formerly known as PMA Reinsurance Corporation).

As a result of this
statutory realignment, dividends from the Pooled Companies and Caliber One Indemnity
Company 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. As
of December 31, 2000, approximately $53 million of dividends are available to be paid to
PMA Capital without the prior approval of the Pennsylvania Insurance Commissioner during
2001. As of December 31, 2000, The PMA Insurance Group can pay up to $20.1 million in
dividends to PMA Capital Insurance Company during 2001. Under Delaware law (which is
substantially similar to Pennsylvania law with respect to dividends), Caliber One can pay
up to $5.5 million in dividends to PMA Capital Insurance Company in 2001. Dividends
received from subsidiaries were $36.0 million, $43.2 million and $35.5 million in 2000,
1999 and 1998, respectively.

PMA Capital's dividends
to shareholders are restricted by its debt agreements. Under the terms of the Credit
Facility and the Letter of Credit Agreement, under the most restrictive debt covenant,
the Company could pay dividends of approximately $9.5 million in 2001.

|15. | EarningsPer Share
|--- | -----------------

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

|                                | 2000 |  | 1999 |            | 1998 | 
|------------------------------- | ---- |  | ---- | ---------- | ---- | 
|                               
|                                |      |  |      |            |      | 
|Basic shares - weighted average |      |  |      |            |      | 
|Common and Class A Common       |      | 
|shares outstanding              |      |  |      | 21,898,967 |      | 
|Effect of dilutive              |      | 
|stock options                   |      |  |      | 454,655    |      | 
|                                |     
|Total diluted shares            |      |  |      | 22,353,622 |      | 
|                                |     

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

The effect of 840,500,
12,500 and 42,000 stock options were excluded from the computation of diluted earnings
per share because they would have been anti-dilutive for 2000, 1999 and 1998,
respectively.

64

---

|16. | Business Segments
|--- | -----------------

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

|(dollar amounts in thousands)                                           | 2000 |  | 1999 |         | 1998 |  
|----------------------------------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                                                       
|                                                                        |      |  |      |         |      |  
|Components of pre-tax operating income (loss)   and net income(1):      |      |  |      |         |      |  
|PMA Re                                                                  |      |  | $    | (7,297  | )    | $
|The PMA Insurance Group:                                                |      | 
|Excluding Run-off Operations                                            |      |  |      | 21,646  |      |  
|Run-off Operations                                                      |      |  |      | (45     | )    |  
|                                                                        |     
|Total                                                                   |      |  |      | 21,601  |      |  
|Caliber One                                                             |      |  |      | (7,014  | )    |  
|Corporate and Other                                                     |      |  |      | (19,142 | )    |  
|                                                                        |     
|Pre-tax operating income (loss)                                         |      |  |      | (11,852 | )    |  
|Net realized investment gains (losses)                                  |      |  |      | 11,975  |      |  
|                                                                        |     
|Income before income taxes and cumulative effect of   accounting change |      |  |      | 123     |      |  
|Income tax expense (benefit)                                            |      |  |      | (1,202  | )    |  
|                                                                        |     
|Income before cumulative effect of accounting change                    |      |  |      | 1,325   |      |  
|Cumulative effect of accounting change, net of tax                      |      |  |      |        |      |  
|                                                                        |     
|Net income                                                              |      |  | $    | 1,325   |      | $
|                                                                        |     

|(1) |  | Operating
income differs from net income under GAAP because operating income excludes net realized
investment gains and losses. Pre-tax operating income (loss) represents income (loss)
from continuing operations before income taxes, excluding net realized investment gains
and losses. The Company excludes net realized investment gains (losses) from the profit
and loss measure it utilizes to assess the performance of its operating segments because
(i) net realized investment gains (losses) are unpredictable and not necessarily
indicative of current operating fundamentals or future performance and (ii) in many
instances, decisions to buy and sell securities are made at the holding company level,
and such decisions result in net realized gains (losses) that do not relate to the
operations of the individual segments.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(dollar amounts in thousands) | 2000 |  | 1999 |         | 1998 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                              |      |  |      |         |      |  
|Revenues:                     |      |  |      |         |      |  
|PMA Re                        |      |  | $    | 302,234 |      | $
|The PMA Insurance Group:      |      | 
|Excluding Run-off             |      | 
|Operations                    |      |  |      | 306,333 |      |  
|Run-off Operations            |      |  |      | 4,083   |      |  
|                              |     
|Total                         |      |  |      | 310,416 |      |  
|Caliber One                   |      |  |      | 33,223  |      |  
|Corporate and Other           |      |  |      | 2,142   |      |  
|Net realized investment       |      | 
|gains (losses)                |      |  |      | 11,975  |      |  
|                              |     
|Total revenues                |      |  | $    | 659,990 |      | $
|                              |     

