PMA Capital Notes Q2 Earnings

Philadelphia-based PMA Capital announced net income of $12.2 million, or 39 cents per diluted share, for the second quarter of 2003, compared with a net loss of $29.7 million, or 95 cents per diluted share, for the second quarter of 2002. For the six months ended June 30, 2003, PMA Capital recorded net income of $22.9 million, or 73 cents per diluted share, compared to a net loss of $47.0 million, or $1.50 per diluted share for the same period last year.

Included in net income for the second quarter and the first six months of 2003 were after-tax net realized investment gains of $2.9 million, or 9 cents per diluted share, and $5.7 million, or 18 cents per diluted share, compared to after-tax net realized losses of $11.4 million, or 36 cents per diluted share, and $10.5 million, or 33 cents per diluted share, for the same periods last year. The realized losses in 2002 reflect impairment losses of $10.3 million after-tax on fixed income securities, including $9.2 million for WorldCom.

The net loss for the second quarter of 2002 included a charge of approximately $28 million after-tax ($43 million pre-tax) for costs to exit from and run off business written by the Run-off Operations (formerly known as the Caliber One operating segment) that we exited in May 2002. The net loss for the first six months of 2002 also included prior year loss development of approximately $26 million after-tax ($40 million pre-tax) at the Run-off Operations in the first quarter of 2002.

Revenues
Revenues for the second quarter of 2003 and 2002 were $312.6 million and $284.1 million, respectively. For the first six months of 2003, revenues were $615.7 million, compared to $511.5 million for the same period in 2002. The 10 percent and 20 percent increase in revenues for the quarter and year-to-date periods reflect higher net premiums earned due to rate increases over the past few years. Additionally, pre-tax net realized investment gains were $4.5 million and $8.8 million for the second quarter and first six months of 2003, compared to pre-tax net realized investment losses of $17.6 million and $16.2 million for the same periods last year.

Written Premiums
For the second quarter of 2003, net written premiums were $290.7 million, compared to $302.5 million for the same period last year. For the first six months of 2003, net premiums written increased 9% to $641.5 million, compared to $591.1 million for the same period last year. Growth in written premiums for 2003 primarily reflects continued rate improvements throughout our commercial insurance and reinsurance businesses. Net premiums written for 2002 included approximately $44 million at PMA Re resulting from a change in the second quarter of 2002 of our estimate of ultimate premiums for the 2000 and 2001 underwriting years due to stronger than expected premium growth from our treaty ceding companies for those years.

Financial Condition
Total assets were $4.5 billion as of June 30, 2003, compared to $4.1 billion as of Dec. 31, 2002. Shareholders’ equity was $617.7 million as of June 30, 2003, compared with $581.4 million as of Dec. 31, 2002.

Book value per share was $19.72 as of June 30, 2003, compared with $18.56 as of Dec. 31, 2002. Net unrealized gains on fixed maturities increased to $52.7 million after-tax, or $1.68 per share, as of June 30, 2003, compared to $33.3 million, or $1.06 per share at year-end 2002, reflecting the declining interest rate environment.

As of June 30, 2003, total outstanding debt was $176.3 million, compared to $151.3 million at Dec. 31, 2002. In the second quarter of 2003, we sold $32.5 million of 30-year trust preferred securities and $57.5 million of 15-year senior notes. PMA Capital used the net proceeds of approximately $87 million from these transactions primarily to repay $45 million outstanding under its bank credit facility and to increase the statutory capital and surplus of its reinsurance subsidiary.

PMA Re
PMA Re reported pre-tax operating income of $13.1 million and $21.7 million for the second quarter and first six months of 2003, compared to $13.8 million and $26.7 million for the same periods last year. The performance relative to last year reflects improved underwriting results reflecting the firming market and good pricing that was more than offset by lower net investment income.

Net premiums written were $172.5 million and $331.0 million for the three and six months ended June 30, 2003, compared with $209.0 million and $299.3 million for the same periods in 2002. Net premiums written for the second quarter and first six months of 2002 included approximately $44 million resulting from a change in our estimate of ultimate premiums written due to stronger than expected premium growth from its treaty ceding companies in the 2000 and 2001 underwriting years. In addition, net premiums written increased approximately 5 percent for the second quarter and 30 percent for the first six months of 2003, compared to the same periods last year. The year-to-date increase primarily reflects higher premiums in the Traditional and Specialty-Treaty units, driven mainly by rate increases. Such increases, as measured by the level of premium increase on renewed in-force business, averaged approximately 30 percent on PMA Re’s Traditional-Treaty and Specialty-Treaty products so far in 2003. Partially offsetting the increase was a decline in net premiums written by the Finite Risk and Financial Products unit, reflecting the effect of a new retrocessional contract.

The combined ratio on a GAAP basis was 97.0 percent and 98.5 percent for the second quarter and first six months of 2003, compared with 100.3 percent and 100.4 percent for the same periods last year. The combined ratios for 2003 reflect the favorable effect of improved current accident year loss ratios, partially offset by net reserve additions of approximately six and one-half points for prior accident years, mainly 1999 and 2000.

The PMA Insurance Group
The PMA Insurance Group reported pre-tax operating income of $6.8 million and $15.2 million for the second quarter and first six months of 2003, compared to $6.4 million and $12.8 million for the same periods last year. The increases are primarily due to improved underwriting results, partially offset by lower investment income.

Net premiums written increased 43 percent to $119.4 million for the second quarter of 2003, compared with $83.6 million for the second quarter of 2002. Net premiums written increased 21 percent to $313.7 million for the first six months of 2003, compared with $260.1 million for the comparable period last year. The growth in premiums primarily reflects improved pricing in all lines of insurance business underwritten by The PMA Insurance Group and, to a lesser extent, an increase in the volume of risks underwritten.

The combined ratio on a GAAP basis in 2003 was 101.9 percent for the second quarter and 101.6 percent for the first six months of 2003, both of which improved from the corresponding periods last year when the GAAP combined ratio was 103.1 percent and 103.4 percent, respectively.

Net investment income was $8.2 million and $16.5 million for the second quarter and first six months of 2003, compared to $9.2 million and $18.0 million for the comparable periods of 2002. The declines in net investment income reflect lower invested asset yields, partially offset by a higher invested asset base.

Run-off Operations
In May 2002, PMA Capital announced its decision to withdraw from the excess and surplus lines marketplace previously served by the Caliber One operating segment. As a result of the decision to exit this business, this segment’s results have been reported as Run-off Operations. The results for Run-off Operations were essentially breakeven for the three and six months ended June 30, 2003.

The Run-off Operations recorded a pre-tax operating loss of $44.4 million in the second quarter of 2002, which includes a charge of approximately $43 million pre-tax for costs to exit from and run off this business. For the first six months of 2002, pre-tax operating losses for the Run-off Operations were $87.5 million and included approximately $40 million for prior year loss development in the first quarter of 2002 principally related to certain casualty lines of business; and the $43 million charge to exit from and run-off this business.

Business Outlook
The current expectation is that full year 2003 consolidated premiums for PMA Re and The PMA Insurance Group will increase by approximately 10-15 percent over 2002 levels. In addition, the company does expect that the consolidated combined ratio for full year 2003 at PMA Re and The PMA Insurance Group will be approximately equal to the combined ratio achieved in the first half of 2003. This reflects its expectation for continued strong results from the 2001, 2002 and 2003 underwriting years and its current view of the 1998 to 2000 business.