UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(MARK ONE)
/X/   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

/  /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________ 
Commission File Number 000-22761

PMA Capital Corporation
(Exact name of registrant as specified in its charter)

|Pennsylvania                                                       | 23-2217932         
|------------------------------------------------------------------ | -------------------
|(State or other jurisdiction of                                    | (IRS Employer      
|incorporation or organization)                                     | Identification No.)
|                                                                   |                    
|1735 Market Street, Suite 2800Philadelphia, Pennsylvania           | 19103-7590         
|(Address of principal executive offices)                           | (Zip code)         
|                                                                   |                    
|Registrants telephone number, including area code: (215) 665-5046
|                                                                   |                    
|Securities registered pursuant to Section 12(b): None             
|                                                                   |                    
|Securities registered pursuant to Section 12(g) of the Act:       
|                                                                   |                    
|Class A Common Stock, par value $5.00 per share                   
|(Title of Class)                                                  
|                                                                   |                    
|Rights to Purchase Preferred Stock                                
|(Title of Class)                                                  

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

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

The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of February 28, 2002, was
$445,180,306.

There were 31,211,856 shares outstanding of the
registrants Class A Common stock, $5 par value per share, as of the close
of business on February 28, 2002.

DOCUMENTS INCORPORATED BY REFERENCE:

|(1) |  | Parts
I, II and IV of this Form 10-K incorporate by reference portions of the Annual Report to
Shareholders for the year ended December 31, 2001, as indicated herein.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Part
III of this Form 10-K incorporates by reference portions of the registrants proxy
statement to be dated March 22, 2002 for the 2002 Annual Meeting of Shareholders.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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INDEX

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|PART I                                                                              | Page
|----------------------------------------------------------------------------------- | ----
|                                                                                    |     
|Item 1    Business                                                                  | 1   
|Company Overview                                                                    | 1   
|PMA Re                                                                              | 3   
|The PMA Insurance Group                                                             | 7   
|Caliber One                                                                         | 12  
|Reinsurance and Retrocessional Protection                                           | 14  
|Loss Reserves                                                                       | 16  
|Investments                                                                         | 20  
|Competition                                                                         | 21  
|Regulatory Matters                                                                  | 23  
|Employees                                                                           | 26  
|Glossary of Selected Insurance Terms                                                | 27  
|Risk Factors                                                                        | 30  
|Item 2    Properties                                                                | 35  
|Item 3    Legal Proceedings                                                         | 35  
|Item 4    Submission of Matters to a Vote of Security Holders                       | 35  
|Executive Officers of the Registrant                                                | 35  
|                                                                                    |     
|PART II                                                                            
|                                                                                    |     
|Item 5    Market for the Registrant's Common Equity and Related Shareholder Matters | 36  
|Item 6    Selected Financial Data                                                   | 36  
|Item 7    Management's Discussion and Analysis of Financial Condition              
|and Results of Operations                                                           | 36  
|Item 7A Quantitative and Qualitative Disclosure About Market Risk                   | 37  
|Item 8    Financial Statements and Supplementary Data                               | 37  
|Item 9    Changes in and Disagreements with Accountants on                         
|Accounting and Financial Disclosure                                                 | 37  
|                                                                                    |     
|PART III                                                                           
|                                                                                    |     
|Item 10   Directors and Executive Officers of the Registrant                        | 37  
|Item 11   Executive Compensation                                                    | 37  
|Item 12   Security Ownership of Certain Beneficial Owners and Management            | 37  
|Item 13   Certain Relationships and Related Transactions                            | 37  
|                                                                                    |     
|PART IV                                                                            
|                                                                                    |     
|Item 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K           | 38  
|                                                                                    |     
|Signatures                                                                          | 39  
|Index to Financial Statement Schedules                                              | FS-1
|Index to Exhibits                                                                   | E-1 

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PART I

The Business Section and other parts of this Form 10-K contain
forward-looking statements that involve inherent risks and uncertainties. Words
such as believes, estimates, anticipates,
expects or similar words are intended to identify forward-looking
statements. Our actual results may differ materially from the projected results
discussed in the forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed in the Risk Factors
beginning on page 30 and in the Cautionary Statements on page 48 of
our Managements Discussion and Analysis (MD&A) section of
our 2001 Annual Report to Shareholders (Annual Report) that has been
incorporated by reference into Part II, Item 7 of this Form 10-K.

Item 1. Business

COMPANY OVERVIEW

We are an
insurance holding company focused on specialty insurance markets where we
believe our underwriting expertise, experienced management and financial
strength allow us to produce attractive returns. Through our operating
subsidiaries, we are a leading provider of property and casualty reinsurance and
a regionally focused provider of commercial property and casualty insurance. Our
primary insurance business has been in operation since 1915 and our reinsurance
operations began writing business in 1969. At December 31, 2001, we had total
assets of approximately $3.8 billion and shareholders equity of
approximately $612 million.

We conduct our
insurance and reinsurance business through three specialty operating segments:

| |  | Our reinsurance operations, PMA Re, offer excess of loss and pro rata property and
casualty reinsurance protection mainly through reinsurance brokers. PMA Re focuses on
risk-exposed business, which we believe allows us to best utilize our underwriting and
actuarial expertise.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
property and casualty insurance operations, The PMA Insurance Group, write workerscompensation,
integrated disability and, to a lesser extent, other standard lines of commercial
insurance, primarily in the eastern part of the United States. Currently, approximately
90% of The PMA Insurance Groups business is produced through independent agents and
brokers.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
specialty property and casualty operations, Caliber One, write excess and surplus lines
of business throughout the United States, generally through surplus lines brokers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, we
have a Corporate and Other segment, which includes unallocated investment income
and expenses, including debt service, as well as the results of certain of our
real estate properties.

Financial
information in the tables that follow is presented in conformity with generally
accepted accounting principles (GAAP), unless otherwise indicated.
Certain reclassifications have been made to prior periods financial
information to conform to the 2001 presentation. Revenues, pre-tax operating
income (loss) and assets attributable to each of our operating segments and our
Corporate and Other segment for the last three years are set forth in Note 14 to
our consolidated financial statements for the year ended December 31, 2001
(Financial Statements) included in our Annual Report.

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

|                              | 2001  |  | 2000 |           | 1999  |   | 2001 as % of Total |  
|----------------------------- | ----- |  | ---- | --------- | ----- | - | ------------------ | -
|(dollar amounts in thousands) | Gross |  | Net  |           | Gross |   | Net                |  
|                             
|                             
|PMA Re                        |       |  | $    | 476,591   |       | $ | 360,604            |  
|The PMA Insurance Group       |       |  |      | 416,695   |       |   | 355,547            |  
|Caliber One                   |       |  |      | 124,335   |       |   | 53,674             |  
|Corporate and Other           |       |  |      | (767      | )     |   | (767               | )
|                              |       |  |      |           |       |   |                    |  
|Total                         |       |  | $    | 1,016,854 |       | $ | 769,058            |  
|                              |       |  |      |           |       |   |                    |  
|                             
|                             

1

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

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

|                        |  |  |  | 2001  |   |  | 2000  |   |  | 1999  |  
|----------------------- |  |  |  | ----- | - |  | ----- | - |  | ----- | -
|                       
|                       
|PMA Re                  |  |  |  | 114.2 | % |  | 123.3 | % |  | 102.5 | %
|The PMA Insurance Group |  |  |  | 105.5 | % |  | 111.7 | % |  | 115.4 | %
|Caliber One             |  |  |  | 163.3 | % |  | 139.7 | % |  | 109.6 | %
|                       
|                       

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

|                        |  |  |  | 2001  |   |  | 2000  |   |  | 1999 |  
|----------------------- |  |  |  | ----- | - |  | ----- | - |  | ---- | -
|                       
|                       
|PMA Re                  |  |  |  | 100.9 | % |  | 102.9 | % |  | 82.9 | %
|The PMA Insurance Group |  |  |  | 94.1  | % |  | 92.7  | % |  | 92.7 | %
|Caliber One             |  |  |  | 156.5 | % |  | 124.3 | % |  | 99.7 | %
|                       
|                       

A glossary of selected insurance terms used in this Form 10-K is
included on pages 27 to 29.

2

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PMA RE

Background

Our reinsurance
operations conduct business mainly in the broker market. We offer excess of loss
and pro rata property and casualty reinsurance protection, with an emphasis on
risk-exposed, excess of loss coverages. We believe that these types of coverages
allow us to best apply our actuarial and underwriting expertise to price our
products and to control our loss exposures. PMA Re provides treaty reinsurance
on both a traditional and finite risk basis, and facultative reinsurance. Since
1999, PMA Res mix of business has included an increasing amount of finite
risk business, which offers a more predictable level of profitability, and
hence, lower volatility in earnings. During that period, the contribution to net
premiums written of PMA Res traditional treaty business declined as PMA Re
non-renewed traditional treaty business that did not meet our pricing
guidelines. However, we now see significant opportunities for growth in our
traditional reinsurance business, and we believe that demand for our finite and
facultative products will remain strong.

PMA Re competes
on the basis of its ability to offer specialized products to its clients, its
long-term relationships with brokers and insurance company clients, and its
prompt and responsive service. PMA Re focuses on providing reinsurance to small-
to medium-sized insurers (defined as insurers with statutory surplus of less
than $500 million). PMA Re believes that its actuarial and underwriting
expertise is important to ceding companies in that size category and
accordingly, it can build long-term relationships with its ceding companies. As
of December 31, 2001, PMA Capital Insurance Company, PMA Res insurance
entity, was the 8th largest broker market reinsurance company in the
United States in terms of statutory capital and surplus, according to data
provided by the Reinsurance Association of America.

In the broker
reinsurance market, the products (reinsurance coverages) are distributed to the
ultimate customer (ceding companies) through reinsurance intermediaries, known
as brokers. In exchange for providing such distribution services, the brokers
are paid commissions, known as brokerage, which are typically based upon a
percentage of the premiums ceded from the ceding companies to the reinsurer
under a particular contract. The broker reinsurance market differs from the
direct reinsurance market in that direct reinsurers maintain their own sales
forces and distribute their products directly to their ceding company clients.

Late in 2000,
PMA Re invested in a Lloyds of London managing general agency, Cathedral
Capital, and commencing in 2001, we began participating in the results of
Syndicate 2010. The Lloyds operation primarily writes property and
aviation reinsurance.

Products

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

PMA Re provides
reinsurance coverage primarily under two arrangements: treaty and facultative.
Typically, in treaty reinsurance, the primary insurer or ceding company is
obligated to cede and the reinsurer is obligated to accept a specified portion
of all agreed upon types or categories of risks originally written by the
primary insurer or ceding company. Facultative reinsurance is a form of
reinsurance coverage that is placed on a risk-by-risk basis, and the reinsurer
retains the right to accept or reject each individual risk submitted by the
ceding company. Of PMA Res total net premiums written during 2001, 98%
were treaty, and 2% were facultative.

To better serve
its brokers and ceding companies, PMA Re has established four distinct
underwriting units, organized by class of business, which provide more
specialized expertise in each area. The Traditional-Treaty, Finite Risk and
Financial Products, and Specialty-Treaty units provide treaty reinsurance
coverage. The fourth unit, Facultative, provides reinsurance on a facultative
basis.

| |   Traditional-Treaty:
This underwriting unit writes general property and casualty business
and emphasizes risk-exposed, excess of loss programs. Included in the client base for the
Traditional unit are standard lines companies, some excess and surplus lines companies,
and, to a lesser extent, non-traditional sources of business, such as self-insureds. The
Traditional casualty portfolio includes general liability, umbrella, commercial
automobile and workerscompensation. This unit presently writes more excess of loss
business than pro rata business. Excess of loss reinsurance, sometimes called
nonproportional reinsurance, generally indemnifies the reinsured against all or a
specified portion of losses on underlying insurance policies in excess of a specified
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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| | dollar amount. With pro rata reinsurance,
sometimes called proportional or participating reinsurance, the reinsurer shares a
proportional part of the ceded insurance liability, premiums and losses of the ceding
company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
breakdown of the Traditional-Treaty units net premiums written between excess of
loss and pro rata reinsurance is as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 | 
|----------------------------- | ---- |  | ---- | ------- | ---- | 
|                             
|                              |      |  |      |         |      | 
|Excess of Loss                |      |  | $    | 68,828  |      | 
|Pro Rata                      |      |  |      | 46,986  |      | 
|                              |      |  |      |         |      | 
|Total Traditional-Treaty      |      |  | $    | 115,814 |      | 
|                              |      |  |      |         |      | 
|                             

| |   
Finite Risk and Financial Products: In 1998, PMA Re made the strategic decision to
broaden its product offerings by adding a finite risk underwriting unit to its
traditional treaty reinsurance portfolio. This underwriting unit is charged with
providing PMA Res clients with creative risk management solutions that complement
their traditional reinsurance program. Under its finite risk covers, PMA Re assumes a
measured amount of insurance risk in exchange for a specified margin. Our finite risk
reinsurance covers typically include a combination of sub-limits and caps on the maximum
gain or loss to PMA Re as the reinsurer. Many insurance companies have some form of
finite protection as a permanent part of their reinsurance program. Examples of finite
risk and financial risk products are aggregate stop-loss coverages, funded catastrophe
coverages and financial quota share coverages.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
finite and financial risk products, in various formats, have been used by ceding
companies for decades. PMA Res approach is to create customized risk management
solutions for its clients. Our average account size is approximately $4 million. Although
most of the Finite Risk and Financial Products units business is related to
domestic insurers, approximately $30 million of the units gross premiums written
for 2001 were generated from foreign insurers and reinsurers.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |   Specialty-Treaty:
This unit underwrites business that falls outside the confines of our traditional
property and casualty risks. These risks include directorsand officersliability
and errors and omissions, as well as all other forms of professional liability.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |   Facultative:
This unit writes property and casualty reinsurance on an individual risk basis and on a
program/semi-automatic basis, in which we agree to accept risks that fall within certain
predetermined parameters. In addition to serving the facultative brokerage community,
this unit strengthens PMA Res reputation as a full service reinsurer. Through its
facultative property book, PMA Re emphasizes program/semi-automatic business. The
facultative casualty focus is on general liability, umbrella and commercial automobile
lines. Our Facultative units emphasis in commercial automobile is on manufacturing,
contracting and service fleets. This unit also reinsures a broad range of professional
liability business, with an emphasis on directorsand officersliability, and
medical malpractice/hospital professional liability.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4