The Company recorded amortization and depreciation expense of $7.4
million, $7.4 million and $7.1 million in 2000, 1999 and 1998, respectively. PMA Re, The
PMA Insurance Group and Caliber One recorded amortization and depreciation expense of
$1.8 million, $3.6 million and $1.1 million respectively, in 2000; $2.8 million, $3.0
million and $600,000, respectively, in 1999; and $2.0 million, $4.2 million and $300,000,
respectively, in 1998.

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

|(dollar amounts in thousands) | 2000 |  | 1999 |           | 1998 |  
|----------------------------- | ---- |  | ---- | --------- | ---- | -
|                             
|                              |      |  |      |           |      |  
|Assets(1):                    |      |  |      |           |      |  
|PMA Re                        |      |  | $    | 1,539,853 |      | $
|The PMA Insurance Group:      |      | 
|Excluding Run-off             |      | 
|Operations                    |      |  |      | 1,640,450 |      |  
|Run-off Operations            |      |  |      | 47,926    |      |  
|                              |     
|Total                         |      |  |      | 1,688,376 |      |  
|Caliber One                   |      |  |      | 239,660   |      |  
|Corporate and Other           |      |  |      | 1,517     |      |  
|                              |     
|Total assets                  |      |  | $    | 3,469,406 |      | $
|                              |     

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

PMA Re distributes its products through major reinsurance brokers, and
PMA Re's top four such brokers accounted for approximately 83% of PMA Re's gross premiums
in force at December 31, 2000. During 2000, 1999 and 1998, total revenues amounting to
$75.7 million, $158.8 million and $70.6 million, respectively,

65

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Notes to Consolidated Financial Statements (continued)

were placed through brokers which individually exceeded 10% of the
Company's total revenue. In 2000, 1999 and 1998, casualty reinsurance lines at PMA Re
represented 28.9%, 35.3% and 35.5%, respectively, of the Company's total net premiums
written.

The PMA Insurance Group's
operations are concentrated in seven contiguous states in the Mid-Atlantic and Southern
regions 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 2000, 1999 and 1998, workers'
compensation net premiums written at The PMA Insurance Group represented 36.9%, 31.8% and
39.4%, respectively, of the Company's total net premiums written.

The Company actively
manages its exposure to catastrophes through its underwriting process, where the Company
generally monitors the accumulation of insurable values in catastrophe prone regions.
Also, in writing property reinsurance coverages, PMA Re typically requires per occurrence
loss limitations for contracts that could have catastrophe exposure. Through per risk
reinsurance, the Company manages its net retention in each exposure. PMA Re's property
per occurrence reinsurance provides catastrophe protection of $50.0 million in excess of
$10.0 million on its traditional property book. Under certain conditions, PMA Re may
recover $6.0 million of the $10.0 million retention for multiple net catastrophe losses.
PMA Re also maintains catastrophe protection of $12.5 million in excess of $5.0 million
for property exposures underwritten by its Finite Risk and Financial Products unit. PMA
Re can also recover an additional $40.0 million of Finite Risk and Financial Products
occurrence losses under certain industry loss scenarios. The PMA Insurance Group
maintains catastrophe reinsurance protection of $27.7 million excess of $850,000 and
Caliber One maintains catastrophe reinsurance protection of $17.5 million excess of $2.5
million. The Company's loss and LAE ratios have not been significantly impacted by
catastrophes in 2000, 1999 or 1998. 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.

|17. | Statutory Financial Information
|--- | -------------------------------

These consolidated financial statements vary in certain respects from
those prepared using statutory accounting practices prescribed or permitted by the
Pennsylvania Insurance Department and the Delaware Insurance Department, (collectively
"SAP"). Prescribed SAP includes state laws, regulations and general administrative rules,
as well as a variety of National Association of Insurance Commissioners ("NAIC")
publications. Permitted SAP encompasses all accounting practices that are not prescribed.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
("Codification") guidance, which will replace the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting. Codification
provides guidance for areas where statutory accounting has been silent and changes
current statutory accounting in some areas, such as deferred income taxes. Effective
December 31, 2000, the Company's insurance subsidiaries implemented the Codification
guidelines, resulting in an increase of $20.5 million in its statutory surplus.

