Selected Financial Data

<TABLE>
<CAPTION>
                                                                    For the year ended December 31,
(dollar amounts in thousands,
except share and per share data)                  1999           1998         1997 (1)       1996 (1)      1995 (1)
-------------------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>           <C>            <C>            <C>
Net premiums written                           $ 563,510      $ 474,761     $ 381,282      $ 432,975      $ 485,876
                                              =====================================================================
Consolidated Results of Operations:
Net premiums earned                            $ 540,087      $ 466,715     $ 375,951      $ 420,575      $ 484,952
Net investment income                            110,057        120,125       133,392        130,837        138,111
Net realized investment gains (losses)            (7,745)        21,745         8,598          2,984         31,923
Other revenues                                    12,718         14,896        13,617         12,288          6,350
                                              ---------------------------------------------------------------------
   Total consolidated revenues                 $ 655,117      $ 623,481     $ 531,558      $ 566,684      $ 661,336
                                              =====================================================================
Income (loss) before extraordinary loss and
   cumulative effect of accounting change      $  28,353      $  44,734     $  19,753      $(135,334)     $  24,130
Extraordinary loss from early extinguishment
   of debt, net of related tax effect(2)              --             --        (4,734)            --             --
Cumulative effect of accounting change,
   net of related tax effect (3)                  (2,759)            --            --             --             --
                                              ---------------------------------------------------------------------
Net income (loss)                              $  25,594      $  44,734     $  15,019      $(135,334)     $  24,130
                                              =====================================================================
Per Share Data:
Weighted average shares:
      Basic(4)                                22,976,326     23,608,618     23,855,031    23,800,791     23,816,088
      Diluted(4), (5)                         23,785,916     24,524,888     24,567,378    23,800,791     24,781,949
Income (loss) before extraordinary loss and
   cumulative effect of accounting change
      Basic(4)                                $     1.23      $    1.89     $    0.83     $    (5.68)     $    1.01
      Diluted(4), (5)                               1.19           1.82          0.80          (5.68)          0.97
Net income (loss) per share:
      Basic(4)                                      1.11           1.89          0.63          (5.68)          1.01
      Diluted(4), (5)                               1.08           1.82          0.61          (5.68)          0.97
Dividends paid per Common share                     0.32           0.32          0.32           0.32           0.32
Dividends paid per Class A Common share             0.36           0.36          0.36           0.36           0.36
Shareholders' equity per share                     19.21          21.90         19.96          17.86          25.53
Consolidated Financial Position:
Total investments                             $1,918,035     $2,325,409    $2,194,738     $2,261,353     $2,455,949
Total assets                                   3,245,087      3,460,718     3,057,258      3,117,516      3,258,572
Reserves for unpaid losses and LAE             1,932,601      1,940,895     2,003,187      2,091,072      2,069,986
Long-term debt                                   163,000        163,000       203,000        204,699        203,848
Shareholders' equity(5)                          429,143        511,480       478,347        425,828        609,668
</TABLE>

(1)  Operating results in 1997, 1996 and 1995 were impacted by approximately
     $12.1 million, $223.1 million and $8.4 million, respectively, of
     restructuring, reserve strengthening and other special charges. See
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations."
(2)  In 1997, the Company refinanced substantially all of its long-term debt
     resulting in a $4.7 million extraordinary loss, net of tax effect. See
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations."
(3)  In 1999, the Company adopted SOP 97-3, "Accounting by Insurance and Other
     Enterprises for Insurance-Related Assessments." As a result of adopting SOP
     97-3, the Company recorded a liability of $4.3 million pre-tax and a
     resulting charge to earnings of $2.8 million, net of tax effect.
(4)  In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
     requires the presentation of basic and diluted earnings per share. See Note
     15 to the Company's Consolidated Financial Statements for additional
     information. All prior periods' presentation of earnings per share data has
     been restated to conform to SFAS No. 128.
(5)  For the year ended December 31, 1996 common stock equivalents were not
     taken into consideration in the computation of weighted-average diluted
     shares as these common stock equivalents would have an anti-dilutive effect
     on the net loss per share.
(6)  Pre-tax operating income (loss) excludes net realized investment gains
     (losses). Pre-tax operating income by business segment for all periods is
     unaudited and has been presented in accordance with SFAS No. 131,
     "Disclosures about Segments of an Enterprise and Related Information,"
     which the Company adopted on January 1, 1998. See "Management's Discussion
     and Analysis of Financial Condition and Results of Operations" and Note 16
     to the Company's Consolidated Financial Statements. The Company excludes
     net realized investment gains (losses) from the profit and loss measure it
     utilizes to assess the performance of its operating segments because (i)
     net realized investment gains (losses) are unpredictable and not
     necessarily indicative of current operating fundamentals or future
     performance and (ii) in many instances, decisions to buy and sell
     securities are made at the holding company level, and such decisions result
     in net realized gains (losses) that do not relate to the operations of the
     individual segments.
(7)  Run-off Operations of The PMA Insurance Group were established in December
     1996 to reinsure certain obligations primarily associated with workers'
     compensation claims written by the Pooled Companies for accident years 1991
     and prior. The Run-off Operations are separate legal entities and
     substantially all of the assets of the Run-off Operations are held in trust
     for the benefit of the Pooled Companies. Effective July 1, 1998 the Company
     sold PMA Cayman. See "Management's Discussion and Analysis of Financial
     Condition and Results of Operations."
(8)  The combined ratio computed on a GAAP basis is equal to losses and loss
     adjustment expenses plus acquisition expenses, operating expenses and
     policyholders' dividends (where applicable), all divided by net premiums
     earned.

                                       26
<PAGE>
<TABLE>
<CAPTION>
                                                                    For the year ended December 31,
(dollar amounts in thousands,
except share and per share data)                  1999           1998         1997 (1)       1996 (1)      1995 (1)
-------------------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>           <C>            <C>            <C>
Pre-tax operating income (loss)(6):
PMA Re                                         $  50,319      $  46,408     $  45,957      $  44,807      $  39,793
                                              ---------------------------------------------------------------------
The PMA Insurance Group(7):
   Excluding Run-off Operations                   18,389         10,018        (3,607)      (215,669)        (3,885)
   Run-off Operations                               (189)           452           (73)            --            --
                                              ---------------------------------------------------------------------
   Total PMA Insurance Group                      18,200         10,470        (3,680)      (215,669)        (3,885)
Caliber One                                           83         (1,606)           --             --             --
Corporate and Other                               (8,544)        (6,939)       (9,954)        (6,464)       (14,184)
                                              ---------------------------------------------------------------------
   Total pre-tax operating income (loss)
      before interest expense                     60,058         48,333        32,323       (177,326)        21,724
Interest expense                                  12,221         15,009        15,768         17,052         18,734
                                              ---------------------------------------------------------------------
Pre-tax operating income (loss)                   47,837         33,324        16,555       (194,378)         2,990
Net realized investment gains (losses)            (7,745)        21,745         8,598          2,984         31,923
                                              ---------------------------------------------------------------------
Income (loss) before income taxes,
   extraordinary loss and cumulative
   effect of accounting change                    40,092         55,069        25,153       (191,394)        34,913
Income tax expense (benefit)                      11,739         10,335         5,400        (56,060)        10,783
                                              ---------------------------------------------------------------------
Income (loss) before extraordinary loss and
   cumulative effect of accounting change         28,353         44,734        19,753       (135,334)        24,130
Extraordinary loss from early extinguishment
   of debt, net of related tax effect(2)              --             --        (4,734)            --             --
Cumulative effect of accounting change,
   net of related tax effect (3)                  (2,759)            --            --             --             --
                                              ---------------------------------------------------------------------
Net income (loss)                              $  25,594      $  44,734     $  15,019      $(135,334)     $  24,130
                                              =====================================================================

GAAP Ratios for Insurance Subsidiaries:
PMA Re:
      Loss and LAE ratio                          70.4%          68.9%          69.6%         73.7%          74.6%
      Expense ratio                               32.1%          34.8%          34.2%         28.9%          29.3%
                                              ---------------------------------------------------------------------
      Combined ratio(8)                          102.5%         103.7%         103.8%        102.6%         103.9%
                                              =====================================================================
The PMA Insurance Group, including
   Run-off Operations(7):
      Loss and LAE ratio                          75.1%          81.6%          91.1%        158.2%          92.5%
      Expense ratio(9)                            31.7%          33.7%          42.8%         47.1%          30.4%
      Policyholders' dividend ratio                8.6%           7.3%           6.9%          6.1%           4.8%
                                              ---------------------------------------------------------------------
      Combined ratio(8)                          115.4%         122.6%         140.8%        211.4%         127.7%
                                              =====================================================================
The PMA Insurance Group, excluding
   Run-off Operations(7):
      Loss and LAE ratio                          73.6%          78.0%          83.7%             --             --
      Expense ratio(9)                            31.1%          31.3%          32.9%             --             --
      Policyholders' dividend ratio                8.6%           7.1%           5.6%             --             --
                                              ---------------------------------------------------------------------
      Combined ratio(8)                          113.3%         116.4%         122.2%             --             --
                                              =====================================================================
Caliber One (10):
      Loss and LAE ratio                          76.5%              --            --             --             --
      Expense ratio                               33.1%              --            --             --             --
                                              ---------------------------------------------------------------------
      Combined ratio(8)                          109.6%              --            --             --             --
                                              =====================================================================
</TABLE>
(9)  The GAAP operating expense ratios exclude $7.9 million, $9.0 million, $9.3
     million, $8.2 million and $5.3 million for the years ended December 31,
     1999, 1998, 1997, 1996 and 1995, respectively, of PMA Management Corp.
     direct expenses related to service revenues, which are not included in
     premiums earned. See "Management's Discussion and Analysis of Financial
     Condition and Results of Operations."

(10) The results of operations of Caliber One for the years ended 1998 and 1997
     are not material to the underwriting ratios of the Company; accordingly,
     the ratios for Caliber One have not been presented for those years.








                                       27
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations

The  following  is a  discussion  of the  financial  condition  of  PMA  Capital
Corporation and its consolidated  subsidiaries  ("PMA Capital" or the "Company")
as of December 31, 1999,  compared  with  December 31, 1998,  and the results of
operations  of PMA  Capital  for 1999 and 1998,  compared  with the  immediately
preceding year. The balance sheet information  presented below is as of December
31 for each respective year. The statement of operations  information is for the
year ended  December 31 for each  respective  year. The term "SAP" refers to the
statutory  accounting  practices  prescribed  or permitted by  applicable  state
insurance  departments,  and  the  term  "GAAP"  refers  to  generally  accepted
accounting principles.

CONSOLIDATED RESULTS
The major  components of operating  revenues,  pre-tax  operating income and net
income are as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands)                                             1999             1998              1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>              <C>               <C>
Net premiums written                                                  $  563,510       $  474,761        $  381,282
                                                                     ==============================================
Net premiums earned                                                   $  540,087       $  466,715        $  375,951
Net investment income                                                    110,057          120,125           133,392
Other revenues                                                            12,718           14,896            13,617
                                                                     ----------------------------------------------
Total operating revenues                                              $  662,862       $  601,736        $  522,960
                                                                     ==============================================

Components of pre-tax operating income(1) and net income:
PMA Re                                                                $   50,319       $   46,408        $   45,957
The PMA Insurance Group:
   Excluding Run-off Operations                                           18,389           10,018            (3,607)
   Run-off Operations                                                       (189)             452               (73)
                                                                     ----------------------------------------------
   Total                                                                  18,200           10,470            (3,680)
Caliber One                                                                   83           (1,606)               --
Corporate and Other                                                      (20,765)         (21,948)          (25,722)
                                                                     ----------------------------------------------
Pre-tax operating income                                                  47,837           33,324            16,555
Net realized investment gains (losses)                                    (7,745)          21,745             8,598
                                                                     ----------------------------------------------
Income before income taxes, extraordinary loss and cumulative
 effect of accounting change                                              40,092           55,069            25,153
Income tax expense                                                        11,739           10,335             5,400
                                                                     ----------------------------------------------
Income before extraordinary loss and cumulative
 effect of accounting change                                              28,353           44,734            19,753
Extraordinary loss, net of tax                                                --               --            (4,734)
Cumulative effect of accounting change, net of tax                        (2,759)              --                --
                                                                     ----------------------------------------------
Net income                                                            $   25,594       $   44,734        $   15,019
                                                                     ==============================================
<FN>
(1)Pre-tax  operating  income is defined as income  from  continuing  operations
   before income taxes,  excluding net realized  investment gains (losses).  The
   Company  excludes net realized  investment gains (losses) from the profit and
   loss measure it utilizes to assess the performance of its operating  segments
   because (i) net realized  investment gains (losses) are unpredictable and not
   necessarily   indicative  of  current   operating   fundamentals   or  future
   performance and (ii) in many instances,  decisions to buy and sell securities
   are made at the  holding  company  level,  and such  decisions  result in net
   realized  gains  (losses)  that  do  not  relate  to  the  operations  of the
   individual segments.
</FN>
</TABLE>


                                       28
<PAGE>
   In 1999,  pre-tax operating income and after-tax  operating income were $47.8
million and $33.4  million,  respectively,  compared to $33.3  million and $30.6
million in 1998.  The  increase in pre-tax and  after-tax  operating  income was
primarily due to higher pre-tax operating income for The PMA Insurance Group and
PMA Re and lower interest expense. The increase in after-tax operating income in
1999 was partially offset by a higher effective tax rate in 1999.
   In 1998,  pre-tax operating income and after-tax  operating income were $33.3
million and $30.6  million,  respectively,  compared to $16.6  million and $14.2
million in 1997.  The  improvement  in the 1998  results  was due  primarily  to
increased  pre-tax operating income generated by The PMA Insurance Group and PMA
Re,  as well as the  absence  of $9.2  million  in  charges  related  to The PMA
Insurance Group's restructuring and cost reduction initiatives in 1997.
   The Company currently expects operating income to continue to improve in 2000
primarily  reflecting  higher pre-tax  operating  income from PMA Re and The PMA
Insurance  Group.  This  expectation  may differ  materially from actual results
because of the risk factors noted in the "Cautionary Statements" on page 43.
   Net income was $25.6 million,  $44.7 million and $15.0 million in 1999,  1998
and 1997, respectively. Net income for 1999 includes an after-tax charge of $2.8
million for the effect of adopting  Statement of Position  97-3,  "Accounting by
Insurance and Other Enterprises for Insurance-Related  Assessments." See "Recent
Accounting  Pronouncements"  for  additional  information.  Net  income for 1997
includes an extraordinary loss of $4.7 million, net of tax, reflecting the early
extinguishment of debt in March 1997 when the Company  refinanced  substantially
all of its outstanding credit agreements not already maturing in 1997 with a new
revolving credit facility (the "Credit Facility").
   Net  income  also  includes  after-tax  gains  and  losses  on  the  sale  of
investments.   The  timing  and   recognition  of  such  gains  and  losses  are
unpredictable and are not indicative of future operating performance.  After-tax
net realized investment losses were $5.0 million for 1999, compared to after-tax
net  realized  investment  gains of $14.1  million in 1998 and $5.6  million for
1997.  The realized  losses for 1999 reflect  sales of  investments  in a rising
interest  rate  environment  in order to  invest in yield  enhancing  investment
opportunities. This is in contrast to the realized gains in 1998 and 1997, which
reflect  sales of  investments  in a declining  interest rate  environment.  Net
realized  investment  gains for 1998 also  include a $2.4  million  pre-tax loss
related to the sale of PMA Insurance, Cayman Ltd. ("PMA Cayman"). See Note 18 to
the Company's Consolidated Financial Statements for additional information.
   In  connection  with the  adoption  of SFAS  No.  131 in  1998,  the  Company
identified four  reportable  segments:  (i) PMA Re, which provides  property and
casualty reinsurance products and services;  (ii) The PMA Insurance Group, which
writes managed care workers' compensation, integrated disability and to a lesser
extent, other standard lines of commercial  insurance;  (iii) Caliber One, which
writes  specialty  insurance  focusing  on excess and  surplus  lines;  and (iv)
Corporate and Other, which includes  unallocated  investment  income,  expenses,
including debt service,  as well as the results of certain of the Company's real
estate properties.  Because Caliber One's operating results were not significant
in 1997,  Caliber One's financial  information was included within the Corporate
and Other segment in 1997.

PMA RE
Summarized financial results of PMA Re are as follows:

(dollar amounts
 in thousands)               1999      1998       1997
--------------------------------------------------------

Net premiums written       $278,998  $234,010  $177,934
                          ==============================
Net premiums earned        $293,862  $223,559  $163,603
Net investment income       57,686    54,734     52,270
                          ------------------------------
Operating revenues          351,548   278,293   215,873
                          ------------------------------
Losses and loss adjustment
 expenses incurred          206,891   154,062   113,931
Acquisition and
 operating expenses          94,338    77,823    55,985
                          ------------------------------
Total losses and expenses   301,229   231,885   169,916
                          ------------------------------
Pre-tax operating income    $50,319   $46,408   $45,957
                          ==============================
GAAP loss and LAE ratio      70.4%     68.9%      69.6%
GAAP combined ratio         102.5%    103.7%     103.8%
                          ------------------------------

PMA Re's pre-tax  operating income increased to $50.3 million in 1999,  compared
to $46.4 million in 1998. The increase in operating results reflects an increase
in net investment  income,  and to a lesser  extent,  slower growth in operating
expenses  relative to premium growth,  partially  offset by increased losses and
loss adjustment  expenses  ("LAE").  The increase in PMA Re's pre-tax  operating
income  to  $46.4  million  in 1998,  compared  to $46.0  million  in 1997,  was
primarily due to higher  investment  income,  as well as higher premium  volume,
which was partially offset by increased losses and LAE and acquisition costs.


