PMA Capital Reports Improved Second Quarter 2008 Results

BLUE BELL, Pa.--(Business Wire)--
PMA Capital Corporation (NASDAQ:PMACA) today reported the
following financial results for the second quarter and first six
months of 2008:

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Three months ended Six months ended
June 30, June 30,
(in thousands, except per share
data) 2008 2007 2008 2007
----------------------------------------------------------------------
Operating income $ 4,583 $ 2,244 $11,566 $ 6,488
Realized investment gains
(losses) after tax (372) (737) 1,915 (101)
------------------ -----------------
Income from continuing operations 4,211 1,507 13,481 6,387
Loss from discontinued operations
after tax (188) (1,016) (2,627) (2,550)
------------------ -----------------
Net income $ 4,023 $ 491 $10,854 $ 3,837
================== =================

Diluted per share amounts:
---------------------------------
Operating income $ 0.14 $ 0.07 $ 0.36 $ 0.20
Realized investment gains
(losses) after tax (0.01) (0.03) 0.06 (0.01)
------------------ -----------------
Income from continuing operations 0.13 0.04 0.42 0.19
Loss from discontinued operations
after tax - (0.03) (0.08) (0.07)
------------------ -----------------
Net income $ 0.13 $ 0.01 $ 0.34 $ 0.12
================== =================

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Vincent T. Donnelly, President and Chief Executive Officer
commented, "PMA Capital produced another quarter of strengthened
operating results. We are pleased with our continued progress in
profitably growing our insurance and fee-based businesses and
improving our return on equity, while continuing to maintain our
underwriting standards."

Significant operating highlights at The PMA Insurance Group
included:

-- The combined ratio improved by 2.1 points to 99.5% in the
quarter and by 2.7 points to 97.2% year-to-date;

-- Pre-tax operating income, including a gain of $2.1 million
from the sale of real estate, increased $3.5 million to $11.3
million in the quarter and increased $6.2 million to $25.0
million for the first six months of 2008;

-- Direct premium production, excluding premium adjustments and
fronting premiums, increased modestly in the second quarter to
$96.7 million and increased 2% during the first six months of
2008 to $243.3 million; and

-- Entering into a fronting arrangement in July, which we expect
will favorably impact our underwriting results beginning in
the third quarter.

Mr. Donnelly continued, "We continue to focus on growing our
fee-based business. Our fee-based business revenue increased $17.2
million to $32.7 million, which represented 13% of our total revenues
for the first half of 2008, compared to 7% during the same period in
2007. Organic revenue growth at PMA Management Corp. was 26% during
the second quarter and 21% year-to-date. Our current year growth was
also due to the inclusion of Midlands, which contributed $6.4 million
and $13.9 million of this revenue growth for the second quarter and
first six months of 2008. At the end of the quarter, we completed the
acquisition of a company known for its expertise in providing risk
management and third party administrator services to healthcare and
public entity customers primarily in the Connecticut market, a
geographic area in which we previously had little penetration. We will
operate this business as PMA Management Corp. of New England and
expect to continue to grow this business which currently generates $6
million in annual revenues."

The Company previously announced the execution of a definitive
stock purchase agreement to sell its Run-off Operations and the filing
of the Form A with the Pennsylvania Insurance Department. PMA is
assisting the buyer to ensure the Pennsylvania Insurance Department
has the information it needs to review the transaction.

Income from continuing operations included the following after-tax
net realized gains (losses):

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Three months ended Six months ended
June 30, June 30,
(dollar amounts in thousands) 2008 2007 2008 2007
----------------------------------------------------------------------
Net realized gains (losses) after
tax:
Sales of investments $ (372) $ (119) $ 1,933 $ 238
Change in fair value of debt
derivative - (507) - (228)
Other - (111) (18) (111)
------------------ -----------------
Net realized gains (losses) after
tax $ (372) $ (737) $ 1,915 $ (101)
================== =================

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Segment Operating Results

Operating income, which we define as net income under accounting
principles generally accepted in the United States ("GAAP") excluding
net realized investment gains (losses) and results from discontinued
operations, is the financial performance measure used by our
management and Board of Directors to evaluate and assess the results
of our businesses. Net realized investment activity is excluded
because (i) net realized investment gains and losses are unpredictable
and not necessarily indicative of current operating fundamentals or
future performance of the business segments and (ii) in many
instances, decisions to buy and sell securities are made at the
holding company level, and such decisions result in net realized gains
and losses that do not relate to the operations of the individual
segments. Operating income does not replace net income as the GAAP
measure of our consolidated results of operations.

