Pma Capital 10Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

OR

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

FOR THE TRANSITION PERIOD FROM _____ TO _____

Commission File Number 001-31706

PMA Capital Corporation

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2217932
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

380 Sentry Parkway
Blue Bell, Pennsylvania	19422
(Address of principal executive offices)	(Zip Code)

(610) 397-5298

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES / / NO / /

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer / /	Accelerated filer /X/
Non-accelerated filer / / (Do not check if a smaller reporting company)	Smaller reporting company / /

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES / / NO /X/

There were 32,280,474 shares outstanding of the registrant’s Class A Common Stock, $5 par value per share, as of the close of business on August 5, 2010.

INDEX

		Page

Part I.	Financial Information

Item 1.	Financial Statements.

	Condensed Consolidated Balance Sheets as of June 30, 2010 and
	December 31, 2009 (unaudited)	1

	Condensed Consolidated Statements of Operations for the three and six months ended
	June 30, 2010 and 2009 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the six months ended
	June 30, 2010 and 2009 (unaudited)	3

	Condensed Consolidated Statements of Comprehensive Income for the
	three and six months ended June 30, 2010 and 2009 (unaudited)	4

	Notes to the Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations.	15

Item 3.	Quantitative and Qualitative Disclosure About Market Risk.	28

Item 4.	Controls and Procedures.	28

Part II.	Other Information

Item 1.	Legal Proceedings.	28

Item 1A.	Risk Factors.	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	30

Item 6.	Exhibits.	30

Signatures		31

Exhibit Index		32

Part I. Financial Information

Item 1. Financial Statements.

PMA Capital Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

		As of			As of
		June 30,			December 31,
(in thousands, except share data)		2010			2009

Assets:
Investments:
	Fixed maturities available for sale, at fair value (amortized cost: 2010 - $741,391; 2009 - $779,154)	$	778,747		$	791,355
	Short-term investments		25,854			41,072
	Other investments (cost: 2010 - $30,442; 2009 - $27,363)		33,701			30,226
	Total investments		838,302			862,653

Cash			15,933			11,059
Accrued investment income			6,852			7,352
Premiums receivable (net of valuation allowance: 2010 - $7,500; 2009 - $7,427)			251,566			238,650
Reinsurance receivables (net of valuation allowance: 2010 - $4,719; 2009 - $4,719)			854,522			827,458
Prepaid reinsurance premiums			36,351			35,788
Deferred income taxes, net			125,381			139,782
Deferred acquisition costs			40,677			39,124
Funds held by reinsureds			64,299			58,935
Intangible assets			29,349			29,757
Other assets			108,776			112,181
	Total assets	$	2,372,008		$	2,362,739

Liabilities:
Unpaid losses and loss adjustment expenses		$	1,267,408		$	1,269,685
Unearned premiums			241,441			240,759
Long-term debt			132,445			143,380
Accounts payable, accrued expenses and other liabilities			243,759			249,787
Reinsurance funds held and balances payable			51,905			51,331
Dividends to policyholders			5,849			6,000
	Total liabilities		1,942,807			1,960,942

Commitments and contingencies (Note 8)

Shareholders' Equity:
Class A Common Stock, $5 par value, 60,000,000 shares authorized
	(2010 - 34,217,945 shares issued and 32,281,576 outstanding;
	2009 - 34,217,945 shares issued and 32,251,120 outstanding)		171,090			171,090
Additional paid-in capital			111,759			111,841
Retained earnings			165,614			155,747
Accumulated other comprehensive income (loss)			3,001			(14,060	)
Treasury stock, at cost (2010 - 1,936,369 shares; 2009 - 1,966,825 shares)			(22,263	)		(22,821	)
	Total shareholders' equity		429,201			401,797
	Total liabilities and shareholders' equity	$	2,372,008		$	2,362,739

See accompanying notes to the unaudited condensed consolidated financial statements.

PMA Capital Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
(in thousands, except per share data)	2010		2009			2010			2009

Revenues:
Net premiums written	$	75,401	$	80,302		$	203,646		$	198,280
Change in net unearned premiums		24,630		26,647			(119	)		13,599
Net premiums earned		100,031		106,949			203,527			211,879
Claims service revenues		18,374		16,835			36,257			32,519
Commission income		2,345		2,117			5,437			5,580
Net investment income		8,734		9,561			17,854			18,018
Net realized investment gains (losses)		1,134		(472	)		1,560			277
Other revenues		394		190			786			366
Total revenues		131,012		135,180			265,421			268,639

Losses and Expenses:
Losses and loss adjustment expenses		70,340		73,494			145,410			149,269
Acquisition expenses		17,595		19,508			35,642			36,706
Operating expenses		35,206		31,540			60,838			55,925
Dividends to policyholders		2,051		2,311			2,575			2,957
Interest expense		2,502		2,476			5,006			4,982
Total losses and expenses		127,694		129,329			249,471			249,839
Income from continuing operations before income taxes		3,318		5,851			15,950			18,800
Income tax expense:
Current		263		265			517			509
Deferred		932		1,819			5,216			6,221
Total income tax expense		1,195		2,084			5,733			6,730
Income from continuing operations		2,123		3,767			10,217			12,070
Loss from discontinued operations, net of tax		-		(1,165	)		-			(1,251	)
Net income	$	2,123	$	2,602		$	10,217		$	10,819

Income (loss) per share:

Basic:
Continuing Operations	$	0.07	$	0.12		$	0.32		$	0.38
Discontinued Operations		-		(0.04	)		-			(0.04	)
	$	0.07	$	0.08		$	0.32		$	0.34
Diluted:
Continuing Operations	$	0.07	$	0.12		$	0.32		$	0.38
Discontinued Operations		-		(0.04	)		-			(0.04	)
	$	0.07	$	0.08		$	0.32		$	0.34

See accompanying notes to the unaudited condensed consolidated financial statements.

PMA Capital Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

		Six Months Ended
		June 30,
(in thousands)		2010			2009

Cash flows from operating activities:
Net income		$	10,217		$	10,819
Less: Loss from discontinued operations			-			(1,251	)
Income from continuing operations, net of tax			10,217			12,070
Adjustments to reconcile income from continuing
operations to net cash flows used in operating activities:
	Deferred income tax expense		5,216			6,221
	Net realized investment gains		(1,560	)		(277	)
	Stock-based compensation		141			943
	Depreciation and amortization		3,498			2,958
	Change in:
	Premiums receivable and unearned premiums, net		(12,234	)		(6,677	)
	Dividends to policyholders		(151	)		(840	)
	Reinsurance receivables		(27,064	)		(29,035	)
	Prepaid reinsurance premiums		(563	)		(7,692	)
	Unpaid losses and loss adjustment expenses		(2,277	)		28,831
	Funds held by reinsureds		(5,364	)		(2,558	)
	Reinsurance funds held and balances payable		574			9,150
	Accrued investment income		500			(708	)
	Deferred acquisition costs		(1,553	)		1,574
	Accounts payable, accrued expenses and other liabilities		(5,484	)		886
	Other, net		5,991			(1,212	)
	Discontinued operations		-			(40,398	)
Net cash flows used in operating activities			(30,113	)		(26,764	)

Cash flows from investing activities:
Fixed maturities available for sale:
Purchases			(77,905	)		(179,862	)
Maturities and calls			48,684			32,941
Sales			67,482			149,594
Net sales of short-term investments			15,218			6,964
Net purchases of other investments			(3,132	)		(11,191	)
Purchase of subsidiaries, net of cash received			-			(795	)
Other, net			(6,345	)		(5,271	)
Discontinued operations			-			34,428
Net cash flows provided by investing activities			44,002			26,808

Cash flows from financing activities:
Repayments of debt			(9,000	)		-
Shares purchased under stock-based compensation plans			(15	)		(482	)
Other payments to discontinued operations			-			(5,870	)
Discontinued operations			-			5,870
Net cash flows used in financing activities			(9,015	)		(482	)

Net increase (decrease) in cash			4,874			(438	)
Cash - beginning of year			11,059			11,872
Cash - end of period (a)		$	15,933		$	11,434

Supplementary cash flow information (all continuing operations):
Interest paid		$	4,917		$	4,963
Income tax paid (refunded)		$	(58	)	$	447

(a) Includes cash from discontinued operations of $1,271 as of June 30, 2009.

See accompanying notes to the unaudited condensed consolidated financial statements.

PMA Capital Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2010			2009			2010			2009

Net income	$	2,123		$	2,602		$	10,217		$	10,819

Other comprehensive income, net of tax:
Unrealized gains on securities:
Holding gains arising during the period		9,356			14,134			17,622			12,775
Portion of other than temporary impairment losses
recognized in other comprehensive income,
net of deferred income tax of $114		-			(211	)		-			(211	)
Less: reclassification adjustment for (gains) losses
included in net income, net of tax (expense)
benefit: ($397) and $165 for the three months
ended June 30, 2010 and 2009; ($546) and
($97) for the six months ended June 30, 2010
and 2009		(737	)		307			(1,014	)		(180	)

Total unrealized gains on securities		8,619			14,230			16,608			12,384

Net periodic benefit cost, net of tax expense: $80 and
$94 for the three months ended June 30, 2010 and 2009;
$155 and $188 for the six months ended June 30, 2010
and 2009		149			174			288			350
Unrealized gains from derivative instruments designated
as cash flow hedges, net of tax expense: $64 and
$150 for the three months ended June 30, 2010 and 2009;
$89 and $177 for the six months ended June 30, 2010
and 2009		119			279			165			328

Other comprehensive income, net of tax		8,887			14,683			17,061			13,062

Comprehensive income	$	11,010		$	17,285		$	27,278		$	23,881

See accompanying notes to the unaudited condensed consolidated financial statements.