                                       29
<PAGE>
Premium Revenues
PMA Re's gross premiums  written by business unit and major category of business
are as follows:
<TABLE>
<CAPTION>

(dollar amounts                                                                       1999       1998
 in thousands)                             1999           1998           1997        Change %   Change %
--------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>              <C>       <C>
Business Unit:
Traditional - Treaty                    $ 180,475      $ 190,749      $ 181,715          (5)%       5%
Specialty - Treaty                         88,433         79,711         37,838          11%      111%
Finite Risk and Financial Products         69,989          7,300             --         859%      N/A
Facultative                                 4,710          6,576          5,768         (28)%      14%
                                      ----------------------------------------------------------------
Total                                   $ 343,607      $ 284,336      $ 225,321          21%       26%
                                      ================================================================

Major Category of Business:
Casualty lines                          $ 246,660      $ 206,317      $ 151,901          20%       36%
Property lines                             95,183         76,975         72,625          24%        6%
Other lines                                 1,764          1,044            795          69%       31%
                                      ----------------------------------------------------------------
Total                                   $ 343,607      $ 284,336      $ 225,321          21%       26%
                                      ================================================================
</TABLE>

NA - Not applicable

PMA Re's net premiums  written by business  unit and major  category of business
are as follows:
<TABLE>
<CAPTION>
                                                                                        1999       1998
(dollar amounts in thousands)              1999           1998           1997         Change %   Change %
---------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>               <C>        <C>
Business Unit:
Traditional - Treaty                    $ 137,686      $ 159,686      $ 141,573         (14)%      13%
Specialty - Treaty                         68,818         64,625         33,846           6%       91%
Finite Risk and Financial Products         69,551          6,971             --         898%      N/A
Facultative                                 2,943          2,728          2,515           8%        8%
                                      ----------------------------------------------------------------
Total                                   $ 278,998      $ 234,010      $ 177,934          19%       32%
                                      ================================================================

Major Category of Business:
Casualty lines                          $ 199,113      $ 168,452      $ 118,889          18%       42%
Property lines                             78,148         64,497         58,257          21%       11%
Other lines                                 1,737          1,061            788          64%       35%
                                      ----------------------------------------------------------------
Total                                   $ 278,998      $ 234,010      $ 177,934          19%       32%
                                      ================================================================
</TABLE>

NA - Not applicable

In 1999, net premiums written increased 19%, primarily reflecting the successful
expansion of finite risk and  financial  product  offerings,  which  resulted in
$49.2 million of casualty  writings and $20.1 million of property  writings.  In
1998, net premiums written increased 32%, primarily  reflecting the expansion of
relationships with PMA Re's existing clients,  which accounted for approximately
$33 million of the growth in casualty  premiums in 1998,  and contracts with new
clients, which accounted for approximately $17 million of the growth in casualty
premiums  in 1998.  In  addition,  as a result of the  increased  business  flow
generated by these  activities,  estimated net premiums written and not received
increased by $16.6 million in 1998.  Partially offsetting these factors were the
effects  of  highly  competitive  conditions  in the  U.S.  reinsurance  market,
particularly in

                                       30
<PAGE>
the traditional  market during 1999,  which has caused PMA Re to
non-renew  certain  accounts  largely  due  to  inadequate  rates  and/or  other
underwriting issues.
   Net premiums earned increased 31% in 1999, compared to 1998, and 37% in 1998,
compared to 1997.  Generally,  trends in net  premiums  earned  follow  patterns
similar to net premiums written, with premiums being earned principally on a pro
rata basis over the terms of the contracts.  In 1999,  PMA Re's earned  premiums
include  approximately $32 million related to a revision in the methodology used
in estimating unearned premiums on in-force contracts.

Losses and Expenses
The components of PMA Re's GAAP combined ratios are as follows:

                              1999      1998       1997
--------------------------------------------------------
Loss and LAE ratio           70.4%     68.9%      69.6%
                           ----------------------------
Expense ratio:
   Acquisition expenses      27.5%     28.9%      27.6%
   Operating expenses         4.6%      5.9%       6.6%
                           ----------------------------
Total expense ratio          32.1%     34.8%      34.2%
                           ----------------------------
GAAP combined ratio(1)      102.5%    103.7%     103.8%
                           ============================

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

In 1999, PMA Re's combined ratio decreased  slightly to 102.5%,  compared with a
combined  ratio of 103.7% in 1998 and 103.8% in 1997.  Since 1997, the 1.3 point
decline  in  the  combined  ratio  is  primarily  attributable  to a  2.0  point
improvement in the operating expense ratio.
   The operating  expense ratio  decreased 1.3 points in 1999,  compared to 1998
and 0.7 points in 1998,  compared to 1997.  These  improvements in the operating
expense  ratio  primarily  reflect  faster  growth  in earned  premiums  than in
operating expenses.

Net Investment Income
Net  investment  income was $57.7  million,  $54.7  million and $52.3 million in
1999,  1998 and 1997,  respectively.  These  improvements  primarily  reflect an
increase in investment  yield and, to a lesser extent,  higher average  invested
assets. During 1999 and 1998, PMA Re shifted some of its investment holdings out
of U.S.  Government  securities and into corporate and asset-backed  securities,
which generally yield higher levels of investment income. At amortized cost, PMA
Re's cash and invested assets increased  approximately  $35 million,  or 4%, and
approximately $55 million, or 6%, during 1999 and 1998, respectively.

THE PMA INSURANCE GROUP
The PMA Insurance Group is comprised of Pennsylvania  Manufacturers' Association
Insurance  Company,  Manufacturers  Alliance  Insurance Company and Pennsylvania
Manufacturers Indemnity Company (collectively,  the "Pooled Companies"), as well
as PMA Management Corp.,  Pennsylvania  Manufacturers  International  Insurance,
Limited, PMA Insurance SPC, Cayman and Run-off Operations.
   Run-off  operations  ("Run-off  Operations")  of The PMA Insurance Group were
classified  by  management  and  segregated  from ongoing  operations  effective
December 31, 1996.  The Run-off  Operations  have been  established  to reinsure
certain  obligations  primarily  associated  with workers'  compensation  claims
written  by the Pooled  Companies  for the years  1991 and  prior.  The  Run-off
Operations have been  segregated into separate legal entities and  substantially
all of the assets of the Run-off Operations are held in trust for the benefit of
the Pooled Companies.

                                       31
<PAGE>
Summarized financial results of The PMA Insurance Group are as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands)               1999             1998             1997
-------------------------------------------------------------------------------------
<S>                                      <C>              <C>              <C>
The PMA Insurance Group
Net premiums written                     $ 233,713        $ 234,837        $ 203,348
                                         ===========================================
Net premiums earned                      $ 221,934        $ 241,928        $ 212,348
Net investment income                       50,282           64,580           81,927
Other revenues                              10,086            9,722           10,482
                                         -------------------------------------------
Operating revenues                         282,302          316,230          304,757
                                         -------------------------------------------
Losses and LAE                             166,674          197,525          193,530
Acquisition and operating
 expenses                                   78,287           90,499          100,191
Dividends to policyholders                  19,141           17,736           14,716
                                         -------------------------------------------
Total losses and expenses                  264,102          305,760          308,437
                                         -------------------------------------------
Pre-tax operating income (loss)          $  18,200        $  10,470        $  (3,680)
                                         ===========================================


The PMA Insurance Group
Excluding Run-off Operations

Net premiums written                     $ 233,713        $ 244,237        $ 254,970
                                         ===========================================
Net premiums earned                      $ 221,934        $ 251,328        $ 263,970
Net investment income                       45,870           50,419           53,796
Other revenues                              10,086            9,722           10,482
                                         -------------------------------------------
Operating revenues                         277,890          311,469          328,248
                                         -------------------------------------------
Losses and LAE                             163,375          196,018          220,990
Acquisition and operating expenses          76,985           87,697           96,149
Dividends to policyholders                  19,141           17,736           14,716
                                         -------------------------------------------
Total losses and expenses                  259,501          301,451          331,855
                                         -------------------------------------------
Pre-tax operating income (loss)          $  18,389        $  10,018        $  (3,607)
                                         ===========================================


Run-off Operations
Net premiums written                     $      --        $  (9,400)       $ (51,622)
                                         ===========================================
Net premiums earned                      $      --        $  (9,400)       $ (51,622)
Net investment income                        4,412           14,161           28,131
                                         -------------------------------------------
Operating revenues                           4,412            4,761          (23,491)
                                         -------------------------------------------
Losses and LAE                               3,299            1,507          (27,460)
Acquisition and operating expenses           1,302            2,802            4,042
                                         -------------------------------------------
Total losses and expenses                    4,601            4,309          (23,418)
                                         -------------------------------------------
Pre-tax operating income (loss)          $    (189)       $     452        $     (73)
                                         ===========================================
</TABLE>

     Pre-tax operating income for The PMA Insurance Group increased in 1999 to
$18.2 million, compared with pre-tax operating income of $10.5 million in 1998,
and a pre-tax operating loss of $3.7 million in 1997. The increases in operating
income since 1997 were primarily due to improved loss experience and lower
operating expenses resulting from ongoing cost reduction initiatives. In
addition, the improvements in operating income reflect a reduction in the level
of net exposures underwritten due to disciplined and focused under-writing as
well as an increase in the use of reinsurance.

The PMA Insurance Group Excluding Run-off Operations
----------------------------------------------------
Premiums

(dollar amounts in thousands)       1999          1998           1997
-----------------------------------------------------------------------

Workers' compensation:
   Direct premiums written       $203,571       $183,913       $181,556
   Premiums assumed                 4,588          4,786          4,112
   Premiums ceded                  29,063          1,666         10,367
                                 --------------------------------------
   Net premiums written           179,096        187,033        175,301
                                 --------------------------------------

Commercial Lines:
   Direct premiums written         85,500         93,628        122,003
   Premiums assumed                 1,782          2,368          2,894
   Premiums ceded                  32,665         38,792         45,228
                                 --------------------------------------
   Net premiums written            54,617         57,204         79,669
                                 --------------------------------------

Total:
   Direct premiums written        289,071        277,541        303,559
   Premiums assumed                 6,370          7,154          7,006
   Premiums ceded                  61,728         40,458         55,595
                                 --------------------------------------
   Net premiums written          $233,713       $244,237       $254,970
                                 ======================================

Direct workers' compensation premiums written increased in the three-year period
ended December 31, 1999, due to an increase in the volume of risks underwritten.
However, manual rate reductions in The PMA Insurance Group's principal marketing
territories have constrained the growth in direct workers' compensation premiums
written in 1998 and 1997,  and to a much  lesser  extent in 1999.  In  addition,
continued intense price  competition and selected  non-renewal of non-profitable
accounts tempered increases in direct premiums written.
   In recent years,  the PMA Insurance  Group increased its writings of workers'
compensation  premiums  through focused  marketing  efforts and has continued to
balance its workers' compensation portfolio by increasing writings in relatively
lower hazard classes of business and reducing  writings in higher hazard classes
of business.

                                       32
<PAGE>

   For example, lower hazard classes of business such as healthcare, educational
institutions  and retail  represented  33%, 26% and 21% of total direct workers'
compensation  premiums  written in 1999,  1998 and 1997,  respectively,  whereas
higher hazard classes of business,  such as  construction,  represented 15%, 21%
and 26% of total direct workers' compensation premiums written in 1999, 1998 and
1997, respectively.
   The  enactment  of  workers'  compensation  benefit  reform  laws  in The PMA
Insurance  Group's principal  marketing  territories has caused manual rates for
workers'  compensation to decline in the past three years.  These benefit reform
laws also have had a favorable  impact on losses and LAE for business written on
policies  subject to such reform laws.  Because manual rate reductions  directly
affect the prices that The PMA Insurance Group can charge for its rate sensitive
workers' compensation products,  which include fixed cost and dividend policies,
such  declines in manual rate levels have had a  significant  effect on workers'
compensation premium volume. The premium charged on a fixed-cost policy is based
upon the manual rates filed with the state insurance  department.  In 1999, 1998
and 1997, manual rate levels have declined on average  approximately 3%, 13% and
25%, respectively.  As a result, the impact of decreasing manual rate levels has
declined over the last three years.
   During  1999,  direct  writings of  commercial  lines of business  other than
workers'  compensation,  such as commercial auto, general  liability,  umbrella,
multi-peril and commercial  property lines  (collectively,  "Commercial  Lines")
decreased  $8.1  million,  compared to 1998.  During  1998,  direct  writings of
Commercial Lines decreased $28.4 million,  compared to 1997. These decreases are
primarily  due to planned  reductions  in such lines and  continued  competitive
conditions.  Rather  than  lower  prices to what it  believes  are  unacceptable
levels,  The PMA Insurance Group has chosen not to renew some of its business in
the Commercial Lines.
   The increase in premiums ceded for 1999, compared to 1998, primarily reflects
a new  reinsurance  treaty  that  reduced  the net  retention  level on workers'
compensation  exposures from $1.5 million to $150,000 per occurrence,  beginning
in 1999.  Partially offsetting such increase in premiums ceded was a decrease of
$6.1 million in ceded premiums for Commercial  Lines,  which is primarily due to
the reduction in direct  Commercial  Lines business  written and negotiated rate
reductions for various treaties  reinsuring  certain  Commercial Lines business.
Premiums ceded for 1998 decreased  $15.1 million,  compared to 1997,  reflecting
lower ceded  premiums  for  workers'  compensation  business of $8.7 million due
primarily to the effect of a $9.4 million profit  commission  between the Pooled
Companies and the Run-off Operations.  In addition, ceded premiums on Commercial
Lines for 1998 decreased $6.4 million, compared to 1997, due to the reduction in
direct Commercial Lines business written.
    Net premiums earned decreased 12% in 1999, compared to 1998, and 5% in 1998,
compared  to 1997.  Each  year's  decrease  corresponds  to the  decrease in net
premiums  written.  Generally,  trends in net premiums  earned  follow  patterns
similar to net premiums  written  adjusted for the  customary lag related to the
timing  of  premium  writings  within  the  year.  Direct  premiums  are  earned
principally on a pro rata basis over the terms of the policies.

Losses and Expenses
The  components of The PMA Insurance  Group's GAAP  combined  ratios,  excluding
Run-off Operations are as follows:

                                   1999      1998      1997
-------------------------------------------------------------

Loss and LAE ratio                 73.6%     78.0%     83.7%
                                 ---------------------------
Expense ratio:
   Acquisition expenses            17.7%     18.0%     18.3%
   Operating expenses(1) (2)       13.4%     13.3%     14.6%
                                 ---------------------------
Total expense ratio                31.1%     31.3%     32.9%
Policyholders' dividend ratio       8.6%      7.1%      5.6%
                                 ---------------------------
GAAP combined
 ratio- (1) (2) (3) (4)           113.3%    116.4%    122.2%
                                 ===========================

(1)The expense  ratio and the combined  ratio for 1999 exclude the impact of the
   cumulative  effect  of  accounting  change  of  $4.3  million  ($2.8  million
   after-tax) for insurance-related assessments.
(2)The expense ratio and the combined  ratio exclude $7.9 million,  $9.0 million
   and $9.3 million in 1999,  1998 and 1997,  respectively,  for direct expenses
   related to service revenues, which are not included in premiums earned.
(3)The combined  ratio computed on a GAAP basis is equal to losses and LAE, plus
   acquisition expenses,  operating expenses and policyholders'  dividends,  all
   divided by net premiums earned.
(4)The GAAP combined  ratios for The PMA Insurance  Group  including the Run-off
   Operations  were  115.4%,   122.6%  and  140.8%  for  1999,  1998  and  1997,
   respectively.

                                       33
<PAGE>
The components of the loss and LAE ratio are as follows:

                                             1999      1998         1997
-------------------------------------------------------------------------
Current accident year - undiscounted(1)      76.8%     80.0%        81.0%
Prior year reserve development(2)            (4.2)%    (1.8)%       (0.4)%
Net discount accretion                        1.0%     (0.2)%        3.1%
                                            -----------------------------
Loss and LAE ratio                           73.6%     78.0%        83.7%
                                            =============================

(1)Returned premiums of $5.7 million,  $3.0 million and $0 associated with older
   years reduced  reported  premiums in 1999, 1998 and 1997,  respectively.  The
   current  accident  year  undiscounted  loss  and LAE  ratios  excluding  such
   adjustments were 74.8%, 79.0% and 81.0% in 1999, 1998 and 1997, respectively.
(2)The prior year  reserve  development  excluding  the  aforementioned  premium
   adjustments  and amounts  returned to the  policyholders  for  rent-a-captive
   business were 0.4%, 0% and 0.3% in 1999, 1998 and 1997, respectively.

The loss and LAE ratio improved 4.4 points in 1999, compared to 1998,  primarily
due to an improved  current accident year loss and LAE ratio, and more favorable
prior accident year reserve  development,  partially  offset by a decline in the
level of reserve discount.  The loss and LAE ratio improved 5.7 points for 1998,
compared to 1997,  primarily due to a more favorable  impact on the loss and LAE
ratio from the lower level of reserve discount and more favorable prior accident
year reserve development.
   In 1999,  The PMA  Insurance  Group  experienced  $9.2  million of  favorable
development of prior accident year reserves, excluding the accretion of discount
("prior year  development").  The  favorable  prior year  development  primarily
reflects  better  than  expected  loss  experience   from   loss-sensitive   and
rent-a-captive   workers'   compensation   business.   Premium  adjustments  for
loss-sensitive business and policyholders' dividends for rent-a-captive business
have substantially offset this favorable  development.  Rent-a-captives are used
by customers as an  alternative  method to manage  their loss  exposure  without
establishing  and capitalizing  their own captive  insurance  company.  In 1998,
favorable prior year development was $4.6 million,  comprised of $6.9 million of
favorable prior year development for workers' compensation,  partially offset by
$2.3 million of adverse prior year  development  in Commercial  Lines.  In 1997,
favorable prior year  development was $1.0 million,  reflecting  favorable prior
year development of $6.0 million on workers'  compensation,  partially offset by
reserve  strengthening of $5.0 million in commercial  multi-peril  business (see
Note  4 to  the  Company's  Consolidated  Financial  Statements  for  additional
information).
   The loss and LAE ratio is  negatively  impacted by  accretion  of discount on
prior year  reserves and  favorably  impacted by setting up discount for current
year  reserves.  The  net of  these  amounts  is  referred  to as  net  discount
accretion.  Accretion of prior year discounted  reserves exceeded the setting up
of discount for 1999 and 1997,  whereas the setting up of discount  exceeded the
accretion of prior year discounted  reserves in 1998. Net discount  accretion in
1999 reflects a reduction in the amount of discount  recorded on current  year's
reserves as a result of higher ceded loss  reserves  due to the new  reinsurance
treaty for workers' compensation.
   In 1999, 1998 and 1997, the impact on the loss and LAE ratio from the effects
of discounting loss reserves has generally  declined due mainly to the effect of
commutations  and lower  business  writings.  The PMA  Insurance  Group has been
executing  programs  under  which it  commuted,  or settled,  a large  number of
workers' compensation claims. Commutations are agreements whereby the claimants,
in exchange for a lump sum payment, release their rights to future payments. The
PMA Insurance Group paid approximately $38 million, $65 million and $113 million
in 1999, 1998 and 1997,  respectively,  to commute workers' compensation claims.
The  commutation   programs  resulted  in  payments  that  were  less  than  the
corresponding  carried  reserves.  Savings  associated  with these  claims  were
consistent with management's  expectations.  Because  substantially all of these
reserves were carried on a discounted  basis,  the ultimate level of discount on
The PMA Insurance Group's carried reserves decreased.
   Measures to control  medical  costs and LAE on workers'  compensation  claims
have also  improved the overall loss and LAE ratio.  Medical costs have improved
primarily due to The PMA Insurance Group's affiliation with a national preferred
provider organization, which became effective late in 1997. This affiliation has
enabled  The PMA  Insurance  Group  to  control  its cost of  providing  medical
benefits to injured workers.  In addition to this improvement in loss costs, LAE
costs have  decreased as well,  primarily due to continued use of certain claims
resolution practices. By using techniques such as managed care and commutations,
The PMA Insurance Group has reduced the amount and number of outstanding  claims
and the amount of time that a claim remains open. This in turn has lowered costs
associated with managing open claims.