The following is a reconciliation of our operating results to GAAP
net income.

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Three months ended Six months ended
June 30, June 30,
(dollar amounts in thousands) 2008 2007 2008 2007
----------------------------------------------------------------------
Pre-tax operating income (loss):
The PMA Insurance Group $ 11,341 $ 7,799 $ 24,960 $18,729
Fee-based Business 1,201 601 3,387 1,394
Corporate & Other (5,424) (4,893) (10,435) (9,988)
------------------ ------------------
Pre-tax operating income 7,118 3,507 17,912 10,135
Income tax expense 2,535 1,263 6,346 3,647
------------------ ------------------
Operating income 4,583 2,244 11,566 6,488
Realized investment gains
(losses) after tax (372) (737) 1,915 (101)
------------------ ------------------
Income from continuing
operations 4,211 1,507 13,481 6,387
Loss from discontinued
operations after tax (1) (188) (1,016) (2,627) (2,550)
------------------ ------------------
Net income $ 4,023 $ 491 $ 10,854 $ 3,837
================== ==================

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1) Effective in the fourth quarter of 2007, the Company reported the
results of its former Run-off Operations segment as discontinued
operations.

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The PMA Insurance Group

The PMA Insurance Group reported pre-tax operating income of $11.3
million for the second quarter of 2008, compared to $7.8 million for
the same period last year. Year-to-date pre-tax operating income
increased to $25.0 million, compared to $18.7 million for the first
half of 2007. During the second quarter of 2008, we sold a property
that housed one of our branch offices in order to move into a more
modern, leased facility. This sale resulted in a gain of $2.1 million,
which is included in other revenues.

Direct premium production was up during the second quarter and
first six months of 2008, compared to the same periods last year. We
define direct premium production as direct premiums written, excluding
premium adjustments and fronting premiums. The following is a
reconciliation of our direct premium production to direct premiums
written:

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Three months ended Six months ended
June 30, June 30,
(dollar amounts in thousands) 2008 2007 2008 2007
----------------------------------------------------------------------

Direct premium production $ 96,736 $ 96,316 $243,344 $239,705
Fronting premiums 2,113 14,936 10,256 33,337
Premium adjustments 370 (134) (13,828) (993)
------------------ -------------------
Direct premiums written $ 99,219 $111,118 $239,772 $272,049
================== ===================

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Direct premiums written were $99.2 million and $239.8 million for
the three and six months ended June 30, 2008, compared to $111.1
million and $272.0 million for the same periods last year. Fronting
premiums were $2.1 million and $10.3 million in the second quarter and
first six months of 2008, compared to $14.9 million and $33.3 million
for the same periods a year ago. The declines in fronting premiums are
the result of the termination of our agreement with Midwest Insurance
Companies ("Midwest") in March 2008. We continue to earn commissions
from the Midwest agreement and service the business previously
written, but no additional business has been written or renewed since
the termination date. Excluding fronting business, we wrote $25.7
million of new business in the second quarter of 2008 and $60.4
million for the first half of 2008, compared to $25.6 million and
$64.6 million during the same periods last year. The increase in
premium adjustments relates primarily to higher return premium
adjustments which occurred in the first quarter of 2008. These premium
adjustments primarily reflect favorable loss experience on
loss-sensitive products where the insured shares in the underwriting
result of the policy. Pricing on our workers' compensation
rate-sensitive business declined 7% during the first six months of
2008, compared to a 4% decrease during the first six months of 2007.
Our renewal retention rate on existing workers' compensation accounts
was 84% for both the second quarters of 2008 and 2007, and our renewal
retention rate was 85% for the first six months of 2008 and 2007.