PMA Capital Corporation

Notes to the Unaudited Condensed Consolidated Financial Statements

1. BUSINESS DESCRIPTION

The accompanying condensed consolidated financial statements include the accounts of PMA Capital Corporation and its subsidiaries (collectively referred to as “PMA Capital” or the “Company”). PMA Capital Corporation is a holding company whose operating subsidiaries provide insurance and fee-based services. Insurance products include workers’ compensation and other commercial property and casualty lines of insurance. Fee-based services include third party administrator (“TPA”), managing general agent and program administrator services. The operating subsidiaries are marketed under PMA Companies and include The PMA Insurance Group, PMA Management Corp., PMA Management Corp. of New England, Inc. and Midlands Management Corporation. The Company previously managed the run-off of its reinsurance and excess and surplus lines operations, which have been recorded as discontinued operations.

On June 9, 2010, the Company and Old Republic International Corporation (“Old Republic”) entered into a merger agreement pursuant to which Old Republic will acquire all of the Company’s outstanding common stock. See Note 3 for additional information.

The PMA Insurance Group — The PMA Insurance Group writes workers’ compensation and other commercial property and casualty lines of insurance, which are marketed primarily in the eastern part of the United States. The PMA Insurance Group primarily consists of the results of the Company’s principal insurance subsidiaries, which are commonly referred to as the “Pooled Companies” because they share results under an intercompany pooling arrangement. Approximately 90% of The PMA Insurance Group’s business is produced through independent agents and brokers.

Fee-based Business — Fee-based Business consists of the results of PMA Management Corp., PMA Management Corp. of New England, Inc. and Midlands Management Corporation. PMA Management Corp. is a TPA that provides various claims administration, risk management, loss prevention and related services, primarily to self-insured clients under fee for service arrangements, as well as to insurance carriers on an unbundled basis. PMA Management Corp. of New England, Inc. is a Connecticut-based provider of risk management and TPA services. Midlands is an Oklahoma City-based managing general agent, program administrator and provider of TPA services.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation – The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. It is management’s opinion that all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.

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. Due to this and certain other factors, such as the seasonal nature of portions of the insurance business, as well as competitive and other market conditions, operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.

The information included in this Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in its 2009 Annual Report on Form 10-K.

B. Intangible Assets — Identifiable intangible assets consist of non-contractual customer relationships, licenses and a trade name from business acquisitions. Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or when there is a reason to suspect that their values may have been diminished or impaired. Other identifiable intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. Annual impairment testing was performed during the second quarter of 2010 on intangible assets. Bas ed upon this review, these assets were not impaired.

C. Recent Accounting Guidance – In June 2009, the Financial Accounting Standards Board issued updated guidance on “Consolidation,” which requires additional disclosures about the transfer and derecognition of financial assets and eliminates the concept of qualifying special-purpose entities. This guidance was effective for fiscal years beginning after November 15,

2009. The 2010 adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or liquidity. As a result of adopting this guidance, the Company was required to consolidate the trusts related to its trust preferred debt which resulted in a decrease in other assets and debt of $1.9 million.

3. MERGER AGREEMENT

On June 9, 2010, the Company and Old Republic entered into a merger agreement pursuant to which Old Republic will acquire all of the Company’s outstanding common stock. At the effective time of the merger, each share of the Company's common stock issued and outstanding immediately prior to the effective time will be automatically cancelled and converted into the right to receive 0.55 shares (the “Exchange Ratio”) of common stock of Old Republic and all outstanding stock options, restricted shares and other equity awards will be converted, based on the Exchange Ratio, into stock options, restricted shares and equity awards covering Old Republic common stock. The Exchange Ratio will be adjusted if the volume weighted average price per share of Old Republic common stock for the 20 consecutive trading days e nding on and including the fifth trading day prior to, but not including, the closing date of the merger exceeds $17.00 or is less than $12.50, but in no event will the Exchange Ratio exceed 0.60 or be less than 0.50. The transaction is expected to close near the end of the third quarter of 2010, subject to approval by PMA Capital’s shareholders and other customary closing conditions. See Note 8 for pending litigation related to the merger.

The merger agreement provides certain termination rights for both parties. In the event the merger agreement is terminated because the Company's Board of Directors fails to recommend approval of the merger, changes its recommendation or approves or recommends an alternative proposal or transaction, the Company will be required to pay Old Republic a termination fee of $8 million.

4. INVESTMENTS

The cost or amortized cost and fair value of the Company’s investment portfolio were as follows:

			Included in Accumulated Other
			Comprehensive Income (Loss)
					Gross Unrealized Losses
	Cost or		Gross		Non-OTTI		OTTI
	Amortized		Unrealized		Unrealized		Unrealized		Fair
(dollar amounts in thousands)	Cost		Gains		Losses		Losses (1)		Value

June 30, 2010
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S. Government agencies	$	64,381	$	4,599	$	105	$	-	$	68,875
States, political subdivisions and foreign government securities		98,506		5,101		150		-		103,457
Corporate debt securities		227,994		14,583		1,045		-		241,532
Mortgage-backed and other asset-backed securities:
Commercial mortgage-backed securities		86,956		3,440		64		-		90,332
Residential mortgage-backed securities (Agency)		194,691		10,348		-		-		205,039
Residential mortgage-backed securities (Non-Agency)		17,923		373		296		-		18,000
Other asset-backed securities		50,940		1,187		615		-		51,512
Total fixed maturities available for sale		741,391		39,631		2,275		-		778,747
Short-term investments		25,854		-		-		-		25,854
Other investments		30,442		3,405		146		-		33,701
Total investments	$	797,687	$	43,036	$	2,421	$	-	$	838,302

December 31, 2009
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S. Government agencies	$	78,952	$	2,580	$	425	$	-	$	81,107
States, political subdivisions and foreign government securities		98,552		850		2,528		-		96,874
Corporate debt securities		232,535		12,370		424		-		244,481
Mortgage-backed and other asset-backed securities:
Commercial mortgage-backed securities		87,228		190		4,250		-		83,168
Residential mortgage-backed securities (Agency)		226,730		5,511		489		-		231,752
Residential mortgage-backed securities (Non-Agency)		21,277		92		796		-		20,573
Other asset-backed securities		33,880		619		1,099		-		33,400
Total fixed maturities available for sale		779,154		22,212		10,011		-		791,355
Short-term investments		41,072		-		-		-		41,072
Other investments		27,363		3,101		238		-		30,226
Total investments	$	847,589	$	25,313	$	10,249	$	-	$	862,653


(1) Represents the total other than temporary impairments ("OTTI") recognized in accumulated other comprehensive income (loss).

The amortized cost and fair value of fixed maturities available for sale at June 30, 2010, by contractual maturity, were as follows:

	Amortized		Fair
(dollar amounts in thousands)	Cost		Value

2010	$	21,758	$	21,983
2011-2014		159,987		169,900
2015-2019		107,582		115,207
2020 and thereafter		101,554		106,774
Mortgage-backed and other asset-backed securities		350,510		364,883
Total fixed maturities available for sale	$	741,391	$	778,747

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

For securities that were in an unrealized loss position, the length of time that such securities have been in an unrealized loss position, as measured by their month-end fair values, were as follows:

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollar amounts in millions)	Value		Loss		Value		Loss		Value		Loss

June 30, 2010

Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S. Government agencies	$	2.2	$	-	$	1.9	$	0.1	$	4.1	$	0.1
States, political subdivisions and foreign government securities		-		-		2.3		0.2		2.3		0.2
Corporate debt securities		5.2		0.8		3.3		0.2		8.5		1.0
Mortgage-backed and other asset-backed securities:
Commercial mortgage-backed securities		-		-		1.9		0.1		1.9		0.1
Residential mortgage-backed securities (Agency)		-		-		-		-		-		-
Residential mortgage-backed securities (Non-Agency)		-		-		9.2		0.3		9.2		0.3
Other asset-backed securities		-		-		6.0		0.6		6.0		0.6
Total fixed maturities available for sale		7.4		0.8		24.6		1.5		32.0		2.3
Other investments		0.6		-		0.4		0.1		1.0		0.1
Total investments	$	8.0	$	0.8	$	25.0	$	1.6	$	33.0	$	2.4

December 31, 2009

Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S. Government agencies	$	15.6	$	0.4	$	-	$	-	$	15.6	$	0.4
States, political subdivisions and foreign government securities		47.6		1.7		7.5		0.8		55.1		2.5
Corporate debt securities		11.1		0.1		5.3		0.3		16.4		0.4
Mortgage-backed and other asset-backed securities:
Commercial mortgage-backed securities		-		-		68.9		4.3		68.9		4.3
Residential mortgage-backed securities (Agency)		38.0		0.5		-		-		38.0		0.5
Residential mortgage-backed securities (Non-Agency)		-		-		11.6		0.8		11.6		0.8
Other asset-backed securities		-		-		10.7		1.1		10.7		1.1
Total fixed maturities available for sale		112.3		2.7		104.0		7.3		216.3		10.0
Other investments		5.5		0.1		4.8		0.1		10.3		0.2
Total investments	$	117.8	$	2.8	$	108.8	$	7.4	$	226.6	$	10.2

There were a total of 31 investment securities in an unrealized loss position at June 30, 2010. Of the 31 investment securities, 19 have been in an unrealized loss position for 12 months or more and have an average unrealized loss per security of approximately $82,000. Of these 19 securities, 8 are non-agency residential mortgage-backed securities that had a total fair value of $9.2 million, or 97% of their combined amortized cost, and unrealized losses of $296,000 at June 30, 2010.