                                       34
<PAGE>
    The loss and LAE ratio for Commercial Lines has improved due to stricter
underwriting standards and measures to control LAE. As mentioned above, The PMA
Insurance Group has chosen not to renew some of its Commercial Lines business
rather than lower prices to what it believes are unacceptable levels. In
addition, LAE costs have been reduced due to improved efficiency in claims
resolution and use of in-house legal services.
   In 1999, the expense ratio decreased by 0.2 points,  compared to 1998, due to
a decrease in the acquisition  expense ratio of 0.3 points,  partially offset by
an increase in the operating  expense  ratio of 0.1 points.  The decrease in the
acquisition  expense  ratio  for 1999 is a result of  higher  ceded  commissions
received as a result of the new  reinsurance  treaty in 1999 and a reduction  in
certain state  assessments,  compared to 1998. The 1998 operating  expense ratio
declined  1.6 points,  compared to 1997,  due to  decreases of 0.3 points in the
acquisition  expense  ratio  and 1.3  points  in the  operating  expense  ratio,
compared  to 1997.  The  1998  acquisition  expense  ratio  decreased  slightly,
compared to 1997,  primarily  due to a change in the mix of business to workers'
compensation business, which has a lower acquisition rate than Commercial Lines.
The 1998 operating expense ratio decreased 1.3 points,  compared to 1997, due to
continued cost cutting measures.
   The  policyholders'  dividend ratio was 8.6%, 7.1% and 5.6% in 1999, 1998 and
1997,  respectively.  Under  policies  that are subject to dividend  plans,  the
customer  may receive a dividend  based upon loss  experience  during the policy
period. The increases in the policyholders' dividend ratios are primarily due to
improved loss  experience  related to  rent-a-captive  business and selling more
business  under dividend  plans,  which  resulted in higher  dividend  payout to
policyholders.

Net Investment Income
Net investment income was $4.5 million lower in 1999, compared to 1998, and $3.4
million lower in 1998,  compared to 1997. The decrease in net investment  income
over the three years is primarily due to a lower asset base  resulting  from the
paydown of loss reserves from prior accident years. The paydown of loss reserves
in 1998  reflects  payments  under the  commutation  programs.  The decrease was
partially offset by higher investment yields associated with a shift in invested
assets towards higher yielding invested assets, such as asset-backed securities.

Run-off Operations
------------------
Net investment income for the Run-off Operations decreased $9.7 million in 1999,
compared to 1998,  primarily  due to the sale of PMA Cayman in  mid-1998,  which
decreased  invested  assets.  To a lesser extent,  the decline in net investment
income also reflects lower  invested  assets due to the paydown of losses by the
remaining  run-off  entities.  Net investment  income for 1998  decreased  $14.0
million, compared with 1997, due to the sale of PMA Cayman in mid-1998.
   Effective  July 1, 1998,  the Company sold PMA Cayman for a purchase price of
$1.8 million and recorded an after-tax  loss of $1.6 million.  This  transaction
included  the  transfer  of $231.5  million in cash and  invested  assets to the
buyer.  At  December  31,  1999,  the  Company had  recorded  $240.8  million in
reinsurance receivables from the buyer related to this transaction, all of which
are  secured by assets in a trust and by  letters of credit  (see Note 18 to the
Company's Consolidated Financial Statements for additional discussion).
   Losses and LAE of the Run-off  Operations  consist of discount  accretion  on
established loss reserves within the Run-off Operations. In 1998, favorable loss
development  was $10.3  million,  and included $9.4 million that was returned to
the Pooled Companies as a profit  commission.  Accordingly,  Run-off  Operations
recorded a $9.4 million  premium  adjustment  in 1998. In 1997,  favorable  loss
development  was  $51.8  million,   which  included  $37.0  million  related  to
retrospectively  rated  policies.  Losses and LAE of the Run-off  Operations for
1997 were  favorably  impacted  by the  cession of prior year  reserves of $14.8
million to a third party  reinsurer in 1997. The favorable  loss  development in
1997 was offset by reductions in earned premiums for the Run-off Operations.

                                       35
<PAGE>
CALIBER ONE
Summarized financial results of Caliber One are as follows:

(dollar amounts in thousands)                1999       1998
-------------------------------------------------------------

Net premiums written                        $51,237   $ 6,436
                                           ==================
Net premiums earned                         $24,729   $ 1,750
Net investment income                         2,459     1,453
                                           ------------------
Operating revenues                           27,188     3,203
                                           ------------------
Losses and LAE                               18,908     1,402
Acquisition and operating expenses            8,197     3,407
                                           ------------------
Total losses and expenses                    27,105     4,809
                                           ------------------
Pre-tax operating income (loss)             $    83   $(1,606)
                                           ==================

Caliber One recorded pre-tax operating income of $83,000 in 1999,  compared to a
pre-tax  operating  loss of $1.6 million in 1998.  The  improvement in operating
results reflects the significant growth in premiums and stabilization of Caliber
One's expenses relative to their premiums, along with a commensurate increase in
net investment income.
   Gross and net  premiums  written for Caliber One for 1999 were $93.4  million
and $51.2  million,  respectively,  compared to $11.8  million and $6.4 million,
respectively,  for 1998.  Earned premiums also increased  significantly in 1999,
compared to 1998. The growth in premiums written and earned in 1999, compared to
the prior year, reflects Caliber One's rising market acceptance and penetration,
and expanded product offerings and distribution network.
   The increase in losses and LAE, and acquisition  expenses,  comparing 1999 to
1998, results from the increase in business written from year to year. Operating
expenses  increased in 1999,  compared to 1998,  primarily due to the increasing
employee base and the expected,  continued investment into the infrastructure of
Caliber One.  Caliber One's combined  ratio in 1999 was 109.6%,  consisting of a
loss and LAE ratio of 76.5% and an expense ratio of 33.1%.
   Net investment  income  increased 69.2% to $2.5 million in 1999,  compared to
$1.5 million in 1998. This increase primarily reflects a larger average invested
asset base,  due primarily to premium  collections  in excess of paid losses and
expenses in 1999.
   In  December  1997,  PMA  Reinsurance   Corporation   acquired  100%  of  the
outstanding Common stock of Caliber One Indemnity Company, domiciled in Delaware
and formerly known as Lincoln Insurance Company, for approximately $16.0 million
and made a capital  contribution of  approximately  $11.3 million to Caliber One
Indemnity Company. All of Caliber One Indemnity Company's acquired loss reserves
were  reinsured  with an affiliate of its former parent for adverse  development
and  uncollectible  reinsurance  (the "Reserve  Guarantee") in the amount of the
recorded  reserves  plus $68.5  million.  Management  believes  that the Reserve
Guarantee  will be adequate to cover any future adverse  reserve  development or
uncollectible reinsurance on the acquired reserves. Management believes that the
reinsurance  obtained  as part of the  purchase  will be  adequate  to cover any
future  reserve  development  or  uncollectible   reinsurance  on  the  acquired
reserves. PMA Reinsurance  Corporation intends to maintain Caliber One Indemnity
Company's surplus at not less than $25.0 million.

LOSS RESERVES AND REINSURANCE
The  Company's  consolidated  unpaid  losses  and LAE,  net of  reinsurance,  at
December 31, 1999 and 1998 were $1,284.4  million and $1,347.2  million,  net of
discount of $180.4 million and $194.6 million,  respectively.  Unpaid losses and
LAE reflect  management's  best estimate of future  amounts needed to pay claims
and related  settlement costs with respect to insured events that have occurred,
including  events  that have not been  reported to the  Company.  In many cases,
significant  periods of time,  ranging up to several  years or more,  may elapse
between the  occurrence  of an insured  loss,  the  reporting of the loss to the
Company and the  Company's  payment of that loss.  In general,  liabilities  for
reinsurers become known more slowly than for primary insurers and are subject to
more  unforeseen  development  and  uncertainty.  As  part  of the  process  for
determining  these amounts,  historical  data is reviewed and  consideration  is
given to the impact of various factors,  such as legal developments,  changes in
social attitudes and economic conditions.
   Unpaid  losses  for  the  Company's  workers'  compensation  claims,  net  of
reinsurance,  at  December  31,  1999 and 1998 were  $527.9  million  and $628.5
million, net of discount of $173.1 million and $194.3 million, respectively. The
approximate discount rate used was 5% at December 31, 1999 and 1998.
   Management  believes  that its unpaid  losses  and LAE are  fairly  stated at
December  31,  1999.  However,  estimating  the  ultimate  claims  liability  is
necessarily a complex and judgmental  process  inasmuch as the amounts are based
on management's informed estimates and judgments using data currently available.
As additional  experience and data become available regarding claims payment and
reporting  patterns,  legislative  developments,  regulatory  trends on  benefit
levels for both medical and indemnity  payments,  and economic  conditions,  the
estimates are revised accordingly. If the Company's ultimate net losses prove to
differ substantially from the amounts

                                       36
<PAGE>
recorded at December 31,  1999,  the related  adjustments  could have a material
adverse effect on the Company's financial  condition,  results of operations and
liquidity.
   At December  31,  1999,  1998 and 1997,  the  Company's  gross  reserves  for
asbestos-related  losses were $61.3  million,  $67.9 million and $76.7  million,
respectively   ($38.9  million,   $43.6  million  and  $48.6  million,   net  of
reinsurance,  respectively).  At December 31, 1999, 1998 and 1997, the Company's
gross  reserves  for  environmental-related  losses  were $41.4  million,  $47.0
million and $45.1 million,  respectively ($24.5 million, $29.4 million and $31.7
million, net of reinsurance, respectively).
   Estimating reserves for asbestos and environmental  exposures continues to be
difficult because of several factors,  including: (i) evolving methodologies for
the estimation of the liabilities;  (ii) lack of reliable historical claim data;
(iii)  uncertainties with respect to insurance and reinsurance  coverage related
to these obligations;  (iv) changing judicial interpretations;  and (v) changing
government standards. To reserve for environmental claims, the Company currently
utilizes  a  calendar  year  development   technique  known  as  aggregate  loss
development.  This  technique  focuses  on the  aggregate  losses  paid  as of a
particular  date and aggregate  payment  patterns  associated  with such claims.
Several  elements   including   remediation   studies,   remediation,   defense,
declaratory  judgment and third party bodily  injury  claims were  considered in
estimating the costs and payment  patterns of the  environmental  and toxic tort
losses.  Prior to the development of these  techniques,  there was a substantial
range in the nature of reserving for environmental and toxic tort liabilities.
   Management  believes that its reserves for asbestos and environmental  claims
are  appropriately  established  based upon known facts,  existing  case law and
generally   accepted   actuarial   methodologies.   However,   due  to  changing
interpretations  by courts involving  coverage issues, the potential for changes
in federal and state  standards  for clean-up and  liability,  as well as issues
involving  policy  provisions,   allocation  of  liability  among  participating
insurers and proof of coverage, the Company's ultimate exposure for these claims
may vary  significantly  from the amounts  currently  recorded,  resulting  in a
potential  future  adjustment that could be material to the Company's  financial
condition and results of operations  (see "Loss  Reserves" in the Company's 1999
Form 10-K and Note 4 to the  Company's  Consolidated  Financial  Statements  for
additional discussion).

   At December 31, 1999, the Company's reinsurance and retrocessional protection
was as follows:
                              Retention      Limits (1)
---------------------------------------------------------------
PMA Re
Per Occurrence:
   Casualty lines           $2.8 million    $17.5 million
   Workers' compensation    $2.0 million    $98.0 million
   Property lines           $2.0 million    $48.0 million
Per Risk:
   Property lines           $ 750,000       $4.3 million
   Casualty lines           $1.5 million    $6.0 million

The PMA
  Insurance Group
Per Occurrence:
   Workers' compensation    $ 150,000       $103.5 million
Per Risk:
   Property lines           $ 500,000(2)    $19.5 million
   Auto physical damage     $ 500,000       $2.0 million
   Other casualty lines     $ 175,000(3)    $4.8 million

Caliber One
Per Occurrence
  and Per Risk:
     Property lines         $ 500,000       $4.5 million
     Casualty lines         $ 500,000       $5.5 million
                           ------------------------------

(1)  Represents the amount of loss protection  above the Company's level of loss
     retention.
(2)  This coverage also provides protection of $48.5 million per occurrence over
     its combined net retention of $500,000.
(3)  This coverage also provides protection of $49.8 million per occurrence over
     its combined net retention of $175,000.

The  Company  actively   manages  its  exposure  to  catastrophes   through  its
underwriting  process,  where the Company generally monitors the accumulation of
insurable  values in  catastrophe  prone  regions.  Also,  in  writing  property
reinsurance coverages, PMA Re typically requires per occurrence loss limitations
for  contracts  that  could  have   catastrophe   exposure.   Through  per  risk
reinsurance,  the Company also manages its net  retention in each  exposure.  In
addition, PMA Re maintains retrocessional  protection of $48.0 million in excess
of $2.0 million per occurrence.  The PMA Insurance  Group maintains  catastrophe
reinsurance  protection  of $27.7  million in excess of $850,000 and Caliber One
maintains  catastrophe  reinsurance  protection  of $19.3  million  in excess of
$750,000.  As a  result,  the  Company's  loss  and LAE  ratios  have  not  been
significantly  impacted by  catastrophes  in 1999,  1998 or 1997.  Although  the
Company  believes  that it has  adequate  reinsurance  to  protect  against  the
estimated  probable maximum gross loss from a catastrophe,  an especially severe
catastrophe  or series of  catastrophes  could exceed the Company's

                                       37
<PAGE>

reinsurance  and/or  retrocessional  protection and may have a material  adverse
impact  on  the  Company's  financial  condition,   results  of  operations  and
liquidity.
   The Company performs extensive credit reviews on its reinsurers, focusing on,
among other things, financial capacity,  stability, trends and commitment to the
reinsurance  business.  Prospective and existing  reinsurers failing to meet the
Company's  standards are excluded from the Company's  reinsurance  programs.  In
addition,  the Company requires letters of credit or other acceptable collateral
to support  balances due from reinsurers not authorized to transact  business in
the  applicable  jurisdictions.  The timing and  collectibility  of  reinsurance
recoverables  have not had,  and are not  expected to have,  a material  adverse
effect on the  Company's  liquidity  (see Note 5 to the  Company's  Consolidated
Financial Statements for additional discussion).

CORPORATE AND OTHER
The  Corporate  and  Other  segment  includes  unallocated   investment  income,
expenses,  including  debt  service,  as well as the  results  of certain of the
Company's  real estate  properties.  For 1999,  Corporate  and Other  recorded a
pre-tax operating loss of $20.8 million,  compared to $21.9 million in 1998. The
decrease in pre-tax  operating  loss was due to lower  interest  expense of $2.8
million  for 1999,  compared  to 1998,  reflecting  a $40.0  million  paydown in
outstanding  debt in the fourth  quarter  of 1998 (see  "Liquidity  and  Capital
Resources"  below for  further  discussion),  partially  offset  by  higher  net
revenues from non-core real estate properties in 1998.
   In 1998,  Corporate  and Other  recorded  a pre-tax  operating  loss of $21.9
million,  compared to $25.7 million in 1997.  The decrease in the operating loss
in 1998,  compared  to 1997,  was  primarily  due to higher  net  revenues  from
non-core real estate properties in 1998. Additionally,  during 1997, the Company
incurred  $1.8  million  of  severance  and  related   restructuring  costs  and
pre-operating charges of approximately $900,000 in establishing Caliber One.

NET REALIZED INVESTMENT GAINS/LOSSES
The Company recorded net pre-tax realized  investment  losses of $7.7 million in
1999,  compared with net pre-tax  realized  investment gains of $21.7 million in
1998 and $8.6 million in 1997.  Gains and losses on the sale of investments  are
recognized as a component of net income,  but the timing and recognition of such
gains and losses are  unpredictable  and are not indicative of current or future
results.  Accordingly,  such gains and losses are not included as a component of
operating income.
   During the three-year  period ended  December 31, 1999, the Company  realized
gains  and  losses  from  investment   sales  related  to  the  following:   (i)
transactions  to  expand  the asset  classes  in which the  Company  invests  to
capitalize on favorable yield spreads between such instruments and U.S. Treasury
securities and (ii)  transactions  based upon an assessment of the interest rate
environment.
   The realized  losses for 1999  primarily  reflect sales of  investments  in a
rising  interest  rate  environment  in  order  to  invest  in  yield  enhancing
investment opportunities.  This is in contrast to the realized gains in 1998 and
1997,  which  reflect  sales  of  investments  in  a  declining   interest  rate
environment.  In 1999 and 1998, the Company diversified its investment portfolio
by  increasing  its  holdings  of  corporate  bonds,  mortgage-backed  and other
asset-backed  securities,  while reducing holdings in government securities.  In
1997, the Company  repositioned its investment  portfolio to improve its pre-tax
investment  yield,  while  maintaining the maturity  matching  structure between
investments and liability cash flow projections.

LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entity's  ability to secure enough cash to meet its
contractual  obligations and operating needs. At the holding company level, cash
is needed to pay debt  obligations,  dividends to shareholders  and taxes to the
Federal government, as well as to capitalize subsidiaries from time to time. PMA
Capital's primary sources of liquidity are dividends from subsidiaries,  net tax
payments received from subsidiaries and borrowings.
   At December  31, 1999 and 1998,  the Company had $163.0  million  outstanding
under its existing  Credit  Facility.  Throughout  much of 1998, the Company had
$203.0 million outstanding under the Credit Facility.  In late 1998, the Company
made an unscheduled  debt  repayment of $40.0 million to reduce the  outstanding
debt to $163.0 million.  At December 31, 1999,  $24.5 million is available under
the Credit  Facility.  In 1997, the Company made scheduled debt payments of $7.3
million  as  well  as an  additional  debt  repayment  of  $8.0  million  before
refinancing all of its credit agreements not already maturing in 1997.
   The final  expiration  of the Credit  Facility is December 31, 2002,  and the
Credit  Facility  matures  in an  installment  of  $38.0  million  in  2000  and
installments of $62.5 million in 2001 and 2002.