In July 2008, we entered into a fronting arrangement with
Appalachian Underwriters, who will underwrite and service workers'
compensation policies using our approved forms and guidelines. The
business produced will be primarily located in the southeastern part
of the United States. We will retain approximately 10% of the direct
premiums and related losses on this business. We will also earn an
administrative fee based upon the direct premiums earned under the
agreement as well as fees for providing claims services on the
business. We expect that direct premiums written under the agreement
will be between $20 million and $30 million on an annualized basis.

Net premiums written were $79.3 million and $193.2 million for the
second quarter and first six months of 2008, compared to $81.8 million
and $207.7 million during the same periods last year. Ceded premiums
written decreased in the second quarter and first six months of 2008,
compared to the same periods in 2007, primarily due to lower premiums
ceded under the Midwest agreement. The year-to-date decline was
partially offset by an increase in the amount of workers' compensation
business sold to captive accounts, where a substantial portion of the
direct premiums are ceded.

For the second quarter and first six months of 2008, the combined
ratios on a GAAP basis were 99.5% and 97.2%, compared to 101.6% and
99.9% for the same periods in 2007.

The improved loss and LAE ratios for both periods were primarily
due to lower current accident year loss and LAE ratios, compared to
2007. The year-to-date loss and LAE ratio also benefited from
favorable development in our loss-sensitive business which resulted in
the retrospective premium adjustments reflected in our first quarter
results. Our current accident year loss and LAE ratios benefited in
2008 from changes in the type of workers' compensation products
selected by our insureds. Pricing changes coupled with payroll
inflation for rate-sensitive workers' compensation business were below
overall estimated loss trends. We estimated our medical cost inflation
to be 6.5% in the first six months of 2008, compared to our estimate
of 8% in the first six months of 2007. This decline reflects a
decrease in utilization as well as our enhanced network and managed
care initiatives.

Commissions earned under our fronting agreements reduced the
expense ratio for the first six months of 2008 by 0.9 points, compared
to 0.6 points for the same period in 2007. Although our agreement with
Midwest was terminated, we continue to earn commissions on this
business until the underlying policies expire. The year-to-date
expense ratio also benefited from reductions in premium-based state
assessments.

Net investment income was $8.9 million in the second quarter of
2008, compared to $9.6 million in the prior year quarter. For the
first six months of 2008, net investment income was $18.0 million,
compared to $19.1 million in the first half of 2007. The decreases
were due primarily to lower yields of approximately 40 basis points
for the quarter and 30 basis points year-to-date.

Fee-based Business

Our Fee-based Business reported pre-tax operating income of $1.2
million for the second quarter of 2008, compared to $601,000 for the
same period last year. Year-to-date pre-tax operating income increased
to $3.4 million, compared to $1.4 million for the first half of 2007.
The increases related primarily to the inclusion of Midlands
Management Corporation's ("Midlands") results in 2008, which we
acquired on October 1, 2007.

For the second quarter of 2008, total revenues increased to $16.1
million, up $8.3 million from the same period last year. For the six
months ended June 30, 2008, total revenues increased to $32.7 million,
compared to $15.5 million for the first half of 2007. Revenues from
PMA Management Corp. increased 26% in the second quarter and 21% in
the first six months of 2008, compared to the same periods last year.
Revenues resulting from our acquisition of Midlands accounted for the
remainder of the growth. The total increases in revenues primarily
reflected higher claims service revenues of $5.7 million and
commission income of $2.6 million for the quarter, and higher claims
service revenues of $10.1 million and commission income of $6.9
million for the first half of the year.

As previously announced, on June 30, 2008, we completed the
acquisition of Webster Risk Services, which we will operate as PMA
Management Corp. of New England, Inc. Beginning in the third quarter
of 2008, we will report the operating results of PMA Management Corp.
of New England, Inc. within our Fee-based Business segment.