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

|(dollar amounts in thousands)      | 2001  |  | 2000 |         | 1999  |  
|---------------------------------- | ----- |  | ---- | ------- | ----- | -
|                                  
|                                   | Gross |  | Net  |         | Gross |  
|                                  
|                                   |       |  |      |         |       |  
|Finite Risk and Financial Products |       |  |      |         |       |  
|Casualty                           |       |  | $    | 115,220 |       | $
|Property                           |       |  |      | 128,110 |       |  
|Other                              |       |  |      | 1,197   |       |  
|                                   |       |  |      |         |       |  
|Total                              |       |  |      | 244,527 |       |  
|                                   |       |  |      |         |       |  
|Traditional - Treaty               |       | 
|Casualty                           |       |  |      | 98,264  |       |  
|Property                           |       |  |      | 71,668  |       |  
|Other                              |       |  |      | 1,386   |       |  
|                                   |       |  |      |         |       |  
|Total                              |       |  |      | 171,318 |       |  
|                                   |       |  |      |         |       |  
|Specialty - Treaty                 |       | 
|Casualty                           |       |  |      | 31,690  |       |  
|Property                           |       |  |      | 2,093   |       |  
|Other                              |       |  |      | 397     |       |  
|                                   |       |  |      |         |       |  
|Total                              |       |  |      | 34,180  |       |  
|                                   |       |  |      |         |       |  
|Facultative                        |       | 
|Casualty                           |       |  |      | 21,498  |       |  
|Property                           |       |  |      | 5,069   |       |  
|Other                              |       |  |      | (1      | )     |  
|                                   |       |  |      |         |       |  
|Total                              |       |  |      | 26,566  |       |  
|                                   |       |  |      |         |       |  
|                                  
|Total Casualty                     |       |  |      | 266,672 |       |  
|Total Property                     |       |  |      | 206,940 |       |  
|Total Other                        |       |  |      | 2,979   |       |  
|                                   |       |  |      |         |       |  
|Total Premiums Written             |       |  | $    | 476,591 |       | $
|                                   |       |  |      |         |       |  
|                                  
|                                  

As of December
31, 2001, traditional catastrophe covers accounted for approximately 2% of gross
property premiums written. The per risk property programs written by PMA Re generally
contain per occurrence limits and in some instances there is less catastrophe exposure
either because of the locations of the insured values or the
nature of the underlying exposures. In addition, PMA Res gross
premiums written include approximately $70 million of funded catastrophe
coverages written by the Finite Risk and Financial Products unit. These funded
covers contain per occurrence and aggregate limits, as well as loss sensitive
additional premium provisions in the event of a loss.

However, as is
common in property reinsurance, PMA Re is exposed to the possibility of loss
from catastrophes due to the aggregation of losses. PMA Re actively manages this
exposure through zonal management, minimizing writings of catastrophe business,
and the purchase of retrocessional protection. See Reinsurance and
Retrocessional Protection on page 14 for PMA Res catastrophe
retrocessional program.

Distribution

PMA Re operates
primarily through the domestic broker reinsurance market. We believe that PMA Re
has developed relationships with the major reinsurance brokers enabling it to
gain access to a wide range of ceding companies with varying reinsurance and
related service needs. Brokers that accounted for more than 10% of PMA Res
gross premiums written in 2001 were as follows:

|(dollar amounts in thousands) | Gross premiums written | % of total
|----------------------------- | ---------------------- | ----------
|                             
|                             
|Guy Carpenter                 |                        |           
|Benfield Blanch               |                        |           
|Towers Perrin                 |                        |           
|AON Reinsurance               |                        |           
|                             
|                             

As of December
31, 2001, PMA Re had approximately 175 unaffiliated clients, with no individual
client accounting for more than 10% of gross premiums written in 2001.
Approximately 75% of PMA Res gross premiums written in 2001 was from
small- to medium-sized insurers (defined as insurers with statutory surplus of
up to $500 million).

5

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Underwriting

In reinsurance,
underwriting involves the selection of risks and determining an adequate price
given expected losses and estimated volatility of such losses. Maintaining
underwriting and pricing discipline is critical to the maintenance of acceptable
operating results.

PMA Res
underwriting process has two principal aspects  underwriting the specific
program/risk submission and underwriting the ceding company. Underwriting the
specific program/risk to be reinsured involves, in addition to pricing, a review
of the type of account, the total risk and the ceding companys coverages.
Underwriting the ceding company involves an evaluation of the expected future
performance of the ceding company through an examination of that companys
management, financial strength, claims handling and underwriting abilities. PMA
Re may conduct underwriting and claim reviews at the offices of prospective
ceding companies before entering into a treaty, as well as throughout the life
of the reinsurance contract.

PMA Res
underwriters and actuaries work together to evaluate reinsurance programs. Using
the information provided by the broker, the actuaries employ pricing models to
estimate the ultimate loss exposure to the treaty. The pricing models employ
various experience-rating and exposure-rating techniques and are tailored in
each case to the risk exposures underlying each treaty. The underwriters then
analyze the results of the pricing models with the terms and conditions being
offered to determine PMA Res selected price.

In underwriting
excess of loss business, PMA Re has typically sought to write treaties that are
risk exposed within the original policy limits of the ceding company. We believe
these layers generally lend themselves more effectively to actuarial pricing
techniques. In underwriting pro rata business, PMA Re attempts to ensure proper
pricing levels are being achieved by the ceding company by reviewing the ceding
companys data, including actuarial reports, and examining their underlying
rate structure.

PMA Re is
attempting to exclude coverage of losses due to future terrorist acts from its
assumed reinsurance policies. However, if a client, because of the types of
coverages that they are writing, cannot accept a full terrorism exclusion and
PMA Re still desires to write the particular business, its underwriters will
attempt to include terms and conditions in the reinsurance contracts intended to
limit PMA Res exposure to losses from future terrorist acts, such as
occurrence caps, aggregate limits and specific terrorism-event exclusions.
Further, PMA Res underwriters also review and monitor geographic
concentrations of underlying risks along with the classes of business and
industries to be reinsured in deciding whether to write the business.

Claims Administration

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

In addition to
evaluating and adjusting claims, the claims department conducts claims audits at
the offices of selected prospective ceding companies. Satisfactory audit results
are required in order for reinsurance coverage to be written or continued by PMA
Re. The claims department also conducts annual claims audits for many current
and former client ceding companies.

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

6

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THE PMA INSURANCE GROUP

Background

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

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

The PMA
Insurance Group believes it has enhanced its ability to handle multi-state
clients based in its operating territory but which have operations in other
parts of the U.S. by being authorized to do business in 52 jurisdictions
(including Puerto Rico and the District of Columbia) for workers
compensation, general liability and commercial automobile. The PMA Insurance
Group intends to continue writing other lines of property and casualty
insurance, but generally only if such writings are supported by its core
workers compensation business. The PMA Insurance Group is one of the
leading providers of integrated disability products with 136 accounts as of
December 31, 2001 that generated approximately $41 million in combined
workers compensation and integrated disability premium in 2001. The PMA
Insurance Groups primary insurance subsidiaries (Pennsylvania
Manufacturers Association Insurance Company, Manufacturers Alliance
Insurance Company and Pennsylvania Manufacturers Indemnity Company) will
sometimes be referred to as the Pooled Companies because they share results
under an intercompany pooling agreement.

Products

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

|(dollar amounts in thousands)                   | 2001 |  | 2000 |         | 1999 |  
|----------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|                                               
|                                               
|                                                |      |  |      |         |      |  
|Gross premiums written:                         |      |  |      |         |      |  
|Workers' compensation and integrated disability |      |  | $    | 321,942 |      | $
|Commercial multi-peril                          |      |  |      | 34,227  |      |  
|Commercial automobile                           |      |  |      | 50,474  |      |  
|Other                                           |      |  |      | 10,052  |      |  
|                                                |      |  |      |         |      |  
|Total                                           |      |  | $    | 416,695 |      | $
|                                                |      |  |      |         |      |  
|                                               
|Net premiums written:                           |      | 
|Workers' compensation and integrated disability |      |  | $    | 292,171 |      | $
|Commercial multi-peril                          |      |  |      | 22,360  |      |  
|Commercial automobile                           |      |  |      | 35,985  |      |  
|Other                                           |      |  |      | 5,031   |      |  
|                                                |      |  |      |         |      |  
|Total                                           |      |  | $    | 355,547 |      | $
|                                                |      |  |      |         |      |  
|                                               
|                                               

7

---

Workers Compensation Insurance

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

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

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 |  
|----------------------------- | ---- |  | ---- | ------- | ---- | -
|                             
|                             
|                              |      |  |      |         |      |  
|Pennsylvania                  |      |  | $    | 132,211 |      | $
|New Jersey                    |      |  |      | 37,794  |      |  
|New York                      |      |  |      | 29,349  |      |  
|Virginia                      |      |  |      | 20,736  |      |  
|North Carolina                |      |  |      | 16,063  |      |  
|Maryland                      |      |  |      | 12,039  |      |  
|Georgia                       |      |  |      | 8,200   |      |  
|South Carolina                |      |  |      | 6,745   |      |  
|Delaware                      |      |  |      | 6,477   |      |  
|Other                         |      |  |      | 37,597  |      |  
|                              |      |  |      |         |      |  
|Total                         |      |  | $    | 307,211 |      | $
|                              |      |  |      |         |      |  
|                             
|                             

Based upon
direct written premium information published by the American Insurance
Association for the most recently available year (2000), The PMA Insurance Group
is the largest writer of workers compensation insurance in Pennsylvania
and ranks among the ten largest writers of workers compensation insurance
in Delaware and Virginia. The PMA Insurance Group has focused on the
jurisdictions in the table above based upon its knowledge of their workers
compensation systems and its assessment of each states respective
business, economic, legal and regulatory climates. We closely monitor and take
into consideration rate adequacy, regulatory climate and economic conditions in
each state in the underwriting process. The PMA Insurance Group intends to
employ similar analyses in determining whether and to what extent it will offer
products in additional jurisdictions.

The PMA
Insurance Group is focused on expanding its premium base in territories that
meet its underwriting and actuarial criteria. In recent years, The PMA Insurance
Group increased its writings of workers compensation premiums through
focused marketing efforts in its principal marketing territories. In 2001, The
PMA Insurance Group expanded its operations by adding an office in Nashville,
Tennessee. The PMA Insurance Group continued to achieve profitable growth in its
two prior expansion states, New York and Georgia. In addition, The PMA Insurance
Group benefited in 2001, 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.

Workers
compensation insurers doing business in certain states are required to provide
insurance for risks that are not otherwise written on a voluntary basis by the
private market (residual market business). This system exists in all
of the jurisdictions in which The PMA Insurance Group does business, except
Pennsylvania, New York and Maryland. In these three states, separate
governmental entities write all of the workers compensation residual
market business. In 2001, The PMA Insurance Group wrote $5.1 million in premiums
of residual market business, which constituted less than two percent of its
gross workers compensation premiums written. Based upon data for policy
year 2000 reported by the National Council on Compensation Insurance, the
percentage of residual market business for the industry as a whole, in all
states, was 4.5% of direct workers compensation premiums written.

8

---

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

Terrorism
exclusions are not permitted under the workers compensation laws of any
state or jurisdiction in which The PMA Insurance Group operates. In addition,
effective January 1, 2002, The PMA Insurance Groups reinsurance coverage
for its workers compensation risks excludes terrorism risks on business
written in 2002. Therefore, The PMA Insurance Group has refined its
workers compensation underwriting guidelines to reduce the underwriting
exposure from terrorism risks, including the review of aggregation of risks by
geographic location, evacuation and security of buildings in which insured
employees work, and the type of entities located in the vicinity of the
prospective insured. These refined underwriting procedures have not materially
affected The PMA Insurance Groups net premiums written or mix of business.

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

|                            | 2001 |  | 2000 |      | 1999 | 
|--------------------------- | ---- |  | ---- | ---- | ---- | 
|                           
|                           
|                            |      |  |      |      |      | 
|Rate-sensitive products     |      |  |      | 59%  |      | 
|Loss-sensitive products     |      |  |      | 34%  |      | 
|Alternative market products |      |  |      | 7%   |      | 
|                            |      |  |      |      |      | 
|Total                       |      |  |      | 100% |      | 
|                            |      |  |      |      |      | 
|                           
|                           

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

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

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

9

---

The PMA
Insurance Group has developed a product for group integrated occupational and
non-occupational disability coverages, named PMA One®, which it began
marketing in 1998. PMA One leverages what we consider to be one of The PMA
Insurance Groups most important core competencies: managing employee
disabilities. PMA One offers employers the benefits of coordinated workers
compensation and disability administration, reduced costs, programs designed to
encourage faster return to work and heightened employee productivity. In 2001,
the number of PMA One clients totaled 136, and generated approximately $41
million of combined workers compensation and integrated disability written
premiums. PMA One clients include health care systems, educational institutions,
manufacturers and financial institutions.

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

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

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

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

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

Commercial Lines

The PMA
Insurance Group writes property and liability coverages for larger and middle
market accounts that satisfy its underwriting standards. See
Underwriting on page 11. These coverages feature commercial
multi-peril, general liability and umbrella, and commercial automobile business.
The PMA Insurance Group offers these products, but generally only if they
complement the core workers compensation business.