                                       38
<PAGE>
   In  addition  to the Credit  Facility,  the  Company  maintains  a  committed
facility  of $50.0  million  for  letters  of  credit  (the  "Letter  of  Credit
Facility").  The Letter of Credit  Facility is utilized  primarily  for securing
reinsurance obligations of the Company's insurance subsidiaries.  As of December
31, 1999,  the Company had $45.9 million  outstanding in letters of credit under
the Letter of Credit Facility.
   The Company's  domestic insurance  subsidiaries'  ability to pay dividends to
the  holding  company  is  limited  by the  insurance  laws and  regulations  of
Pennsylvania  and  Delaware  (the laws of which are  substantially  similar with
respect to dividends).  Under  Pennsylvania laws and regulations,  dividends may
not be paid without prior approval of the  Pennsylvania  Insurance  Commissioner
(the  "Commissioner")  in excess  of the  greater  of (i) 10% of  policyholders'
surplus  as of the end of the  preceding  year or (ii)  SAP net  income  for the
preceding  year,  but in no event to exceed SAP unassigned  surplus.  Under this
standard,  the  Pooled  Companies  and PMA  Reinsurance  Corporation  can pay an
aggregate of approximately  $55 million of dividends  without the prior approval
of  the   Commissioner   during  2000.   Caliber  One   Indemnity   Company,   a
Delaware-domiciled  company,  is directly owned by PMA  Reinsurance  Corporation
and, as such,  its dividends may not be paid directly to PMA Capital.  As stated
above,  Delaware's  insurance laws as they apply to  restricting  the payment of
dividends are  substantially  similar to  Pennsylvania's  insurance laws.  Under
Delaware  insurance laws,  Caliber One Indemnity Company can pay $3.3 million in
dividends during 2000.  Dividends received from subsidiaries were $43.2 million,
$35.5 million and $22.5 million in 1999, 1998 and 1997, respectively.
   Net tax payments received from subsidiaries were $21.8 million, $29.7 million
and $20.0 million in 1999,  1998 and 1997,  respectively.  In December 1998, the
Company  received  a  refund  from  the  Internal  Revenue  Service  ("IRS")  of
approximately  $15 million relating to Federal income taxes paid by the Company.
The refund relates to a claim for refund filed by the Company with regard to its
1992 U.S. Federal income tax return. In 1997, the Company received a refund from
the IRS of  approximately  $16.8  million as a result of a net  operating  loss,
which was generated in 1996 and carried back to 1993,  1994 and 1995 (see Note 8
to the Company's  Consolidated Financial Statements for additional discussion of
income taxes).
   PMA  Capital's   dividends  to  shareholders   are  restricted  by  its  debt
agreements. Based upon the terms of the Credit Facility and the Letter of Credit
Facility, under the most restrictive debt covenant, PMA Capital would be able to
pay dividends of  approximately  $10 million in 2000. The Company paid dividends
to shareholders of $7.8 million, $7.9 million and $8.0 million in 1999, 1998 and
1997, respectively.
   In  December  1997,  PMA  Reinsurance   Corporation   acquired  100%  of  the
outstanding  Common  stock of Caliber One  Indemnity  Company for  approximately
$16.0 million and made a capital  contribution of approximately $11.3 million to
Caliber  One  Indemnity   Company  (see  "Caliber  One"  herein  for  additional
discussion).   PMA  Capital  also  made  cash  capital   contributions   to  its
subsidiaries totaling $7.1 million, $480,000 and $11.0 million in 1999, 1998 and
1997, respectively.
   In 1998,  the  Company's  Board of Directors  authorized a plan to repurchase
shares of Common stock and Class A Common stock in an amount not to exceed $25.0
million. In 1999, an additional $50.0 million of share repurchase  authority was
approved  by  the  Company's  Board  of  Directors.  During  1999,  the  Company
repurchased a total of approximately  1.5 million Class A shares at a total cost
of $30.2 million (average per share price was $19.81).  During 1998, the Company
repurchased a total of approximately 1.0 million shares at a total cost of $18.9
million  (average per share price was $18.92).  Since the inception of its share
repurchase  program in February  1998,  PMA Capital has  repurchased  a total of
approximately  2.5  million  Class A shares  at a total  cost of  $49.1  million
(average per share price was $19.46),  leaving $25.9 million of share repurchase
authorization.  Decisions  regarding share  repurchases are subject to the costs
and benefits  associated with alternative uses of capital and prevailing  market
conditions.
   The Company's total assets decreased to $3,245.1 million at December 31, 1999
from $3,460.7 million at December 31, 1998. Total  investments  decreased $407.4
million to $1,918.0 million at December 31, 1999. The decrease in investments is
primarily  attributable  to declines in market  values of $118.2  million due to
rising  interest  rates as well as a decrease of $178.8 million in securities on
loan under the Company's securities lending program.
   Management  believes  that  the  Company's  sources  of  funds  will  provide
sufficient liquidity to meet short-term and long-term obligations.  In addition,
management believes that the existing capital structure is appropriate. However,
management  continually  monitors the capital structure in light of developments
in the business,  and the present  assessment could change as management becomes
aware of new opportunities and challenges in the Company's business.

                                       39
<PAGE>

INVESTMENTS
The Company's investment objectives are to (i) seek competitive after-tax income
and total return,  (ii) maintain medium to high  investment  grade asset quality
and high marketability,  (iii) maintain maturity distribution  commensurate with
the  Company's  business  objectives,  (iv) provide  portfolio  flexibility  for
changing  business and  investment  climates  and (v) provide  liquidity to meet
operating objectives.  The Company's investment strategy includes guidelines for
asset quality  standards,  asset allocations and other relevant criteria for its
portfolio.  In addition,  maturities are structured after  projecting  liability
cash  flows  with  actuarial  models  of loss  reserve  payouts.  The  Company's
portfolio  does not contain any  significant  concentrations  in single  issuers
(other  than  U.S.  Treasury  and  agency  obligations),  industry  segments  or
geographic  regions.  The  Company  has  no  investments  that  are  not  dollar
denominated as of December 31, 1999.
   The Company's investments at fair value were as follows at December 31:
<TABLE>
<CAPTION>
                                                                   1999                         1998
-------------------------------------------------------------------------------------------------------------
(dollar amounts in millions)                            Fair Value    Percent         Fair Value     Percent
-------------------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>           <C>            <C>
U.S. Treasury securities and
   obligations of U.S. Government agencies                $  419.4       22%           $  827.2       36%
Obligations of states, political
   subdivisions and foreign governments                       30.6        1%               24.9        1%
Corporate debt securities                                    555.1       29%              420.3       18%
Mortgage-backed and other asset-backed securities            574.5       30%              555.0       24%
Equity securities                                             35.0        2%                 --       --
Short-term investments                                       303.4       16%              498.0       21%
                                                         ------------------------------------------------
Total                                                     $1,918.0      100%           $2,325.4      100%
                                                         ================================================
</TABLE>

Mortgage-backed  and  other  asset-backed   securities  include   collateralized
mortgage  obligations  ("CMOs") of $168.2 million and $100.0 million  carried at
fair value as of December  31, 1999 and 1998,  respectively.  CMO  holdings  are
concentrated in securities with limited prepayment,  extension and default risk,
such as planned amortization class bonds.
   The  composition of the Company's fixed  maturities at fair value,  excluding
short-term investments, by rating was as follows at December 31:
<TABLE>
<CAPTION>
                                                       1999                         1998
------------------------------------------------------------------------------------------------
(dollar amounts in millions)                Fair Value    Percent        Fair Value     Percent
------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>           <C>            <C>
U.S. Treasury securities and AAA              $1,018.1       64%           $1,355.2       74%
AA                                                86.7        5%              100.5        5%
A                                                325.9       21%              266.4       15%
BBB                                              124.0        8%              105.3        6%
BB                                                21.9        1%                 --       --
B                                                  3.0        1%                 --       --
                                            --------------------------------------------------
Total                                         $1,579.6      100%           $1,827.4      100%
                                            ==================================================
</TABLE>

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

                                       40
<PAGE>
The following table reflects the Company's investment results:

(dollar amounts in millions)          1999           1998           1997
--------------------------------------------------------------------------
Average invested assets(1)         $ 1,818.0      $ 2,038.0      $ 2,207.0
Net investment income(2)           $   108.7      $   119.1      $   132.8
Net effective yield(3)                  5.98%          5.84%          6.02%
                                   ---------------------------------------

(1)Average  invested assets  throughout the year, at amortized  cost,  excluding
   amounts related to securities lending activities.
(2)Gross  investment  income less  investment  expenses.  Excludes  net realized
   investment gains and amounts related to securities lending activities.
(3)Net investment  income for the period divided by average invested assets for
   the same period.

As of December 31, 1999, the duration of the Company's  investments that support
the insurance reserves was approximately 4 years,  which generally  approximates
the duration of the insurance reserves.
   See "Business -  Investments"  in the Company's  1999 Form 10-K and Notes 2-B
and  3  to  the  Company's  Consolidated  Financial  Statements  for  additional
discussion.

MARKET RISK OF FINANCIAL INSTRUMENTS
A significant  portion of PMA  Capital's  assets and  liabilities  are financial
instruments,  which are  subject to the market  risk of  potential  losses  from
adverse  changes in market rates and prices.  The Company's  primary market risk
exposures  relate to  interest  rate  risk on fixed  rate  domestic  medium-term
instruments and, to a lesser extent,  domestic short- and long-term instruments.
The  Company  has  established  strategies,   asset  quality  standards,   asset
allocations and other relevant criteria for its portfolio to manage its exposure
to  market  risk.  In  addition,  maturities  are  structured  after  projecting
liability cash flows with actuarial  models.  The Company currently has only one
derivative instrument outstanding, an interest rate swap on its Credit Facility,
which is used as a hedge.  All of the Company's  financial  instruments are held
for purposes  other than trading.  The Company's  portfolio does not contain any
significant  concentrations  in single  issuers  (other than U.S.  Treasury  and
agency obligations), industry segments or geographic regions. See Notes 3, 6 and
10 to the Company's Consolidated Financial Statements for additional information
about financial instruments.
   Caution should be used in evaluating  PMA Capital's  overall market risk from
the information  below, since actual results could differ materially because the
information was developed  using  estimates and assumptions as described  below,
and because  insurance  liabilities and reinsurance  receivables are excluded in
the  hypothetical  effects  (insurance   liabilities   represent  78%  of  total
liabilities and reinsurance  receivables on unpaid losses represent 20% of total
assets).
   The  hypothetical  effects of  changes in market  rates or prices on the fair
values of financial  instruments  as of December 31, 1999,  excluding  insurance
liabilities and reinsurance  receivables on unpaid losses because such insurance
related assets and liabilities are not carried at fair value, would have been as
follows:

o  If interest rates had increased by 100 basis points, there would have been no
   significant  change in the fair value of the Company's  long-term debt or the
   related  swap  agreement.  The  change  in  fair  values  was  determined  by
   estimating  the present  value of future cash flows using models that measure
   the change in net present values arising from selected  hypothetical  changes
   in market interest rates.

o  If interest rates had increased by 100 basis points,  there would have been a
   net decrease of approximately  $75 million in the fair value of the Company's
   investment portfolio.  The change in fair values was determined by estimating
   the  present  value of future  cash flows  using  various  models,  primarily
   duration modeling.

OTHER MATTERS
The Company's  businesses  are subject to a changing  social,  economic,  legal,
legislative  and  regulatory  environment  that could affect  them.  Some of the
changes include initiatives to restrict insurance pricing and the application of
underwriting  standards and  reinterpretations of insurance contracts long after
the policies were written in an effort to provide coverage  unanticipated by the
Company. The eventual effect on the Company of the changing environment in which
it  operates  remains  uncertain  (see  Notes  4,  8  and  12 to  the  Company's
Consolidated Financial Statements for additional discussion).

Year 2000 Issue
---------------
As a consequence of the programming  convention which utilized a two-digit field
rather than a four-digit field,  certain  information  technology ("IT") systems
and non-IT  systems,  such as equipment with embedded chips or  microprocessors,
required  reprogramming or replacement to enable them to perform  correctly date
operations involving year 2000 or later ("Year 2000 Issue").

                                       41
<PAGE>
   With  the  assistance  of  outside   consulting  groups,  the  Company  began
evaluating  and  reprogramming  its IT systems to address the Year 2000 Issue in
late 1995.  The Company's Year 2000 systems'  program  consisted of four phases:
(i) identifying systems requiring  remediation;  (ii) assessing the requirements
to remediate those systems;  (iii)  remediating  those systems to make them Year
2000 ready by either  modifying or replacing  them; and (iv) testing the systems
for Year  2000  readiness,  including,  where  applicable,  that  they  properly
interface with third parties.  Prior to the end of 1999, the Company  remediated
and  tested  its IT  systems  that  the  Company  determined  were  critical  to
maintaining operations or the failure of which would result in significant costs
or disruption of operations ("mission critical systems") and its non-IT systems.
As  of  February  29,  2000,  the  Company  has  not  experienced  any  material
disruptions  to its business  due to Year 2000 Issues with its mission  critical
systems or non-IT  systems.  The cost of the Company's  Year 2000 readiness work
through December 31, 1999 was approximately $5.4 million.
   As of February 29, 2000,  the Company was not aware of any Year 2000 problems
with  third   parties   with  which  the  Company  has  a  direct  and  material
relationship.
   It is possible that the Company's  computerized  systems could be affected in
the  future  by the Year 2000  Issue.  The  Company  has  numerous  computerized
interfaces  with third parties that are possibly  vulnerable to failure if those
third  parties have not  adequately  addressed  their Year 2000 Issues.  Systems
failures resulting from these issues could cause significant  disruptions to the
Company's operations.  As of February 29, 2000, there do not appear to have been
any such failures.
   Although  there have been no apparent Year 2000 problems  related to internal
systems and third parties, the Company may have underwriting exposure related to
the Year 2000 Issue.  Businesses materially damaged as a result of the Year 2000
Issue may attempt to recoup  their  losses by claiming  coverage  under  various
types of insurance policies  underwritten by the Company and by ceding companies
to whom the Company provides  reinsurance.  The Company has attempted,  whenever
possible,  to avoid or otherwise limit its potential Year 2000 exposure  through
its  underwriting  process.  In the event that  claims for Year 2000  Issues are
asserted  against the Company,  it is not possible to predict whether or to what
extent  coverage  could  ultimately  be  found to exist  by  courts  in  various
jurisdictions,  or, if found,  the effect  thereof on the Company.  In addition,
even if such  coverage were found not to exist,  which cannot be predicted,  the
costs of litigation could be material.  In the absence of any claims  experience
at this time, such losses and costs are not currently reasonably  estimable.  As
of February 29, 2000, the Company has not received notice of any material claims
from insureds based on the Year 2000 Issue.

Comparison of SAP and GAAP Results
Results  presented  in  accordance  with  GAAP  vary in  certain  respects  from
statutory  accounting  practices  prescribed  or permitted  by the  Pennsylvania
Insurance  Department  and  the  Delaware  Insurance  Department,  (collectively
"SAP").   Prescribed   SAP  includes   state  laws,   regulations   and  general
administrative  rules, as well as a variety of National Association of Insurance
Commissioners  ("NAIC")  publications.  Permitted SAP encompasses all accounting
practices that are not prescribed. In 1998, the NAIC adopted the Codification of
Statutory Accounting Principles  ("Codification")  guidance,  which will replace
the current  Accounting  Practices and  Procedures  manual as the NAIC's primary
guidance on statutory accounting. Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas, such as deferred income taxes.
   The  Company's   insurance   subsidiaries  will  implement  the  Codification
guidelines effective January 1, 2001. The Company is in the process of assessing
the impact that  Codification  will have on its statutory  surplus and currently
expects  that the  impact  of  adopting  Codification  will not be  material  to
statutory surplus.

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

                                       42
<PAGE>
   In June 1998,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 133,  "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
"derivatives")  and for hedging  activities.  SFAS No. 133 requires an entity to
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position and measure those  instruments at fair value. The accounting
for  changes  in the fair  value of a  derivative  (that is,  gains and  losses)
depends on the intended use of the derivative and the resulting designation.  In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative  Instruments
and Hedging  Activities-Deferral  of the  Effective  Date of FASB  Statement No.
133," which defers the effective date of SFAS No. 133 to fiscal years  beginning
after June 15,  2000.  While the Company is presently  evaluating  the impact of
SFAS No. 133,  the  adoption of SFAS No. 133 is not  expected to have a material
impact on the Company's financial condition, results of operations or liquidity.
   In October 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-7, "Deposit  Accounting:
Accounting  for  Insurance  and  Reinsurance  Contracts  That  Do  Not  Transfer
Insurance Risk." This statement identifies several methods of deposit accounting
and  provides  guidance  on the  application  of  each  method.  This  statement
classifies  insurance and reinsurance  contracts for which the deposit method is
appropriate as contracts that (i) transfer only  significant  timing risk,  (ii)
transfer only significant  underwriting risk, (iii) transfer neither significant
timing nor underwriting  risk and (iv) have an  indeterminate  risk. SOP 98-7 is
effective for financial  statements  for fiscal years  beginning  after June 15,
1999. The adoption of SOP 98-7 is not expected to have a material  impact on the
Company's financial condition, results of operations or liquidity.
   See  Note  2-J  to  the  Company's   Consolidated  Financial  Statements  for
additional discussion.

CAUTIONARY STATEMENTS
Except for historical  information provided in this Management's  Discussion and
Analysis and otherwise in this report,  statements  made  throughout this report
are forward-looking  and contain  information about financial results,  economic
conditions, trends and known uncertainties. These forward-looking statements are
based on currently  available  financial,  competitive and economic data and the
Company's current operating plans based on assumptions  regarding future events.
The Company's actual results could differ  materially from those expected by the
Company's  management.  The  factors  that could  cause  actual  results to vary
materially,  some of which are described  with the  forward-looking  statements,
include,  but are not  limited  to,  changes  in  general  economic  conditions,
including the performance of financial markets and interest rates; regulatory or
tax  changes,  including  changes  in  risk-based  capital  or other  regulatory
standards  that  affect the  ability of the  Company  to conduct  its  business;
competitive  or  regulatory  changes  that  affect the cost of or demand for the
Company's products; the Company's ability to meet its marketing objectives;  the
effect of changes in workers'  compensation  statutes and their  administration;
the  Company's  ability to predict  and  effectively  manage  claims  related to
insurance and  reinsurance  policies;  reliance on key  management;  adequacy of
reserves for claim  liabilities;  adverse property and casualty loss development
for events the Company insured in prior years;  adequacy and  collectibility  of
reinsurance  purchased by the Company;  severity of natural  disasters and other
catastrophes;  and other factors disclosed from time to time in reports filed by
the Company with the Securities and Exchange  Commission.  Investors  should not
place  undue  reliance  on any  such  forward-looking  statements.  The  Company
disclaims any obligation to update forward-looking statements.



                                       43
<PAGE>
Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                               December 31,
(in thousands, except share data)                                                          1999              1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>               <C>
Assets:
Investments:
   Fixed maturities available for sale, at fair value (amortized cost:
      1999 - $1,648,894; 1998 - $1,781,188)                                            $1,579,640       $ 1,827,354
   Equity securities, at fair value (cost: 1999 - $37,779; 1998 - $5)                      34,966                17
   Short-term investments, at cost which approximates fair value                          303,429           498,038
                                                                                       ----------------------------
      Total investments                                                                 1,918,035         2,325,409

Cash                                                                                       84,261             2,562
Accrued investment income                                                                  20,480            19,900
Premiums receivable (net of valuation allowance: 1999 -$18,088; 1998 - $19,874)           271,833           279,633
Reinsurance receivables (net of valuation allowance: 1999 -$5,528; 1998 - $2,178)         658,164           610,291
Deferred income taxes, net                                                                105,363            63,929
Deferred acquisition costs                                                                 48,949            51,115
Other assets                                                                              138,002           107,879
                                                                                       ----------------------------
      Total assets                                                                     $3,245,087       $ 3,460,718
                                                                                       ============================

Liabilities:
Unpaid losses and loss adjustment expenses                                             $1,932,601       $ 1,940,895
Unearned premiums                                                                         260,352           227,945
Long-term debt                                                                            163,000           163,000
Accounts payable and accrued expenses                                                     109,447           107,952
Funds held under reinsurance treaties                                                      94,445            77,674
Dividends to policyholders                                                                 13,782            10,700
Payable under securities loan agreements                                                  242,317           421,072
                                                                                       ----------------------------
      Total liabilities                                                                 2,815,944         2,949,238
                                                                                       ----------------------------

Commitments and contingencies (Note 12)

Shareholders' Equity:
Common stock,  $5 par value  (40,000,000  shares  authorized;  1999 - 13,084,665
   shares issued and 12,648,658 outstanding;
   1998 - 13,956,268 shares issued and 13,520,261 outstanding)                             65,423            69,781
Class A common stock, $5 par value (40,000,000 shares authorized;
   1999 - 11,358,280 shares issued and 9,692,854 outstanding;
   1998 - 10,486,677 shares issued and 9,837,963 outstanding)                              56,791            52,433
Additional paid-in capital - Class A common stock                                             339               339
Retained earnings                                                                         391,981           377,601
Accumulated other comprehensive income (loss)                                             (46,844)           30,016
Notes receivable from officers                                                                (56)             (498)
Treasury stock, at cost:
   Common stock (1999 - 436,007 shares; 1998 - 436,007 shares)                             (5,582)           (5,582)
   Class A common stock (1999-1,665,426 shares; 1998 - 648,714 shares)                    (32,909)          (12,610)
                                                                                       ----------------------------
      Total shareholders' equity                                                          429,143           511,480
                                                                                       ----------------------------
      Total liabilities and shareholders' equity                                       $3,245,087       $ 3,460,718
                                                                                       ============================
</TABLE>

See accompanying notes to the consolidated financial statements.