Net investment income consisted of the following:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Fixed maturities	$	9,322		$	10,052		$	18,861		$	19,377
Short-term investments		8			82			20			223
Other		481			476			925			772
Gross investment income		9,811			10,610			19,806			20,372
Investment expenses		(595	)		(538	)		(1,109	)		(1,555	)
Interest on funds held		(482	)		(511	)		(843	)		(799	)
Net investment income	$	8,734		$	9,561		$	17,854		$	18,018

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Sales of investments:
Realized gains	$	1,167		$	694		$	1,659		$	5,396
Realized losses		(33	)		(137	)		(99	)		(181	)
Other than temporary impairments		-			(1,029	)		-			(4,938	)
Net realized investment gains (losses)	$	1,134		$	(472	)	$	1,560		$	277

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

As of June 30, 2010, the carrying amounts for the Company’s financial instruments approximated their estimated fair value. The Company primarily measures the fair value of fixed maturities, other investments and its debt based upon quoted market prices or by obtaining quotes from dealers. Certain financial instruments, specifically amounts relating to insurance and reinsurance contracts, are excluded from this disclosure.

The following is a description of the Company’s categorization of the fair value of its financial instruments:

Level 1 – Fair value measures are based on unadjusted quoted market prices in active markets for identical securities. The fair value of securities included in the Level 1 category were based on quoted prices that are readily and regularly available in an active market. The Company includes U.S. Treasury securities and its publicly traded mutual funds in the Level 1 category.

Level 2 – Fair value measures are based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of securities included in the Level 2 category were based on market values generated by external pricing models that vary by asset class and incorporate available trade, bid and other market information, as well as price quotes from other well-established independent market sources.

Level 3 – Fair value measures are based on inputs that are unobservable and significant to the overall fair value measurement, and may involve management judgment. Included in the Level 3 category are six privately placed construction bridge loans, one private placement whose principal is backed and guaranteed at maturity by discounted U.S. Government Sponsored Enterprise securities, two corporate bonds currently in default with an expected recovery value upon bankruptcy liquidation, and two promissory notes.

The following tables provide the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of June 30, 2010 and December 31, 2009. These assets and liabilities are measured on a recurring basis.

			Fair Value Measurements at June 30, 2010 Using
(dollar amounts in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)

Assets
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S. Government agencies	$	68,875	$	50,386	$	18,489	$	-
States, political subdivisions and foreign government securities		103,457		-		103,457		-
Corporate debt securities		241,532		-		238,250		3,282
Mortgage-backed and other asset-backed securities:
Commercial mortgage-backed securities		90,332		-		90,332		-
Residential mortgage-backed securities (Agency)		205,039		-		205,039		-
Residential mortgage-backed securities (Non-Agency)		18,000		-		18,000		-
Other asset-backed securities		51,512		-		50,515		997
Total fixed maturities available for sale		778,747		50,386		724,082		4,279
Other investments		33,701		9,710		19,491		4,500
Total	$	812,448	$	60,096	$	743,573	$	8,779

Liabilities
Accounts payable, accrued expenses and other liabilities - Interest rate swap contracts	$	1,779	$	-	$	1,779	$	-

			Fair Value Measurements at December 31, 2009 Using
(dollar amounts in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)

Assets
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S. Government agencies	$	81,107	$	50,487	$	30,620	$	-
States, political subdivisions and foreign government securities		96,874		-		96,874		-
Corporate debt securities		244,481		-		241,787		2,694
Mortgage-backed and other asset-backed securities:
Commercial mortgage-backed securities		83,168		-		83,168		-
Residential mortgage-backed securities (Agency)		231,752		-		231,752		-
Residential mortgage-backed securities (Non-Agency)		20,573		-		20,573		-
Other asset-backed securities		33,400		-		32,570		830
Total fixed maturities available for sale		791,355		50,487		737,344		3,524
Other investments		30,226		10,504		15,222		4,500
Total	$	821,581	$	60,991	$	752,566	$	8,024

Liabilities
Accounts payable, accrued expenses and other liabilities - Interest rate swap contracts	$	2,033	$	-	$	2,033	$	-

The following table provides a summary of changes in the fair value of Level 3 assets within the fair value hierarchy for the three and six months ended June 30, 2010 and 2009.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Fixed maturities available for sale:

Beginning balance	$	4,216		$	3,257		$	3,524		$	2,249
Maturities		(37	)		(1,000	)		(37	)		(1,000	)
Net unrealized gains included in other comprehensive income		100			161			167			869
Transfers into Level 3		-			-			625			300
Ending balance as of June 30,	$	4,279		$	2,418		$	4,279		$	2,418

6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

At June 30, 2010, the Company estimated that its liability for unpaid losses and loss adjustment expenses (“LAE”) for all insurance policies and reinsurance contracts issued by its insurance business was $1.3 billion. This amount included estimated losses from claims plus estimated expenses to settle claims. This estimate also included estimated amounts for losses occurring on or prior to June 30, 2010 that had not yet been reported to the Company.

Management believes that its unpaid losses and LAE are fairly stated at June 30, 2010. However, estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates, assumptions and judgments using data currently available. As additional experience and data become available regarding claims payment and reporting patterns, legal and legislative developments, judicial theories of liability, the impact of regulatory trends on benefit levels for both medical and indemnity payments, changes in social attitudes and economic conditions, the estimates are revised accordingly. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at June 30, 2010, then the rela ted adjustments could have a material adverse impact on the Company’s financial condition, results of operations and liquidity.

As previously disclosed, the Bureau of Financial Examinations of the Pennsylvania Insurance Department issued a report questioning the reasonableness of the Pooled Companies’ loss and loss adjustment expense reserves, which report was subsequently rejected by the Department. The Company believes its estimates of loss and loss adjustment expense reserves were reasonable and has provided the Department with several independent studies and industry data which support the Company’s position. The Company has not been able to resolve this matter with the Department. Based on recent discussions with representatives of the Department, the Company has concluded that in order to resolve the outstanding issues as a stand alone organization, it will need to engage in administrative and legal review process es which, irrespective of their ultimate outcome, will likely hinder the long-term and day-to-day continuity of the Company’s business operations and, in the interim, potentially have a negative impact on the financial ratings of its insurance subsidiaries. The Company cannot predict how long the processes would take or whether it would ultimately be successful. In the event that the Company is unsuccessful in its administrative and legal appeals, the Company could be required to take actions, such as increasing its loss and loss adjustment expense reserves, which would materially and adversely affect its business, financial condition and results of operations.

7. REINSURANCE

The Company follows the customary practice of reinsuring with other insurance companies a portion of the risks under the policies written by its insurance subsidiaries. The Company’s insurance subsidiaries maintain reinsurance to protect themselves against the severity of losses on individual claims and unusually serious occurrences in which a number of claims in the aggregate produce a significant loss. Although reinsurance does not discharge the insurance subsidiaries from their primary liabilities to their policyholders for losses insured under the insurance policies, it does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Premiums written:
Direct	$	108,236		$	108,994		$	278,966		$	270,959
Assumed		1,622			4,430			2,797			6,535
Ceded		(34,457	)		(33,122	)		(78,117	)		(79,214	)
Net	$	75,401		$	80,302		$	203,646		$	198,280
Premiums earned:
Direct	$	136,247		$	139,473		$	277,124		$	276,194
Assumed		2,253			4,642			3,957			7,206
Ceded		(38,469	)		(37,166	)		(77,554	)		(71,521	)
Net	$	100,031		$	106,949		$	203,527		$	211,879
Losses and LAE:
Direct	$	98,081		$	104,507		$	192,551		$	199,304
Assumed		1,735			3,714			3,047			5,765
Ceded		(29,476	)		(34,727	)		(50,188	)		(55,800	)
Net	$	70,340		$	73,494		$	145,410		$	149,269

Included in direct premiums written were amounts written under fronting arrangements of $9.5 million and $25.3 million during the three and six months ended June 30, 2010, and $9.7 million and $29.3 million during the three and six months ended June 30, 2009. Ceded premiums written included amounts written under fronting arrangements of $8.1 million and $21.5 million during the three and six months ended June 30, 2010, and $8.5 million and $25.2 million for the same periods last year.

8. COMMITMENTS AND CONTINGENCIES

The Company’s businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could materially 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.

In 2009, the Company entered into two capital support agreements in connection with the sale of its former run-off operations. Under the terms of the capital support agreements, the Company has agreed to indemnify the buyer in the event payments on claims in the run-off operations’ excess workers’ compensation and certain excess liability (occurrence) lines of business exceed certain pre-established limits. Such support is limited to an amount not to exceed $45.9 million.

Under the terms of the sale of one of the Company’s insurance subsidiaries in 1998, the Company has agreed to indemnify the buyer, up to a maximum of $15 million, if the actual claim payments in the aggregate exceed the estimated payments upon which the loss reserves of the former subsidiary were established. If the actual claim payments in the aggregate are less than the estimated payments upon which the loss reserves have been established, then the Company will participate in such favorable loss reserve development.