Other Products and Services

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

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

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

10

---

Distribution

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

As of December
31, 2001, The PMA Insurance Group employed 12 direct sales representatives and
used approximately 300 independent brokers and agents. The direct sales
representatives are generally responsible for certain business located in
Pennsylvania and Delaware. For the year ended December 31, 2001, these employees
produced approximately $40 million in direct premiums written, constituting
approximately 10% of The PMA Insurance Groups direct written premiums.

The brokers and
agents solicit business throughout the marketing territory. The current
distribution network generally consists of large regional agents and brokers,
local agents, and national brokers that specialize in larger to middle market
accounts that require the variety of workers compensation, commercial
lines and alternative market products offered by The PMA Insurance Group. In
2001, brokers and agents accounted for approximately 90% of The PMA Insurance
Groups direct written premiums. The top ten brokers and agents accounted
for approximately 25% of The PMA Insurance Groups direct written premiums,
the largest of which accounted for approximately 8% of its direct written
premiums.

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

As of December
31, 2001, the field organization consisted of 17 offices throughout The PMA
Insurance Groups principal marketing territory. These offices deliver a
full range of services directly to customers located in their service territory,
while satellite offices primarily offer underwriting and claim adjustment
services.

Underwriting

The PMA
Insurance Groups underwriters, in consultation with actuaries, determine
the general type of business to be written using a number of criteria, including
past performance, relative exposure to hazard, premium size, type of business
and other indicators of potential loss. Specific types of business are referred
to underwriting specialists and actuaries for individual pricing. The
underwriting team also establishes classes of business that The PMA Insurance
Group generally will not write, such as certain property exposures, certain
hazardous products and activities, and certain environmental coverages. As a
result of the attack on the World Trade Center, The PMA Insurance Group has
refined its underwriting guidelines to evaluate terrorism risks and their effect
on risk concentrations.

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

The PMA
Insurance Group also employs credit analysts. These employees review the
financial strength and stability of customers who utilize loss-sensitive and
alternative market products and specify the type and amount of collateral that
customers must provide under these arrangements.

11

---

Claims Administration

Claims services
are delivered to customers primarily through employees in the field offices. The
PMA Insurance Group maintains a centralized call center for loss reporting and
has automated and centralized the processing of claims payments, which allows
the claims adjusters to substantially reduce the time that they spend with
clerical and repetitive functions. In 2001, The PMA Insurance Group launched an
Internet-based risk management information system that allows clients to analyze
losses, manage claims costs and report claims electronically. The PMA Insurance
Group also employs in-house attorneys who represent customers in workers
compensation cases and other insurance matters. The PMA Insurance Group has a
separate, anti-fraud unit that investigates suspected false claims and other
irregularities. Certain specialized matters, such as asbestos and environmental claims,
are referred to a special claims unit in the home office.

Run-off Operations

As a part of The
PMA Insurance Groups 1996 restructuring plan, Run-off Operations were
established principally to manage the capital supporting workers
compensation loss reserves for accident years 1991 and prior. The reserves
primarily related to the period of time from 1987 to 1991 when The PMA Insurance
Group wrote a much higher volume of business and experienced poor underwriting
results. Effective December 31, 2000, substantially all of the remaining assets
and liabilities of the Run-off Operations were transferred to a third party
under an assumption reinsurance agreement. As a result of this transaction, The
PMA Insurance Group no longer reports separate results for Run-off Operations.

CALIBER ONE

Background

Our specialty
insurance unit commenced writing business in 1998. Caliber One focuses on excess
and surplus lines of insurance for low frequency/high severity risks that are
declined by the standard market. Caliber One writes business throughout the
United States, generally through surplus lines brokers.

Products

Caliber One
offers liability coverages for low frequency/high severity classes, including
medium- to high-hazard products liability classes of business, commercial
contractors, professional liability and other difficult-to-insure liability
risks, as well as property coverages for risks declined by the standard market.
In addition, Caliber One offers various ocean marine coverages including cargo,
hull and liability. Caliber Ones policy forms contain various endorsements
and exclusions, and in some cases, include defense costs within the policy
limits rather than offering such coverages outside the policy limits. Caliber
One has diversified its product offerings and classes of business within its
product offerings so that it will generally not have more than 10% of its net
premiums written in any one class of business.

Caliber
Ones premiums written by major line of business are as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 | 
|----------------------------- | ---- |  | ---- | ------- | ---- | 
|                             
|Gross premiums written:       |      |  |      |         |      | 
|Casualty                      |      |  | $    | 55,228  |      | 
|Property                      |      |  |      | 69,107  |      | 
|                              |      |  |      |         |      | 
|Total                         |      |  | $    | 124,335 |      | 
|                              |      |  |      |         |      | 
|                             
|Net premiums written:         |      | 
|Casualty                      |      |  | $    | 21,995  |      | 
|Property                      |      |  |      | 31,679  |      | 
|                              |      |  |      |         |      | 
|Total                         |      |  | $    | 53,674  |      | 
|                              |      |  |      |         |      | 
|                             
|                             

12

---

Caliber One
currently operates through three internal underwriting units based on classes of
business and distribution channels: casualty brokerage, property brokerage and
ocean marine brokerage. Program business is managed through the respective
underwriting units. Premiums written by underwriting unit are as follows:

|(dollar amounts in thousands) | 2001 |  | 2000 |         | 1999 | 
|----------------------------- | ---- |  | ---- | ------- | ---- | 
|                             
|Gross premiums written:       |      |  |      |         |      | 
|Casualty brokerage            |      |  | $    | 54,618  |      | 
|Property brokerage            |      |  |      | 32,740  |      | 
|Programs                      |      |  |      | 30,870  |      | 
|Ocean marine brokerage        |      |  |      | 6,107   |      | 
|                              |      |  |      |         |      | 
|Total                         |      |  | $    | 124,335 |      | 
|                              |      |  |      |         |      | 
|Net premiums written:         |      | 
|Casualty brokerage            |      |  | $    | 20,039  |      | 
|Property brokerage            |      |  |      | 22,610  |      | 
|Programs                      |      |  |      | 5,604   |      | 
|Ocean marine brokerage        |      |  |      | 5,421   |      | 
|                              |      |  |      |         |      | 
|Total                         |      |  | $    | 53,674  |      | 
|                              |      |  |      |         |      | 
|                             
|                             

Underwriting

The underwriting
of excess and surplus lines involves reviewing the claims exposure and
experience of an account, if any, as well as the claims experience of the
particular class or similar classes of risk. As a surplus lines insurer, Caliber
One is generally free from rate and policy form regulation by insurance
regulatory bodies. Accordingly, Caliber One utilizes policy features that can be
changed in light of the circumstances, such as occurrence versus claims-made
coverage, different levels of retentions, exclusions and endorsements.

Caliber One is
attempting to include terrorism exclusions in its excess and surplus lines
policies when underwriters determine that there is a significant terrorism risk.
However, if a client objects to a full terrorism exclusion and Caliber One still
desires to write the particular business, its underwriters may include terms and
conditions in its insurance contracts intended to limit Caliber Ones
exposure to losses from future terrorist acts, such as occurrence caps,
aggregate limits and specific terrorism-event exclusions. Further, Caliber
Ones underwriters have the ability to review and monitor geographic
concentrations of its underlying risks and the types of industry or industries
to be insured in deciding whether to write the business.

Distribution

Caliber One
distributes its excess and surplus lines products on a nationwide basis through
approximately 100 appointed surplus lines brokers. Caliber One underwrites its
casualty coverages from its home office in Yardley, Pennsylvania and through
branch offices in Seattle, Washington, which was opened in 2000 and Glendale,
California, which was opened in 2001. Property and ocean marine coverages are
underwritten centrally in the home office. Caliber One generally does not grant
underwriting or binding authority to its brokers.

Two brokers
accounted for more than 10% of Caliber Ones gross premiums written in
2001: Sherwood Insurance Services, $27.9 million (22%), and Swett &
Crawford, $16.2 million (13%).

Based upon
direct written premium information published by A.M. Best Company for 2000,
Caliber One is the 22nd largest domestic writer of excess and surplus lines.

Claims Administration

Caliber
Ones claims department analyzes and investigates reported claims,
establishes individual claim reserves, pays claims and monitors the progress and
ultimate outcome of the claims. In addition, they determine that subrogation,
salvage and other cost recovery opportunities have been adequately explored.

All notices of
claims are reported to Caliber Ones centralized claims department in
Yardley. Claims services are delivered to customers through employees and
independent adjusters under the direction of Caliber Ones claims staff.
Caliber One also utilizes outside attorneys for specific cases. Caliber
Ones claims staff actively directs and manages the activities of all
outside attorneys utilized in the claims process.

13

---

REINSURANCE AND RETROCESSIONAL PROTECTION

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

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

At December 31,
2001, our reinsurance and retrocessional protections were as follows:

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

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

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

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

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

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

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

14

---

We actively
manage our exposure to catastrophes through our underwriting process, where we
generally monitor the accumulation of insurable values in catastrophe-prone
regions. Also, in writing property reinsurance coverages, PMA Re typically
requires per occurrence loss limitations for contracts that could have
catastrophe exposure. Through per risk reinsurance, we manage our net retention
in each exposure. PMA Res property per occurrence reinsurance provides
catastrophe protection of $50.0 million in excess of $10.0 million on its
traditional property book. Under certain conditions, PMA Re may recover $6.0
million of the $10.0 million retention for multiple net catastrophe losses. PMA
Re also maintains catastrophe protection of $12.5 million in excess of $5.0
million for property exposures underwritten by its Finite Risk and Financial
Products unit. PMA Re can also recover an additional $40.0 million of Finite
Risk and Financial Products occurrence losses under certain industry loss
scenarios. The PMA Insurance Group maintains catastrophe reinsurance protection
of 95% of $18.0 million excess of $2.0 million and Caliber One maintains
catastrophe reinsurance protection of $14.7 million excess of $1.3 million. Any
cession of losses under certain of these contracts requires that we cede
additional premiums.

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

With respect to
the reinsurance and retrocessional protection shown in the table on page 14, our
treaties that renewed effective January 1, 2002 do not cover us for losses
sustained from terrorist activities, except for PMA Res property per
occurrence treaty. Further, for treaties that renew later in 2002 it is possible
that losses due to terrorist attacks may be excluded. Therefore, future
terrorist attacks may result in losses that have a material adverse effect on
our financial condition, results of operations and liquidity.

The
collectibility of reinsurance is largely a function of the solvency of
reinsurers. At December 31, 2001, the Company had reinsurance receivables due
from the following unaffiliated reinsurers in excess of 5% of shareholders
equity:

|(dollar amounts in thousands)       |  | ReinsuranceReceivables |   | Collateral |  | Rating(1) |        
|----------------------------------- |  | ---------------------- | - | ---------- |  | --------- | -------
|                                   
|The London Reinsurance Group        |  |                        | $ | 343,270    |  | $         | 343,270
|United States Fidelity and Guaranty |  |                        |   | 143,635    |  |           | 104,154
|Underwriters Re                     |  |                        |   | 86,549     |  |           | 86,549 
|Houston Casualty                    |  |                        |   | 74,566     |  |           |       
|Mountain Ridge Insurance Company    |  |                        |   | 49,829     |  |           | 49,829 
|PXRE                                |  |                        |   | 36,495     |  |           | 2,754  
|Folksamerica Re                     |  |                        |   | 31,732     |  |           | 1,243  
|                                   

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

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

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

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

See Note 5 to
the Financial Statements included in the Annual Report for additional
information on reinsurance.

15

---

LOSS RESERVES

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

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

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

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

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

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

In many cases,
significant periods of time, ranging up to several years or more, may elapse
between the occurrence of an insured loss, the reporting of the loss to the
insurer and the insurers payment of that loss. Liabilities for reinsurers
generally become known more slowly than for primary insurers and are generally
subject to more unforeseen development. Estimating our ultimate claims liability
is necessarily a complex and judgmental process inasmuch as the amounts are
based on managements informed estimates and judgments using data currently
available. As additional experience and data become available regarding claims
payment and reporting patterns, legislative developments, regulatory trends on
benefit levels for both medical and indemnity payments, and economic conditions,
the estimates are revised accordingly. If our ultimate losses, net of
reinsurance, prove to differ substantially from the amounts recorded at December
31, 2001, the related adjustments could have a material adverse effect on our
financial condition, results of operations and liquidity.

The table on the
next page presents the subsequent development of the estimated year-end property
and casualty reserves, net of reinsurance (net reserves), for the
ten years prior to 2001. The first section of the table shows the estimated net
reserves that were recorded at the end of each respective year for all current
and prior year unpaid losses and LAE. The second section shows the cumulative
amounts of such previously recorded net reserves paid in succeeding years. The
third section shows the re-estimates of the net reserves made in each succeeding
year.

The cumulative
deficiency (redundancy) as shown in the table represents the aggregate change in
the reserve estimates from the original balance sheet dates through December 31,
2001; an increase in a loss estimate that related to a prior year occurrence
generates a deficiency in each intervening year. For example, a deficiency first
recognized in 1998 relating to losses incurred in 1991 would be included in the
cumulative deficiency amount for each of the years 1991 through 1997. However,
the deficiency would be reflected in operating results in 1998 only.

