The following is a discussion of our financial condition as of March 31, 2009, compared with December 31, 2008, and our results of operations for the three months ended March 31, 2009, compared with the same period 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, 2008 (the "2008 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 30 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 2008 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, 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 $162.1 million in the first quarter of 2009, compared to $140.6 million in the same period last year. Because 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 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 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, 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 incur a charge to earnings in the period the 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 $19.7 million in the first quarter of 2009, compared to $16.7 million in the first quarter last year. Payments made at this segment primarily consist of operating expenses, which include internal expenses to operate the business and commissions paid to sub-producers.

In 2007, we began reporting the results of our Run-off Operations as discontinued operations. Our Run-off Operations includes our reinsurance and excess and surplus lines businesses, which we placed into run-off in 2003 and 2002, respectively. The sale of our Run-off Operations 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," 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. We continue to work with the buyer and with the Pennsylvania Insurance Department to complete this sale.

Consolidated Results

We recorded net income of $8.2 million for the first quarter of 2009, compared to $6.8 million for the first quarter of 2008. Operating income, which we define as net income excluding realized gains and results from discontinued operations, was $7.8 million for the first three months of 2009, compared to $7.0 million for the same period last year.

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

                                           Three Months Ended
                                                March 31,
(dollar amounts in thousands)               2009          2008
Net realized gains (losses) after tax:
Sales of investments                     $     3,028     $ 2,305
Other than temporary impairments              (2,541 )         -
Other                                              -         (18 )
Net realized gains after tax             $       487     $ 2,287

Consolidated revenues for the first quarter of 2009 were $133.5 million, compared to $114.9 million for the same period last year. The increase in consolidated revenues primarily reflected an increase in net premiums earned, which were $104.9 million in the first quarter of 2009, compared to $85.6 million in the same period a year ago.

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

The following is a reconciliation of our segment operating results and operating income to GAAP net income:

                                                  Three Months Ended
                                                       March 31,
(dollar amounts in thousands)                      2009          2008

Components of net income:
Pre-tax operating income (loss):
The PMA Insurance Group                         $   15,187     $ 13,619
Fee-based Business                                   2,013        2,186
Corporate and Other                                 (5,000 )     (5,011 )
Pre-tax operating income                            12,200       10,794
Income tax expense                                   4,384        3,811
Operating income                                     7,816        6,983
Realized gains after tax                               487        2,287
Income from continuing operations                    8,303        9,270
Loss from discontinued operations, net of tax          (86 )     (2,439 )
Net income                                      $    8,217     $  6,831

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
                                            March 31,
(dollar amounts in thousands)          2009          2008

Net premiums written                 $ 118,126     $ 113,905

Net premiums earned                    105,078        85,718
Net investment income                    8,466         9,099
Total revenues                         113,544        94,817

Losses and LAE                          75,775        59,922
Acquisition and operating expenses      21,776        20,180
Dividends to policyholders                 646           882
Total losses and expenses               98,197        80,984

Operating income before income
taxes and interest expense              15,347        13,833

Interest expense                           160           214

Pre-tax operating income             $  15,187     $  13,619

Combined ratio                            93.5 %        94.5 %
Less: net investment income ratio          8.1 %        10.6 %
Operating ratio                           85.4 %        83.9 %

The PMA Insurance Group recorded pre-tax operating income of $15.2 million for the first quarter of 2009, compared to $13.6 million for the same period last year. The increase for the first quarter was due primarily to higher net premiums earned and an improved underwriting margin, as reflected in our lower combined ratio. Given the seasonality of our business, our first quarter combined ratios have historically been lower than the subsequent quarters and full year ratios.

Premiums

Direct premium production increased modestly during the first quarter of 2009,
compared to the first quarter of 2008. 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
                                       March 31,
(dollar amounts in thousands)     2009          2008

Direct premium production       $ 147,367     $ 146,608
Fronting premiums                  19,622         8,143
Premium adjustments                (4,876 )     (14,198 )
Direct premiums written         $ 162,113     $ 140,553

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

                                  Three Months Ended
                                       March 31,
(dollar amounts in thousands)     2009          2008

Workers' compensation:
Direct premiums written         $ 134,533     $ 123,712
Premiums assumed                    2,085         3,071
Premiums ceded                    (32,260 )     (23,967 )
Net premiums written            $ 104,358     $ 102,816
Commercial lines:
Direct premiums written         $  27,580     $  16,841
Premiums assumed                       20            39
Premiums ceded                    (13,832 )      (5,791 )
Net premiums written            $  13,768     $  11,089
Total:
Direct premiums written         $ 162,113     $ 140,553
Premiums assumed                    2,105         3,110
Premiums ceded                    (46,092 )     (29,758 )
Net premiums written            $ 118,126     $ 113,905