                                       44
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                                              For the years ended December 31,
(in thousands, except per share data)                                       1999             1998              1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>               <C>              <C>
Revenues:
   Net premiums written                                                $ 563,510        $ 474,761         $ 381,282
   Change in net unearned premiums                                       (23,423)          (8,046)           (5,331)
                                                                      ----------------------------------------------
      Net premiums earned                                                540,087          466,715           375,951
   Net investment income                                                 110,057          120,125           133,392
   Net realized investment gains (losses)                                 (7,745)          21,745             8,598
   Other revenues                                                         12,718           14,896            13,617
                                                                      ----------------------------------------------
      Total revenues                                                     655,117          623,481           531,558
                                                                      ----------------------------------------------

Losses and Expenses:
   Losses and loss adjustment expenses                                   392,473          352,671           307,281
   Acquisition expenses                                                  124,368          110,837            93,501
   Operating expenses                                                     66,822           72,159            75,139
   Dividends to policyholders                                             19,141           17,736            14,716
   Interest expense                                                       12,221           15,009            15,768
                                                                      ----------------------------------------------
      Total losses and expenses                                          615,025          568,412           506,405
                                                                      ----------------------------------------------

Income before income taxes, extraordinary loss
   and cumulative effect of accounting change                             40,092           55,069            25,153

Income tax expense                                                        11,739           10,335             5,400
                                                                      ----------------------------------------------

Income before extraordinary loss and cumulative
   effect of accounting change                                            28,353           44,734            19,753

Extraordinary loss from early extinguishment
   of debt (net of income tax benefit of $2,549)                              --               --            (4,734)
Cumulative effect of accounting change (net of income tax
   benefit of $1,485)                                                     (2,759)              --                --
                                                                      ----------------------------------------------
Net income                                                             $  25,594         $ 44,734         $  15,019
                                                                      ==============================================

Income (loss) per share:
   Basic:
      Income before extraordinary loss and cumulative
         effect of accounting change                                   $    1.23         $   1.89         $    0.83
      Extraordinary loss                                                      --              --              (0.20)
      Cumulative effect of accounting change                               (0.12)             --                 --
                                                                      ----------------------------------------------
   Net income                                                          $    1.11         $   1.89         $    0.63
                                                                      ==============================================
   Diluted:
      Income before extraordinary loss and cumulative
         effect of accounting change                                   $    1.19         $   1.82         $    0.80
      Extraordinary loss                                                      --              --              (0.19)
      Cumulative effect of accounting change                               (0.11)             --                 --
                                                                      ----------------------------------------------
   Net income                                                          $    1.08         $   1.82         $    0.61
                                                                      ==============================================
</TABLE>


See accompanying notes to the consolidated financial statements.


                                       45

<PAGE>
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                              For the years ended December 31,
(in thousands)                                                             1999             1998              1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>              <C>               <C>
Cash flows from operating activities:
Net income                                                            $   25,594       $   44,734        $   15,019
Adjustments to reconcile net income to net cash flows
      provided by (used in) operating activities:
   Depreciation and amortization                                           7,403            7,109            12,744
   Provision for deferred income taxes                                     1,813              425             9,906
   Extraordinary loss from early extinguishment of debt                       --               --             4,734
   Cumulative effect of accounting change                                  2,759               --                --
   Net realized investment (gains) losses                                  7,745          (21,745)           (8,598)
   Change in:
      Premiums receivable and unearned premiums, net                      40,207          (10,718)           39,030
      Dividends to policyholders                                           3,082              500            (2,324)
      Reinsurance receivables                                            (47,873)         (60,348)          (74,423)
      Unpaid losses and loss adjustment expenses                          (8,294)         (62,292)          (87,885)
      Accrued investment income                                             (580)           3,918             6,577
      Deferred acquisition costs                                           2,166           (5,827)           (1,282)
   Other, net                                                            (16,625)          24,592           (20,275)
                                                                      ----------------------------------------------
Net cash flows provided by (used in) operating activities                 17,397          (79,652)         (106,777)
                                                                      ----------------------------------------------

Cash flows from investing activities:
   Fixed maturities available for sale:
      Purchases                                                       (1,198,557)      (1,741,790)       (1,963,492)
      Maturities or calls                                                171,091          207,285           168,304
      Sales                                                            1,149,951        1,468,231         2,072,842
   Equity securities:
      Purchases                                                          (37,779)              --                --
      Sales                                                                    6               --               254
   Net (purchases) sales of short-term investments                        15,887          176,658          (130,391)
   Proceeds from sale of PMA Insurance, Cayman Ltd.                           --            2,902                --
   Purchase of Caliber One Indemnity Company,
      net of acquired cash                                                    --               --           (11,481)
   Other, net                                                             (4,738)            (414)            3,568
                                                                      ----------------------------------------------
Net cash flows provided by investing activities                           95,861          112,872           139,604
                                                                      ----------------------------------------------

Cash flows from financing activities:
   Dividends paid to shareholders                                         (7,795)          (7,939)           (7,965)
   Proceeds from exercised stock options and issuance
      of Class A Common stock                                              6,035            4,283             1,442
   Purchase of treasury stock                                            (30,241)         (18,850)             (597)
   Repayments of long-term debt                                               --          (40,000)         (211,699)
   Proceeds from issuance of long-term debt                                   --               --           210,000
   Net repayments (issuance) of notes receivable from officers               442             (300)              964
                                                                      ----------------------------------------------
Net cash flows used in financing activities                              (31,559)         (62,806)           (7,855)
                                                                      ----------------------------------------------

Net increase (decrease) in cash                                           81,699          (29,586)           24,972
Cash - beginning of year                                                   2,562           32,148             7,176
                                                                      ----------------------------------------------
Cash - end of year                                                    $   84,261       $    2,562        $   32,148
                                                                      ==============================================

Supplementary cash flow information:
   Income tax paid (refunded)                                         $   12,352       $  (15,170)       $  (19,112)
   Interest paid                                                      $   12,050       $   14,895        $   19,776
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       46
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
                                                                              For the years ended December 31,
(in thousands)                                                              1999            1998             1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>               <C>              <C>
Common stock:
   Balance at beginning of year                                        $  69,781         $ 76,431         $  80,477
   Conversion of Common stock into Class A Common stock                   (4,358)          (6,650)           (4,046)
                                                                      ---------------------------------------------
   Balance at end of year                                                 65,423           69,781            76,431
                                                                      ---------------------------------------------
Class A Common stock:
   Balance at beginning of year                                           52,433           45,783            41,239
   Conversion of Common stock into Class A Common stock                    4,358            6,650             4,046
   Issuance of shares                                                         --               --               498
                                                                      ---------------------------------------------
   Balance at end of year                                                 56,791           52,433            45,783
                                                                      ---------------------------------------------
Additional paid-in capital - Class A Common stock:
   Balance at beginning of year                                              339              339                --
   Issuance of shares                                                         --               --               339
                                                                      ---------------------------------------------
   Balance at end of year                                                    339              339               339
                                                                      ---------------------------------------------
Retained earnings:
   Balance at beginning of year                                          377,601          343,368           336,921
   Net income                                                             25,594           44,734            15,019
   Common stock dividends declared                                        (4,139)          (4,527)           (4,842)
   Class A Common stock dividends declared                                (3,543)          (3,417)           (3,147)
   Reissuance of treasury shares under employee benefit plans             (3,532)          (2,557)             (583)
                                                                      ---------------------------------------------
   Balance at end of year                                                391,981          377,601           343,368
                                                                      ---------------------------------------------
Accumulated other comprehensive income (loss):
   Balance at beginning of year                                           30,016           18,806           (24,874)
   Other comprehensive income (loss), net of tax (expense) benefit:
      1999 - $41,386; 1998 - ($6,036); 1997 - ($23,520)                  (76,860)          11,210            43,680
                                                                      ---------------------------------------------
   Balance at end of year                                                (46,844)          30,016            18,806
                                                                      ---------------------------------------------
Notes receivable from officers:
   Balance at beginning of year                                             (498)            (198)           (1,162)
   Repayment (issuance) of notes receivable from officers                    442             (300)              964
                                                                      ---------------------------------------------
   Balance at end of year                                                    (56)            (498)             (198)
                                                                      ---------------------------------------------

Treasury stock - Common:
   Balance at beginning of year                                           (5,582)          (5,572)           (5,408)
   Purchase of treasury shares                                                --              (10)             (164)
                                                                      ---------------------------------------------
   Balance at end of year                                                 (5,582)          (5,582)           (5,572)
                                                                      ---------------------------------------------
Treasury stock - Class A Common:
   Balance at beginning of year                                          (12,610)            (610)           (1,365)
   Purchase of treasury shares                                           (30,241)         (18,840)             (433)
   Reissuance of treasury shares under employee benefit plans              9,942            6,840             1,188
                                                                      ---------------------------------------------
   Balance at end of year                                                (32,909)         (12,610)             (610)
                                                                      ---------------------------------------------

Total shareholders' equity:
   Balance at beginning of year                                          511,480          478,347           425,828
   Net income                                                             25,594           44,734            15,019
   Common stock dividends declared                                        (4,139)          (4,527)           (4,842)
   Class A Common stock dividends declared                                (3,543)          (3,417)           (3,147)
   Purchase of treasury shares                                           (30,241)         (18,850)             (597)
   Reissuance of treasury shares under employee benefit plans              6,410            4,283               605
   Other comprehensive income (loss)                                     (76,860)          11,210            43,680
   Repayment (issuance) of notes receivable from officers                    442             (300)              964
   Issuance of shares                                                         --               --               837
                                                                      ---------------------------------------------
   Balance at end of year                                              $ 429,143         $511,480         $ 478,347
                                                                      =============================================
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       47
<PAGE>
Consolidated Statements of Comprehensive Income (Loss)


<TABLE>
<CAPTION>
                                                                              For the years ended December 31,
(in thousands)                                                             1999             1998              1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>               <C>
Net income                                                              $ 25,594         $ 44,734          $ 15,019
                                                                       --------------------------------------------

Other  comprehensive  income  (loss),  net of tax:
   Unrealized gain (loss) on securities:
   Holding gain (loss) arising during the period                         (81,894)          25,344            49,269
   Less: reclassification adjustment for (gains) losses included in net
      income, net of tax expense (benefit): 1999 - ($2,711);
      1998 - $7,611; 1997 - $3,009                                         5,034          (14,134)           (5,589)
                                                                       --------------------------------------------

Other comprehensive income (loss), net of tax                            (76,860)          11,210            43,680
                                                                       --------------------------------------------

Comprehensive income (loss)                                             $(51,266)        $ 55,944          $ 58,699
                                                                       ============================================
</TABLE>


See accompanying notes to the consolidated financial statements.










                                       48
<PAGE>
Notes to Consolidated Financial Statements

1. Business Description
The accompanying consolidated financial statements include the accounts of PMA
Capital Corporation and its wholly and majority owned subsidiaries (collectively
referred to as "PMA Capital" or the "Company"). PMA Capital is an insurance
holding company that operates three specialty risk management businesses, which
are more fully described below.

Reinsurance -- PMA Capital's reinsurance operations ("PMA Re") consist mainly of
PMA Reinsurance Corporation, a Pennsylvania domiciled insurance company, and
emphasize risk-exposed, excess of loss reinsurance and operate in the brokered
market. PMA Re's business is predominantly in casualty lines of reinsurance.

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

Specialty Property and Casualty -- The Company established a separate specialty
insurance operation focusing on excess and surplus lines ("Caliber One") in
1997, and Caliber One commenced writing business in 1998. Caliber One writes
business through surplus lines brokers on a national basis. Caliber One's excess
and surplus lines insurance affiliate, Caliber One Indemnity Company, is an
eligible surplus lines insurer in 41 states, the District of Columbia and Puerto
Rico, with applications pending in two other states. Because Caliber One's
results were not significant in 1997, its financial information was included
within the Corporate and Other segment in 1997, including pre-opening costs of
approximately $900,000, which were expensed as incurred.
   PMA Reinsurance Corporation acquired 100% of the outstanding Common stock of
Caliber One Indemnity Company, domiciled in Delaware and formerly known as
Lincoln Insurance Company, for approximately $16.0 million in late 1997 and made
a capital contribution of approximately $11.3 million to Caliber One Indemnity
Company. All of Caliber One Indemnity Company's acquired loss reserves were
reinsured with an affiliate of its former parent for adverse development and
uncollectible reinsurance (the "Reserve Guarantee") in the amount of the
recorded reserves plus $68.5 million. Management believes that the Reserve
Guarantee will be adequate to cover any future adverse reserve development or
uncollectible reinsurance on the acquired reserves. PMA Reinsurance Corporation
intends to maintain Caliber One Indemnity Company's surplus at not less than
$25.0 million.

2. Summary of Significant Accounting Policies

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

B. Investments -- Fixed maturity investments include U.S. Treasury securities
and obligations of U.S. Government agencies; obligations of states, political
subdivisions and foreign governments; corporate debt securities; and
mortgage-backed and other asset-backed securities. All fixed maturity
investments are classified as available-for-sale and, accordingly, are carried
at fair value with changes in fair value, net of income tax effects, reflected
in accumulated other comprehensive income (loss).
   Equity securities for all periods are stated at fair value with changes in
fair value, net of income tax effects, reflected in accumulated other
comprehensive income (loss). Short-term investments, which have an original
maturity of one year or less, are carried at cost, which approximates fair
value.
   Realized gains and losses, determined by specific identification where
possible and the first-in, first-out method in other instances, are reflected in
income in the period in which the sale transaction occurs.

                                       49
<PAGE>
C. Premiums -- Premiums, including estimates of additional premiums resulting
from audits of insureds' records, and premiums from ceding companies which are
typically reported on a delayed basis, are earned principally on a pro rata
basis over the terms of the policies. Premiums applicable to the unexpired terms
of policies in force are reported as unearned premiums. The estimated premiums
receivable on retrospectively rated policies are reported as a component of
premiums receivable (see Note 2-K).

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

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

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

G. Income Taxes -- The Company records deferred tax assets and liabilities in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS No. 109 the Company
records deferred income taxes, which reflect the net tax effect of the temporary
difference between the carrying amounts of the assets and liabilities for
financial reporting purposes and their respective tax bases. A valuation
allowance is recorded for deferred tax assets where it appears more likely than
not that the Company will not be able to recover the deferred tax asset.

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

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

J. Recent Accounting Pronouncements -- Effective January 1, 1999, the Company
adopted Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance for
determining when an insurance company should recognize a liability for guaranty
fund and other insurance-related assessments and how to measure that liability.
As a result of adopting SOP 97-3, the Company recorded a liability of $4.3
million pre-tax and a resulting charge to earnings of $2.8 million, net of
income tax benefit of $1.5 million, which has been reported as a cumulative
effect of accounting change. This accounting change impacts The PMA Insurance
Group segment.
   As of January 1, 1998, the Company adopted SFAS No. 130, "Comprehensive
Income," which establishes standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and losses).
SFAS No. 130 requires that all items required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires only additional disclosures and does not
affect the Company's financial condition or results of operations.

                                       50
<PAGE>
   As of January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes standards
for the reporting of information about operating segments. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. In connection with the adoption of SFAS
No. 131, the Company has identified four reportable segments: (i) PMA Re, which
provides property and casualty reinsurance products and services; (ii) The PMA
Insurance Group, which writes managed care workers' compensation, integrated
disability, and to a lesser extent, other standard lines of commercial
insurance; (iii) Caliber One, which writes specialty insurance focusing on
excess and surplus lines; and (iv) Corporate and Other, which includes
unallocated investment income and expenses, including debt service, as well as
the results of certain of the Company's real estate properties. SFAS No. 131
requires only additional disclosures (see Note 16) and does not affect the
Company's financial condition, results of operations or liquidity.
   In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which revises employers' disclosures about pensions and other
postretirement benefit plans. SFAS No. 132 does not change the measurement or
recognition of those plans and was effective for fiscal years beginning after
December 15, 1997. The Company has applied the guidelines of SFAS No. 132 in its
pension and other postretirement-related disclosures (see Note 9).
   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. SFAS No. 133 requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in the fair
value of a derivative (that is, gains and losses) depends on the intended use of
the derivative and the resulting designation. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133," which defers the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. While the
Company is presently evaluating the impact of SFAS No. 133, the adoption of SFAS
No. 133 is not expected to have a material impact on the Company's financial
condition, results of operations or liquidity.

   In October 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." This statement identifies several methods of deposit accounting
and provides guidance on the application of each method. This statement
classifies insurance and reinsurance contracts for which the deposit method is
appropriate as contracts that (i) transfer only significant timing risk, (ii)
transfer only significant underwriting risk, (iii) transfer neither significant
timing nor underwriting risk and (iv) have an indeterminate risk. SOP 98-7 is
effective for financial statements for fiscal years beginning after June 15,
1999. The adoption of SOP 98-7 is not expected to have a material impact on the
Company's financial condition, results of operations or liquidity.

K. Accrued Retrospective Premiums -- Accrued retrospective premiums, which are a
component of premiums receivable, are based upon actuarial estimates of expected
ultimate losses and resulting estimated premium adjustments relating to
retrospectively rated policies. The estimated ultimate premium adjustments under
retrospectively rated policies are recorded in the initial accident year based
upon estimated loss experience on the underlying policies and adjusted in
subsequent periods in conjunction with revisions of the underlying estimated
losses on such policies. In addition, accrued retrospective premiums are
increased based upon retrospective policy adjustments paid and decreased based
on billings. The change in accrued retrospective premiums is a component of net
premiums written and net premiums earned.
   The components of the change in accrued retrospective premiums are as
follows:

                                     For the years ended December 31,
(dollar amounts in thousands)       1999             1998           1997
---------------------------------------------------------------------------
Estimated retrospective
 policy adjustments related
 to current accident year         $(20,061)       $ (9,204)       $(12,460)
Revision of estimate of
 retrospective policy
 adjustments related to
 prior accident years              (10,743)        (11,684)        (44,719)
Retrospective policy
 adjustments paid                   13,804          17,888          20,179
Write-off of uncollectible
 amounts                            (4,000)             --              --
                                  --------        --------        --------
Net decrease in accrued
 retrospective premiums           $(21,000)       $ (3,000)       $(37,000)
                                  ========        ========        ========

                                       51
<PAGE>
For 1999 and 1998, the net decrease in accrued retrospective premiums of $21
million and $3 million respectively, primarily reflects favorable development of
claims liabilities at The PMA Insurance Group. The net decrease in accrued
retrospective premiums of $37 million for 1997 is due primarily to the $44.7
million revision of the estimate of retrospective policy adjustments related to
prior years. This revision related to the favorable development of claims
liabilities for accident years 1992 through 1996, and the commutation of claims
for accident years 1991 and prior. As a result, management recognized a
reduction in losses and loss adjustment expenses under retrospectively rated
policies and also reduced its estimate of amounts recoverable associated with
such policies. Management believes that it has made a reasonable estimate of the
Company's accrued retrospective premiums. While the ultimate amount receivable
may differ from the current estimates, management does not believe that the
difference will have a material effect on the Company's financial condition,
results of operations or liquidity.


