Caliber One Exiting Excess and Surplus Lines Marketplace

May 3, 2002

PMA Capital has decided to withdraw from the excess and surplus (E&S) lines marketplace served by its Caliber One business segment, even though PMA Capital shows strong growth and operating income for PMA Re and The PMA Insurance Group.

“Despite the currently desirable market conditions in the excess and surplus lines market, we have decided to withdraw from this business to remove the uncertainty associated with Caliber One’s operations from our future operating results,” John Smithson, PMA Capital’s President and CEO, remarked. “This decision also will enable us to devote all of our financial resources and managerial attention to our most significant and best-performing businesses, PMA Re and The PMA Insurance Group, at a time when market conditions present us with the opportunity to achieve our long-term return on equity goal and other business objectives.”

Caliber One’s decision to withdraw will impact approximately 110 employees, according to a PMA spokesman, about 10 percent of PMA Capital’s total employment base. Employees will continue with Caliber One while the company seeks options, including the possible sale of Caliber One to another buyer.

In California, Caliber One wrote premium amounts on a gross written premium basis for full-year 2001 in the amount of $36,618,793, while on a gross premium written basis for Texas, the figures were approximately $13,257,637.

Excluding the results of this exited business, the company’s after-tax operating income for the first quarter of 2002 was $9.8 million, or $0.32 per share. The numbers showed a significant increase in operating income from its ongoing businesses, compared to pro forma after-tax operating income of $3.7 million or $0.17 per diluted share for the first quarter of 2001, which exclude losses from Caliber One, a gain on sale of real estate and a tax benefit. Including the results from Caliber One, the company had an after-tax operating loss of $18.2 million, or $0.58 per share, in the first quarter of 2002, reflecting an after-tax operating loss of $28.0 million, or $0.90 per share, for Caliber One due to its higher than expected loss development.

“Operating income, the combined ratio and premium growth at PMA Re and The PMA Insurance Group all improved over the first quarter of 2001,” Smithson said. “Both PMA Re and The PMA Insurance Group performed very well in the quarter and continue to benefit from an improving pricing environment. PMA Capital’s reinsurance business and traditional property and casualty business comprise more than 90% of our net premium writings and all of our earnings and both businesses are strong and meeting their underwriting and operating profit objectives.

As a result of the company’s decision to exit the E&S business, it currently expects that, based on a preliminary assessment of the costs to exit this business, its second quarter 2002 results will include an after-tax charge estimated to be in the range of approximately $25 million to $30 million, or approximately $0.80 to $0.95 per share. Components of that charge will include expenses associated with reinsurance costs for the exited business, long-term lease costs and severance. Recently issued accounting rules require that the company take this charge in the second quarter of 2002 to coincide with the timing of its decision to exit the business.

“For full year 2002, our outlook for PMA Re and The PMA Insurance Group is unchanged,” Smithson added. “We currently expect to benefit from higher rates and improving margins in our long-standing and well-established reinsurance and workers’ compensation businesses. These franchises are currently enjoying excellent opportunities to serve the needs of their clients in an improving property and casualty insurance market.”

For the first quarter of 2001, after-tax operating income was $5.7 million, or $0.26 per diluted share. First quarter 2001 results include an after-tax gain of $6.3 million, or $0.29 per diluted share, from the sale of real estate, as well as a tax benefit of $10.1 million, or $0.46 per diluted share, resulting from the completion of an IRS examination.

Partially offsetting the favorable impact on earnings from these events were after-tax operating losses of $14.4 million, or $0.66 per diluted share, at Caliber One. Excluding these items, operating income for the first quarter of 2001 would have been $3.7 million, or $0.17 per diluted share.

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