The following is a discussion of our financial condition as of September 30, 2008, compared with December 31, 2007, and our results of operations for the three and nine months ended September 30, 2008, compared with the same periods last year. This discussion should be read in conjunction with 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, 2007 (the "2007 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.

In the fourth quarter of 2007, we reported the results of our Run-off Operations as discontinued operations. On March 28, 2008, we entered into a stock purchase agreement to sell this business. The sale is currently pending regulatory approval from the Pennsylvania Insurance Department. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets" ("SFAS 144"), the Balance Sheets have been presented with the gross assets and liabilities of discontinued operations in separate lines and the Statements of Operations have been presented with the net results from discontinued operations, shown after the results from continuing operations. For comparative purposes, we have reclassified our prior period financial presentation to conform with these changes.

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements, which involve inherent risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. These statements are based upon current estimates, assumptions and projections. Actual results may differ materially from those projected in such forward-looking statements, and therefore, you should not place undue reliance on them. See the Cautionary Statements on page 33 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 2007 Form 10-K for a further discussion of risks that could materially affect our business.

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 business segment. Fee-based services include third party administrator ("TPA"), managing general agent and program administrator services. Our Fee-based Business segment consists of the results of PMA Management Corp., Midlands Management Corporation ("Midlands"), and PMA Management Corp. of New England, Inc. 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. Midlands is an Oklahoma City-based managing general agent, program administrator and provider of TPA services, which we acquired on October 1, 2007. On June 30, 2008, we acquired PMA Management Corp. of New England, Inc. (formerly Webster Risk Services), a Connecticut-based provider of risk management and TPA services.

In November 2007, we announced that we were actively pursuing the sale of our Run-off Operations. Our Run-off Operations include our reinsurance and excess and surplus lines businesses, which we placed into run-off in 2003 and 2002, respectively. On March 28, 2008, we entered into a Stock Purchase Agreement (the "Agreement") to sell our Run-off Operations to Armour Reinsurance Group Limited ("Armour Re"), a Bermuda-based corporation. On May 22, 2008, Armour Re filed the Form A application with the Pennsylvania Insurance Department (the "Department"), which formally started the regulatory review process. The closing of the sale and transfer of ownership are subject to regulatory approval by the Department. As of October 2008, the Department's public comment period related to the sale remained open. The Department's financial examination of PMA Capital Insurance Company, which includes its review of the loss reserves, was also still in process. Under the original terms of the Agreement, the Agreement could have been terminated by either us or Armour Re if the closing of the sale had not occurred within six months of signing the Agreement. We have amended the Agreement with Armour Re to extend the termination date to December 15, 2008 or such later date as mutually agreed.

The PMA Insurance Group earns revenue and generates cash primarily by writing insurance policies and collecting insurance premiums. We also earn revenues 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. As time normally elapses between the receipt of premiums and the payment of claims and certain related expenses, we are able to invest the available premiums and earn investment income. The types of payments that we make are:

· losses we pay 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, brokers and sub-producers and the internal expenses to operate the business; 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 representing estimates of future amounts needed to pay claims with respect to insured events that have occurred, including events that have not been reported to us. We also establish reserves for LAE, which represent the estimated expenses of settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. Reserves are estimates of amounts to be paid in the future for losses and LAE and do not and cannot represent an exact measure of liability. If actual losses and LAE are higher than our loss reserve estimates, if actual claims reported to us exceed our estimate of the number of claims to be reported to us, or if we increase our estimate of the severity of claims previously reported to us, then we have to increase reserve estimates with respect to prior periods. 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 incur a charge to earnings in the period the reserves are increased.

Consolidated Results

We had a net loss of $1.1 million for the third quarter of 2008, compared to a net loss of $8.8 million for the third quarter of 2007. Operating income, which we define as net income (loss) excluding realized gains and losses and results from discontinued operations, was $6.4 million for the three months ended September 30, 2008, compared to $5.1 million for the same period last year. For the first nine months of 2008, we had net income of $9.8 million, compared to a net loss of $5.0 million for the first nine months of 2007. Operating income for the first nine months of 2008 was $18.0 million, compared to $11.6 million for the same period last year.

Net income for the first nine months of 2008 included an after-tax reserve charge of $4.9 million for adverse loss development at the discontinued operations, including $2.3 million recorded in the third quarter. Also, included in net income and operating income for the nine months ended September 30, 2008 was an after-tax gain of $1.4 million, which resulted from the sale of a property at The PMA Insurance Group.

