PMA Capital Ratings Lowered

Standard & Poor’s Ratings Services lowered its counterparty credit rating on PMA Capital Corp. to “CC” from “B” and removed it from CreditWatch, where it had been placed on Nov. 4, 2003. The outlook on PMACA is developing. S&P also revised its counterparty credit and financial strength ratings on PMACA’s reinsurance subsidiary, PMA Capital Insurance Co. (PMACIC), to “R” from “BB” and removed them from CreditWatch.

In addition, S&P lowered its counterparty credit and financial strength ratings on PMACA’s primary insurance subsidiaries, Pennsylvania Manufacturers Assoc. Insurance Co., Pennsylvania Manufacturers Indemnity Co. and Manufacturers Alliance Insurance Co., collectively referred to as PMAIG, to “BB-” from “BBB-,” removed them from CreditWatch and assigned a negative outlook.

These rating actions follow PMACA’s recent 8-K filing, which indicated that PMACIC had entered into a letter agreement, dated Dec. 22, 2003, with the Pennsylvania Insurance Department, in which PMACIC agreed to request prior regulatory approval for a number of actions. PMACIC also agreed to engage an independent actuary to review the group’s reserves, as well as to provide the regulator with monthly statutory financial reports. S&P’s interpretation of this agreement is that PMACIC has experienced a regulatory action with regards to its solvency, which is why the ratings were revised to “R.”

Given the increased regulatory control over PMACIC, which is PMACA’s sole source of dividends, S&P believes there is significant risk that PMACA might not be able to obtain regulatory approval for dividends from PMACIC to service PMACA’s interest and principal debt payments. This is a significant concern, particularly given PMACIC’s very weak stand-alone capital adequacy. Over the medium term, S&P believes PMACA’s ability to obtain any dividend payment approvals will be dependent on how the group’s loss reserves develop over time and whether PMACIC will be able to successfully run-off its liabilities over the medium term. S&P believes PMACA currently has enough resources to service interest payments for about a year.