On June 15, 2010 and as amended on July 30, 2010, a purported derivative and class action lawsuit was filed by an alleged shareholder of PMA Capital naming PMA Capital, its Board of Directors, Old Republic International Corporation and OR New Corp. as defendants. The action was filed in the Court of Common Pleas of Montgomery County, Pennsylvania. The action is Alan R. Kahn and Wister S. Baisch v. Peter S. Burgess, et al., Case No. 2010-15690. The complaint claims to be a class action on behalf of all of PMA Capital’s shareholders, except the defendants and any of their affiliates. The complaint alleges that the merger consideration is inadequate, the proxy statement/prospectus filed in connection with the merger fails to disclose all material information about the merger, the directors of PMA Capital breached their fiduciary duties and failed to manage prudently the business of PMA Capital and Old Republic International Corporation and OR New Corp. aided and abetted the alleged breaches by PMA Capital’s directors. The complaint seeks several forms of relief, including monetary

damages and injunctive relief that would, if granted, prevent the merger from closing on the terms set forth in the merger agreement.

The defendants believe that the complaint has no merit and intend to vigorously defend against the action.

On June 29, 2010, a second complaint was filed by an alleged shareholder of PMA Capital naming PMA Capital and its Board of Directors as defendants. The complaint was filed in the Court of Common Pleas of Philadelphia, Pennsylvania. The action was Wister S. Baisch v. Peter S. Burgess, et al., Case ID 100603098. The matter was discontinued without prejudice by the plaintiff on July 29, 2010 and the plaintiff joined the above described matter.

In addition to the foregoing matters, the Company is 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, such 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. For additional information about the Company’s liability for unpaid losses and loss adjustment expenses, see Note 6. In addition, reinsurance recoverie s related to claims in litigation, net of the allowance for uncollectible reinsurance, are not expected to result in recoveries that differ from recorded receivables by amounts that would be material to the Company’s financial condition, results of operations or liquidity.

9. EARNINGS PER SHARE

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009

Denominator:
Basic shares		32,221,116		32,177,933		32,210,307		32,067,670
Dilutive effect of:
Stock options		16,860		-		12,081		-
Restricted stock		50,590		50,709		51,163		56,032
Convertible debt		-		2,749		2,749		2,749
Total diluted shares		32,288,566		32,231,391		32,276,300		32,126,451

The effects of 728,000 and 741,000 stock options were excluded from the computations of diluted earnings per share for the three and six months ended June 30, 2010, and the effects of 1.1 million stock options were excluded from the computations of diluted earnings per share for both the three and six months ended June 30, 2009, respectively, because they were anti-dilutive.

10. BUSINESS SEGMENTS

Operating income, which the Company defines as GAAP net income excluding net realized investment gains and losses and results from discontinued operations, is the financial performance measure used by the Company’s management and Board of Directors to evaluate and assess the results of its 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 measur e of the Company’s consolidated results of operations.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Revenues:
The PMA Insurance Group	$	109,009		$	116,593		$	221,868		$	230,137
Fee-based Business		21,217			19,522			42,702			39,248
Corporate and Other		(348	)		(463	)		(709	)		(1,023	)
Net realized investment gains (losses)		1,134			(472	)		1,560			277
Total revenues	$	131,012		$	135,180		$	265,421		$	268,639

Components of net income:
Pre-tax operating income (loss):
The PMA Insurance Group	$	6,998		$	9,965		$	21,265		$	25,152
Fee-based Business		1,209			1,525			3,514			3,538
Corporate and Other		(6,023	)		(5,167	)		(10,389	)		(10,167	)
Pre-tax operating income		2,184			6,323			14,390			18,523
Income tax expense		798			2,249			5,187			6,633
Operating income		1,386			4,074			9,203			11,890
Realized investment gains (losses) after tax		737			(307	)		1,014			180
Income from continuing operations		2,123			3,767			10,217			12,070
Loss from discontinued operations, net of tax		-			(1,165	)		-			(1,251	)
Net income	$	2,123		$	2,602		$	10,217		$	10,819

Net premiums earned by principal business segment were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

The PMA Insurance Group:
Workers' compensation	$	91,003		$	98,478		$	183,144		$	192,275
Commercial automobile		5,351			5,208			11,928			11,076
Commercial multi-peril		2,721			2,281			4,954			5,461
Other		1,110			1,124			3,793			3,357
Total net premiums earned		100,185			107,091			203,819			212,169
Corporate and Other		(154	)		(142	)		(292	)		(290	)
Consolidated net premiums earned	$	100,031		$	106,949		$	203,527		$	211,879

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

	As of		As of
	June 30,		December 31,
(dollar amounts in thousands)	2010		2009

The PMA Insurance Group	$	2,216,658	$	2,186,684
Fee-based Business		98,150		101,146
Corporate and Other (1)		57,200		74,909
Total assets	$	2,372,008	$	2,362,739

(1) Corporate and Other includes the effects of eliminating transactions between the business segments.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion of our financial condition as of June 30, 2010, compared with December 31, 2009, and our results of operations for the three and six months ended June 30, 2010, compared with the same periods last year. This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”), to which the reader is directed for additional information. The term “GAAP” refers to accounting principles generally accepted in the United States of America.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, which involve risks and uncertainties. See the “Cautionary Note Regarding Forward-Looking Statements” on page 27 for a list of factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Also, see “Item 1A. Risk Factors” in our 2009 Form 10-K for a further discussion of risks that could materially affect our business.

OVERVIEW

We are a holding company whose operating subsidiaries provide insurance and fee-based services. Our insurance products include workers’ compensation and other commercial property and casualty lines of insurance, which are marketed primarily in the eastern part of the United States. These products are written through The PMA Insurance Group, our property and casualty insurance segment which includes the operations of our principal insurance subsidiaries. Fee-based services include third party administrator, managing general agent and program administrator services. We also have a Corporate and Other segment, which primarily includes corporate expenses and debt service.

The PMA Insurance Group earns revenue and generates cash primarily by writing insurance policies and collecting insurance premiums. Direct premiums written at The PMA Insurance Group were $108.4 million in the second quarter of 2010, compared to $109.1 million in the same period last year. Direct premiums written in the first six months of 2010 were $279.3 million, compared to $271.2 million during the same period last year. Because time normally elapses between the receipt of premiums and the payment of claims and operating expenses, we are able to invest the available premiums and earn investment income. The types of payments that we make at The PMA Insurance Group are:

·	losses under insurance policies that we write;

·	loss adjustment expenses (“LAE”), which are the expenses of settling claims;

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

·	dividends and premium adjustments that are paid to policyholders of certain of our insurance products.

Losses and LAE are the most significant payment items affecting our insurance business and represent the most significant accounting estimates in our consolidated financial statements. We establish reserves for losses, which represent estimates of future amounts needed to pay claims with respect to insured events that have occurred, including events that have not been reported to us. We also establish reserves for LAE, which represent the estimated expenses of settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. Changes in reserve estimates may be caused by a wide range of factors, including inflation, changes in claims and litigation trends and legislative or regulatory changes. We would incur a charge to earnings in any period ou r reserves are increased.

Our Fee-based Business earns revenues and generates cash by providing claims adjusting, managed care and risk control services to customers and by placing insurance business with other third party insurance and reinsurance companies. Revenues for our Fee-based Business were $21.2 million in the second quarter of 2010, compared to $19.5 million in the second quarter last year. Revenues in the first six months of 2010 were $42.7 million, compared to $39.2 million for the same period last year. Payments made at this segment primarily consist of operating expenses, which include employee-related costs to operate the business, managed care vendor expenses and commissions paid to sub-producers.

On June 9, 2010, we entered into a merger agreement with Old Republic International Corporation (“Old Republic”) pursuant to which Old Republic will acquire all of our outstanding common stock. Old Republic will issue approximately 0.55 shares of their common stock in exchange for each of our outstanding common shares. The transaction is expected to close near the end of the third quarter, subject to approval by our shareholders and other customary closing conditions.

RESULTS OF OPERATIONS

Consolidated Results

We had net income of $2.1 million for the second quarter of 2010, compared to $2.6 million for the second quarter of 2009. Operating income, which we define as GAAP net income excluding net realized investment gains and losses and results from discontinued operations, was $1.4 million for the second quarter of 2010, compared to $4.1 million for the same period last year. For the first six months of 2010, we had net income of $10.2 million, compared to $10.8 million for the first half of 2009. Operating income for the first six months of 2010 was $9.2 million, compared to $11.9 million for the same period last year. The results in 2010 were adversely impacted by return premium adjustments in the second quarter, primarily from audits, and costs incurred in connection with our pending merger with O ld Republic.