The net losses for the three and nine months ended September 30, 2007 included an after-tax reserve charge of $14.3 million for adverse loss development at the discontinued operations. The reserve charge was primarily related to increased loss development from a limited number of ceding companies on our claims-made general liability business, primarily related to professional liability claims from accident years 2001 to 2003.

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

                                                Three Months Ended           Nine Months Ended
                                                  September 30,                September 30,
(dollar amounts in thousands)                   2008          2007           2008          2007
Net realized gains (losses) after tax:
Sales of investments                         $      792     $  (1,899 )   $    2,725     $  (1,661 )
Other than temporary impairments                 (5,946 )           -         (5,946 )           -
Change in fair value of trading securities            -         2,106              -         2,093
Other                                                 -          (108 )          (18 )        (434 )
Net realized gains (losses) after tax        $   (5,154 )   $      99     $   (3,239 )   $      (2 )

Consolidated revenues for the third quarter of 2008 were $117.4 million, compared to $111.5 million for the same period last year. Consolidated revenues for the first nine months of 2008 were $361.5 million, compared to $337.2 million for the same period in 2007. Net premiums earned for the third quarter increased 4% to $98.0 million, compared to $93.8 million for the same period a year ago. Net premiums earned were $286.5 million for the first nine months of 2008, compared to $284.6 million for the same period last year. Claims service revenues for the third quarter and first nine months of 2008 were $15.7 million and $40.6 million, compared to $7.6 million and $22.8 million for the same periods in 2007. Commission income during the third quarter and first nine months of 2008 was $2.6 million and $9.5 million.

In this MD&A, in addition to providing consolidated net income (loss), 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, which is GAAP net income (loss) excluding net realized investment gains and losses and results from discontinued operations, is the financial performance measure used by our management and Board of Directors to evaluate and assess the results of our businesses. Net realized investment activity is excluded because (i) net realized investment gains and losses are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments and (ii) in many instances, decisions to buy and sell securities are made at the holding company level, and such decisions result in net realized gains and losses that do not relate to the operations of the individual segments. Operating income does not replace net income (loss) 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 (loss):

                                              Three Months Ended           Nine Months Ended
                                                September 30,                September 30,
(dollar amounts in thousands)                 2008          2007          2008          2007

Components of net income (loss):
Pre-tax operating income (loss):
The PMA Insurance Group                    $   13,325     $  11,702     $  38,285     $  30,431
Fee-based Business                              1,929           661         5,316         2,055
Corporate and Other                            (5,319 )      (4,573 )     (15,754 )     (14,561 )
Pre-tax operating income                        9,935         7,790        27,847        17,925
Income tax expense                              3,530         2,711         9,876         6,358
Operating income                                6,405         5,079        17,971        11,567
Realized investment gains (losses) after
tax                                            (5,154 )          99        (3,239 )          (2 )
Income from continuing operations               1,251         5,178        14,732        11,565
Loss from discontinued operations, net
of tax (1)                                     (2,310 )     (13,981 )      (4,937 )     (16,531 )
Net income (loss)                          $   (1,059 )   $  (8,803 )   $   9,795     $  (4,966 )

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

We provide combined ratios and operating ratios for The PMA Insurance Group below. 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 certain related expenses, we invest the available premiums. Underwriting results do not include investment income from these funds. Given the long-tail nature of our liabilities, we believe that the operating ratios are also important in evaluating our business. The operating ratio is equal to the combined ratio less the net investment income ratio, which is computed by dividing net investment income by net premiums earned.

Segment Results

The PMA Insurance Group

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

                                        Three Months Ended             Nine Months Ended
                                           September 30,                 September 30,
(dollar amounts in thousands)           2008           2007           2008           2007

Net premiums written                 $  124,117     $  116,271     $  317,295     $  323,980

Net premiums earned                  $   98,096     $   93,928     $  286,861     $  285,097
Net investment income                     8,776          9,397         26,818         28,530
Other revenues                                -              -          2,120              -
Total revenues                          106,872        103,325        315,799        313,627

Losses and LAE                           68,660         63,163        200,154        197,047
Acquisition and operating expenses       23,527         26,001         73,223         79,521
Dividends to policyholders                1,169          2,205          3,544          5,874
Total losses and expenses                93,356         91,369        276,921        282,442

Operating income before income
 taxes and interest expense              13,516         11,956         38,878         31,185

Interest expense                            191            254            593            754

Pre-tax operating income             $   13,325     $   11,702     $   38,285     $   30,431