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

16

---

Consolidated Loss and Loss Adjustment Expense Development

December 31,
(dollar amounts in millions)

|                                      |  | 1991 |   | 1992    |         | 1993 |         | 1994    |   | 1995    |         | 1996 |         | 1997    |   | 1998    |         | 1999 |         | 2000    |   | 2001    |        
|------------------------------------- |  | ---- | - | ------- | ------- | ---- | ------- | ------- | - | ------- | ------- | ---- | ------- | ------- | - | ------- | ------- | ---- | ------- | ------- | - | ------- | -------
|                                     
|                                      |  |      |   |         |         |      |         |         |   |         |         |      |         |         |   |         |         |      |         |         |   |         |        
|I. Initial estimated liability for    |  |      |   |         |         |      |         |         |   |         |         |      |         |         |   |         |         |      |         |         |   |         |        
|unpaid losses and LAE,                |  |     
|net of reinsurance                    |  |      | $ | 1,824.3 |         | $    | 1,941.0 |         | $ | 1,932.0 |         | $    | 1,855.9 |         | $ | 1,808.5 |         | $    | 1,834.5 |         | $ | 1,670.9 |        
|                                      | 
|II. Amount of reserve paid,           |  |     
|net of reinsurance through:           |  |     
|                                      | 
|- one year later                      |  |      | $ | 490.5   |         | $    | 442.4   |         | $ | 407.8   |         | $    | 398.9   |         | $ | 437.6   |         | $    | 398.8   |         | $ | 360.7   |        
|- two years later                     |  |      |   | 848.8   |         |      | 779.1   |         |   | 746.1   |         |      | 763.7   |         |   | 780.0   |         |      | 669.6   |         |   | 646.0   |        
|- three years later                   |  |      |   | 1,127.0 |         |      | 1,066.8 |         |   | 1,055.9 |         |      | 1,072.9 |         |   | 999.0   |         |      | 894.8   |         |   | 924.6   |        
|- four years later                    |  |      |   | 1,364.9 |         |      | 1,329.2 |         |   | 1,330.6 |         |      | 1,252.2 |         |   | 1,183.5 |         |      | 1,118.2 |         |   | 1,013.0 |        
|- five years later                    |  |      |   | 1,585.4 |         |      | 1,573.8 |         |   | 1,472.7 |         |      | 1,405.9 |         |   | 1,369.7 |         |      | 1,172.3 |        
|- six years later                     |  |      |   | 1,788.9 |         |      | 1,688.7 |         |   | 1,605.4 |         |      | 1,573.2 |         |   | 1,407.9 |        
|- seven years later                   |  |      |   | 1,882.2 |         |      | 1,805.4 |         |   | 1,761.7 |         |      | 1,595.8 |        
|- eight years later                   |  |      |   | 1,986.5 |         |      | 1,953.8 |         |   | 1,779.3 |        
|- nine years later                    |  |      |   | 2,125.1 |         |      | 1,967.6 |        
|- ten years later                     |  |      |   | 2,134.3 |        
|                                      | 
|III. Re-estimated liability,          |  |     
|net of reinsurance, as of             |  |     
|                                      | 
|- one year later                      |  |      | $ | 1,966.8 |         | $    | 1,998.1 |         | $ | 1,932.3 |         | $    | 1,907.4 |         | $ | 1,964.6 |         | $    | 1,748.5 |         | $ | 1,624.3 |        
|- two years later                     |  |      |   | 2,067.5 |         |      | 2,006.5 |         |   | 1,982.5 |         |      | 2,073.4 |         |   | 1,866.8 |         |      | 1,700.5 |         |   | 1,557.6 |        
|- three years later                   |  |      |   | 2,081.5 |         |      | 2,060.6 |         |   | 2,163.9 |         |      | 1,986.7 |         |   | 1,819.2 |         |      | 1,611.1 |         |   | 1,495.3 |        
|- four years later                    |  |      |   | 2,134.8 |         |      | 2,258.2 |         |   | 2,078.3 |         |      | 1,942.0 |         |   | 1,742.1 |         |      | 1,542.3 |         |   | 1,480.8 |        
|- five years later                    |  |      |   | 2,302.0 |         |      | 2,170.3 |         |   | 2,030.5 |         |      | 1,880.3 |         |   | 1,672.6 |         |      | 1,524.3 |        
|- six years later                     |  |      |   | 2,209.3 |         |      | 2,126.6 |         |   | 1,973.2 |         |      | 1,822.1 |         |   | 1,658.0 |        
|- seven years later                   |  |      |   | 2,169.5 |         |      | 2,079.9 |         |   | 1,922.1 |         |      | 1,807.6 |        
|- eight years later                   |  |      |   | 2,133.7 |         |      | 2,036.5 |         |   | 1,910.9 |        
|- nine years later                    |  |      |   | 2,096.8 |         |      | 2,027.0 |        
|- ten years later                     |  |      |   | 2,089.3 |        
|                                      | 
|IV. Cumulative deficiency             |  |     
|(redundancy):                         |  |      | $ | 265.0   |         | $    | 86.0    |         | $ | (21.1   | )       | $    | (48.3   | )       | $ | (150.5  | )       | $    | (310.2  | )       | $ | (190.1  | )      
|                                      | 
|                                      | 
|V. Net liability                      |  |      |   | $       | 1,932.0 |      | $       | 1,855.9 |   | $       | 1,808.5 |      | $       | 1,834.5 |   | $       | 1,670.9 |      | $       | 1,347.2 |   | $       | 1,284.4
|Reinsurance recoverables              |  |      |   |         | 218.7   |      |         | 247.9   |   |         | 261.5   |      |         | 256.6   |   |         | 332.3   |      |         | 593.7   |   |         | 648.2  
|                                      | 
|Gross liability                       |  |      |   | $       | 2,150.7 |      | $       | 2,103.8 |   | $       | 2,070.0 |      | $       | 2,091.1 |   | $       | 2,003.2 |      | $       | 1,940.9 |   | $       | 1,932.6
|                                      | 
|                                      | 
|VI. Re-estimated net liability        |  |      |   | $       | 1,910.9 |      | $       | 1,807.6 |   | $       | 1,658.0 |      | $       | 1,524.3 |   | $       | 1,480.8 |      | $       | 1,288.9 |   | $       | 1,304.1
|Re-estimated reinsurance recoverables |  |      |   |         | 234.1   |      |         | 276.2   |   |         | 306.2   |      |         | 289.1   |   |         | 360.9   |      |         | 652.1   |   |         | 833.0  
|                                      | 
|Re-estimated gross liability          |  |      |   | $       | 2,145.0 |      | $       | 2,083.8 |   | $       | 1,964.2 |      | $       | 1,813.4 |   | $       | 1,841.7 |      | $       | 1,941.0 |   | $       | 2,137.1
|                                      | 

17

---

Unpaid losses
and LAE on a GAAP basis were $2,324.4 million and $2,053.1 million at December
31, 2001 and 2000, respectively. Unpaid losses and LAE on a statutory basis were
$1,039.8 million and $1,073.6 million at December 31, 2001 and 2000,
respectively. The difference between GAAP and statutory loss reserves reflects:
1) reinsurance receivables on unpaid losses and LAE, which are recorded as
assets for GAAP but netted against statutory loss reserves, and 2) non-U.S.
domiciled insurance companies, whose unpaid losses and LAE are included for GAAP
purposes, but not for statutory purposes.

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

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

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

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

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

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

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

18

---

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

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

At December 31,
2001 and 2000, our GAAP loss reserves were stated net of discount of $113.7
million and $104.0 million, respectively, primarily related to workers
compensation business. Pre-tax income is negatively impacted by accretion of
discount on prior year reserves and favorably impacted by recording of discount
for current year reserves. The net of these amounts is referred to as net
discount accretion. Net discount accretion increased (decreased) pre-tax income
by $11.5 million and $(4.9) million in 2001 and 2000, respectively.

At December 31,
2001, our loss reserves were stated net of $40.8 million of salvage and
subrogation. Our policy with respect to estimating the amounts and realizability
of salvage and subrogation is to develop accident year schedules of historic
paid salvage and subrogation by line of business, which are then projected to an
ultimate basis using actuarial projection techniques. The anticipated salvage
and subrogation is the estimated ultimate salvage and subrogation less any
amounts received by us. The realizability of anticipated salvage and subrogation
is reflected in the historical data that is used to complete the projection, as
historical paid data implicitly considers realization and collectibility.

Asbestos and Environmental Reserves

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

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

19

---

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

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

Of the total net
asbestos reserves, approximately $26.6 million, $27.2 million and $32.0 million
related to incurred but not reported losses at December 31, 2001, 2000 and 1999,
respectively. Of the total net environmental reserves, approximately $9.2
million, $9.2 million and $18.0 million related to incurred but not reported
losses at December 31, 2001, 2000 and 1999, respectively. All incurred asbestos
and environmental losses were for accident years 1986 and prior.

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

INVESTMENTS

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

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

We currently
have no derivative financial instruments outstanding. We do not use derivatives
for speculative purposes. Our investment portfolio does not contain any
significant concentrations in single issuers other than U.S. Treasury and agency
obligations. In addition, we do not have a significant concentration of
investments in any single industry segment other than finance companies, which
comprise 8% of invested assets at December 31, 2001. Included in this industry
segment are financial institutions, including financing subsidiaries of
automotive manufacturers.

20

---

For additional
information on our investments, including carrying values by category, quality
ratings and net investment income, see pages 43 and 44 of the MD&A as well
as Notes 2B and 3 to the Financial Statements in the Annual Report.

COMPETITION

General

The domestic
property and casualty insurance and reinsurance industries are very competitive
and consist of many companies, with no one company dominating the market. In
addition, the degree and nature of competition varies from state to state for a
variety of reasons, including the regulatory climate and other market
participants in each state. PMA Re competes with other reinsurers in the broker
market as well as reinsurers that underwrite reinsurance business on a direct
basis. In addition to competition from other insurance companies, The PMA
Insurance Group and Caliber One compete with certain alternative market
arrangements, such as captive insurers, risk-sharing pools and associations,
risk retention groups, and self-insurance programs. Many of our competitors are
larger and have greater financial resources than us.

The main factors
upon which entities in our markets compete are price, service, product
capabilities and financial security. PMA Re, The PMA Insurance Group and Caliber
One attempt to price their products in such a way that the prices charged to
their clients are commensurate with the overall marketplace while still meeting
our rate of return targets. The soft pricing environment which existed until the
second half of 2000 in most of our business has made competing solely on the
basis of price increasingly difficult. PMA Re, The PMA Insurance Group and
Caliber One have rejected and/or non-renewed certain accounts in recent years,
as the market rates, terms and conditions for such risks did not provide the
opportunity to achieve an acceptable rate of return.

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

We attempt to
design products that meet the needs of clients in our markets. PMA Re has
expanded its product line in recent years to satisfy the needs of its client
base. Products introduced by PMA Re in the last four years include finite risk
and financial products reinsurance and facultative reinsurance. See PMA
ReProducts for additional discussion. In recent years, The PMA
Insurance Group has developed products that reflect the evolving nature of the
workers compensation market. Specifically, it has developed PMA One, a
product that provides for group integrated occupational and non-occupational
disability coverages. The PMA Insurance Group has also increased its focus on
rehabilitation and managed care to control workers compensation costs for
the employers. In addition, it also benefited in 2001, 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. See The PMA Insurance Group  Products for
additional discussion. Caliber One designs products that meet the needs of new
classes of business and that cover emerging risks. We continually evaluate new
product opportunities for PMA Re, The PMA Insurance Group and Caliber One.

Industry Trends

During the 1990s
and into 2000, the property and casualty insurance and reinsurance industry was
characterized by excess capacity, which resulted in highly competitive market
conditions evidenced by declining premium rates and, in many cases, policy terms
less favorable to the insurers. As a result of this prolonged soft market,
beginning in 2000, capacity in the property and casualty market began to
contract as companies withdrew from the business or ceased operations. In
response to market conditions, many insurance and reinsurance companies,
including our companies, independently sought and achieved significant price
increases and improved policy terms commencing in the second half of 2000. For
example, in 2000, we realized an increase of approximately 25% in premiums on
renewal business at PMA Re and achieved average (weighted by premium volume)
price increases at The PMA Insurance Group in excess of 10%. These increases
continued in 2001 as follows:

|PMA Re                   | 30%
|------------------------ | ---
|The PMA Insurance Group:
|Workers' Compensation    | 15%
|Commercial Lines         | 25%
|Caliber One              | 25%

21

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In addition to
these increases, we have achieved generally improved terms in certain of our
insurance and reinsurance policies. For example, we have implemented broader
coverage exclusions, lower occurrence limits, lower ceding commissions,
accelerated payment terms and higher retentions or deductibles for insureds. As
a result of the events of September 11th, we experienced an acceleration of the
improvement in pricing and terms. These improvements in terms and conditions
should further enhance the profitability of our business.

Despite current
market conditions, there can be no assurance that prices and premiums will
increase at a level consistent with these expectations. Even if the industry in
general experiences those types of increases, we cannot assure you that we will
see similar increases in one or more of our businesses or that we will achieve
price increases consistent with 2001. Further, any benefit that we derive from
such price increases may be partially or completely offset by increases in ceded
reinsurance premiums and unexpected increases in our loss reserves.

Ratings

We believe that
our customers place a high degree of value on an insurer or reinsurer that has
good financial security, and will therefore find such insurer or reinsurer to be
of acceptable credit quality to underwrite the customers risks. For many
intermediaries and clients, financial security is measured by the ratings
assigned by independent rating agencies. Certain of our insurance subsidiaries
are rated by independent rating agencies. The ratings represent the opinions of
the rating agencies on the insurance companys financial strength and our
ability to pay obligations to policyholders and are not directed toward the
protection of investors. Management believes that the ratings assigned by
nationally recognized, independent rating agencies, particularly A.M. Best, are
material to our operations.