In addition to providing consolidated net income, we also provide segment operating income (loss) because we believe that it is a meaningful measure of the profit or loss generated by our operating segments. Operating income 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 segment operating results and operating income to GAAP net income:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Components of net income:
Pre-tax operating income (loss):
The PMA Insurance Group	$	6,998		$	9,965		$	21,265		$	25,152
Fee-based Business		1,209			1,525			3,514			3,538
Corporate and Other		(6,023	)		(5,167	)		(10,389	)		(10,167	)
Pre-tax operating income		2,184			6,323			14,390			18,523
Income tax expense		798			2,249			5,187			6,633
Operating income		1,386			4,074			9,203			11,890
Net realized investment gains (losses) after tax		737			(307	)		1,014			180
Income from continuing operations		2,123			3,767			10,217			12,070
Loss from discontinued operations, net of tax		-			(1,165	)		-			(1,251	)
Net income	$	2,123		$	2,602		$	10,217		$	10,819

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

	Three Months Ended					Six Months Ended
	June 30,					June 30,
(dollar amounts in thousands)	2010		2009			2010		2009
Net realized investment gains (losses) after tax:
Sales of investments	$	737	$	362		$	1,014	$	3,390
Other than temporary impairments		-		(669	)		-		(3,210	)
Net realized investment gains (losses) after tax	$	737	$	(307	)	$	1,014	$	180

Consolidated revenues for the second quarter of 2010 were $131.0 million, compared to $135.2 million for the second quarter of 2009. Consolidated revenues for the first six months of 2010 were $265.4 million, compared to $268.6 million for the same period last year. The declines in consolidated revenues for both periods primarily reflected decreases in net premiums earned, partially offset by increases in claims service revenues and net realized investment gains. Net premiums earned were $100.0 million in the second quarter of 2010, compared to $106.9 million for the same period last year. For the

first six months of 2010, net premiums earned were $203.5 million, compared to $211.9 million in the first half of 2009. Claims service revenues were $18.4 million in the second quarter of 2010, compared to $16.8 million in the second quarter of 2009, and claims service revenues were $36.3 million in the first half of 2010, compared to $32.5 million for the same period last year.

Segment Results

The PMA Insurance Group

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Net premiums written	$	75,555		$	80,444		$	203,938		$	198,570

Net premiums earned	$	100,185		$	107,091		$	203,819		$	212,169
Net investment income		8,824			9,502			18,049			17,968
Total revenues		109,009			116,593			221,868			230,137

Losses and LAE		70,340			73,494			145,410			149,269
Acquisition and operating expenses		29,496			30,680			52,372			52,456
Dividends to policyholders		2,051			2,311			2,575			2,957
Total losses and expenses		101,887			106,485			200,357			204,682

Operating income before income
taxes and interest expense		7,122			10,108			21,511			25,455
Interest expense		124			143			246			303

Pre-tax operating income	$	6,998		$	9,965		$	21,265		$	25,152

Combined ratio		101.7	%		99.4	%		98.3	%		96.5	%
Less: net investment income ratio		8.8	%		8.9	%		8.9	%		8.5	%
Operating ratio		92.9	%		90.5	%		89.4	%		88.0	%

The PMA Insurance Group had pre-tax operating income of $7.0 million for the second quarter of 2010, compared to $10.0 million for the same period in 2009. Year-to-date pre-tax operating income was $21.3 million in 2010, compared to $25.2 million for the first half of 2009. Pre-tax operating income was reduced by $2.5 million in 2010 for the net impact of second quarter return premium adjustments.

We provide combined ratios and operating ratios for The PMA Insurance Group as we believe they are important measures for our insurance business. The “combined ratio” is a measure of property and casualty underwriting performance. The combined ratio computed on a GAAP basis is equal to losses and loss adjustment expenses, plus acquisition and operating expenses and policyholders’ dividends, all divided by net premiums earned. A combined ratio of less than 100% reflects an underwriting profit. Because time normally elapses between the receipt of premiums and the payment of claims and operating expenses, we invest the available premiums. Underwriting results do not include investment income from these funds. Given the long-tail nature of our liabilities, we believe that the operating ratios are also important in evaluating our business. The operating ratio is equal to the combined ratio less the net investment income ratio, which is computed by dividing net investment income by net premiums earned.

Premiums

We define direct premium production as direct premiums written, excluding fronting premiums and premium adjustments. The following is a reconciliation of our direct premium production to direct premiums written:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Direct premium production	$	107,038		$	102,212		$	264,130		$	249,579
Fronting premiums		9,457			9,677			25,252			29,299
Premium adjustments		(8,105	)		(2,753	)		(10,124	)		(7,629	)
Direct premiums written	$	108,390		$	109,136		$	279,258		$	271,249

The increase in direct premium production for the second quarter of 2010, compared to the second quarter of 2009, was mostly due to an increase in the amount of captive accounts business written in the period, while the year-to-date increase primarily reflected an increase in workers’ compensation premium production which mainly resulted from a higher retention rate in 2010. The increases in premium adjustments for both periods in 2010 primarily reflected increases in audit return premiums as payrolls on expiring workers’ compensation policies were less than expected.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Workers' compensation:
Direct premiums written	$	85,674		$	88,989		$	227,821		$	223,522
Premiums assumed		1,608			4,417			2,776			6,502
Premiums ceded		(20,851	)		(21,350	)		(48,871	)		(53,610	)
Net premiums written	$	66,431		$	72,056		$	181,726		$	176,414
Commercial lines:
Direct premiums written	$	22,716		$	20,147		$	51,437		$	47,727
Premiums assumed		14			13			21			33
Premiums ceded		(13,606	)		(11,772	)		(29,246	)		(25,604	)
Net premiums written	$	9,124		$	8,388		$	22,212		$	22,156
Total:
Direct premiums written	$	108,390		$	109,136		$	279,258		$	271,249
Premiums assumed		1,622			4,430			2,797			6,535
Premiums ceded		(34,457	)		(33,122	)		(78,117	)		(79,214	)
Net premiums written	$	75,555		$	80,444		$	203,938		$	198,570

Direct workers’ compensation premiums written were $85.7 million in the second quarter of 2010, compared to $89.0 million during the same period last year. The decrease for the quarter was primarily due to return premium adjustments related to premium audits. Direct workers’ compensation premiums written during the first six months of 2010 were $227.8 million, compared to $223.5 million during the first half of 2009. The year-to-date increase was primarily due to an increase in workers’ compensation premium production of $10.2 million, which was partially offset by lower fronting premiums and return premium adjustments.

Direct premium production included $19.7 million of new workers’ compensation business in the second quarter of 2010, compared to $23.1 million in the second quarter of 2009, and $50.1 million in the first half of 2010, compared to $47.8 million during the same period last year. Pricing on our rate-sensitive workers’ compensation business increased 1% during the first six months of 2010, compared to a 3% decrease during the first six months of 2009. Our renewal retention rates on existing workers’ compensation accounts increased to 79% for the second quarter and 81% for the first half of 2010,

compared to 78% and 79% for the same periods in 2009. During the first six months of 2010, our retention rates and new business for workers’ compensation were higher for business written on a loss-sensitive basis than for business written on a rate-sensitive basis, as we continue to emphasize loss-sensitive business.

Direct premiums written for commercial lines of business other than workers’ compensation, such as commercial auto, general liability, umbrella, multi-peril and commercial property lines (collectively, “Commercial Lines”), were $22.7 million in the second quarter of 2010, compared to $20.1 million for the same period last year. For the first six months of the year, direct premiums written for Commercial Lines were $51.4 million in 2010, compared to $47.7 million in 2009. New business was $5.3 million in the second quarter of 2010, compared to $10.3 million in the second quarter of 2009, and new business for the first six months in 2010 was $9.4 million, compared to $23.7 million for the same period last year. The decreases in new business for both periods related primarily to lower amount s of new captive business. Our renewal retention rates on existing Commercial Lines accounts were 79% for the second quarter and 85% for the first six months of 2010, compared to 81% and 85% for the same periods in 2009.

Total premiums assumed decreased by $2.8 million and $3.7 million during the second quarter and first six months of 2010, compared to the same periods last year. The declines in both periods were primarily due to a decrease in the involuntary residual market business assigned to us. Companies that write premiums in certain states generally must share in the risk of insuring entities that cannot obtain insurance in the voluntary market. Typically, an insurer’s assigned share of this residual market business lags its market share in terms of direct premiums in the voluntary market. These assignments are accomplished either by direct assignment or by assumption from pools of residual market business.

Premiums ceded on workers’ compensation business decreased by $499,000 and $4.7 million during the second quarter and first six months of 2010, compared to the same periods in 2009. The year-to-date decline was primarily due to a lower amount of premiums ceded under our fronting arrangements. Premiums ceded on Commercial Lines business increased by $1.8 million and $3.6 million during the second quarter and first six months of 2010, compared to the same periods last year, mainly resulting from increases in the amount of Commercial Lines business sold to captive accounts, where a substantial portion of the direct premiums are ceded.

In total, net premiums written decreased 6% during the second quarter of 2010, compared to the same period last year. The decrease for the quarter was mainly due to the impact of return premium adjustments and, to a lesser extent, lower assumed premiums. Year-to-date net premiums written in 2010 increased 3%, compared to the first half of 2009. The increase during the first six months of 2010 primarily reflected the increase in direct premium production for the period, partially offset by the impact of return premium adjustments and lower assumed premiums.

Net premiums earned decreased 6% during the second quarter and 4% for the first six months of 2010, compared to the same periods last year. The decreases for both periods primarily reflect the impact of return premium adjustments and lower assumed premiums. 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. In periods of increasing premium writings, the dollar change in premiums written will typically be greater than the change in premiums earned. Direct premiums are earned principally on a pro rata basis over the terms of the policies. However, with respect to policies that provide for premium adjustments, such as experience or exposure-based adjustments, t he premium adjustments may be made subsequent to the end of the policy’s coverage period and will be recorded as earned premium in the period in which the adjustment is made.

