The following is a discussion of our financial condition as of June 30, 2009, compared with December 31, 2008, and our results of operations for the three and six months ended June 30, 2009, 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, 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 35 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 $109.1 million in the second quarter of 2009, compared to $99.2 million in the same period last year. Direct premiums written in the first six months of 2009 were $271.2 million, compared to $239.8 million during 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 $19.5 million in the second quarter of 2009, compared to $16.1 million in the second quarter of 2008. Revenues in the first six months of 2009 were $39.2 million, compared to $32.7 million for the same period last year. Payments made at this segment primarily consist of operating expenses, which include internal expenses to operate the business, managed care vendor expenses 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.

Consolidated Results

We recorded net income of $2.6 million for the second quarter of 2009, compared to $4.0 million for the second quarter of 2008. Operating income, which we define as net income excluding realized gains (losses) and results from discontinued operations, was $4.1 million for the three months ended June 30, 2009, compared to $4.6 million for the same period last year. For the first six months of 2009, we had net income of $10.8 million, compared to $10.9 million for the first half of 2008. Operating income for the first six months of 2009 was $11.9 million, compared to $11.6 million for the same period last year. Included in net income and operating income for the three and six months ended June 30, 2008 was an after-tax gain of $1.4 million, which resulted from the sale of a property at The PMA Insurance Group.

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

                                           Three Months Ended          Six Months Ended
                                                June 30,                   June 30,
(dollar amounts in thousands)              2009           2008         2009         2008
Net realized gains (losses) after tax:
Sales of investments                     $     362       $  (372 )   $   3,390     $ 1,933
Other than temporary impairments              (669 )           -        (3,210 )         -
Other                                            -             -             -         (18 )
Net realized gains (losses) after tax    $    (307 )     $  (372 )   $     180     $ 1,915

Consolidated revenues for the second quarter of 2009 were $135.2 million, compared to $129.2 million for the same period last year. Consolidated revenues for the first six months of 2009 were $268.6 million, compared to $244.1 million for the same period in 2008. The increases in consolidated revenues primarily reflected increases in net premiums earned and claims service revenues. Net premiums earned were $106.9 million in the second quarter of 2009, compared to $102.9 million in the same period a year ago. Net premiums earned were $211.9 million for the first six months of 2009, compared to $188.5 million for the same period last year. Claims service revenues were $16.8 million in the second quarter of 2009, compared to $12.9 million in the second quarter of 2008, and claims service revenues were $32.5 million in the first half of 2009, compared to $24.9 million in the first half of 2008.

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

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

                                                   Three Months Ended           Six Months Ended
                                                        June 30,                    June 30,
(dollar amounts in thousands)                      2009          2008          2009          2008

Components of net income:
Pre-tax operating income (loss):
The PMA Insurance Group                         $    9,965     $  11,341     $  25,152     $  24,960
Fee-based Business                                   1,525         1,201         3,538         3,387
Corporate and Other                                 (5,167 )      (5,424 )     (10,167 )     (10,435 )
Pre-tax operating income                             6,323         7,118        18,523        17,912
Income tax expense                                   2,249         2,535         6,633         6,346
Operating income                                     4,074         4,583        11,890        11,566
Realized investment gains (losses) after tax          (307 )        (372 )         180         1,915
Income from continuing operations                    3,767         4,211        12,070        13,481
Loss from discontinued operations, net of tax       (1,165 )        (188 )      (1,251 )      (2,627 )
Net income                                      $    2,602     $   4,023     $  10,819     $  10,854

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           Six Months Ended
                                            June 30,                    June 30,
(dollar amounts in thousands)          2009          2008          2009          2008

Net premiums written                 $  80,444     $  79,273     $ 198,570     $ 193,178

Net premiums earned                    107,091       103,047       212,169       188,765
Net investment income                    9,502         8,943        17,968        18,042
Other revenues                               -         2,120             -         2,120
Total revenues                         116,593       114,110       230,137       208,927

Losses and LAE                          73,494        71,572       149,269       131,494
Acquisition and operating expenses      30,680        29,516        52,456        49,696
Dividends to policyholders               2,311         1,493         2,957         2,375
Total losses and expenses              106,485       102,581       204,682       183,565