Direct workers' compensation premiums written were $134.5 million in the first quarter of 2009, compared to $123.7 million during the same period last year. The increase in direct workers' compensation premiums written for the first quarter of 2009, compared to the first quarter last year, was primarily due to a lower amount of return premium adjustments and higher premiums on fronting arrangements, which were partially offset by a decrease in workers' compensation premium production. Fronting premiums increased primarily as a result of the two fronting arrangements we entered into during August 2008. The decrease in premium adjustments primarily reflected a lower amount of return premium adjustments on loss-sensitive products where the insured shares in the underwriting result of the policy. We write these retrospective products because we believe they provide us with greater certainty in achieving our targeted underwriting results as the customer shares in the underwriting result of the policy with us.

Excluding fronting business, we wrote $24.7 million of new workers' compensation business in the first quarter of 2009, compared to $31.5 million during the same period last year. Pricing on our rate-sensitive workers' compensation business declined 4% during the first three months of 2009, compared to a 6% decrease during the first three months of 2008. While pricing continues to soften, we experienced smaller declines during the first quarter of 2009, compared to previous quarters. Our renewal retention rate on existing workers' compensation accounts for the first quarter was 79%, compared to 85% for the same period in 2008. The decline in the retention rate in 2009 primarily reflected lower retentions on rate-sensitive middle-market business as we continue to maintain disciplined underwriting standards in a price competitive environment. During 2009, our retention rates for workers' compensation were higher for business written on a loss-sensitive basis than for business written on a rate-sensitive basis.

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 $27.6 million in the first quarter of 2009, compared to $16.8 million for the same period last year. New business was $13.3 million for the three months ended March 31, 2009, compared to $3.1 million during the first quarter last year. The new business in 2009 related primarily to captive accounts where we earn fees and only take a limited amount of underwriting risk. Our renewal retention rate on existing Commercial Lines accounts was 89% for the first three months of 2009, compared to 85% for the first quarter of 2008. Overall pricing on Commercial Lines declined 2% during the first quarter of 2009, compared to a 5% decrease during the first quarter of 2008.

Total premiums assumed decreased by $1.0 million during the first quarter of 2009, 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 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. Although our total direct premiums written in the first quarter of 2009 increased, we believe the decline in assumed premiums assigned to us was a result of more business being written in the traditional market and less in the involuntary residual market.

Premiums ceded on workers' compensation business increased by $8.3 million during the first three months of 2009, compared to the same period in 2008. The increase was primarily due to more premiums ceded under our fronting arrangements. Premiums ceded on Commercial Lines business increased by $8.0 million during the first quarter of 2009, compared to the same period last year, mainly resulting from an increase 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 increased 4% during the first quarter of 2009, compared to the first quarter of 2008. The increase in net premiums written primarily reflected the lower impact of premium adjustments, which was partially offset by a decrease in workers' compensation premium production.

Net premiums earned increased 23% during the first quarter of 2009, compared to the same period last year. The increase in net premiums earned between periods reflects the increase in direct premium production over the past year as well as the impact of lower return premium adjustments in 2009. 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 increase in premiums written will typically be greater than the increase 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, such premium adjustment 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
                                       March 31,
                                  2009           2008

Loss and LAE ratio                   72.1 %        69.9 %
Expense ratio:
Acquisition expense                  16.4 %        17.1 %
Operating expense                     4.4 %         6.5 %
Total expense ratio                  20.8 %        23.6 %
Policyholders' dividend ratio         0.6 %         1.0 %
Combined ratio                       93.5 %        94.5 %

The loss and LAE ratio during the first three months of 2009 increased by 2.2 points, compared to the same period last year. The increase in the loss and LAE ratio in the first quarter of 2009 was due primarily to a reduction in our audit premium accrual. While payrolls, which declined by less than 1% through March, on our renewal book have been stable overall, this was lower than the rate of growth we experienced in 2008, and as a result we reduced our accrual for additional audit premiums by $3.3 million. Key loss indicators are in line with our expectations for this business, and we will continue to evaluate loss activity on these accounts as they mature, but we did not reduce our expectation of losses on these policies, which were primarily written in 2007 and 2008. Although pricing changes coupled with payroll inflation for rate-sensitive workers' compensation business were below overall estimated loss trends, our current accident year loss and LAE ratio remained consistent between periods as we continued to benefit in the first quarter of 2009 from changes in the type of workers' compensation products selected by our insureds. We estimate our medical cost inflation to be 6.0% in the first quarter of 2009, compared to our estimate of 6.5% in the first quarter of 2008.