Losses and Expenses

The components of the GAAP combined ratios were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Loss and LAE ratio		70.2	%		68.6	%		71.3	%		70.4	%
Expense ratio:
Acquisition expense		17.6	%		18.2	%		17.5	%		17.3	%
Operating expense		11.9	%		10.4	%		8.2	%		7.4	%
Total expense ratio		29.5	%		28.6	%		25.7	%		24.7	%
Policyholders' dividend ratio		2.0	%		2.2	%		1.3	%		1.4	%
Combined ratio		101.7	%		99.4	%		98.3	%		96.5	%

The loss and LAE ratios increased by 1.6 points in the second quarter and by 0.9 points in the first six months of 2010, compared to the same periods last year. Pricing and payroll increases for rate-sensitive workers’ compensation business were slightly below overall estimated loss trends. Losses and LAE in 2010 also included expenses incurred on a new claims system which was implemented in both our insurance and fee-based businesses. We estimate our medical cost inflation to be 6.0% in the first six months of 2010 and 2009.

The total expense ratios increased by 0.9 points in the second quarter and by 1.0 point in the first six months of 2010, compared to the same periods last year, primarily due to higher operating expenses. Operating expenses increased $718,000 in the second quarter and $921,000 in the first six months of 2010, compared to the same periods in 2009, mainly due to higher consulting and employee-related costs.

Net Investment Income

Net investment income was $8.8 million for the second quarter of 2010, compared to $9.5 million for the same period a year ago. The decrease in the quarter was due primarily to lower yields on our investment portfolio, which were partially offset by an increase in average invested assets. Year-to-date net investment income was $18.0 million in both 2010 and 2009.

Fee-based Business

Summarized financial results of the Fee-based Business were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(dollar amounts in thousands)	2010		2009		2010		2009

Claims service revenues	$	18,394	$	17,122	$	36,289	$	33,117
Commission income		2,377		2,132		5,536		5,607
Net investment income		61		101		104		187
Other revenues		385		167		773		337
Total revenues		21,217		19,522		42,702		39,248

Operating expenses		20,008		17,997		39,188		35,710

Pre-tax operating income	$	1,209	$	1,525	$	3,514	$	3,538

Pre-tax operating income for the Fee-based Business was $1.2 million in the second quarter of 2010, compared to $1.5 million in the second quarter of 2009. Year-to-date pre-tax operating income was $3.5 million in both 2010 and 2009. The decrease in return on revenue in 2010 was primarily due to higher expenses at our agency business.

Revenues

Revenues for our Fee-based Business were $21.2 million during the second quarter of 2010, compared to $19.5 million for the same period in 2009, and revenues for the first six months of 2010 were $42.7 million, compared to $39.2 million for the first half of 2009. The increases in both periods were primarily due to increases in claims service revenues of $1.3 million and $3.2 million for the second quarter and first six months of 2010. The growth in claims service revenues primarily reflected increases in managed care revenues, mainly relating to services provided to self-insured clients. Managed care services include medical bill review, access to preferred provider networks, pharmacy discounts and nurse case management services.

Expenses

Operating expenses increased to $20.0 million in the second quarter of 2010, up from $18.0 million in the second quarter of 2009. Year-to-date operating expenses increased to $39.2 million, compared to $35.7 million during the same period last year. The increases in operating expenses primarily reflected additional staffing and managed care expenses incurred in connection with the growth in revenues.

Corporate and Other

The Corporate and Other segment primarily includes corporate expenses and debt service. Corporate and Other had net expenses of $6.0 million during the second quarter of 2010, compared to $5.2 million in the second quarter of 2009. Net expenses were $10.4 million during the first six months of 2010, compared to $10.2 million during the first six months of 2009. The increases in net expenses for both periods in 2010 were mainly due to costs incurred related to the pending merger transaction with Old Republic that were partially offset by lower stock-based compensation expense and certain 2009 intercompany transactions with our former run-off operations which were eliminated in the Corporate and Other segment. The costs incurred during the second quarter of 2010 related to the merger were $1.6 mil lion.

Loss Reserves

At June 30, 2010, we estimated that under all insurance policies and reinsurance contracts issued by our insurance business, our liability for unpaid losses and LAE for all events that occurred as of June 30, 2010 was $1.3 billion. This amount included estimated losses from claims plus estimated expenses to settle claims. Our estimate also included estimated amounts for losses occurring on or prior to June 30, 2010 that had not yet been reported to us.

Unpaid losses and LAE reflect management’s best estimate of future amounts needed to pay claims and related settlement costs with respect to insured events which have occurred, including events that have not been reported to us. Due to the “long-tail” nature of a significant portion of our business, in many cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that loss. We define long-tail business as those lines of business in which a majority of coverage involves average loss payment lags of several years beyond the expiration of the policy. Our primary long-tail line is our workers’ compensation business. This business is subject to more unforese en development than shorter tailed lines of business. As part of the process for determining our unpaid losses and LAE, various actuarial models are used that analyze historical data and consider the impact of current developments and trends, such as trends in claims severity and frequency and claims settlement trends. Also considered are legal developments, regulatory trends, legislative developments, changes in social attitudes and economic conditions.

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. We believe that our reserves for asbestos and environmental claims have been appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies. However, the potential exists for changes in federal and state standards for clean-up and liability and changing interpretations by courts resulting from the resolution of coverage issues. Coverage issues in cases in which we are a party include disputes concerning proof of insurance coverage, questions of allocation of liability and damages among the insured and participating insurers, assertions that asbestos claims are not products or completed operations claims subject to an aggregate limit and contentions that more than a single occurrence exists for purposes of determining the available coverage. Therefore, our ultimate exposure for these claims may vary significantly from the amounts currently recorded, resulting in potential future adjustments that could be material to our financial condition, results of operations and liquidity.

We believe that our unpaid losses and LAE are fairly stated at June 30, 2010. However, estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates, assumptions and judgments using data currently available. As additional experience and data become available regarding claims payment and reporting patterns, legal and legislative developments, judicial theories of liability, the impact of regulatory trends on benefit levels for both medical and indemnity payments, changes in social attitudes and economic conditions, the estimates are revised accordingly. If our ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at June 30, 2010, then the related adjustments could hav e a material adverse impact on our financial condition, results of operations and liquidity.

As previously disclosed, the Bureau of Financial Examinations of the Pennsylvania Insurance Department issued a report questioning the reasonableness of the Pooled Companies’ loss and loss adjustment expense reserves, which report was subsequently rejected by the Department. As directed by the Department, the examiner reopened the examination to obtain additional data, documentation and information from us relative to our insurance subsidiaries’ December 31, 2007 reserves. We provided the Department with several independent studies performed subsequent to December 31, 2007, as well as industry and other information in support of our position. Notwithstanding this additional support and information, we have not been able to achieve a resolution of these matters. After recent discussio ns with the Department, we concluded that we could only resolve these matters as a stand alone organization by engaging in administrative and legal review processes which, irrespective of their ultimate outcome, would likely hinder the long-term and day-to-day continuity of our business operations and, in the interim, potentially have a negative impact on our financial ratings. These discussions have also led us to conclude that the merger with Old Republic, a company with greater capitalization, resources and financial flexibility, would likely provide us with the necessary financial wherewithal to enhance our own financial resources and lead to a resolution of the outstanding regulatory matters related to the Department’s year-end 2007 examination.

If the merger is not completed, our ability to reach a resolution with the Pennsylvania Insurance Department with respect to the Department’s examination of our insurance subsidiaries as of December 31, 2007 will be adversely impacted. We cannot predict how long the administrative and legal review processes would take or whether they would ultimately be successful. In the event that we were unsuccessful in our administrative and legal appeals, we could be required to take actions, such as increasing our loss and loss adjustment expense reserves, which would materially and adversely affect our business, financial condition and results of operations.

For additional discussion of loss reserves and reinsurance, see discussion beginning on pages 10, 42 and 54 of our 2009 Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of an entity’s ability to secure sufficient cash to meet its contractual obligations and operating needs. Our insurance operations generate cash by writing insurance policies and collecting premiums. The cash generated is used to pay losses and LAE as well as acquisition and operating expenses. Any excess cash is invested and earns investment income. Our fee-based businesses generate cash by providing services to clients. The cash generated is used to pay operating expenses, including commissions to sub-producers.

Net cash flows used in operating activities were $30.1 million during the first six months of 2010, compared to $26.8 million during the first six months of 2009. The decrease in net operating cash flows was primarily due to a decrease in cash flows from underwriting activities at The PMA Insurance Group, resulting from an increase in net paid losses and LAE and, to a lesser extent, lower net premium collections. Net premium collections were adversely impacted by higher return premium adjustments in 2010. Net operating cash flows in the first six months of 2009 included net cash flows used in operating activities from discontinued operations of $40.4 million that did not recur in 2010 following the sale of the discontinued operations.