3. Investments
The Company's investment portfolio is diversified and contains no significant
concentrations in any specific industry, business segment or individual issuer.
The amortized cost and fair value of the Company's investment portfolio are as
follows:
<TABLE>
<CAPTION>
                                                                                Gross         Gross
                                                              Amortized    Unrealized     Unrealized           Fair
(dollar amounts in thousands)                                      Cost         Gains         Losses          Value
--------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>           <C>            <C>            <C>
December 31, 1999 Fixed maturities available for sale:
   U.S. Treasury securities and obligations
      of U.S. Government agencies                             $ 438,412     $     841      $  19,797      $ 419,456
   States, political subdivisions and foreign
      government securities                                      32,164            18          1,602         30,580
Corporate debt securities                                       580,710           380         25,964        555,126
Mortgage-backed and other asset-backed securities               597,608           204         23,334        574,478
                                                            -------------------------------------------------------
Total fixed maturities available for sale                     1,648,894         1,443         70,697      1,579,640
                                                            -------------------------------------------------------
Equity securities                                                37,779           614          3,427         34,966
Short-term investments                                          303,429            --             --        303,429
                                                            -------------------------------------------------------
Total investments                                            $1,990,102     $   2,057      $  74,124     $1,918,035
                                                            =======================================================

December 31, 1998 Fixed maturities available for sale:
   U.S. Treasury securities and obligations
      of U.S. Government agencies                             $ 801,174     $  27,112      $   1,097      $ 827,189
   States, political subdivisions and foreign
      government securities                                      24,634           236              9         24,861
   Corporate debt securities                                    406,707        14,267            632        420,342
   Mortgage-backed and other asset-backed securities            548,673         7,263            974        554,962
                                                            -------------------------------------------------------
Total fixed maturities available for sale                     1,781,188        48,878          2,712      1,827,354
Equity securities                                                     5            12             --             17
Short-term investments                                          498,038            --             --        498,038
                                                            -------------------------------------------------------
Total investments                                            $2,279,231     $  48,890      $   2,712     $2,325,409
                                                            =======================================================
</TABLE>

                                       52
<PAGE>
The amortized cost and fair value of fixed maturities at December 31, 1999, by
contractual maturity, are as follows:

                                   Amortized                   Fair
(dollar amounts in thousands)           Cost                  Value
----------------------------------------------------------------------
2000                                $ 69,240                $69,159
2001-2004                            445,238                435,980
2005-2009                            205,228                195,166
2010 and thereafter                  331,580                304,857
Mortgage-backed and other
 asset-backed securities             597,608                574,478
                                 ----------------------------------
                                  $1,648,894             $1,579,640
                                 ==================================

Net investment income consists of the following:

                                        For the years ended December 31,
(dollar amounts in thousands)            1999         1998         1997
-------------------------------------------------------------------------
Fixed maturities                       $106,058     $115,414     $128,400
Equity securities                           131           --           --
Short-term investments                    5,126        7,959        7,282
Other                                     2,887        1,590        1,116
                                      -----------------------------------
   Total investment income              114,202      124,963      136,798
Investment expenses                       4,145        4,838        3,406
                                      -----------------------------------
   Net investment income               $110,057     $120,125     $133,392
                                      ===================================

Net realized investment gains (losses) consist of the following:
<TABLE>
<CAPTION>
                                                   For the years ended December 31,
(dollar amounts in thousands)                      1999          1998          1997
--------------------------------------------------------------------------------------
Realized gains:
<S>                                              <C>           <C>           <C>
   Fixed maturities                              $  6,839      $ 28,140      $ 20,899
   Equity securities                                    2            --            --
                                                -------------------------------------
                                                    6,841        28,140        20,899
Realized losses:
   Fixed maturities                               (14,585)       (6,070)      (12,203)
   Equity securities                                   (1)           --            --
                                                -------------------------------------
                                                  (14,586)       (6,070)      (12,203)
Other realized losses, net                             --          (325)          (98)
                                                -------------------------------------
Total net realized investment gains (losses)     $ (7,745)     $ 21,745      $  8,598
                                                =====================================
</TABLE>

The change in unrealized appreciation (depreciation) of investments for 1999,
1998 and 1997 was ($118.2) million, $17.2 million and $67.2 million,
respectively, primarily attributable to fixed maturities.
   On December 31, 1999, the Company had securities with a total amortized cost
of $31.5 million and fair value of $30.1 million on deposit with various
governmental authorities, as required by law. In addition, at December 31, 1999,
securities with a total amortized cost of $13.2 million and fair value of $12.7
million, were pledged as collateral for letters of credit issued on behalf of
the Company.
   During 1997, the Company established a securities lending program through
which securities are lent from the Company's portfolio to qualifying third
parties, subject to certain limits, via a lending agent for short periods of
time. Borrowers of these securities must provide collateral equal to a minimum
of 102% of the market value and accrued interest of the lent securities.
Acceptable collateral may be in the form of either cash or securities. Cash
received as collateral is invested in short-term investments, and all securities
received as collateral are of similar quality to those securities lent by the
Company. The Company is not permitted by contract to sell or repledge the
securities received as collateral. Additionally, the Company limits securities
lending to 40% of SAP admitted assets of its insurance subsidiaries, with a 2%
limit on SAP admitted assets to any individual borrower. The Company receives
either a fee from the borrower or retains a portion of the income earned on the
collateral. Under the terms of the securities lending program, the Company is
indemnified against borrower default, with the lending agent responsible to the
Company for any deficiency between the cost of replacing a security that was not
returned and the amount of collateral held by the Company. The Company
recognized income from securities lending transactions of $1.3 million, $1.0
million and $524,000 in 1999, 1998 and 1997, respectively, net of lending fees,
which was included in net investment income. At December 31, 1999, the Company
had approximately $248.5 million of collateral related to securities on loan of
which $242.3 million was cash received and subsequently reinvested in short-term
investments.

                                       53
<PAGE>
4. Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses ("LAE")
is summarized as follows:
<TABLE>
<CAPTION>
                                                         For the years ended December 31,
(dollar amounts in thousands)                         1999            1998             1997
-----------------------------------------------------------------------------------------------
<S>                                              <C>              <C>              <C>
Balance at January 1                             $ 1,940,895      $ 2,003,187      $ 2,091,072
Less: reinsurance
 recoverable on unpaid
 losses and LAE                                      593,701          332,284          256,576
                                                ----------------------------------------------

Net balance at January 1                           1,347,194        1,670,903        1,834,496
                                                ----------------------------------------------

Losses and LAE incurred, net:
     Current year, net
       of discount                                   409,554          373,098          341,880
     Prior years                                     (32,514)         (46,515)         (86,006)
     Accretion of prior
       years' discount                                15,433           26,088           51,407
                                                ----------------------------------------------

Total losses and LAE incurred, net                   392,473          352,671          307,281
                                                ----------------------------------------------

Losses and LAE paid, net:
   Current year                                     (103,798)         (96,658)         (72,399)
   Prior years                                      (351,495)        (362,186)        (398,475)
                                                ----------------------------------------------

Total losses and LAE paid, net                      (455,293)        (458,844)        (470,874)
                                                ----------------------------------------------
Reserves transferred
 upon sale of subsidiary                                  --         (217,536)              --
                                                ----------------------------------------------

Net balance at  December 31                        1,284,374        1,347,194        1,670,903
Reinsurance recoverable
 on unpaid losses and LAE                            648,227          593,701          332,284
                                                ----------------------------------------------
Balance at December 31                           $ 1,932,601      $ 1,940,895      $ 2,003,187
                                                ==============================================
</TABLE>

The Company's results of operations benefited from a decrease in estimated
incurred losses and LAE related to prior accident years of $32.5 million, $46.5
million and $86.0 million in 1999, 1998 and 1997, respectively, which was
partially offset by adjustments to premiums for retrospectively rated business
and by dividends on captive workers' compensation business of $13.4 million,
$4.5 million and $51.8 million in 1999, 1998 and 1997, respectively.
   During 1999, 1998 and 1997, PMA Re recorded favorable reserve development on
prior accident years ("prior year development") of $23.5 million, $31.5 million
and $32.1 million, respectively. The favorable reserve development reflects
development on prior accident years due to re-estimated loss trends for such
years that were lower than previous expectations. This is largely due to
favorable development on casualty excess of loss business.
   During 1999, 1998 and 1997, The PMA Insurance Group recorded favorable prior
year development of $9.0 million, $15.0 million and $53.9 million, respectively.
The favorable reserve development in 1999 reflects better than expected loss
experience from loss-sensitive and rent-a-captive workers' compensation
business. This favorable development has been substantially offset by premium
adjustments for loss-sensitive business and policyholders' dividends for
rent-a-captive business. Rent-a-captives are used by customers as an alternative
method to manage their loss exposure without establishing and capitalizing their
own captive insurance company. The favorable reserve development during 1998
primarily relates to the formal commutation programs, which resulted in early
liability settlements made during 1998 to reduce future claim payments.
Favorable loss development in 1997 is attributable to the following: favorable
reserve development of approximately $37.0 million related to retrospectively
rated policies for Run-off Operations; the cession of prior year reserves of
$14.8 million from Run-off Operations to a third party reinsurer; and favorable
reserve development of $7.1 million on guaranteed cost workers' compensation
reserves, partially offset by reserve strengthening of $5.0 million in
commercial multi-peril business.
   Unpaid losses and LAE reflect management's best estimate of future amounts
needed to pay claims and related settlement costs with respect to insured events
which have occurred, including events that have not been reported to the
Company. In many cases, significant periods of time, ranging up to several years
or more, may elapse between the occurrence of an insured loss, the reporting of
the loss to the Company and the Company's payment of that loss. In general,
liabilities for reinsurers become known more slowly than for primary insurers
and are subject to more unforeseen development and uncertainty. As part of the
process in determining these amounts, historical data is reviewed and
consideration is given to the impact of various factors, such as legal
developments, changes in social attitudes and economic conditions.
   Unpaid losses for the Company's workers' compensation claims, net of
reinsurance, at December 31, 1999 and 1998 were $527.9 million and $628.5
million, net of discount of $173.1 million and $194.3 million, respectively. The
approximate discount rate used was 5% at December 31, 1999 and 1998.

                                       54
<PAGE>
   Since 1996, the impact on losses from the effects of discounting loss
reserves at The PMA Insurance Group has generally declined due mainly to the
effect of commutations and lower business writings. The PMA Insurance Group has
been executing programs under which it commuted, or settled, a large number of
workers' compensation claims. Commutations are agreements whereby the claimants,
in exchange for a lump sum payment, release their rights to future payments from
The PMA Insurance Group. The PMA Insurance Group paid approximately $38 million,
$65 million and $113 million in 1999, 1998 and 1997, respectively, to commute
workers' compensation claims. The commutation programs resulted in payments
which were less than the corresponding carried reserves. Savings associated with
these claims were consistent with management's expectations. As substantially
all of these reserves were carried on a discounted basis, the ultimate level of
discount on The PMA Insurance Group's carried reserves decreased.
   Management believes that its unpaid losses and LAE are fairly stated at
December 31, 1999. However, estimating the ultimate claims liability is
necessarily a complex and judgmental process inasmuch as the amounts are based
on management's informed estimates and judgments using data currently available.
As additional experience and data become available regarding claims payment and
reporting patterns, legislative developments, regulatory trends on benefit
levels for both medical and indemnity payments, and economic conditions, the
estimates are revised accordingly. If the Company's ultimate net losses prove to
differ substantially from the amounts recorded at December 31, 1999, the related
adjustments could have a material adverse impact on the Company's financial
condition, results of operations and liquidity.
   The Company's asbestos-related losses were as follows:

                                   For the years ended December 31,
(dollar amounts in thousands)     1999          1998         1997
--------------------------------------------------------------------
Gross of reinsurance:
   Beginning reserves          $ 67,857      $ 76,726      $ 80,055
   Incurred losses and LAE        1,910        (1,976)        2,435
   Paid losses and LAE           (8,490)       (6,893)       (5,764)
                              --------------------------------------
   Ending reserves             $ 61,277      $ 67,857      $ 76,726
                              ======================================

Net of reinsurance:
   Beginning reserves          $ 43,556      $ 48,578      $ 53,300
   Incurred losses and LAE         (341)       (2,754)          (36)
   Paid losses and LAE           (4,364)       (2,268)       (4,686)
                              --------------------------------------
   Ending reserves             $ 38,851      $ 43,556      $ 48,578
                              ======================================


The Company's environmental-related losses were as follows:

                                    For the years ended December 31,
(dollar amounts in thousands)       1999          1998          1997
---------------------------------------------------------------------

Gross of reinsurance:
   Beginning reserves            $ 47,036      $ 45,108      $ 35,626
   Incurred losses and LAE          5,081        11,895         1,130
   Reserves acquired through
    purchase of Caliber One
    Indemnity Company(1)               --            --        13,060
   Paid losses and LAE            (10,758)       (9,967)       (4,708)
                                 ------------------------------------
   Ending reserves               $ 41,359      $ 47,036      $ 45,108
                                 ====================================

Net of reinsurance:
   Beginning reserves            $ 29,356      $ 31,695      $ 34,592
   Incurred losses and LAE             82         3,644         1,068
   Paid losses and LAE             (4,916)       (5,983)       (3,965)
                                 ------------------------------------
   Ending reserves               $ 24,522      $ 29,356      $ 31,695
                                 ====================================

(1)  Such acquired  reserves  have been  reinsured by an affiliate of the former
     parent (see Note 1).

Of the total net asbestos reserves, approximately $32.0 million, $34.2 million
and $41.9 million related to IBNR losses at December 31, 1999, 1998 and 1997,
respectively. Of the total net environmental reserves, approximately $18.0
million, $20.3 million and $20.5 million related to IBNR losses at December 31,
1999, 1998 and 1997, 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. To reserve for environmental claims, the Company currently
utilizes a calendar year development technique known as aggregate loss
development. This technique focuses on the aggregate losses paid as of a
particular date and aggregate payment patterns associated with such claims.
Several elements including remediation studies, remediation, defense,
declaratory judgment and third party bodily injury claims were considered in
estimating the costs and payment patterns of the environmental and toxic tort
losses. Prior to the development of these techniques, there was a substantial
range in the nature of reserving for environmental and toxic tort liabilities.

                                       55
<PAGE>
   Management believes that its reserves for asbestos and environmental claims
are appropriately established based upon known facts, existing case law and
generally accepted actuarial methodologies. However, due to changing
interpretations by courts involving coverage issues, the potential for changes
in federal and state standards for clean-up and liability, as well as issues
involving policy provisions, allocation of liability among participating
insurers and proof of coverage, the Company's ultimate exposure for these claims
may vary significantly from the amounts currently recorded, resulting in a
potential future adjustment that could be material to the Company's financial
condition and results of operations.
   The Company's loss reserves were stated net of salvage and subrogation of
approximately $43.8 million and $60.4 million at December 31, 1999 and 1998,
respectively.

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

                                 For the years ended December 31,
(dollar amounts in thousands)   1999            1998          1997
-----------------------------------------------------------------------

Earned premiums:
   Direct                    $ 328,590      $ 286,987      $ 277,871
   Assumed                     366,029        276,689        216,357
   Ceded                      (154,532)       (96,961)      (118,277)
                            -----------------------------------------
   Net                       $ 540,087      $ 466,715      $ 375,951
                            =========================================

Losses and LAE incurred:

   Direct                    $ 262,340      $ 250,641      $ 244,429
   Assumed                     243,200        184,309        166,202
   Ceded                      (113,067)       (82,279)      (103,350)
                            -----------------------------------------
   Net                       $ 392,473      $ 352,671      $ 307,281
                            =========================================


At December 31, 1999, the Company had reinsurance receivables due from the
following unaffiliated single reinsurers in excess of 3% of shareholders'
equity:

(dollar amounts in thousands)                  Gross amount due
-----------------------------------------------------------------
London Life Reinsurance Group                      $ 240,753
United States Fidelity and Guaranty Company           98,940
American Reinsurance Corporation                      29,599
Essex Insurance Company                               26,554
SCOR Reinsurance Company                              22,724
Houston Casualty Company                              22,574
GE Reinsurance Corporation                            20,051
Continental Casualty Company                          16,062
Odyssey Reinsurance Corporation                       15,279
Signet Star Reinsurance Company                       14,132
FolksAmerica Reinsurance Company                      14,003

The Company performs extensive credit reviews of its reinsurers focusing on,
among other things, financial capacity, stability, trends and commitment to the
reinsurance business. Prospective and existing reinsurers failing to meet the
Company's standards are excluded from the Company's reinsurance programs. In
addition, the Company requires letters of credit or other acceptable collateral
to support balances due from reinsurers not authorized to transact business in
the applicable jurisdictions.
   The Company maintained funds held to collateralize the above balances in the
amount of $91.1 million at December 31, 1999. In addition, the entire receivable
from the London Life Reinsurance Group is secured by assets in trust and letters
of credit.


6. Long-Term Debt
Long-term debt consisted of $163.0 million outstanding under the Company's
revolving credit facility (the "Credit Facility") as of December 31, 1999 and
1998. The Credit Facility matures as follows: $38.0 million in 2000, $62.5
million in 2001 and $62.5 million in 2002. The Credit Facility bears interest at
the London InterBank Offered Rate ("LIBOR") plus 0.375% on the utilized portion
and carries a 0.225% facility fee on the unutilized portion. The spread over
LIBOR and the facility fee are adjustable downward in the future based upon the
Company's debt-to-capitalization ratios. As of December 31, 1999, the interest
rate on the utilized portion of the Credit Facility was 6.56%.
   The Company has entered into an interest rate swap agreement in its
management of its existing interest rate exposures with a notional principal
balance of $150.0 million at December 31, 1999. The rate on the swap

                                       56
<PAGE>
resets every three months such that it effectively converts the Company's
interest rate exposure on $150.0 million of the Credit Facility, which has a
floating rate, to a fixed obligation (7.14% at December 31, 1999). The swap
involves the exchange of interest payment obligations without the exchange of
underlying principal. The differential to be paid or received is recognized as
an adjustment of interest expense. In the event that a counterparty fails to
meet the terms of the swap, the Company's exposure is limited to the interest
rate differential on the notional principal amount ($150.0 million). Management
believes such credit risk is minimal and any loss would not be material to
financial condition, results of operations and liquidity.
   On March 14, 1997, the Company refinanced substantially all of its existing
credit agreements not already maturing in 1997 through the completion of the
Credit Facility. The early extinguishment of the senior note agreements resulted
in an extraordinary loss of $4.7 million ($7.3 million pre-tax).
   Effective March 14, 1997, the Company modified its letter of credit agreement
with a group of banks (the "Letter of Credit Agreement") to reduce its aggregate
outstanding face amount to $50.0 million. The agreement requires the Company to
pay a commitment fee, which is adjustable downward in the future based upon the
Company's debt-to-capitalization ratios. At December 31, 1999, the commitment
fee was 0.225% per annum. At December 31, 1999 and 1998, the aggregate
outstanding face amount of letters of credit issued was $45.9 million and $46.9
million, respectively. The Letter of Credit Agreement primarily secures
reinsurance liabilities of the insurance subsidiaries of the Company.
   The debt covenants supporting the Credit Facility and the Letter of Credit
Agreement contain provisions that, among other matters, limit the Company's
ability to incur additional indebtedness, merge, consolidate and acquire or sell
assets. The debt covenants also require the Company to satisfy certain ratios
related to net worth, debt-to-capitalization and interest coverage.
Additionally, the debt covenants place restrictions on dividends to shareholders
(see Note 14).