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

|(dollar amounts in thousands) | 2000 |  | 1999 |          | 1998 |  
|----------------------------- | ---- |  | ---- | -------- | ---- | -
|                             
|                              |      |  |      |          |      |  
|SAP net income (loss):        |      |  |      |          |      |  
|PMA Capital Insurance Co.     |      |  | $    | 8,920    |      | $
|The PMA Insurance Group       |      |  |      | 4,847    |      |  
|Caliber One Indemnity Co.     |      |  |      | 5,233    |      |  
|                              |     
|Total                         |      |  | $    | 19,000   |      | $
|                              |     
|SAP capital and surplus:      |      | 
|PMA Capital Insurance Co.     |      |  | $    | 529,631  |      | $
|The PMA Insurance Group       |      |  |      | 254,633  |      |  
|Caliber One Indemnity Co.     |      |  |      | 42,859   |      |  
|Eliminations(1)               |      |  |      | (297,492 | )    |  
|                              |     
|Total                         |      |  | $    | 529,631  |      | $
|                              |     

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

66

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

|(dollar amounts in thousands)                     | 2000 |  | 1999 |        | 1998 |  
|------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|                                                 
|                                                  |      |  |      |        |      |  
|SAP net income - domestic insurance subsidiaries  |      |  | $    | 19,000 |      | $
|GAAP adjustments:                                 |      | 
|Change in deferred acquisition costs              |      |  |      | (109   | )    |  
|Benefit (provision) for deferred income taxes     |      |  |      | (5,205 | )    |  
|Cumulative effect of accounting change            |      |  |      |       |      |  
|Allowance for doubtful accounts                   |      |  |      | (454   | )    |  
|Guaranty fund and loss based assessments          |      |  |      | 1,362  |      |  
|Other                                             |      |  |      | (5,733 | )    |  
|                                                  |     
|GAAP net income - domestic insurance subsidiaries |      |  |      | 8,861  |      |  
|Other entities and eliminations                   |      |  |      | (7,536 | )    |  
|                                                  |     
|GAAP net income                                   |      |  | $    | 1,325  |      | $
|                                                  |     

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

|(dollar amounts in thousands)                                 | 2000 |  | 1999 |          | 1998 |  
|------------------------------------------------------------- | ---- |  | ---- | -------- | ---- | -
|                                                             
|                                                              |      |  |      |          |      |  
|SAP capital and surplus - domestic insurance subsidiaries     |      |  | $    | 529,631  |      | $
|GAAP adjustments:                                             |      | 
|Deferred acquisition costs                                    |      |  |      | 48,522   |      |  
|Deferred income taxes                                         |      |  |      | 41,843   |      |  
|Allowance for doubtful accounts                               |      |  |      | (16,152  | )    |  
|Retirement accruals                                           |      |  |      | (346     | )    |  
|Reversal of non-admitted assets                               |      |  |      | 45,815   |      |  
|Unrealized gain (loss) on fixed maturities available for sale |      |  |      | (12,789  | )    |  
|Other                                                         |      |  |      | 10,224   |      |  
|                                                              |     
|GAAP shareholders' equity - domestic insurance subsidiaries   |      |  |      | 646,748  |      |  
|Other entities and eliminations                               |      |  |      | (206,702 | )    |  
|                                                              |     
|GAAP shareholders' equity                                     |      |  | $    | 440,046  |      | $
|                                                              |     

|18. | Dispositions
|--- | ------------

Effective July 1, 1998, the Company sold PMA Insurance, Cayman Ltd., one
of the entities included in The PMA Insurance Group's Run-off operations, which reinsures
claims for certain policies written by other members of The PMA Insurance Group, to a
third party for a purchase price of $1.8 million and recorded an after-tax loss of $1.6
million. This transaction included the transfer of $231.5 million in cash and invested
assets to the buyer. At December 31, 2000, the Company has recorded $221.3 million in
reinsurance receivables related to this transaction, all of which are secured by assets
in trust or by letters of credit. If the actual claim payments in the aggregate exceed
the estimated payments upon which the loss reserves have been established, the Company
has agreed to indemnify the buyer, up to a maximum of $15.0 million. 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.