At the holding company level, our primary sources of liquidity are dividends and tax payments received from subsidiaries and, when available, capital raising activities. Dividends payable by our regulated insurance subsidiaries are limited by applicable state regulations and require prior notice to the Pennsylvania Insurance Department. Capital raising activities are subject to economic and market conditions and may not provide satisfactory liquidity, especially at times of severe disruptions or dislocations in the capital markets. Given the recent economic climate and the fact that our shares trade at a considerable discount to their book value, we have had limited access to additional capital from the capital markets. We utilize cash to pay debt obligations, including interest costs, taxes to the federal government, corporate expenses and, at the discretion of our Board of Directors, dividends to shareholders. At June 30, 2010, we had $23.8 million of cash and short-term investments at our holding company and non-regulated subsidiaries, which we believe combined with payments from our subsidiaries and other potential capital sources, will continue to provide us with sufficient funds to meet our foreseeable

ongoing expenses, interest payments and other obligations. We do not currently pay dividends on our Class A Common Stock.

Our principal insurance subsidiaries which comprise The PMA Insurance Group (the “Pooled Companies”) have the ability to pay $46.1 million in dividends to the holding company during 2010 without requesting the prior approval of the Pennsylvania Insurance Department. In considering their future dividend policy, the Pooled Companies will consider, among other things, applicable regulatory constraints and the impact of paying dividends on their financial strength ratings. The Pooled Companies had statutory surplus of $430.8 million as of June 30, 2010, including $10.0 million relating to surplus notes.

Net tax payments received from subsidiaries were $6.8 million during the second quarter of 2010, compared to $3.3 million during the same period last year. Net tax payments received from subsidiaries during the first six months of 2010 were $9.3 million, compared to $7.2 million for the same period in 2009.

As of June 30, 2010, our total outstanding debt was $132.4 million, compared to $143.4 million at December 31, 2009. During the first six months of 2010, we paid $9.0 million in scheduled principal payments on notes to our former run-off operations which included $5.0 million in June 2010. Our final principal payment of $5.0 million on the remaining note is payable in June 2011. The next scheduled maturity on our debt is not until 2018. We incurred interest expense of $2.5 million and $5.0 million during the second quarter and first six months of 2010 and 2009. We paid interest of $2.4 million during the second quarter of 2010, compared to $2.5 million during the same period last year. We paid $4.9 million in interest through the first six months of 2010, compared to $5.0 m illion during the first six months of 2009. We expect to pay interest of $5 million for the remainder of 2010.

Liquidity requirements are met primarily through operating cash flows and by maintaining a portfolio with maturities that reflect our estimates of future cash flow requirements. Our investment strategy includes setting guidelines for asset quality standards, allocating assets among investment types and issuers, and other relevant criteria for our portfolio. In addition, invested asset cash flows, which include both current interest income received and investment maturities, are structured to consider projected liability cash flows of loss reserve payouts that are based on actuarial models. Property and casualty claim demands are somewhat unpredictable in nature and require liquidity from the underlying invested assets. Our invested assets are structured to emphasize current investment income whi le maintaining appropriate portfolio quality and diversity.

Investment grade fixed income securities, substantially all of which are publicly traded, constitute substantially all of our invested assets. The fair values of these investments are subject to fluctuations in interest rates. Although we have structured our investment portfolio to provide an appropriate matching of maturities with anticipated claims payments, if we decide or are required in the future to sell securities in a rising interest rate environment, then we would expect to incur losses from such sales. As of June 30, 2010, the duration of our investments that support the insurance reserves was 3.9 years and the duration of our insurance reserves was 3.6 years. The difference in the duration of our investments and our insurance reserves reflects our decision to maintain longer asse t duration in order to enhance overall yield, while maintaining a high overall credit quality.

INVESTMENTS

At June 30, 2010, our investments were carried at a fair value of $838.3 million and had a cost or amortized cost of $797.7 million. The average credit quality of our portfolio was AA. All but nine of our fixed income securities, which had an aggregate fair value of $4.3 million, were publicly traded and rated by at least one nationally recognized credit rating agency. At June 30, 2010, all but ten of the publicly traded securities in our fixed income portfolio were of investment grade credit quality. The ten below investment grade securities had an aggregate fair value of $10.2 million and a net unrealized gain of approximately $900,000.

At June 30, 2010, $364.9 million, or 44% of our investment portfolio, was invested in mortgage-backed and other asset-backed securities and collateralized mortgage obligations (“structured securities”). Of this $364.9 million, $90.3 million, or 25% of our structured securities, were commercial mortgage-backed securities (“CMBS”). The CMBS had a net unrealized gain of $3.4 million at June 30, 2010. All of the CMBS in our portfolio were either the senior or super senior tranches of their respective mortgage pools, and had a weighted average life of 5.2 years and an average credit quality of AAA-. During the first six months of 2010, the CMBS generated cash flows which totaled $299,000 of principal paydowns from their underlying mortgages. On a weighted average ba sis, the CMBS we hold have a current credit support of 29% of the par of the securities, and 10% of the underlying pool collateral is delinquent.

We hold $205.0 million, or 56% of our structured securities, of residential mortgage-backed pools and collateralized mortgage obligations issued by either U.S. Government Agencies or U.S. Government Sponsored Enterprises (“GSE”).

We also hold $9.0 million, or 2% of our structured securities, in residential mortgage-backed securities whose underlying collateral was either a sub-prime or alternative A mortgage. The $9.0 million, which includes $7.4 million of alternative A collateral and $1.6 million of sub-prime collateral, had an estimated weighted average life of 3.5 years, with $639,000 of that balance expected to pay off within one year, and an average credit quality of AA+. Based upon the quality of the collateral and short average life of these securities, we do not expect to incur material losses of principal from these securities.

The investment portfolio also held securities with a fair value of $25.6 million, or 3% of our investment portfolio, whose credit ratings were enhanced by various financial guaranty insurers. Of the credit enhanced securities, $6.9 million were asset-backed securities with a weighted average life of 1.3 years and whose underlying collateral had an imputed internal rating of AA-. We do not have any wrapped asset-backed security collateralized debt obligation exposures.

The net unrealized gain on our investments at June 30, 2010 was $40.6 million, or 5% of the cost or amortized cost basis. The net unrealized gain included gross unrealized gains of $43.0 million and gross unrealized losses of $2.4 million.

For all but nine fixed income securities and two other investments, which were carried at fair values of $4.3 million and $4.5 million at June 30, 2010, respectively, we determined the fair value of fixed income securities and other investments from prices obtained in the public markets. Prices obtained in the public market include quoted prices that are readily and regularly available in an active market, market values generated by external pricing models that vary by asset class and incorporate available trade, bid and other market information, as well as price quotes from other well-established independent market sources. For the 11 investments whose prices were not obtained from the public markets, which included six privately placed construction bridge loans, one private placement whose principal is backed and g uaranteed at maturity by discounted GSE securities, two corporate bonds currently in default with an expected recovery value upon bankruptcy liquidation, and two promissory notes, we generally use discounted cash flow valuation models to approximate fair value.

Net realized investment gains (losses) were comprised of the following:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollar amounts in thousands)	2010			2009			2010			2009

Sales of investments:
Realized gains	$	1,167		$	694		$	1,659		$	5,396
Realized losses		(33	)		(137	)		(99	)		(181	)
Other than temporary impairments		-			(1,029	)		-			(4,938	)
Net realized investment gains (losses)	$	1,134		$	(472	)	$	1,560		$	277

The gross realized gains on sales of investments during the first six months of 2009 were generated in order to minimize the statutory capital charge associated with the reduction of our CMBS exposure.

As of June 30, 2010, our investment portfolio had gross unrealized losses of $2.4 million. For securities that were in an unrealized loss position at June 30, 2010, the length of time that such securities were in an unrealized loss position, as measured by their month-end fair value, was as follows:

									Percentage
					Cost or		Gross		Fair Value to
	Number of		Fair		Amortized		Unrealized		Cost or
(dollar amounts in millions)	Securities		Value		Cost		Loss		Amortized Cost

Fixed maturities available for sale
Less than 6 months		6	$	5.2	$	6.0	$	0.8		87	%
12 months or more		17		22.7		24.1		1.4		94	%
Subtotal		23		27.9		30.1		2.2		93	%
U.S. Treasury and Agency securities		4		4.1		4.2		0.1		98	%
Total fixed maturities available for sale		27	$	32.0	$	34.3	$	2.3		93	%

Other investments
Less than 6 months		3	$	0.6	$	0.6	$	-		92	%
12 months or more		1		0.4		0.5		0.1		80	%
Total other investments		4	$	1.0	$	1.1	$	0.1		87	%

Total investments		31	$	33.0	$	35.4	$	2.4		93	%

The 17 fixed income securities that have been in an unrealized loss position for 12 months or more have an average unrealized loss per security of approximately $81,000. Of these 17 securities, 8 are non-agency residential mortgage-backed securities that had a total fair value of $9.2 million, or 97% of their combined amortized cost, and unrealized losses of $296,000 at June 30, 2010.

The contractual maturities of fixed maturities available for sale in an unrealized loss position at June 30, 2010 were as follows:

					Gross		Percentage
	Fair		Amortized		Unrealized		Fair Value to
(dollar amounts in millions)	Value		Cost		Loss		Amortized Cost

2010	$	-	$	-	$	-		0	%
2011-2014		2.1		2.3		0.2		91	%
2015-2019		3.0		3.6		0.6		83	%
2020 and thereafter		5.7		6.1		0.4		93	%
Non-agency mortgage and other asset-backed securities		17.1		18.1		1.0		94	%
Subtotal		27.9		30.1		2.2		93	%
U.S. Treasury and Agency securities		4.1		4.2		0.1		98	%
Total	$	32.0	$	34.3	$	2.3		93	%

OTHER MATTERS

Comparison of SAP and GAAP Results

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

Recent Accounting Guidance

Refer to Note 2-C to the Unaudited Condensed Consolidated Financial Statements for information regarding recent accounting guidance that impacts us.