7. Stock Options
The Company currently has seven stock option plans in place for stock options
granted to officers and other key employees for the purchase of the Company's
Class A Common stock, under which 3,787,897 Class A Common shares were reserved
for issuance at December 31, 1999. The stock options are granted under terms and
conditions determined by the Stock Option Committee of the Board of Directors.
Stock options granted have a maximum term of ten years, generally vest over
periods ranging between zero and five years, and are typically granted with an
exercise price at least equal to the fair market value of the Class A Common
stock on the date the options are granted. Information regarding these option
plans is as follows:
<TABLE>
<CAPTION>
                                                       1999                     1998                     1997
---------------------------------------------------------------------------------------------------------------------------
                                                         Weighted                 Weighted                 Weighted
                                                          Average                  Average                  Average
                                                 Shares     Price         Shares     Price        Shares      Price
---------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>         <C>          <C>         <C>         <C>          <C>
Options outstanding, beginning of year        3,446,170   $ 14.39      3,117,612   $ 13.18     3,242,160    $ 12.43
Options granted                                 427,000     19.53        826,500     17.12       324,500      17.00
Options exercised                              (515,864)    11.94       (386,142)    11.07      (162,248)      8.78
Options forfeited or expired                    (36,750)    16.53       (111,800)    12.26      (286,800)     11.53
                                             -----------------------------------------------------------------------
Options outstanding, end of year(1)           3,320,556   $ 15.40      3,446,170   $ 14.39     3,117,612    $ 13.18
                                             =======================================================================
Options exercisable, end of year              2,160,486   $ 14.03      2,468,233   $ 13.32     2,556,087    $ 12.42
                                             =======================================================================
Option price range at end of year                  $8.00 to $20.44        $8.00 to $19.00           $8.00 to $17.00
Option price range for exercised shares            $8.00 to $17.00        $8.00 to $17.00           $8.00 to $15.00
Options available for grant at end of year             467,341                 7,591                    747,291
</TABLE>
(1)  Included in the options outstanding at the end of 1999 and 1998 are 420,000
     options ("Target Price Options") with an exercise price of $17.00, which
     become exercisable based on the Company's Class A Common stock achieving
     certain target prices, with one-half of those options becoming exercisable
     at $28.00 and the remaining one-half becoming exercisable at $32.00. In
     1998, the Company recorded approximately $1 million in compensation expense
     related to such options.


                                       57
<PAGE>
In 1999, all options were granted with an exercise price that exceeded the
market value on the grant date ("out-of-the-money"), and such options had a
weighted average exercise price of $19.53 per share and a fair value of $9.61
per share. Of the total options granted in 1998, 96% were granted
out-of-the-money at an exercise price of $17.03 per share and a weighted average
fair value of $3.65 per share. The remaining 4% were granted with an exercise
price that was lower than the market value on the grant date ("in-the-money"),
and such options had a weighted average exercise price of $19.00 per share and a
weighted average fair value of $7.59 per share. In 1997, all options were
granted out-of-the-money at an exercise price of $17.00 per share and a fair
value of $5.79 per share.
   Stock options outstanding at December 31, 1999 and related exercise price and
weighted average remaining life information is as follows:

                                                   Weighted Average
                          Options         Options    Remaining Life
Exercise Prices       Outstanding     Exercisable         (in years)
----------------------------------------------------------------------
$ 8.00 to $11.00          290,916         290,916              2.21
$11.01 to $14.00          684,200         684,200              3.81
$14.01 to $17.00        1,868,440       1,157,120              5.95
$17.01 to $21.00          477,000          28,250              9.05
                      ---------------------------
                        3,320,556       2,160,486              5.63
                      ===========================

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

                              1999      1998       1997
----------------------------------------------------------

Expected life (years)           10       7.5         10
Risk-free interest rate       4.9%      5.5%       6.3%
Expected volatility            17%       26%        18%
Expected dividend yield       2.0%      1.9%       2.3%

The Company has adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, compensation cost that
was recognized in 1999, 1998 and 1997 for stock options, other than Target Price
Options, was not significant. Had compensation costs for the Company's stock
option plans been determined based on the fair value at the grant date for
awards granted during the year, pre-tax income would have been reduced by $4.1
million, $3.2 million and $1.9 million in 1999, 1998 and 1997, respectively.
After-tax income would have been reduced by $2.7 million, $2.1 million and $1.2
million or $0.12, $0.09 and $0.05 per basic share and $0.11, $0.08 and $0.05 per
diluted share in 1999, 1998 and 1997, respectively.


8. Income Taxes
The components of the Federal income tax expense from continuing operations are
as follows:


(dollar amounts           For the years ended December 31,
 in thousands)               1999      1998       1997
---------------------------------------------------------

Current                    $ 9,926    $9,910    $(4,506)
Deferred                     1,813       425      9,906
                         ------------------------------
Income tax expense         $11,739    $10,335   $ 5,400
                         ==============================

In addition, the Company recognized a deferred Federal income tax benefit of
$1.5 million related to the cumulative effect of accounting change recorded in
1999. The Company also recognized current and deferred Federal income tax
benefits of $374,000 and $2.2 million, respectively, related to the
extraordinary loss recorded in 1997.
   A reconciliation between the total income tax expense and the amounts
computed at the Statutory Federal income tax rate of 35% is as follows:

                                  For the years ended December 31,
(dollar amounts in thousands)    1999         1998           1997
----------------------------------------------------------------------
Computed at the Statutory
 Federal income tax rate      $ 14,032      $ 19,274      $  8,804
Increase (decrease) in
    taxes resulting from:
  Reversal of income
    tax accruals                (2,672)      (12,637)       (3,703)
  Tax-exempt interest               --            --           (61)
  Other                            379         3,698           360
                             --------------------------------------
Income tax expense            $ 11,739      $ 10,335      $  5,400
                             ======================================


                                       58
<PAGE>

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

                                                   December 31,
(dollar amounts in thousands)                   1999           1998
--------------------------------------------------------------------

Discounting of unpaid losses and LAE        $  56,817      $  55,945
Unrealized depreciation of investments         25,223             --
Tax credit carryforwards                       21,705         29,039
Unearned premiums                              15,612         14,305

Allowance for uncollectible accounts            6,188          6,822
Postretirement benefit obligation               5,179          5,160
Other                                          14,489         12,823
                                           -------------------------
Gross deferred tax asset                      145,213        124,094
                                           -------------------------

Deferred acquisition costs                    (17,021)       (17,377)
Unrealized appreciation of investments             --        (16,163)
Losses of foreign reinsurance affiliate       (21,130)       (24,542)
Other                                          (1,699)        (2,083)
                                           -------------------------
Gross deferred tax liability                  (39,850)       (60,165)
                                           -------------------------
Net deferred tax asset                      $ 105,363      $  63,929
                                           =========================


At December 31, 1999, the Company had approximately $21.3 million of alternative
minimum tax credit carryforwards, which do not expire.
   Management believes that it is more likely than not that the benefit of its
deferred tax asset will be fully realized, and therefore has not recorded a
valuation allowance.
   The Company's Federal income tax returns are subject to audit by the Internal
Revenue Service ("IRS"), and provisions are made in the financial statements in
anticipation of the results of these audits. The Company's 1996 Federal income
tax return is currently under examination by the IRS. In 1998, the IRS completed
their examination of the 1994 and 1995 U.S. Federal tax returns. In 1997, the
IRS completed their examinations of the 1992 and 1993 U.S. Federal tax returns.
In management's opinion, adequate liabilities have been established for all
years.
   In December 1998, the Company received a refund from the IRS of approximately
$15.0 million. The refund relates to a claim for refund filed by the Company
with regard to its 1992 income tax return. In 1997, the Company received a
refund from the IRS of approximately $16.8 million as a result of a net
operating loss, which was generated in 1996 and carried back to 1993, 1994 and
1995.


9. Employee Retirement, Postretirement and Postemployment Benefits

A. Pension and Other Postretirement Benefits:

Pension Benefits -- The Company sponsors a qualified non-contributory defined
benefit pension plan (the "Qualified Pension Plan") covering substantially all
employees. After meeting certain qualifications, an employee acquires a vested
right to future benefits. The benefits payable under the plan are generally
determined on the basis of an employee's length of employment and modified
career average salary. The Company's policy is to fund pension costs in
accordance with the Employee Retirement Income Security Act of 1974. The Company
also maintains non-qualified unfunded supplemental defined benefit pension plans
(the "Non-qualified Pension Plans") for the benefit of certain key employees.
The projected benefit obligation and accumulated benefit obligation for the
Non-qualified Pension Plans were $3.9 million and $3.6 million, respectively, as
of December 31, 1999.

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

                                       59
<PAGE>
   The following tables set forth the amounts recognized in the Company's
financial statements with respect to Pension Benefits and Other Postretirement
Benefits:
<TABLE>
<CAPTION>
                                                               Pension Benefits            Other Postretirement Benefits
                                                                 December 31,                      December 31,
(dollar amounts in thousands)                                1999           1998                1999           1998
---------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>                 <C>            <C>
Change in benefit obligation:
Benefit obligation at beginning of year                  $ 50,280       $ 47,125            $  9,169       $  9,673
Service cost                                                1,597          1,780                 286            271
Interest cost                                               3,372          3,201                 622            594
Plan amendments                                             1,177            310                  --             --
Actuarial (gain) loss                                      (7,335)           168                (975)          (870)
Benefits paid                                              (2,209)        (2,304)               (411)          (499)
                                                       -------------------------------------------------------------
Benefit obligation at end of year                        $ 46,882       $ 50,280            $  8,691       $  9,169
                                                       -------------------------------------------------------------

Change in plan assets:
Fair value of plan assets at beginning of year           $ 42,816       $ 40,600            $     --       $     --
Actual return on plan assets                                6,931          2,660                  --             --
Employer contributions                                      1,689          1,860                  --             --
Benefits paid                                              (2,209)        (2,304)                 --             --
                                                       -------------------------------------------------------------
Fair value of plan assets at end of year                 $ 49,227       $ 42,816            $     --       $     --
                                                       -------------------------------------------------------------

Benefit obligation (greater) less than the
 fair value of plan assets                               $  2,345       $ (7,464)           $ (8,691)     $  (9,169)

Unrecognized actuarial (gain) loss                         (4,722)         5,894              (4,957)        (4,137)
Unrecognized prior service (cost) benefit                     507           (700)             (1,079)        (1,198)
Unrecognized net transition obligation                        321            316                  --             --
                                                       -------------------------------------------------------------
Accrued benefit at end of year                           $ (1,549)      $ (1,954)           $(14,727)      $(14,504)
                                                       =============================================================
</TABLE>
<TABLE>
<CAPTION>
                                                           Pension Benefits             Other Postretirement Benefits
                                                   For the years ended December 31,   For the years ended December 31,
(dollar amounts in thousands)                       1999        1998        1997       1999        1998        1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>         <C>         <C>        <C>         <C>         <C>
Components of net periodic benefit cost:
Service cost                                     $ 1,597     $ 1,780     $ 1,468    $   286     $   271     $   237
Interest cost                                      3,372       3,201       3,200        622         594         655
Expected return on plan assets                    (3,619)     (3,496)     (3,159)        --          --          --
Amortization of transition obligation                 (5)         (3)        (23)        --          --          --
Amortization of prior service cost                   (30)        (91)        (99)      (119)       (119)       (119)
Recognized actuarial (gain) loss                       4         (11)         --       (155)       (188)       (123)
Settlement charge                                     --          --         115         --          --          --
                                                -------------------------------------------------------------------
Net periodic benefit cost                        $ 1,319     $ 1,380     $ 1,502    $   634     $   558     $   650
                                                ===================================================================

Weighted average assumptions:
Discount rate                                      7.75%       6.75%       7.00%      7.75%       6.75%       7.00%
Expected return on plan assets                     9.00%       9.00%       9.00%         --          --          --
Rate of compensation increase                      5.00%       4.50%       4.50%         --          --          --
</TABLE>

                                       60
<PAGE>
For the measurement of Other Postretirement Benefits, a 6.50% annual rate of
increase in the per capita cost of covered health care benefits was assumed for
1999. The rate was assumed to decrease gradually to 5.50% for 2002 and remain at
that level thereafter. A one percentage point change in assumed health care cost
trend rates would have an immaterial impact on the total service and interest
cost components of the net periodic benefit cost and the postretirement benefit
obligation.
   Qualified Pension Plan assets consist of equity securities, fixed maturity
securities and fixed income contracts. The Pension Plan owned approximately
249,000 shares of the Company's common stock at December 31, 1998. All 249,000
shares were sold during 1999.
   During 1997, an annuity contract with a third party was terminated, resulting
in a one-time settlement charge of approximately $115,000.

B. Defined Contribution Savings Plan -- The Company also maintains a voluntary
defined contribution savings plan covering substantially all employees. The
Company matches employee contributions up to 5% of compensation. Contributions
under such plans charged to income were $2.3 million, $2.0 million and $1.7
million in 1999, 1998 and 1997, respectively.

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


10. Fair Value of Financial Instruments
As of December 31, 1999 and 1998, the carrying amounts for the Company's
financial instruments approximated their estimated fair value, except for
interest rate swaps which had a carrying value of zero and a fair value of
$305,000 and ($5.8) million at December 31, 1999 and 1998, respectively. The
Company measures the fair value of fixed maturities and interest rate swaps
based upon quoted market prices or by obtaining quotes from dealers. The fair
value of long-term debt is estimated using discounted cash flow calculations
based upon the Company's current incremental borrowing rate for similar types of
borrowing facilities or the rate utilized to prepay obligations, where
applicable. For other financial instruments, the carrying values approximate
their fair values. Certain financial instruments, specifically amounts relating
to insurance contracts, are excluded from this disclosure.


11. Transactions with Related Parties
The Company's largest shareholder is PMA Foundation (the "Foundation"), a
not-for-profit corporation qualified under Section 501(c)(6) of the Internal
Revenue Code, whose purposes include the promotion of the common business
interests of its members and the economic prosperity of the Commonwealth of
Pennsylvania. As of December 31, 1999, the Foundation owned 4,561,225 shares of
Common stock (36.1% of the class) and 912,225 shares of Class A Common stock
(9.4% of the class), which constitutes 34.2% of the total number of votes
available to be cast in matters brought before the Company's shareholders. All
of the members of the Company's Board of Directors currently serve as members of
the Foundation's Board of Trustees. Also, Frederick W. Anton III, Chairman of
the Company, serves as President and Chief Executive Officer of the Foundation.
The Company and certain of its subsidiaries provide certain administrative
services to the Foundation for which the Company and its subsidiaries receive
reimbursement. Total reimbursements amounted to $13,000, $14,000 and $34,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. The Foundation
also leases its Harrisburg, Pennsylvania headquarters facility from a subsidiary
of the Company under an operating lease presently requiring rent payments of
$25,000 per month, and reimburses a subsidiary of the Company for its use of
office space in the Blue Bell, Pennsylvania facility. Rent and related
reimbursements paid to the Company's affiliates by the Foundation amounted to
$304,000, $262,000 and $250,000 for the years ended December 31, 1999, 1998 and
1997, respectively.

                                       61
<PAGE>
   The Company incurred legal and consulting fees aggregating approximately $5.3
million, $6.5 million and $6.5 million in 1999, 1998 and 1997, respectively,
from firms in which directors of the Company are partners or principals.
   The Company has notes receivable from officers that are accounted for as a
reduction of shareholders' equity in the accompanying balance sheets. Such notes
receivable had balances of $56,000 and $498,000 as of December 31, 1999 and
1998, respectively. The interest rates on the notes range between 6% and 8%.
   The Company has arranged an executive loan program with a financial
institution. The institution provides personal demand loans to officers of the
Company at a floating interest rate equal to the financial institution's prime
rate minus 1/2%. Such loans are collateralized by Common Stock and Class A
Common Stock beneficially owned by the officer and a Company treasury security.
The Company has agreed to purchase any loan made to an officer (including
accrued interest and related expenses) from the financial institution in the
event that the borrower defaults on the loan. The amount of loans outstanding to
current employees as of December 31,1999 under this program was $729,847.


12. Commitments and Contingencies
For the years ended December 31, 1999, 1998 and 1997, total rent expense was
$2.7 million, $2.6 million and $2.8 million, respectively. At December 31, 1999,
the Company was obligated under noncancelable operating leases for office space
with aggregate minimum annual rentals of $3.8 million in 2000, $4.1 million in
2001, $3.9 million in 2002, $3.6 million in 2003, $3.2 million in 2004 and $4.3
million thereafter.
   In the event a property and casualty insurer operating in a jurisdiction
where the Company's insurance subsidiaries also operate becomes or is declared
insolvent, state insurance regulations provide for the assessment of other
insurers to fund any capital deficiency of the insolvent insurer. Generally,
this assessment is based upon the ratio of an insurer's voluntary premiums
written to the total premiums written for all insurers in that particular
jurisdiction (see Note 2-J regarding SOP 97-3).
   The Company has provided guarantees of approximately $7.7 million, primarily
related to loans on properties in which the Company has an interest.
   The Company is continuously involved in numerous lawsuits arising, for the
most part, in the ordinary course of business, either as a liability insurer
defending third party claims brought against its insureds, or as an insurer
defending coverage claims brought against it by its policyholders or other
insurers. While the outcome of all litigation involving the Company, including
insurance-related litigation, cannot be determined, litigation is not expected
to result in losses that differ from recorded reserves by amounts that would be
material to the Company's financial condition, results of operations or
liquidity. In addition, reinsurance recoveries related to claims in litigation,
net of the allowance for uncollectible reinsurance, are not expected to result
in recoveries that differ from recorded recoverables by amounts that would be
material to the Company's financial condition, results of operations or
liquidity.


13. Cost Reduction Initiatives
During 1997, the Company recorded a $7.0 million pre-tax charge ($4.6 million
after-tax) in operating expenses for costs associated with nonvoluntary
terminations of approximately 60 employees in various operational and management
positions. As of December 31, 1999, approximately $1.5 million of such charges
remained in accounts payable and accrued expenses on the balance sheet.


