Three months ended           Nine months ended           
                                                       September 30,                September 30,               
 (in thousands, except per share data)                 2009          2008           2009           2008         
 Operating income before gain on sale of real estate   $  6,732      $  6,405       $  18,622      $  16,593    
 Gain on sale of real estate after tax                    -             -              -              1,378     
 Operating income                                         6,732         6,405          18,622         17,971    
 Realized investment gains (losses) after tax             517           (5,154  )      697            (3,239  ) 
 Income from continuing operations                        7,249         1,251          19,319         14,732    
 Loss from discontinued operations after tax              (40    )      (2,310  )      (1,291  )      (4,937  ) 
 Net income (loss)                                     $  7,209      $  (1,059  )   $  18,028      $  9,795     
                                                                                                                
 Diluted per share amounts:                                                                                     
 Operating income                                      $  0.21       $  0.20        $  0.58        $  0.56      
 Realized investment gains (losses) after tax             0.01          (0.16   )      0.02           (0.10   ) 
 Income from continuing operations                        0.22          0.04           0.60           0.46      
 Loss from discontinued operations after tax              -             (0.07   )      (0.04   )      (0.15   ) 
 Net income (loss)                                     $  0.22       $  (0.03   )   $  0.56        $  0.31      
                                                                                                                


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Vincent T. Donnelly, President and Chief Executive Officer commented, "PMA Capital produced improved operating results and book value growth in the quarter. We continued to grow our core insurance business, while maintaining disciplined underwriting standards in a price competitive environment, and had significant growth in the revenues of our Fee-based Business. Our combined ratio remained below 97% and for the first quarter since early 2006 our pricing on rate-sensitive workers' compensation business increased. The Company's book value grew by 8% in the quarter and 15% in the first nine months of 2009 to $12.38 per share, reflecting improved values in our investment portfolio combined with our earnings."

At The PMA Insurance Group, Mr. Donnelly noted the following significant operating highlights:

Pre-tax operating income increased to $13.6 million in the quarter, from $13.3 million in the third quarter of 2008, and increased to $38.8 million for the first nine months of 2009, compared to $38.3 million in the same period last year. The prior year-to-date results included a gain of $2.1 million from the sale of real estate;

The combined ratio was 95.8% in the quarter, which improved the year-to-date ratio to 96.2%;

Net investment income increased 7% in the quarter and 2% year-to-date, compared to the same periods last year, as the increase in investment portfolio assets more than offset the decrease in investment yields; and

Direct premium production, which excludes fronting premiums and premium adjustments, increased 3% in the third quarter to $154.8 million, and increased 3% during the first nine months of 2009 to $404.3 million.

Mr. Donnelly added, "We are continuing to grow our Fee-based Business, with revenues increasing 9% in the quarter and 16% for the first nine months of 2009 as a result of organic growth and our prior year acquisition of PMA Management Corp. of New England. Organic growth of claims service revenues was 9% in the quarter and 12% during the first nine months of 2009. Our Fee-based Business revenues of $59.8 million represent 15% of our total revenues in 2009. Pre-tax operating income for our Fee-based Business was $1.6 million in the quarter, compared to $1.9 million for the same period last year, and $5.1 million for the first nine months of 2009, compared to $5.3 million for the same period in 2008."

The Company previously announced the execution of a definitive stock purchase agreement (the "Agreement") to sell its Run-off Operations and the filing of a Form A with the Pennsylvania Insurance Department. On November 3, 2009, additional information regarding the Form A was filed with the Department. Subject to the approval of the transaction by the Pennsylvania Insurance Department under the revised terms, the Company would make a capital contribution of $13 million at the closing of the sale. This contribution will include cash of $3 million and a note payable in two equal installments of $5 million in 2010 and 2011. The revised terms also include capital support agreements provided by the Company to the Run-off Operations in the event that its payments on claims in the 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 $46 million and any payments with respect to the supported lines of business are not expected to commence until 2018 and may extend to 2052. Under Generally Accepted Accounting Principles guidance for Guarantees, which requires guarantees to be recorded at fair value at inception, the Company estimates that the fair value of the capital support is approximately $13 million. Upon the closing of the transaction, the Company expects to record an after-tax charge of approximately $17 million, or $0.52 per share, to record the impact of the capital contribution and the additional capital support. The Company and the buyer have mutually agreed to extend the Agreement termination date to December 31, 2009.