Critical Accounting Estimates

Our critical accounting estimates can be found beginning on page 54 of our 2009 Form 10-K.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 with respect to the Company’s business, financial condition and results of operations and the plans and objectives of its management. Forward-looking statements can generally be identified by use of forward-looking terminology such as “may,” “will,” “plan,” “expect,” “intend,” “anticipate,” and “believe.” These forward-looking statements may include estimates, assumptions or projections and are based on currently available financial, industry, competitive and economic data and our current operating plans. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements.

The factors that could cause actual results to differ materially from those in the forward-looking statements, include, but are not limited to:

·	adequacy of reserves for claim liabilities, including reserves for potential environmental and asbestos claims;

·	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;

·	judicial, legislative and regulatory changes that affect the cost of, or demand for, our products or otherwise affect our ability to conduct business, including any action with respect to our industry or business taken by state insurance departments or the federal government;

·	regulatory actions by state insurance departments affecting the operation of our business or our financial condition, including actions relating to licensing, examinations, reserving, rate changes, investments, insurance policy terms and conditions and state based assessments;

·	if the merger with Old Republic is not completed, the Company’s ability to reach a resolution with the Pennsylvania Insurance Department with respect to the Department’s examination of the Company’s insurance subsidiaries will be adversely impacted;

·	adequacy and collectibility of reinsurance that we purchase;

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

·	the effects of emerging claims and coverage issues, including changing judicial interpretations of available coverage for certain insured losses;

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

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

·	cyclical changes in the insurance industry;

·	the success with which our independent agents and brokers sell our products and our ability to collect payments from them;

·	our ability to effectively compete in the highly competitive property and casualty insurance industry;

·	our concentration in workers’ compensation insurance, which makes us particularly susceptible to adverse changes in that industry segment;

·	adverse economic or regulatory developments in the eastern part of the United States, particularly those affecting Pennsylvania, New York and New Jersey;

·	fluctuations in interest rates and other events that can adversely impact our investment portfolio;

·	disruptions in the financial markets that affect the value of our investment portfolio and our ability to sell our investments;

·	our ability to attract and retain qualified management personnel;

·	our ability to repay our indebtedness and meet our other contractual and financial obligations;

·	our ability to raise additional capital on financially favorable terms when required;

·	restrictions on our operations contained in any document governing future or existing indebtedness;

·	statutory requirements and rating agency expectations that limit our ability to receive dividends from our insurance subsidiaries;

·	the impact of future results on the value of recorded goodwill and other intangible assets and the recoverability of our deferred tax asset;

·	limitations on our ability to use our deferred tax assets in the event we experience an ownership change;

·	the outcome of any litigation against us;

·	provisions in our charter documents that can inhibit a change in control of our company; and

·	other risks or uncertainties disclosed from time to time in our filings with the Securities and Exchange Commission and, in particular, our Annual Report on Form 10-K for the year ended December 31, 2009.

You should not place undue reliance on any forward-looking statements that we make. All forward-looking statements made in this Form 10-Q reflect our views on the date of this report. 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 Form 10-Q to reflect circumstances after the date of this report or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

There has been no material change regarding our market risk position from the information provided on page 61 of our 2009 Form 10-K.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, we, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President and Interim Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information we are required to disclose in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms specified by the U.S. Securities and Exchange Commission and is accumulated and communicated to our management, including our Chief Executive Officer and our Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our management, including the Chief Executive Officer and the Interim Chief Financial Officer, conducted an evaluation of the internal control over financial reporting, as required by Rule 13a-15(d) of the Exchange Act, to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer noted that during the fourth quarter of 2009 the Claims department piloted a new claims system and, in 2010, commenced the transition of al l claims within our insurance and fee-based businesses to the new system. This transition was completed for the majority of our branch offices during the first quarter of 2010 and, therefore, became a significant system to our business. There were no other changes that occurred during the six months ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings.

The defendants believe that the complaint has no merit and intend to vigorously defend against the action.

Item 1A. Risk Factors.

The announcement and pendency of the merger among PMA Capital Corporation, Old Republic International Corporation and OR New Corp. could have an adverse effect on the Company’s stock price, business, financial condition, results of operations or business prospects.

The announcement and pendency of the merger could disrupt the Company’s businesses in the following ways, among others:

·	employees may experience uncertainty regarding their future roles with the combined company, which might adversely affect the Company’s ability to retain, recruit and motivate key personnel;

the attention of the Company’s management may be directed toward the completion of the merger and transaction-related considerations and may be diverted from the day-to-day business operations of the company, and matters related to the merger may require commitments of time and resources that could otherwise have been devoted to other opportunities that might have been beneficial to the Company; and

third parties with business relationships with Old Republic or the Company may seek to terminate and/or renegotiate their relationships with Old Republic or the Company as a result of the merger, whether pursuant to the terms of their existing agreements with the Company and/or Old Republic or otherwise.

The merger agreement also restricts the Company from engaging in certain actions and taking certain actions without Old Republic’s approval, which could prevent the Company from pursuing opportunities that may arise prior to the closing of the merger or termination of the merger agreement.

Any of these matters could adversely affect the Company’s business, financial condition, results of operations, prospects and stock price.

Failure to complete the merger could negatively affect the stock price and the future business and financial results of PMA Capital Corporation.

If the merger is not completed, the ongoing business of the Company may be adversely affected and the Company will be subject to several risks, including the following:

·	having to pay certain significant costs relating to the merger without receiving the benefits of the merger;

·	the attention of management of the Company will have been diverted to the merger instead of the Company’s own operations and pursuit of other opportunities that could have been beneficial to the Company; and

·	resulting negative customer perception could adversely affect the ability of the Company to compete for, or to win, new and renewal business in the marketplace.

If the merger is not completed, the Company’s ability to reach a resolution with the Pennsylvania Insurance Department with respect to the Department’s examination of the Company’s insurance subsidiaries as of December 31, 2007 will be adversely impacted. As previously disclosed, the Bureau of Financial Examinations of the Pennsylvania Insurance Department issued a report questioning the reasonableness of the Pooled Companies’ loss and loss adjustment expense reserves, which report was subsequently rejected by the Department. Based on recent discussions with representatives of the Department, in order to resolve the outstanding issues as a stand alone organization, the Company will need to engage in administrative and legal review processes which, irrespective of their ultimate outcome, will l ikely hinder the long-term and day-to-day continuity of the Company’s business operations and, in the interim, potentially have a negative impact on the financial ratings of its insurance subsidiaries. The Company cannot predict how long the processes would take or whether it would ultimately be successful. In the event that the Company is unsuccessful in its administrative and legal appeals, the Company could be required to take actions, such as increasing its loss and loss adjustment expense reserves, that would materially and adversely affect its business, financial condition and results of operations.

PMA Capital Corporation will incur substantial transaction and merger-related costs in connection with the merger.

The Company expects to incur a number of substantial non-recurring transaction fees and other costs associated with the merger. During the second quarter of 2010, the Company incurred expenses of approximately $1.6 million related to the merger. Additional unanticipated costs may be incurred in the integration of the businesses of Old Republic and the Company. In the event the merger agreement is terminated, under certain circumstances the Company may be required to pay Old Republic a termination fee of $8 million or reimburse Old Republic for expenses incurred by it in connection with the merger in an amount up to $2 million.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchase of Equity Securities

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs
4/1/10-4/30/10		919	$	6.33		-		-
6/1/10-6/30/10		1,375		6.73		-		-
Total		2,294	$	6.57

(1)

Transactions represent shares of Class A Common Stock withheld by the Company, at the election of employees, pursuant to the Company’s 2007 Omnibus Incentive Compensation Plan, to satisfy such employees’ tax obligations upon vesting of restricted stock awards. The price per share equals the closing price of the Company’s Class A Common Stock on the vesting date.

Item 6. Exhibits.

The Exhibits are listed in the Exhibit Index on page 32.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PMA CAPITAL CORPORATION


Date: August 9, 2010	By: /s/ John M. Cochrane
	John M. Cochrane
	Senior Vice President and
	Interim Chief Financial Officer
	(Principal Financial Officer)

Exhibit Index

Exhibit No.	Description of Exhibit	Method of Filing

(2)	Plan of acquisition, reorganization, arrangement, liquidation or succession:

	Agreement and Plan of Merger among PMA Capital Corporation, Old Republic International Corporation and OR New Corp. dated June 9, 2010.	Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on June 10, 2010 and incorporated herein by reference.

(4)	Instruments defining the rights of security holders, including indentures:

	Amendment No. 1 to Section 382 Rights Agreement between PMA Capital Corporation and American Stock Transfer & Trust Company, LLC.	Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 6, 2010 and incorporated herein by reference.

(31)	Rule 13a - 14(a)/15d - 14 (a) Certifications:
31.1	Certification of Chief Executive Officer pursuant to Rule 13a -14(a) of the Securities Exchange Act of 1934.	Filed herewith.

31.2	Certification of Chief Financial Officer pursuant to Rule 13a -14(a) of the Securities Exchange Act of 1934.	Filed herewith.

(32)	Section 1350 Certifications:

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Furnished herewith.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Furnished herewith.

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Pma Capital (PMACA) Inactive 10-Q2010 Q2 Quarterly report

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