Corporate and Other

The Corporate and Other segment, which includes primarily
corporate expenses and debt service, recorded net expenses of $5.4
million during the second quarter of 2008, compared to $4.9 million in
the second quarter of 2007. Net expenses were $10.4 million during the
first six months of 2008, compared to $10.0 million for the same
period in 2007. We incurred $655,000 in contract severance costs
associated with the March 2008 retirement of an executive officer.

Discontinued Operations

Discontinued operations, formerly our Run-off Operations which
consists of our former reinsurance and excess and surplus lines
businesses, recorded after-tax losses of $188,000 and $2.6 million for
the three and six months ended June 30, 2008, compared to after-tax
losses of $1.0 million and $2.6 million for the same periods in 2007.
The loss for the first six months of 2008 was due to a charge in the
first quarter for adverse loss development.

Financial Condition

Total assets were $2.5 billion as of June 30, 2008, compared to
$2.6 billion as of December 31, 2007. Assets of discontinued
operations represented 13% of total assets at June 30, 2008, compared
to 15% at December 31, 2007. Shareholders' equity was $380.6 million
as of June 30, 2008, compared to $378.6 million as of December 31,
2007. Book value per share was $11.92 at both June 30, 2008 and
December 31, 2007. During the first six months of 2008, the unrealized
position on our available for sale fixed income portfolio decreased by
$11.1 million, or 35 cents per share. The unrealized position on our
portfolio decreased as a result of higher long-term market interest
rates and due to gains that we realized in 2008. The decrease in the
unrealized position was substantially offset by net income. At June
30, 2008, we had $27.5 million in cash and short-term investments at
our holding company and non-regulated subsidiaries.

The insurance companies within The PMA Insurance Group had
statutory capital and surplus of $352.1 million as of June 30, 2008,
compared to $335.4 million as of December 31, 2007. The PMA Insurance
Group has the ability to pay $29.2 million in dividends during 2008
without the prior approval of the Pennsylvania Insurance Department.
The statutory capital and surplus of PMA Capital Insurance Company,
PMA Capital Corporation's wholly-owned run-off reinsurance subsidiary
which is being reported as discontinued operations, was $37.8 million
as of June 30, 2008, compared to $47.6 million as of December 31,
2007.

Conference Call with Investors

As a reminder, we will hold a conference call with investors
beginning at 8:30 a.m. Eastern Time on Friday, August 1 to review our
second quarter 2008 results. The conference call will be available via
a live webcast over the Internet at www.pmacapital.com. To access the
webcast, enter the Investor Information section, click on News
Releases and then click on the microphone icon. Please note that by
accessing the conference call via the Internet, you will be in a
listen-only mode.

The call-in numbers and passcodes for the conference call are as
follows:

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Live Call Replay
--------------------------------- ------------------------------------
888-680-0860 (Domestic) 888-286-8010 (Domestic)
617-213-4852 (International) 617-801-6888 (International)
Passcode 30101283 Passcode 29167795

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You may pre-register for the conference call using the following
link:

www.theconferencingservice.com/prereg/key.process?key=PHV79DVKP

Pre-registering is not mandatory but is recommended as it will
provide you immediate entry into the call and will facilitate the
timely start of the conference. Pre-registration only takes a few
moments and you may pre-register at anytime, including up to and after
the call start time. Alternatively, if you would rather be placed into
the call by an operator, please use the dial-in information above at
least 5 minutes prior to the call start time.

A replay of the conference call will be available over the
Internet or by dialing the call-in number for the replay and using the
passcode. The replay will be available from approximately 10:30 a.m.
Eastern Time on Friday, August 1 until 11:59 p.m. Eastern Time on
Monday, September 1.