Operating income before income
 taxes and interest expense             10,108        11,529        25,455        25,362

Interest expense                           143           188           303           402

Pre-tax operating income             $   9,965     $  11,341     $  25,152     $  24,960

Combined ratio                            99.4 %        99.5 %        96.5 %        97.2 %
Less: net investment income ratio          8.9 %         8.7 %         8.5 %         9.6 %
Operating ratio                           90.5 %        90.8 %        88.0 %        87.6 %

The PMA Insurance Group recorded pre-tax operating income of $10.0 million for the second quarter of 2009, compared to $11.3 million for the same period last year. Year-to-date pre-tax operating income increased modestly to $25.2 million, compared to $25.0 million for the first half of 2008. The increase in the first six months of 2009 was due primarily to higher net premiums earned and an improved underwriting margin, as reflected in our lower combined ratio. Results for the second quarter and first six months of 2008 included a pre-tax gain of $2.1 million, which resulted from the sale of a property that housed one of our branch offices.

Premiums

Direct premium production increased during the second quarter and first six months of 2009, compared to the same periods last year. The increases for both periods reflected an increase in the amount of captive accounts business written in 2009, compared to 2008, and the year-to-date increase was partially offset by a decline in workers' compensation premium production. 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)      2009          2008         2009          2008

Direct premium production       $  102,212     $ 96,736     $ 249,579     $ 243,344
Fronting premiums                    9,677        2,113        29,299        10,256
Premium adjustments                 (2,753 )        370        (7,629 )     (13,828 )
Direct premiums written         $  109,136     $ 99,219     $ 271,249     $ 239,772

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

                                  Three Months Ended           Six Months Ended
                                       June 30,                    June 30,
(dollar amounts in thousands)     2009          2008          2009          2008

Workers' compensation:
Direct premiums written         $  88,989     $  84,714     $ 223,522     $ 208,426
Premiums assumed                    4,417         2,536         6,502         5,607
Premiums ceded                    (21,350 )     (17,064 )     (53,610 )     (41,031 )
Net premiums written            $  72,056     $  70,186     $ 176,414     $ 173,002
Commercial lines:
Direct premiums written         $  20,147     $  14,505     $  47,727     $  31,346
Premiums assumed                       13            31            33            70
Premiums ceded                    (11,772 )      (5,449 )     (25,604 )     (11,240 )
Net premiums written            $   8,388     $   9,087     $  22,156     $  20,176
Total:
Direct premiums written         $ 109,136     $  99,219     $ 271,249     $ 239,772
Premiums assumed                    4,430         2,567         6,535         5,677
Premiums ceded                    (33,122 )     (22,513 )     (79,214 )     (52,271 )
Net premiums written            $  80,444     $  79,273     $ 198,570     $ 193,178

Direct workers' compensation premiums written were $89.0 million in the second quarter of 2009, compared to $84.7 million during the same period last year. The increase for the quarter was primarily due to more premiums written under fronting arrangements. Direct workers' compensation premiums written during the first six months of 2009 were $223.5 million, compared to $208.4 million during the first half of 2008. The year-to-date increase was primarily due to more premiums written under fronting arrangements and, to a lesser extent, a lower amount of return premium adjustments, which were partially offset by a decrease in workers' compensation premium production. Fronting premiums increased for both periods in 2009, primarily as a result of the two fronting arrangements we entered into during August 2008. We expect that direct premiums written under these fronting arrangements will be between $50 million and $60 million on an annualized basis. 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 $23.1 million of new workers' compensation business in the second quarter of 2009, compared to $19.9 million in the second quarter of 2008, and $47.8 million for the first half of 2009, compared to $51.5 million during the same period last year. Pricing on our rate-sensitive workers' compensation business declined 3% during the first six months of 2009, compared to a 7% decrease during the first six months of 2008. The decline in pricing that we experienced during the second quarter of 2009 was smaller, compared to previous quarters. Our renewal retention rate on existing workers' compensation accounts was 78% for the second quarter of 2009, compared to 84% for the second quarter of 2008, and our renewal retention rate for the first six months of 2009 was 79%, compared to 85% for the same period in 2008. The decline in the retention rates 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. While retention rates were also down on loss-sensitive workers' compensation business, the decrease was lower than that on rate-sensitive business and retention rates remained 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 $20.1 million in the second quarter of 2009, compared to $14.5 million for the same period last year. For the first six months of the year, direct premiums written for Commercial Lines were $47.7 million in 2009, compared to $31.3 million in 2008. New business increased to $10.3 million in the second quarter of 2009, up from $5.8 million in the second quarter of 2008, and new business for the first six months in 2009 increased to $23.7 million, compared to $8.9 million for the same period last year. The new business in 2009 related primarily to captive accounts where we earn fees and cede a substantial portion of the premiums and associated underwriting risk. Our renewal retention rate on existing Commercial Lines accounts was 81% for the second quarter of 2009, compared to 84% for the second quarter of 2008, and our renewal retention rate was 85% for both the first six months of 2009 and 2008. Overall pricing on Commercial Lines declined 1% during the first six months of 2009, compared to a 5% decrease during the same period last year.