Financial Condition

Total assets were $2.6 billion as of September 30, 2009, compared to $2.5 billion as of December 31, 2008. Assets of discontinued operations represented 7% of total assets at September 30, 2009, compared to 10% at December 31, 2008. At September 30, 2009, we had $33.7 million in cash and short-term investments at our holding company and non-regulated subsidiaries.

Shareholders' equity and book value per share changed as follows:

                                             Three months ended           Nine months ended           
                                             September 30, 2009           September 30, 2009          
                                             Shareholders'   Book value   Shareholders'   Book value  
 (in thousands, except per share data)       equity          per share    equity          per share   
 Balance, beginning of period                $  368,998      $  11.45     $  344,656      $  10.78    
 Net income                                     7,209           0.22         18,028          0.56     
 Unrealized gain on securities, net of tax      22,721          0.71         35,105          1.09     
 Other                                          244             -            1,383           0.04     
 Impact of change in shares outstanding         -               -            -               (0.09  ) 
 Balance, end of period                      $  399,172      $  12.38     $  399,172      $  12.38    
                                                                                                      


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The insurance companies within The PMA Insurance Group had statutory capital and surplus of $385.1 million as of September 30, 2009, compared to $332.9 million as of December 31, 2008. The increase in capital and surplus during 2009 related primarily to statutory net income, which included a benefit from the second quarter commutation of a reinsurance agreement with an affiliated entity. The PMA Insurance Group has the ability to pay $31.8 million in dividends during 2009 without the prior approval of the Pennsylvania Insurance Department.

Segment Operating Results

Operating income, which we define as net income (loss) under GAAP 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 operating results to GAAP net income (loss):

                                                Three months ended            Nine months ended             
                                                September 30,                 September 30,                 
 (dollar amounts in thousands)                  2009           2008           2009            2008          
 Pre-tax operating income (loss):                                                                           
 The PMA Insurance Group                        $  13,616      $  13,325      $  38,768       $  38,285     
 Fee-based Business                                1,574          1,929          5,112           5,316      
 Corporate & Other                                 (4,768  )      (5,319  )      (14,935  )      (15,754  ) 
 Pre-tax operating income                          10,422         9,935          28,945          27,847     
 Income tax expense                                3,690          3,530          10,323          9,876      
 Operating income                                  6,732          6,405          18,622          17,971     
 Realized investment gains (losses) after tax      517            (5,154  )      697             (3,239   ) 
 Income from continuing operations                 7,249          1,251          19,319          14,732     
 Loss from discontinued operations after tax       (40     )      (2,310  )      (1,291   )      (4,937   ) 
 Net income (loss)                              $  7,209       $  (1,059  )   $  18,028       $  9,795      
                                                                                                            


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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)                       2009     2008           2009           2008         
 Net realized investment gains (losses) after tax:                                                       
 Sales of investments                                $  517   $  792         $  3,907       $  2,725     
 Other than temporary impairments                       -        (5,946  )      (3,210  )      (5,946  ) 
 Other                                                  -        -              -              (18     ) 
 Net realized investment gains (losses) after tax    $  517   $  (5,154  )   $  697         $  (3,239  ) 
                                                                                                         


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We recorded other than temporary impairments of $3.2 million after-tax during the nine months ended September 30, 2009. The impairments in the first nine months of 2009 related primarily to write-downs of $2.9 million on $45.9 million par of commercial mortgage-backed securities (CMBS) that we sold in order to reduce our exposure to this asset sector. These write-downs were measured based on public market prices. At September 30, 2009, our CMBS had an average credit rating of AAA and fair value of $81.4 million, which represented 93% of their amortized cost. The prior year other than temporary impairments resulted from writing down our investments of Lehman Brothers senior debt and Fannie Mae preferred stock. Details of the Company's investment portfolio at September 30, 2009 and December 31, 2008 are posted on our website at www.pmacapital.com.

The PMA Insurance Group

The PMA Insurance Group reported pre-tax operating income of $13.6 million for the third quarter of 2009, compared to $13.3 million for the same period last year. Year-to-date pre-tax operating income increased to $38.8 million, compared to $38.3 million for the first nine months of 2008. The results for the first nine months of 2008 included a gain of $2.1 million from the sale of a property that housed one of our branch offices.

Direct premium production increased during the third quarter and first nine months of 2009, compared to the same periods last year. We define direct premium production as direct premiums written, excluding fronting premiums and premium adjustments.