A.M. Best Lowers Ratings for PMA Capital

February 25, 2003

A.M. Best Co. has lowered the financial strength rating to A- (Excellent) from A (Excellent) of PMA Capital Insurance Company (Pennsylvania) with a stable outlook.

The current financial strength rating of A- (Excellent) with a stable outlook of PMA Insurance Group (Pennsylvania) has been affirmed. The indicative senior debt rating assigned to PMA Capital Corporation’s (PMA Capital) (NASDAQ: PMACA – News) $86.3 million convertible senior debentures due to mature in 2022, issued under the company’s existing $250 million universal shelf registration, has been lowered to “bbb-” with a stable outlook from “bbb” with a negative outlook. A.M. Best has also lowered the indicative ratings for other securities which may be issued under the shelf, including senior debt to “bbb-” from “bbb”; subordinated debt to “bb+” from “bbb-“; preferred securities (PMA Capital Trust I and PMA Capital Trust II) to “bb+” from “bbb-“; and preferred stock to “bb” from “bb+”. All have stable outlooks.

These rating actions follow PMA Capital’s fourth-quarter 2002 earnings release in which the corporation announced a $10.4 million net loss for the quarter and a $48.0 million net loss for the year. This included a $26 million after-tax loss reserve charge in the fourth quarter in its reinsurance operations for higher than expected underwriting losses on business from 1998-2000.

The current ratings reflect the reduced flexibility PMA Capital has in addressing any future earnings surprises and capital needs. Given the reserve charges during the year and the company’s strong growth in 2002, capitalization needs and financial flexibility are a priority, and several options are being explored. While the potential for further adverse loss reserve development exists, A.M. Best expects PMA Capital’s current reinsurance and workers’ compensation business will prove to be more profitable over the next few years, helping to bolster capitalization, which while adequate, provides little flexibility for growth or additional surprises.

In 2002, PMA Capital closed on a new credit facility to replace its existing $62.5 million credit facility. The new bank facility automatically renews in one year, contingent upon the corporation meeting financial goals related to earnings and surplus. Given the latest announcement, A.M. Best believes PMA Capital may not be able to meet its financial goals to automatically renew the current credit facility in 2003.

As the financial flexibility and liquidity of the holding company remain concerns, A.M. Best will continue to monitor PMA Capital’s replacement of the credit facility with a more permanent capital structure. The ratings outlook for PMA Capital is stable; however, it reflects A.M. Best’s expectation that the credit facility will be replaced or restructured in the near term.

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