67

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Report of Independent Accountants

PRICEWATERHOUSECOOPERS (LOGO)

To the Board of Directors and Shareholders of PMA Capital Corporation

In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, cash flows,
shareholders equity and comprehensive income (loss) present fairly, in all
material respects, the financial position of PMA Capital Corporation and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Companys management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP 
Two Commerce Square
2001 Market Street
Philadelphia, PA
February 7, 2001

68

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Quarterly Financial Information (Unaudited)

The following unaudited quarterly financial data are presented on a
consolidated basis for each of the years ended December 31, 2000 and 1999. Quarterly
financial results necessarily rely on estimates and caution is required in drawing
specific conclusions from quarterly consolidated results.

|                                                     |  | FirstQuarter |   | SecondQuarter |  | ThirdQuarter |         | FourthQuarter |  
|---------------------------------------------------- |  | ------------ | - | ------------- |  | ------------ | ------- | ------------- | -
|                                                    
|2000                                                 |  |              |   |               |  |              |         |               |  
|Income Statement Data:                               |  |             
|Total revenues                                       |  |              | $ | 151,555       |  | $            | 177,894 |               | $
|Income (loss) before income taxes                    |  |              |   | 6,739         |  |              | 15,807  |               |  
|Net income (loss)                                    |  |              |   | 4,378         |  |              | 10,140  |               |  
|                                                    
|Per Share Data:                                      |  |             
|Net income (loss) (Basic)                            |  |              | $ | 0.20          |  | $            | 0.46    |               | $
|Net income (loss) (Diluted)                          |  |              | $ | 0.19          |  | $            | 0.45    |               | $
|                                                    
|Class A Common Stock Prices:                         |  |             
|High                                                 |  |              | $ | 20.00         |  | $            | 19.00   |               | $
|Low                                                  |  |              |   | 16.06         |  |              | 15.88   |               |  
|Close                                                |  |              |   | 17.50         |  |              | 19.00   |               |  
|                                                    
|1999                                                 |  |              |   |               | 
|Income Statement Data:                               |  |             
|Total revenues                                       |  |              | $ | 140,446       |  | $            | 157,168 |               | $
|Income before income taxes                           |  |              |   | 13,147        |  |              | 6,381   |               |  
|Income before cumulative effect of accounting change |  |              |   | 8,468         |  |              | 6,746   |               |  
|Net income                                           |  |              |   | 5,709         |  |              | 6,746   |               |  
|                                                    
|Per Share Data:                                      |  |             
|Basic:                                               |  |             
|Income before cumulative effect of accounting change |  |              | $ | 0.37          |  | $            | 0.29    |               | $
|Net income                                           |  |              | $ | 0.25          |  | $            | 0.29    |               | $
|Diluted:                                             |  |             
|Income before cumulative effect of accounting change |  |              | $ | 0.35          |  | $            | 0.28    |               | $
|Net income                                           |  |              | $ | 0.24          |  | $            | 0.28    |               | $
|                                                    
|Class A Common Stock Prices:                         |  |             
|High                                                 |  |              | $ | 20.31         |  | $            | 21.00   |               | $
|Low                                                  |  |              |   | 17.63         |  |              | 19.00   |               |  
|Close                                                |  |              |   | 20.13         |  |              | 20.56   |               |  

The Company had approximately 310 recordholders at January 31, 2001. In
the first quarter of 2000, the Company declared a quarterly dividend of $0.08 and $0.09
per share for its Common stock and Class A Common stock, respectively. In the second
quarter of 2000, the Company declared a quarterly dividend of $0.09 per share for its
Class A Common stock. In the third and fourth quarters of 2000, the Company declared a
quarterly dividend of $0.105 per share for its Class A Common stock. For each of the
quarters in 1999, the Company declared a quarterly dividend of $0.08 and $0.09 per share
for its Common stock and Class A Common stock, respectively. See Note 14 for a discussion
of a change in the Company's capital structure in 2000, which effectively converted all
shares of Common stock to Class A Common stock.

69

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Securities Listing

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

Dividends

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

72

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