Combined ratio                             95.2 %         97.3 %         96.5 %         99.0 %
Less: net investment income ratio           8.9 %         10.0 %          9.3 %         10.0 %
Operating ratio                            86.3 %         87.3 %         87.2 %         89.0 %

The PMA Insurance Group recorded pre-tax operating income of $13.3 million for the third quarter of 2008, compared to $11.7 million for the same period last year. Year-to-date pre-tax operating income increased to $38.3 million, compared to $30.4 million for the first nine months of 2007. The increases for both the third quarter and first nine months of 2008 were due primarily to improved underwriting results, as reflected in our lower combined ratios. The third quarter increase was also impacted by an increase in net premiums earned. The increase for the first nine months of 2008 was also impacted by a pre-tax gain of $2.1 million on the sale of a property that housed one of our branch offices.

Premiums

Direct premium production was up during the third quarter and first nine months of 2008, compared to the same periods last year. We define direct premium production as direct premiums written, excluding fronting premiums and premium adjustments. The increase in direct premium production for both periods primarily reflected increases in larger account business, primarily captive accounts. Captive account business provides us with a greater degree of certainty in achieving our profit margin on an account by account basis as opposed to traditional first dollar business. The following is a reconciliation of our direct premium production to direct premiums written:

                                  Three Months Ended           Nine Months Ended
                                     September 30,               September 30,
(dollar amounts in thousands)     2008          2007          2008          2007

Direct premium production       $ 150,547     $ 137,144     $ 393,891     $ 376,849
Fronting premiums                   2,776        13,707        13,032        47,044
Premium adjustments                (5,008 )      (4,149 )     (18,836 )      (5,142 )
Direct premiums written         $ 148,315     $ 146,702     $ 388,087     $ 418,751

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

                                  Three Months Ended           Nine Months Ended
                                     September 30,               September 30,
(dollar amounts in thousands)     2008          2007          2008           2007

Workers' compensation:
Direct premiums written         $ 131,491     $ 132,888     $ 339,917     $  375,365
Premiums assumed                    3,265         2,816         8,872         10,804
Premiums ceded                    (19,843 )     (29,334 )     (60,874 )      (90,048 )
Net premiums written            $ 114,913     $ 106,370     $ 287,915     $  296,121
Commercial lines:
Direct premiums written         $  16,824     $  13,814     $  48,170     $   43,386
Premiums assumed                       40            73           110            174
Premiums ceded                     (7,660 )      (3,986 )     (18,900 )      (15,701 )
Net premiums written            $   9,204     $   9,901     $  29,380     $   27,859
Total:
Direct premiums written         $ 148,315     $ 146,702     $ 388,087     $  418,751
Premiums assumed                    3,305         2,889         8,982         10,978
Premiums ceded                    (27,503 )     (33,320 )     (79,774 )     (105,749 )
Net premiums written            $ 124,117     $ 116,271     $ 317,295     $  323,980

Direct workers' compensation premiums written were $131.5 million in the third quarter of 2008, compared to $132.9 million during the same period last year. These premium writings during the first nine months of 2008 were $339.9 million, compared to $375.4 million during the first nine months of last year. Our renewal retention rate on existing workers' compensation accounts was 88% for the third quarter of 2008, compared to 89% for the same period last year, while our renewal retention rate for the first nine months of 2008 was 86%, compared to 87% for the same period in 2007. Direct workers' compensation premiums written for the first nine months of 2008 were down due to a reduction in fronting premiums and higher return premium adjustments of $13.1 million. The premium adjustments primarily reflect favorable loss experience on loss-sensitive products where the insured shares in the underwriting result of the policy. Fronting premiums were $2.8 million and $13.0 million in the third quarter and first nine months of 2008, compared to $13.7 million and $47.0 million for the same periods a year ago. The decreases in fronting premiums were primarily the result of the termination of our agreement with Midwest Insurance Companies ("Midwest") in March 2008. We continue to earn commissions from the Midwest agreement and service the business previously written, but no additional business has been

written or renewed since the termination date. As discussed further below, during the third quarter, we entered into two fronting arrangements which produced $2.0 million of workers' compensation business in the current period. Excluding fronting business, we wrote $35.3 million of new workers' compensation business in the third quarter of 2008 and $86.8 million for the first nine months of 2008, compared to $24.5 million and $81.9 million during the same periods last year.