Quarterly Statistical Supplement

Our Second Quarter Statistical Supplement, which provides more
detailed historical information about us, is available on our website.
Please see the Investor Information section of our website at
www.pmacapital.com. You may also obtain a copy of this supplement by
sending your request to:

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PMA Capital Corporation
380 Sentry Parkway
Blue Bell, PA 19422
Attention: Investor Relations
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Alternatively, you may make a request by telephone (610-397-5298)
or by e-mail to InvestorRelations@pmacapital.com. We will also furnish
a copy of this news release and the Statistical Supplement to the SEC
on a Form 8-K. A copy of the Form 8-K will be available on the SEC's
website at www.sec.gov.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The statements contained in this press release that are not
historical facts are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements may include estimates, assumptions or
projections and are based on currently available financial,
competitive and economic data and the Company's current operating
plans. Although the Company's management believes that its
expectations are reasonable, there can be no assurance that the
Company's actual results will not differ materially from those
expected. The factors that could cause actual results to differ
materially from those in the forward-looking statements, include, but
are not limited to:

-- adverse property and casualty loss development for events that
we insured in prior years, including unforeseen increases in
medical costs and changing judicial interpretations of
available coverage for certain insured losses;

-- our ability to increase the amount of new and renewal business
written by The PMA Insurance Group at adequate prices or
revenues of our fee-based businesses;

-- our ability to have sufficient cash at the holding company to
meet our debt service and other obligations, including any
restrictions such as those imposed by the Pennsylvania
Insurance Department on receiving dividends from our insurance
subsidiaries in an amount sufficient to meet such obligations;

-- any future lowering or loss of one or more of our financial
strength and debt ratings, and the adverse impact that any
such downgrade may have on our ability to compete and to raise
capital, and our liquidity and financial condition;

-- our ability to effect an efficient withdrawal from and
divestiture of the reinsurance business, including the sale of
the entity and commutation of reinsurance business with
certain large ceding companies, without incurring any
significant additional liabilities;

-- adequacy and collectibility of reinsurance that we purchased;

-- adequacy of reserves for claim liabilities;

-- whether state or federal asbestos liability legislation is
enacted and the impact of such legislation on us;

-- regulatory changes in risk-based capital or other standards
that affect the cost of, or demand for, our products or
otherwise affect our ability to conduct business, including
any future action with respect to our business taken by the
Pennsylvania Insurance Department or any other state insurance
department;

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

-- the outcome of any litigation against us;

-- competitive conditions that may affect the level of rate
adequacy related to the amount of risk undertaken and that may
influence the sustainability of adequate rate changes;

-- our ability to implement and maintain rate increases;

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

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

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

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

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

-- uncertainties related to possible terrorist activities or
international hostilities and whether the Terrorism Risk
Insurance Program Reauthorization Act of 2007 is extended
beyond its December 31, 2014 termination date; and

-- other factors or uncertainties disclosed from time to time in
our filings with the Securities and Exchange Commission.

You should not place undue reliance on any forward-looking
statements in this press release. Forward-looking statements are not
generally required to be publicly revised as circumstances change and
we do not intend to update the forward-looking statements in this
press release to reflect circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

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PMA Capital Corporation
GAAP Consolidated Statements of Operations
(Unaudited)

Three months ended June 30,
(dollar amounts in thousands, except per
share data) 2008 2007
----------------------------------------------------------------------

Gross premiums written $ 101,659 $ 115,258
============= =============

Net premiums written $ 79,146 $ 81,656
============= =============

Revenues:
Net premiums earned $ 102,920 $ 97,014
Claims service revenues 12,937 7,535
Commission income 2,631 -
Net investment income 9,040 9,951
Net realized investment losses (572) (1,134)
Other revenues 2,214 32
------------- -------------
Total revenues 129,170 113,398
------------- -------------

Expenses:
Losses and loss adjustment expenses 71,572 67,965
Acquisition expenses 19,524 18,759
Operating expenses 27,347 19,411
Dividends to policyholders 1,493 2,047
Interest expense 2,688 2,843
------------- -------------
Total losses and expenses 122,624 111,025
------------- -------------

Pre-tax income 6,546 2,373
------------- -------------

Income tax expense:
Current 151 200
Deferred 2,184 666
------------- -------------
Total income tax expense 2,335 866
------------- -------------

Income from continuing operations 4,211 1,507

Loss from discontinued operations after
tax (188) (1,016)
------------- -------------

Net income $ 4,023 $ 491
============= =============

Earnings per share:

Basic:
Continuing Operations $ 0.13 $ 0.05
Discontinued Operations - (0.03)
------------- -------------
$ 0.13 $ 0.02
============= =============