The rating
scales of the principal agencies that rate our insurance subsidiaries are
characterized as follows:

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

| |  | Standard
&Poor's ("S&P"), AAA to R ("Extremely Strong" to "Regulatory Supervision")
| | - | -----------------------------------------------------------------------------------

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

As of February
28, 2002, our principal insurance subsidiaries had the following
ratings(1):

|                               | A. M. Best                   | S&P                       | Moody's                      
|------------------------------ | ---------------------------- | ------------------------- | -----------------------------
|                               |                              |                           |                              
|PMA Capital Insurance  Company | A  ("Excellent" - 3rd of 16) | A  ("Strong" - 6th of 21) | A3    ("Good" - 7th of 21)   
|Pooled Companies               | A- ("Excellent" - 4th of 16) | A  ("Strong" - 6th of 21) | Baa1 ("Adequate" - 8th of 21)
|Caliber One Indemnity Company  | A  ("Excellent" - 3rd of 16) | Not rated                 | Not rated                    
|                              

|(1) |  | See
page 30 of the MD&A for information regarding rating agency reviews conducted as a
result of our losses from the attack on the World Trade Center.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

These ratings
are subject to revision or withdrawal at any time by the rating agencies, and
therefore, no assurance can be given that PMA Capital Insurance Company, the
Pooled Companies and/or Caliber One Indemnity Company can maintain these
ratings. Each rating should be evaluated independently of any other rating. A
downgrade in these ratings could affect our competitive position in the
insurance industry and make it more difficult for us to market our products. A
significant downgrade could result in a material loss of business as
policyholders move to other companies with higher ratings.

22

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REGULATORY MATTERS

General

PMA Capital
Insurance Company is licensed or accredited to transact business in, and is
subject to regulation and supervision by, 50 states and the District of
Columbia. One or more of the Pooled Companies are licensed to transact insurance
business in, and are subject to regulation and supervision by, 52 jurisdictions
(including Puerto Rico and the District of Columbia). Caliber One Indemnity
Company is licensed in Delaware, its domiciliary state, and is an eligible
excess and surplus lines carrier in 44 states, the District of Columbia, U.S.
Virgin Islands and Puerto Rico. Our insurance subsidiaries are authorized and
regulated in all jurisdictions where they conduct insurance business.

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

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

The U.S. federal
government does not directly regulate the insurance industry; however, federal
initiatives from time to time can impact the insurance industry. In 1999,
Gramm-Leach-Bliley Financial Modernization Act was signed into law. This Act
removed many of the restrictions on affiliations among firms in different
financial services businesses, notably banking, securities and insurance. The
Act also contained provisions to protect the privacy of certain information on
individuals held by insurance companies and financial institutions. Several
governmental agencies and insurance departments have enacted or proposed
regulations to implement these privacy provisions. To date, the Act has not had
a material effect on us, although future privacy regulations could result in
additional costs to us. Further, the Act may result in additional competition in
one or more of the markets in which we sell our products and services.

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

In the aftermath
of the September 11th terrorist attack, the Bush Administration and Congress
discussed various proposals that would make the federal government share in a
portion of any future terrorism losses in the property and casualty industry.
Although the House of Representatives passed legislation, the Senate did not. As
of February 28, 2002, no further action has been taken by Congress to enact
legislation on this subject. Without this type of legislation, property and
casualty insurance companies may be responsible for losses arising from acts of
terrorism to the extent that coverage for acts of terrorism is not excluded from
their insurance policies.

We are currently
attempting to exclude coverage of losses due to terrorist activity in our
assumed reinsurance contracts and in our surplus lines insurance agreements
where underwriters determine that there is a significant risk of loss from
terrorism activities. For the commercial insurance business offered by The PMA
Insurance Group, excluding our workers compensation business, state
insurance departments must approve the terms of our insurance forms and new
exclusions included in those forms. As of January 31, 2002, all states except
for California, Georgia, Florida and New York, have approved terrorism
exclusions for polices on commercial insurance business, other than
workers compensation insurance. Accordingly, we are attempting to include
terrorism exclusions when permitted. With respect to workers compensation
insurance, terrorism exclusions are not permitted under workers
compensation laws of any state or jurisdiction in which we operate. When
underwriting existing and new workers compensation business, we are
considering the added potential risk of loss due to terrorist activity, and this
may lead us to decline to write or non-renew certain business. However, even
when terrorism exclusions are permitted, because our clients may not accept a
full

23

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terrorism exclusion in connection with business that we may still desire
to write without an exclusion, some or many of our insurance policies or reinsurance
contracts may not include a terrorism exclusion or only include a limited exclusion.
Therefore, future terrorist attacks may result in losses that have a material adverse
effect on our financial condition, results of operations and liquidity.

State insurance
departments in jurisdictions in which our insurance subsidiaries do business
also conduct periodic examinations of their respective operations and accounts
and require the filing of annual and other reports relating to their financial
condition. The Pennsylvania Department of Insurance last conducted examinations
of PMA Capital Insurance Company and the Pooled Companies as of December 31,
1997. No material adjustments to previously filed statutory financial statements
were required as a result of such examinations. In addition, there were no
material qualitative matters indicated in the examination reports that had a
material adverse effect on the operations of PMA Capital Insurance Company and
the Pooled Companies. The Delaware Department of Insurance recently completed an
examination of Caliber One Indemnity Company for the three-year period ended
December 31, 2000. Although a final report on this examination has not yet been
issued, we do not expect there to be any significant adjustments to our reported
statutory financial statements.

Insurance Holding Company Regulation

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

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

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

Restrictions on Subsidiaries Dividends and Other Payments

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

Our domestic
insurance subsidiaries ability to pay dividends is regulated under the
insurance laws and regulations of Pennsylvania and Delaware (the laws of which
are substantially similar with respect to dividends). In addition to the
regulatory restrictions, our existing revolving credit and letter of credit
facilities limit the amount of dividends that our subsidiaries may pay to us. As
a result, we may not be able to receive dividends from these subsidiaries at
times and in amounts necessary to meet our obligations or to pay dividends on
our Class A Common stock.

24

---

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

All of our
domestic insurance entities are owned by PMA Capital Insurance Company. Only PMA
Capital Insurance Company, a Pennsylvania domiciled company, may pay dividends
directly to us. During 2001, we received $29.6 million in dividends from PMA Capital
Insurance Company. As of December 31, 2001, approximately $56 million of dividends
are available to be paid to us without prior approval of the Pennsylvania
Insurance Commissioner during 2002. As of December 31, 2001, The PMA Insurance
Group can pay up to approximately $27 million in dividends to PMA Capital
Insurance Company during 2002.

Caliber One
Indemnity Company is a Delaware-domiciled insurance subsidiary of PMA Capital
Insurance Company. As a subsidiary of PMA Capital Insurance Company, Caliber One
Indemnity Companys dividends are not directly available to us. As noted
above, the Delaware insurance law provisions restricting dividends by insurers
are substantially similar to such provisions under Pennsylvania insurance laws.
As of December 31, 2001, Caliber One Indemnity Company may not pay dividends to
PMA Capital Insurance Company without prior approval of the Delaware Insurance
Commissioner during 2002. During 2001, no dividends were declared or paid by
Caliber One Indemnity Company.

In the event
that PMA Capital Insurance Companys ability to pay dividends or make other
payments to us in the future is reduced or eliminated, our ability to pay
dividends to our shareholders and meet our other obligations, including
operating expenses and any principal and interest on debt, could be materially
and adversely affected, depending upon the extent of such reduction. In the
event that the Pennsylvania Insurance Commissioner determines that the
policyholders surplus of one subsidiary is inadequate, the Commissioner
could use his or her broad discretionary authority to seek to require us to
apply payments received from another subsidiary for the benefit of that
insurance subsidiary.

In addition to
regulatory restrictions on dividends, our Revolving Credit Facility and Letter
of Credit Facility also impose restrictions on the ability of our insurance
subsidiaries to pay dividends. Under the most restrictive debt covenant of the
Facilities, PMA Capital would be able to pay approximately $15 million in
dividends in 2002.

Risk-Based Capital

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

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

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

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

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

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

25

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At December 31,
2001, the RBC ratios of the Pooled Companies ranged from 355% to 612%. PMA
Capital Insurance Companys RBC ratio was 323% and Caliber One Indemnity
Companys RBC ratio was 426%.

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

The NAIC has
also developed a series of twelve ratios (known as the IRIS ratios) designed to
further assist regulators in assessing the financial condition of insurers.
These ratio results are computed annually and reported to the NAIC and the
insurers state of domicile. In 2001, each of the Pooled Companies reported
an unusual value in one ratio, relating to reserve development due to the
paydown of loss reserves.

In 2001, PMA
Capital Insurance Company reported three unusual values, relating to: (1) the
change in net premiums written, (2) two-year overall operating ratio and (3)
reserve development. The unusual value relating to the change in net premiums
written is attributable to an intercompany quota share reinsurance treaty with
Caliber One Indemnity Company, which commenced in 2001, and higher ceded
premiums in 2000 due to the third quarter 2000 reserve action. The unusual
value relating to the two-year overall operating ratio is due to the losses
resulting from the attack on the World Trade Center in 2001 and the third
quarter 2000 reserve action. The unusual value relating to reserve development
is due to the long-tail nature of PMA Capital Insurance Companys loss
reserves, coupled with the above average premium growth in 2001 discussed above.

In 2001, Caliber
One Indemnity Company reported six unusual values, relating to: (1) the change
in net premiums written, (2) surplus aid to surplus, (3) two-year overall
operating ratio, (4) gross agents balances to surplus, (5) one-year
reserve development and (6) change in surplus. The unusual values relating to
the change in net premiums written and surplus aid to surplus were attributable
to an intercompany quota share reinsurance treaty with PMA Capital Insurance
Company. The unusual values relating to the two-year overall operating ratio,
one-year reserve development and change in surplus are primarily the result of
the higher than expected claim frequency and severity that emerged in 2001 on
certain casualty lines of business, primarily professional liability policies
for the nursing homes class of business. The unusual value relating to gross
agents balances to surplus is attributable to increased gross premiums
written in the fourth quarter of 2001, which is reflective of the improving
market conditions experienced by Caliber One in the excess and surplus lines
marketplace.

EMPLOYEES

As of February
28, 2002, we had approximately 1,250 full-time employees. None of our employees
are represented by a labor union and we are not a party to any collective
bargaining agreements. We consider our employee relations to be good.

26

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GLOSSARY OF SELECTED INSURANCE TERMS

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

27

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|                                             |                                                                                                                                                                                                                                                                                                                                       
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                            
|Funded catastrophe coverages                 | Reinsurance contracts under which the ceding company pays a higher than
normal premium intended to build a fund from which to pay expected losses. All of the
premium less the reinsurance charge will be returned to the ceding company at some time
in the future as loss payments, returned premiums, or contingent commissions.   
|                                            
|Funds held                                   | The holding by a ceding company of funds representing the unearned
premium reserve or the outstanding loss reserve applied to the business it cedes to a
reinsurer.                                                                                                                                                                   
|                                            
|Gross premiums written                       | Total premiums for direct insurance and reinsurance assumed during a given period.                                                                                                                                                                                                                                                    
|                                            
|Incurred but not reported  ("IBNR") reserves | Loss reserves for estimated losses that have been incurred but not yet
reported to the insurer or reinsurer.                                                                                                                                                                                                                          
|                                            
|Incurred losses                              | The total losses sustained by an insurance company under a policy or
policies, whether paid or unpaid. Incurred losses include a provision for claims that
have occurred but have not yet been reported to the insurer ("IBNR").                                                                                                      
|                                            
|Layers                                       | The division of a particular reinsurance program delineated by an
attachment point and a maximum limit. Often, a reinsurance program will be divided into
several layers, with the lower layers typically having higher premiums and higher claim
frequency and the higher layers typically having lower premiums and claim frequency.
|                                            
|Loss adjustment expenses  ("LAE")            | The expenses of settling claims, including legal and other fees and the
portion of general expenses allocated to claim settlement costs.                                                                                                                                                                                              
|                                            
|Loss and LAE ratio                           | Loss and LAE ratio is equal to losses and LAE divided by earned premiums.                                                                                                                                                                                                                                                             
|                                            
|Loss reserves                                | Liabilities established by insurers and reinsurers to reflect the
estimated cost of claims payments that the insurer or reinsurer ultimately will be
required to pay in respect of insurance or reinsurance it has written. Reserves are
established for losses and for LAE and consist of case reserves and bulk reserves.           
|                                            
|Manual rates                                 | Insurance rates for lines and classes of business that are approved and
published by state insurance departments.                                                                                                                                                                                                                     
|                                            
|Net premiums earned                          | The portion of net premiums written that is earned during a period and
recognized for accounting purposes as revenue.                                                                                                                                                                                                                 
|                                            
|Net premiums written                         | Gross premiums written for a given period less premiums ceded to
reinsurers during such period.                                                                                                                                                                                                                                       
|                                            
|Per occurrence                               | A form of insurance or reinsurance under which the date of the loss event
is deemed to be the date of the occurrence, regardless of when reported and permits all
losses arising out of one event to be aggregated instead of being handled on a
risk-by-risk basis.                                                                  
|                                            
|Policyholders' dividend ratio                | The ratio of policyholders' dividends to earned premiums.                                                                                                                                                                                                                                                                             
|                                            
|Primary insurer                              | An insurance company that issues insurance policies to the general public
or to certain non-insurance entities.                                                                                                                                                                                                                       
|                                            
|Pro rata reinsurance                         | A form of reinsurance in which the reinsurer shares a proportional part
of the ceded insurance liability, premiums and losses of the ceding company. Pro rata
reinsurance also is known as proportional reinsurance or participating reinsurance.                                                                                     

28

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

29

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RISK FACTORS

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

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

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

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

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

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

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

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

The property and
casualty insurance industry historically is cyclical in nature. The demand for
property and casualty insurance can vary significantly, rising as the overall
level of economic activity increases and falling as such activity decreases. The
property and casualty insurance industry and especially the reinsurance business
also have been very competitive, although our insurance subsidiaries have
experienced more favorable terms and pricing beginning in the second half of
2000 and continuing into early 2002. These fluctuations in demand and
competition and the impact on us of other factors identified above could have a
negative impact on our results of operations and financial condition.