We entered into a fronting agreement considerably smaller than Midwest in February 2008, and we also entered into two fronting arrangements in the third quarter of 2008. Under these arrangements, Appalachian Underwriters ("Appalachian") and Arrowhead General Insurance Agency ("Arrowhead") underwrite and service workers' compensation policies using our approved forms and guidelines. The workers' compensation business produced with Appalachian is primarily located in the southeastern part of the United States, while the production with Arrowhead is limited to California. We retain approximately 10% of the underwriting results on the business written with Appalachian and 20% of underwriting results on the business produced with Arrowhead. We also earn an administrative fee based upon the direct premiums earned under each agreement as well as fees for providing claims services on the business placed through Appalachian. All of the participating reinsurers, except for Accident Insurance Company ("AIC"), an affiliate of Appalachian, have current A.M. Best Company, Inc. ("A.M. Best") financial strength ratings of "A-" (Excellent) or higher. AIC does not have an A.M. Best financial strength rating. We are mitigating our credit risk with AIC by requiring it to secure amounts owed by holding cash in trust. We expect that direct premiums written under these arrangements will be between $70 million and $100 million on an annualized basis, and we expect that the fees from these arrangements will fully replace the fees from our expiring agreement with Midwest.

Pricing on our rate-sensitive workers' compensation business, which represents approximately 60% of our total workers' compensation business, declined 7% during the first nine months of 2008, compared to a 4% decrease during the first nine months of 2007. Our pricing on this business during the first nine months of 2008 decreased 23% in New York and 18% in Florida. The pricing reductions in both New York and Florida were mainly driven by manual loss cost changes filed by each respective state's rating bureau, which we believe were consistent with loss trends in each state. These two states collectively represent about 18% of our overall rate-sensitive workers' compensation business written during the first nine months of 2008. Exclusive of business written in New York and Florida, our pricing on rate-sensitive workers' compensation business decreased 4% for the nine months ended September 30, 2008.

Pricing on our rate-sensitive workers' compensation business in Pennsylvania declined 6% during the first nine months of 2008. In Pennsylvania, we were affected by a 10.2% reduction in loss costs that the Pennsylvania Insurance Department approved earlier this year. While this resulted in lower filed loss costs in Pennsylvania, we will continue our practice of underwriting our business with a goal of achieving a reasonable level of profitability on each account. We continue to determine our business pricing through schedule charges and credits that we file and use to limit the effect of filed loss cost changes and have not experienced a decrease in premiums equal to the level of the loss costs reduction. We also believe the nature of our loss-sensitive book of business, which represents about 45% of our Pennsylvania workers' compensation business, mitigates the impact of reductions in filed loss costs.

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 $16.8 million in the third quarter of 2008, compared to $13.8 million for the same period last year. For the first nine months of the year, direct premiums written for Commercial Lines were $48.2 million in 2008, compared to $43.4 million in 2007. New business increased to $4.1 million in the third quarter of 2008, up from $2.4 million in the third quarter of 2007, and new business for the first nine months increased to $13.0 million in 2008, compared to $9.6 million for the same period last year. Our renewal retention rate on existing Commercial Lines accounts was 92% and 88% for the three and nine months ended September 30, 2008, compared to 89% and 90% for the three and nine months ended September 30, 2007.

Total premiums assumed decreased by $2.0 million during the first nine months of 2008, compared to the same period last year. The decline was primarily due to a reduction 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 share of this residual market business is assigned on a lag based upon its market share in terms of direct premiums in the voluntary market. These assignments are accomplished either directly or by assumption from pools of residual market business.

Premiums ceded for workers' compensation decreased by $9.5 million and $29.2 million during the three and nine months ended September 30, 2008, compared to the same periods a year ago. The declines were primarily due to lower premiums ceded under the Midwest agreement, partially offset by an increase in the amount of workers' compensation business sold to captive accounts, where a substantial portion of the direct premiums are ceded, and an increase in premiums ceded under

other fronting arrangements. Premiums ceded for other commercial lines increased by $3.7 million and $3.2 million during the three and nine months ended September 30, 2008, compared to the same periods in 2007, mainly resulting from increased direct premium writings.

In total, net premiums written increased by 7% during the third quarter of 2008, compared to the same period last year, while year-to-date net premiums written decreased by 2%, compared to the same period in 2007. The increase in net premiums written for the quarter primarily reflected the increase in direct production. Net premiums written for the first nine months of 2008 were down due primarily to the first quarter return premium adjustments and, to a lesser extent, the increase in the amount of workers' compensation business sold to captive accounts. The year-to-date impact of these items was partially offset by . . .