Diluted:
Continuing Operations $ 0.13 $ 0.04
Discontinued Operations - (0.03)
------------- -------------
$ 0.13 $ 0.01
============= =============

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PMA Capital Corporation
GAAP Consolidated Statements of Operations
(Unaudited)

----------------------------------------------------------------------
Six months ended
June 30,
(dollar amounts in thousands, except per share
data) 2008 2007
----------------------------------------------------------------------

Gross premiums written $245,200 $279,822
========= =========

Net premiums written $192,929 $207,393
========= =========

Revenues:
Net premiums earned $188,516 $190,853
Claims service revenues 24,889 15,200
Commission income 6,912 -
Net investment income 18,475 19,705
Net realized investment gains (losses) 2,946 (156)
Other revenues 2,360 139
--------- ---------
Total revenues 244,098 225,741
--------- ---------

Expenses:
Losses and loss adjustment expenses 131,494 133,884
Acquisition expenses 34,216 37,538
Operating expenses 49,680 35,012
Dividends to policyholders 2,375 3,669
Interest expense 5,475 5,659
--------- ---------
Total losses and expenses 223,240 215,762
--------- ---------

Pre-tax income 20,858 9,979
--------- ---------

Income tax expense:
Current 151 200
Deferred 7,226 3,392
--------- ---------
Total income tax expense 7,377 3,592
--------- ---------

Income from continuing operations 13,481 6,387

Loss from discontinued operations after tax (2,627) (2,550)
--------- ---------

Net income $ 10,854 $ 3,837
========= =========

Earnings per share:

Basic:
Continuing Operations $ 0.42 $ 0.20
Discontinued Operations (0.08) (0.08)
--------- ---------
$ 0.34 $ 0.12
========= =========

Diluted:
Continuing Operations $ 0.42 $ 0.19
Discontinued Operations (0.08) (0.07)
--------- ---------
$ 0.34 $ 0.12
========= =========
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PMA Capital Corporation
GAAP Consolidated Balance Sheets
(Unaudited)

----------------------------------------------------------------------
(dollar amounts in thousands, except per June 30, December 31,
share data) 2008 2007
----------------------------------------------------------------------
Assets:
Investments:
Fixed maturities available for sale $ 730,466 $ 728,725
Short-term investments 59,785 78,426
------------ ------------
Total investments 790,251 807,151

Cash 10,557 15,828
Accrued investment income 5,762 5,768
Premiums receivable 215,030 222,140
Reinsurance receivables 817,182 795,938
Prepaid reinsurance premiums 21,414 32,361
Deferred income taxes, net 117,983 118,857
Deferred acquisition costs 38,739 37,404
Funds held by reinsureds 46,980 42,418
Intangible assets 30,013 22,779
Other assets 125,533 105,341
Assets of discontinued operations 317,189 375,656
------------ ------------
Total assets $ 2,536,633 $ 2,581,641
============ ============

Liabilities:
Unpaid losses and loss adjustment expenses $ 1,240,224 $ 1,212,956
Unearned premiums 219,643 226,178
Debt 129,790 131,262
Accounts payable, accrued expenses and other
liabilities 193,342 195,895
Reinsurance funds held and balances payable 31,947 39,324
Dividends to policyholders 5,459 5,839
Liabilities of discontinued operations 335,633 391,603
------------ ------------
Total liabilities 2,156,038 2,203,057
------------ ------------

Shareholders' Equity:
Class A Common Stock 171,090 171,090
Additional paid-in capital 111,754 111,088
Retained earnings 145,638 136,627
Accumulated other comprehensive loss (17,743) (6,663)
Treasury stock, at cost (30,144) (33,558)
------------ ------------
Total shareholders' equity 380,595 378,584
------------ ------------
Total liabilities and shareholders' equity $ 2,536,633 $ 2,581,641
============ ============

Shareholders' equity per share $ 11.92 $ 11.92
============ ============
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PMA Capital Corporation
William E. Hitselberger
610-397-5298

Copyright Business Wire 2008