The total expense ratio improved by 2.8 points in the first quarter of 2009, compared to the first quarter of 2008. The expense ratio in 2009 benefited as the increase in net premiums earned outpaced the increase in our controllable expenses, which include salary, benefits and other employee-related costs. Commissions earned under our fronting arrangements

reduced the first quarter acquisition expense ratio by 0.5 points in 2009, compared to a reduction of 0.9 points for the same period in 2008, as the ceding commissions earned on this business reduce our commission expense.

The policyholders' dividend ratio was lower by 0.4 points in the first three months of 2009, compared to the same period last year. The current year period reflected slightly higher than expected loss experience, which resulted in lower dividends on captive accounts business where the policyholders may receive a dividend based, to a large extent, on their loss experience.

Net Investment Income

Net investment income was $8.5 million for the three months ended March 31, 2009, compared to $9.1 million for the same period a year ago. The decrease was due primarily to a lower yield of approximately 50 basis points on an average invested asset base that increased modestly.

Fee-based Business

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

                                                 Three Months Ended
                                                      March 31,
               (dollar amounts in thousands)      2009          2008

               Claims service revenues         $   15,995     $ 12,108
               Commission income                    3,475        4,281
               Net investment income                   86          161
               Other revenues                         170          102
               Total revenues                      19,726       16,652

               Operating expenses                  17,713       14,466

               Pre-tax operating income        $    2,013     $  2,186

Pre-tax operating income for the Fee-based Business was $2.0 million for the first quarter of 2009, compared to $2.2 million for the same period in 2008. The decline was primarily due to a reduction in the net commissions earned by our agency business.

Revenues

Revenues for our Fee-based Business were $19.7 million for the three months ended March 31, 2009, compared to $16.7 million for the same period in 2008. The increase was primarily due to an increase in claims service revenues of $3.9 million, partially offset by a decline in commission income of $806,000. Organic claims service revenue growth was 16% in the first quarter of 2009, compared to the prior year period. The organic growth primarily reflected an increase in managed care services of $1.0 million due to enhancements in our preferred provider networks and additional claims services provided to self-insured clients of $641,000, which primarily resulted from new business. Managed care services include medical bill review services, access to our preferred provider network partnerships, pharmacy discounts and nurse case management services. Claims service revenues also increased by $1.9 million in the first quarter of 2009, compared to the first quarter of 2008, as a result of our June 2008 acquisition of PMA Management Corp. of New England, Inc. The decrease in commission income was mainly the result of continued soft pricing in excess workers' compensation business and lower insured payrolls primarily in construction accounts. Commission income is primarily derived from producing excess workers' compensation business and providing program administrator services to self-insured clients.

Expenses

Operating expenses increased to $17.7 million in the first quarter of 2009, from $14.5 million in the first quarter of 2008. The increase in operating expenses primarily reflected additional expenses incurred in connection with the growth of our claims services business, partially offset by a decrease in commission expenses that were related to the lower commission income. Commission expenses in the first quarter of 2009 were $1.6 million, compared to $2.0 million in the first quarter of 2008.

Corporate and Other

The Corporate and Other segment primarily includes corporate expenses and debt service. Corporate and Other recorded net expenses of $5.0 million for both of the three-month periods ended March 31, 2009 and 2008.

Discontinued Operations

Discontinued operations includes the results of our reinsurance and excess and surplus lines businesses from which we withdrew in November 2003 and May 2002, respectively.

On March 27, 2009, we amended the terms of the Stock Purchase Agreement related to the sale of our Run-off Operations to extend the termination date of the Agreement to June 30, 2009, or such later date as the parties may mutually agree. We continue to work with the buyer and with the Pennsylvania Insurance Department to conclude the Form A process. For additional information regarding the Stock Purchase Agreement, see Note 4, "Discontinued Operations," to our Unaudited Condensed Consolidated Financial Statements.

Summarized financial results from discontinued operations, which are reported as a single line, net of tax, below income from continuing operations in our Condensed Consolidated Statements of Operations, were as follows:

                                                        Three Months Ended
                                                            March 31,
      (dollar amounts in thousands)                    2009            2008

      Net premiums earned                           $       617   $      1,026
      Net investment income                               (878)            128
      Net realized investment gains (losses)              (354)            760
                                                          (615)          1,914

      Losses and loss adjustment expenses                   129          9,280
      Acquisition expenses                                1,199             85
      Operating expenses                                  2,577          2,782
      Valuation adjustment                              (4,387)        (6,480)
                                                          (482)          5,667

      Income tax benefit                                   (47)        (1,314)
      Loss from discontinued operations, net of tax $      (86)   $    (2,439)

The loss from discontinued operations in the three months ended March 31, 2008 . . .