Because we operate in a highly competitive industry, we may
be unable to maintain adequate rates.

The property and casualty
insurance and reinsurance industry is highly competitive. We compete with major U.S. and
regional insurers and reinsurers as well as non-U.S. insurers and reinsurers. Some of our
competitors have greater financial, marketing and management resources than we do.

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

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

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

| |  | the
implementation of commercial lines deregulation in several states, which could increase
competition from standard carriers for our excess and surplus lines of insurance
business;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

30

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These
developments could make the property and casualty insurance marketplace more
competitive by increasing the supply of insurance and reinsurance available. The
significant amount of capital in the property and casualty marketplace has,
until recently, resulted in the supply of insurance and reinsurance outpacing
demand. This oversupply has made it difficult to achieve a level of rate
adequacy related to the amount of risk undertaken. Although rates have improved
recently, continued oversupply may negatively influence the sustainability of
adequate rate changes, and accordingly, have an adverse effect on our earnings.

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

Like all
insurers, we establish reserves representing estimates of future amounts needed
to pay claims with respect to insured events that have occurred, including
events that have not been reported to us. We also establish reserves for loss
adjustment expenses, which represent the estimated expenses of settling claims,
including legal and other fees, and general expenses of administering the claims
adjustment process. Reserves are merely estimates and do not and cannot
represent an exact measure of liability. The reserving process involves
actuarial models, which rely on the basic assumption that past experience,
adjusted for the effect of current developments and likely trends in claims
severity, frequency, judicial theories of liability and other factors, is an
appropriate basis for predicting future events. However, in many cases
significant periods of time, ranging up to several years or more, may elapse
between the occurrence of an insured loss, the reporting of the loss to the
insurer and the insurers payment of that loss. Further, liabilities for
reinsurers generally become known more slowly than for primary insurers and are
generally subject to more unforeseen development.

If, during that
time, actual losses and loss adjustment expenses develop faster or are larger
than our loss reserve estimates, which may be due to a wide range of factors,
including inflation, changes in claims and litigation trends and legislative or
regulatory changes, we would have to increase reserves. As a result, we would
incur a charge to earnings in the period the reserves are increased. For
example, in the third quarter of 2000, we took a charge of approximately $60
million to our pre-tax earnings as a result of higher than expected loss and
loss adjustment expenses in certain lines of our reinsurance business.

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

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

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

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

We are currently
attempting to exclude coverage of losses due to terrorist activity in our
assumed reinsurance contracts and in our surplus lines insurance agreements
where underwriters determine that there is a significant risk of loss from
terrorism activities. For the commercial insurance business offered by The PMA
Insurance Group, excluding our workers compensation business, state
insurance departments must approve the terms of our insurance forms and new
exclusions included in those forms. As of January 31, 2002, all states except
for California, Georgia, Florida and New York, have approved terrorism
exclusions for polices on commercial insurance business, other than workers

31

---

compensation insurance. Accordingly, we are attempting
to include terrorism exclusions when permitted. With respect to workers compensation
insurance, terrorism exclusions are not permitted under workers compensation laws of
any state or jurisdiction in which we operate. When underwriting existing and new workers compensation
business, we are considering the added potential risk of loss due to terrorist activity,
and this may lead us to decline to write or non-renew certain business. However, even
when terrorism exclusions are permitted, because our clients may object to a terrorism
exclusion in connection with business that we may still desire to write without an
exclusion, some or many of our insurance policies or reinsurance contracts may not
include a terrorism exclusion. Therefore, future terrorist attacks may result in losses
that have a material adverse effect on our financial condition, results of operations and
liquidity.

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

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

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

Market
conditions beyond our control determine the availability and cost of the
reinsurance protection we purchase. We cannot assure you that reinsurance will
remain continuously available to us to the same extent and on the same terms and
rates as are currently available. If we are unable to maintain our current level
of reinsurance or purchase new reinsurance protection in amounts that we
consider sufficient, we would either have to be willing to accept an increase in
our net exposures or reduce our insurance writings. Due to the terrorist attack
on the World Trade Center, for example, our reinsurers have generally included
terrorism exclusions or limits in their reinsurance agreements. Although this
has not materially affected our business written or our results of operations,
future terrorist attacks leading to claims under policies that we have written
without terrorism exclusions may have a material adverse effect on our results
of operations.

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

Rating agencies
rate insurance companies based on financial strength and the ability to pay
claims, factors more relevant to policyholders than investors. We believe that
the ratings assigned by nationally recognized, independent rating agencies,
particularly A.M. Best, are material to our operations. A. M. Best, Standard
& Poors and Moodys Investor Services currently rate our
principal insurance subsidiaries. Please see
Competition  Ratings on page 22 for a description of our
ratings.

A downgrade in
these ratings could affect our competitive position in the insurance industry
and make it more difficult for us to market our products. A significant
downgrade could result in a material loss of business as policyholders move to
other companies with higher claims-paying and financial strength ratings.

32

---

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

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

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

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

| |  | limitations
on the rates that we may charge on our workers' compensation business;
|- |  | ----------------------------------------------------------------------------------

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

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

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

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

The regulations
of the state insurance departments may affect the cost or demand for our
products and may impede us from obtaining rate increases on insurance policies
offered by our primary insurance operations or taking other actions we might
wish to take to increase our profitability. Further, we may be unable to
maintain all required licenses and approvals and our business may not fully
comply with the wide variety of applicable laws and regulations or the relevant
authoritys interpretation of the laws and regulations, which may change
from time to time. Also, regulatory authorities have relatively broad discretion
to grant, renew or revoke licenses and approvals. If we do not have the
requisite licenses and approvals or do not comply with applicable regulatory
requirements, the insurance regulatory authorities could preclude or temporarily
suspend us from carrying on some or all of our activities or impose substantial
fines. In light of recent insolvencies of large property and casualty insurers,
it is possible that the regulations governing the level of the guaranty fund or
association assessments against us may change, requiring us to increase our
level of payments.

Because our reinsurance operations depend on a few
reinsurance brokers for a large portion of their revenue, loss of business
provided by them could adversely affect us.

We market our
reinsurance products through reinsurance brokers. Four brokerage firms accounted
for 80% of our reinsurance gross premiums written and 37% of our consolidated
gross premiums written for the year ended December 31, 2001. Please see
PMA Re  Distribution on page 5 for a further description of our
broker relationships. Loss of all or a substantial portion of the business
provided by these brokers could have a material adverse effect on us.

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

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

33

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Our status as an insurance holding company with no direct
operations could adversely affect our ability to meet our obligations and pay
dividends.

We are a holding
company that transacts substantially all of our business directly and indirectly
through subsidiaries. Our primary assets are the stock of our operating
subsidiaries. Our ability to meet our obligations on our outstanding debt and to
pay dividends and our general and administrative expenses depends on the surplus
and earnings of our subsidiaries and the ability of our subsidiaries to pay
dividends or to advance or repay funds to us. Payments of dividends and advances
and repayments by our insurance operating subsidiaries are restricted by state
insurance laws, including laws establishing minimum solvency and liquidity
thresholds. Approximately $56 million of dividends are available to be paid to
us in 2002 from our domestic insurance subsidiaries without prior regulatory
approval. In addition to the regulatory restrictions, our existing revolving
credit and letter of credit facilities limit the amount of dividends that our
subsidiaries may pay to us. As a result, we may not be able to receive dividends
from these subsidiaries at times and in amounts necessary to meet our debt
obligations or to pay dividends on our capital securities.

The covenants in our debt agreements could limit our
financial and operational flexibility, which could have an adverse effect on our
financial condition, and limit the amount of dividends that we can pay on any
class of capital stock.

We have incurred
indebtedness and may incur additional indebtedness in the future. At December
31, 2001, we had $62.5 million outstanding under our credit facility and $27.9
million outstanding in letters of credit under our secured letter of credit
facility. The agreements governing our indebtedness contain numerous covenants
that limit, or have the effect of limiting, our ability to, among other things,
borrow money, sell assets, merge or consolidate and make investments. These
restrictions could limit our ability to take advantage of business and
investment opportunities, and therefore, could adversely affect our financial
condition, liquidity and results of operations. In addition, these agreements
limit our ability to pay dividends on our Class A Common stock. In 2002, under
the most restrictive covenants of these agreements, we would be able to pay
dividends of approximately $15 million on any class of capital stock.

Our business is dependent upon our key executives who do not
have employment agreements with restrictive covenants and can leave our
employment at any time.

Our success
depends significantly on the efforts and abilities of our Chairman, Frederick W.
Anton III; our President and Chief Executive Officer, John W. Smithson; the
President and Chief Operating Officer of PMA Re, Stephen G. Tirney; the
President and Chief Operating Officer of The PMA Insurance Group, Vincent T.
Donnelly; and the President and Chief Operating Officer of Caliber One, Ronald
S. Austin. We do not presently have employment agreements that include
restrictive covenants with our key executives. Accordingly, our key executives
may leave our employment at any time. Because our business is based to some
extent upon relationships with our brokers and insureds, our future results of
operations could be adversely affected if we are unable to retain our current
executives or to attract new executives.

34

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Item 2.  Properties

The
Companys and PMA Res headquarters are located in 87,500 square feet
of leased space in center city Philadelphia, Pennsylvania. The PMA Insurance
Groups headquarters are located in a four story, 110,000 square foot
building in Blue Bell, Pennsylvania. Caliber Ones headquarters are located
in approximately 50,000 square feet of leased office space in Yardley, Pennsylvania.

Through various
wholly owned subsidiaries, the Company also owns and occupies additional office
facilities in three other locations and rents additional office space for its
insurance operations in 16 other locations. The Company believes that such owned
properties are suitable and adequate for its current business operations.

Item 3.  Legal Proceedings

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

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

There were no
matters submitted to a vote of security holders during the fourth quarter of
2001.

Executive Officers of the Registrant

Our executive
officers are as follows:

|                       |     |                                               
|---------------------- | --- | ----------------------------------------------
|Name                   | Age | Position                                      
|John W. Smithson       | 56  | President and Chief Executive Officer         
|Frederick W. Anton III | 68  | Chairman of the Board                         
|Ronald S. Austin       | 44  | President and Chief Operating Officer -       
|                       |     | Caliber One Management Company                
|Vincent T. Donnelly    | 49  | President and Chief Operating Officer -       
|                       |     | The PMA Insurance Group                       
|Francis  W. McDonnell  | 45  | Senior Vice President, Chief Financial Officer
|                       |     | and Treasurer                                 
|Robert L. Pratter      | 57  | Senior Vice President, General Counsel and    
|                       |     | Secretary                                     
|Stephen G. Tirney      | 48  | President and Chief Operating Officer -       
|                       |     | PMA Re Management Company                     

John W. Smithson
has served as our President and Chief Executive Officer since May 1997, and as a
director since 1987. Mr. Smithson served as our President and Chief Operating
Officer from 1995 to May 1997. He has also served as Chairman and Chief
Executive Officer of the following subsidiaries: PMA Capital Insurance Company
since 1984; The PMA Insurance Group since 1995; Caliber One Management Company
since 1997; Caliber One Indemnity Company since 1997; and PMA Re Management
Company since 2000.

Frederick W.
Anton III has served as Chairman of the Board since 1995 and as a director since
1972. Mr. Anton served as Chairman of the Board and Chief Executive Officer from
1995 to May 1997, and as President and Chief Executive Officer from 1981 to
1995.

Ronald S. Austin
has served as the President and Chief Operating Officer of Caliber One
Management Company and Caliber One Indemnity Company since 1997, and has served
as Executive Vice President of PMA Capital Insurance Company since November
2000. From 1988 to 1997, Mr. Austin served as an officer and director of General
Star Management Company, a subsidiary of the General Re Group.

35

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Vincent T.
Donnelly has served as President and Chief Operating Officer of The PMA
Insurance Group since February 1997, and has served as Executive Vice President
of PMA Capital Insurance Company since November 2000. Mr. Donnelly served as
Senior Vice President  Finance and Chief Actuary of The PMA Insurance
Group from 1995 to 1997.

Francis W.
McDonnell has served as our Senior Vice President and Chief Financial Officer
since 1995 and as Treasurer since 1997, and has served as Vice President and
Chief Financial Officer of PMA Capital Insurance Company since 1995.

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

Stephen G.
Tirney has served as President and Chief Operating Officer of PMA Re Management
Company, since November 2000, Executive Vice President of PMA Capital Insurance
Company since November 2000 and President and Chief Operating Officer of PMA
Reinsurance Corporation from 1997 to November 2000. Mr. Tirney served as
Executive Vice President of PMA Reinsurance Corporation from 1993 to 1997.

PART II

Item 5.  Market for the Registrant's Common Equity and Related
Shareholder Matters

Market For Class A Common Stock

The Class
A Common Stock Prices under the caption Quarterly Financial
Information and the last paragraph on page 74 of the Annual Report, as
well as the information under the captions Securities Listing and
Dividends on page 77 of the Annual Report are incorporated herein by
reference. Further, the information in Note 8 to the Financial Statements in the
Annual Report and under the caption Regulatory MattersRestrictions
on Subsidiaries Dividends and Other Payments in Item 1 of this Form
10-K is incorporated herein by reference.

Related Shareholder Matters

On November 21,
2001, we commenced an offering of 8,500,000 shares of Class A Common Stock by
filing a registration statement on Form S-3, No. 333-72952. The offering was
joint lead-managed by Credit Suisse First Boston (bookrunner) and Banc of
America Securities LLC, and was co-managed by Sandler ONeill &
Partners, L.P. The offering closed on December 19, 2001, and we sold 9,775,000
shares in the offering, including the underwriters overallotment option
for 1,275,000 shares, at $17.25 per share. We realized proceeds of $157.9
million, net of issuance costs of $585,000 and underwriting discounts and
commissions of $10.2 million. We used $62.5 million of the proceeds to repay a
portion of our outstanding debt under our revolving credit facility and the
remainder was contributed to the capital of our insurance subsidiaries.