Total premiums assumed increased by $1.9 million and $858,000 during the second quarter and first six months of 2009, compared to the same periods last year. The increases in both periods were primarily due to an increase 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 increased by $4.3 million and $12.6 million during the second quarter and first six months of 2009, compared to the same periods in 2008. The increases were primarily due to more premiums ceded under our fronting arrangements. Premiums ceded on Commercial Lines business increased by $6.3 million and $14.4 million during the second quarter and first six months of 2009, 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 increased 1% during the second quarter of 2009, compared to the same period last year, and year-to-date net premiums written increased 3%, compared to the first half of 2008. The year-to-date increase in net premiums written was primarily due to the lower impact of premium adjustments.

Net premiums earned increased 4% during the second quarter of 2009 and 12% for the first six months of 2009, compared to the same periods last year. The increases in both periods reflect the increase in direct premium production over the past year. While net premiums earned were negatively impacted by higher return premium adjustments in the second quarter of 2009, the impact of lower return premium adjustments in the first six months of 2009 positively impacted net premiums earned during that period. 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          Six Months Ended
                                       June 30,                   June 30,
                                  2009           2008         2009          2008

Loss and LAE ratio                   68.6 %        69.4 %        70.4 %      69.6 %
Expense ratio:
Acquisition expense                  18.2 %        19.0 %        17.3 %      18.1 %
Operating expense                    10.4 %         9.7 %         7.4 %       8.2 %
Total expense ratio                  28.6 %        28.7 %        24.7 %      26.3 %
Policyholders' dividend ratio         2.2 %         1.4 %         1.4 %       1.3 %
Combined ratio                       99.4 %        99.5 %        96.5 %      97.2 %

The loss and LAE ratio decreased by 0.8 points during the second quarter of 2009, compared to the same period last year, primarily due to favorable development on captive business. This improvement in loss experience was offset by an increase in policyholders' dividends. The loss and LAE ratio increased by 0.8 points during the first six months of 2009, compared to the first six months of 2008. The year-to-date increase in 2009 was due primarily to the first quarter reduction in audit premiums. While payrolls, which declined by 2% through June, 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 during the first quarter of 2009. 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 half 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 six months of 2009, compared to our estimate of 6.5% in the first six months of 2008.

The total expense ratio improved by 1.6 points in the first six months of 2009, compared to the same period last year, as the increase in net premiums earned outpaced the 3% increase in our controllable expenses, which include salary, benefits and other employee-related costs. Commissions earned under our fronting arrangements reduced the second quarter and year-to-date acquisition expense ratios by 0.6 points for both periods in 2009, compared to reductions of 0.7 points and 0.9 points for the same periods in 2008, as the ceding commissions earned on this business reduce our commission expense.

The policyholders' dividend ratio increased by 0.8 points in the second quarter of 2009, compared to the same period last year. The current year period reflected slightly lower than expected loss experience, which resulted in higher 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 $9.5 million for the second quarter of 2009, compared to $8.9 million for the same period a year ago. Net investment income was $18.0 million for the first six months of 2009 and 2008. The increase in the second quarter was due primarily to improved investment yields from our long-term fixed income securities, which were partially offset by declining investment yields on our short-term fixed income securities.

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)      2009          2008         2009         2008
. . .