14. Shareholders' Equity
The Company has two classes of Common stock, Class A Common stock and Common
stock. The Company's bylaws limit the classes of persons who may own the Common
stock. Holders of Common stock may elect to convert any or all such shares into
Class A Common stock on a share-for-share basis. The Company's Class A Common
stock and Common stock generally vote without regard to class on matters
submitted to shareholders, with the Class A Common stock having one vote per
share and the Common stock having ten votes per share.
   With respect to dividend rights, the Class A Common stock is entitled to cash
dividends at least 10% higher than those declared and paid on the Common stock.
The Company declared dividends on its Common stock and Class A Common stock of
$0.32 per share and $0.36 per share, respectively, in 1999, 1998 and 1997.

                                       62
<PAGE>
   Changes in Common stock and Class A Common stock shares were as follows:
<TABLE>
<CAPTION>
                                                                          For the years ended December 31,
                                                                       1999            1998              1997
-----------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>              <C>
Common stock:
   Balance at beginning of year                                    13,956,268       15,286,263       16,095,416
   Conversion of Common stock into Class A Common stock              (871,603)      (1,329,995)        (809,153)
                                                                 -----------------------------------------------
   Balance at end of year                                          13,084,665       13,956,268       15,286,263
                                                                 ===============================================

Class A Common stock:
   Balance at beginning of year                                    10,486,677        9,156,682        8,247,804
   Conversion of Common stock into Class A Common stock               871,603        1,329,995          809,153
   Issuance of shares                                                      --               --           99,725
                                                                 -----------------------------------------------
   Balance at end of year                                          11,358,280       10,486,677        9,156,682
                                                                 ===============================================

Treasury stock - Common stock:
   Balance at beginning of year                                       436,007          435,474          425,364
   Purchase of treasury shares                                             --              533           10,110
                                                                 -----------------------------------------------
   Balance at end of year                                             436,007          436,007          435,474
                                                                 ===============================================

Treasury stock - Class A Common stock:
   Balance at beginning of year                                       648,714           38,947           74,781
   Purchase of treasury shares                                      1,526,500          995,909           27,689
   Reissuance of treasury shares under employee benefit plans        (509,788)        (386,142)         (63,523)
                                                                 -----------------------------------------------
   Balance at end of year                                           1,665,426          648,714           38,947
                                                                 ===============================================
</TABLE>

In 1998, the Company's Board of Directors authorized a plan to repurchase shares
of Common stock and Class A Common stock in an amount not to exceed $25.0
million. In 1999, an additional $50.0 million of share repurchase authority was
approved by the Company's Board of Directors. During 1999, the Company
repurchased a total of approximately 1.5 million Class A shares at a total cost
of $30.2 million (average per share price was $19.81). During 1998, the Company
repurchased a total of approximately 1.0 million shares at a total cost of $18.9
million (average per share price was $18.92). Since the inception of its share
repurchase program in February 1998, PMA Capital has repurchased a total of
approximately 2.5 million Class A shares at a total cost of $49.1 million
(average per share price was $19.46), leaving $25.9 million of share repurchase
authorization. Decisions regarding share repurchases are subject to the costs
and benefits associated with alternative uses of capital and prevailing market
conditions.
   The Company's domestic insurance subsidiaries' ability to pay dividends to
the holding company is limited by the insurance laws and regulations of
Pennsylvania and Delaware (the laws of which are substantially similar with
respect to dividends). Under Pennsylvania laws and regulations, without prior
approval of the Pennsylvania Insurance Commissioner (the "Commissioner"),
dividends may not be paid in excess of the greater of (i) 10% of policyholders'
surplus as of the end of the preceding year or (ii) SAP net income for the
preceding year, but in no event to exceed SAP unassigned surplus. At December
31, 1999, the maximum amount available to be paid as dividends from the
Company's insurance subsidiaries to PMA Capital, without the prior consent of
the Pennsylvania Insurance Department, was approximately $55 million.
   PMA Capital's dividends to shareholders are restricted by its debt
agreements. Under the terms of the Credit Facility and the Letter of Credit
Agreement, under the most restrictive debt covenant, the Company could pay
dividends of approximately $10 million in 2000.

                                       63
<PAGE>
15. Earnings Per Share
A reconciliation of the shares used as the denominator of the basic and diluted
earnings per share computations is presented below.

                                1999          1998           1997
--------------------------------------------------------------------
Basic shares - weighted
 average Common
 and Class A Common
 shares outstanding         22,976,326     23,608,618     23,855,031

Effect of dilutive
 stock options                 809,590        916,270        712,347
                           -----------------------------------------
Total diluted shares        23,785,916     24,524,888     24,567,378
                           =========================================

For all years presented, there were no differences in the numerator (income
before extraordinary item and cumulative effect of accounting change) for the
basic and diluted earnings per share calculation.
   Options to purchase shares of Class A Common stock are excluded from the
computation of diluted earnings per share if they would have been anti-dilutive,
and for 1999, 1998 and 1997, such anti-dilutive options were 12,500, 42,000 and
646,000, respectively.


16. Business Segments
The Company's pre-tax operating income by principal business segment were as
follows:
<TABLE>
<CAPTION>
                                                                                     For the years ended December 31,
(dollar amounts in thousands)                                                       1999         1998          1997
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>           <C>           <C>
Components of pre-tax operating income and net income(1):
PMA Re                                                                          $ 50,319      $ 46,408      $ 45,957
The PMA Insurance Group:
   Excluding Run-off Operations                                                   18,389        10,018        (3,607)
   Run-off Operations                                                               (189)          452           (73)
                                                                              ----------------------------------------
   Total                                                                          18,200        10,470        (3,680)
Caliber One                                                                           83        (1,606)           --
Corporate and Other                                                              (20,765)      (21,948)      (25,722)
                                                                              ----------------------------------------

Pre-tax operating income                                                          47,837        33,324        16,555
Net realized investment gains (losses)                                            (7,745)       21,745         8,598
                                                                              ----------------------------------------
Income before income taxes, extraordinary loss and cumulative
 effect of accounting change                                                      40,092        55,069        25,153
Income tax expense                                                                11,739        10,335         5,400
                                                                              ----------------------------------------
Income before extraordinary loss and cumulative effect of accounting change       28,353        44,734        19,753
Extraordinary loss, net of tax                                                        --            --        (4,734)
Cumulative effect of accounting change, net of tax                                (2,759)           --            --
                                                                              ----------------------------------------
Net income                                                                      $ 25,594      $ 44,734      $ 15,019
                                                                              ========================================
</TABLE>
(1)  Pre-tax operating income is defined as income from continuing operations
     before income taxes, excluding net realized investment gains (losses). The
     Company excludes net realized investment gains (losses) from the profit and
     loss measure it utilizes to assess the performance of its operating
     segments because: (i) net realized investment gains (losses) are
     unpredictable and not necessarily indicative of current operating
     fundamentals or future performance, and (ii) in many instances, decisions
     to buy and sell securities are made at the holding company level, and such
     decisions result in net realized gains (losses) that do not relate to the
     operations of the individual segments.


                                       64
<PAGE>
The Company's revenues, all of which are generated within the U.S., by principal
business segment were as follows:
<TABLE>
<CAPTION>
                                               For the years ended December 31,
(dollar amounts in thousands)                 1999           1998          1997
Revenues:
<S>                                        <C>            <C>           <C>
PMA Re                                     $ 351,548      $ 278,293     $ 215,873
The PMA Insurance Group:
   Excluding Run-off Operations              277,890        311,469       328,248
   Run-off Operations                          4,412          4,761       (23,491)
                                          ---------------------------------------
   Total                                     282,302        316,230       304,757
Caliber One                                   27,188          3,203            --
Corporate and Other                            1,824          4,010         2,330
Net realized investment gains (losses)        (7,745)        21,745         8,598
                                          ---------------------------------------
Total revenues                             $ 655,117      $ 623,481     $ 531,558
                                          =======================================
</TABLE>

The Company recorded amortization and depreciation expense of $7.4 million, $7.1
million and $12.7 million in 1999, 1998 and 1997, respectively. PMA Re and The
PMA Insurance Group recorded amortization and depreciation expense of $2.8
million and $3.0 million, respectively, in 1999; $2.0 million and $4.2 million,
respectively, in 1998; and $2.5 million and $7.6 million, respectively, in 1997.
   The Company's total assets by principal business segment were as follows:
<TABLE>
<CAPTION>
                                                     December 31,
(dollar amounts in thousands)          1999             1998             1997
--------------------------------------------------------------------------------
Assets(1):
<S>                                <C>              <C>              <C>
PMA Re                             $ 1,351,962      $ 1,417,901      $ 1,102,242
The PMA Insurance
  Group:
  Excluding Run-off Operations       1,667,673        1,883,575        1,452,469
   Run-off Operations                   79,003           95,110          398,959
                                  ----------------------------------------------
   Total                             1,746,676        1,978,685        1,851,428
Caliber One                            160,194           69,083           64,302
Corporate and Other                    (13,745)          (4,951)          39,286
                                  ----------------------------------------------
   Total assets                    $ 3,245,087      $ 3,460,718      $ 3,057,258
                                  ==============================================
</TABLE>

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

PMA Re distributes its products through major reinsurance brokers, and PMA Re's
top four such brokers accounted for approximately 83% of PMA Re's gross premiums
in force at December 31, 1999. During 1999, 1998 and 1997, total revenues
amounting to $158.8 million, $70.6 million and $54.8 million, respectively, were
placed through brokers which individually exceeded 10% of the Company's total
revenue. In 1999, 1998 and 1997, casualty reinsurance lines at PMA Re
represented 35.3%, 35.5% and 31.2%, respectively, of the Company's total net
premiums written.
   The PMA Insurance Group's operations are concentrated in seven contiguous
states in the Mid-Atlantic and Southern regions of the U.S. As such, economic
trends in individual states may not be independent of one another. Also, The PMA
Insurance Group's products are highly regulated by each of these states. For
many of The PMA Insurance Group's products, the insurance departments of the
states in which it conducts business must approve rates and policy forms. In
addition, workers' compensation benefits are determined by statutes and
regulations in each of these states. While The PMA Insurance Group considers
factors such as rate adequacy, regulatory climate and economic factors in its
underwriting process, unfavorable developments in these factors could have an
adverse impact on the Company's financial condition

                                       65
<PAGE>

and results of operations. In 1999, 1998 and 1997, workers' compensation net
premiums at The PMA Insurance Group represented 31.8%, 39.4% and 46.0%,
respectively, of the Company's total net premiums written.
   The Company actively manages its exposure to catastrophes through its
underwriting process, where the Company generally monitors the accumulation of
insurable values in catastrophe prone regions. Also, in writing property
reinsurance coverages, PMA Re typically requires per occurrence loss limitations
for contracts that could have catastrophe exposure. Through per risk
reinsurance, the Company also manages its net retention in each exposure. In
addition, PMA Re maintains retrocessional protection of $48.0 million in excess
of $2.0 million per occurrence, The PMA Insurance Group maintains catastrophe
reinsurance protection of $27.7 million in excess of $850,000 and Caliber One
maintains catastrophe reinsurance protection of $19.3 million in excess of
$750,000. As a result, the Company's loss and LAE ratios have not been
significantly impacted by catastrophes in 1999, 1998 or 1997. Although the
Company believes that it has adequate reinsurance to protect against the
estimated probable maximum gross loss from a catastrophe, an especially severe
catastrophe or series of catastrophes could exceed the Company's reinsurance
and/or retrocessional protection, and may have a material adverse impact on the
Company's financial condition, results of operations and liquidity.


17. Statutory Financial Information
These consolidated financial statements vary in certain respects from those
prepared using statutory accounting practices prescribed or permitted by the
Pennsylvania Insurance Department and the Delaware Insurance Department,
(collectively "SAP"). Prescribed SAP includes state laws, regulations and
general administrative rules, as well as a variety of National Association of
Insurance Commissioners ("NAIC") publications. Permitted SAP encompasses all
accounting practices that are not prescribed. In 1998, the NAIC adopted the
Codification of Statutory Accounting Principles ("Codification") guidance, which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting beginning in 2001. Codification
provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in some areas, such as deferred income
taxes, which will be recorded under Codification.
   Effective January 1, 2001 the Company's insurance subsidiaries will implement
the Codification guidelines. The Company is in the process of assessing the
impact that Codification will have on its statutory surplus and currently
expects that the impact of adopting Codification will not be material.

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

(dollar amounts in thousands)              1999            1998          1997
-------------------------------------------------------------------------------
SAP net income (loss):

PMA Reinsurance Corporation             $  34,412      $  29,746      $  25,752
The PMA Insurance Group
  (domestic insurance subsidiaries)         6,963         23,034         10,785
Caliber One Indemnity Company              (5,453)           (90)            --
                                       ----------------------------------------
Total                                   $  35,922      $  52,690      $  36,537
                                       ========================================

SAP capital and surplus:

PMA Reinsurance Corporation(1)          $ 287,635      $ 287,466      $ 271,154
The PMA Insurance Group
  (domestic insurance subsidiaries)       265,162        281,947        281,071
                                       ----------------------------------------
Total                                   $ 552,797      $ 569,413      $ 552,225
                                       ========================================

(1)The SAP capital and surplus of PMA Reinsurance Corporation includes PMA
   Reinsurance Corporation's investment in Caliber One Indemnity Company of
   $32.8 million in 1999 and $25.0 million in 1998 and 1997.

                                       66
<PAGE>
A reconciliation of PMA Capital's domestic insurance subsidiaries' SAP net
income to the Company's GAAP net income is as follows:
<TABLE>
<CAPTION>
                                                         For the years ended December 31,
(dollar amounts in thousands)                            1999          1998          1997
------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>           <C>
SAP net income - domestic insurance subsidiaries      $ 35,922      $ 52,690      $ 36,537
GAAP adjustments:
   Change in deferred acquisition costs                 (1,159)        4,504         1,282
   Benefit for deferred income taxes                     3,937        14,012         4,725
   Cumulative effect of accounting change               (2,759)           --            --
   Allowance for doubtful accounts                       1,750            --            --
   Guaranty fund and loss based assessments              1,306            --            --
   Other                                                 4,700         4,366         1,131
                                                     --------------------------------------
GAAP net income - domestic insurance subsidiaries       43,697        75,572        43,675


Other entities and eliminations                        (18,103)      (30,838)      (23,922)
Extraordinary loss                                          --            --        (4,734)
                                                     --------------------------------------
GAAP net income                                       $ 25,594      $ 44,734      $ 15,019
                                                     ======================================
</TABLE>

A reconciliation of PMA Capital's domestic insurance subsidiaries' SAP capital
and surplus to the Company's GAAP shareholders' equity is as follows:
<TABLE>
<CAPTION>
                                                                                   December 31,
(dollar amounts in thousands)                                           1999           1998          1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>            <C>
SAP capital and surplus - domestic insurance subsidiaries            $ 552,797      $ 569,413      $ 552,225
GAAP adjustments:
   Deferred acquisition costs                                           47,946         49,118         45,288
   Deferred income taxes                                                78,371         71,443         52,571
   Allowance for doubtful accounts                                     (21,550)       (19,650)       (19,700)
   Retirement accruals                                                  (9,965)       (10,244)       (10,653)
   Reversal of non-admitted assets                                      21,136         22,711         21,330
   Unrealized gain (loss) on fixed maturities available for sale       (40,654)        27,506         19,380
   Other                                                                15,000         13,569          3,254
                                                                     ----------------------------------------
GAAP shareholders' equity - domestic insurance subsidiaries            643,081        723,866        663,695
Other entities and eliminations                                       (213,938)      (212,386)      (185,348)
                                                                     ----------------------------------------
GAAP shareholders' equity                                            $ 429,143      $ 511,480      $ 478,347
                                                                     ========================================
</TABLE>

18. Dispositions
Effective July 1, 1998, the Company sold PMA Insurance, Cayman Ltd. ("PMA
Cayman"), one of the entities included in The PMA Insurance Group's Run-off
Operations, which reinsures claims for certain policies written by other members
of The PMA Insurance Group, to a third party for a purchase price of $1.8
million and recorded an after-tax loss of $1.6 million. This transaction
included the transfer of $231.5 million in cash and invested assets to the
buyer. At December 31, 1999, the Company has recorded $240.8 million in
reinsurance receivables related to this transaction, all of which are secured by
assets in trust or by letters of credit. If the actual claim payments in the
aggregate exceed the estimated payments upon which the loss reserves have been
established, the Company has agreed to indemnify the buyer, up to a maximum of
$15.0 million. If the actual claim payments in the aggregate are less than the
estimated payments upon which the loss reserves have been established, the
Company will participate in such favorable loss reserve development.

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<PAGE>

[PricewaterhouseCoopers LLP LOGO]


Report of Independent Accountants

To the Board of Directors and Shareholders of
PMA Capital Corporation

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity, cash flows and
comprehensive income (loss) present fairly, in all material respects, the
financial position of PMA Capital Corporation and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.


/s/ PricewaterhouseCoopers LLP


1177 Avenue of the Americas
New York, New York
February 2, 2000





                                       68
<PAGE>

Quarterly Financial Information (Unaudited)
The following unaudited quarterly financial data are presented on a consolidated
basis for each of the years ended December 31, 1999 and 1998. Quarterly
financial results necessarily rely on estimates and caution is required in
drawing specific conclusions from quarterly consolidated results.
<TABLE>
<CAPTION>
                                                                  First        Second          Third        Fourth
                                                                Quarter       Quarter        Quarter       Quarter
------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>            <C>           <C>
1999
Income Statement Data:
Total revenues                                                 $140,446      $157,168       $156,034      $201,469
Income before income taxes                                       13,147         6,381         10,369        10,195
Income before cumulative effect of accounting change              8,468         6,746          6,512         6,627
Net income                                                        5,709         6,746          6,512         6,627

Per Share Data:
Basic:
   Income before cumulative effect of accounting change        $   0.37      $   0.29      $    0.28      $   0.29
   Net income                                                      0.25          0.29           0.28          0.29
Diluted:
   Income before cumulative effect of accounting change            0.35          0.28           0.27          0.28
   Net income                                                      0.24          0.28           0.27          0.28

Class A Common Stock Prices:
      High                                                     $  20.31      $  21.00      $   21.00      $  20.38
      Low                                                         17.63         19.00          19.38         19.38
      Close                                                       20.13         20.56          20.00         19.88

1998
Income Statement Data:
Total revenues                                                 $149,386      $153,743       $149,471      $170,881
Income before income taxes                                       14,741        10,775         12,584        16,969
Net income                                                       12,088         9,357         10,552        12,737

Per Share Data:
   Net income (Basic)                                          $   0.51      $   0.39      $    0.45      $   0.54
   Net income (Diluted)                                            0.49          0.38           0.43          0.52

Class A Common Stock Prices:
      High                                                     $  19.38      $  23.00      $   22.69      $  19.63
      Low                                                         15.75         17.63          17.25         16.75
      Close                                                       18.00         23.00          19.50         19.56
</TABLE>

The Company had 326 recordholders of Class A Common stock and 142 recordholders
of Common stock at January 31, 2000. For each of the quarters in the two years
ended December 31, 1999, the Company declared a quarterly dividend of $0.08 and
$0.09 per share for its Common stock and Class A Common stock, respectively.


                                       69
<PAGE>
Securities Listing

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

[PMACA LOGO]

Dividends
PMA Capital Corporation's quarterly dividends on Common stock and Class A Common
stock are paid on or about the first day of January, April, July and October.
Each share of Class A Common stock is entitled to a cash dividend at least 10%
higher than any cash dividend paid on the Common stock.














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