Item 6.  Selected Financial Data

The information
under the caption Selected Financial Data on pages 26 and 27 of the
Annual Report is incorporated herein by reference.

Item 7.  Management's Discussion and Analysis of Financial
Condition and Results of Operations

Managements
Discussion and Analysis of Financial Condition and Results of Operations on
pages 28 through 48 of the Annual Report is incorporated herein by reference.

36

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Item 7A.  Quantitative and Qualitative Disclosure About
Market Risk

The information
under the caption Market Risk of Financial Instruments on pages 44 and 45 of
the Annual Report is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

Our Consolidated
Financial Statements and Notes to Consolidated Financial Statements on pages 49
through 72 and the Report of Independent Accountants on page 73 of the Annual
Report are incorporated herein by reference, as is the unaudited Income
Statement Data and Per Share Data under the caption
Quarterly Financial Information on page 74 of the Annual Report.

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

None.

PART III

Item 10.  Directors and Executive Officers of the Registrant

See
Executive Officers of the Registrant under Item 4 above. The
information under the captions Nominees For Election and
Directors Continuing in Office on pages 5 through 7 of our Proxy
Statement, dated March 22, 2002 for the 2002 Annual Meeting of Shareholders
(Proxy Statement) is incorporated herein by reference, as is the
information under the caption Section 16(a) Beneficial Ownership Reporting
Compliance on page 27 of the Proxy Statement.

Item 11.  Executive Compensation

The information
under the caption Compensation of Executive Officers on pages 10
through 13 and under the caption Director Compensation on page 8 of
the Proxy Statement is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and
Management

The information
under the caption Beneficial Ownership of Class A Common Stock on
pages 3 through 5 of the Proxy Statement is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

The information
under the caption Certain Transactions on pages 17 and 18 of the
Proxy Statement is incorporated herein by reference.

37

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PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

FINANCIAL STATEMENTS AND SCHEDULES

|(a) (1) | The
following consolidated financial statements of PMA Capital and its subsidiary companies
and Report of Independent Accountants, included on pages 49 through 73 of the Annual
Report are incorporated herein by reference:
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Consolidated
Balance Sheets at December 31, 2001 and 2000
|- |  | ---------------------------------------------------------

| |  | Consolidated
Statements of Operations for the years ended December 31, 2001, 2000 and 1999
|- |  | ------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
|- |  | ------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999
|- |  | ----------------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Comprehensive Income (Loss) for the years ended December 31, 2001, 2000 and
1999
|- |  | -----------------------------------------------------------------------------------------------------------

| |  | Notes
to Consolidated Financial Statements
|- |  | ------------------------------------------

| |  | Report
of Independent Accountants
|- |  | ---------------------------------

|(a) (2) | The Financial Statement Schedules are listed in the Index to Financial Statement
Schedules on page FS-1
|------- | -------------------------------------------------------------------------------------------------------

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

|(a) (3) | The
Exhibits are listed in the Index to Exhibits on pages E-1 through E-4.
|------- | --------------------------------------------------------------------------

|(b) |  | Reports
on Form 8-K filed during the quarter ended December 31, 2001:
|--- |  | ---------------------------------------------------------------------

| | During
the quarterly period ended December 31, 2001, the Company filed the following reports on
Form 8-K:
| | ---------------------------------------------------------------------------------------------------------

| |  dated
November 7, 2001, Items 5 and 9  containing a news release regarding its third
quarter 2001 results and informing investors that its third quarter 2001 statistical
supplement is available on its website.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  dated
November 8, 2001, Item 9  containing a news release announcing that it has filed a
registration statement with the Securities and Exchange Commission covering an offering
of shares of its common stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

38

---

Signatures

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

|                     |  |                                             
|-------------------- |  | --------------------------------------------
|                     |  | PMA CAPITAL CORPORATION                     
|                     |  |                                             
|                     |  |                                             
|Date: March 19, 2002 |  | By: /s/ Francis W. McDonnell                
|                     |  | Francis W. McDonnell                        
|                     |  | Senior Vice President,                      
|                     |  | Chief Financial Officer and Treasurer       
|                     |  | (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 19, 2002.

|Signature*                                                                                      |  | Title                                                                            
|----------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------
|                                                                                                |  |                                                                                  
|John W. Smithson                                                                                |  | President and Chief Executive Officer anda Director (Principal Executive Officer)
|                                                                                                |  |                                                                                  
|Frederick W. Anton III                                                                          |  | Chairman of the Board and a Director                                             
|Paul I. Detwiler, Jr.                                                                           |  | Director                                                                         
|Joseph H. Foster                                                                                |  | Director                                                                         
|Thomas J. Gallen                                                                                |  | Director                                                                         
|Anne S. Genter                                                                                  |  | Director                                                                         
|James F. Malone III                                                                             |  | Director                                                                         
|Louis N. McCarter III                                                                           |  | Director                                                                         
|John W. Miller, Jr.                                                                             |  | Director                                                                         
|Edward H. Owlett                                                                                |  | Director                                                                         
|Louis I. Pollock                                                                                |  | Director                                                                         
|Roderic H. Ross                                                                                 |  | Director                                                                         
|L. J. Rowell, Jr.                                                                               |  | Director                                                                         
|                                                                                                |  |                                                                                  
|* By: /s/  Charles A. Brawley, III
         Charles A. Brawley, III
           Attorney-in-Fact |  |                                                                                  

39

---

PMA Capital CorporationIndex to Financial Statement Schedules

| | Schedule No. | Description                                                                                                                             | Page        
| | ------------ | --------------------------------------------------------------------------------------------------------------------------------------- | ------------
|
| | II           | Condensed Financial Information of Registrant as of December 31, 2001 and
2000 and for the years ended December 31, 2001, 2000 and 1999 | FS-2 to FS-4
| |             
| | III          | Supplementary Insurance Information for the years ended December 31,
2001, 2000 and 1999                                                | FS-5        
| |             
| | IV           | Reinsurance for the years ended December 31, 2001, 2000 and 1999                                                                        | FS-6        
| |             
| | V            | Valuation and Qualifying Accounts for the years ended December 31, 2001,
2000 and 1999                                                  | FS-7        
| |             
| | VI           | Supplemental Information Concerning Property and Casualty Insurance
Operations for the years ended December 31, 2001, 2000 and 1999     | FS-8        
| |             
| |              | Report of Independent Accountants on Financial Statement Schedules                                                                      | FS-9        

Certain financial statement schedules have been omitted because
they are either not applicable or the required financial information is
contained in the Companys 2001 Consolidated Financial Statements and notes
thereto.

FS-1

---

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

|                                                                           |  | December 31, |  
|-------------------------------------------------------------------------- |  | ------------ | -
|(dollar amounts in thousands)                                              |  | 2001         |  
|                                                                          
|                                                                           |  |              |  
|Assets                                                                     |  |              |  
|Cash                                                                       |  |              | $
|Investment in subsidiaries                                                 |  |              |  
|Deferred income taxes, net                                                 |  |              |  
|Other assets                                                               |  |              |  
|                                                                           |  |             
|Total assets                                                               |  |              | $
|                                                                           |  |             
|                                                                           |  |             
|Liabilities                                                                |  |             
|Short-term debt                                                            |  |              | $
|Long-term debt                                                             |  |              |  
|Related party payables                                                     |  |              |  
|Other liabilities                                                          |  |              |  
|                                                                           |  |             
|Total liabilities                                                          |  |              |  
|                                                                           |  |             
|                                                                           |  |             
|Shareholders' Equity                                                       |  |             
|Class A Common stock, $5 par value (40,000,000 shares authorized;          |  |             
|2001 - 34,217,945 shares issued and 31,167,006 outstanding                 |  |             
|2000 - 24,442,945 shares issued and 21,573,316 outstanding                 |  |              |  
|Additional paid-in capital                                                 |  |              |  
|Retained earnings                                                          |  |              |  
|Accumulated other comprehensive income (loss)                              |  |              |  
|Notes receivable from officers                                             |  |              |  
|Treasury stock, at cost (2001  3,050,939 shares; 2000  2,869,629 shares) |  |              |  
|                                                                           |  |             
|Total shareholders' equity                                                 |  |              |  
|                                                                           |  |             
|Total liabilities and shareholders' equity                                 |  |              | $
|                                                                           |  |             

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

FS-2

---

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

|                                                                | Years Ended December 31,
|--------------------------------------------------------------- | ------------------------
|(dollar amounts in thousands)                                   | 2001                    
|                                                               
|                                                                |                         
|Revenues:                                                       |                         
|Net investment income (expense)                                 |                         
|Other revenues                                                  |                         
|                                                                |                         
|Total revenues                                                  |                         
|                                                                |                         
|                                                                |                         
|Expenses:                                                       |                         
|General expenses                                                |                         
|Interest expense                                                |                         
|                                                                |                         
|Total expenses                                                  |                         
|                                                                |                         
|Loss before income taxes and equity in earnings of subsidiaries |                         
|                                                                |                         
|Income tax benefit                                              |                         
|                                                                |                         
|                                                                |                         
|Income (loss) before equity in earnings of subsidiaries         |                         
|                                                                |                         
|Equity in earnings of subsidiaries                              |                         
|                                                                |                         
|                                                                |                         
|Net income                                                      |                         
|                                                                |                         

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

FS-3

---

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

|                                                               | Years ended December 31,
|-------------------------------------------------------------- | ------------------------
|(dollar amounts in thousands)                                  | 2001                    
|                                                              
|                                                               |                         
|Cash Flows From Operating Activities:                          |                         
|Net income                                                     |                         
|Adjustments to reconcile net income to net cash flows provided |                         
|by operating activities:                                       |                         
|Equity in earnings of subsidiaries                             |                         
|Dividends received from subsidiaries                           |                         
|Net tax sharing payments received from subsidiaries            |                         
|Deferred income tax expense (benefit)                          |                         
|Other, net                                                     |                         
|                                                               |                         
|Net cash flows provided by operating activities                |                         
|                                                               |                         
|                                                               |                         
|Cash Flows From Investing Activities:                          |                         
|Cash contributions to subsidiaries                             |                         
|                                                               |                         
|Net cash flows used in investing activities                    |                         
|                                                               |                         
|                                                               |                         
|Cash Flows From Financing Activities:                          |                         
|Proceeds from issuance of stock                                |                         
|Dividends paid to shareholders                                 |                         
|Proceeds from exercise of stock options                        |                         
|Purchase of treasury stock                                     |                         
|Repayments of debt                                             |                         
|Net repayments (issuance) of notes receivable from officers    |                         
|Change in related party receivables and payables               |                         
|                                                               |                         
|Net cash flows provided by (used in) financing activities      |                         
|                                                               |                         
|                                                               |                         
|Net increase (decrease) in cash                                |                         
|Cash - beginning of year                                       |                         
|                                                               |                         
|Cash - end of year                                             |                         
|                                                               |                         
|                                                               |                         
|Supplementary cash flow information:                           |                         
|Income taxes paid (refunded)                                   |                         
|Interest paid                                                  |                         

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

FS-4

---

PMA Capital Corporation
Schedule III
Supplementary Insurance Information

|(dollar amounts in thousands) |  | Deferred acquisitioncosts |   | Unpaid losses and lossadjustment expenses |  | Unearnedpremiums |           | Net premiumsearned |   | Net investmentincome(1) |  | Losses and lossadjustmentexpenses |         | Acquisitionexpenses |   | Operatingexpenses |   | Net premiumswritten |        
|----------------------------- |  | ------------------------- | - | ----------------------------------------- |  | ---------------- | --------- | ------------------ | - | ----------------------- |  | --------------------------------- | ------- | ------------------- | - | ----------------- | - | ------------------- | -------
|                             
|                              |  |                           |   |                                           |  |                  |           |                    |   |                         |  |                                   |         |                     |   |                   |   |                     |        
|December 31, 2001:            |  |                           |   |                                           |  |                  |           |                    |   |                         |  |                                   |         |                     |   |                   |   |                     |        
|PMA Re                        |  |                           | $ | 34,286                                    |  | $                | 1,047,503 |                    | $ | 105,085                 |  | $                                 | 340,401 |                     | $ | 45,361            |   | $                   | 297,623
|The PMA Insurance Group       |  |                           |   | 24,932                                    |  |                  | 1,107,141 |                    |   | 146,658                 |  |                                   | 346,574 |                     |   | 39,444            |   |                     | 258,933
|Caliber One                   |  |                           |   | 5,132                                     |  |                  | 189,534   |                    |   | 56,549                  |  |                                   | 46,232  |                     |   | 3,124             |   |                     | 60,207 
|Corporate and Other(2)        |  |                           |   | -                                         |  |                  | (19,739   | )                  |   | -                       |  |                                   | (767    | )                   |   | (984              | ) |                     | -      
|                             
|Total                         |  |                           | $ | 64,350                                    |  | $                | 2,324,439 |                    | $ | 308,292                 |  | $                                 | 732,440 |                     | $ | 86,945            |   | $                   | 616,763
|                             
|December 31, 2000:            |  |                          
|PMA Re                        |  |                           | $ | 22,969                                    |  | $                | 871,727   |                    | $ | 90,851                  |  | $                                 | 251,109 |                     | $ | 51,125            |   | $                   | 229,925
|The PMA Insurance Group       |  |                           |   | 23,554                                    |  |                  | 1,058,524 |                    |   | 138,554                 |  |                                   | 252,348 |                     |   | 47,969            |   |                     | 189,001
|Caliber One                   |  |                           |   | 1,999                                     |  |                  | 132,104   |                    |   | 40,329                  |  |                                   | 28,799  |                     |   | 4,424             |   |                     | 30,462 
|Corporate and Other(2)        |  |                           |   | -                                         |  |                  | (9,217    | )                  |   | -                       |  |                                   | (832    | )                   |   | (927              | ) |                     | -      
|                             
|Total                         |  |                           | $ | 48,522                                    |  | $                | 2,053,138 |                    | $ | 269,734                 |  | $                                 | 531,424 |                     | $ | 102,591           |   | $                   | 449,388
|                             
|December 31, 1999:            |  |                          
|PMA Re                        |  |                           | $ | 23,446                                    |  | $                | 743,528   |                    | $ | 88,183                  |  | $                                 | 293,862 |                     | $ | 57,686            |   | $                   | 206,891
|The PMA Insurance Group       |  |                           |   | 20,558                                    |  |                  | 1,144,087 |                    |   | 120,928                 |  |                                   | 221,934 |                     |   | 50,282            |   |                     | 166,674
|Caliber One                   |  |                           |   | 4,945                                     |  |                  | 54,809    |                    |   | 51,241                  |  |                                   | 24,729  |                     |   | 2,459             |   |                     | 18,908 
|Corporate and Other(2)        |  |                           |   | -                                         |  |                  | (9,823    | )                  |   | -                       |  |                                   | (438    | )                   |   | (370              | ) |                     | -      
|                             
|Total                         |  |                           | $ | 48,949                                    |  | $                | 1,932,601 |                    | $ | 260,352                 |  | $                                 | 540,087 |                     | $ | 110,057           |   | $                   | 392,473
|                             

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

(2) Corporate and Other includes unallocated investment income and expenses,
including debt service, as well as the results of certain of our real estate properties. Corporate
and Other also includes the effect of eliminating intercompany transactions.

FS-5

---

PMA Capital CorporationSchedule IVReinsurance

|(dollar amounts in thousands)             |  | Direct amount |   | Ceded to othercompanies |  | Assumed fromothercompanies |         | Net amount |   | Percentage ofamount assumedto net | 
|----------------------------------------- |  | ------------- | - | ----------------------- |  | -------------------------- | ------- | ---------- | - | --------------------------------- | 
|                                         
|                                         
|                                          |  |               |   |                         |  |                            |         |            |   |                                   | 
|Year Ended December 31, 2001:             |  |               |   |                         |  |                            |         |            |   |                                   | 
|                                         
|Property and liability insurance premiums |  |               | $ | 508,821                 |  | $                          | 243,356 |            | $ | 466,975                           | 
|                                          |  |               |   |                         |  |                            |         |            |   |                                  
|                                         
|Year Ended December 31, 2000:             |  |              
|                                         
|Property and liability insurance premiums |  |               | $ | 416,152                 |  | $                          | 278,556 |            | $ | 393,828                           | 
|                                          |  |               |   |                         |  |                            |         |            |   |                                  
|                                         
|Year Ended December 31, 1999:             |  |              
|                                         
|Property and liability insurance premiums |  |               | $ | 328,590                 |  | $                          | 154,532 |            | $ | 366,029                           | 
|                                          |  |               |   |                         |  |                            |         |            |   |                                  

FS-6

---

PMA Capital CorporationSchedule VValuation and Qualifying Accounts

|(dollar amounts in thousands)        
|-------------------------------------
|                                     
|Description                          
|                                     
|                                     
|Year ended December 31, 2001:        
|Allowance for uncollectible accounts:
|Premiums receivable                  
|Reinsurance receivables              
|                                     
|                                     
|Year ended December 31, 2000:        
|Allowance for uncollectible accounts:
|Premiums receivable                  
|Reinsurance receivables              
|                                     
|                                     
|Year ended December 31, 1999:        
|Allowance for uncollectible accounts:
|Premiums receivable                  
|Reinsurance receivables              
|                                     

FS-7

---

PMA Capital CorporationSchedule VISupplemental Information
Concerning Property and Casualty Insurance Operations

|(dollar amounts in thousands)  | 
|------------------------------ | 
|                              
|Affiliation with registrant    | 
|                              
|                              
|Consolidated property-casualty | 
|subsidiaries:                  | 
|                               | 
|December 31, 2001              | 
|                               | 
|December 31, 2000              | 
|                               | 
|December 31, 1999              | 
|                              

(1) - Reserves discounted at approximately 5%.

(2) - Excludes accretion of loss reserve discount of $6,859, $10,130 and
$15,433 in 2001, 2000 and 1999, respectively.

FS-8

---

PRICEWATERHOUSECOOPERS LLP (LOGO)

| | PricewaterhouseCoopers LLP                  
| | --------------------------------------------
| | Two Commerce Square, Suite 1700             
| | 2001 Market StreetPhiladelphia PA 19103-7042
| | Telephone (267) 330 3000                    
| | Facsimile (267) 330 3300                    

REPORT OF INDEPENDENT ACCOUNTANTS ONFINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Shareholders of PMA Capital Corporation

Our audits of the consolidated financial statements referred to
in our report dated February 6, 2002 appearing in the 2001 Annual Report to
Shareholders of PMA Capital Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Philadelphia, PA February 6, 2002

FS-9

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INDEX TO EXHIBITS

---

|Exhibit No. | Description of Exhibit | Method of Filing                                                                                                                        
|----------- | ---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------
|(3)         |                        | Articles of Incorporation and Bylaws:                                                                                                   
|            | 3.1                    | Restated Articles of Incorporation of the Company.                                                                                      
|            | 3.2                    | Amended and Restated Bylaws of the Company.                                                                                             
|(4)         |                        | Instruments defining the rights of security holders, including indentures:                                                              
|            | 4.1                    | Rights Agreement, dated as of May 3, 2000, between the Company and The
Bank of New York, as Rights Agent.                               
|(10)        |                        | Material Contracts:Exhibits 10.1 through 10.24 are management contracts
or compensatory plans.                                          
|            | 10.1                   | Description of 2001 stock appreciation rights.                                                                                          
|            | 10.2                   | PMA Capital Corporation 401(k) Excess Plan, dated March 29, 2001.                                                                       
|            | 10.3                   | PMA Capital Corporation Executive Deferred Compensation Plan (as Amended
and Restated Effective January 1, 1999), dated March 29, 2001. 
|            | 10.4                   | PMA Capital Corporation Supplemental Executive Retirement Plan (as
Amended and Restated Effective January 1, 1999), dated March 7, 2001.
|            | 10.5                   | PMA Capital Corporation Executive Management Pension Plan, dated March 7,
2001.                                                         
|            | 10.6                   | Amended and Restated Employment Agreement, dated May 1, 1999, between PMA
Capital Corporation and Frederick W. Anton III.               

E-1

---

| |       |                                                                                                                                                                                            |                                                                                                                                                        
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.7  | Amended and Restated Split-Dollar Insurance Agreement, dated May 12,
1999, among PMA Capital Corporation, Frederick W. Anton III and Irrevocable Deed and
Trust of Frederick W. Anton III. | Filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q/A,
No. 1 for the quarter ended June 30, 1999 and incorporated herein by reference.
| | 10.8  | Split-Dollar Insurance Agreement, dated May 12, 1999, among PMA Capital
Corporation, Frederick W. Anton III and Irrevocable Deed of Trust of Frederick W. Anton
III.                       | Filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q/A,
No. 1 for the quarter ended June 30, 1999 and incorporated herein by reference.
| | 10.9  | Split-Dollar Insurance Agreement, dated May 12, 1999, among PMA Capital
Corporation, Frederick W. Anton III and Irrevocable Deed of Trust of Frederick W. Anton
III.                       | Filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q/A,
No. 1 for the quarter ended June 30, 1999 and incorporated herein by reference.
| | 10.10 | Employment Agreement dated May 1, 1995 between the Company and John W.
Smithson.                                                                                                           | Filed as Exhibit 10.2 to the Company's Registration Statement on Form 10
dated June 26, 1997 and incorporated herein by reference.                     
| | 10.11 | Amended and Restated Deferred Compensation Plan for Non-Employee
Directors of the Company.                                                                                                 | Filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 and incorporated herein by reference.           
| | 10.12 | Company's Annual Incentive Plan.                                                                                                                                                           | Filed as Annex C to the Company's Definitive Proxy Statement on Schedule
14A dated March 23, 2000 and incorporated herein by reference.                
| | 10.13 | Company's Amended and Restated 1987 Incentive Stock Option Plan.                                                                                                                           | Filed as Exhibit 10.5 to the Company's Registration Statement on Form 10
dated June 26, 1997 and incorporated herein by reference.                     
| | 10.14 | Company's Amended and Restated 1991 Equity Incentive Plan.                                                                                                                                 | Filed as Exhibit 10.6 to the Company's Registration Statement on Form 10
dated June 26, 1997 and incorporated herein by reference.                     
| | 10.15 | Amendment No. 1 to the Amended and Restated 1991 Equity Incentive Plan
dated May 5, 1999.                                                                                                  | Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 and incorporated herein by reference.         
| | 10.16 | Company's Amended and Restated 1993 Equity Incentive Plan.                                                                                                                                 | Filed as Exhibit 10.7 to the Company's Registration Statement on Form 10
dated June 26, 1997 and incorporated herein by reference.                     

E-2

---

| |       |                                                                                                                                                                                                                                                                                                       |                                                                                                                                                             
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.17 | Amendment No. 1 to the Amended and Restated 1993 Equity Incentive Plan
dated May 5, 1999.                                                                                                                                                                                                             | Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 and incorporated herein by reference.              
| | 10.18 | Company's Amended and Restated 1994 Equity Incentive Plan.                                                                                                                                                                                                                                            | Filed as Exhibit 10.8 to the Company's Registration Statement on Form 10
dated June 26, 1997 and incorporated herein by reference.                          
| | 10.19 | Amendment No. 1 to the Amended and Restated 1994 Equity Incentive Plan
dated May 5, 1999.                                                                                                                                                                                                             | Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 and incorporated herein by reference.              
| | 10.20 | Company's 1995 Equity Incentive Plan.                                                                                                                                                                                                                                                                 | Filed as Exhibit 10.9 to the Company's Registration Statement on Form 10
dated June 26, 1997 and incorporated herein by reference.                          
| | 10.21 | Amendment No. 1 to the 1995 Equity Incentive Plan dated May 5, 1999.                                                                                                                                                                                                                                  | Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 and incorporated herein by reference.              
| | 10.22 | Company's 1996 Equity Incentive Plan.                                                                                                                                                                                                                                                                 | Filed as Exhibit 10.10 to the Company's Registration Statement on Form 10
dated June 26, 1997 and incorporated herein by reference.                         
| | 10.23 | Amendment No. 1 to the 1996 Equity Incentive Plan dated May 5, 1999.                                                                                                                                                                                                                                  | Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 and incorporated herein by reference.              
| | 10.24 | Company's 1999 Equity Incentive Plan.                                                                                                                                                                                                                                                                 | Filed as Annex A to the Company's Definitive Proxy Statement on Schedule
14A dated March 26, 1999 and incorporated herein by reference.                     
| | 10.25 | Credit Agreement dated as of March 14, 1997 by and among the Company, The
Bank of New York, First Union National Bank of North Carolina, Fleet National Bank, PNC
Bank, National Association, Mellon Bank, N.A., CoreStates Bank, N.A. and Dresdner Bank
AG, New York Branch and Grand Cayman Branch. | Filed as Exhibit 10.13 to the Company's Registration Statement on Form 10
dated June 26, 1997 and incorporated herein by reference.                         
| | 10.26 | First Amendment, dated as of October 2, 1998, to the Credit Agreement
dated as of March 14, 1997.                                                                                                                                                                                                     | Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A,
No. 1 for the quarter ended September 30, 1998 and incorporated herein by reference.

E-3

---

|     |       |                                                                                                                                                                        |                                                                                                                                              
|---- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------
|     | 10.27 | Second Amendment and Consent, dated as of November 17, 2000, to the
Credit Agreement dated as of March 14, 1997.                                                       | Filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by reference.
|     | 10.28 | Third Amendment, dated as of December 7, 2001, to the Credit Agreement
dated as of March 14, 1997.                                                                     | Filed herewith.                                                                                                                              
|     | 10.29 | Master Agreement dated as of February 7, 1997 between the Company and
First Union National Bank of North Carolina.                                                     | Filed as Exhibit 10.14 to the Company's Registration Statement on Form 10
dated June 26, 1997 and incorporated herein by reference.          
|     | 10.30 | Letter of Credit Agreement dated as of December 4, 2001, by and among the
Company and Certain Co-Applicants and Fleet National Bank and Other Banks Party Thereto.     | Filed herewith.                                                                                                                              
|     | 10.31 | Pledge and Security Agreement, dated as of December 4, 2001, by and among
the Company and Certain Co-Applicants and Fleet National Bank and Other Banks Party Thereto. | Filed herewith.                                                                                                                              
|     | 10.32 | Form of Control Agreement, dated as of December 4, 2001, by and among the
Company, Certain Pledgors and Fleet National Bank.                                           | Filed herewith.                                                                                                                              
|(12) |       | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                     | Filed herewith.                                                                                                                              
|(13) |       | Portions of the Company's 2001 Annual Report to Shareholders, which are
expressly incorporated by reference in this Form 10-K, are "filed" as part of this Form
10-K.  | Filed herewith.                                                                                                                              
|(21) |       | Subsidiaries of the Company.                                                                                                                                           | Filed herewith.                                                                                                                              
|(23) |       | Consent of Independent Accountants.                                                                                                                                    | Filed herewith.                                                                                                                              
|(24) |       | Power of Attorney:                                                                                                                                                     |                                                                                                                                              
|     | 24.1  | Powers of Attorney.                                                                                                                                                    | Filed herewith.                                                                                                                              
|     | 24.2  | Certified Resolutions.                                                                                                                                                 | Filed herewith.                                                                                                                              

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

E-4

---